UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______to_______
Commission file number 1-12835
GENERAL AMERICAN ROYALTY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2468002
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Energy Square, Suite 717
4925 Greenville Avenue
Dallas, Texas
(Address of principal executive offices)
75206
(Zip Code)
(214) 361-8535
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No___
As of July 31, 1997, there were 921,500 shares of the Registrant's
Common Stock, par value $.001 per share, outstanding.
Traditional Small Business Disclosure Format (check one):
Yes____ No____
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GENERAL AMERICAN ROYALTY, INC.
BALANCE SHEET
<TABLE>
<S> <C> <C>
July 31, 1997 October 31,
(Unaudited) 1996
------------- ----------
ASSETS
Current assets:
Cash $ 54,294 $ 37,916
Accounts receivable - oil & gas 23,816 29,608
Accounts receivable - officers 5,554 3,135
Accounts receivable - other 1,650 1,650
Prepaid costs and expenses 9,443 2,834
--------- ---------
Total current assets 94,757 75,143
Equipment, less accumulated depreciation of $241 1,429 --
Royalty interests in oil and gas properties, less accumulated
depletion of $63,921 and $21,381 respectively 503,275 545,815
Deferred financing costs, net of amortization of $83,846 -- 25,154
Other assets, net of amortization of $175 and $100 respectively 4,060 3,929
--------- ---------
Total assets $ 603,521 $ 650,041
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 11,797 $ 10,022
Accounts payable - shareholder -- 3,000
Notes payable to shareholder, current portion 300,000 33,333
--------- ---------
Total current liabilities 311,797 46,355
Notes payable to shareholder -- 136,667
--------- ---------
Total liabilities 311,797 183,022
--------- ---------
Stockholders' equity:
Common Stock, $.001 par value, 20,000,000 shares authorized,
921,500 and 910,000 issued and outstanding, respectively 922 910
Preferred stock, $.001 par value, 5,000,000 shares authorized,
no shares issued or outstanding -- --
Additional paid-in capital 653,957 598,219
Accumulated deficit (363,155) (132,110)
--------- ---------
Total stockholder's equity 291,724 467,019
--------- ---------
Total liabilities and stockholder's equity $ 603,521 $ 650,041
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
July 31 July 31
--------- ---------
1997 1996 1997 1996
--------- --------- --------- ---------
Revenues:
Oil and gas royalty income, net of
severance and ad valorem taxes $ 28,748 $ 13,056 $ 121,853 $ 16,529
--------- --------- --------- ---------
Costs and expenses
General and administrative 78,522 13,115 264,741 35,776
Amortization of deferred financing costs -- 6,708 25,154 6,708
Depletion, depreciation and amortization 14,304 5,910 42,856 7,276
Interest expense 9,887 368 20,147 368
--------- --------- --------- ---------
102,713 26,101 352,898 50,128
--------- --------- --------- ---------
Net loss $ (73,965) $ (13,045) $(231,045) $ (33,599)
========= ========= ========= =========
Net loss per common share $ (0.08) $ (0.02) $ (0.26) $ (0.04)
========= ========= ========= =========
Weighted average number of common
shares outstanding 921,150 767,987 904,870 753,661
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<S> <C> <C>
Nine Months Ended
July 31,
1997 1996
-------------------
Cash flows from operating activities:
Net loss $(231,045) $ (33,599)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depletion, depreciation and amortization 42,856 7,276
Amortization of deferred financing costs 25,154 6,707
Decrease (increase) in accounts receivable 3,373 (16,529)
Increase in prepaid expenses (6,610) (569)
Noncash payment of stock for services -- 508
(Decrease) increase in accounts payable (1,224) 11,805
Increase in other assets (206) (3,001)
--------- ---------
Net cash used in operating activities (167,702) (27,402)
Cash flows from investing activities:
Purchase of equipment (1,670) --
Purchase of royalty and mineral interests -- (203,153)
--------- ---------
Net cash used in investing activities (1,670) (203,153)
Cash flows from financing activities:
Issuance of common stock 55,750 102,558
Proceeds from borrowings 500,000 140,000
Payments on borrowings (370,000) --
--------- ---------
Net cash provided by financing activities 185,750 242,558
--------- ---------
Net increase in cash 16,378 12,003
Cash at beginning of period 37,916 --
--------- ---------
Cash at end of period $ 54,294 $ 12,003
========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional Total
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
Balance at October 31, 1996 910,000 $ 910 $ 598,219 $(132,110) $ 467,019
Exercise of common stock
warrants net of costs 11,500 12 55,738 -- 55,750
Net loss -- -- -- (231,045) (231,045)
--------- --------- ---------
Balance at July 31, 1997 921,500 $ 922 $ 653,957 $(363,155) $ 291,724
======= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The balance sheet of General American Royalty, Inc., the "Company", at October
31, 1996 has been taken from the Company's audited financial statements at that
date. The balance sheet at July 31, 1997, the statements of operations for the
three months and nine months ended July 31, 1997 and 1996, the statement of
changes in stockholders' equity for the nine months ended July 31, 1997 and the
statements of cash flows for the nine months ended July 31, 1997 and 1996 have
been prepared by the Company, without audit. The financial statements have been
prepared in conformity with generally accepted accounting principles and contain
such adjustments as management feels are necessary to present fairly, in all
material aspects, the financial position and results of operations of the
Company.
1. Summary of Significant Accounting Policies:
- -----------------------------------------------
The Company was incorporated on December 28, 1992 in the state of Delaware as
Hermes Capital Management, Inc. and was inactive until it changed its name on
October 23, 1995 to General American Royalty, Inc. The Company is engaged in the
business of acquiring and managing producing crude oil and gas royalty,
overriding royalty and mineral interests in Texas and New Mexico.
Royalty Interests in Oil and Gas Properties
- -------------------------------------------
Costs of acquiring interests in producing royalty interests, including
evaluation costs, are capitalized and depleted on a straight line basis over a
period of 10 years, since overall U.S. proved reserves are about 8 to 10 times
overall production. The Company owns a large number of interests whose
acquisition costs are not individually significant. The Company annually reviews
significant properties for impairment comparing estimated future cash flows to
the carrying amount of the asset. If impairment is indicated, the asset is
written down to its fair value based upon its expected future discounted cash
flows.
Income Taxes
- ------------
The Company follows Statement of Financial Standards No. 109, "Accounting for
Income Taxes," which requires the recognition of deferred tax liabilities and
assets based on the difference between the financial statement and the tax basis
of assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
(Unaudited)
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements, and the
reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
New Accounting Standards
- ------------------------
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, entitled "Earnings per Share" in February
1997. SFAS No. 128 requires standards to replace the presentation of primary
earnings per share ("EPS") with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures. The Company is required to
adopt the computation, presentation and disclosure requirements of SFAS No. 128
for the fiscal year ended October 31, 1998. The Company's basic and diluted loss
per share under SFAS No. 128 would have each been $0.08 for the three months and
$0.26 for the nine months ended July 31, 1997, respectively.
2. Notes Payable
- -----------------
On June 20, 1997, the Company entered into a $300,000 financing agreement with
Eagle Equity Oil & Gas L.P., a Dallas based lender and shareholder of the
Company. The Company has collateralized the loan with mortgages and deeds of
trust on certain royalty interests in crude oil and gas properties, a personal
guarantee by James F. Smith, President of the Company and a term life insurance
policy on Mr. Smith for $300,000.
The full principal amount of $300,000 plus any accrued interest is payable on
December 31, 1997, and bears interest at a 14% rate per annum. Interest is
payable monthly commencing on July 20, 1997. From the proceeds of this
financing, $200,000 was used to pay off the note payable to State Bank & Trust
Company.
3. Stockholders Equity
- -----------------------
As of July 31, 1997, 11,500 of the 90,000 common stock purchase warrants, from
the Company's initial offering, had been exercised. The net proceeds to the
Company from the exercise of these warrants was $55,750. The remaining 78,500
warrants expired on July 31, 1997.
4. Related Party Transactions
- ------------------------------
As of July 31, 1997 the Company has accounts receivable for travel advances due
from one officer of approximately $5,554.
5. Income Taxes:
- -----------------
The Company has net loss carryforwards which will begin to expire in 2011. None
of the benefit of the net operating loss has been recognized in the financial
statements.
6. Year-end Balance Sheet:
- ---------------------------
The year-end condensed balance sheet was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
For the three and nine months ended July 31, 1997
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Sales of crude oil and natural gas from royalty and overriding royalty
interests have been the Company's principal internal source of liquidity.
Monthly sales have not reached a sufficient level to cover administrative and
overhead expenses. Growth in the Company's sales is expected to be the result of
acquiring additional producing crude oil and natural gas royalty interests.
The Company has completed offerings of its equity securities and
incurred bank debt during the past year as its primary sources of external
capital. Proceeds from these financings were used to acquire royalty interests
in producing crude oil and natural gas wells and for working capital. The
Company intends to direct its efforts and resources toward developing
opportunities to increase its crude oil and natural gas reserves.
Specifically, the Company anticipates that proceeds from the sale of
its equity securities in public and private offerings will serve as the
principal source of capital for acquisition of royalty interests and retirement
of debt. In June 1997 the Company borrowed $300,000 from an entity controlled by
a shareholder and used the proceeds to repay a $200,000 bank loan. Debt secured
by producing royalty interests will be a source of short term financing for
royalty acquisition activities.
The Company's revenues are substantially affected by prevailing prices
for natural gas, crude oil and condensate. These prices are affected by numerous
factors over which the Company has no control. Historically the energy markets
have been very volatile, and there can be no assurances that crude oil and
natural gas prices will not be subject to material fluctuations in the future. A
material or long term decline in crude oil and gas prices could have an adverse
effect on the Company's financial position and results of operations, affecting
the economic productivity of an indeterminable number of producing properties in
which the Company has royalty or overriding royalty interests. Natural gas
accounts for approximately 90% of the Company's crude oil and natural gas sales.
<PAGE>
RESULTS OF OPERATIONS
Three and Nine Months Ended July 31, 1997 Compared
to the Three and Nine Months Ended July 31, 1996
Revenues
Revenues for the three months and nine months ended July 31, 1997 are
significantly higher than the same periods in 1996 due to an increase in crude
oil and natural gas sales that resulted from the acquisition of additional
royalty and overriding royalty interests. The acquired interests comprise
approximately 31% of the Company's current total producing reserves. The
revenues for periods in 1996 consisted of production from fewer wells.
Costs and Expenses
General and Administrative Expenses.
----------------------------------------
General and administrative expenses ("G&A") increased from $13,115 and $35,776,
respectively, for the three and nine months ended July 31, 1996 to $78,522 and
$264,741 for the comparable periods in 1997. The increase in G&A expenses for
1997 resulted from an increased expansion of the Company's operational
activities and the costs incurred in connection with becoming a publicly traded
entity.
Depletion, Depreciation and Amortization.
------------------------------------------
Depletion, depreciation and amortization ("DD&A"), increased to $14,304 and
$42,856 respectively, for the three and nine months ended July 31, 1997 compared
to $5,910 and $7,276 respectively for the comparable period in 1996. The
increase is primarily due to the acquisition of additional producing royalty and
overriding royalty interests.
Interest expense.
------------------
The Company first incurred interest bearing debt of $140,000 on July 24, 1996.
The interest expense for the three and nine months ended July 31, 1997 was
incurred on a $200,000 note payable to a financial institution, subsequently
paid off by the incurrence of a $300,000 note payable to a shareholder of the
Company.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 128, entitled "Earnings per Share" in February
1997. SFAS No. 128 requires standards to replace the presentation of primary
earnings per share ("EPS") with a presentation of basic EPS. It also requires
dual presentation of basic and diluted EPS on the face of the income statement
for all entities with complex capital structures. The Company is required to
adopt the computation, presentation and disclosure requirements of SFAS No. 128
for the fiscal year ended October 31, 1998. The Company's basic and diluted loss
per share under SFAS No. 128 would have each been $0.08 for the three months and
$0.26 for the nine months ended July 31, 1997, respectively.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
On September 8, 1997, Daniel M. Vines, George E. Green, Douglas Weedon and J.
Donald Hill resigned as members of the registrant's board of directors. Their
resignations were not a result of any disagreements with the registrant on any
matters relating to the registrant's operations, policies or practices.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. None.
(b) Reports on Form 8-K. None.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GENERAL AMERICAN ROYALTY, INC.
------------------------------
(Registrant)
Date: September 12, 1997 /S/ James F. Smith
------------------------------
James F. Smith,
President and Chief Executive Officer
Date: September 12, 1997 /S/ Sam E. Nicholson
------------------------------
Sam E. Nicholson,
Treasurer and Chief Financial Officer
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from July 31, 1997 Financial Statements and
is qualified in its entirety by reference to such.
</LEGEND>
<CIK> 0001014491
<NAME> General American Royalty, Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> MAY-01-1997
<PERIOD-END> JUL-31-1997
<EXCHANGE-RATE> 1
<CASH> 54,294
<SECURITIES> 0
<RECEIVABLES> 25,466
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 94,757
<PP&E> 568,866
<DEPRECIATION> 64,162
<TOTAL-ASSETS> 603,521
<CURRENT-LIABILITIES> 311,797
<BONDS> 0
0
0
<COMMON> 922
<OTHER-SE> 290,802
<TOTAL-LIABILITY-AND-EQUITY> 603,521
<SALES> 121,853
<TOTAL-REVENUES> 121,853
<CGS> 0
<TOTAL-COSTS> 307,597
<OTHER-EXPENSES> 25,154
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,147
<INCOME-PRETAX> (231,045)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (231,045)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
