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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the period ended June 30, 2003
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( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File Number 0-9116
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PANHANDLE ROYALTY COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OKLAHOMA 73-1055775
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Grand Centre Suite 210, 5400 N Grand Blvd., Oklahoma City, Oklahoma 73112
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number including area code (405) 948-1560
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
x Yes No
--- ---
Outstanding shares of Class A Common stock (voting) at August 6, 2003: 2,082,190
INDEX
Part I. Financial Information
Item 1. Consolidated Financial Statements Page
Condensed Consolidated Balance Sheets -
June 30, 2003 and September 30, 2002......................... 1
Condensed Consolidated Statements of Operations -
Three months and nine months ended June 30, 2003
and 2002..................................................... 2
Condensed Consolidated Statements of Cash Flows -
Nine months ended June 30, 2003 and 2002..................... 3
Notes to Condensed Consolidated Financial Statements......... 4-5
Item 2. Management's discussion and analysis of financial
condition and results of operations.......................... 5-8
Item 3. Quantitative and qualitative disclosures about market risk............ 8
Item 4. Controls and Procedures............................................... 8
Part II. Other Information .............................................................. 9
Item 6. Exhibits and reports on Form 8-K...................................... 9
Signatures...................................................................... 9
PART I. FINANCIAL INFORMATION
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Information at June 30, 2003 is unaudited)
June 30, September 30,
Assets 2003 2002
------------ -------------
Current assets:
Cash and cash equivalents $ 898,292 $ 242,836
Oil and gas sales receivable 4,604,181 2,533,249
Prepaid expenses 49,169 5,709
------------ ------------
Total current assets 5,551,642 2,781,794
Properties and equipment, at cost, based on successful efforts accounting:
Producing oil and gas properties 63,826,445 58,697,095
Non producing oil and gas properties 9,660,187 9,754,336
Other 393,341 360,784
------------ ------------
73,879,973 68,812,215
Less accumulated depreciation,
depletion and amortization 30,288,625 27,860,713
------------ ------------
Net properties and equipment 43,591,348 40,951,502
Investment in partnerships 811,072 856,607
Marketable securities and other assets 247,157 247,157
------------ ------------
Total Assets $ 50,201,219 $ 44,837,060
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 966,619 $ 653,758
Accrued liabilities:
Deferred director compensation 504,203 321,555
Interest 95,758 66,567
Other 250,435 133,308
Income taxes payable 196,918 10,063
Current portion of long-term debt 2,000,004 3,996,000
------------ ------------
Total current liabilities 4,013,937 5,181,251
Long-term debt 14,666,662 14,024,000
Deferred income taxes 10,110,500 8,639,000
Asset retirement obligations and other 344,378 39,515
Stockholders' equity:
Class A voting Common Stock, $.0333 par value; 6,000,000, shares
authorized, 2,082,190 issued and outstanding at June 30, 2003
and 2,079,423 at September 30, 2002 69,406 69,314
Capital in excess of par value 935,305 896,643
Retained earnings 20,061,031 15,987,337
------------ ------------
Total stockholders' equity 21,065,742 16,953,294
------------ ------------
Total liabilities and stockholders' equity $ 50,201,219 $ 44,837,060
============ ============
(1)
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended June 30, Nine Months Ended June 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Oil and gas sales $ 5,539,482 $ 3,548,007 $ 16,863,008 $ 9,426,408
Lease bonuses and rentals 14,995 17,177 51,423 28,857
Interest and other 57,785 210,456 110,166 357,582
Equity in income of partnerships 49,877 17,354 82,229 56,53
------------ ------------ ------------ ------------
5,662,139 3,792,994 17,106,826 9,869,379
Costs and expenses:
Lease operating expenses and
production taxes 1,004,449 734,689 3,030,229 2,191,524
Exploration costs 10,516 116,014 417,974 248,101
Depreciation, depletion,
amortization and impairment 1,534,634 1,648,872 4,719,074 4,869,449
General and administrative 747,936 454,903 2,057,587 1,747,092
Interest expense 171,021 214,832 534,724 688,791
------------ ------------ ------------ ------------
3,468,556 3,169,310 10,759,588 9,744,957
------------ ------------ ------------ ------------
Income before provision
for income taxes and cumulative effect of
accounting change 2,193,583 623,684 6,347,238 124,422
Provision for income taxes 655,000 170,000 1,883,000 34,717
------------ ------------ ------------ ------------
Income before cumulative effect of
accounting change 1,538,583 453,684 4,464,238 89,705
Cumulative effect of
accounting change, net of taxes of $28,500 -- -- 46,500 --
------------ ------------ ------------ ------------
Net Income $ 1,538,583 $ 453,684 $ 4,510,738 $ 89,705
============ ============ ============ ============
Basic earnings per common share (Note 3)
Income before cumulative effect of
accounting change $ .74 $ .22 $ 2.15 $ .04
Cumulative effect of
accounting change $ -- $ -- $ .02 $ --
------------ ------------ ------------ ------------
Net income $ .74 $ .22 $ 2.17 $ .04
============ ============ ============ ============
Diluted earnings per common share (Note 3)
Income before cumulative effect of
accounting change $ .73 $ .21 $ 2.12 $ .04
Cumulative effect of
accounting change $ -- $ -- $ .02 $ --
------------ ------------ ------------ ------------
Net income $ .73 $ .21 $ 2.14 $ .04
============ ============ ============ ============
Dividends declared
per share of common stock $ .07 $ .07 $ .21 $ .21
============ ============ ============ ============
(2)
PANHANDLE ROYALTY COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended June 30,
2003 2002
------------- -------------
Operating activities:
Net income $ 4,510,739 $ 89,705
Adjustments to reconcile net income to net cash provided by operating
activities:
Cumulative effect of change in accounting principle (46,500) --
Depreciation, depletion, amortization and impairment 4,719,074 4,869,449
Exploration costs 417,974 248,101
Equity in earnings of partnerships (82,229) (56,532)
Other non-current liabilities 54,863 20,157
Provision (benefit) for deferred income taxes 1,443,000 (128,000)
Gain on sale of assets (4,001) (178,987)
Cash provided (used) by changes in assets and liabilities, excluding
those acquired in Wood Oil acquisition:
Oil and gas sales receivable (2,075,932) 169,999
Income taxes receivable -- 415,810
Prepaid expenses (43,460) 229,047
Income taxes payable 186,855 63,298
Accounts payable and accrued liabilities 641,828 (639,604)
------------- -------------
Total adjustments 5,211,472 5,012,738
------------- -------------
Net cash provided by operating activities 9,722,211 5,102,443
Investing activities:
Acquisition of Wood Oil, net of cash acquired -- (15,229,466)
Purchase of and development of
properties and equipment, including dry hole costs (7,523,226) (5,185,908)
Proceeds from sale of assets 30,331 1,371,273
Distributions from partnerships 177,763 125,823
------------- -------------
Net cash used in investing activities (7,315,132) (18,918,278)
Financing activities:
Borrowings under credit agreements 1,525,000 21,700,000
Payments of loan principal (2,878,334) (7,181,000)
Acquisition of common shares (4,691) (1,715)
Issuance of common shares 43,445 --
Payments of dividends (437,043) (434,002)
------------- -------------
Net cash provided (used) by financing activities (1,751,623) 14,083,283
------------- -------------
Increase in cash and cash equivalents 655,456 267,448
Cash and cash equivalents at beginning of period 242,836 98,970
------------- -------------
Cash and cash equivalents at end of period $ 898,292 $ 366,418
============= =============
(See accompanying notes)
(3)
PANHANDLE ROYALTY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: Accounting Principles and Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q as
prescribed by the Securities and Exchange Commission, and effective
October 1, 2001, include the Company's wholly-owned subsidiary, Wood
Oil Company (Wood). Management of Panhandle Royalty Company believes
that all adjustments necessary for a fair presentation of the
consolidated financial position and results of operations for the
periods have been included. All such adjustments are of a normal
recurring nature. The consolidated results are not necessarily
indicative of those to be expected for the full year.
NOTE 2: Income Taxes
The Company utilizes tight gas sands production tax credits to reduce
its federal income tax liability, if any. These credits were available
through calendar year 2002. The Company's provision for income taxes is
also reflective of excess percentage depletion, reducing the Company's
effective tax rate from the federal statutory rate.
NOTE 3: Earnings (Loss) Per Share
The following table sets forth the number of shares utilized in the
computation of basic and diluted earnings per share, giving
consideration to, certain shares that may be issued under the
Non-Employee Director's Deferred Compensation Plan, to the extent
dilutive:
Three months ended June 30, Nine months ended June 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Denominator:
For basic earnings per share
Weighted average shares 2,082,190 2,066,402 2,081,071 2,066,428
Effect of potential diluted shares:
Directors deferred
compensation shares 22,409 26,691 21,207 25,915
---------- ---------- ---------- ----------
Denominator for diluted earnings
per share - adjusted weighted
average shares and potential
shares 2,104,599 2,093,093 2,102,278 2,092,343
========== ========== ========== ==========
NOTE 4: Long-term Debt
On March 25, 2003, the Company amended its Loan Agreement with
BancFirst, Oklahoma City, OK. The Agreement consists of a term loan in
the amount of $10,000,000 and a revolving loan in the amount of
$15,000,000, which is subject to a semi-annual borrowing base
determination. The current borrowing base under the agreements is
$22,500,000 which can be re-determined semi-annually. The term loan
matures on April 1, 2008, and the revolving loan matures on April 1,
2005. Monthly payments on the term loan are $166,667, plus accrued
interest, beginning on May 1, 2003. Interest on the term loan is fixed
at 4.56% until maturity. The revolving loan bears interest at the
national prime rate minus 3/4% (3.25% at June 30, 2003) or Libor (for
one, three or six month periods), plus 1.80%. The Company, at March 31,
2003, elected a six month Libor rate (aggregate of 3.08%). At June 30,
2003, the Company had $9,666,667 outstanding under the term loan and
$7,000,000 outstanding under the revolving loan.
(4)
NOTE 5: Asset Retirement Obligation
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (SFAS No. 143). SFAS No. 143 requires entities to record
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred and a corresponding increase in the carrying amount of
the related long-lived asset. Subsequently, the asset retirement cost should be
allocated to expense using a systematic and rational method and the liability
should be accreted to its face amount. The Company adopted SFAS No. 143 on
October 1, 2002. The primary impact of this standard relates to oil and gas
wells on which the Company has a legal obligation to plug and abandon the wells.
Prior to SFAS No. 143, the Company had not recorded an obligation for these
plugging and abandonment costs due to its assumption that the salvage value of
the surface equipment would offset the cost of dismantling the facilities and
carrying out the necessary clean-up and reclamation activities. The adoption of
SFAS No. 143 on October 1, 2002, resulted in a net increase to Property and
Equipment and Retirement Obligations of approximately $325,000 and $250,000,
respectively, as a result of the Company separately accounting for salvage
values and recording the estimated fair value of its plugging and abandonment
obligations on the balance sheet. The increase in expense resulting from the
accretion of the asset retirement obligation and the depreciation of the
additional capitalized well costs is expected to be substantially offset by the
decrease in depreciation from the Company's consideration of the estimated
salvage values in the calculation. The proforma impact of SFAS No. 143 on the
2002 period was not material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND RISK FACTORS
Forward-Looking Statements for 2003 and later periods are made in this
document. Such statements represent estimates of management based on the
Company's historical operating trends, its proved oil and gas reserves and other
information currently available to management. The Company cautions that the
forward-looking statements provided herein are subject to all the risks and
uncertainties incident to the acquisition, development and marketing of, and
exploration for oil and gas reserves. These risks include, but are not limited
to, oil and natural gas price risk, environmental risks, drilling risk, reserve
quantity risk and operations and production risk. For all the above reasons,
actual results may vary materially from the forward-looking statements and there
is no assurance that the assumptions used are necessarily the most likely to
occur.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003, the Company had positive working capital of
$1,537,705, as compared to negative working capital of $2,399,457 at September
30, 2002. The increase in working capital from September 30, 2002 to June 30,
2003, is the result of increased oil and gas sales revenues during fiscal 2003,
which is discussed in Results of Operations below, and the reduction in the
current portion of long-term debt by $2,000,000. This reduction in the current
portion of long-term debt is the result of the restructuring of the Company's
bank debt. The fixed monthly principal payment on the bank debt was reduced from
$333,000 to $166,667. For a further discussion of the Company's bank debt see
Note 4: Long Term Debt of Notes to the Condensed Consolidated Financial
Statements contained here-in. Cash flow from operating activities increased 90%
to $9,722,211 for the first nine-months of fiscal 2003, as compared to the first
nine-months of fiscal 2002, primarily due to a significant increase in product
sales prices.
Capital expenditures for oil and gas activities for the 2003 nine-month
period amounted to $7,523,226, as compared to $5,185,908 for the 2002 period,
exclusive of $15,229,466 used to acquire Wood Oil Company. Management's current
expectation for capital expenditures in 2003 is approximately $9,000,000.
The Company has historically funded its capital expenditures, overhead
expenditures and dividend payments from operating cash flow. Due to the
increased capital expenditure level in fiscal 2003, the Company has utilized (as
of August 6, 2003), $7,000,000 of the $15,000,000 revolving loan to help fund
these expenditures. As a result of the increased cash flow from the higher
prices being received for natural gas in fiscal 2003, management currently does
not expect to borrow additional funds under the revolving loan during the
remainder of fiscal 2003. The Company has the potential availability of equity,
which could be offered in a public or private placement, if additional capital
were needed, above the amount available from bank debt, for capital
expenditures, or for debt reduction, or a combination of uses.
(5)
RESULTS OF OPERATIONS
THREE MONTHS COMPARED TO THREE MONTHS
Revenues:
Total revenues increased $1,869,145 or 49% for the 2003 quarter as
compared to the 2002 quarter. Sales volumes for oil decreased due to normal
production decline in the 2003 quarter, and sales volumes for natural gas
increased 16% as a result of new wells coming on line. However, the increase in
average sales prices for both products produced the majority of the revenue
increase. The table below outlines the Company's production and average sales
prices for oil and natural gas for the three month periods of fiscal 2003 and
2002:
BARRELS AVERAGE MCF AVERAGE
SOLD PRICE SOLD PRICE
--------- --------- --------- ---------
Three months ended 6/30/03 27,864 $ 27.79 999,246 $ 4.77
Three months ended 6/30/02 30,238 $ 25.54 864,108 $ 3.20
The table outlines a 9% increase in oil price and a 49% increase in gas
price and an increase in equivalent production to 1,166,430 mcfe, resulting in a
56% increase in oil and gas sales revenue for the quarter.
Lease Operating Expenses and Production Taxes (LOE):
LOE increased 37% or $269,760 in the 2003 quarter. A majority of this
increase was the result of a $179,549 increase in production taxes in the 2003
quarter as oil and gas sales revenues increased and production taxes are paid as
a percentage of oil and gas sales revenue. In addition, lease operating costs
continue to increase ($90,211 for the quarter) as the Company adds operating
costs from the substantial number of new wells drilled each year.
Exploration Costs:
These costs decreased $105,498 in the 2003 period as there were fewer
high cost exploratory wells which completed drilling in the 2003 period,
resulting in lesser costs being charged to exploration costs in the period
incurred.
Depreciation, Depletion, Amortization and Impairment (DD&A):
DD&A decreased $114,238 or 7% in the 2003 period. This decrease was
principally the result of impairment charges declining by approximately $128,000
in the 2003 period somewhat offset by the increase in gas sales volume.
General and Administrative Costs (G&A):
G&A expenses increased $293,033 or 64% in the 2003 period. The majority
of the increase in the 2003 period, was due to higher personnel related costs in
the 2003 period, an increase of $171,000 in the expense related to the Directors
Deferred Compensation Plan as a result of Panhandle's common share price
increasing from March 31, 2003 to June 30, 2003; professional service fees, and
costs for additional directors and officers liability insurance.
Interest Expense:
Interest expense decreased in the 2003 quarter due to a lower level of
debt and due to a decrease in the interest rate on the debt. The interest rate
is tied to the prime rate or Libor which has decreased throughout fiscal 2002
and 2003.
Income Taxes:
The 2003 period provision for income taxes increased due to
substantially increased income before provision for income taxes. The Company
utilizes tight gas sands production tax credits (available through calendar year
2002) and excess percentage depletion to reduce its effective tax rate from the
federal statutory rate. The effective tax rate estimate was 30% for the 2003
period and 27% for the 2002 period.
NINE MONTHS COMPARED TO NINE MONTHS
Revenues:
Total revenues increased $7,237,447 or 73% for the 2003 nine months as
compared to the 2002 nine months. Sales volumes for oil decreased 12% due to
normal production decline in the 2003 nine months while the sales volume for
natural gas increased 3% as a result of recently completed wells coming on line.
However, the substantial increases in sales prices for both products produced
the 2003 period revenue increase. The table below outlines the Company's
production and average sales prices for oil and natural gas for the nine month
periods of fiscal 2003 and 2002:
BARRELS AVERAGE MCF AVERAGE
SOLD PRICE SOLD PRICE
----------- ----------- ----------- -----------
Nine months ended 6/30/03 85,086 $ 29.32 2,956,157 $ 4.86
Nine months ended 6/30/02 96,679 $ 21.55 2,879,901 $ 2.55
As the table outlines, the 36% increase in oil price and the 91%
increase in gas price resulted in a 79% increase in oil and gas revenue for the
2003 nine months to $17,106,826. Mcfe production was basically flat in the two
periods.
(6)
Lease Operating Expenses and Production Taxes (LOE):
LOE increased 38% or $838,705 in the 2003 nine months. A majority of
this increase was the result of a $501,980 increase in production taxes in the
2003 nine months as oil and gas sales revenues increased and production taxes
are paid as a percentage of oil and gas sales revenue. In addition, well
operating costs continue to increase ($336,725 for the nine months) as the
Company adds operating costs from the substantial number of new wells drilled
each year.
Exploration Costs:
These costs increased $169,873 in the 2003 period as there were several
exploratory wells which completed drilling in 2003, thus increasing the chances
of drilling an exploratory dry hole. These costs are charged to exploration
costs in the period they are determined to be unsuccessful. Three wells
accounted for substantially all of the expense.
Depreciation, Depletion, Amortization and Impairment (DD&A):
DD&A decreased $150,375 in the 2003 period. This decrease was the
result of impairment charges declining by approximately $67,000 in the 2003
period and lower production volumes on the Wood Oil properties. These properties
have proportionately higher depreciable values due to the purchase price
accounting used for the Wood acquisition. Thus, volume reductions on these wells
reduced DD&A per mcfe more than the small volume increases on newly completed
Panhandle wells increased DD&A per mcfe.
General and Administrative Costs (G&A):
G&A expenses increased $310,495 in the 2003 period. The majority of the
increase in the 2003 period was due to higher personnel related costs in the
2003 period, an increase of $138,000 in the expense related to the Directors
Deferred Compensation Plan as a result of Panhandle's common share price
increasing from September 30, 2002 to June 30, 2003; professional service fees,
and costs for additional directors and officers liability insurance.
Interest Expense:
Interest expense decreased in the 2003 nine month period due to a lower
level of debt and due to a decrease in the interest rate on the debt. The
interest rate is tied to the prime rate or Libor which has decreased throughout
fiscal 2002 and 2003.
Income Taxes:
The 2003 period provision for income taxes increased due to
substantially increased income before provision for income taxes. The Company
utilizes tight gas sands production tax credits (available through calendar year
2002) and excess percentage depletion to reduce its effective tax rate from the
federal statutory rate. The effective tax rate estimate was 30% for the 2003
period and 28% for the 2002 period.
Overview:
The Company recorded a third quarter 2003 net income of $1,538,583, or
$.73 per share, as compared to a $453,684 net income, or $.21 per share in the
2002 quarter, and a 2003 nine month net income of $4,510,738, or $2.14 per
share, as compared to a $89,705 net income, or $.04 per share in the 2002 nine
months. The improved 2003 results were primarily due to substantial increases in
the sales price of both oil and natural gas.
CRITICAL ACCOUNTING POLICIES
Preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates, judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. However, the accounting principles used by the Company generally do
not change the Company's reported cash flows or liquidity. Generally, accounting
rules do not involve a selection among alternatives, but involve a selection of
the appropriate policies for applying the basic principles. Interpretation of
the existing rules must be done and judgments made on how the specifics of a
given rule apply to the Company.
The more significant reporting areas impacted by management's judgments
and estimates are crude oil and natural gas reserve estimation, impairment of
assets and tax accruals. Management's judgments and estimates in these areas are
based on information available from both internal and external sources,
including engineers, geologists and historical experience in similar matters.
Actual results could differ from the estimates as additional information becomes
known.
Oil and Gas Reserves
Of these judgments and estimates, management considers the estimation
of crude oil and natural gas reserves to be the most significant. Changes in
crude oil and natural gas reserve estimates affect the Company's calculation of
depreciation and depletion,
(7)
provision for abandonment and assessment of the need for asset impairments. On
an annual basis, with a limited scope semi-annual update, the Company's
consulting engineer with assistance from Company geologists prepares estimates
of crude oil and natural gas reserves based on available geologic and seismic
data, reservoir pressure data, core analysis reports, well logs, analogous
reservoir performance history, production data and other available sources of
engineering, geological and geophysical information. As required by the
guidelines and definitions established by the Securities and Exchange
Commission, these estimates are based on current crude oil and natural gas
pricing. Crude oil and natural gas prices are volatile and largely affected by
worldwide consumption and are outside the control of management. Projected
future crude oil and natural gas pricing assumptions are used by management to
prepare estimates of crude oil and natural gas reserves used in formulating
managements overall operating decisions in the exploration and production
segment.
Successful Efforts Method of Accounting
The Company has elected to utilize the successful efforts method of
accounting for its oil and gas exploration and development activities.
Exploration expenses, including geological and geophysical costs, rentals and
exploratory dry holes, are charged against income as incurred. Costs of
successful wells and related production equipment and developmental dry holes
are capitalized and amortized by field using the unit-of-production method as
oil and gas is produced. This accounting method may yield significantly
different operating results than the full cost method.
Impairment of Assets
All long-lived assets are monitored for potential impairment when
circumstances indicate that the carrying value of the asset may be greater than
its future net cash flows. The evaluations involve a significant amount of
judgment since the results are based on estimated future events, such as
inflation rates, future sales prices for oil and gas, future costs to produce
these products, estimates of future oil and gas reserves to be recovered and the
timing thereof, the economic and regulatory climates and other factors. The need
to test a property for impairment may result from significant declines in sales
prices or unfavorable adjustments to oil and gas reserves. Any assets held for
sale are reviewed for impairment when the Company approves the plan to sell.
Estimates of anticipated sales prices are highly judgmental and subject to
material revision in future periods. Because of the uncertainty inherent in
these factors, the Company cannot predict when or if future impairment charges
will be recorded.
Tax Accruals
The estimation of the amounts of income tax to be recorded by the
Company involves interpretation of complex tax laws and regulations as well as
the completion of complex calculations, including the determination of the
Company's percentage depletion deduction. Although the Company's management
believes its tax accruals are adequate, differences may occur in the future
depending on the resolution of pending and new tax matters.
The above description of the Company's critical accounting policies is
not intended to be an all-inclusive discussion of the uncertainties considered
and estimates made by management in applying accounting principles and policies.
Results may vary significantly if different policies were used or required and
if new or different information becomes known to management.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company's results of operations and operating cash flows are
impacted by changes in market prices for oil and gas. Operations and cash flows
are also impacted by changes in the market interest rates related to the
revolving credit facility which bears interest at an annual variable interest
rate equal to the national prime rate minus 3/4% or Libor for one, three or six
month periods, plus 1.8%. A one percent change in the prime interest rate would
result in approximately a $70,000 change in annual interest expense. The Company
has a $10,000,000 term loan which matures on April 1, 2008. The interest rate is
fixed at 4.56% until maturity.
ITEM 4. CONTROLS and PROCEDURES
Panhandle Royalty Company management, under the supervision of and with
the participation of the Chief Executive Officer and Chief Financial Officer
have conducted an evaluation of the effectiveness of disclosure controls and
procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures are effective in ensuring that all material
information required to be filed in this quarterly report has been made known to
them in a timely fashion. There have been no significant changes in our internal
controls or in factors that could significantly affect internal controls,
subsequent to the date the Chief Executive Officer and Chief Financial Officer
completed their evaluation.
(8)
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORT ON FORM 8-K
(a) EXHIBITS - Exhibit 31.1 and 31.2 - Certification under Section
302 of the Sarbanes-Oxley Act of 2002
- Exhibit 32.1 and 32.2 - Certification under
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Form 8-K - Dated May 14, 2003, Regulation FD disclosure of
Company's earnings release for the second quarter
of fiscal 2003.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PANHANDLE ROYALTY COMPANY
August 12, 2003 /s/ H W Peace II
- ----------------------- --------------------------------------
Date H W Peace II, President
and Chief Executive Officer
August 12, 2003 /s/ Michael C. Coffman
- ---------------------- --------------------------------------
Date Michael C. Coffman,
Vice President,
Chief Financial Officer and
Secretary and Treasurer
(9)