-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IRVAkZ++1LoVsz3ymYSO/yhwbgrMGfKTcE8Dp2Xpw57Ko6nzhb2m7Q/6JsC0kUOg sN2qCJxsoafe3+W+bKioyQ== 0000950134-03-011544.txt : 20030813 0000950134-03-011544.hdr.sgml : 20030813 20030813105253 ACCESSION NUMBER: 0000950134-03-011544 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030813 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PANHANDLE ROYALTY CO CENTRAL INDEX KEY: 0000315131 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 731055775 STATE OF INCORPORATION: OK FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-31759 FILM NUMBER: 03839426 BUSINESS ADDRESS: STREET 1: 5400 NW GRAND BLVD STREET 2: GRAND CENTRE STE 210 CITY: OKLAHOMA CITY STATE: OK ZIP: 73112 BUSINESS PHONE: 4059481560 10-Q 1 d08298e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ( X ) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the period ended June 30, 2003 --------------------------------------------------- ( ) 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 August 6, 2003: 2,082,190 INDEX
Part I. Financial Information Item 1. Consolidated Financial Statements Page Condensed Consolidated Balance Sheets - June 30, 2003 and September 30, 2002......................... 1 Condensed Consolidated Statements of Operations - Three months and nine months ended June 30, 2003 and 2002..................................................... 2 Condensed Consolidated Statements of Cash Flows - Nine months ended June 30, 2003 and 2002..................... 3 Notes to Condensed Consolidated Financial Statements......... 4-5 Item 2. Management's discussion and analysis of financial condition and results of operations.......................... 5-8 Item 3. Quantitative and qualitative disclosures about market risk............ 8 Item 4. Controls and Procedures............................................... 8 Part II. Other Information .............................................................. 9 Item 6. Exhibits and reports on Form 8-K...................................... 9 Signatures...................................................................... 9
PART I. FINANCIAL INFORMATION PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED BALANCE SHEETS (Information at June 30, 2003 is unaudited)
June 30, September 30, Assets 2003 2002 ------------ ------------- Current assets: Cash and cash equivalents $ 898,292 $ 242,836 Oil and gas sales receivable 4,604,181 2,533,249 Prepaid expenses 49,169 5,709 ------------ ------------ Total current assets 5,551,642 2,781,794 Properties and equipment, at cost, based on successful efforts accounting: Producing oil and gas properties 63,826,445 58,697,095 Non producing oil and gas properties 9,660,187 9,754,336 Other 393,341 360,784 ------------ ------------ 73,879,973 68,812,215 Less accumulated depreciation, depletion and amortization 30,288,625 27,860,713 ------------ ------------ Net properties and equipment 43,591,348 40,951,502 Investment in partnerships 811,072 856,607 Marketable securities and other assets 247,157 247,157 ------------ ------------ Total Assets $ 50,201,219 $ 44,837,060 ============ ============ Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 966,619 $ 653,758 Accrued liabilities: Deferred director compensation 504,203 321,555 Interest 95,758 66,567 Other 250,435 133,308 Income taxes payable 196,918 10,063 Current portion of long-term debt 2,000,004 3,996,000 ------------ ------------ Total current liabilities 4,013,937 5,181,251 Long-term debt 14,666,662 14,024,000 Deferred income taxes 10,110,500 8,639,000 Asset retirement obligations and other 344,378 39,515 Stockholders' equity: Class A voting Common Stock, $.0333 par value; 6,000,000, shares authorized, 2,082,190 issued and outstanding at June 30, 2003 and 2,079,423 at September 30, 2002 69,406 69,314 Capital in excess of par value 935,305 896,643 Retained earnings 20,061,031 15,987,337 ------------ ------------ Total stockholders' equity 21,065,742 16,953,294 ------------ ------------ Total liabilities and stockholders' equity $ 50,201,219 $ 44,837,060 ============ ============
(1) PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended June 30, Nine Months Ended June 30, 2003 2002 2003 2002 ------------ ------------ ------------ ------------ Revenues: Oil and gas sales $ 5,539,482 $ 3,548,007 $ 16,863,008 $ 9,426,408 Lease bonuses and rentals 14,995 17,177 51,423 28,857 Interest and other 57,785 210,456 110,166 357,582 Equity in income of partnerships 49,877 17,354 82,229 56,53 ------------ ------------ ------------ ------------ 5,662,139 3,792,994 17,106,826 9,869,379 Costs and expenses: Lease operating expenses and production taxes 1,004,449 734,689 3,030,229 2,191,524 Exploration costs 10,516 116,014 417,974 248,101 Depreciation, depletion, amortization and impairment 1,534,634 1,648,872 4,719,074 4,869,449 General and administrative 747,936 454,903 2,057,587 1,747,092 Interest expense 171,021 214,832 534,724 688,791 ------------ ------------ ------------ ------------ 3,468,556 3,169,310 10,759,588 9,744,957 ------------ ------------ ------------ ------------ Income before provision for income taxes and cumulative effect of accounting change 2,193,583 623,684 6,347,238 124,422 Provision for income taxes 655,000 170,000 1,883,000 34,717 ------------ ------------ ------------ ------------ Income before cumulative effect of accounting change 1,538,583 453,684 4,464,238 89,705 Cumulative effect of accounting change, net of taxes of $28,500 -- -- 46,500 -- ------------ ------------ ------------ ------------ Net Income $ 1,538,583 $ 453,684 $ 4,510,738 $ 89,705 ============ ============ ============ ============ Basic earnings per common share (Note 3) Income before cumulative effect of accounting change $ .74 $ .22 $ 2.15 $ .04 Cumulative effect of accounting change $ -- $ -- $ .02 $ -- ------------ ------------ ------------ ------------ Net income $ .74 $ .22 $ 2.17 $ .04 ============ ============ ============ ============ Diluted earnings per common share (Note 3) Income before cumulative effect of accounting change $ .73 $ .21 $ 2.12 $ .04 Cumulative effect of accounting change $ -- $ -- $ .02 $ -- ------------ ------------ ------------ ------------ Net income $ .73 $ .21 $ 2.14 $ .04 ============ ============ ============ ============ Dividends declared per share of common stock $ .07 $ .07 $ .21 $ .21 ============ ============ ============ ============
(2) PANHANDLE ROYALTY COMPANY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended June 30, 2003 2002 ------------- ------------- Operating activities: Net income $ 4,510,739 $ 89,705 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle (46,500) -- Depreciation, depletion, amortization and impairment 4,719,074 4,869,449 Exploration costs 417,974 248,101 Equity in earnings of partnerships (82,229) (56,532) Other non-current liabilities 54,863 20,157 Provision (benefit) for deferred income taxes 1,443,000 (128,000) Gain on sale of assets (4,001) (178,987) Cash provided (used) by changes in assets and liabilities, excluding those acquired in Wood Oil acquisition: Oil and gas sales receivable (2,075,932) 169,999 Income taxes receivable -- 415,810 Prepaid expenses (43,460) 229,047 Income taxes payable 186,855 63,298 Accounts payable and accrued liabilities 641,828 (639,604) ------------- ------------- Total adjustments 5,211,472 5,012,738 ------------- ------------- Net cash provided by operating activities 9,722,211 5,102,443 Investing activities: Acquisition of Wood Oil, net of cash acquired -- (15,229,466) Purchase of and development of properties and equipment, including dry hole costs (7,523,226) (5,185,908) Proceeds from sale of assets 30,331 1,371,273 Distributions from partnerships 177,763 125,823 ------------- ------------- Net cash used in investing activities (7,315,132) (18,918,278) Financing activities: Borrowings under credit agreements 1,525,000 21,700,000 Payments of loan principal (2,878,334) (7,181,000) Acquisition of common shares (4,691) (1,715) Issuance of common shares 43,445 -- Payments of dividends (437,043) (434,002) ------------- ------------- Net cash provided (used) by financing activities (1,751,623) 14,083,283 ------------- ------------- Increase in cash and cash equivalents 655,456 267,448 Cash and cash equivalents at beginning of period 242,836 98,970 ------------- ------------- Cash and cash equivalents at end of period $ 898,292 $ 366,418 ============= =============
(See accompanying notes) (3) PANHANDLE ROYALTY COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1: Accounting Principles and Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission, and effective October 1, 2001, include the Company's wholly-owned subsidiary, Wood Oil Company (Wood). Management of Panhandle Royalty Company believes that all adjustments necessary for a fair presentation of the consolidated financial position and results of operations for the periods have been included. All such adjustments are of a normal recurring nature. The consolidated results are not necessarily indicative of those to be expected for the full year. NOTE 2: Income Taxes The Company utilizes tight gas sands production tax credits to reduce its federal income tax liability, if any. These credits were available through calendar year 2002. The Company's provision for income taxes is also reflective of excess percentage depletion, reducing the Company's effective tax rate from the federal statutory rate. NOTE 3: Earnings (Loss) Per Share The following table sets forth the number of shares utilized in the computation of basic and diluted earnings per share, giving consideration to, certain shares that may be issued under the Non-Employee Director's Deferred Compensation Plan, to the extent dilutive:
Three months ended June 30, Nine months ended June 30, 2003 2002 2003 2002 ---------- ---------- ---------- ---------- Denominator: For basic earnings per share Weighted average shares 2,082,190 2,066,402 2,081,071 2,066,428 Effect of potential diluted shares: Directors deferred compensation shares 22,409 26,691 21,207 25,915 ---------- ---------- ---------- ---------- Denominator for diluted earnings per share - adjusted weighted average shares and potential shares 2,104,599 2,093,093 2,102,278 2,092,343 ========== ========== ========== ==========
NOTE 4: Long-term Debt On March 25, 2003, the Company amended its Loan Agreement with BancFirst, Oklahoma City, OK. The Agreement consists of a term loan in the amount of $10,000,000 and a revolving loan in the amount of $15,000,000, which is subject to a semi-annual borrowing base determination. The current borrowing base under the agreements is $22,500,000 which can be re-determined semi-annually. The term loan matures on April 1, 2008, and the revolving loan matures on April 1, 2005. Monthly payments on the term loan are $166,667, plus accrued interest, beginning on May 1, 2003. Interest on the term loan is fixed at 4.56% until maturity. The revolving loan bears interest at the national prime rate minus 3/4% (3.25% at June 30, 2003) or Libor (for one, three or six month periods), plus 1.80%. The Company, at March 31, 2003, elected a six month Libor rate (aggregate of 3.08%). At June 30, 2003, the Company had $9,666,667 outstanding under the term loan and $7,000,000 outstanding under the revolving loan. (4) NOTE 5: Asset Retirement Obligation In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations (SFAS No. 143). SFAS No. 143 requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the asset retirement cost should be allocated to expense using a systematic and rational method and the liability should be accreted to its face amount. The Company adopted SFAS No. 143 on October 1, 2002. The primary impact of this standard relates to oil and gas wells on which the Company has a legal obligation to plug and abandon the wells. Prior to SFAS No. 143, the Company had not recorded an obligation for these plugging and abandonment costs due to its assumption that the salvage value of the surface equipment would offset the cost of dismantling the facilities and carrying out the necessary clean-up and reclamation activities. The adoption of SFAS No. 143 on October 1, 2002, resulted in a net increase to Property and Equipment and Retirement Obligations of approximately $325,000 and $250,000, respectively, as a result of the Company separately accounting for salvage values and recording the estimated fair value of its plugging and abandonment obligations on the balance sheet. The increase in expense resulting from the accretion of the asset retirement obligation and the depreciation of the additional capitalized well costs is expected to be substantially offset by the decrease in depreciation from the Company's consideration of the estimated salvage values in the calculation. The proforma impact of SFAS No. 143 on the 2002 period was not material. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS AND RISK FACTORS Forward-Looking Statements for 2003 and later periods are made in this document. Such statements represent estimates of management based on the Company's historical operating trends, its proved oil and gas reserves and other information currently available to management. The Company cautions that the forward-looking statements provided herein are subject to all the risks and uncertainties incident to the acquisition, development and marketing of, and exploration for oil and gas reserves. These risks include, but are not limited to, oil and natural gas price risk, environmental risks, drilling risk, reserve quantity risk and operations and production risk. For all the above reasons, actual results may vary materially from the forward-looking statements and there is no assurance that the assumptions used are necessarily the most likely to occur. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2003, the Company had positive working capital of $1,537,705, as compared to negative working capital of $2,399,457 at September 30, 2002. The increase in working capital from September 30, 2002 to June 30, 2003, is the result of increased oil and gas sales revenues during fiscal 2003, which is discussed in Results of Operations below, and the reduction in the current portion of long-term debt by $2,000,000. This reduction in the current portion of long-term debt is the result of the restructuring of the Company's bank debt. The fixed monthly principal payment on the bank debt was reduced from $333,000 to $166,667. For a further discussion of the Company's bank debt see Note 4: Long Term Debt of Notes to the Condensed Consolidated Financial Statements contained here-in. Cash flow from operating activities increased 90% to $9,722,211 for the first nine-months of fiscal 2003, as compared to the first nine-months of fiscal 2002, primarily due to a significant increase in product sales prices. Capital expenditures for oil and gas activities for the 2003 nine-month period amounted to $7,523,226, as compared to $5,185,908 for the 2002 period, exclusive of $15,229,466 used to acquire Wood Oil Company. Management's current expectation for capital expenditures in 2003 is approximately $9,000,000. The Company has historically funded its capital expenditures, overhead expenditures and dividend payments from operating cash flow. Due to the increased capital expenditure level in fiscal 2003, the Company has utilized (as of August 6, 2003), $7,000,000 of the $15,000,000 revolving loan to help fund these expenditures. As a result of the increased cash flow from the higher prices being received for natural gas in fiscal 2003, management currently does not expect to borrow additional funds under the revolving loan during the remainder of fiscal 2003. The Company has the potential availability of equity, which could be offered in a public or private placement, if additional capital were needed, above the amount available from bank debt, for capital expenditures, or for debt reduction, or a combination of uses. (5) RESULTS OF OPERATIONS THREE MONTHS COMPARED TO THREE MONTHS Revenues: Total revenues increased $1,869,145 or 49% for the 2003 quarter as compared to the 2002 quarter. Sales volumes for oil decreased due to normal production decline in the 2003 quarter, and sales volumes for natural gas increased 16% as a result of new wells coming on line. However, the increase in average sales prices for both products produced the majority of the revenue increase. The table below outlines the Company's production and average sales prices for oil and natural gas for the three month periods of fiscal 2003 and 2002:
BARRELS AVERAGE MCF AVERAGE SOLD PRICE SOLD PRICE --------- --------- --------- --------- Three months ended 6/30/03 27,864 $ 27.79 999,246 $ 4.77 Three months ended 6/30/02 30,238 $ 25.54 864,108 $ 3.20
The table outlines a 9% increase in oil price and a 49% increase in gas price and an increase in equivalent production to 1,166,430 mcfe, resulting in a 56% increase in oil and gas sales revenue for the quarter. Lease Operating Expenses and Production Taxes (LOE): LOE increased 37% or $269,760 in the 2003 quarter. A majority of this increase was the result of a $179,549 increase in production taxes in the 2003 quarter as oil and gas sales revenues increased and production taxes are paid as a percentage of oil and gas sales revenue. In addition, lease operating costs continue to increase ($90,211 for the quarter) as the Company adds operating costs from the substantial number of new wells drilled each year. Exploration Costs: These costs decreased $105,498 in the 2003 period as there were fewer high cost exploratory wells which completed drilling in the 2003 period, resulting in lesser costs being charged to exploration costs in the period incurred. Depreciation, Depletion, Amortization and Impairment (DD&A): DD&A decreased $114,238 or 7% in the 2003 period. This decrease was principally the result of impairment charges declining by approximately $128,000 in the 2003 period somewhat offset by the increase in gas sales volume. General and Administrative Costs (G&A): G&A expenses increased $293,033 or 64% in the 2003 period. The majority of the increase in the 2003 period, was due to higher personnel related costs in the 2003 period, an increase of $171,000 in the expense related to the Directors Deferred Compensation Plan as a result of Panhandle's common share price increasing from March 31, 2003 to June 30, 2003; professional service fees, and costs for additional directors and officers liability insurance. Interest Expense: Interest expense decreased in the 2003 quarter due to a lower level of debt and due to a decrease in the interest rate on the debt. The interest rate is tied to the prime rate or Libor which has decreased throughout fiscal 2002 and 2003. Income Taxes: The 2003 period provision for income taxes increased due to substantially increased income before provision for income taxes. The Company utilizes tight gas sands production tax credits (available through calendar year 2002) and excess percentage depletion to reduce its effective tax rate from the federal statutory rate. The effective tax rate estimate was 30% for the 2003 period and 27% for the 2002 period. NINE MONTHS COMPARED TO NINE MONTHS Revenues: Total revenues increased $7,237,447 or 73% for the 2003 nine months as compared to the 2002 nine months. Sales volumes for oil decreased 12% due to normal production decline in the 2003 nine months while the sales volume for natural gas increased 3% as a result of recently completed wells coming on line. However, the substantial increases in sales prices for both products produced the 2003 period revenue increase. The table below outlines the Company's production and average sales prices for oil and natural gas for the nine month periods of fiscal 2003 and 2002:
BARRELS AVERAGE MCF AVERAGE SOLD PRICE SOLD PRICE ----------- ----------- ----------- ----------- Nine months ended 6/30/03 85,086 $ 29.32 2,956,157 $ 4.86 Nine months ended 6/30/02 96,679 $ 21.55 2,879,901 $ 2.55
As the table outlines, the 36% increase in oil price and the 91% increase in gas price resulted in a 79% increase in oil and gas revenue for the 2003 nine months to $17,106,826. Mcfe production was basically flat in the two periods. (6) Lease Operating Expenses and Production Taxes (LOE): LOE increased 38% or $838,705 in the 2003 nine months. A majority of this increase was the result of a $501,980 increase in production taxes in the 2003 nine months as oil and gas sales revenues increased and production taxes are paid as a percentage of oil and gas sales revenue. In addition, well operating costs continue to increase ($336,725 for the nine months) as the Company adds operating costs from the substantial number of new wells drilled each year. Exploration Costs: These costs increased $169,873 in the 2003 period as there were several exploratory wells which completed drilling in 2003, thus increasing the chances of drilling an exploratory dry hole. These costs are charged to exploration costs in the period they are determined to be unsuccessful. Three wells accounted for substantially all of the expense. Depreciation, Depletion, Amortization and Impairment (DD&A): DD&A decreased $150,375 in the 2003 period. This decrease was the result of impairment charges declining by approximately $67,000 in the 2003 period and lower production volumes on the Wood Oil properties. These properties have proportionately higher depreciable values due to the purchase price accounting used for the Wood acquisition. Thus, volume reductions on these wells reduced DD&A per mcfe more than the small volume increases on newly completed Panhandle wells increased DD&A per mcfe. General and Administrative Costs (G&A): G&A expenses increased $310,495 in the 2003 period. The majority of the increase in the 2003 period was due to higher personnel related costs in the 2003 period, an increase of $138,000 in the expense related to the Directors Deferred Compensation Plan as a result of Panhandle's common share price increasing from September 30, 2002 to June 30, 2003; professional service fees, and costs for additional directors and officers liability insurance. Interest Expense: Interest expense decreased in the 2003 nine month period due to a lower level of debt and due to a decrease in the interest rate on the debt. The interest rate is tied to the prime rate or Libor which has decreased throughout fiscal 2002 and 2003. Income Taxes: The 2003 period provision for income taxes increased due to substantially increased income before provision for income taxes. The Company utilizes tight gas sands production tax credits (available through calendar year 2002) and excess percentage depletion to reduce its effective tax rate from the federal statutory rate. The effective tax rate estimate was 30% for the 2003 period and 28% for the 2002 period. Overview: The Company recorded a third quarter 2003 net income of $1,538,583, or $.73 per share, as compared to a $453,684 net income, or $.21 per share in the 2002 quarter, and a 2003 nine month net income of $4,510,738, or $2.14 per share, as compared to a $89,705 net income, or $.04 per share in the 2002 nine months. The improved 2003 results were primarily due to substantial increases in the sales price of both oil and natural gas. CRITICAL ACCOUNTING POLICIES Preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. However, the accounting principles used by the Company generally do not change the Company's reported cash flows or liquidity. Generally, accounting rules do not involve a selection among alternatives, but involve a selection of the appropriate policies for applying the basic principles. Interpretation of the existing rules must be done and judgments made on how the specifics of a given rule apply to the Company. The more significant reporting areas impacted by management's judgments and estimates are crude oil and natural gas reserve estimation, impairment of assets and tax accruals. Management's judgments and estimates in these areas are based on information available from both internal and external sources, including engineers, geologists and historical experience in similar matters. Actual results could differ from the estimates as additional information becomes known. Oil and Gas Reserves Of these judgments and estimates, management considers the estimation of crude oil and natural gas reserves to be the most significant. Changes in crude oil and natural gas reserve estimates affect the Company's calculation of depreciation and depletion, (7) provision for abandonment and assessment of the need for asset impairments. On an annual basis, with a limited scope semi-annual update, the Company's consulting engineer with assistance from Company geologists prepares estimates of crude oil and natural gas reserves based on available geologic and seismic data, reservoir pressure data, core analysis reports, well logs, analogous reservoir performance history, production data and other available sources of engineering, geological and geophysical information. As required by the guidelines and definitions established by the Securities and Exchange Commission, these estimates are based on current crude oil and natural gas pricing. Crude oil and natural gas prices are volatile and largely affected by worldwide consumption and are outside the control of management. Projected future crude oil and natural gas pricing assumptions are used by management to prepare estimates of crude oil and natural gas reserves used in formulating managements overall operating decisions in the exploration and production segment. Successful Efforts Method of Accounting The Company has elected to utilize the successful efforts method of accounting for its oil and gas exploration and development activities. Exploration expenses, including geological and geophysical costs, rentals and exploratory dry holes, are charged against income as incurred. Costs of successful wells and related production equipment and developmental dry holes are capitalized and amortized by field using the unit-of-production method as oil and gas is produced. This accounting method may yield significantly different operating results than the full cost method. Impairment of Assets All long-lived assets are monitored for potential impairment when circumstances indicate that the carrying value of the asset may be greater than its future net cash flows. The evaluations involve a significant amount of judgment since the results are based on estimated future events, such as inflation rates, future sales prices for oil and gas, future costs to produce these products, estimates of future oil and gas reserves to be recovered and the timing thereof, the economic and regulatory climates and other factors. The need to test a property for impairment may result from significant declines in sales prices or unfavorable adjustments to oil and gas reserves. Any assets held for sale are reviewed for impairment when the Company approves the plan to sell. Estimates of anticipated sales prices are highly judgmental and subject to material revision in future periods. Because of the uncertainty inherent in these factors, the Company cannot predict when or if future impairment charges will be recorded. Tax Accruals The estimation of the amounts of income tax to be recorded by the Company involves interpretation of complex tax laws and regulations as well as the completion of complex calculations, including the determination of the Company's percentage depletion deduction. Although the Company's management believes its tax accruals are adequate, differences may occur in the future depending on the resolution of pending and new tax matters. The above description of the Company's critical accounting policies is not intended to be an all-inclusive discussion of the uncertainties considered and estimates made by management in applying accounting principles and policies. Results may vary significantly if different policies were used or required and if new or different information becomes known to management. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company's results of operations and operating cash flows are impacted by changes in market prices for oil and gas. Operations and cash flows are also impacted by changes in the market interest rates related to the revolving credit facility which bears interest at an annual variable interest rate equal to the national prime rate minus 3/4% or Libor for one, three or six month periods, plus 1.8%. A one percent change in the prime interest rate would result in approximately a $70,000 change in annual interest expense. The Company has a $10,000,000 term loan which matures on April 1, 2008. The interest rate is fixed at 4.56% until maturity. ITEM 4. CONTROLS and PROCEDURES Panhandle Royalty Company management, under the supervision of and with the participation of the Chief Executive Officer and Chief Financial Officer have conducted an evaluation of the effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in ensuring that all material information required to be filed in this quarterly report has been made known to them in a timely fashion. There have been no significant changes in our internal controls or in factors that could significantly affect internal controls, subsequent to the date the Chief Executive Officer and Chief Financial Officer completed their evaluation. (8) PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORT ON FORM 8-K (a) EXHIBITS - Exhibit 31.1 and 31.2 - Certification under Section 302 of the Sarbanes-Oxley Act of 2002 - Exhibit 32.1 and 32.2 - Certification under Section 906 of the Sarbanes-Oxley Act of 2002. (b) Form 8-K - Dated May 14, 2003, Regulation FD disclosure of Company's earnings release for the second quarter of fiscal 2003. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PANHANDLE ROYALTY COMPANY August 12, 2003 /s/ H W Peace II - ----------------------- -------------------------------------- Date H W Peace II, President and Chief Executive Officer August 12, 2003 /s/ Michael C. Coffman - ---------------------- -------------------------------------- Date Michael C. Coffman, Vice President, Chief Financial Officer and Secretary and Treasurer (9) EX-31.1 3 d08298exv31w1.txt CERTIFICATION UNDER SECTION 302 EXHIBIT 31.1 CERTIFICATION I, HW Peace II, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Panhandle Royalty Company (the Company); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of, the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Company and we have: a). designed such disclosure controls and procedures, or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b). evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on our evaluation; and c). disclosed in this quarterly report any change in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13 a-15(f) and 15d-15(f) that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the Company's auditors and the audit committee of the Company's board of directors: a). all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; b). any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. /s/ HW Peace II ------------------------------- HW Peace II Chief Executive Officer Date: August 12, 2003 EX-31.2 4 d08298exv31w2.txt CERTIFICATION UNDER SECTION 302 EXHIBIT 31.2 CERTIFICATION I, Michael C. Coffman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Panhandle Royalty Company (the Company); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of, the Company as of, and for, the periods presented in this quarterly report; 4. The Company's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Company and we have: a). designed such disclosure controls and procedures, or caused such disclosure controls to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b). evaluated the effectiveness of the Company's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on our evaluation; and c). disclosed in this quarterly report any change in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13 a-15(f) and 15d-15(f) that occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting; and 5. The Company's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting to the Company's auditors and the audit committee of the Company's board of directors: a). all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company's ability to record, process, summarize and report financial information; b). any fraud, whether or not material, that involves management or other employees who have a significant role in the Company's internal control over financial reporting. /s/ Michael C. Coffman ------------------------------- Michael C. Coffman Chief Financial Officer Date: August 12, 2003 EX-32.1 5 d08298exv32w1.txt CERTIFICATION UNDER SECTION 906 EXHIBIT 32.1 Panhandle Royalty Company 5400 North Grand Blvd. Suite #210 Oklahoma City, OK 73112 CERTIFICATION OF CHIEF EXECUTIVE OFFICER REGARDING PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS I, H W Peace II, Chief Executive Officer of Panhandle Royalty Company, (the "Issuer"), in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify in connection with the Issuer's Quarterly Report on Form 10-Q for the period that ended June 30, 2003 as filed with the Securities and Exchange Commission (the "Report") that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. /s/ HW Peace II - ---------------------------- HW Peace II President & Chief Executive Officer August 12, 2003 EX-32.2 6 d08298exv32w2.txt CERTIFICATION UNDER SECTION 906 EXHIBIT 32.2 Panhandle Royalty Company 5400 North Grand Blvd. Suite #210 Oklahoma City, OK 73112 CERTIFICATION OF CHIEF EXECUTIVE OFFICER REGARDING PERIODIC REPORT CONTAINING FINANCIAL STATEMENTS I, Michael C. Coffman, Chief Financial Officer of Panhandle Royalty Company, (the "Issuer"), in compliance with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, hereby certify in connection with the Issuer's Quarterly Report on Form 10-Q for the period that ended June 30, 2003 as filed with the Securities and Exchange Commission (the "Report") that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Issuer. /s/ Michael C. Coffman - ------------------------------ Michael C. Coffman Vice President & Chief Financial Officer August 12, 2003 -----END PRIVACY-ENHANCED MESSAGE-----