UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 30, 2001
Commission File Number: 0-9116
PANHANDLE ROYALTY COMPANY
(Exact name of small business registrant 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., Okla. City, OK 73112
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number (405) 948-1560
--------------
Securities registered under Section 12(b) of the Exchange Act: NONE
----
Securities registered under Section 12(g) of the Exchange Act:
(Title of Class)
CLASS A COMMON STOCK (VOTING) .0333 par value
----------------------------- ---------------
(Title of Class)
CLASS B COMMON STOCK (NON-VOTING) $1.00 par value
---------------------------------------------------
Check whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
--- ---
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation SB contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. { }
Registrant's revenues for fiscal year-end September 30, 2001, were $12,795,922.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by using the closing price of registrant's common stock, at
December 4, 2001, was $31,183,440. As of December 4, 2001, 2,066,441 Class A
common shares were outstanding.
Documents Incorporated By Reference ..... NONE
TABLE OF CONTENTS
PART I PAGE
------ ----
Item 1. Description of Business ........................................ 1-4
Item 2. Description of Properties....................................... 4-9
Item 3. Legal Proceedings............................................... 9
Item 4. Submission of Matters to a Vote of
Security Holders........................................... 9
PART II
Item 5. Market for Common Equity and
Related Stockholder Matters................................ 9-10
Item 6. Management's Discussion and Analysis
or Plan of Operations...................................... 10-14
Item 7. Financial Statements............................................ 15-35
Item 8. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure....................................... 36
PART III
Item 9. Directors, Executive Officers, Promoters
and Control Persons; Compliance with
Section 16(a) of the Exchange Act.......................... 36-38
Item 10. Executive Compensation.......................................... 38-39
Item 11. Security Ownership of Certain Beneficial
Owners and Management...................................... 39-40
Item 12. Certain Relationships and Related
Transactions............................................... 41
Item 13. Exhibits and Reports on Form 8-K................................ 41
Signature Page..................................................................... 42
Exhibit 21
(i)
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Panhandle Royalty Company ("Panhandle" or the "Company") is an Oklahoma
Corporation, organized in 1926 as Panhandle Cooperative Royalty Company. In
1979, Panhandle Cooperative Royalty Company was merged into Panhandle Royalty
Company. Panhandle's authorized and registered stock consisted of 100,000 shares
of $1.00 par value Class A common stock. In 1982, the Company split the stock on
a 10-for-1 basis and reduced the par value to $.10, resulting in 1,000,000
shares of authorized Class A common stock. In May 1999, the Company's
shareholders voted to increase the authorized Class A Common shares of the
Company to 6,000,000 and to split the shares on a three-for-one basis. In
addition, voting rights for the shares were changed from one vote per
shareholder to one vote per share.
Since its formation, the Company has been involved in the acquisition
and management of mineral interests and the exploration for, and development of,
oil and gas properties, principally involving wells located on the Company's
mineral interests. Panhandle's mineral properties and other oil and gas
interests are located primarily in Oklahoma, New Mexico and Texas. Properties
are also located in twelve other states. The majority of the Company's oil and
gas production is from wells located in Oklahoma and the Dagger Draw Field in
Eddy County, New Mexico. In 1988, the Company merged with New Mexico Osage
Royalty Company, thus acquiring most of its New Mexico mineral interests. On
October 1, 2001, Panhandle acquired privately held Wood Oil Company (Wood) of
Tulsa, Oklahoma. The acquisition was made pursuant to an Agreement and Plan of
Merger among Panhandle Royalty Company, PHC, Inc., and Wood, 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 an office building in Tulsa. Wood will continue to
operate as a subsidiary of Panhandle. Wood and its shareholders were unrelated
parties to Panhandle.
The Company's office is located at Grand Centre Suite 210, 5400 N.
Grand Blvd., Oklahoma City, OK 73112 (405)948-1560, FAX (405)948-2038.
BUSINESS OF ISSUER
The majority of Panhandle's revenues are derived from the production
and sale of oil and natural gas. See "Item 7 - Financial Statements". The
Company's oil and gas holdings, including its mineral interests and its
interests in producing wells, both working interests and royalty interests, are
centered in Oklahoma with activity, in recent years, in New Mexico and Texas.
See "Item 2 - Description of Properties". Exploration and
(1)
development of the Company's oil and gas properties is conducted in association
with operating oil and gas companies, including major and independent companies.
The Company does not operate any of its oil and gas properties. The Company has
been an active participant for several years in wells drilled on the Company's
mineral properties and in third party drilling prospects. A large percentage of
the Company's recent drilling participations have been on properties in which
the Company has mineral interests and in many cases already owns an interest in
a producing well in the unit. This "increased density" drilling has accounted
for a majority of the successful oil and gas wells completed during these years
and has added significant reserves for the Company. The Company acquired
additional mineral interest properties, both producing and non-producing and
interests in approximately 2000 wells in the Wood acquisition. Several of the
mineral properties and well interests were in areas where the Company had no
mineral holdings, thus expanding the Company's area of interest.
PRINCIPAL PRODUCTS AND MARKETS
The Company's principal products are crude oil and natural gas. These
products are sold to various purchasers, including pipeline companies, which are
generally located in and service the areas where the Company's producing wells
are located. The Company does not act as operator for any of the properties in
which it owns an interest, thus it relies on the operating expertise of numerous
companies that operate in the area where the Company owns mineral interests.
This expertise includes drilling operations and completions, producing well
operations and, in some cases, the marketing or purchasing of the well's
production. Natural gas sales are principally handled by the well operator and
are normally contracted on a monthly basis with third party gas marketers and
pipeline companies. Payment for gas sold is received either from the contracted
purchasers or the well operator. Crude oil sales are generally handled by the
well operator and payment for oil sold is received from the well operator or
from the crude oil purchaser.
COMPETITIVE BUSINESS CONDITIONS
The oil and gas industry is highly competitive, particularly in the
search for new oil and gas reserves. There are many factors affecting
Panhandle's competitive position and the market for its products which are
beyond its control. Some of these factors are quantity and price of foreign oil
imports, changes in prices received for its oil and gas production, business and
consumer demand for refined oil products and natural gas, and the effects of
federal and state regulation of the exploration, production and sales of oil and
natural gas. Changes in existing economic conditions, weather patterns and
actions taken by OPEC and other oil-producing countries have dramatic influence
on the price Panhandle receives for its oil and gas production. The Company
relies heavily on companies with greater resources, staff, equipment, research,
and experience for operation of wells and the development and drilling of
subsurface prospects. The Company uses its strong financial base and its mineral
property ownership, coupled with it's own geologic and economic evaluation to
participate in drilling operations with these larger companies. This method
allows the Company to effectively compete in drilling operations it could not
undertake on its own due to financial and personnel limits and allows it to
maintain low overhead costs.
(2)
SOURCES AND AVAILABILITY OF RAW MATERIALS
The existence of commercial oil and gas reserves is essential to the
ultimate realization of value from the Company's mineral properties and these
mineral properties may be considered a raw material to its business. The
production and sale of oil and natural gas from the Company's oil and gas
properties is essential to provide the cash flow necessary to sustain the
ongoing viability of the Company. The Company continues to reinvest a portion of
its cash flow in the purchase of additional mineral properties to assure the
continued availability of acreage with which to participate in exploration,
drilling, and development operations and subsequently the production and sale of
oil and gas. This participation in exploration and production and the purchasing
of additional mineral interests will continue to supply the Company with the raw
materials with which to generate additional cash flow. Mineral purchases are
made from varied owners, and the Company does not rely on any particular
companies or individuals for these acquisitions.
MAJOR CUSTOMERS
The Company's oil and gas production is sold by the well operators, in
most cases, to many different purchasers on a well-by-well basis. During fiscal
2001, sales to one purchaser, through the well operator, accounted for
approximately 23% of the Company's total revenues. Generally, if one purchaser
declines to continue purchasing the Company's oil and/or natural gas, several
other purchasers can be located, especially in the current market environment
for natural gas. Pricing is usually reasonably consistent from purchaser to
purchaser.
PATENTS, TRADEMARKS, LICENSES, FRANCHISES AND ROYALTY AGREEMENTS
The Company does not own any patents, trademarks, licenses or
franchises. Royalty agreements on producing oil and gas wells stemming from the
Company's ownership of mineral interests generate a substantial portion of the
Company's revenues. These royalties are tied to the ownership of the mineral
interests and this ownership is perpetual, unless sold by the Company. Royalties
are due and payable to the Company whenever oil and/or gas is produced from
wells located on the Company's mineral properties.
GOVERNMENTAL REGULATION
Oil and gas production is subject to various taxes, such as gross
production taxes and, in some cases, ad valorem taxes.
The State of Oklahoma and other states require permits for
drilling operations, drilling bonds and reports concerning operations and impose
other requirements relating to the exploration and production of oil and gas.
Such states also have regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and gas properties, the
establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. These statutes
and
(3)
regulations currently limit the rate at which oil and gas can be produced from
certain of the Company's properties. As previously discussed, the well operators
are relied upon by Panhandle to comply with governmental regulations.
Federal tax law allows producers of "tight gas" to utilize an
approximate $.52/MMBTU tax credit for gas produced from approved wells. The
credit is a direct reduction of regular federal income tax. Panhandle began
receiving revenues from "tight gas" wells during fiscal 1992. This credit will
be available for all tight gas sold prior to January 1, 2003, and is expected to
reduce the Company's cash outlay for income taxes.
ENVIRONMENTAL MATTERS
As the Company is directly involved in the extraction and use of
natural resources, it is subject to various federal, state and local provisions
regarding environmental and ecological matters. Compliance with these laws may
necessitate significant capital outlays, however, to date the Company's cost of
compliance has been insignificant. The Company does not feel the existence of
these environmental laws will materially hinder or adversely affect the
Company's business operations; however, there can be no assurances of future
events. Since the Company does not operate any wells where it owns an interest,
actual compliance with environmental laws is controlled by others, with
Panhandle being responsible for its proportionate share of the costs involved.
Panhandle carries liability insurance and to the extent available at reasonable
cost, pollution control coverage. However, all risks are not insured due to
insurance availability and/or cost thereof.
EMPLOYEES
At September 30, 2001, Panhandle employed ten persons on a full-time
basis and has no part-time employees. Three of the employees are executive
officers and one is also a director of the Company.
ITEM 2. DESCRIPTION OF PROPERTIES
As of September 30, 2001, Panhandle's principal properties consisted of
perpetual ownership of 190,213 net mineral acres, held in tracts in Alabama,
Arkansas, Colorado, Idaho, Illinois, Indiana, Kansas, Montana, Nebraska, New
Mexico, North Dakota, Oklahoma, Tennessee and Texas. The Company also held
leases on 7,883 net acres of minerals in Louisiana, Oklahoma and Texas. At
September 30, 2001, Panhandle held royalty and/or working interests in 2,412
producing oil or gas wells, 91 successfully completed but not yet producing
wells, and 55 wells in the process of being drilled or completed.
Panhandle does not have current abstracts or title opinions on all
mineral properties owned and, therefore, cannot warrant that it has unencumbered
title to all of its properties. In the period from 1927 through 1937, the
Company lost title to a number of its then owned mineral acres through
foreclosures and tax sales of the surface acreage overlying its minerals. In
recent years, few challenges have been made against the Company's fee title to
its properties.
Panhandle pays ad valorem taxes on its minerals owned in Arkansas,
Colorado, Idaho, Indiana, Illinois, Kansas, Tennessee and Texas.
(4)
ACREAGE
The following table of mineral interests owned reflects, as of
September 30, 2001, in each respective state, the number of net and gross acres,
net and gross producing acres, net and gross acres leased, and net and gross
acres open (unleased).
MINERAL INTERESTS
Net Gross Net Gross Net Gross
Acres Acres Acres Acres Acres Acres
Net Gross Prod'g Prod'g Leased Leased Open Open
St. Acres Acres (1) (1) (2) (2) (3) (3)
--- ------- --------- ------ ------- ----- ------ ------- ---------
AL 5 479 5 479
AR 7,546 38,579 64 220 119 400 7,363 37,959
CO 8,217 39,080 51 137 8,166 38,943
ID 30 880 30 880
IL 1,018 4,393 1,018 4,393
IN 27 262 27 262
KS 637 6,024 62 720 575 5,304
MT 422 7,960 422 7,960
NE 442 6,120 7 160 435 5,960
ND 292 5,036 37 320 255 4,716
NM 53,324 153,073 1,150 4,949 1,916 5,190 50,258 142,934
OK 93,424 844,196 18,717 159,227 2,285 24,454 72,422 660,515
TN 1,543 3,087 1,543 3,087
TX 23,286 222,495 1,160 35,684 356 3,281 21,770 183,530
------- --------- ------ ------- ----- ------ ------- ---------
TOT: 190,213 1,331,664 21,153 200,800 4,771 33,942 164,289 1,096,922
(1) "Producing" represents the mineral acres in which Panhandle owns a
royalty or working interest in a producing well.
(2) "Leased" represents the mineral acres, owned by Panhandle, that are
leased to third parties but not producing.
(3) "Open" represents mineral acres owned by Panhandle that are not leased
or in production.
This table reflects net mineral acres leased from others, lease
expiration dates, and net leased acres held by production. LEASES
Net Acres Leases
Expiring Net Acres
Net --------------------------- Held By
State Acres 2002 2003 2004 Production
----- ------- ----- ----- ----- ----------
LA 204 204
OK 7,625 1,176 1,951 743 3,755
TX 54 1 53
----- ----- ----- ----- ------
TOT: 7,883 1,177 1,951 743 4,012
PROVED RESERVES
The following table summarizes estimates of the proved reserves of oil
and gas held by Panhandle. All reserves are located within the United States.
Because the Company's non-producing mineral and leasehold interests consist of
various small interests in numerous tracts located primarily in Oklahoma, New
Mexico and Texas and because the Company is a non-operator and must rely on
third parties to propose and drill wells, it is not feasible to provide
estimates of all proved undeveloped reserves and associated future net revenues.
Prior to fiscal 1995, the Company did not provide estimates of any proved
undeveloped reserves. The Company directs its independent petroleum engineering
firm to
(5)
include proved undeveloped reserves in certain areas of Oklahoma and New Mexico
in the scope of properties evaluated for the Company. Due to field production
allowable rules in Dagger Draw, only those proved undeveloped reserves which the
Company felt could be drilled, under existing allowable rules, have been
included. Should the allowable rules be amended and/or production volumes change
significantly, additional proved undeveloped reserves may be added in the
future. The Company, in both cases, expects drilling to continue for the next
several years, and thus made the decision to provide proved undeveloped reserve
estimates for these areas. All reserve quantity estimates were prepared by
Campbell & Associates, Inc., an independent petroleum engineering firm. The
Company's reserve estimates were not filed with any other federal agency.
Barrels of Oil MCF of Gas
-------------- ------------
Proved Developed Reserves
-------------------------
September 30, 1999 433,263 11,519,071
September 30, 2000 408,732 11,585,331
September 30, 2001 412,705 13,236,455
Proved Undeveloped Reserves
---------------------------
September 30, 1999 287,940 1,596,149
September 30, 2000 251,508 2,803,789
September 30, 2001 263,386 4,451,895
Total Proved Reserves
---------------------
September 30, 1999 721,203 13,115,220
September 30, 2000 660,240 14,389,120
September 30, 2001 676,091 17,688,350
Because the determination of reserves is a function of testing,
evaluating, developing oil and gas reservoirs and establishing a production
decline history, along with product price fluctuations, it would be expected
that estimates will change as future information concerning those reservoirs is
developed and as market conditions change. Estimated reserve quantities and
future net revenues are affected by changes in product prices, and these prices
have varied substantially in recent years. Proved developed reserves are those
expected to be recovered through existing well bores under existing economic and
operating conditions. Proved undeveloped reserves are reserves that may be
recovered from undrilled acreage, but are usually limited to those sites
directly offsetting established production units and have sufficient geological
data to indicate a reasonable expectation of commercial success.
ESTIMATED FUTURE NET CASH FLOWS
Set forth below are estimated future net cash flows with respect to
Panhandle's proved reserves (based on the estimated units set forth in the
immediately preceding table) as of year ends, and the present value of such
estimated future net cash flows, computed by applying a ten (10) percent
discount factor as required by the rules and regulations of the Securities and
Exchange Commission. Estimated future net cash flows have been computed by
applying current year-end prices to future production of proved reserves less
estimated future expenditures (based on costs as of year end) to be incurred
with respect to the development and production of such reserves. Such pricing is
based on SEC guidelines. No federal income taxes are included in estimated
costs. However, the amounts are net of production taxes levied by respective
states. Prices used for determining future cash flows
(6)
from oil and natural gas for the periods ended September 30, 2001, 2000, and
1999 were as follows: 2001 - $24.03, $1.81; 2000 - $32.84, $3.96; 1999 - $23.29,
$2.70. These future net cash flows should not be construed as the fair market
value of the Company's reserves. A market value determination would need to
include many additional factors, including anticipated oil and gas price
increases or decreases.
Estimated Future Net Cash Flows
9-30-01 9-30-00 9-30-99
----------- ----------- -----------
Proved Developed $25,797,780 $48,481,740 $33,049,035
Proved Undeveloped $10,141,828 $16,604,661 $ 8,942,345
----------- ----------- -----------
Total Proved (1) $35,939,608 $65,086,401 $41,991,380
10% Discounted Present Value of Estimated Future Net Cash Flows
9-30-01 9-30-00 9-30-99
----------- ----------- -----------
Proved Developed $17,533,672 $32,122,191 $22,066,753
Proved Undeveloped $ 6,589,021 $11,417,769 $ 5,566,777
----------- ----------- -----------
Total Proved (1) $24,122,693 $43,539,960 $27,633,530
(1) The major portion of the increase from September 30, 1999, to
September 30, 2000, and the decrease from September 30, 2000
to September 30, 2001, is attributable to the increased oil
and gas prices used in the 2000 reserve report as compared to
the prices used in the 1999 and 2001 reserve reports,
respectively (see above listed prices).
OIL AND GAS PRODUCTION
The following table sets forth the Company's net production of oil and
gas for the fiscal periods indicated.
Year Year Year
Ended Ended Ended
9-30-01 9-30-00 9-30-99
--------- --------- ---------
Bbls - Oil 68,530 66,609 75,891
MCF - Gas 2,208,238 2,454,844 1,888,890
Average Sales Prices and Production Costs
The following table sets forth unit price and cost data for the fiscal
periods indicated.
Year Year Year
Ended Ended Ended
Average Sales Price 9-30-01 9-30-00 9-30-99
------------------- ------- ------- -------
Per Bbl. Oil $28.16 $27.13 $15.53
Per MCF Gas $ 4.81 $ 3.03 $ 2.06
Average Production (Lifting Cost)
Per Equivalent MCF of Gas
(1)(2) $ .27 $ .17 $ .20
(3) $ .41 $ .34 $ .21
(7)
(1) Oil production is converted to MCF equivalents at the rate of
6 MCF per barrel, representing the estimated relative energy
content of natural gas and oil.
(2) Includes actual well operating costs only.
(3) Includes production taxes, compression, handling and marketing
fees paid on natural gas sales, and other minor expenses
associated with well operations.
Average well operating costs are influenced by the fact that the
Company bears no cost of production on many of its well interests, as a large
part of the Company's producing well interests are royalty interests, which bear
no share of the operating costs.
GROSS AND NET PRODUCTIVE WELLS AND DEVELOPED ACRES
The following table sets forth Panhandle's gross and net productive oil
and gas wells as of September 30, 2001. Panhandle owns fractional royalty
interests or fractional working interests in these wells. The Company does not
operate any wells.
Gross Wells Net Wells
----------- ---------
Oil 494 17.136364
Gas 1,923 27.067059
----------- ---------
TOTAL 2,417 44.203423
Information on multiple completions is not available from Panhandle's
records, but the number of such is insignificant.
As of September 30, 2001, Panhandle owned 200,800 gross developed
mineral acres and 21,153 net developed mineral acres. Panhandle has also leased
from others 59,379 gross developed acres which contain 4,012 net developed
acres.
UNDEVELOPED ACREAGE
As of September 30, 2001, Panhandle owned 1,130,864 gross and 169,060
net undeveloped mineral acres, and leases on 45,161 gross and 3,871 net acres.
DRILLING ACTIVITY
The following net productive development and exploratory wells and net
dry development and exploratory wells, in which the Company had a fractional
royalty or working interest, were drilled and completed during the fiscal years
indicated. Also shown are the net wells purchased during these periods.
Net Productive Net Dry
Development Wells Wells Wells
----------------- --------------- ---------
Fiscal year ending
September 30, 1999 1.813871 .582417
Fiscal year ending
September 30, 2000 2.356519 .277873
Fiscal year ending
September 30, 2001 4.568279 .969404
(8)
Exploratory Wells
Fiscal year ending
September 30, 1999 .497868 .270698
Fiscal year ending
September 30, 2000 .810099 .400511
Fiscal year ending
September 30, 2001 1.806223 .676206
Purchased Wells
Fiscal year ending
September 30, 1999 .178395 0
Fiscal year ending
September 30, 2000 .007321 0
Fiscal year ending
September 30, 2001 .040365 0
PRESENT ACTIVITIES
The following table sets forth the gross and net oil and gas wells
drilling or testing as of September 30, 2001, in which Panhandle owns a royalty
or working interest.
Gross Wells Net Wells
----------- ---------
Oil 12 .439842
Gas 43 1.538022
ITEM 3. LEGAL PROCEEDINGS
There were no material legal proceedings involving Panhandle or its
subsidiary, as of the date of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Panhandle's security holders
during the fourth quarter of the fiscal year ended September 30, 2001.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the NASDAQ Small-Cap Market
(symbol PANRA). The following table sets forth the high and low trade prices of
the Company's common stock during the periods indicated:
(9)
Quarter Ended HIGH LOW
----------------- ------- -------
December 31, 1999 $ 9.000 $ 6.500
March 31, 2000 $ 8.250 $ 7.000
June 30, 2000 $ 9.500 $ 7.375
September 30, 2000 $17.000 $ 8.750
December 31, 2000 $14.000 $12.250
March 31, 2001 $19.563 $13.250
June 30, 2001 $23.000 $18.050
September 30, 2001 $19.010 $15.160
As of December 4, 2001, the approximate number of holders of shares of
Panhandle stock were:
Title of Class Number of Holders
---------------------- -----------------
Class A Common (Voting)................................... 2,600
During the past two years, cash dividends have been paid as follows on
the class A common stock:
DATE RATE PER SHARE
---- --------------
December 1999 $ .07
March 2000 $ .07
June 2000 $ .07
September 2000 $ .07
December 2000 $ .07
March 2001 $ .14
June 2001 $ .07
September 2001 $ .07
The Company's line of credit loan agreement contains a provision
limiting the paying or declaring of a cash dividend to fifty percent of cash
flow, as defined, of the preceding twelve-month period. See Note 3 to the
consolidated financial statements contained herein at "Item 7 - Financial
Statements", for a further discussion of the loan agreement.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company had positive working capital of
$1,044,334, a decrease of $668,472, compared to year-end September 30, 2000.
Cash flow from operating activities increased 73% to $9,302,965 for fiscal 2001,
as compared to fiscal 2000. This increase was a result of increased oil and gas
sales revenues during fiscal 2001, which are discussed in detail in "Results of
Operations."
(10)
Capital expenditures on oil and gas activities in fiscal 2001
amounted to $9,481,077, a 133% increase from the $4,070,865 expended in fiscal
2000. This increased spending was the result of increased market prices for
natural gas and crude oil stimulating new wells to be drilled. The Company
participated in a record number of wells in fiscal 2001. As market prices began
declining during the last part of the year, well proposals submitted to the
Company for drilling participations began decreasing, and have continued to
decline.
Historically, the Company has funded drilling costs and other
capital expenditures, as well as overhead costs and dividend payments, from
operating cash flow. However, in fiscal 2001, the Company borrowed $300,000
under it's bank line-of-credit to help fund the above costs. As of September 30,
2001, the Company had also borrowed $3,750,000 to use as an escrow deposit on
the Wood Oil Company acquisition discussed in Item 1. Business Development,
herein.
The Company expects to continue its business strategy of
aggressive drilling participation in fiscal 2002, and well into the future. At
September 30, 2001, the Company had projected costs of $4,689,000, for its share
of drilling and equipment costs on working interest wells which have been
proposed or were in the process of being drilled or completed. Management
currently anticipates spending a total of approximately $6,250,000, for
exploration and development costs on its oil and gas properties in fiscal 2002.
These capital costs, along with overhead expenses and dividend payments, are
expected to be funded by cash flow and from borrowings, if needed, under the
Company's bank line-of-credit. Anticipated cash flows are sufficient to meet
currently expected capital obligations. As capital expenditure amounts can vary
due to many factors, including drilling results, oil and gas prices, industry
conditions and acquisition opportunities, the exact amount of future capital
expenditures is not known. The Company has its bank line-of-credit, that had
additional borrowing capacity of $4,850,000 as of December 4, 2001, to
supplement cash flow from operations, if needed.
RESULTS OF OPERATIONS
Revenues increased $3,517,948 or 38% in fiscal 2001, as compared
to fiscal 2000. The increased revenues were attributable to a $3,454,135
increase in oil and gas sales revenues. Oil and gas sales revenues increased due
to a large increase in the average sales price for natural gas in fiscal 2001,
as compared to fiscal 2000 sales price. The chart below summarizes the Company's
sales volumes and average sales prices for oil and natural gas in fiscal 2001
and 2000.
OIL AND GAS SALES
OIL GAS
----------------- ---------------------
Total Average Total Average
BBLS Price/BBL MCF Price/MCF
----- --------- ----- ---------
Year-Ended 9/30/01 68,530 $ 28.16 2,208,238 $ 4.81
Year-Ended 9/30/00 66,609 $ 27.13 2,454,844 $ 3.03
(11)
The decrease in gas sales volume in fiscal 2001, was due to
decreased sales from the Potato Hills field in southeast Oklahoma. Several of
these wells are maturing and normal production decline is taking place.
Additionally, nationwide gas storage facilities filled up quickly as summer
approached, limiting demand for gas.
Natural gas sales prices increased rapidly in early fiscal 2001
hitting a high of approximately $10.00 MCF in January 2001. These high prices
apparently reduced demand for natural gas, resulting in prices dropping
throughout the remainder of fiscal 2001, hitting a low of under $2.00 MCF at
September 30, 2001.
Oil production and average oil sales prices remained relatively
flat in fiscal 2001 compared to fiscal 2000. New oil production from wells in
Oklahoma replaced declining production volumes in the Dagger Draw field of New
Mexico.
Costs and Expenses increased $1,436,489 or 26% in fiscal 2001,
as compared to fiscal 2000. The increase was due to increased production taxes
on the increased oil and gas sales revenues of fiscal 2001, and increased
non-cash charges for impairment costs and exploration costs (principally dry
hole costs).
Exploration costs increased $432,307 or 84% in fiscal 2001
verses fiscal 2000. These costs are primarily dry hole costs. The Company
participated in a record number of wells in fiscal 2002, many of which were
exploratory. As the Company utilizes the successful efforts method of accounting
for oil and gas operations, dry holes result in the current period expensing of
all costs associated with these wells. The Company expects to continue its
aggressive drilling participations, including exploratory wells, thus, future
exploration costs can be expected.
The Company recognized an impairment provision on its proved oil
and gas properties of $848,535 in fiscal 2001 as compared to a provision of
$262,998 in fiscal 2000. The 2001 impairment provision significantly increased
over the fiscal 2000 amount due to well reserves and future net cash flows from
those reserves being negatively impacted by reduced prices used in the
calculations in fiscal 2001 as compared to fiscal 2000. The lower 2001 reserve
volumes and the currently anticipated lower oil and gas price forecasts as
compared to prior period forecasts resulted in several fields with insufficient
net cash flow to recover the Company's carrying cost. Thus, these fields were
written down to estimated fair value.
Gross production taxes are paid as a percentage of oil and gas
sales revenues. Increased revenues in fiscal 2001 increased gross production
taxes paid in fiscal 2001 by approximately $186,000, as compared to fiscal 2000.
Lease operating expenses continue to increase each year; $127,000 higher in 2001
as compared to 2000; as the Company adds additional working interest wells each
year. Also, the Company has an interest in several newly completed oil wells,
which have relatively high operating costs.
General and administrative costs increased $239,185 in fiscal
2001, as compared to fiscal 2000. This increase was principally the result of
the Company paying an investment banking firm $200,000 to provide a valuation of
the Company, strategic planning and other advice. In addition, personnel related
expenses (including salaries, payroll taxes,
(12)
insurance expenses and ESOP expense) increased approximately $98,000 in fiscal
2001, along with rent expense and professional fees. These increases were offset
by a reduction in current period expense related to the Non-Employee Director's
Deferred Compensation Plan ("the Plan"). This decrease was a result of the
Company recognizing a charge to general and administrative expense of
approximately $175,000 to adjust the potential shares in the Plan to market
price at September 30, 2000, verses a comparable charge to expense of
approximately $31,000 for fiscal 2001. The Non-Employee directors have taken
these potential shares, rather than a cash payment for their directors fees.
The provision for income taxes increased in fiscal 2001, due to
a much larger income before taxes (as discussed above). The Company continues to
be able to utilize tax credits from production of "tight gas sands" natural gas
and excess percentage depletion on it's oil and gas properties to reduce its tax
liability, and an effective tax rate from the federal and state statutory rates.
The effective tax rate was approximately 27% and 24% in fiscal 2001 and 2000,
respectively.
OUTLOOK FOR FISCAL YEAR 2002
Forward-looking statements for 2002 and later periods are made
throughout 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 risk, drilling
risk, reserve quantity risk and operations and production risks. 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.
As discussed above, the increase in net income in fiscal 2001
was attributable to increased oil and gas sales revenues, partially offset by
increased expenses. Management currently expects average 2002 natural gas sales
prices to be substantially lower than fiscal 2001 average levels. However,
recent well completions should keep natural gas and crude oil production at
approximately equal to or slightly higher than fiscal 2001 levels. The above
factors, should allow the Company in fiscal 2002, to continue reporting strong
earnings. However, as management has no control over market prices of natural
gas or crude oil, continued price reductions could affect year 2002 results.
Also, unexpected production declines from large volume wells or investments in
exploratory well drilling resulting in dry hole costs, could adversely affect
2002 earnings.
The acquisition on October 1, 2001 of Wood Oil Company will
materially add to the Company's revenues and reserve base for fiscal 2002 and
beyond. The adjusted cash purchase price of $22,603,886 was funded by Wood Oil
working capital and a $20,000,000 five year term loan. Monthly payments on the
loan are $333,000, plus accrued interest. The additional cash flow from Wood's
oil and gas properties is currently expected to be sufficient to meet the
required debt payments on the term loan in fiscal 2002.
(13)
The acquisition will be accounted for as a purchase,
accordingly, Wood's financial results will be consolidated with Panhandle's,
beginning October 1, 2001. All assets acquired and any liabilities assumed will
be recorded at their fair values with any remaining differences between the
purchase price of Wood recorded as goodwill. Thus, fiscal 2002 consolidated
results of operations will show not only increased revenues but depreciation,
depletion and amortization expenses will be significantly increased over 2001
and there will also be added general and administrative costs associated with
the three Wood Oil employees added to Panhandle's staff and costs associated
with moving Wood's offices to Oklahoma City.
ITEM 7. FINANCIAL STATEMENTS
Report of Independent Auditors ..................................... 15
Consolidated Balance Sheets
As of September 30, 2001 and 2000 ......................... 16
Consolidated Statements of Income For The
Years Ended September 30, 2001 and 2000 ................... 17
Consolidated Statements of Stockholders' Equity For
The Years Ended September 30, 2001 and 2000 ............... 18
Consolidated Statements of Cash Flows For
The Years Ended September 30, 2001 and 2000 ............... 19
Notes To Consolidated Financial Statements ......................... 20-35
(14)
Report of Independent Auditors
Board of Directors and Stockholders
Panhandle Royalty Company
We have audited the accompanying consolidated balance sheets of Panhandle
Royalty Company (the Company) as of September 30, 2001 and 2000, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Panhandle Royalty
Company at September 30, 2001 and 2000, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States.
ERNST & YOUNG LLP
Oklahoma City, OK
December 14, 2001
(15)
Panhandle Royalty Company
Consolidated Balance Sheets
SEPTEMBER 30
2001 2000
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 98,970 $ 815,912
Oil and gas sales receivable 1,566,538 1,955,590
Income tax receivable 294,137 --
Prepaid expenses 4,552 3,817
----------- -----------
Total current assets 1,964,197 2,775,319
Property and equipment at cost, based on successful
efforts accounting:
Producing oil and gas properties 35,586,081 27,282,697
Nonproducing oil and gas properties 6,384,332 6,154,159
Furniture and fixtures 287,268 280,877
----------- -----------
42,257,681 33,717,733
Less accumulated depreciation, depletion, and amortization
22,909,937 20,390,441
----------- -----------
Net properties and equipment 19,347,744 13,327,292
Escrow deposit and deferred costs related to Wood Oil acquisition
3,860,027 --
Other assets 107,716 107,716
----------- -----------
Total assets $25,279,684 $16,210,327
=========== ===========
(Continued on next page.)
(16)
SEPTEMBER 30
2001 2000
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 856,594 $ 703,917
Gas imbalance liability 55,527 55,527
Dividends payable 7,742 7,742
Income taxes payable -- 249,327
Deferred income taxes -- 46,000
----------- -----------
Total current liabilities 919,863 1,062,513
Long-term debt 4,050,000 --
Deferred income taxes 3,284,000 1,794,000
Deferred lease bonus 30,771 --
Stockholders' equity:
Class A voting common stock, $.0333 par value;
6,000,000 shares authorized, 2,066,441 issued and
outstanding (2,060,206 in 2000) 68,881 68,673
Capital in excess of par value 702,948 608,280
Retained earnings 16,223,221 12,676,861
----------- -----------
Total stockholders' equity 16,995,050 13,353,814
----------- -----------
Total liabilities and stockholders' equity $25,279,684 $16,210,327
=========== ===========
See accompanying notes.
(17)
Panhandle Royalty Company
Consolidated Statements of Income
YEAR ENDED SEPTEMBER 30
2001 2000
----------- -----------
Revenues:
Oil and gas sales $12,546,055 $ 9,091,920
Lease bonuses and rentals 17,991 82,030
Interest 47,141 17,689
Other 184,735 86,335
----------- -----------
12,795,922 9,277,974
Costs and expenses:
Lease operating expenses and production taxes 1,771,789 1,458,935
Exploration costs 947,046 514,739
Depreciation, depletion, and amortization 1,670,961 1,789,491
Provision for impairment 848,535 262,998
General and administrative 1,689,426 1,450,241
Interest expense 779 15,643
----------- -----------
6,928,536 5,492,047
----------- -----------
Income before provision for income taxes 5,867,386 3,785,927
Provision for income taxes 1,600,000 925,000
----------- -----------
Net income $ 4,267,386 $ 2,860,927
=========== ===========
Basic earnings per share $ 2.07 $ 1.39
=========== ===========
Diluted earnings per share $ 2.05 $ 1.38
=========== ===========
See accompanying notes.
(18)
Panhandle Royalty Company
Consolidated Statements of Stockholders' Equity
COMMON STOCK CAPITAL IN
-------------------------- EXCESS OF RETAINED
SHARES AMOUNT PAR VALUE EARNINGS TOTAL
--------- ------------ ------------ ------------ ------------
Balances at September 30, 1999 2,056,990 $ 68,566 $ 587,058 $ 10,392,980 $ 11,048,604
Purchase and cancellation of common
shares (3,368) (112) (70,798) -- (70,910)
Issuance of common shares to ESOP 6,584 219 92,020 -- 92,239
Dividends declared ($.28 per share) -- -- -- (577,046) (577,046)
Net income -- -- -- 2,860,927 2,860,927
--------- ------------ ------------ ------------ ------------
Balances at September 30, 2000 2,060,206 68,673 608,280 12,676,861 13,353,814
Purchase and cancellation of common
shares (146) (5) (1,855) -- (1,860)
Issuance of common shares to ESOP 6,381 213 96,523 -- 96,736
Dividends declared ($.35 per share) -- -- -- (721,026) (721,026)
Net income -- -- -- 4,267,386 4,267,386
--------- ------------ ------------ ------------ ------------
Balances at September 30, 2001 2,066,441 $ 68,881 $ 702,948 $ 16,223,221 $ 16,995,050
========= ============ ============ ============ ============
See accompanying notes.
(19)
Panhandle Royalty Company
Consolidated Statements of Cash Flows
YEAR ENDED SEPTEMBER 30
2001 2000
------------ ------------
OPERATING ACTIVITIES
Net income $ 4,267,386 $ 2,860,927
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation, depletion, amortization, and impairment 2,519,496 2,052,489
Deferred income taxes 1,444,000 271,000
Deferred lease bonus 30,771 --
Exploration costs 947,046 514,739
Common stock issued to Employee Stock Ownership Plan 96,736 92,239
Cash provided (used) by changes in assets and liabilities:
Oil and gas sales and other receivables 389,052 (821,437)
Income taxes receivable (294,137) --
Prepaid expenses (735) 315
Accounts payable and accrued liabilities 152,677 192,795
Income taxes payable (249,327) 202,999
------------ ------------
Total adjustments 5,035,579 2,505,139
------------ ------------
Net cash provided by operating activities 9,302,965 5,366,066
INVESTING ACTIVITIES OF PROPERTY AND EQUIPMENT
Capital expenditures, including dry hole costs (9,486,994) (4,089,851)
Escrow deposit and payments related to Wood Oil acquisition (3,860,027) --
------------ ------------
Net cash used in investing activities (13,347,021) (4,089,851)
FINANCING ACTIVITIES
Borrowings under line of credit 4,050,000 500,000
Payments of loan principal -- (500,000)
Purchase and cancellation of common shares (1,860) (70,910)
Payments of dividends (721,026) (602,600)
------------ ------------
Net cash provided by (used in) financing activities 3,327,114 (673,510)
------------ ------------
Increase (decrease) in cash and cash equivalents (716,942) 602,705
Cash and cash equivalents at beginning of year 815,912 213,207
------------ ------------
Cash and cash equivalents at end of year $ 98,970 $ 815,912
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ 36,798 $ 15,643
Income taxes paid, net of refunds received 699,464 451,167
See accompanying notes.
(20)
Panhandle Royalty Company
Notes to Consolidated Financial Statements
September 30, 2001 and 2000
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Panhandle Royalty
Company and its wholly owned subsidiary, P.H.C., Inc. All material intercompany
transactions have been eliminated in the accompanying consolidated financial
statements.
CASH EQUIVALENTS
All highly liquid short-term investments with original maturities of three
months or less at the date of purchase by the Company are considered to be cash
equivalents.
OIL AND GAS SALES
The Company sells oil and natural gas to various customers, recognizing revenues
as oil and gas is produced and sold. Substantially all of the Company's accounts
receivable are due from purchasers of oil and natural gas or operators of the
oil and gas properties. Oil and natural gas sales are generally unsecured. The
Company has not experienced significant credit losses in prior years and is not
aware of any significant uncollectible accounts at September 30, 2001.
OIL AND GAS PRODUCING ACTIVITIES
The Company follows the successful efforts method of accounting for oil and gas
producing activities. Intangible drilling and other costs of successful wells
and development dry holes are capitalized and amortized. The costs of
exploratory wells are initially capitalized, but charged against income if and
when the well is determined to be nonproductive. Oil and gas mineral and
leasehold costs are capitalized when incurred.
DEPRECIATION, DEPLETION, AMORTIZATION, AND IMPAIRMENT
Depreciation, depletion, and amortization of the costs of producing oil and gas
properties are generally computed using the units of production method primarily
on a separate-property basis using proved reserves as estimated annually by an
independent petroleum engineer. Depreciation of furniture and fixtures is
computed using the straight-line method over estimated productive lives of five
to eight years.
(21)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company has significant royalty interests in wells for which the Company
does not share in the costs associated with the wells. Estimated costs of future
dismantlement, restoration and abandonment of wells in which the Company owns a
working interest are not expected to differ significantly from the estimated
salvage value of equipment from such wells and, accordingly, no accrual of such
costs is included in the accompanying consolidated financial statements.
Nonproducing oil and gas properties include nonproducing minerals, which have a
net book value of $4,095,680 at September 30, 2001, consisting of perpetual
ownership of mineral interests in several states, including Oklahoma, Texas and
New Mexico. These costs are being amortized over a thirty-three year period
using the straight-line method. An ultimate determination of whether these
properties contain recoverable reserves in economical quantities is expected to
be made within this time frame. Impairment of nonproducing oil and gas
properties is recognized based on experience and management judgment.
In accordance with the provisions of Financial Accounting Standards (SFAS) No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, the Company recognizes impairment losses for
long-lived assets when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. Fair values are based on discounted future cash flows. The
Company's oil and gas properties were reviewed for indicators of impairment on a
field-by-field basis, resulting in the recognition of impairment provisions of
$848,535 and $262,998, respectively, for 2001 and 2000. The majority of the
impairment recognized in these years relates to fields comprised of a small
number of wells on which the Company does not expect sufficient future net cash
flow to recovery its carrying cost.
ENVIRONMENTAL COSTS
Environmental liabilities, which historically have not been material, are
recognized when it is probable that a loss has been incurred and the amount of
that loss is reasonably estimable. Environmental liabilities, when accrued, are
based upon estimates of expected future costs. At September 30, 2001, there were
no such costs accrued.
(22)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
PRODUCTION IMBALANCES
During the course of normal production operations, joint interest owners will,
from time to time, take more or less than their ownership share of natural gas
volumes from jointly-owned wells. These production imbalances are monitored over
the life of the well to achieve balancing, or to minimize imbalances, by the
time reserves are depleted, with final cash settlements made under a variety of
arrangements at that time. The Company follows the sales method of accounting
for imbalances. A receivable or liability is recorded to the extent that an
under produced or overproduced position in a reservoir cannot be recouped
through production of remaining reserves. At September 30, 2001 and 2000, the
Company has recorded a liability of $55,527 related to overproduced positions of
approximately 31,000 mcf. The Company's remaining production imbalances were not
significant at September 30, 2001 or 2000.
EARNINGS PER SHARE OF COMMON STOCK
Basic earnings per share (EPS) is calculated using net income divided by the
weighted average of common shares outstanding during the year. Diluted EPS is
similar to basic EPS except that the weighted average common shares outstanding
is increased to include the number of additional common shares that would have
been outstanding if the dilutive potential common shares had been issued. The
treasury stock method is used to calculate dilutive shares, which reduces the
gross number of dilutive shares (see Note 5).
(23)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following information is provided regarding the estimated fair value of the
Company's financial instruments at September 30, 2001 and 2000:
Cash and cash equivalents, receivables, prepaid expenses, accounts
payable, and accrued liabilities are each estimated to have a fair
value approximating the carrying amount due to the short maturity of
those instruments. The fair value of Company's long-term debt
approximates its carrying amount due to the variable interest rate on
these borrowings.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations (SFAS No. 141) which addresses financial accounting
and reporting for business combinations. SFAS No. 141 is effective for all
business combinations initiated after June 30, 2001, and for all business
combinations accounted for under the purchase method initiated before but
completed after June 30, 2001. In addition, in July 2001 the FASB issued SFAS
No. 142, Goodwill and Other Intangible Assets (SFAS No. 142) which addresses
financial accounting and reporting for acquired goodwill and other intangible
assets. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001, and applies to all goodwill and other intangibles recognized in the
financial statements at that date. Early adoption of SFAS No. 142 is permitted.
The Company expects to adopt SFAS No. 142 on October 1, 2001 in connection with
its acquisition of Wood Oil Company (see Note 11).
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143) and in October 2001, issued SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS No. 144). 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. SFAS No. 143 is effective for fiscal years beginning after June
15, 2002. SFAS No. 144 addresses financial accounting and reporting for the
impairment of long-lived assets and for long-lived assets to be disposed of. It
(24)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
supersedes, with exceptions, SFAS No. 121 and is effective for fiscal years
beginning after December 15, 2001. The Company is currently assessing the impact
of SFAS No. 143 and No. 144; however, at this time does not believe the impact
of these standards will be material to the Company's financial position or
results of operations.
2. INCOME TAXES
The Company's provision for income taxes is detailed as follows:
2001 2000
----------- -----------
Current:
Federal $ 160,000 $ 647,000
State (4,000) 7,000
----------- -----------
156,000 654,000
Deferred:
Federal 1,232,000 244,000
State 212,000 27,000
----------- -----------
1,444,000 271,000
----------- -----------
$ 1,600,000 $ 925,000
=========== ===========
The difference between the provision for income taxes and the amount which would
result from the application of the federal statutory rate to income before
provision for income taxes is analyzed below:
2001 2000
----------- -----------
Provision for income taxes at statutory rate $ 2,053,587 $ 1,325,074
Percentage depletion (559,668) (368,687)
Tight-sands gas credits (47,114) (59,359)
State income taxes, net of federal benefit 141,099 22,125
Other 12,096 5,847
----------- -----------
$ 1,600,000 $ 925,000
=========== ===========
(25)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
2. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities, resulting from differences between the
financial statement carrying amounts and the tax bases of assets and
liabilities, consist of the following:
2001 2000
---------- ----------
Deferred tax liabilities:
Capitalized costs and related depreciation, depletion,
amortization, and impairment $3,592,000 $1,794,000
Cash basis of accounting for income tax purposes -- 46,000
---------- ----------
3,592,000 1,840,000
Deferred tax assets:
Percentage depletion carryforward 308,000 --
Alternative minimum tax credit carryforwards -- --
---------- ----------
308,000 --
---------- ----------
Net deferred tax liabilities $3,284,000 $1,840,000
========== ==========
3. LONG-TERM DEBT
The Company has a revolving line of credit agreement with a bank, which extends
through December 31, 2002, for borrowings up to $5,000,000, which bear interest
at the bank's base rate minus .25% (5.75% at September 30, 2001). Any
outstanding borrowings are unsecured but subject to a negative pledge on all of
the Company's oil and gas properties and are payable in full, with accrued and
unpaid interest, on December 31, 2002. The Company is required to pay an annual
fee of .06% for the unused portion of the line of credit. The outstanding
balance was $4,050,000 at September 30, 2001 (none at September 30, 2000).
The agreement contains various restrictions which, among other things, require
the Company to maintain, at the end of each quarter, positive net income for the
preceding twelve-month period. Additionally, the Company is restricted from
incurring certain indebtedness, selling oil and gas properties for which the
proceeds received exceed $250,000, acquiring treasury stock in any one year in
excess of $250,000 and paying or declaring cash dividends exceeding fifty
percent of the cash flow from operations, as defined, for the preceding
twelve-month period.
(26)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
4. DIVIDENDS PAYABLE
Dividends payable represent accrued dividends which are due and payable, but
have not been paid for various reasons, including questions concerning estates
of deceased stockholders, unlocatable stockholders or questions of ownership of
the underlying shares.
5. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share. The Company's diluted earnings per share calculation takes into account
certain shares that may be issued under the Non-Employee Directors' Deferred
Compensation Plan (see Note 7).
YEAR ENDED SEPTEMBER 30
2001 2000
---------- ----------
Numerator for primary and diluted earnings per share:
Net income $4,267,386 $2,860,927
========== ==========
Denominator:
For basic earnings per share--weighted average shares
2,060,109 2,055,470
Effect of potential diluted shares:
Directors' deferred compensation shares 24,935 21,960
---------- ----------
Denominator for diluted earnings per share--adjusted weighted
average shares and potential shares 2,085,044 2,077,430
========== ==========
Basic earnings per share $ 2.07 $ 1.39
========== ==========
Diluted earnings per share $ 2.05 $ 1.38
========== ==========
(27)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
6. EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan that covers substantially all
employees and is established to provide such employees with a retirement
benefit. These benefits become fully vested after three years of employment.
Contributions to the plan are at the discretion of the Board of Directors and
can be made in cash (none in 2001 or 2000) or the Company's common stock. For
contributions of common stock, the Company records as expense, the fair market
value of the stock at the time of contribution. The 114,590 shares of the
Company's common stock held by the plan as of September 30, 2001, are allocated
to individual participant accounts, are included in the weighted average shares
outstanding for purposes of earnings per share computations and receive
dividends. Contributions to the plan consisted of:
YEAR SHARES AMOUNT
---- ------ --------
2001 6,381 $96,736
2000 6,584 $92,239
1999 9,625 $73,391
7. DEFERRED COMPENSATION PLAN FOR DIRECTORS
Effective November 1, 1994, the Company formed the Panhandle Royalty Company
Deferred Compensation Plan for Non-Employee Directors (the Plan). The Plan
provides that each eligible director can individually elect to receive shares of
Company stock rather than cash for board meeting fees and board committee
meeting fees. These shares are unissued and vest at the date of grant. The
shares are credited to each director's deferred fee account at the fair market
value of the stock at the date of grant and are adjusted for changes in market
value subsequent thereto. Upon retirement, termination or death of the director,
or upon change in control of the Company, the shares accrued under the Plan will
be either issued to the director or may be converted to cash, at the director's
discretion, for the fair market value of the shares on the conversion date as
defined by the Plan. As of September 30, 2001, 24,935 shares (21,960 shares at
September 30, 2000) are included in the Plan. The Company has accrued $378,014
at September 30, 2001 ($307,444 at September 30, 2000) in connection with the
Plan which is included in accrued liabilities in the accompanying consolidated
balance sheet ($70,570 and $174,717 was charged to the results of operations for
the years ended September 30, 2001 and 2000, respectively, and is included in
general and administrative expense in the accompanying income statement).
(28)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
8. INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
All oil and gas producing activities of the Company are conducted within the
United States (principally Oklahoma and New Mexico) and represent substantially
all of the business activities of the Company.
During 2001 and 2000 approximately 23% and 21%, respectively, of the Company's
total revenues were derived from gas sales to ONEOK, Inc. The Company also has
interests in a field of properties, the production on which accounted for
approximately 15% of the Company's revenues in 2001 and 2000.
AGGREGATE CAPITALIZED COSTS
The aggregate amount of capitalized costs of oil and gas properties and related
accumulated depreciation, depletion, and amortization as of September 30 is as
follows:
2001 2000
------------ ------------
Producing properties $ 35,586,081 $ 27,282,697
Nonproducing properties 6,384,332 6,154,159
------------ ------------
41,970,413 33,436,856
Accumulated depreciation, depletion and amortization (22,662,509) (20,164,045)
------------ ------------
Net capitalized costs $ 19,307,904 $ 13,272,811
============ ============
COSTS INCURRED
During the reporting period, the Company incurred the following costs in oil and
gas producing activities:
2001 2000 1999
---------- ---------- ----------
Property acquisition costs $ 194,645 $ 528,691 $ 445,827
Exploration costs 3,839,009 1,776,773 514,546
Development costs 5,447,423 1,765,401 1,399,795
---------- ---------- ----------
$9,481,077 $4,070,865 $2,360,168
========== ========== ==========
(29)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED)
The following unaudited information regarding the Company's oil and natural gas
reserves is presented pursuant to the disclosure requirements promulgated by the
Securities and Exchange Commission (SEC) and SFAS No. 69, Disclosures About Oil
and Gas Producing Activities.
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those proved reserves that
can be expected to be recovered through existing wells with existing equipment
and operating methods. Because the Company's nonproducing mineral and leasehold
interests consist of various small interests in numerous tracts located
primarily in Oklahoma, New Mexico, and Texas, it is not economically feasible
for the Company to provide estimates of all proved undeveloped reserves. The
Company directs its independent petroleum engineering firm to include proved
undeveloped reserves in certain areas of Oklahoma and New Mexico in the scope of
properties which are evaluated for the Company. Due to field production
allowable rules in the Dagger Draw field of New Mexico only those proved
undeveloped reserves which the Company felt could be drilled, under existing
allowable rules, have been included. Should the allowable rules be amended
and/or production volumes change significantly, additional proved undeveloped
reserves in the Dagger Draw field of New Mexico may be added in the future.
The Company's net proved (including certain undeveloped reserves described
above) oil and gas reserves, all of which are located in the United States, as
of September 30, 2001, 2000, and 1999, have been estimated by Campbell &
Associates, Inc., an independent petroleum engineering firm. All studies have
been prepared in accordance with regulations prescribed by the Securities and
Exchange Commission. The reserve estimates were based on economic and operating
conditions existing at September 30, 2001, 2000, and 1999. Since the
determination and valuation of proved reserves is a function of testing and
estimation, the reserves presented should be expected to change as future
information becomes available.
(30)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)
ESTIMATED QUANTITIES OF PROVED OIL AND GAS RESERVES
Net quantities of proved, developed, and undeveloped oil and gas reserves are
summarized as follows:
PROVED RESERVES
-------------------------
OIL GAS
(Mbarrels) (Mmcf)
---------- ----------
September 30, 1999 721 13,115
Revisions of previous estimates (1) (81) 396
Purchases of reserves in place 6 147
Extensions and discoveries 81 3,186
Production (67) (2,455)
---------- ----------
September 30, 2000 660 14,389
Revisions of previous estimates (1) (47) (2,178)
Extensions and discoveries 132 7,685
Production (69) (2,208)
---------- ----------
September 30, 2001 676 17,688
========== ==========
(1) Oil and gas revisions in 2001 are primarily related to those reserves
that were uneconomical at the lower prices that existed at September
30, 2001. Gas revisions in 2000 are primarily related to those reserves
that were economically recoverable at the higher prices that existed at
September 30, 2000, which were not economically recoverable at prices
existing at September 30, 1999. In 2000 and 1999, oil reserves were
also revised downward due to a decline in production of certain New
Mexico properties after being shut-in for several months in 1999 due to
depressed oil prices.
(31)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)
PROVED DEVELOPED RESERVES PROVED UNDEVELOPED RESERVES
------------------------- ---------------------------
OIL GAS OIL GAS
(Mbarrels) (Mmcf) (Mbarrels) (Mmcf)
---------- ---------- ---------- ----------
September 30, 1999 433 11,519 288 1,596
========== ========== ========== ==========
September 30, 2000 409 11,585 251 2,804
========== ========== ========== ==========
September 30, 2001 413 13,236 263 4,452
========== ========== ========== ==========
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
Estimates of future cash flows from proved oil and gas reserves, based on
current prices and costs, as of September 30 are shown in the following table.
Estimated income taxes are calculated by (i) applying the appropriate year-end
tax rates to the estimated future pretax net cash flows less depreciation of the
tax basis of properties and statutory depletion allowances and (ii) reducing the
amount in (i) for estimated tax credits to be realized in the future for gas
produced from "tight-sands."
2001 2000
----------- -----------
Future cash inflows $48,294,240 $78,668,350
Future production costs 9,355,230 12,308,320
Future development costs 2,999,402 1,273,629
----------- -----------
Future net cash inflows before future income tax expenses 35,939,608 65,086,401
Future income tax expense 9,381,868 18,332,743
----------- -----------
Future net cash flows 26,557,740 46,753,658
10% annual discount 8,927,795 15,892,344
----------- -----------
Standardized measure of discounted future net cash flows $17,629,945 $30,861,314
=========== ===========
(32)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
9. SUPPLEMENTARY INFORMATION ON OIL AND GAS RESERVES (UNAUDITED) (CONTINUED)
Changes in the standardized measure of discounted future net cash flows are as
follows:
2001 2000
------------ ------------
Beginning of year $ 30,861,314 $ 20,071,898
Changes resulting from:
Sales of oil and gas, net of production costs (10,774,266) (7,632,985)
Net change in sales prices and production costs (17,851,098) 11,642,854
Net change in future development costs (1,154,469) (60,124)
Extensions and discoveries 10,190,264 8,886,844
Revisions of quantity estimates (2,981,154) (221,761)
Purchases of minerals-in-place -- 438,663
Accretion of discount 3,086,132 2,007,190
Net change in income taxes 6,185,986 (4,807,558)
Change in timing and other, net 67,236 536,293
------------ ------------
End of year $ 17,629,945 $ 30,861,314
============ ============
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the Company's unaudited quarterly results of
operations.
FISCAL 2001
--------------------------------------------------------
QUARTER ENDED
--------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- ---------- ---------- ------------
Revenues $ 3,474,221 $3,940,975 $2,918,603 $ 2,462,123
Income before provision for income
taxes (A) 1,561,911 2,374,071 1,367,935 563,469
Net income (B) 1,386,310 1,690,071 1,027,935 163,070
Basic earnings per share $ .67 $ .82 $ .50 $ .08
Diluted earnings per share $ .67 $ .82 $ .49 $ .08
(33)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) (CONTINUED)
FISCAL 2000
-------------------------------------------------------
QUARTER ENDED
-------------------------------------------------------
DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30
----------- ---------- ---------- ------------
Revenues $1,650,961 $2,240,986 $2,410,493 $2,975,534
Income before provision for income
taxes (A) 406,258 1,002,720 1,253,740 1,123,209
Net income (B) 364,258 722,720 943,740 830,209
Basic earnings per share $ .18 $ .35 $ .46 $ .40
Diluted earnings per share $ .18 $ .35 $ .46 $ .39
(A) Fourth quarter income before provision for income taxes includes an
SFAS No. 121 charge of $623,535 and $112,998 for 2001 and 2000,
respectively.
(B) Year-end adjustments to the Company's provision for income taxes caused
the effective rate for 2001 and 2000 to be less than that estimated
during the previous three quarters. The effect of this difference is
reflected in the fourth quarter net income above.
11. SUBSEQUENT EVENT (UNAUDITED)
On October 1, 2001 Panhandle Royalty Company acquired privately held Wood Oil
Company (Wood) of Tulsa, Oklahoma. The acquisition was made pursuant to an
Agreement and Plan of Merger among Panhandle Royalty 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 an office
building in Tulsa. Wood will continue to operate as a subsidiary of Panhandle
and will be moved to Oklahoma City in early 2002. Wood and its shareholders were
unrelated parties to Panhandle.
Wood's assets, in addition to those mentioned above, included approximately
71,000 net acres of fee minerals and 14,923 net leasehold acres located
primarily in Oklahoma, Texas and 17 additional states. Wood owns non-operating,
royalty and working interests in
(34)
Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued)
11. SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
approximately 2,000 producing wells with estimated net proven reserves of 13.1
billion cubic feet of natural gas equivalents at October 1, 2001. Daily
production is approximately 4,700 mcf and 166 barrels of oil. For the years
ended July 31, 2001 and 2000, Wood had total revenues of $11.9 million and $5.6
million and net income of $5.5 million and $1.6 million, respectively.
The preliminary adjusted cash purchase price was $22,603,886, which included
working capital assumed of $4,195,794. Funding for the acquisition was obtained
from BancFirst of Oklahoma City, Oklahoma in the form of a $20,000,000 five-year
term loan. Three million dollars of Wood's cash was used to reduce Panhandle's
debt on the date of closing.
The acquisition will be accounted for as a purchase, accordingly, Wood's
financial results will be consolidated with Panhandle's beginning October 1,
2001. Under the purchase method, identifiable assets and liabilities of Wood
will be recorded at their fair values. The remaining difference between the
purchase price of Wood, including direct costs of the acquisition, will be
recorded as goodwill. Based on the preliminary purchase price allocation, the
Company expects to record goodwill of approximately $4.0 million.
(35)
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
NONE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a)
OF THE EXCHANGE ACT
Listed below are the names, ages and positions, as of December
4, 2001, of the directors and executive officers of the Company. The Company's
bylaws provide for seven directors who are elected for staggered three-year
terms. Executive officers are appointed by the board of directors to serve in
their respective capacities until their successors are duly appointed by the
directors.
DIRECTORS
Served As
Term Director
Name Age Position & Offices Expires Since
---------------------- --- ------------------ ------- ---------
Michael A. Cawley (b) 54 Director 2004 1991
Sam J. Cerny (a) 69 Director 2003 1993
E. Chris Kauffman (b)(c) 61 Director 2003 1991
(d)
H W Peace II (b) 66 Director, Chief 2002 1991
Executive Officer,
President
Ray H. Potts (c) 69 Director 2004 1997
Robert A. Reece (a)(c) 57 Director 2002 1986
Jerry L. Smith (a) 61 Director, Chairman 2002 1987
of the Board
(a) Member of Audit Committee
(b) Member of Compensation Committee
(c) Member of Retirement Committee
(d) The sale of 2,700 shares of Panhandle Royalty Company
class A common stock in July, 2001 by the Estate of
Linda Partricia Kauffman was not reported by Mr.
Kauffman on FORM 4, until December 28, 2001.
(36)
EXECUTIVE OFFICERS
Name Age Office Since
------------------ --- ----------------------- -----
Jerry L. Smith 61 Chairman of the Board 1997
H W Peace II 66 Chief Executive Officer 1991
President
Michael C. Coffman 48 Vice President, 1990
Chief Financial Officer,
Secretary/Treasurer
Wanda C. Tucker 64 Vice President of Land 1990
BUSINESS EXPERIENCE
Michael A. Cawley is an attorney and is the president and chief
executive officer of the Samuel Roberts Noble Foundation, Inc. He has been
employed by the Noble Foundation for the last seven years. Prior to joining the
Noble Foundation, he was engaged in the practice of law in Ardmore, Oklahoma
with the firm of Thompson & Cawley. He is also a director of Noble Drilling
Corporation and Noble Affiliates Inc.
Sam J. Cerny is a geological engineer and has been employed by
Shell Oil Company, Cleary Petroleum Corporation and its successor company, Grace
Petroleum Corporation, where he served as President/CEO from 1976 to 1991. He is
a past president of the Oklahoma Independent Petroleum Association and for the
last five years has been active as a petroleum management consultant.
E. Chris Kauffman is a vice-president of Campbell-Kauffman,
Inc., an independent insurance agency in Oklahoma City. He has been involved
with the agency since it was formed in 1981. He is also Chairman of the Central
Oklahoma Transportation & Parking Authority Trust.
Robert A. Reece is an attorney, and for the last five years has
been of counsel with the firm of Crowe & Dunlevy. He is active in the management
of his family's investments. He is also a director of National Bank of Commerce.
H W Peace II holds bachelors and masters degrees in geology. For
thirty-seven years he has been employed as a geologist, in management or as an
officer and/or director in the petroleum industry. He has been employed by Union
Oil Company of California, Cotton Petroleum and Hadson Petroleum Corporation. He
has been president of the Company since 1991.
(37)
Ray H. Potts holds a master's degree in geology from the
University of Missouri. He was employed for six years as an exploration
geologist for the Pure Oil Company and in 1967 formed Potts-Stephenson
Exploration Company, later changed to PSEC, Inc. In 1997 PSEC, Inc. was sold to
ONEOK Resources Company. Mr. Potts is currently active in the oil and gas
industry and has been involved in several national and state trade associations,
geological societies and numerous civic activities.
Jerry L. Smith for the last eleven years has been the owner of
Smith Capital Corporation in Dallas. This corporation is a private investment
firm focusing on commercial real estate and securities. Mr. Smith also is a past
Treasurer and Director of the Association of Graduates of the United States Air
Force Academy.
Michael C. Coffman is a certified public accountant. Since 1975,
he has worked in public accounting and as a financial officer of three publicly
owned companies involved in the oil and gas industry. He has been employed by
the Company since 1990.
Wanda C. Tucker has been a full-time employee of the Company
since 1978, has served in various positions with the Company.
None of the organizations described in the business experiences
of company directors and officers are parents, subsidiaries or affiliates of
Panhandle Royalty Company.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
Name and Annual Compensation
Principal ----------------------------------------------------------
Position Year Salary Bonus All Other
------------ ---- -------- ------- ----------
H W Peace II 2001 $138,756 $25,600 $24,653 (1)
President & 2000 $128,000 $18,100 $21,915 (1)
Chief Exec. Officer 1999 $125,000 $13,100 $20,715 (1)
Michael C. Coffman 2001 $ 92,250 $15,600 $16,628 (2)
Vice President, 2000 $ 87,875 $10,600 $14,771 (2)
Chief Financial Officer 1999 $ 85,625 $ 5,600 $13,684 (2)
(1) Represents the value of 1,541 shares for 2001, and 1,565
shares for 2000, and 2,589 shares for 1999, of Company stock
contributed to the Panhandle Employee Stock Ownership Plan
(ESOP) on Mr. Peace's behalf.
(2) Represents the value of 1,039 shares for 2001, and 1,055
shares for 2000, and 1,710 shares for 1999, of Company stock
contributed to the Panhandle Employee Stock Ownership Plan
(ESOP) on Mr. Coffman's behalf.
(38)
The ESOP is a defined contribution plan, non-voluntary and
non-contributory and serves as the retirement plan for the
Company's employees. Contributions are at the discretion of
the board of directors and, to date, all contributions have
been made in shares of Company stock. Contributions are
allocated to all participants in proportion to their salaries
for the plan year and 100% vesting occurs after three year's
of service.
DIRECTORS FEES
Outside directors of the Company are paid $1,000 plus travel
expenses for attending each meeting of the board of directors and $200 for
attending each committee meeting of the board. Any director who travels in
excess of 50 miles to attend a meeting receives an additional $100 for each
meeting. Outside directors can elect to be included in the Panhandle Royalty
Company Deferred Compensation Plan For Non-Employee Directors (the "Plan"). The
Plan provides that each eligible director can individually elect to receive
shares of Company stock rather than cash for board meeting fees and board
committee meeting fees. These unissued shares are credited to each director's
deferred fee account at the fair market value of the shares on the date of the
meeting. Upon retirement, termination or death of the director, or upon a change
in control of the Company, the shares accrued under the Plan will be either
issued to the director or may be converted to cash, at the directors'
discretion, at the fair market value of the shares on the conversion date, as
defined. All outside directors are participating in this Plan.
In addition to the above, Jerry L. Smith, chairman of the board
of directors, who is not an employee of the Company, is entitled to receive a
$100 per hour fee for time spent, other than board or committee meetings, on
Company business. During fiscal 2001 and 2000, no payments were made to Mr.
Smith under this arrangement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of December 4, 2001, the following person or "group" as that
term is used in Section 13(d)(3) of the Securities Exchange Act of 1934, was
known to Panhandle to be the only beneficial owner of more than five percent of
the outstanding shares of Panhandle's class A common stock.
Amount And Nature Of Percent Of
Name Beneficial Ownership Class
--------------------- ------------------------- ----------
Robert Robotti 123,397 shares, shared voting 5.9%
c/o Robotti & Company and investment powers
Incorporated,
52 Vanderbilt Avenue,
New York, NY 10017
(39)
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of September 30, 2001, all
shares of class A common stock held beneficially, directly or indirectly by each
director and by all directors and officers as a group (excluding certain shares
that may be issued under the Non-Employee Directors' Deferred Compensation Plan
(see Item 10. EXECUTIVE COMPENSATION and Item 7. FINANCIAL STATEMENTS, Note 7).
Amount And Nature Of Percent Of
Name Beneficial Ownership Class
--------------------- ------------------------- ----------
Michael A. Cawley (A) 300 shares, sole voting *
and investment powers
Sam J. Cerny (B) 300 shares, sole voting *
and investment powers
E. Chris Kauffman (C) 6,600 shares, shared voting *
and investment powers
H W Peace II (D) 30,808 shares, shared voting 1.5%
and investment powers
Ray H. Potts (E) 1,480 shares, sole voting *
and investment powers
Robert A. Reece (F) 16,044 shares, sole voting *
and investment powers
Jerry L. Smith (G) 19,572 shares, sole voting 1.0%
and investment powers
All Directors and 37,408 shares, shared 1.8%
Officers as a voting and investment
group (9 persons) powers
78,568 shares, sole voting 3.8%
and investment powers
115,976 shares total 5.6%
* less than 1.0%
(A) P.O. Box 2180, Ardmore, OK 73402
(B) 3330 Liberty Tower, 100 N. Broadway, Okla. City, OK 73102
(C) 9705 North Broadway Ext. - Suite #200, Okla. City, OK 73114
(D) 5400 N.W. Grand Blvd - Suite #210, Okla. City, OK 73112
(E) 100 N. Broadway - Suite #3200, Okla. City, OK 73102
(F) 6403 N. Grand Blvd. - Suite #204, Okla. City, OK 73116
(G) 5944 Luther Lane - Suite #401, Dallas, TX 75225
(40)
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
NONE
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(3) Amended Certificate of Incorporation (Incorporated by
reference to Exhibit attached to Form 10 filed January 27,
1980, and to Forms 8-K dated June 1, 1982, December 3, 1982
and to Form 10-QSB dated March 31, 1999).
By-Laws as amended (Incorporated by reference to Form 8-K
dated October 31, 1994)
(4) Instruments defining the rights of security holders
(Incorporated by reference to Certificate of Incorporation and
By-Laws listed above)
(10) Agreement indemnifying directors and officers (Incorporated by
reference to Form 10-K dated September 30, 1989)
(21) Subsidiaries of the Registrant
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 2001.
(41)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PANHANDLE ROYALTY COMPANY
By: /s/ H W Peace II
------------------------------
H W Peace II, Chief
Executive Officer,
President, Director
Date: December 18, 2001
-------------------
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.
/s/ Jerry L. Smith /s/ E. Chris Kauffman
--------------------------------- ----------------------------------
Jerry L. Smith, Chairman of Board E. Chris Kauffman, Director
Date December 18, 2001 Date December 18, 2001
--------------------- -----------------------
/s/ Robert A. Reece /s/ Ray H. Potts
--------------------------------- ----------------------------------
Robert A. Reece, Director Ray H. Potts, Director
Date December 18, 2001 Date December 18, 2001
--------------------- -----------------------
/s/ Michael A. Cawley
--------------------------------- ----------------------------------
Sam J. Cerny, Director Michael A. Cawley, Director
Date December 18, 2001 Date December 18, 2001
--------------------- ----------------------
/s/ Michael C. Coffman
-----------------------------
Michael C. Coffman, Vice President
Treasurer and Secretary
(Principal Financial and Accounting
Officer)
Date December 18, 2001
(42)
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------- -----------
(3) Amended Certificate of Incorporation (Incorporated by
reference to Exhibit attached to Form 10 filed January 27,
1980, and to Forms 8-K dated June 1, 1982, December 3, 1982
and to Form 10-QSB dated March 31, 1999).
By-Laws as amended (Incorporated by reference to Form 8-K
dated October 31, 1994)
(4) Instruments defining the rights of security holders
(Incorporated by reference to Certificate of Incorporation and
By-Laws listed above)
(10) Agreement indemnifying directors and officers (Incorporated by
reference to Form 10-K dated September 30, 1989)
(21) Subsidiaries of the Registrant