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 March 31, 2002 ---------------------------------------------------- ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to ------------------ ------------------ Commission File Number 0-9116 --------------------------------------------------- PANHANDLE ROYALTY COMPANY - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) OKLAHOMA 73-1055775 - -------------------------------------------------------------------------------- (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 May 6, 2002: 2,066,426 -------------
INDEX <Table> <Caption> Part I. Financial Information Item 1. Consolidated Financial Statements (unaudited) Page <S> <C> Condensed Consolidated Balance Sheets - March 31, 2002 and September 30, 2001 ............................. 1 Condensed Consolidated Statements of Income - Three months and six months ended March 31, 2002 and 2001 ...................................... 2 Condensed Consolidated Statements of Cash Flows - Six months ended March 31, 2002 and 2001 ............................................... 3 Notes to Condensed Consolidated Financial Statements ........................................ 4 Item 2. Management's discussion and analysis of financial condition and results of operations ................ 5 Item 3. Quantitative and qualitative disclosures about market risk ... 7 Part II. Other Information Item 4. Submission of matters to a vote of security holders .......... 7 Item 6. Reports on Form 8-K .......................................... 8 </Table>
PART I. FINANCIAL INFORMATION PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Information at March 31, 2002 is unaudited) <Table> <Caption> March 31, September 30, Assets 2002 2001 ------------ ------------- <S> <C> <C> Current assets: Cash and cash equivalents $ 612,899 $ 98,970 Oil and gas sales receivable 2,016,508 1,566,538 Income tax receivable -- 294,137 Prepaid expenses 26,997 4,552 ------------ ------------ Total current assets 2,656,404 1,964,197 Properties and equipment, at cost, based on successful efforts accounting: Producing oil and gas properties 56,641,673 35,586,081 Non producing oil and gas properties 10,979,875 6,384,332 Other 352,522 287,268 ------------ ------------ 67,974,070 42,257,681 Less accumulated depreciation, depletion and amortization 26,103,558 22,909,937 ------------ ------------ Net properties and equipment 41,870,512 19,347,744 Investment in partnerships 803,572 -- Assets held for sale 1,225,000 -- Escrow deposit and deferred costs related to Wood Oil acquisition -- 3,860,027 Marketable securities and other assets 247,157 107,716 ------------ ------------ Total Assets $ 46,802,645 $ 25,279,684 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 567,948 $ 478,580 Accrued liabilities: Deferred compensation 395,229 378,014 Gas imbalances 93,027 55,527 Dividends 7,742 7,742 Interest 77,845 -- Income taxes payable 63,000 -- Current portion of long-term debt 3,996,000 -- ------------ ------------ Total current liabilities 5,200,791 919,863 Long-term debt 16,372,000 4,050,000 Deferred income taxes 8,838,438 3,284,000 Deferred lease bonus 49,648 30,771 Stockholders' equity: Class A voting Common Stock, $.0333 par value; 6,000,000, shares authorized, 2,066,441 issued and outstanding at March 31,2002 and September 30, 2001 68,881 68,881 Capital in excess of par value 702,948 702,948 Retained earnings 15,569,939 16,223,221 ------------ ------------ Total stockholders' equity 16,341,768 16,995,050 ------------ ------------ Total liabilities and stockholders' equity $ 46,802,645 $ 25,279,684 ============ ============ </Table> (1)
PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <Table> <Caption> Three Months Ended March 31, Six Months Ended March 31, ---------------------------------- ---------------------------------- 2002 2001 2002 2001 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Revenues: Oil and gas sales $ 2,693,527 $ 3,883,831 $ 5,878,401 $ 7,303,887 Lease bonuses and rentals (8,219) 1,584 11,680 4,269 Interest and other 56,660 55,560 147,126 107,040 Equity in income of partnerships 3,856 -- 39,178 -- -------------- -------------- -------------- -------------- 2,745,824 3,940,975 6,076,385 7,415,196 Costs and expenses: Lease operating expenses 444,925 231,536 1,085,527 435,214 Production taxes 172,493 268,889 371,308 480,356 Exploration costs 71,159 97,984 132,087 314,107 Depreciation, depletion, amortization and impairment 1,577,300 423,954 3,220,577 887,591 General and administrative 650,531 544,541 1,292,189 1,011,547 Interest expense 226,441 -- 473,959 -- -------------- -------------- -------------- -------------- 3,142,849 1,566,904 6,575,647 3,128,815 -------------- -------------- -------------- -------------- Income (loss) before provision for income taxes (397,025) 2,374,071 (499,262) 4,286,381 Provision (benefit) for income taxes (109,902) 684,000 (135,283) 1,210,000 -------------- -------------- -------------- -------------- Net income (loss) $ (287,123) $ 1,690,071 $ (363,979) $ 3,076,381 ============== ============== ============== ============== Basic earnings (loss) per share (Note 4) $ (.14) $ .82 $ (.18) $ 1.49 ============== ============== ============== ============== Diluted earnings (loss) per share (Note 4) $ (.14) $ .81 $ (.18) $ 1.48 ============== ============== ============== ============== Dividends declared per share of common stock $ .07 $ .07 $ .14 $ .21 ============== ============== ============== ============== </Table> (2)
PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <Table> <Caption> Six months ended March 31, ---------------------------------- 2002 2001 -------------- -------------- <S> <C> <C> Cash flows from operating activities: Net income (loss) $ (363,979) $ 3,076,381 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation, depletion and amortization 3,220,577 887,591 Exploration costs 132,087 314,107 Equity in income of partnerships (39,178) -- Deferred lease bonus 18,876 37,308 Provision (benefit) for deferred income taxes (253,000) 650,000 Cash provided (used) by changes in assets and liabilities, excluding those acquired in Wood Oil acquisition: Oil and gas sales and other receivables 711,149 (570,261) Income taxes receivable 415,810 -- Prepaid expenses and other assets 218,403 (18,362) Income taxes payable 63,000 (139,464) Accounts payable and accrued liabilities (631,209) 432,108 -------------- -------------- Total adjustments 3,856,515 1,593,027 -------------- -------------- Net cash provided by operating activities 3,492,536 4,669,408 Cash flows from investing activities: Acquisition of Wood Oil, net of cash acquired (15,229,466) -- Purchase of and development of properties and equipment (3,865,944) (4,353,127) Distributions from partnerships 88,106 -- -------------- -------------- Net cash used in investing activities (19,007,304) (4,353,127) Cash flows from financing activities: Borrowings under credit agreements 21,700,000 -- Payments of loan principal (5,382,000) -- Acquisition of common shares -- (1,859) Payment of dividends (289,303) (432,622) -------------- -------------- Net cash provided (used) by financing activities 16,028,697 (434,481) -------------- -------------- Increase (decrease) in cash and cash equivalents 513,929 (118,200) Cash and cash equivalents at beginning of period 98,970 815,912 -------------- -------------- Cash and cash equivalents at end of period $ 612,899 $ 697,712 ============== ============== </Table> (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 are scheduled to be available through the year 2002. The Company's 2001 provision for income taxes was 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 computation of basic and diluted earnings (loss) per share, giving consideration to, certain shares that may be issued under the Non-Employee Director's Deferred Compensation Plan, to the extent dilutive: <Table> <Caption> Three months ended March 31, Six months ended March 31, ------------------------------ ------------------------------ 2002 2001 2002 2001 ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Numerator for primary and diluted earnings per share: Net income (loss) $ (287,123) $ 1,690,071 $ (363,979) $ 3,076,381 ============ ============ ============ ============ Denominator: For basic earnings per share Weighted average shares 2,066,441 2,060,060 2,066,441 2,060,115 Effect of potential diluted shares: Directors deferred compensation shares -- 23,824 -- 23,278 ------------ ------------ ------------ ------------ Denominator for diluted earnings per share - adjusted weighted average shares and potential shares 2,066,441 2,083,844 2,066,441 2,083,393 ============ ============ ============ ============ Basic earnings (loss) per share $ (.14) $ .82 $ (.18) $ 1.49 ============ ============ ============ ============ Diluted earnings (loss) per share $ (.14) $ .81 $ (.18) $ 1.48 ============ ============ ============ ============ </Table> NOTE 4: Long-term Debt The Company has a $5,000,000 line-of-credit with BancFirst in Oklahoma City, OK. This facility matures on December 31, 2003. At March 31, 2002, the Company had $1,700,000 outstanding under the BancFirst facility ($ 900,000 at May 7, 2002). In addition, on October 1, 2001, the Company utilized a $20,000,000 five year term loan from BancFirst to make the Wood Oil acquisition. Monthly payments on the term loan, which began in December 2001, are $333,000 plus, accrued interest. The line-of-credit and term loan bear interest equal to the national prime rate minus 1/4% (4.5% at March 31, 2002). (4)
NOTE 5: Acquisition of Wood Oil Company On October 1, 2001, the Company acquired 100% of the outstanding common stock of Wood Oil Company (Wood). The acquisition was made pursuant to an Agreement and Plan of Merger among the Company, PHC, Inc. and Wood Oil Company, dated August 9, 2001. Wood merged with Panhandle's wholly owned subsidiary PHC, Inc., on October 1, 2001, with Wood being the surviving Company. Prior to the acquisition, Wood was a privately held company engaged in oil and gas exploration and production and fee mineral ownership and owned interests in certain oil and gas and real estate partnerships and owned an office building in Tulsa, Oklahoma. Wood will continue to operate as a subsidiary of Panhandle and was moved to Oklahoma City in early 2002. Wood and its shareholders were unrelated parties to Panhandle. The Company's decision to acquire Wood was the result of desired growth in the Company's asset base of producing oil and gas reserves and fee mineral acreage. Wood's oil and gas activity, fee minerals and operating philosophy in general had been very similar to the Company's. Wood's mineral acreage ownership and leasehold position as well as its producing oil and gas properties are located in the same general areas as the Company's. In several cases, both companies own interests in existing producing wells and several developing fields. The Company intends to actively pursue drilling opportunities on Wood's properties. The combination of the companies will provide reduced overhead expenses as the Wood Oil office was combined with the Company's. This acquisition should considerably enhance the medium to long term growth of the Company and is expected to generally be accretive to earnings and cash flow per share. Funding for the acquisition was obtained from BankFirst of Oklahoma City, Oklahoma in the form of a $20 million five-year term loan. Three million of Wood's cash was used to reduce Panhandle's debt on the date of closing. The operations of Wood, since October 1, 2001, are included in the accompanying financial statements. The preliminary purchase price was determined as follows, cash consideration to Wood shareholders $22,604,000 and transaction costs of $244,000, for a total of $22,848,000. The following table sets forth the preliminary allocation of the purchase price to the assets and liabilities acquired (in thousands). The Company is in process of determining the final tax basis of the properties acquired, thus, the allocation of the purchase price is subject to refinement. No goodwill will be deductible for tax purposes. <Table> <S> <C> Cash $ 3,759 Other current assets 1,260 Land and buildings held for sale 750 Oil and Gas properties -- proved 17,550 Minerals: Producing 925 Nonproducing 3,491 Other property and equipment 43 Investments in partnerships and other assets 1,731 -------- Total assets acquired 29,509 Current liabilities (853) Deferred income taxes (5,808) -------- Total liabilities assumed (6,661) -------- Net assets acquired $ 22,848 ======== </Table> In April 2002, the Company sold the land and building and its interest in two partnerships for net proceeds of approximately $1.4 million, $800,000 of the proceeds were used to pay down long term debt. The following unaudited proforma results of operations give effect to the acquisition as if consummated on October 1, 2000. The data reflects adjustments of the historical Wood results for depreciation and amortization of the property and equipment acquired, adjustments of expenses resulting from contractual requirements of the acquisition agreement, incremental interest expense relating to bank borrowing used to finance the purchase and income taxes. The pro forma adjustments are based upon available information and assumptions that management of the Company believes are reasonable. The pro forma results of operations data does not purport to represent the results of operations that would have occurred had such transaction been consummated on October 1, 2000 or the Company's results of operation for any future date or period. <Table> <Caption> Three months ended Six months ended March 31, 2001, March 31, 2001, ------------------ ---------------- (In the thousands, except per share amounts) <S> <C> <C> Total revenues $ 6,876 $ 12,636 Net income $ 2,723 $ 4,480 Earnings per share: Basic $ 1.32 $ 2.17 Diluted $ 1.30 $ 2.15 </Table> (5)
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND RISK FACTORS Forward-Looking Statements for 2002 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 March 31, 2002, the Company had negative working capital of $2,544,387, as compared to positive working capital of $1,044,334 at September 30, 2001. The decrease is a result of $3,996,000 being recorded as the current portion of the $20,000,000 term loan used to fund the acquisition of Wood Oil Company ("Wood Acquisition") on October 1, 2001. Monthly payments on the term loan of $333,000, plus, accrued interest began on December 1, 2001. Cash flow from operating activities decreased 25% to $3,492,536 for the six months of fiscal 2002, as compared to the first six months of fiscal 2001, primarily due to a significant reduction in product prices and increased lease operating expense and interest expense related to the Wood acquisition. Capital expenditures for oil and gas activities for the 2002 six month amounted to $3,865,944, exclusive of $15,229,466 used to acquire Wood Oil Company, as compared to $4,353,127 for the 2001 quarter. This 11% decrease was due to the continuing depressed market prices of oil and natural gas causing operators, which the Company depends on to drill new wells, to either cancel or postpone drilling many proposed wells. The reduction in capital expenditures is anticipated to continue through the second six months of fiscal 2002. The Company has historically funded its capital expenditures, overhead expenditures and dividend payments from operating cash flow. With the addition of the monthly payments required on the term loan, the Company has utilized the $5,000,000 line-of-credit, as needed, to help fund these expenditures. Management expects to borrow additional funds under the line-of-credit during the remainder of fiscal 2002. The Company has the potential availability of equity, which could be offered in a public or private placement, if additional capital were needed for capital expenditures, or for debt reduction, or a combination of uses. RESULTS OF OPERATIONS Revenues decreased significantly for the three-month and six-month periods ended March 31, 2002, as compared to the same periods in fiscal 2001. These decreases were a result of decreased natural gas and oil sales prices offset somewhat by increased sales volumes of both gas and oil. The chart below outlines the Company's production and average sales prices for oil and gas for the three and six-month periods of fiscal 2002 and 2001: <Table> <Caption> BARRELS AVERAGE MCF AVERAGE SOLD PRICE SOLD PRICE ------- ---------- --------- ---------- <S> <C> <C> <C> <C> Three months ended 3/31/02 34,092 $ 19.48 967,146 $ 2.09 Three months ended 3/31/01 14,128 $ 27.42 520,854 $ 6.71 Six months ended 3/31/02 66,440 $ 19.73 2,015,794 $ 2.26 Six months ended 3/31/01 33,843 $ 30.03 1,074,641 $ 5.05 </Table> The increased sales volume of both natural gas and oil was primarily due to production added from the Wood acquisition properties. For the three and six month periods of 2002, Wood Oil's production amounted to 19,909 barrels and 421,660 MCF and 36,582 barrels and 834,156 MCF, respectively. The remaining increase in gas sales volume was due to new wells drilled in fiscal 2001 coming on line in the first six-months of fiscal 2002. Lease operating expense (LOE) increased in the 2002 periods as compared to the 2001 periods as a result of LOE cost on the Wood Oil properties. Production taxes declined in both the 2002 periods as compared to 2001, as these taxes are calculated as a percentage of oil and gas sales revenues, which declined in the 2002 periods. (6)
Exploration costs declined in the 2002 periods as fewer exploratory wells have been drilled in 2002, which reduced the chance of an exploratory well being a dry hole, which under the successful efforts accounting method would be expensed. Depreciation, depletion, amortization and impairment (DD&A) increased 272% and 263%, respectively for the three-month and six-month periods. The major portion of the increase, approximately $1.6 million, was DD&A recognized on the Wood properties. Wood DD&A is based on the fair value of Wood oil and gas properties which was assigned in the purchase accounting done at the acquisition date. In addition, DD&A on properties in the Potato Hills field increased in the 2002 periods as initial production on one costly well in the field was realized in the second quarter of 2002, and decline in the field's expected reserves accelerated DD&A recognition during the 2002 periods. In addition, impairment expense increased $75,000 in the 2002 six-month period as compared to the 2001 period. General and administrative costs(G&A) increased $105,990 and $280,642 for the three-month and six-month periods of fiscal 2002 as compared to the same periods in fiscal 2001. Substantially all of the increase was due to the addition of G&A charges related to the Wood Oil office in Tulsa, OK. The Wood office in Tulsa was closed on March 1, 2002 and the remaining three employees were moved to Panhandle's Oklahoma City office. The Wood Oil building was sold in April, 2002. Interest expense in the 2002 periods was a result of the Wood acquisition which closed on October 1, 2001. The acquisition was funded by a new $20,000,000 five-year bank term loan. The Company had no debt outstanding in the comparable periods of fiscal 2001. Earnings were adversely affected by the severe decrease in oil and natural gas sales prices discussed above, and increased costs associated with the Wood properties. Natural gas sales prices are recovering and appear to be stabilizing at higher levels than those seen in the first six months of 2002. Management currently anticipates this recovery of natural gas prices to continue through the remainder of fiscal 2002. These increased prices should result in increased oil and gas sales revenues in the last six months of fiscal 2002, as compared to the first six months. However, financial results are expected to remain lower than fiscal 2001, which benefited from oil and gas prices which were at record levels. The Company's financial results are dependent on these natural gas and oil prices, which fluctuate widely in response to changing market conditions. 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 and the $20 million five-year term loan, both bearing interest at an annual variable interest rate equal to the national prime rate minus 1/4%. A one percent change in the prime interest rate would result in approximately a $200,000 change in annual interest expense. PART II. OTHER INFORMATION Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of shareholders was held on February 22, 2002. (b) Three directors were elected for three-year terms at the meeting. Also, ratification of the selection of Ernst & Young, LLP as independent auditors for the Company was voted upon. The directors elected and the results of voting were as follows: <Table> <Caption> SHAREHOLDERS ------------------------------------------- For Against Withheld --------- ----------- ----------- <S> <C> <C> <C> Directors HW Peace II 1,348,549 16,374 Robert A. Reece 1,357,681 7,242 Jerry L. Smith 1,355,479 9,444 Auditors Ernst & Young, LLP 1,354,089 3,136 8,652 </Table> (7)
Item 6. EXHIBITS AND REPORT ON FORM 8-K (b) Form 8-K - There were no reports on Form 8-K filed for the three-months ended March 31, 2002. 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 May 14, 2002 /s/ H W Peace II - ------------------------- --------------------------------- Date H W Peace II, President and Chief Executive Officer May 14, 2002 /s/ Michael C. Coffman - ------------------------- --------------------------------- Date Michael C. Coffman, Vice President, Chief Financial Officer and Secretary and Treasurer (8)