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 April 30, 1998
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 1005
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 April 30, 1998, there were 1,031,500 shares of the Registrant's
Common Stock, par value $.001 per share, outstanding.
Traditional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
GENERAL AMERICAN ROYALTY, INC.
BALANCE SHEET
April 30, 1998 October 31,
(Unaudited) 1997
-------------- ------------
<S> <C>
ASSETS
Current assets:
Cash $ 6,009 $ 14,967
Accounts receivable-oil & gas 9,404 26,224
Accounts receivable - officers 2,784 --
Accounts receivable-other 1,650 1,750
Prepaid expenses 4,328 4,819
----------- -----------
Total Current Assets 24,175 47,760
Royalty interest in oil and gas properties, less accumulated
depletion of $87,658 and $100,230 247,385 466,966
Prepaid Consulting Fees 41,768 50,717
Other assets, net of amortization of $6,740 and $4,496 5,247 7,491
----------- -----------
Total Assets $ 318,575 $ 572,934
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 54,926 $ 24,886
Accounts payable-shareholder -- 4,808
Note payable shareholder 39,247 300,000
----------- -----------
Total current liabilities 94,173 329,694
----------- -----------
Commitments
Total liabilities 94,173 329,694
----------- -----------
Stockholders' equity:
Common stock, $.001 par value, 20,000,000 shares
authorized, 1,031,500 issued and outstanding 1,032 1,032
Preferred stock, $.001 par value, 4,000,000 shares
authorized, no shares issued or outstanding
Additional paid-in capital 1,245,647 1,245,647
Accumulated deficit (1,022,277) (1,003,439)
----------- -----------
Total stockholders' equity 224,402 243,240
----------- -----------
Total liabilities and stockholders' equity $ 318,575 $ 572,934
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF OPERATIONS
(Unaudited)
Three Months Ended Six Months Ended
April 30, April 30,
------------------------- --------------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C>
Revenues:
Oil and gas royalty income $ 11,766 $ 58,516 $ 53,522 $ 111,623
Other income 7,547 -- 7,547 --
Gain on sale of royalty interests 90,931 -- 90,931 --
----------- ----------- ----------- -----------
Total revenues 110,242 58,516 152,000 111,623
----------- ----------- ----------- -----------
Cost and expenses:
Production taxes and transportation costs 1,309 10,761 5,790 18,518
General and administrative 49,439 102,097 114,299 186,219
Amortization of deferred financing costs 728 -- 1,863 25,154
Depreciation, depletion and amortization 11,671 14,299 31,354 28,552
Interest Expense 6,896 5,118 17,532 10,260
----------- ----------- ----------- -----------
Total Cost and expense $ 70,043 $ 132,275 $ 170,838 $ 268,703
----------- ----------- ----------- -----------
Net income, (loss) $ 40,201 $ (73,759) $ (18,838) $ (157,080)
=========== =========== =========== ===========
Net income (loss) per common share .04 (.08) (.02) (.17)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 1,031,500 911,055 1,031,500 910,505
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
April 30,
----------------------
1998 1997
------ ------
Cash flows from operating activities:
Net loss $ (18,838) $(157,080)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation, depletion and amortization 31,354 28,552
Amortization of deferred financing costs 1,863 25,154
Gain on sale of royalty interests (90,931) --
Change in accounts receivable 14,136 1,675
Change in prepaid expenses 9,438 (3,497)
Change in accounts payable 25,232 20,912
Change in other assets -- (206)
--------- ---------
Net cash used in operating activities (27,746) (84,490)
--------- ---------
Cash flows from investing activities:
Purchase of equipment -- (1,125)
Sale of royalty interests 279,541 --
--------- ---------
Net cash used in investing activities 279,541 (1,125)
--------- ---------
Cash flows from financing activities:
Issuance of common stock -- 32,000
Proceeds from borrowings 15,000 200,000
Payments on borrowings (275,753) (170,000)
--------- ---------
Net cash provided by financing activities (260,753) 62,000
--------- ---------
Net decrease in cash (8,958) (23,615)
Cash at beginning of period 14,967 37,916
--------- ---------
Cash at end of period $ 6,009 $ 14,301
========= =========
Supplemental Information:
Cash paid for interest $ 18,912 $ 9,735
========= =========
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN ROYALTY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
Additional Total
Common Stock Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Equity
----------- ----------- ----------- ----------- -----------
<S> <C> <C>
Balance at October 31, 1997 1,031,500 $ 1,032 $ 1,245,647 $(1,003,439) $ 243,240
Net loss -- -- -- (18,838) (18,838)
----------- ----------- ----------- ----------- -----------
Balance January 31, 1998 1,031,500 $ 1,032 $ 1,245,647 $(1,022,277) $ 224,402
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
The accompanying unaudited financial statements reflect the financial position
as of April 30, 1998 and the results of operations and cash flows of General
American Royalty, Inc. (the "Company") for the three and six month period ended
April 30, 1998 and April 30, 1997. The financial statements have been prepared
in conformity with generally accepted accounting principals 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:
------------------------------------------
General American Royalty, Inc. (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 oil and gas royalty, overriding royalty and mineral interests in Texas
and New Mexico.
Cash and Cash Equivalents
- -------------------------
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
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 the
estimated lives of the related reserves. The Company estimated the lives of
reserves to be ten years in fiscal year 1996 and revised the estimate to seven
years in fiscal year 1997. This change in accounting estimate resulted in a
decrease in net income and in basic and diluted net income per share for the
three months ended April 30,1998 of $3,444 and $.003, an increase in the net
loss and basic and diluted net loss per share and for the six months ended April
30, 1998 of $9,292 and $.009. The Company owns a large number of interests whose
acquisition costs are not individually significant. The Company annually reviews
significant properties for impairment by comparing undiscounted estimated future
net cash flows to the carrying amount of the asset. If impairment is indicated,
the asset is written down to its estimated fair value
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
Other Property
- --------------
Property and equipment is primarily office equipment, and is carried at cost.
Depreciation is provided using the straight-line method over estimated useful
lives of three years. Gain or loss on retirement or sale or other disposition of
assets is included in income in the period of disposition.
Loss Per Share
- --------------
Loss per share is calculated in accordance with Financial Accounting Standards
Board Statement No. 128, "Earnings Per Share". Earnings or loss per share is
based on the weighted average number of shares of common stock outstanding
during the period. As of April 30, 1998 the Company had no outstanding options,
warrants or other potentially dilutive securities.
Income Taxes
- ------------
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due, if any, plus net
deferred taxes related primarily to differences between the bases of assets and
liabilities for financial and income tax reporting. Deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets include recognition of operating
losses that are available to offset future taxable income and tax credits that
are available to offset future income taxes. Valuation allowances are recognized
to limit recognition of deferred tax assets where appropriate. Such allowances
may be reversed when circumstances provide evidence that the deferred tax assets
will more likely than not be realized.
Continuation as a Going Concern
- -------------------------------
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has negative working
capital of $69,998 at April 30, 1998 and has suffered significant losses from
operations, which raise substantial doubt about its ability to continue as a
going concern. It is management's opinion that sufficient capital can be raised
from various sources to provide funding to reduce short term debt and allow the
Company to acquire additional producing royalty interests that will generate
sufficient cash flow to cover general and administrative expenses.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
Use of Estimates and Certain Significant Estimates
- --------------------------------------------------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the estimation of
future net cash flows, which as described above may affect the amount at which
oil and gas properties are recorded. It is at least reasonably possible those
estimates could be revised in the near term and those revisions could be
material.
2. Notes Payable
-------------
As of April 30, 1998, the Company has a $39,247 note payable to a shareholder
that bears interest at 14% and was due on March 31, 1998. The original principal
balance of $307,500 was reduced by $268,253 on March 26, 1998, using proceeds
from the sale of royalty interests. As the note payable is technically in
default on April 30, 1998, the entire principal balance is reflected as a
current liability in the accompanying balance sheet. Interest on this note is
payable monthly. The note is collateralized by all royalty and overriding
royalty interests of the Company and is personally guaranteed by the Company's
president.
In connection with the note above, the Company recorded $5,961 of deferred
financing costs. For the three and six months ended April 30, 1998, $728 and
$1,863, respectively, of this amount was charged to operations.
3. Related Party Transactions
--------------------------
As of April 30, 1998 the Company has accounts receivable from travel advances
due from the Company's president of approximately $2,780.
4. Equity Transactions
-------------------
During fiscal 1997, the Company issued options to three corporate entities in
exchange for financial public relations and investment banking services. The
fair market value of the options at the date of grant was $590,000. Of this
amount, $50,717 was recorded as prepaid consulting fees of which $4,475 and
$8,949 of amortization expense was included in general and administrative
expense for the three and six months ended April 30, 1998, respectively. The
prepaid consulting fees are being amortized over the three year life of the
contracts. The remainder of the fair market value of the options was expensed in
the year ended October 31, 1997.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
5. Stock Based Compensation
------------------------
Incentive Stock Option Plan
- ---------------------------
In September 1997, the Board of Directors approved an incentive stock option
plan for certain key officers and directors under which 2,500,000 shares of the
Company's common stock may be issued. The plan must be ratified and approved by
the Company's shareholders. There were 2,100,000 options granted to key officers
and directors during the three and six months ended April 30, 1998. The options
are exercisable at $5.25 per share and expire in November 2002. The market price
at the date of grant was $5.00 per share.
On June 11, 1998, all of the 2,100,000 options which had been granted, were
terminated at the direction of the board of directors.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Since 1996 the Company has relied upon the proceeds from the sales of
crude oil and natural gas from royalty and overriding royalty interests as its
principal internal source of liquidity. Cash generated from such sales has not
reached a sufficient level to cover administrative and overhead expenses. Growth
in the Company's sales during the past two years has been the result of
acquiring additional producing crude oil and natural gas royalty interests.
The Company utilized sales of its common stock and secured debt during
the previous year as its primary sources of external capital. Proceeds from
these sources were used to acquire royalty interests in producing crude oil and
natural gas wells and for working capital. During 1996, the Company purchased
royalty, overriding royalty and mineral interests in several producing oil and
gas properties.
After closing the unit equity offering in 1997, the Company was
prohibited from obtaining additional equity capital until January 1998 to comply
with securities regulations on integration of offerings. This has restricted the
Company's ability to acquire royalty assets and to repay short-term debt
obligations as they become due with permanent equity capital. During the fiscal
year ended October 1997 and the six months ended April 30, 1998, the Company did
not acquire any mineral and royalty interests.
In March 1998 the Company sold its royalty interests in twelve
Fruitland Coal Seam wells located in San Juan County, New Mexico. The
transaction was recorded to give effect to the sale as of February 1, 1998. The
properties were sold pursuant to a preferential right to repurchase agreement
with a shareholder that owns less than 5% of the Company's common stock. The net
sales proceeds of $279,541 were used to reduce the Company's short-term debt
obligation of $307,500 by $268,253 and the balance was used for working capital.
These interests had a net book value of $188,610, which resulted in a gain of
$90,931. During the 19 months the Company owned the properties, net revenues of
approximately $115,600 were recorded.
<PAGE>
At April 30, 1998, the Company's short term debt obligation was reduced
to $39,247. This obligation was due on March 31, 1998 and is expected to be
repaid with proceeds from the sale of additional producing royalty interests
owned by the Company, a private placement of equity securities or by refinancing
with another lender. If the Company is unable to satisfy or extend this
obligation, it may have an adverse impact on the Company's ability to obtain
debt secured by producing royalty interests as an interim source of financing
for royalty acquisition activities. When necessary the Company may sell certain
of its mineral and royalty interests to satisfy such debt obligations.
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 prices have been subject to material fluctuations. A
material or lengthy 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 61% of the Company's oil and gas sales.
RESULTS OF OPERATIONS
Three and Six Months Ended April 30, 1998 Compared
to the Three and Six Months Ended April 30, 1997
Revenues
Oil and Gas Royalty Income. Revenues for the three and six months ended
April 30, 1998 were $11,766 and $53,522 compared with $58,516 and $111,623 for
the comparable periods in 1997. The 80% decrease in revenues for the three
months ended April 30, 1998 as compared to the same period in 1997 is primarily
attributable to the sale of royalty interests, which accounted for approximately
56% of the Company's total revenues, and to decreased crude oil and natural gas
production of approximately 23% and 19% respectively, and a approximate 32%
decrease of in the price of crude oil, although natural gas prices were
comparable for both periods. The 52% decrease in revenues for the six months
ended April 30, 1998 as compared to the same period in 1997 is also attributable
to the sale of royalty interests which accounted for sales only in the first
three months and due to the decreased crude oil and natural gas production of
approximately 22% each and an approximate 34% decrease in the price of natural
gas, and a 28% decrease in crude oil prices.
<PAGE>
Other Income. In March and April of 1998 the Company granted mineral
------------
leases from fee minerals owned by the Company to two unrelated oil and gas
entities. In consideration for the granting of those leases the Company received
$7,547. If economically productive oil and or gas wells are drilled on those
leases the Company will be entitled to royalty payments from the revenues they
generate.
Gain on Sale of Royalty Interests. In March of 1998 the Company
------------------------------------
recognized a gain of $90,931, on the sale of royalty interests in twelve wells
located in San Juan County, New Mexico.. The net proceeds of $279,541 were
offset by the net book value of $188,610.
Costs and Expenses
Production Taxes and Transportation Costs. Production taxes and
---------------------------------------------
transportation costs, as a percentage of gross revenues, decreased 7% and 6%
respectively, for the three and six months ended April 30, 1998 as compared to
the three and six months ended April 30, 1997. The decrease is attributable
primarily to the royalty interests which were sold and a new gas sales contract
which eliminated processing and transportation costs on those same properties,
which had sales only in the first three months of the quarter.
General and Administrative Expenses. General and administrative
---------------------------------------
expenses ("G&A") decreased from $102,097 and $186,219 for the three and six
months ended April 30, 1997 to $49,439 and $114,299 for the comparable period in
1998. The decrease in G&A expenses for 1998 is primarily attributable to a
decrease in salaries paid to certain officers, expensing of deferred financing
costs in 1997 and costs associated with becoming a public company incurred in
1997.
Depletion, Depreciation and Amortization. Depletion, depreciation and
-----------------------------------------
amortization ("DD&A"), decreased to $11,671 for the three months ended April 30,
1998 compared to $14,299 for the comparable period in 1997. The decrease was
attributable to the sale of royalty interests, even though there was an increase
due to a change in estimated life used in the straight line depletion of royalty
interests in oil and gas properties as described in Note 1 of the "Notes To
Financial Statements". For the six months ended April 30, 1998 and 1997 DD&A
increased from $28,552 to $31,354. The increase is attributable to above
mentioned change in depletion and to the inclusion of three months of depletion
on the royalty interests which were sold.
Interest expense. The increase in interest expense from $5,118 and
-----------------
$10,260 for the three and six months ended April 30, 1997 to $8,696 and $17,532
for the three and six months ended April 30, 1998 is two fold, more debt and a
higher interest rate. The Company had debt of $200,000 at a rate of 10% in 1997
as compared to $307,500 at a rate of 14% in 1998.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
On June 10, 1998 George E. Green became a member of the board of
directors of the registrant.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Item 3(i) and (ii). The articles of incorporation and by-laws, as
filed in Item 2 of Part III of the Company's Form 10-SB dated March 26, 1997,
are hereby incorporated by reference.
Item 27 Financial data schedule.
(b) Reports on Form 8-K. None filed.
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 June 12, 1998 /s/ James F. Smith
------------------- -----------------------
James F. Smith,
President and Chief Executive Officer
Date June 12, 1998 /s/ Sam E. Nicholson
------------------ -------------------------
Sam E. Nicholson,
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from April
30, 1998 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-31-1998
<PERIOD-START> NOV-01-1998
<PERIOD-END> APR-30-1998
<EXCHANGE-RATE> 1
<CASH> 6,009
<SECURITIES> 0
<RECEIVABLES> 11,054
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 24,175
<PP&E> 337,034
<DEPRECIATION> 88,387
<TOTAL-ASSETS> 318,575
<CURRENT-LIABILITIES> 94,173
<BONDS> 0
0
0
<COMMON> 1,032
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 318,575
<SALES> 53,522
<TOTAL-REVENUES> 152,000
<CGS> 5,790
<TOTAL-COSTS> 5,790
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,532
<INCOME-PRETAX> (18,838)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,838)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
