##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION  FORM 10-K Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934  Commission File Number: 0-9116 PANHANDLE ROYALTY COMPANY 
  OKLAHOMA
    
    73-1055775(State or other jurisdiction of incorporation
or organization)
    
    (I.R.S. Employer Identification No.)
 Grand Centre, Suite 305,
5400 North Grand Blvd., Oklahoma City, OK
73112   Registrants telephone number: (405) 948-1560 Securities registered under Section 12(b) of the Act: CLASS A COMMON STOCK (VOTING)
    
    AMERICAN STOCK EXCHANGE(Title of Class)
    
    (Name of each exchange on which registered)
 Securities registered under Section 12(g) of the Act:          (Title
of Class) CLASS B COMMON STOCK (NON-VOTING) $1.00 par value 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
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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X] Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). [  ] Yes [X] No 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 March 31, 2004, was $64,613,932. As of
December 3, 2004, 4,189,783 shares of Class A Common stock were outstanding. Documents Incorporated By Reference The information required by Part III of this Report, to the extent not set
forth herein, is incorporated by reference from the registrants definitive
proxy statement relating to the annual meeting of stockholders to be held in
February 2005, which definitive proxy statement will be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year to which this Report relates.




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TABLE OF CONTENTS PagePART IItem 1
    
    Business
    
    1-5Item 2
    
    Properties
    
    5-10Item 3
    
    Legal Proceedings
    
    10Item 4
    
    Submission of Matters to a Vote of Security Holders
    
    10PART IIItem 5
    
    Market for Registrants Common Equity and Related Stockholder Matters
    
    10-11Item 6
    
    Selected Financial Data
    
    11-12Item 7
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    13-19Item 7A
    
    Quantitive and Qualitative Disclosures about Market Risk
    
    19Item 8
    
    Financial Statements and Supplementary Data
    
    19-39Item 9
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    39Item 9A
    
    Controls and Procedures
    
    39PART IIIItem 10-14
    
    Incorporated by Reference to Proxy StatementPART IVItem 15
    
    Exhibits, Financial Statement Schedules and Reports on Form 8- K
    
    40Signature Page
    
    
    
    41Exhibit 21
    
    
    
    42Exhibit 31.1-31.2
    
    
    
    43-44Exhibit 32.1-32.2
    
    
    
    45-46SubsidiariesCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer
  As used in this report, SEC means the United States Securities and Exchange
Commission, Bbl means barrel, Mcf means thousand cubic feet, Mcf/D means
thousand cubic feet per day, Mcfe means natural gas stated on an MCF basis
and crude oil converted to a thousand cubic feet of natural gas equivalent by
using the ratio of one Bbl of crude oil to six Mcf of natural gas, PV-10
means estimated pretax present value of future net revenues discounted at 10%
using SEC rules, gross wells or acres are the wells or acres in which the
Company has a working interest, and net wells or acres are determined by
multiplying gross wells or acres by the Companys net revenue interest in such
wells or acres. References to years 2001-2005 refer to the Companys fiscal
years ended September 30, each year.




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PART I 
 ITEM 1 BUSINESS GENERAL 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 stock of
the Company to 6,000,000 shares 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. In February 2004, the Companys
shareholders voted to increase the authorized Class A Common Stock of the
Company to 12,000,000 shares and to split the shares on a two for one basis. 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 nineteen other states. The majority of the Companys oil
and gas production is from wells located in Oklahoma and 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 is operating as a subsidiary of Panhandle. Wood and its
shareholders were unrelated parties to Panhandle. The Companys office is located at Grand Centre, Suite 305, 5400 North
Grand Blvd., Oklahoma City, OK 73112 (405)948-1560, FAX (405)948-2038. Its
website is located at www.panra.com. BUSINESS STRATEGY The majority of Panhandles revenues are derived from the production and
sale of oil and natural gas. See Item 8  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 some activity in New Mexico and Texas. See Item 2 -
Description of Properties. Exploration and development of the Companys oil
and gas properties are 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 many 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 (1)




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density drilling has accounted for a large part 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 and marketing
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 areas 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. In general, prices of oil and gas are dependent on numerous factors beyond
the control of the Company, such as competition, international events and
circumstances, including actions taken by the Organization of Petroleum
Exporting Countries (OPEC), and economic, political and regulatory
developments. Since demand for natural gas is generally highest during winter
months, prices received for the Companys natural gas are subject to seasonal
variations. The Company has not engaged in price hedging on its oil or gas
production. 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 the 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. 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 (2)




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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 oil and gas
leasehold acreage and 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 and leasehold
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 2004, sales to ONEOK, through well operators, accounted for
approximately 10% of the Companys total revenues. Generally, if one purchaser
declines to continue purchasing the Companys oil and 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. These
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 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. Various aspects of the Companys oil and gas operations are regulated by
agencies of the federal government. The transportation of natural gas in
interstate commerce is generally regulated by the Federal Energy Regulatory
Commission (FERC) pursuant to the Natural Gas Act of 1938 (the NGA) and the
Natural Gas Policy Act of 1978 (NGPA). The intrastate transportation and
gathering of natural gas (and operational and safety matters related thereto)
may be subject to regulation by state and local governments. In the past, the federal government regulated the prices at which the
Companys produced oil and gas could be sold. Currently, first sales of
natural gas by producers and marketers, and all sales of crude (3)




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oil, condensate
and natural gas liquids, can be made at uncontrolled market prices, but
Congress could reenact price controls at any time. Within the past decade, the FERC has issued numerous orders and policy
statements designed to create a more competitive environment in the national
natural gas marketplace, including orders promoting open access
transportation on natural gas pipelines subject to the FERCs NGA and NGPA
jurisdiction. The FERCs Order 636 was issued in April 1992 and was designed
to restructure the interstate natural gas transportation and marketing system
and to promote competition within all phases of the natural gas industry.
Among other things, Order 636 required interstate pipelines to separate the
transportation of gas from the sale of gas, to change the manner in which
pipeline rates were designed and to implement other changes intended to promote
the growth of market centers. Subsequent FERC initiatives have attempted to
standardize interstate pipeline business practices and to allow pipelines to
implement market-based, negotiated and incentive rates. The restructured
services implemented by Order 636 and successor orders have now been in effect
for a number of winter heating seasons and have significantly affected the
manner in which natural gas (both domestic and foreign) is transported and sold
to consumers. FERC has indicated that it remains committed to Order 636s fundamental
goal of improving the competitive structure of the natural gas industry in
order to maximize the benefits of wellhead decontrol, the future regulatory
goals and priorities of FERC may change, and it is not possible to predict the
effect, if any, of future restructuring orders or policies on the Companys
operations. Federal tax law has allowed producers of tight gas to utilize an
approximate $.52/MMBTU tax credit for gas produced from approved wells. The
credit was a direct reduction of regular federal income tax. Panhandle began
receiving revenues from tight gas wells during fiscal 1992. This credit was
available for all tight gas sold prior to January 1, 2003. While Order 636 and related orders do not directly regulate either the
production or sale of gas that may be produced from the Companys properties,
the increased competition and changes in business practices within the natural
gas industry resulting from such orders have affected the terms and conditions
under which the Company markets and transports its available gas supplies. To
date, the FERCs pro-competition policies have not materially affected the
Companys business or operations. On a prospective basis, however, such orders
may substantially increase the burden on producers and transporters to
accurately nominate and deliver on a daily basis specified volumes of natural
gas, or to bear penalties or increased costs in the event scheduled deliveries
are not made. 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 believe 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 the availability and cost of insurance. (4)




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EMPLOYEES At September 30, 2004, Panhandle employed sixteen persons on a full-time
basis and has no part-time employees. Four of the employees are executive
officers and one is a director of the Company. 
 ITEM 2 PROPERTIES As of September 30, 2004, Panhandles principal properties consisted of
perpetual ownership of 259,211 net mineral acres, held principally in tracts in
Oklahoma, New Mexico and Texas and 19 other states. The Company also held
leases on 18,781 net acres of minerals in Louisiana, Oklahoma and Texas. At
September 30, 2004, Panhandle held small royalty and/or working interests in
5,022 producing oil or gas wells, and 78 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 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. ACREAGE The following table of mineral interests owned reflects, as of September
30, 2004, 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
    
    GrossNet
    
    Gross
    
    Acres
    
    Acres
    
    Acres
    
    Acres
    
    Acres
    
    AcresAcres
    
    Acres
    
    Prodg
    
    Prodg
    
    Leased
    
    Leased
    
    Open
    
    OpenState
    
    
    
    
    
    (1)
    
    (1)
    
    (2)
    
    (2)
    
    (3)
    
    (3)Arkansas
    
    
    10,050
    
    
    
    44,596
    
    
    
    1,073
    
    
    
    2,836
    
    
    
    
    
    
    
    
    
    
    
    8,977
    
    
    
    41,760Colorado
    
    
    8,326
    
    
    
    39,299
    
    
    
    109
    
    
    
    219
    
    
    
    31
    
    
    
    200
    
    
    
    8,186
    
    
    
    38,880Florida
    
    
    6,839
    
    
    
    13,849
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,839
    
    
    
    13,849Illinois
    
    
    1,068
    
    
    
    4,979
    
    
    
    40
    
    
    
    261
    
    
    
    
    
    
    
    
    
    
    
    1,028
    
    
    
    4,718Kansas
    
    
    3,122
    
    
    
    11,976
    
    
    
    112
    
    
    
    1,120
    
    
    
    40
    
    
    
    160
    
    
    
    2,970
    
    
    
    10,696Montana
    
    
    1,007
    
    
    
    17,947
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,007
    
    
    
    17,947Nebraska
    
    
    1,319
    
    
    
    13,249
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,319
    
    
    
    13,249North Dakota
    
    
    11,179
    
    
    
    64,286
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,179
    
    
    
    64,286New Mexico
    
    
    57,396
    
    
    
    174,460
    
    
    
    1,335
    
    
    
    6,200
    
    
    
    47
    
    
    
    125
    
    
    
    56,014
    
    
    
    168,135Oklahoma
    
    
    113,089
    
    
    
    940,620
    
    
    
    29,616
    
    
    
    242,845
    
    
    
    2,509
    
    
    
    20,388
    
    
    
    80,964
    
    
    
    677,387South Dakota
    
    
    1,825
    
    
    
    9,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,825
    
    
    
    9,300Texas
    
    
    43,085
    
    
    
    361,182
    
    
    
    7,173
    
    
    
    88,872
    
    
    
    877
    
    
    
    4,987
    
    
    
    35,035
    
    
    
    267,323OTHER
    
    
    906
    
    
    
    6,112
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    906
    
    
    
    6,112Total:
    
    
    259,211
    
    
    
    1,701,855
    
    
    
    39,458
    
    
    
    342,353
    
    
    
    3,504
    
    
    
    25,860
    
    
    
    216,249
    
    
    
    1,333,642
   (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. (5)




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The following table reflects net mineral acres leased from others, lease
expiration dates, and net leased acres held by production. LEASES Net AcresNet
    
    Lease Acres
    
    Held byState
    
    Acres
    
    Expiring
    
    Production2005
    
    2006
    
    2007Kansas
    
    
    2,117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,117Oklahoma
    
    
    14,442
    
    
    
    469
    
    
    
    645
    
    
    
    908
    
    
    
    12,420Texas
    
    
    396
    
    
    
    
    
    
    
    
    
    
    
    64
    
    
    
    332New Mexico
    
    
    528
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    528Other
    
    
    1,298
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,298TOTAL
    
    
    18,781
    
    
    
    469
    
    
    
    645
    
    
    
    972
    
    
    
    16,695
 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. Beginning in 1995 the Company directed its
consulting petroleum engineering firm to include proved undeveloped reserves in
certain significant areas in the scope of properties evaluated for the Company.
The Company, expects drilling to continue in these areas for the next several
years, and thus made the decision to provide limited proved undeveloped reserve
estimates for these areas. All reserve quantity estimates were prepared by
Campbell & Associates, Inc., Norman, Oklahoma, a consulting petroleum
engineering firm. The Companys reserve estimates were not filed with any
other federal agency. These reserves exclude approximately 1.2 mmcf of CO2 gas
reserves for all years presented. Barrels of Oil
    
    MCF of GasProved Developed ReservesSeptember 30, 2004
    
    
    710,513
    
    
    
    24,086,120September 30, 2003
    
    
    703,400
    
    
    
    23,599,473September 30, 2002
    
    
    820,790
    
    
    
    22,896,330Proved Undeveloped ReservesSeptember 30, 2004
    
    
    49,729
    
    
    
    4,164,633September 30, 2003
    
    
    132,575
    
    
    
    4,670,400September 30, 2002
    
    
    294,415
    
    
    
    5,219,570Total Proved ReservesSeptember 30, 2004
    
    
    760,242
    
    
    
    28,250,753September 30, 2003
    
    
    835,978
    
    
    
    28,269,873September 30, 2002
    
    
    1,115,205
    
    
    
    28,115,900
 (6)




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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, 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 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 10% 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 operating costs and production taxes levied by
respective states. Prices used for determining future cash flows from oil and
natural gas for the periods ended September 30, 2004, 2003, 2002 were as
follows: 2004 -$44.68, $5.42; 2003  $27.39, $4.43; 2002  $27.76, $3.12.
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. The future net cash flows are net of $413,854 undiscounted and
$253,842 discounted at 10% from CO2 reserves. Estimated Future Net Cash Flows 9-30-04
    
    9-30-03
    
    9-30-02Proved Developed
    
    $
    129,410,259
    
    
    $
    97,847,582
    
    
    $
    76,081,978Proved Undeveloped
    
    $
    18,782,490
    
    
    $
    17,893,760
    
    
    $
    18,572,672Total Proved
    
    $
    148,192,749
    
    
    $
    115,741,342
    
    
    $
    94,654,650
 10% Discounted Present Value of Estimated Future Net Cash Flows 9-30-04
    
    9-30-03
    
    9-30-02Proved Developed
    
    $
    84,400,194
    
    
    $
    63,591,623
    
    
    $
    49,485,409Proved Undeveloped
    
    $
    12,812,424
    
    
    $
    11,905,681
    
    
    $
    11,868,812Total Proved
    
    $
    97,212,618
    
    
    $
    75,497,304
    
    
    $
    61,354,221
 (7)




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##### Table of Contents



OIL AND GAS PRODUCTION The following table sets forth the Companys net production of oil and gas
for the fiscal periods indicated. Year Ended
    
    Year Ended
    
    Year Ended9-30-04
    
    9-30-03
    
    9-30-02Bbls  Oil
    
    
    114,986
    
    
    
    112,746
    
    
    
    132,514MCF  Gas
    
    
    3,863,277
    
    
    
    3,926,124
    
    
    
    3,897,084
 Gas production includes 176,605, 152,384 and 145,686 MCF of CO2 sold at
average prices of $.41, $.32 and $.27 per MCF for the years ended September 30,
2004, 2003 and 2002, respectively. Average Sales Prices and Production Costs The following table sets forth unit price and cost data for the fiscal
periods indicated. Year
    
    Year
    
    YearEnded
    
    Ended
    
    Ended9-30-04
    
    9-30-03
    
    9-30-02Average Sales PricePer Bbl Oil
    
    $
    35.89
    
    
    $
    29.30
    
    
    $
    22.48Per MCF Gas
    
    $
    5.03
    
    
    $
    4.79
    
    
    $
    2.59Average Production
(Lifting Cost)(Per MCFE of Gas)(1)
    
    $
    .48
    
    
    $
    .46
    
    
    $
    .36(2)
    
    $
    .42
    
    
    $
    .41
    
    
    $
    .28$
    .90
    
    
    $
    .87
    
    
    $
    .64
  (1)
    
    Includes actual well operating costs only.(2)
    
    Includes production taxes, compression, handling and marketing fees
paid on natural gas sales and other minor expenses associated with well
operations. A substantial number 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, 2004. Panhandle owns fractional royalty
interests or fractional working interests in these wells. The Company does not
operate any wells. Gross Wells
    
    Net WellsOil
    
    
    935
    
    
    
    26.2430Gas
    
    
    4,087
    
    
    
    82.8126TOTAL
    
    
    5,022
    
    
    
    109.0556
 Information on multiple completions is not available from Panhandles
records, but the number of such is insignificant. (8)




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##### Table of Contents



As of September 30, 2004, Panhandle owned 342,353 gross developed mineral
acres and 39,458 net developed mineral acres. Panhandle has also leased from
others 177,606 gross developed acres, which contain 16,695 net developed acres. UNDEVELOPED ACREAGE As of September 30, 2004, Panhandle owned 1,333,642 gross and 216,249 net
undeveloped mineral acres, and leases on 28,399 gross and 2,086 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 DryWells
    
    WellsDevelopment WellsFiscal year ending
September 30, 2002
    
    
    4.059870
    
    
    
    1.146157Fiscal year ending
September 30, 2003
    
    
    4.986539
    
    
    
    .462544Fiscal year ending
September 30, 2004
    
    
    4.362204
    
    
    
    .322523Exploratory WellsFiscal year ending
September 30, 2002
    
    
    1.416253
    
    
    
    .550419Fiscal year ending
September 30, 2003
    
    
    1.117805
    
    
    
    .541950Fiscal year ending
September 30, 2004
    
    
    1.245048
    
    
    
    .305172Purchased WellsFiscal year ending
September 30, 2002
    
    
    53.246100
    
    
    
    0Fiscal year ending
September 30, 2003
    
    
    .113069
    
    
    
    0Fiscal year ending
September 30, 2004
    
    
    .009749
    
    
    
    0
 (9)




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##### Table of Contents



PRESENT ACTIVITIES The following table sets forth the gross and net oil and gas wells
drilling or testing as of September 30, 2004, in which Panhandle owns a royalty
or working interest. Gross Wells
    
    Net WellsOil
    
    
    15
    
    
    
    .454565Gas
    
    
    63
    
    
    
    1.818652
 OTHER FACILITIES The Company leases approximately 8,189 square feet of office space in
Oklahoma City, OK. The obligation under this lease will end in 2008. 
 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, 2004. 
 PART II 
 ITEM 5 MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Companys Class A Common Stock (Common Stock) is listed on the
American Stock Exchange (symbol PHX). The following table sets forth the high
and low trade prices of the Common Stock during the periods indicated (all
share and per share amounts, are adjusted for a 2-for-1 stock split, which was
effective April 16, 2004): Quarter Ended
    
    High
    
    LowDecember 31, 2002
    
    $
    10.10
    
    
    $
    6.00March 31, 2003
    
    $
    9.07
    
    
    $
    7.63June 30, 2003
    
    $
    11.92
    
    
    $
    7.47September 30, 2003
    
    $
    11.96
    
    
    $
    10.70December 31, 2003
    
    $
    15.68
    
    
    $
    10.94March 31, 2004
    
    $
    19.35
    
    
    $
    13.22June 30, 2004
    
    $
    19.27
    
    
    $
    14.31September 30, 2004
    
    $
    17.80
    
    
    $
    14.76
 (10)




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##### Table of Contents



As of December 3, 2004, the approximate number of holders of shares of
Panhandle Common Stock was: Title of Class
    
    Number of HoldersClass A Common (Voting)
    
    
    3,190
 During the past two years, cash dividends have been paid as follows on the
Common Stock: Date
    
    Rate Per ShareDecember 2002
    
    $
    .035March 2003
    
    $
    .035June 2003
    
    $
    .035September 2003
    
    $
    .035December 2003
    
    $
    .04March 2004
    
    $
    .04June 2004
    
    $
    .05September 2004
    
    $
    .05
 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 4 to the consolidated
financial statements contained herein at Item 8  Financial Statements, for a
further discussion of the loan agreement. 
 ITEM 6 SELECTED FINANCIAL DATA The following table summarizes consolidated financial data of the Company
and should be read in conjunction with the Managements Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements of the Company, including the Notes thereto, included
elsewhere in this report. Year Ended September 30,2004(A)
    
    2003(A)
    
    2002(A)
    
    2001
    
    2000RevenuesOil & Gas Sales
    
    $
    23,578,615
    
    
    $
    22,098,198
    
    
    $
    13,080,754
    
    
    $
    12,546,055
    
    
    $
    9,091,920Lease Bonuses
    
    
    115,938
    
    
    
    72,765
    
    
    
    41,497
    
    
    
    17,991
    
    
    
    82,030Interest & Other
    
    
    912,056
    
    
    
    285,075
    
    
    
    469,146
    
    
    
    231,876
    
    
    
    104,024$
    24,606,609
    
    
    $
    22,456,038
    
    
    $
    13,591,397
    
    
    $
    12,795,922
    
    
    $
    9,277,974Costs & ExpensesLease Oper. Exp
& Prod. Taxes
    
    $
    4,098,124
    
    
    $
    4,013,572
    
    
    $
    3,001,449
    
    
    $
    1,771,789
    
    
    $
    1,458,935Exploration Costs (B)
    
    
    236,939
    
    
    
    469,224
    
    
    
    417,971
    
    
    
    947,046
    
    
    
    514,739Depr. Depl.
Amortization
    
    
    6,115,500
    
    
    
    5,783,457
    
    
    
    5,845,779
    
    
    
    1,670,961
    
    
    
    1,789,491Provision for
Impairment
    
    
    841,687
    
    
    
    692,220
    
    
    
    1,116,234
    
    
    
    848,535
    
    
    
    262,998Gen. & Administrative
    
    
    3,033,437
    
    
    
    2,666,177
    
    
    
    2,263,908
    
    
    
    1,689,426
    
    
    
    1,450,241Interest Expense
    
    
    488,097
    
    
    
    699,266
    
    
    
    895,997
    
    
    
    779
    
    
    
    15,643$
    14,813,784
    
    
    $
    14,323,916
    
    
    $
    13,541,338
    
    
    $
    6,928,536
    
    
    $
    5,492,047
 (11)




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##### Table of Contents



Year Ended September 30,2004 (A)
    
    2003 (A)
    
    2002 (A)
    
    2001
    
    2000Income before Provision
(Benefit) for Income
Taxes
    
    $
    9,792,825
    
    
    $
    8,132,122
    
    
    $
    50,059
    
    
    $
    5,867,386
    
    
    $
    3,785,927Cumulative effect of
accounting changes, net
of taxes of $28,500 (C)
    
    
    
    
    
    
    46,500
    
    
    
    
    
    
    
    
    
    
    
    Provision (Benefit)
for Income Taxes
    
    
    3,063,000
    
    
    
    2,217,000
    
    
    
    (293,000
    )
    
    
    1,600,000
    
    
    
    925,000Net Income
    
    $
    6,729,825
    
    
    $
    5,961,622
    
    
    $
    343,059
    
    
    $
    4,267,386
    
    
    $
    2,860,927Diluted Earnings per
share
    
    $
    1.59
    
    
    $
    1.42
    
    
    $
    .08
    
    
    $
    1.02
    
    
    $
    .69Dividends Declared per
share
    
    $
    .18
    
    
    $
    .14
    
    
    $
    .14
    
    
    $
    .18
    
    
    $
    .14Weighted Average
Shares OutstandingBasic
    
    
    4,178,783
    
    
    
    4,162,744
    
    
    
    4,135,744
    
    
    
    4,120,218
    
    
    
    4,110,940Diluted
    
    
    4,228,801
    
    
    
    4,207,426
    
    
    
    4,179,944
    
    
    
    4,170,088
    
    
    
    4,154,860Net Cash Provided by
Operating Activities
    
    $
    15,529,639
    
    
    $
    13,198,368
    
    
    $
    7,481,195
    
    
    $
    9,302,965
    
    
    $
    5,366,066Total Assets
    
    $
    54,186,362
    
    
    $
    49,402,534
    
    
    $
    44,837,068
    
    
    $
    25,279,684
    
    
    $
    16,210,327Long-Term Debt
    
    $
    8,516,657
    
    
    $
    12,666,661
    
    
    $
    14,024,000
    
    
    $
    4,050,000
    
    
    $
    0Shareholders Equity
    
    $
    28,700,515
    
    
    $
    22,527,685
    
    
    $
    16,953,294
    
    
    $
    16,995,050
    
    
    $
    13,353,814
 All share and per share amounts, are adjusted for the effect of the 2-for-1
stock split which was effective
April 16, 2004.  (A)
    
    2002, 2003 and 2004 results included are consolidated amounts
of Panhandle Royalty Company and its wholly owned subsidiary
Wood Oil Company, acquired October 1, 2001.(B)
    
    The Company uses the successful efforts method of accounting for its
oil and gas activities.(C)
    
    Represents the income effect of the adoption of SFAS No. 143,
Accounting for Asset Retirement Obligationson October 1, 2003. See
Note 1: Summary of Significant Accounting Policies of Notes to the
Condensed Consolidated Financial Statements for a complete
discussion. (12)




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##### Table of Contents



ITEM 7 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-looking statements for 2005 and later periods are made throughout
this report. 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. GENERAL The Companys principal line of business is the production and sale of oil
and natural gas. Results of operations are dependent upon the quantity of
production and the price obtained for such production. Prices received by the
Company for the sale of its oil and natural gas have fluctuated significantly
from period to period. Such fluctuations affect the Companys ability to
maintain or increase its production from existing oil and gas properties and to
explore, develop or acquire new properties. The following table reflects certain operating data for the periods
presented: For the Year Ended September 30,2004
    
    2003
    
    2002Production:Oil (Bbls)
    
    
    114,986
    
    
    
    112,746
    
    
    
    132,514Gas (MCF)
    
    
    3,863,277
    
    
    
    3,926,124
    
    
    
    3,897,084Average Sales Price:Oil (per Bbl)
    
    $
    35.89
    
    
    $
    29.30
    
    
    $
    22.48Gas (per MCF)
    
    $
    5.03
    
    
    $
    4.79
    
    
    $
    2.59
 RESULTS OF OPERATIONS 2004 COMPARED TO 2003 OVERVIEW The Company recorded a net income of $6,729,825 in 2004, compared to a net
income of $5,961,622 in 2003. Total revenues were larger as a result of
increased oil and gas sales revenues generated by increases in the average
sales prices of oil and natural gas in 2004 as compared to 2003. It currently
appears oil and gas sales prices will remain at the levels seen in 2004, or
even slightly increased, for at least the next year. REVENUES Total revenues increased 10% to $24,606,609 in 2004 compared to
$22,456,038 in 2003. The increase was due to increases in the average sales
price for oil and natural gas in 2004. Production volumes were basically flat
in 2004 compared to 2003. New production from the Companys drilling
activity almost replaced the normal production decline of existing gas wells,
thus, gas production declined only 2%. Oil wells beginning production in 2004
replaced the decline of existing oil well production, and increased oil
production 2%. (13)




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##### Table of Contents



LEASE OPERATING EXPENSES AND PRODUCTION TAXES (LOE) LOE continues to increase each year as the Company increases the number of
working interest wells in which it has an interest and due to normal inflation
of costs. Gross production taxes are paid as a percentage of oil and gas sales
revenues and thus, increased in 2004 due to the increase in oil and gas sales
revenues. EXPLORATION COSTS Exploration costs decreased $232,285 or 50% in 2004 as compared to 2003.
The Company utilizes the successful efforts method of accounting for oil and
gas operations thus, only exploratory dry holes result in their costs being
charged to exploration costs. In fiscal 2004, there were no high cost
exploratory dry holes. DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A) DD&A increased $332,043 or 6% in 2004 as compared to 2003. The increase
is due to several new wells, with large cost basis, going on production in 2004
and having high initial production rates. These production rates and the large
cost basis resulted in the increase in DD&A. PROVISON FOR IMPAIRMENT The provision for impairment increased $149,467 or 22% in 2004 as compared
to 2003. This increase was the result of several older fields fair values
being reduced along with several individual wells, which were completed and began
production in 2004, having a fair value at year-end less than their book value, as their initial production rates were substantially less than expected. GENERAL AND ADMINISTRATIVE COSTS (G&A) G&A costs increased $367,260 or 14% in 2004. Personnel related expenses
(including salaries, payroll taxes, insurance and ESOP expenses) increased
approximately $203,000 in 2004. G&A expense related to the Non-Employee
Directors Deferred Compensation Plan (the Plan) increased approximately
$130,000 in 2004. The increase resulted from the Company recognizing a charge
to G&A to adjust the potential shares in the Plan to market price at September
30, 2004. The non-employee directors have taken these potential shares, rather
than a cash payment for their directors fees. INTEREST EXPENSE Interest expense decreased $211,169 or 30% in 2004. The decrease was due
to lower average outstanding debt balances during 2004. PROVISION FOR INCOME TAXES The provision for income taxes increased in 2004, due to increased income
before taxes (as discussed above). The Company continued to be able to utilize
excess percentage depletion on its oil and gas properties to reduce its tax
liability, and its effective tax rate from the federal and state statutory
rates. The effective tax rate was approximately 31% in 2004, 27% in 2003,
while a tax benefit was provided in 2002. (14)




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES At September 30, 2004, the Company had positive working capital of
$1,941,634 as compared to $1,335,344 at September 30, 2003. The increase in
working capital at September 30, 2004 compared to September 30, 2003, is the
result of increased oil and gas sales revenues during 2004, which is discussed
in Results of Operation above. Cash flow from operating activities increased
16% to $15,529,639 for fiscal 2004, as compared to fiscal 2003, primarily due
to the increase in oil and gas sales prices. Capital expenditures for oil and gas activities for 2004 amounted to
$10,960,810, as compared to $9,195,916 for 2003. The Company has historically
funded its capital expenditures, overhead costs and dividend payments from
operating cash flow. Due to the increased capital expenditure level in 2004,
the Company borrowed on its revolving bank loan to help fund those
expenditures. However, as a result of the increased cash flow from higher
prices received for natural gas in fiscal 2004, the Company was able to reduce
its bank debt by a net of $4,150,004. Approximately $12 million is available
under the Companys current bank debt facility for capital expenditures,
acquisitions or any combination of uses. Further, the credit facility could be
increased, if needed, for a large acquisition. The Company expects to increase
its capital expenditure level to approximately $12 million in 2005. Funds for
this level of expenditures will come from cash flow and/or bank debt, if
required. CONTRACTUAL OBLIGATIONS The Company has a credit facility with BancFirst of Oklahoma City,
Oklahoma. The facility 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
facility is $22,500,000. The term loan matures on April 1, 2008, and the
revolving loan matures on March 31, 2006. Monthly payments on the term loan
are $166,667, plus accrued interest, beginning on May 1, 2003. Borrowings
under the revolving loan are due at maturity. 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% (4.0% at September 30, 2004) or LIBOR (for
one, three or six month periods), plus 1,80%. The Company, at September 30,
2004, has elected the prime rate option. The total outstanding borrowings under both the term loan and the
revolving line of credit may not exceed the borrowing base, which is $22.5
million as of September 30, 2004. Subsequent determinations of the borrowing
base are made semi-annually or whenever the bank, in its sole discretion,
believes that there has been a material change in the value of the oil and gas
properties. The loan agreement contains customary covenants which, among other
things, require periodic financial and reserve reporting and limit the
Companys incurrence of indebtedness, liens, dividends and acquisitions of
treasury stock, and require the Company to maintain certain financial ratios.
At September 30, 2004 the Company was in compliance with the covenants. The table below summarizes the Companys contractual obligations as of
September 30, 2004: Payments Due By PeriodLess than
    
    1-3
    
    3-5
    
    More thanContractual Obligations
    
    Total
    
    1 Year
    
    Years
    
    Years
    
    5 YearsLong-term debt
obligations
    
    $
    10,516,661
    
    
    $
    2,000,004
    
    
    $
    7,350,008
    
    
    $
    1,166,649
    
    
    
 (15)




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##### Table of Contents



2003 COMPARED TO 2002 OVERVIEW The Company recorded a net income of $5,961,622 in 2003, compared to a net
income of $343,059 in 2002. Total revenues were larger as a result of
significantly increased oil and gas sales revenues generated by increases in
the average sales prices of oil and natural gas in 2003 as compared to 2002. REVENUES Total revenues increased 65% to $22,456,038 in 2003 compared to
$13,591,397 in 2002. The increase was due to a large increase in the average
sales price for natural gas in 2003; offset some what by a 15% decrease in oil
production volumes in 2003. Gas production volume was basically flat in 2003
compared to 2002. New production from the Companys drilling activity replaced
the normal production decline of existing gas wells allowing gas production to
remain flat. Fewer oil wells have been drilled in recent years, thus, oil
production continues to decline as existing wells production continues its
normal decline. LEASE OPERATING EXPENSES AND PRODUCTION TAXES (LOE) LOE continues to increase each year as the Company increases the number of
working interest wells in which it has an interest and due to normal inflation
of costs. The Company participated in a record number of working interest
wells in 2003. Gross production taxes are paid as a percentage of oil and gas
sales revenues and thus increased substantially in 2003 due to the large
increase in oil and gas sales revenues. EXPLORATION COSTS Exploration costs increased $51,253 or 12% in 2003 as compared to 2002.
The increased costs were primarily dry hole costs. As previously mentioned,
the Company participated in a record number of wells in 2003, several of which
were exploratory wells. As the Company utilizes the successful efforts method
of accounting for oil and gas operations exploratory dry holes result in the
expensing of all costs associated with those wells. Several of the exploratory
wells drilled in 2003 were dry holes. DEPRECIATION, DEPLETION AND AMORTIZATION (DD&A) DD&A declined $62,322 or 1% in 2003. The decline was principally due to
decreased oil production volume in 2003; reducing the units of production, DD&A
on the Companys oil properties. PROVISON FOR IMPAIRMENT The provision for impairment of the Companys oil and gas properties
decreased $424,014, or 38% in 2003. This decrease can be principally
attributed to the higher market price for natural gas at year-end 2003 as
compared to year-end 2002, which increased the fair value of the Companys oil
and gas properties in 2003 as compared to the carrying amount of the
properties. GENERAL AND ADMINISTRATIVE COSTS (G&A) G&A costs increased $402,269 in 2003. Personnel related expenses
(including salaries, payroll taxes, insurance expenses and ESOP expenses)
increased approximately $137,000 in 2003. G&A expense (16)




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##### Table of Contents



related to the Non-Employee Directors Deferred Compensation Plan (the Plan) increased
approximately $180,000 in 2003. This increase was a result of the Company
recognizing a charge to general and administrative expense to adjust the potential shares in the Plan
to market price at September 30, 2003, versus a minimal charge in 2002 for the
same adjustment. The Non-Employee directors have taken these potential shares,
rather than a cash payment for their directors fees. In addition, the Company
incurred expenses of approximately $50,000 upon listing its shares on the
American Stock Exchange in 2003. INTERST EXPENSE Interest expense decreased $196,731 or 22% in 2003. The decrease was due
to lower outstanding debt balances, and lower effective interest rates. PROVISION FOR INCOME TAXES The provision for income taxes increased in 2003, due to a much larger
income before taxes (as discussed above). The Company continued to be able to
utilize tax credits from production of tight
gas sands natural gas and excess percentage depletion on its oil and gas
properties to reduce its tax liability, and its effective tax rate from the
federal and state statutory rates. The effective tax rate was approximately
27% in 2003 and 2001 while a tax benefit was provided in 2002. LIQUIDITY AND CAPITAL RESOURCES At September 30, 2003, the Company had positive working capital of
$1,335,344 as compared to negative working capital of $2,399,457 at September
30, 2002. The increase in working capital from September 30, 2002 to September
30, 2003, is the result of increased oil and gas sales revenues during 2003,
which is discussed in Results of Operation above, 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 in March 2003. 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. Cash flow from operating activities
increased 76% to $13,198,368 for fiscal 2003, as compared to fiscal 2002,
primarily due to a significant increase in product sales prices. Capital expenditures for oil and gas activities for 2003 amounted to
$9,195,916, as compared to $6,967,767 for 2002, exclusive of $15,229,466 used
to acquire Wood Oil Company. The Company has historically funded its capital expenditures, overhead
costs and dividend payments from operating cash flow. Due to the increased
capital expenditure level in 2003, the Company borrowed, early in the year,
$1,525,000 on its revolving bank loan to help fund those expenditures. As a
result of the increased cash flow from higher prices received for natural gas
in the last three quarters of fiscal 2003, the Company made total principal
payments of $4,878,335 on its bank debt. The Company has approximately $7.8
million available credit under the bank debt facility which is in place, for
capital expenditures, acquisitions or any combination of uses. Further, the
credit facility could be increased, if needed, for a large acquisition. CRITICAL ACCOUNTING POLICIES Preparation of financial statements in conformity with accounting
principles generally accepted in (17)




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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, provision for abandonment and assessment of the
need for asset impairments. 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. As previously discussed,
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 field 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 (18)




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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. 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 7 A 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 either the national prime rate minus 3/4% or LIBOR for one, three or six
month periods, plus 1.8%. At September 30, 2004, a 1% change in the prime
interest rate would result in approximately a $33,500 change in annual interest
expense. The Company has a $10,000,000 term loan (outstanding balance of
$7,166,661 at September 30, 2004) which matures on April 1, 2008. The interest
rate is fixed at 4.56% until maturity. 
 ITEM 8 FINANCIAL STATEMENTS Report of Independent
Auditors
    
    
    20Consolidated Balance Sheets
As of September 30, 2004 and 2003
    
    
    21-22Consolidated Statements of Income for the
Years Ended September 30, 2004, 2003 and
2002
    
    
    23Consolidated Statements of Stockholders Equity for
the Years Ended September 30, 2004, 2003 and 2002
    
    
    24Consolidated Statements of Cash Flows for
the Years Ended September 30, 2004, 2003 and 2002
    
    
    25-26Notes to Consolidated Financial Statements
    
    
    27-41
 (19)




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Report of Independent Registered Public Accounting Firm 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, 2004 and 2003, and the
related consolidated statements of income, stockholders equity, and cash flows
for each of the three years in the period ended September 30, 2004. 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 the standards of the Public Company
Accounting Oversight Board (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, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
September 30, 2004, in conformity with accounting principles generally accepted
in the United States. Ernst & Young, LLP
Oklahoma City, Oklahoma
December 6, 2004 (20)




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Panhandle Royalty Company
Consolidated Balance Sheets September 30,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    642,343
    
    
    $
    593,006Oil and gas sales receivable
    
    
    4,962,992
    
    
    
    3,989,877Income tax and other receivables
    
    
    239,895
    
    
    
    117,422Total current assets
    
    
    5,845,230
    
    
    
    4,700,305Property and equipment at cost, based on successful
efforts accounting:Producing oil and gas properties
    
    
    74,928,073
    
    
    
    65,342,062Non-producing oil and gas properties
    
    
    9,790,377
    
    
    
    9,610,757Furniture and fixtures
    
    
    471,564
    
    
    
    405,51485,190,014
    
    
    
    75,358,333Less accumulated depreciation, depletion,
and amortization
    
    
    37,755,438
    
    
    
    31,685,848Net properties and equipment
    
    
    47,434,576
    
    
    
    43,672,485Investment in partnerships, at equity
    
    
    659,399
    
    
    
    782,587Other
    
    
    247,157
    
    
    
    247,157Total assets
    
    $
    54,186,362
    
    
    $
    49,402,534
 (Continued on next page.) (21)




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Panhandle Royalty Company
Consolidated Balance Sheets September 30,2004
    
    2003Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    825,941
    
    
    $
    552,201Accrued liabilities:Deferred compensation
    
    
    864,333
    
    
    
    519,783Interest
    
    
    30,936
    
    
    
    40,213Other
    
    
    182,382
    
    
    
    121,972Income taxes payable
    
    
    
    
    
    
    130,788Long-term debt due within one year
    
    
    2,000,004
    
    
    
    2,000,004Total current liabilities
    
    
    3,903,596
    
    
    
    3,364,961Long-term debt
    
    
    8,516,657
    
    
    
    12,666,661Deferred income taxes
    
    
    12,249,000
    
    
    
    10,315,000Asset retirement obligation and
other noncurrent liabilities
    
    
    816,594
    
    
    
    528,227Stockholders equity:Class A voting common stock, $.0166
par value; 6,000,000 shares
authorized, 4,189,783 issued and
outstanding (4,158,846 in 2003)
    
    
    69,830
    
    
    
    69,637Capital in excess of par value
    
    
    1,286,850
    
    
    
    1,091,886Retained earnings
    
    
    27,343,835
    
    
    
    21,366,162Total stockholders equity
    
    
    28,700,515
    
    
    
    22,527,685Total liabilities and stockholders equity
    
    $
    54,186,362
    
    
    $
    49,402,534
 See accompanying notes. (22)




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Panhandle Royalty Company
Consolidated Statements of Income Year ended September 30,2004
    
    2003
    
    2002Revenues:Oil and gas sales
    
    $
    23,578,615
    
    
    $
    22,098,198
    
    
    $
    13,080,754Lease bonuses and rentals
    
    
    115,938
    
    
    
    72,765
    
    
    
    41,497Interest
    
    
    5,436
    
    
    
    13,580
    
    
    
    36,743Income from partnerships and other
    
    
    906,620
    
    
    
    271,495
    
    
    
    432,40324,606,609
    
    
    
    22,456,038
    
    
    
    13,591,397Costs and expenses:Lease operating expenses and production
taxes
    
    
    4,098,124
    
    
    
    4,013,572
    
    
    
    3,001,449Exploration costs
    
    
    236,939
    
    
    
    469,224
    
    
    
    417,971Depreciation, depletion, and amortization
    
    
    6,115,500
    
    
    
    5,783,457
    
    
    
    5,845,779Provision for impairment
    
    
    841,687
    
    
    
    692,220
    
    
    
    1,116,234General and administrative
    
    
    3,033,437
    
    
    
    2,666,177
    
    
    
    2,263,908Interest expense
    
    
    488,097
    
    
    
    699,266
    
    
    
    895,99714,813,784
    
    
    
    14,323,916
    
    
    
    13,541,338Income before provision for income taxes
and cumulative effect of accounting change
    
    
    9,792,825
    
    
    
    8,132,122
    
    
    
    50,059Provision (benefit) for income taxes
    
    
    3,063,000
    
    
    
    2,217,000
    
    
    
    (293,000
    )Net income before cumulative effect of
accounting change
    
    
    6,729,825
    
    
    
    5,915,122
    
    
    
    343,059Cumulative effect of accounting changes, net
of taxes of $28,500
    
    
    
    
    
    
    46,500
    
    
    
    Net income
    
    $
    6,729,825
    
    
    $
    5,961,622
    
    
    $
    343,059Basic earnings per common share:Income before cumulative effect of
accounting change
    
    $
    1.61
    
    
    $
    1.42
    
    
    $
    .08Cumulative effect of accounting change
    
    
    
    
    
    
    .01
    
    
    
    Net income
    
    
    1.61
    
    
    
    1.43
    
    
    
    .08Diluted earnings per common share:Income before cumulative effect of
accounting change
    
    
    1.59
    
    
    
    1.41
    
    
    
    .08Cumulative effect of accounting change
    
    
    
    
    
    
    .01
    
    
    
    Net income
    
    $
    1.59
    
    
    $
    1.42
    
    
    $
    .08
 See accompanying notes. (23)




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Panhandle Royalty Company
Consolidated Statements of Stockholders Equity Common Stock
    
    Capital inExcess of
    
    RetainedShares
    
    Amount
    
    Par Value
    
    Earnings
    
    TotalBalances at September 30, 2002
    
    
    4,158,846
    
    
    $
    69,314
    
    
    $
    896,643
    
    
    $
    15,987,337
    
    
    $
    16,953,294Purchases and cancellation of
common shares
    
    
    (108
    )
    
    
    (2
    )
    
    
    (776
    )
    
    
    
    
    
    
    (778
    )Issuance of common shares to ESOP
    
    
    13,284
    
    
    
    222
    
    
    
    152,676
    
    
    
    
    
    
    
    152,898Issuance of common shares to
directors for services
    
    
    6,180
    
    
    
    103
    
    
    
    43,343
    
    
    
    
    
    
    
    43,446Dividends declared ($.14 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (582,797
    )
    
    
    (582,797
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,961,622
    
    
    
    5,961,622Balances at September 30, 2003
    
    
    4,178,202
    
    
    
    69,637
    
    
    $
    1,091,886
    
    
    $
    21,366,162
    
    
    $
    22,527,685Issuance of common shares to ESOP
    
    
    10,058
    
    
    
    168
    
    
    
    172,830
    
    
    
    
    
    
    
    172,998Issuance of common shares to
directors for services
    
    
    1,523
    
    
    
    25
    
    
    
    22,134
    
    
    
    
    
    
    
    22,159Dividends declared ($.18 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (752,152
    )
    
    
    (752,152
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,729,825
    
    
    
    6,729,825Balances at September 30, 2004
    
    
    4,189,783
    
    
    $
    69,830
    
    
    $
    1,286,850
    
    
    $
    27,343,835
    
    
    $
    28,700,515
 See accompanying notes. (24)




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Panhandle Royalty Company
Consolidated Statements of Cash Flows Year ended September 30,2004
    
    2003
    
    2002Operating ActivitiesNet income
    
    $
    6,729,825
    
    
    $
    5,961,622
    
    
    $
    343,059Adjustments to reconcile net income to net cash
provided by operating activities:Cumulative effect of accounting change
    
    
    
    
    
    
    (46,500
    )
    
    
    Depreciation, depletion, amortization, and
impairment
    
    
    6,957,186
    
    
    
    6,475,677
    
    
    
    6,962,013Deferred income taxes
    
    
    1,920,000
    
    
    
    1,676,000
    
    
    
    (453,000
    )Deferred lease bonus
    
    
    288,028
    
    
    
    67,673
    
    
    
    8,744Exploration costs
    
    
    236,939
    
    
    
    469,224
    
    
    
    417,971Gain on sale of assets
    
    
    (6,959
    )
    
    
    (38,378
    )
    
    
    (179,037
    )Equity in earnings of partnerships
    
    
    (246,573
    )
    
    
    (133,836
    )
    
    
    (77,015
    )Common stock issued to Employee Stock
Ownership Plan/Directors for Services
    
    
    195,156
    
    
    
    152,898
    
    
    
    118,684Cash provided (used) by changes in assets and
liabilities, net of amounts acquired in Wood
Oil acquisition:Oil and gas sales and other receivables
    
    
    (1,121,476
    )
    
    
    (1,456,628
    )
    
    
    191,908Prepaid expenses and other
    
    
    96,893
    
    
    
    (111,713
    )
    
    
    655,501Accounts payable and accrued liabilities
    
    
    669,422
    
    
    
    61,604
    
    
    
    (517,696
    )Income taxes payable
    
    
    (203,141
    )
    
    
    120,725
    
    
    
    10,063Total adjustments
    
    
    8,785,475
    
    
    
    7,236,746
    
    
    
    7,138,136Net cash provided by operating activities
    
    
    15,515,300
    
    
    
    13,198,368
    
    
    
    7,481,195Investing ActivitiesCapital expenditures, including dry hole costs
    
    
    (10,946,471
    )
    
    
    (9,195,916
    )
    
    
    (6,967,767
    )Acquisition of Wood, net of cash acquired
    
    
    
    
    
    
    
    
    
    
    (15,229,466
    )Distributions received from partnerships
    
    
    369,761
    
    
    
    252,856
    
    
    
    191,685Investment in partnerships
    
    
    
    
    
    
    (45,000
    )
    
    
    (90,000
    )Proceeds from sale of assets
    
    
    12,903
    
    
    
    76,772
    
    
    
    1,371,272Net cash used in investing activities
    
    
    (10,563,807
    )
    
    
    (8,911,288
    )
    
    
    (20,724,276
    )
 Continued on next page. (25)




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Panhandle Royalty Company
Consolidated Statements of Cash Flows (continued) Year ended September 302004
    
    2003
    
    2002Financing ActivitiesBorrowings under debt agreement
    
    $
    6,825,000
    
    
    $
    1,525,000
    
    
    $
    18,100,000Payments of loan principal
    
    
    (10,975,004
    )
    
    
    (4,878,335
    )
    
    
    (4,130,000
    )Purchase and cancellation of common shares
    
    
    0
    
    
    
    (778
    )
    
    
    (4,110
    )Payments of dividends
    
    
    (752,152
    )
    
    
    (582,797
    )
    
    
    (578,943
    )Net cash provided by (used in) financing activities
    
    
    (4,902,156
    )
    
    
    (3,936,910
    )
    
    
    13,386,947Increase (decrease) in cash and cash equivalents
    
    
    49,337
    
    
    
    350,170
    
    
    
    143,866Cash and cash equivalents at beginning of year
    
    
    593,006
    
    
    
    242,836
    
    
    
    98,970Cash and cash equivalents at end of year
    
    $
    642,343
    
    
    $
    593,006
    
    
    $
    242,836Supplemental Disclosures of Cash Flow InformationInterest paid
    
    $
    496,441
    
    
    $
    727,153
    
    
    $
    829,430Income taxes paid, net of refunds received
    
    
    1,344,321
    
    
    
    456,338
    
    
    
    (215,687
    )
 See accompanying notes. (26)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements September 30, 2004, 2003 and 2002 1. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of Panhandle Royalty
Company and its wholly owned subsidiaries after elimination of all material
intercompany transactions. 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. Cash and Cash Equivalents Cash and cash equivalents consist of all demand deposits and funds invested in
short-term investments with original maturities of three months or less. Oil and Gas Sales and Gas Imbalances The Company sells oil and natural gas to various customers, recognizing
revenues as oil and gas is produced and sold. The Company uses the sales method
of accounting for gas imbalances in those circumstances where it has
underproduced or overproduced its ownership percentage in a property. Under
this method, a receivable or liability is recorded to the extent that an
underproduced or overproduced position in a reservoir cannot be recouped
through the production of remaining reserves. At September 30, 2004 and 2003,
the Company had no material gas imbalances. Charges for gathering and transportation are included in lease operating
expenses and production taxes. Concentration of Credit Risk 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, 2004. 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. (27)




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##### Table of Contents



Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) 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. Non-producing oil and gas properties include non-producing minerals, which have
a net book value of $6,593,777 at September 30, 2004, 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 non-producing oil and gas
properties is recognized based on experience and management judgment. In accordance with the provisions of Financial Accounting Standards (SFAS) No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, 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 $841,687, $692,220, and,
$1,116,234 respectively, for 2004, 2003 and 2002. The majority of the
impairment recognized in these years relates to fields comprised of a small
number of properties or single wells on which the Company does not expect
sufficient future net cash flow to recover its carrying cost. Asset Retirement Obligations The adoption of SFAS No. 143 on October 1, 2002 resulted in a net increase to
Property and Equipment and Asset Retirement Obligations of approximately
$481,000 and $406,000, 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 was substantially offset
by the decrease in depreciation from the Companys consideration of the
estimated salvage values in the calculation. At September 30, 2004 the net
increase to Property and Equipment had increased to $728,037 and the Asset
Retirement Obligation increased to $602,979. 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, 2004, there
were no such costs accrued. (28)




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##### Table of Contents



Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 1. Summary of Significant Accounting Policies (continued) 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). Stock-based Compensation The Company applies APB Opinion No. 25 in accounting for its Deferred
Compensation Plan for Outside Directors. Under APB No. 25, compensation cost
is recognized for changes in the fair value of the stock credited to each
directors account at the fair market value of the stock at the date of grant.
The shares are then adjusted for changes in the shares market value subsequent
to the date of grant until the conversion date (see Note 7). The Company applies SOP 93-6 in accounting for its non-leveraged Employee Stock
Ownership Plan. Under SOP 93-6 the Company records as expense, the fair market
value of the stock at the time of contribution. Fair Values of Financial Instruments The carrying amounts reported in the balance sheets for cash and cash
equivalents, receivables, prepaid expenses, accounts payable, and accrued
liabilities approximate their fair values due to the short maturity of these
instruments. The fair value of Companys long-term debt approximates its
carrying amount due to the interest rate on the Companys term-loan being a
fixed rate, which approximated market rates at September 30, 2004, the
remaining borrowings bear interest at a variable rate. (29)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 2. Acquisition of Wood Oil Company On October 1, 2001, the Company acquired 100% of the outstanding common stock
of Wood Oil Company (Wood). The acquisition was made pursuant to an Agreement
and Plan of Merger among the Company, PHC, Inc. and Wood Oil Company, dated
August 9, 2001. Wood merged with Panhandles wholly owned subsidiary PHC, Inc.,
on October 1, 2001, with Wood being the surviving Company. Prior to the
acquisition, Wood was a privately held company engaged in oil and gas
exploration and production and fee mineral ownership and owned interests in
certain oil and gas and real estate partnerships and owned an office building
in Tulsa, Oklahoma. Subsequent to the acquisition, Wood has continued to
operate as a subsidiary of Panhandle and personnel were moved to Oklahoma City
in early 2002. Wood and its shareholders were unrelated parties to Panhandle. The Companys decision to acquire Wood was the result of desired growth in the
Companys asset base of producing oil and gas reserves and fee mineral acreage.
Woods oil and gas activity, fee minerals and operating philosophy, in general,
had been very similar to the Companys. Woods mineral acreage ownership and leasehold position as well as its
producing oil and gas properties are located in the same general areas as the
Companys. In several cases, both companies owned interests in existing
producing wells and several developing fields. The Company intends to actively
pursue drilling opportunities on Woods properties. Funding for the acquisition was obtained from Banc First of Oklahoma City,
Oklahoma in the form of a $20 million five-year term loan. Three million of
Woods cash was used to reduce Panhandles debt on the date of closing. The operations of Wood, since October 1, 2001, are included in the accompanying
consolidated financial statements. (30)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 3. Income Taxes The Companys provision for income taxes is detailed as follows: 2004
    
    2003
    
    2002Current:Federal
    
    $
    1,113,000
    
    
    $
    521,000
    
    
    $
    150,000State
    
    
    30,000
    
    
    
    20,000
    
    
    
    10,0001,143,000
    
    
    
    541,000
    
    
    
    160,000Deferred:Federal
    
    
    1,851,000
    
    
    
    1,607,000
    
    
    
    (390,000
    )State
    
    
    69,000
    
    
    
    69,000
    
    
    
    (63,000
    )1,920,000
    
    
    
    1,676,000
    
    
    
    (453,000
    )$
    3,063,000
    
    
    $
    2,217,000
    
    
    $
    (293,000
    )
 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: 2004
    
    2003
    
    2002Provision for income taxes at statutory rate
    
    $
    3,329,561
    
    
    $
    2,762,324
    
    
    $
    17,521Percentage depletion
    
    
    (334,365
    )
    
    
    (653,947
    )
    
    
    (201,600
    )Tight-sands gas credits
    
    
    
    
    
    
    (20,000
    )
    
    
    (77,404
    )State income taxes, net of federal benefit
    
    
    64,350
    
    
    
    57,850
    
    
    
    (34,419
    )Other
    
    
    3,454
    
    
    
    70,773
    
    
    
    2,902$
    3,063,000
    
    
    $
    2,217,000
    
    
    $
    (293,000
    )
 Deferred tax assets and liabilities, resulting from differences between the
financial statement carrying amounts and the tax basis of assets and
liabilities, consist of the following: 2004
    
    2003Deferred tax liabilities:Financial basis in excess of tax basis, including
intangible drilling costs capitalized for financial
purposes and expensed for tax purposes
    
    $
    12,843,000
    
    
    $
    11,744,000Deferred tax assets:Percentage depletion and alternative minimum tax
credit, and state net operating loss carry forwards
    
    
    233,000
    
    
    
    991,000Financial charges which are deferred for tax purposes
    
    
    361,000
    
    
    
    438,000594,000
    
    
    
    1,429,000Net deferred tax liabilities
    
    $
    12,249,000
    
    
    $
    10,315,000
 (31)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 4. Long-Term Debt Long-term debt consisted of the following at September 30: 2004
    
    2003Revolving line of credit
    
    $
    3,350,000
    
    
    $
    5,500,000Term loan
    
    
    7,166,661
    
    
    
    9,166,66510,516,661
    
    
    
    14,666,665Current maturities of long-term debt
    
    
    2,000,004
    
    
    
    2,000,004$
    8,516,657
    
    
    $
    12,666,661
 On March 25, 2003, the Company amended its Loan Agreement with BancFirst of
Oklahoma City, Oklahoma. 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 Agreement is $22,500,000. The term loan matures on April 1,
2008, and the revolving loan matures on March 31, 2006. Monthly payments on
the term loan are $166,667, plus accrued interest, beginning on May 1, 2003.
Borrowings under the revolving loan are due at maturity. 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% (4.0% at September 30, 2004) or LIBOR (for
one, three or six month periods), plus 1.80%. The Company, at September 30,
2004, has elected the prime rate option. The total outstanding borrowings under both the term loan and the revolving
line of credit may not exceed the borrowing base, which is $22.5 million as of
September 30, 2004. Subsequent determinations of the borrowing base are made
semi-annually or whenever the bank, in its sole discretion, believes that there
has been a material change in the value of the oil and gas properties. The loan
agreement contains customary covenants which, among other things, require
periodic financial and reserve reporting and limit the Companys incurrence of
indebtedness, liens, dividends and acquisitions of treasury stock, and require
the Company to maintain certain financial ratios. At September 30, 2004 the
Company was in compliance with the covenants. The amount of required principal payments for the next five years as of
September 30, 2004, are as follows: 2005$2,000,004, 2006$5,350,004,
2007$2,000,004 and 2008$1,166,649. (32)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 5. Shareholders Equity On December 18, 2003, the Companys Board of Directors approved a proposal to
amend the Companys Articles of Incorporation to increase the number of
authorized shares of Class A Common Stock from 6,000,000 shares to 12,000,000
shares and effect a 2-for-1 stock split of the outstanding Class A Common Stock
and a corresponding reduction of the par value per share from $.03333 to
$.01666. On February 27, 2004, these proposals were put forth to a vote of the
shareholders, for which a majority of the shareholders voted in favor of each
proposal, causing these proposals to become effective on such date. The Class
A Common Stock split was effected in the form of a stock dividend, distributed
on April 15, 2004, to stockholders of record on April 1, 2004. All agreements concerning Common Stock of the Company, including the Companys
Employee Stock Ownership Plan and the Companys commitment under the Deferred
Compensation Plan for Non-Employee Directors, provide for the issuance or
commitment, respectively, of additional shares of the Companys stock due to
the declaration of the stock split. All references to number of shares, per
share, and authorized share information in the accompanying consolidated
financial statements have been adjusted to reflect the stock split and increase
in authorized shares approved on February 27, 2004, at the Annual Meeting of
the Stockholders of the Company. 6. 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 30,2004
    
    2003
    
    2002Numerator for primary and diluted
earnings per share:Net income
    
    $
    6,729,825
    
    
    $
    5,961,622
    
    
    $
    343,059Denominator:For basic earnings per
shareweighted average shares
    
    
    4,178,783
    
    
    
    4,162,744
    
    
    
    4,135,744Effect of potential diluted shares:Directors deferred
compensation shares
    
    
    50,018
    
    
    
    44,682
    
    
    
    44,200Denominator for diluted earnings per
shareadjusted weighted average
shares and potential shares
    
    
    4,228,801
    
    
    
    4,207,426
    
    
    
    4,179,944
 The weighted average shares outstanding, potentially dilutive shares, and
earnings per share for 2002 and 2003 have been restated to affect the 2-for-1
stock split discussed in Note 5. (33)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 7. 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 2004, 2003 or 2002) 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 249,847 shares of
the Companys common stock held by the plan as of September 30, 2004, 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
    
    Amount2004
    
    
    10,058
    
    
    $
    173,1252003
    
    
    13,822
    
    
    $
    156,9782002
    
    
    16,314
    
    
    $
    118,684
 8. 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, 2004, 50,251 shares
(45,816 shares at September 30, 2003) are included in the Plan. The Company has
accrued $864,334 at September 30, 2004 ($519,783 at September 30, 2003) in
connection with the Plan ($344,551, $241,673 and $23,095 was charged to the
results of operations for the years ended September 30, 2004, 2003 and 2002,
respectively, and is included in general and administrative expense in the
accompanying income statement). (34)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 9. Information on Oil and Gas Producing Activities All oil and gas producing activities of the Company are conducted within the
United States (principally in Oklahoma) and represent substantially all of the
business activities of the Company. During 2004, 2003 and 2002 approximately 10%, 14%, and 17%, 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 7%, 9%, and 12% of the Companys revenues in 2004,
2003 and 2002, respectively. 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: 2004
    
    2003Producing properties
    
    $
    74,928,073
    
    
    $
    65,342,062Non-producing properties
    
    
    9,790,377
    
    
    
    9,610,75784,718,450
    
    
    
    74,952,819Accumulated depreciation, depletion and amortization
    
    
    (37,424,995
    )
    
    
    (31,386,538
    )Net capitalized costs
    
    $
    47,293,455
    
    
    $
    43,566,281
 Costs Incurred During the reporting period, the Company incurred the following costs in oil
and gas producing activities: 2004
    
    2003
    
    2002Property acquisition costs (A)
    
    $
    612,392
    
    
    $
    127,058
    
    
    $
    219,306Exploration costs
    
    
    1,239,217
    
    
    
    1,412,653
    
    
    
    1,080,951Development costs
    
    
    9,005,341
    
    
    
    7,818,988
    
    
    
    5,637,430$
    10,856,950
    
    
    $
    9,358,699
    
    
    $
    6,937,687
 (A) Excludes Wood Oil acquisition in 2002 as set forth in Note 2, the cost of
which, net of cash acquired, was $15,229,466. (35)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 10. 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 non-producing 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 consulting 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. 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, 2004, 2003 and 2002, have been estimated by Campbell &
Associates, Inc., a consulting 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, 2004, 2003 and 2002. 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. (36)




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##### Table of Contents



Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 10. 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 ReservesOil
    
    Gas(Mbarrels)
    
    (Mmcf)September 30, 2001
    
    
    676
    
    
    
    17,688Revisions of previous estimates
    
    
    (38
    )
    
    
    745Purchases of reserves in place
    
    
    487
    
    
    
    8,519Extensions and discoveries
    
    
    123
    
    
    
    5,061Production
    
    
    (133
    )
    
    
    (3,897
    )September 30, 2002
    
    
    1,115
    
    
    
    28,116Revisions of previous estimates
    
    
    (289
    )
    
    
    (1,953
    )Extensions and discoveries
    
    
    123
    
    
    
    6,033Production
    
    
    (113
    )
    
    
    (3,926
    )September 30, 2003
    
    
    836
    
    
    
    28,270Revisions of previous estimates
    
    
    (50
    )
    
    
    (2,489
    )Extensions and discoveries
    
    
    89
    
    
    
    6,333Production
    
    
    (115
    )
    
    
    (3,863
    )September 30, 2004
    
    
    760
    
    
    
    28,251
 Proved Developed Reserves
    
    Proved Undeveloped ReservesOil
    
    Gas
    
    Oil
    
    Gas(Mbarrels)
    
    (Mmcf)
    
    (Mbarrels)
    
    (Mmcf)September 30, 2001
    
    
    413
    
    
    
    13,236
    
    
    
    263
    
    
    
    4,452September 30, 2002
    
    
    821
    
    
    
    22,896
    
    
    
    294
    
    
    
    5,220September 30, 2003
    
    
    703
    
    
    
    23,600
    
    
    
    133
    
    
    
    4,670September 30, 2004
    
    
    710
    
    
    
    24,086
    
    
    
    50
    
    
    
    4,165
 The above reserve numbers exclude approximately 1.2 mmcf of CO2 gas reserves
for years ended September 30, 2004, 2003 and 2002. (37)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 10. Supplementary Information on Oil and Gas Reserves (Unaudited) (continued) 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 through December 31, 2002. 2004
    
    2003
    
    2002Future cash inflows
    
    $
    187,769,949
    
    
    $
    148,633,837
    
    
    $
    123,668,010Future production costs
    
    
    35,447,026
    
    
    
    29,036,188
    
    
    
    25,022,170Future development costs
    
    
    3,716,299
    
    
    
    3,856,341
    
    
    
    3,991,185Asset Retirement Obligation
    
    
    728,037
    
    
    
    508,362
    
    
    
    Future net cash inflows before future
income tax expenses
    
    
    147,878,587
    
    
    
    115,232,946
    
    
    
    94,654,655Future income tax expense
    
    
    40,959,776
    
    
    
    31,554,746
    
    
    
    25,831,291Future net cash flows
    
    
    106,918,811
    
    
    
    83,678,200
    
    
    
    68,823,36410% annual discount
    
    
    37,768,822
    
    
    
    29,937,664
    
    
    
    24,878,417Standardized measure of discounted
future net cash flows
    
    $
    69,149,989
    
    
    $
    53,740,536
    
    
    $
    43,944,947
 Changes in the standardized measure of discounted future net cash flows are as follows: 2004
    
    2003
    
    2002Beginning of year
    
    $
    53,740,536
    
    
    $
    43,944,947
    
    
    $
    17,629,945Changes resulting from:Sales of oil and gas, net of production costs
    
    
    (19,480,491
    )
    
    
    (18,084,626
    )
    
    
    (10,079,305
    )Net change in sales prices and production
costs
    
    
    23,317,917
    
    
    
    20,300,852
    
    
    
    15,794,503Net change in future development costs
    
    
    91,349
    
    
    
    87,405
    
    
    
    (665,685
    )Net change in asset retirement obligation
    
    
    (144,078
    )
    
    
    (331,601
    )
    
    
    Extensions and discoveries
    
    
    20,153,689
    
    
    
    15,315,189
    
    
    
    10,313,163Revisions of quantity estimates
    
    
    (8,026,019
    )
    
    
    (8,291,358
    )
    
    
    885,028Purchases of reserves-in-place
    
    
    
    
    
    
    
    
    
    
    19,370,609Accretion of discount
    
    
    7,516,647
    
    
    
    6,135,420
    
    
    
    2,412,266Net change in income taxes
    
    
    (6,413,806
    )
    
    
    (4,032,361
    )
    
    
    (10,933,161
    )Change in timing and other, net
    
    
    (1,605,755
    )
    
    
    (1,303,331
    )
    
    
    (782,416
    )Net change
    
    
    15,409,453
    
    
    
    9,795,589
    
    
    
    26,315,002End of year
    
    $
    69,149,989
    
    
    $
    53,740,536
    
    
    $
    43,944,947
 (38)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 11. Quarterly Results of Operations (Unaudited) The following is a summary of the Companys unaudited quarterly results of
operations. Fiscal 2004Quarter EndedDecember 31
    
    March 31
    
    June 30
    
    September 30Revenues
    
    $
    4,973,462
    
    
    $
    6,184,605
    
    
    $
    6,809,770
    
    
    $
    6,638,772Income (loss) before provision for income taxes
    
    
    1,402,233
    
    
    
    2,705,868
    
    
    
    3,374,484
    
    
    
    2,310,240Net income (loss)
    
    
    990,233
    
    
    
    1,897,637
    
    
    
    2,130,484
    
    
    
    1,711,471Basic earnings (loss) per share
    
    $
    .24
    
    
    $
    .45
    
    
    $
    .51
    
    
    $
    .41Diluted earnings (loss) per share
    
    $
    .24
    
    
    $
    .45
    
    
    $
    .50
    
    
    $
    .40
 Fiscal 2003Quarter EndedDecember 31
    
    March 31
    
    June 30
    
    September 30Revenues
    
    $
    4,463,748
    
    
    $
    6,980,939
    
    
    $
    5,662,139
    
    
    $
    5,349,212Income before provision
for income taxes and
cumulative effect of
accounting change
    
    
    829,981
    
    
    
    3,323,674
    
    
    
    2,193,583
    
    
    
    1,777,244Income before cumulative
effect of accounting
change
    
    
    604,981
    
    
    
    2,320,674
    
    
    
    1,538,583
    
    
    
    1,443,244Net income
    
    
    651,481
    
    
    
    2,320,674
    
    
    
    1,538,583
    
    
    
    1,450,884Basic earnings per share
    
    $
    .16
    
    
    $
    .56
    
    
    $
    .37
    
    
    $
    .35Diluted earnings per share
    
    $
    .15
    
    
    $
    .55
    
    
    $
    .37
    
    
    $
    .34
 
 ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE NONE 
 ITEM 9 A            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 (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934) as of the end of the period covered by this Report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures are effective
in insuring that all material information required to be filed in this annual
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. (39)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 
 PART III The information called for by Part III of Form 10-K (Item 10  Directors
and Executive Officers of the Registrant, Item 11  Executive Compensation,
Item 12  Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters, Item 13  Certain Relationships and Related
Transactions, and Item 14  Principal Accountant Fees and Services), is
incorporated by reference from Panhandle Royalty Companys definitive proxy
statement, which will be filed with the Securities and Exchange Commission
within 120 days after the end of the fiscal year to which this Report relates. 
 PART IV 
 ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, 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)
    
    Amendment to Loan Agreement (Incorporated by
reference to Form 10-K dated September 30, 2003)(10)
    
    Agreement indemnifying directors and officers
(Incorporated by reference to Form 10-K dated September 30,
1989)(21)
    
    Subsidiaries of the Registrant(31.1)
    
    Certification of Chief Executive Officer(31.2)
    
    Certification of Chief Financial Officer(32.1)
    
    Certification of Chief Executive Officer(32.2)
    
    Certification of Chief Financial Officer REPORTS ON FORM 8-K Form 8-K dated August 10, 2004, Regulation FD disclosure of Companys
earnings release for the third quarter of fiscal 2004. (40)




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Panhandle Royalty Company
Notes to Consolidated Financial Statements (continued) 
 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized. PANHANDLE ROYALTY COMPANYBy:
    
    /s/ HW Peace IIH W Peace II, ChiefExecutive Officer,President, Director(Principal Executive Officer)Date:
    
    December 16, 2004
 In accordance with the Securities Exchange Act of 1934, 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 KauffmanJerry L. Smith, Chairman of Board
    
    E. Chris Kauffman, DirectorDate December 16, 2004
    
    Date December 16, 2004/s/ Robert A. Reece
    
    /s/ Robert E. RobottiRobert A. Reece, Director
    
    Robert E. Robotti, DirectorDate December 16, 2004
    
    Date December 16, 2004/s/ H. Grant Swartzwelder
    
    /s/ Robert O. LorenzH. Grant Swartzwelder, Director
    
    Robert O. Lorenz, DirectorDate December 16, 2004
    
    Date December 16, 2004
 /s/ Michael C. CoffmanMichael C. Coffman, Vice President
Treasurer and Secretary (Principal Financial and
Accounting Officer)
 Date December 16, 2004 (41)