UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 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 75206
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (214) 361-8535
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12(g of the Exchange Act:
Common Stock, Par Value $.001
--------------------------------------------------------------------
(Title of Class)
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___
<PAGE>
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in this form, and no
proxy of information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. ____
Registrant's revenues for the fiscal year ended October 31, 1997, were
$197,916.
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 February 10, 1998, was $ 1,535,000.
As of February 10, 1998, there were 1,031,500 shares of the Registrant's
Common Stock, par value $.001 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Traditional Small Business Disclosure Format:
Yes No X
<PAGE>
T A B L E O F C O N T E N T S
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PART I Page
- ------ ----
Item 1. Description of Business
Item 2. Description of Properties
Item 3. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
PART II
- -------
Item 5. Market of Common Equity and Related Stockholder Matters
Item 6. Management's Discussion and Analysis of Plan of Operations
Item 7. Financial Statements
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
PART II
- -------
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16 (a) if the Exchange Act
Item 10. Executive Compensation
Item 11. Security Ownership of Certain Beneficial Owners and Management
Item 12. Certain Relationships and Related Transactions
Item 13. Exhibits and Reports on Form 8-K
Signature Page
<PAGE>
PART I
------
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
- --------------------
General American Royalty, Inc. (the "Company") is a Delaware corporation
incorporated on December 28, 1992 as Hermes Capital Management, Inc. It
conducted no business activities under that name. On October 23, 1995 it changed
its name to General American Royalty, Inc. and became active in the acquisition
of certain oil and gas royalty, overriding and fee mineral interests located in
Texas and New Mexico. Interests have been purchased in exchange for shares of
Common Stock of the Company, issuance of promissory notes and for cash. During
1996 the Company completed a private placement of common stock and a public
offering of units that consisted of shares of common stock and stock purchase
warrants. Net proceeds from these offerings were approximately $485,000, which
were used to complete acquisitions of royalty and mineral interests and to repay
debt.
BUSINESS OF ISSUER
- ------------------
General American Royalty, Inc. (the "Company") was organized to engage in
the following business activities: to acquire producing oil and natural gas
royalty, overriding royalty, and mineral interests; to acquire non-producing oil
and natural gas royalty, overriding royalty, and mineral interests; to purchase
units in publicly traded royalty trusts; and to manage joint ventures with
institutional investors to accomplish the above purposes.
The Company's management believes that the opportunity exists to acquire
substantial amounts of mineral and royalty interests located in producing wells
and fields that generate an immediate stream of income. Interest acquired in
non-producing areas with nearby exploration activity could dramatically increase
in value, allowing the Company to sell a portion of such interests for a
substantial profit, in effect, paying for the interests retained. Acquisitions
of minerals and royalty interests in areas offsetting production (developmental
drilling) or in trend areas have a high probability of being selected as
drilling prospects and have enhanced value through leasing (lease bonuses) and,
ultimately through the production of oil and gas..
The Company does not know of a public royalty company in the United States
that is active in the acquisition of solely royalty and mineral interests with
no drilling or exploration activities. While there are other public entities
that are classified as royalty companies, none is active in the continual
acquisition of royalty interests and fee mineral in oil and gas properties. The
large publicly held companies that once engaged in the business of accumulating
<PAGE>
royalty and mineral interests in oil and gas properties have ceased to exist.
Although successful, those companies have either been acquired or reorganized as
self-liquidating trusts whose ownership units were distributed to the
shareholders and offer no opportunity for growth.
PRINCIPAL PRODUCTS AND MARKETS
- ------------------------------
The Company's owns fee mineral, royalty and overriding royalty interests in
producing oil and gas wells, that generate revenues from the sale of crude oil
and natural gas. These products are sold to numerous purchasers and pipeline
companies generally located and servicing the areas where the Company's
producing interests are located. The Company does not act as operator for any of
the properties in which it owns an interest and as such relies on the operating
expertise of the numerous companies that operate those properties. As a royalty
or overriding royalty interest owner the Company has no contractual control over
the operations or marketing and sales of the crude oil and natural gas produced
by the properties. The operating companies or working interest owners contract
all natural gas sales 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 also handled by the well operators and
payments for oil sold is received from the well operator or from the crude oil
purchaser.
COMPETITIVE BUSINESS CONDITIONS
- -------------------------------
Oil and gas prices can be extremely volatile and are subject to substantial
seasonal, political and other fluctuations. As a result, the prices at which oil
and gas produced for the Company may be sold is uncertain and it is possible
that under some market conditions the production and sale of oil and gas from
some or all of the Company's properties may not be economical. In most
instances, the operator will market the production from the Company's royalty
interests, and the Company will have no control over the marketing or sale of
production. The availability of a ready market for oil and gas and the prices
obtained for such oil and gas depend upon numerous factors beyond the control of
the Company, including competition from other oil and gas producers and national
and international economic and political developments. In addition, the
marketability of natural gas production depends upon the availability and
capacity of gas gathering systems and pipelines.
The oil and gas business is highly competitive and has few barriers to
entry. The Company will be competing with other oil and gas companies and
investment partnerships in the search for, and obtaining of, desirable proved
producing royalty and mineral interests. Many of the Company's competitors are
larger than the Company and have substantially greater access to capital and
technical resources than does the Company and may, therefore, have a significant
competitive advantage. Many of the Company's competitors are capable of making a
larger investment in a given area than is the Company, although large and small
companies alike are subject to the economics of cost effectiveness. It can be
expected that prices for oil and gas will continue to fluctuate, depending upon
<PAGE>
a number of conditions over which the Company has no control, including actions
taken by the Organization of Petroleum Exporting Countries ("OPEC"), turmoil in
the Middle East, and the price of alternative fuels. The prices at which the
Company's oil and gas production will be sold will have a substantial effect on
its earnings (if any) and its results of operations.
OWNERSHIP AND TITLE TO INTERESTS
- --------------------------------
The Company generally examines title before acquiring a mineral fee,
royalty or overriding royalty interests and all such mineral interests acquired
by the Company are evidenced by written conveyances, which are filed in the
records of the county or parish in which such mineral interests are located.
Management believes that the Company has satisfactory title to all mineral and
royalty interests it has acquired.
SOURCES AND AVAILABILITY OF RAW MATERIALS
- -----------------------------------------
The existence of commercial quantities of oil and gas reserves is essential
to the realization of value from the Company's royalty and mineral interests and
these reserves may be considered a raw material to its business. The cash flow
from producing activities and lease bonus income from granting mineral leases
constitutes the Company's primary internal source of liquidity. The viability of
the Company may depend on the reinvestment of cash resources in the purchase of
additional raw materials in the form of producing mineral and royalty interests.
Purchases of royalty and mineral interests are available from many sources, and
the Company does not rely on any particular companies or individuals for these
acquisitions.
MAJOR CUSTOMERS
- ---------------
The Company generally sells its share of oil and production to pipeline
companies and refineries through arrangements and contracts administrated by the
operator of the property. Since royalty and mineral interests do not bear any
costs related to exploration and production (except for severance and ad valorem
taxes), owners of such interests have no authority to select purchasers for
their share of oil and gas produced. For the fiscal year ended October 31, 1997
the following customers accounted for more than 10% of the Company's revenues:
Percentage
Customer of Revenues
-------- -----------
Marathon Oil Company 48%
Lomak Petroleum, Inc. 23%
<PAGE>
GOVERNMENTAL REGULATION AND
- ---------------------------
ENVIRONMENTAL MATTERS
- ---------------------
The cost of compliance with governmental provisions regulating the
discharge of materials into the environment is a cost that is borne by the
working interest owners of oil and gas wells. The Company, by limiting its
activities to the acquisition of non-working interest royalty and mineral
interests, will bear none of these costs. There is some risk of eventual
liability under environmental regulations, which risk can occur where royalty
interests that convert to a possessory interest are involved. In those
instances, activities can result in liability under federal, state and local
environmental regulations for activities involving, among other things, water
pollution and hazardous waste transportation, storage and disposal. Such
liability can attach not only to the operator of record of a well, but also to
other parties that may be deemed to be current or prior operators or owners of
possessory interest in a property.
EMPLOYEES
- ---------
The Company has three full-time employees and no part-time employees.
FORWARD-LOOKING STATEMENTS
- --------------------------
Forward-looking statements for 1997 and later periods are made throughout
this document. Such statements represent estimates of management based on the
Company's knowledge of historic trends, reserve information 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 of producing royalty and overriding
royalty interests and fee mineral ownership. These risks include, but are not
limited to, oil and natural gas prices, reserve quantity risks, the risks
confronting the operators of the wells in which the Company has royalty and
overriding royalty interests in and the uncertainties of leasing prospects from
fee ownership of minerals. For all the above reasons, actual results may vary
materially from the forward-looking statements and there is no assurance that
the assumptions used will occur.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company owns small mineral, royalty and overriding royalty interests in
approximately 670 wells located in two counties in New Mexico and eleven
counties in Texas. These interests were acquired in four transactions during
fiscal year 1996.
<PAGE>
Basin Fruitland Coal Field - San Juan County, New Mexico. This is a 2.5%
overriding royalty interest in 9 wells and a 1.25% overriding interest in 3
wells. The interests cover the rights to the Fruitland Coal formation only. The
wells are operated by Marathon Oil Company and have produced a total of
approximately 10.7 billion cubic feet through October 1997, and at October 31,
1997 had an estimated 14.3 billion cubic feet of gross recoverable gas reserves
remaining. Monthly production from the 12 wells is approximately 155 million
cubic feet of gas.
Alta Mesa Gas Field - Brooks County, Texas. This is a 0.333 percent
overriding royalty interest in 16 producing wells and a 0.005 percent overriding
royalty interest in 5 producing wells located in the South Texas Alta Mesa gas
field. Production depths range from 1,100-foot depth gas sands to the Vicksburg
sands at depths in excess of 7,000 feet. Gross remaining reserves at October 31,
1997 were estimated to be 14.2 billion cubic feet of gas and 206,341 barrels of
condensate. Remaining life of the wells is estimated to be in excess of fifteen
years.
North Wilton Strawn Waterflood Unit - Young County, Texas. This is a 3.125
percent overriding royalty interest in the 3-well North Wilton Strawn Waterflood
Unit in Young County, Texas. At October 31, 1997, estimated gross remaining
reserves of 63,000 barrels of oil are estimated to be recovered over an
estimated life in excess of fifteen years.
Dumraese Estate Purchase - Lea County, New Mexico and Bexar, Brooks,
Colorado, DeWitt, Duval, Jim Wells, Lavaca, Starr and Stephens Counties, Texas.
Effective August 1, 1996 the Company purchased small fee mineral, royalty and
overriding royalty interests in over 635 producing oil and gas wells located in
numerous oil and gas fields in New Mexico and Texas. The properties range from
large unitized waterfloods to single low rate producing wells. Net remaining
reserves, to the Company's interests, at October 31, 1997 were estimated to be
.07 billion cubic feet of gas and 8,511 barrels of oil. Remaining life of the
wells is estimated to be in excess of fifteen years.
ACREAGE
- -------
It is the Company's general practice to have title examined by a landman or
an attorney before acquiring royalty, overriding royalty or mineral interests.
All such royalty and mineral interests acquired by the Company are evidenced by
written conveyances, which are duly filed in the applicable records of the
county or parish in which such mineral interests are located. Generally, the
Company will not make on site inspections of the properties in which it acquires
an interest. Information regarding gross and net acreage owned is not presented
herein because the Company owns a large number of small percentage royalty and
mineral interests that would impose an undue burden to report.
<PAGE>
PROVED RESERVES
- ---------------
Information regarding estimates of the proved oil and gas reserves
attributable to the Company are based on reports prepared internally with the
assistance of two independent petroleum engineering consultants who have no
affiliation or economic interest in the Company. Utilizing current available
data, these estimates of proved reserves were made using geological and
engineering methods generally accepted in the petroleum industry. Estimates were
prepared in accordance with Statement of Financial Accounting Standards No. 69
and the guidelines established by the Securities and Exchange Commission Rule
4-10(a) of Regulation S-X, using prices and costs as of the day of the
estimates. The prices and costs were not escalated. The interests owned by the
Company are all royalty and overriding royalty interests, and therefore do not
bear their share of operating costs and current data on operating costs is not
available.
Proved reserves are those quantities of Crude oil, natural gas, and natural
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in the future from known oil and gas reservoirs,
under existing economic and operating conditions. Proved developed producing
reserves are those reserves which can be expected to be recovered from
completion intervals open to production in existing wells. Estimated quantities
of proved developed reserves of oil and gas, to the Company's interest, as of
October 31, 1997 and 1996 were as follows:
1997 1996
---- ----
Oil (barrels) 11,487 13,209
Gas (Mcf) 400,357 462,001
Any additional information concerning the Company's estimated proved
developed oil and gas reserves are included in Item 8. - Financial Statement and
Supplementary Data.
Petroleum engineering is not an exact science and involves estimates based
upon numerous factors, many of which are inherently variable and uncertain.
Consequently, reserve estimates are imprecise and are subject to change as
additional information becomes available. Estimates of oil and gas reserves, of
necessity, are projections based upon engineering data. As a result of the
uncertainties inherent in the interpretation of such data there can be no
assurance that the Company's estimated oil and gas reserves would ultimately be
developed. Estimates of the reserves and future net revenues involve projecting
future results by estimating future events. Actual production, revenues, taxes,
and expenses may not occur as estimated. Additionally, as the Company owns
royalty interests rather than working interests, and is not party to the
operating agreements of the various properties, there may be additional
considerations concerning the evaluated properties of which the Company and the
independent reserve engineer may not be aware. These considerations could
materially affect the reserve estimates.
<PAGE>
No reserve reports with respect to the Company's proved net oil or gas
reserves were filed with any federal authority or agency during the fiscal year
ended October 31, 1997.
ESTIMATED FUTURE NET CASH FLOWS
- -------------------------------
The following table sets forth an estimate of future net cash flows, using
current prices and costs, but before consideration of federal income taxes. The
future net revenues have been discounted at an annual rate of 10% to determine
"present value." The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties. Estimates have been made in accordance with
current Securities and Exchange Commission guidelines concerning the use of
constant oil and gas prices and costs in reserve evaluations.
Estimated Future Net Cash Flows and Present Value
of Proved Producing Reserves
As of October 31, 1997
Year Ending 1998 $ 161,280
October 31, 1999 137,731
2000 118,541
2001 102,430
2002 88,795
Thereafter 578,521
-----------
Total $ 1,187,298
Estimated Future Net Cash Flows before
income taxes, discounted at 10% per
annum $ 708,475
PRODUCTION, AVERAGE SALES PRICES
- --------------------------------
The following table sets forth certain information regarding volumes of the
Company's production of crude oil and natural gas and the Company's average
sales price per barrel of crude oil ("Bbl") and average sales price per thousand
cubic feet of natural gas ("Mcf") for the two years ended October 31, 1997 and
1996. Production and sales information relating to properties acquired or
disposed of is reflected in this table only since or up to the closing date of
their respective acquisition or sale and may effect comparability.
<PAGE>
1997 1996
---- ----
Production:
Oil (Bbl) 1,722 380
Gas (Mcf) 61,411 24,941
Average Sales Prices:
Oil (per Bbl) $19.83 $20.21
Gas (per Mcf) $ 2.46 $ 2.01
Note: Production numbers do not include plant products.
ITEM 3. LEGAL PROCEEDINGS
There were no legal proceedings involving General American Royalty, Inc. 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 General American Royalty Inc's.
security holders during the fourth quarter of the fiscal year ended October 31,
1997.
PART II
- -------
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the NASDAQ Bulletin Board (symbol
TROY). The first trading in the stock occurred on February 4, 1997. The
following table sets forth the high and low trade prices of the Company's common
stock, as reported by NASDAQ System Statistics furnished by NASD, during the
periods indicated:
Quarter Ended HIGH LOW
------------- ---- ---
April 30, 1997 6-1/4 4-3/4
July 31, 1997 4-1/2 3-1/2
October 31, 1997 5-3/4 4-1/4
<PAGE>
As of October 31, 1997, the approximate number of holders of General
American Royalty, Inc. were:
Title of Class Number of Holders
-------------- -----------------
Common (Voting) 100
During the last two years no cash dividends have been declared on General
American Royalty, Inc. common stock.
ITEM 6. 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. As
of October 31, 1997 the Company had acquired, for approximately $567,000,
royalty and mineral interests that have generated net revenues of approximately
$206,000.
The Company has completed offerings of its equity securities and incurred
bank debt during the previous 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
acquire 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.
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 refinance short-term debt obligations
as they become due with permanent equity capital. During the fiscal year ended
October 1997, the Company did not acquire any mineral and royalty interests.
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 and for working
capital. This obligation is due on February 28, 1998 and is expected to be
repaid with proceeds from the sale of producing royalty interests owned by the
<PAGE>
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 will
have a severe adverse impact on the Company. In the future, short-term debt
secured by producing royalty interests will be utilized 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 90% of the Company's oil and gas sales.
RESULTS OF OPERATIONS
- ---------------------
Fiscal Year Ended October 31, 1997 Compared
to the Fiscal Year Ended October 31, 1996
Revenues
Revenues for the twelve months ended October 31, 1997 were $198,000
compared with $61,000 in 1996. The Company acquired royalty and overriding
royalty interests, in three separate acquisitions, during the fiscal year ended
October 31, 1996. The first acquisition representing approximately 30% of its
total production became effective for production beginning April 1, 1996, the
second representing approximately 50% of its total production became effective
for production beginning July 1, 1996 and the third representing approximately
20% of its total production became effective for production beginning August 1,
1996. The significantly higher revenues for 1997 are due to the increased crude
oil and natural gas sales that resulted from a full twelve months of production
from the Company's royalty and overriding royalty interests and significantly
higher prices for natural gas.
Costs and Expenses
General and Administrative Expenses. General and administrative expenses
-------------------------------------
("G&A") increased from $72,000 for the twelve months ended October 31, 1996 to
$887,536 for the comparable period in 1997. The increase in G&A expenses for
1997 primarily resulted from a non-cash charge of $536,500 equal to the market
value of the Company's 100,000 shares of common stock issued to Russo
Securities, Inc. which agreed to perform investment banking services. Also,
increases were attributable to the expansion of the Company's operational
activities and the costs incurred in connection with becoming a publicly traded
entity.
<PAGE>
Depletion, Depreciation and Amortization. Depletion, depreciation and
--------------------------------------------
amortization ("DD&A"), increased to $79,000 for the twelve months ended October
31, 1997 compared to $21,000 for the comparable period in 1996. The increase is
primarily due to additional costs attributable to acquired producing royalty and
overriding royalty interests as described in the "Revenues" section above.
Interest expense. The Company first incurred interest-bearing debt of
-----------------
$140,000 on July 24, 1996. The interest expense for the twelve months ended
October 31, 1997 was incurred on notes payable that totaled $300,000 at October
31, 1997.
ITEM 7. FINANCIAL STATEMENTS
Independent Auditors Report F-1
Report of Independent Accountants F-2
Balance Sheet as of October 31, 1997 F-3
Statements of Operations for the Years Ended
October 31, 1997 and 1996 F-4
Statements of Stockholders' Equity for the Years
Ended October 31, 1997 and 1996 F-5
Statements of Cash Flows for the Years Ended
October 31, 1997 and 1996 F-6
Notes To Financial Statements F-7
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On October 30, 1997 the Company engaged Hein + Associates LLP ("Hein") as
its independent principal accountant and auditor, replacing Coopers & Lybrand,
LLP ("C&L"). C&L had been engaged as principal accountants and issued an audit
report on the Company's financial statements for the last fiscal year. C&L's
audit reports were not qualified in any manner and contained no adverse opinion
of disclaimer of opinion. The Company had no disagreements over accounting
matters or received any notification from C&L that the scope of its audit or
reliability of the Company's financial information had adversely changed during
the current fiscal year. C&L's letter confirming these facts was included as
part of the Company's filing on Form 8-K dated October 30, 1997.
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Set forth below are the identities of the directors, executive officers and
significant employees of the Company and a brief account of their business
experience. The Company's bylaws provide for nine directors who are elected for
one-year terms. Executive officers are appointed by the board of directors to
serve in their respective capacities for one year until the directors duly
appoint their successors.
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
<TABLE>
<S> <C>
Served as
Term Director
Name Age Position and Offices Expires Since
---- --- -------------------- ------- -----
James F. Smith 61 Director, Chief Executive 1998 1996
Officer, President
James E. Mitschke 56 Director, Executive Vice 1998 1996
President
Bill L. Bledsoe 62 Director 1998 1996
Malcolm E. Wilson, Jr. 71 Director 1998 1996
J. Donald Hill 65 Advisory Director 1998 1998
Rory S. Phillips 45 Advisory Director 1998 1998
</TABLE>
<PAGE>
EXECUTIVE OFFICERS
- -------------------
Held Office
Name Age Position and Offices Since
---- --- ------------------------- -----
James F. Smith 61 Director, Chief Executive 1996
Officer, President
James E. Mitschke 56 Director, Executive Vice 1996
President
Sam E. Nicholson 50 Vice President, Secretary 1996
and Treasurer
BUSINESS EXPERIENCE
- -------------------
James F. Smith. Mr. Smith received a Bachelor of Business Administration
degree in 1958 from Southern Methodist University and attended the Graduate
School of Business Administration during 1959-1960 at the University of Texas at
Austin.
After leaving college he embarked on a career in the oil and gas business,
although he was also active in the ownership of several banks and savings and
loan associations from 1960 through 1968. Mr. Smith has been engaged in the
domestic oil and gas industry for over 30 years, his companies have drilled over
400 wells during this period. He has completed four initial public offerings for
companies of which he was founder and an executive officer, which were
PetroDynamics, Inc. in 1968, Toltec Oil & Gas, Inc. in 1979 and Toltec Royalty
Corporation in 1980. Controlling interest in Toltec Royalty Corporation was sold
to an American Stock Exchange company in 1982. Toltec Oil & Gas, Inc. was merged
with a public company in 1983, which later became Coda Energy, Inc. Both
PetroDynamics and Toltec Royalty were active in the acquisition of oil and gas
royalty interests.
James E. Mitschke. Mr. Mitschke is a petroleum landman with more than 24
------------------
years experience in the oil and gas industry. He has been employed during this
period as a landman for several companies, all based in Dallas, Texas, which
include Hunt Energy Corporation, Wessely Energy Corporation and Murchison
Exploration Company. His positions with these companies have ranged from area
land manager to vice president-land. He is a member of the American Association
of Professional Landmen and served as the chairman of its industry affairs
committee, 1980-81 and as a director, 1981-82. He has been a member of the
Dallas Association of Petroleum Landmen for a number of years and was its
president in 1979 and served on its board of directors from 1978-80. Mr.
Mitschke has a Bachelor of Arts degree from Southwestern Oklahoma State
University in Weatherford, Oklahoma.
<PAGE>
Sam E. Nicholson. Mr. Nicholson received his Bachelor of Business
-------------------
Administration in accounting from the University of Texas at Arlington, in 1978.
In 1984 he became a Certified Public Accountant in the State of Texas. Mr.
Nicholson has over 15 years experience in the oil and gas industry serving as a
controller or financial officer for both public and privately owned companies.
From 1992 to 1993 he was self-employed as a practicing accountant primarily for
the oil and gas industry. From 1993 to 1995 he served as the controller for
Superior Energy Co., Inc. in Dallas, Texas. In 1995 he joined the Company as an
officer and principal financial officer.
Mr. Nicholson is a member of the American Institute of Certified Public
Accountants and the Texas Society of Certified Public Accountants.
Malcolm E. Wilson, Jr. Mr. Wilson is a professional petroleum geologist
------------------
with considerable experience as a chief executive officer of an independent oil
company. From 1948 to 1975 he was employed as a geologist with General American
Oil Company of Texas where, prior to his resignation in January 1975, he was
Vice President of Geology. During 1975 and 1976 he was a Petroleum Consultant to
Baruch-Foster Corporation, May Petroleum Company, and Republic Production
Company of Texas. From 1977 until February 1991 he was the President and Chief
Executive officer of Baruch-Foster Corporation and its subsidiaries which in
February of 1991 merged with another oil company. Since that time, Mr. Wilson
has managed his personal investments, which are primarily mineral, royalty and
overriding royalty interests. He has also served as a Petroleum Consultant. Mr.
Wilson has considerable experience as a geologist having either personally
geologically mapped prospects or supervised the geological and geophysical
mapping in many of the major oil and gas fields in Louisiana, Texas, Oklahoma,
New Mexico, Mississippi, Alabama, the Rocky Mountains, the Gulf of Mexico and
some foreign countries, for the companies and clients with which he was
associated.
Bill L. Bledsoe. Mr. Bledsoe received a Bachelor of Science degree from the
----------------
University of North Texas (Denton) in 1957.
Mr. Bledsoe has 35 years of experience in the general management of
domestic and international oil and gas exploration and production. From 1960
through 1965 he served in the land department of Texaco, Inc. in New Orleans and
Shreveport, Louisiana. From 1965 to 1979 he served the various organizations of
H. L. Hunt in a number of management capacities worldwide, being Assistant Land
Manager of Placid Company, Vice President/Land Manager of Hunt Energy
Corporation, General Manager of Hunt International Petroleum Corporation and
President of Pursue Energy Corporation, among others. From 1979 to the present
he has owned and served as President of Bledsoe Energy Corporation and Bledsoe
Petro Corporation in Dallas, Texas, both of which are exploration and production
companies, operating approximately 300 wells in Texas, Oklahoma and New Mexico.
<PAGE>
J. Donald Hill. Mr. Hill is the Chairman and Chief Executive Officer of
---------------
Excel Technology, Inc. a company that is based in Long Island, New York. Excel
Technology, Inc. trades on NASDAQ under the symbol XLTC.
Mr. Hill has extensive experience in investment banking, having served as a
General Partner of Loeb, Rhoads & Company from 1966 to 1977 and Vice Chairman of
First Affiliated Securities, Inc. from 1978 to 1988. From 1988 to 1990 he was
director of Corporate Finance at Weeden & Company, an investment banking firm
and member of the New York Stock Exchange. During 1991 he was Chief Executive
Officer of Medstone International, Inc., a company engaged in shock wave therapy
devices. He served as President and Chief Financial Officer of a subsidiary of
Excel Technology, Inc., Excel/Quantronix, from November 1992 until becoming
Chief Executive Officer of Excel Technology, Inc., in 1995.
Rory S. Phillips. Mr. Phillips is a managing director of Mandeville
------------------
Partners. Prior to joining Mandeville, Mr. Phillips had a financial consulting
practice, which concentrated on U.S. and international telecommunications
transactions. He concurrently served as Chief Financial Officer of Cable
Holdings, Inc., a privately owned cable television company. From April, 1980 to
November, 1994, Mr. Phillips was Chief Financial Officer of Cellular Information
Systems, Inc., a public traded cellular telephone company.
Mr. Phillips also has 15 years experience in senior banking positions, both
in the U.S. and in London. Mr. Phillips holds a B.A. degree from the University
of California at Davis and a M.A. degree in international finance and business
from the Fletcher School of Law and Diplomacy, Boston.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
The following persons during the last fiscal year failed to file on a
timely basis, as disclosed in the following table, reports required by Section
16(a) of the Exchange Act:
Number of Number of
Name Late Reports Transactions
James F. Smith 2 2
James E. Mitschke 1 1
Malcolm E. Wilson, Jr. 1 1
J. Donald Hill 1 1
Bill L. Bledsoe 1 1
Sam E. Nicholson 1 1
Lawrence E. Steinberg 1 1
Sammie S. Smith 1 1
The Company knows of no existing failures to file a required form.
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
Set forth below is the aggregate annual remuneration during fiscal year
1997 of the officers and directors who received remuneration, and of the
officers and directors as a group.
Name of Individual Capacities in Which Remuneration
------------
Identity of Group Remuneration was Received October 31 October 31,
- ----------------- ------------------------- 1997 1996
James F. Smith President and Chief Executive
Officer and Director $30,000 $14,950
Sam E. Nicholson Vice President, Secretary
and Treasurer 33,350 7,500
Officers and
directors as a group
(8 persons) $76,350 $22,450
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
As of February 10, 1998 set forth below are the numbers of shares and the
percentage of outstanding shares of Common Stock of the Company held of record
by each of the 3 highest paid persons who are officers and directors of the
Company, by all officers and directors as a group, and by each shareholder who
owns more than 10 percent of any class of the Company's securities, including
those shares subject to outstanding options or warrants:
Title of Name and Address Amount Percent
Class of Owner Owned of Class
- --------------------------------------------------------------------------------
Common Stock James F. Smith(1)(2) 34,000 3.3%
4925 Greenville Ave. Ste 717
Dallas, TX 75206
Common Stock James E. Mitschke 40,000 3.9%
4925 Greenville Ave. Ste 717
Dallas, TX 75206
<PAGE>
Common Stock Sam E. Nicholson 10,000 1.0%
4925 Greenville Ave. Ste 717
Dallas, TX 75206
Common Stock Sammie S. Smith(2) 105,000 10.2%
4925 Greenville Ave. Ste 717
Dallas, TX 75206
Common Stock Officers and Directors 159,000 15.4%
as a group (8 persons)
Common Stock Russo Securities, Inc.(3)
128 Sand Lane
Staten Island, NY 10305
- ---------------
(1) Mr. Smith holds 10,000 shares of record and 21,000 are held by two trusts of
which Mr. Smith is the trustee. One trust benefits Mr. Smith's children and
holds 15,000 shares, and the other trust benefits the Company's employees and
holds 9,000 shares.
(2) Mr. and Mrs. Smith are husband and wife. They each disavow any beneficial
interest in the shares held of record or beneficially by the other.
(3) In September 1997 the Company sold 100,000 shares of its Common stock to
Russo Securities, Inc. ("Russo") which is further explained in Notes to 4 and 5
of Notes to Financial Statements. The Shares were issued using an S-8
Registration, filed with the SEC. In December 1997 the Company requested a
confirmation from Russo as to the number of shares directly owned by Russo. On
December 22, 1997 Russo reported to the company that Russo and its customers
held in excess of 100,000 shares of General American Royalty, Inc. common stock.
As of this date the Company is unable to determine the exact number of shares
directly owned by Russo.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Eagle Equity Oil & Gas L.P., an entity under the control of Lawrence E.
Steinberg, on July 24, 1996 loaned $140,000 to the Company. The loan was due on
September 23, 1996, provided for interest at 12 percent a year, and was
collateralized by the properties in the Basin Fruitland Coal Field, San Juan
County, New Mexico purchased by the Company from the proceeds of the loan. The
loan was paid down to $40,000 by August 31, 1996 from the proceeds of the sale
of securities by the Company.
On August 13, 1996 Eagle Equity Oil & Gas L.P. loaned an additional
$130,000 to the Company. The loan was due October 14, 1996, provided for
interest at 12 percent a year, and was collateralized by the oil and gas
properties in the Basin Fruit land Coal Field, the Alta Mesa Gas Field in Brooks
County, Texas and the North Wilton Strawn Waterflood Unit in Young County, Texas
and a life insurance policy on the president of the Company.
The loans were paid off in January 1997 from the proceeds of a bank loan
made to the Company. In July 1997 the bank loan of $200,000 was repaid from a
$300,000 loan from Eagle Equity Oil & Gas L.P. due February 28, 1998 and bears
interest at 14%.
Mr. Lawrence E. Steinberg, who controls Eagle Equity Oil & Gas L.P.,
contemporaneously with the transactions described above, purchased 100,000
shares of Common Stock of the Company for $100 from James F. Smith, president
and a director of the Company. He holds 30,000 of these shares in his name and
35,000 in each of two trusts for his children.
<PAGE>
ITEM 13. 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 10. The agreement between the Company and Russo Securities dated
September 12, 1997, as filed in exhibit 4(a) of item 8 of the Company's report
on Form 8-K dated September 16,1997, is hereby incorporated by reference.
Item 27. Financial data schedule.
(b) Reports on Form 8-K. None filed.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
GENERAL AMERICAN ROYALTY, INC.
------------------------------
(Registrant)
/s/ James F. Smith
----------------------------
James F. Smith, Director, President
and Chief Executive Officer
Date February 12, 1998
-----------------
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<S> <C>
/s/ James E. Mitschke /s/ Bill L. Bledsoe
- -------------------------------- -----------------------------
James E. Mitschke, Director, Bill L. Bledsoe, Director
Executive Vice President
Date February 12, 1998 Date February 12, 1998
--------------------- -------------------
/s/ Malcolm E. Wilson /s/ Sam E. Nicholson
- -------------------------------- -----------------------------------
Malcolm E. Wilson, Jr., Director Sam E. Nicholson, Vice President, Secretary
Treasurer and Chief Financial Officer
Date February 12, 1998 Date February 12, 1998
--------------------- -------------------
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
General American Royalty, Inc.
Dallas, Texas
We have audited the accompanying balance sheet of General American Royalty, Inc.
as of October 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of General American Royalty, Inc.
as of October 31, 1997, and the results of its operations and cash flows for the
year then ended, in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has negative working capital of $281,934 at
October 31, 1997 and has suffered significant losses from operations, which
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HEIN + ASSOCIATES LLP
Dallas, Texas
December 10, 1997
F-1
<PAGE>
Report of Independent Accountants
We have audited the statements of operations, stockholders' equity and cash
flows of General American Royalty, Inc. for the year ended October 31, 1996.
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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 principals used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above presents fairly, in
all material respects, the results of operations and cash flows of General
American Royalty, Inc. for the year ended October 31, 1996, in conformity with
generally accepted accounting principals.
Coopers & Lybrand L.L.P.
Dallas, Texas
November 30, 1996
F-2
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN ROYALTY, INC.
BALANCE SHEET
OCTOBER 31, 1997
ASSETS
------
<S> <C>
CURRENT ASSETS:
Cash $ 14,967
Accounts receivable, oil and gas 26,224
Accounts receivable, other 1,750
Prepaid expenses 4,819
-----------
Total current assets 47,760
-----------
ROYALTY INTERESTS IN OIL AND GAS PROPERTIES, less accumulated 466,966
depletion of $100,230
PREPAID CONSULTING FEES 50,717
OTHER ASSETS, net of accumulated depreciation and amortization of $4,496 7,491
-----------
Total assets $ 572,934
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 24,886
Accounts payable - shareholder 4,808
Note payable to shareholder 300,000
-----------
Total current liabilities 329,694
COMMITMENTS (Note 6)
STOCKHOLDERS' EQUITY:
Preferred stock, $.001 par value, 5,000,000 shares authorized, no shares issued or
outstanding --
Common stock, $.001 par value, 20,000,000 shares authorized, 1,031,500 shares
issued and outstanding 1,032
Additional paid-in capital 1,245,647
Accumulated deficit (1,003,439)
-----------
Total stockholders' equity 243,240
Total liabilities and stockholders' equity $ 572,934
===========
</TABLE>
See accompanying notes to these financial statements.
F-3
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31,
1997 1996
----------- -----------
REVENUES:
Oil and gas royalty income $ 194,583 $ 60,751
Other income 3,333 --
----------- -----------
Total revenues 197,916 60,751
----------- -----------
COST AND EXPENSES:
Production taxes and transportation costs 38,281 10,716
General and administrative expense 887,536 71,814
Amortization of deferred financing costs 35,313 83,846
Depletion and amortization expense 79,346 21,481
Interest expense 28,769 5,004
----------- -----------
Total costs and expenses 1,069,245 192,861
----------- -----------
NET LOSS $ (871,329) $ (132,110)
=========== ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.94) $ (0.17)
=========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 929,197 766,356
=========== ===========
See accompanying notes to these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED OCTOBER 31, 1997 AND 1996
<S> <C> <C>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED STOCKHOLDERS'
------------
SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ---------- ----------- -------------
BALANCES, November 1, 1995 -- $ -- $ -- $ -- $ --
Sale of common stock 763,000 763 42,455 -- 43,218
Common stock issued for
oil and gas interests 57,000 57 56,943 -- 57,000
Offering of common stock
and other warrants, net of
offering costs 90,000 90 498,821 -- 498,911
Net loss -- -- -- (132,110) (132,110)
----------- ----------- ----------- ----------- -----------
BALANCES, October 31, 1996 910,000 910 598,219 (132,110) 467,019
Exercise of common stock
warrants, net of related
costs 11,500 12 56,838 -- 56,850
Exercise of common stock
options by consultants 110,000 110 590,590 -- 590,700
Net loss -- -- -- (871,329) (871,329)
----------- ----------- ----------- ----------- -----------
BALANCES, October 31, 1997 1,031,500 $ 1,032 $ 1,245,647 $(1,003,439) $ 243,240
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN ROYALTY, INC.
STATEMENTS OF CASH FLOWS
<S> <C>
FOR THE YEARS ENDED OCTOBER 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(871,329) $(132,110)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depletion and amortization 79,346 21,481
Amortization of deferred financing costs 35,313 83,846
Non-cash payment of stock for services 539,983 508
Change in accounts receivable 6,419 (34,393)
Change in prepaid expenses (1,985) (2,834)
Change in accounts payable 16,672 13,022
Change in other assets (206) (4,029)
--------- ---------
Net cash used in operating activities (195,787) (54,509)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture and equipment (1,991) --
Purchase of royalty interests -- (510,196)
--------- ---------
Net cash used in investing activities (1,991) (510,196)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 56,850 432,621
Proceeds from borrowings 130,000 170,000
Payments for deferred financing costs (12,021) --
--------- ---------
Net cash provided by financing activities 174,829 602,621
--------- ---------
NET CHANGE IN CASH (22,949) 37,916
CASH, beginning of year 37,916 --
--------- ---------
CASH, end of year $ 14,967 $ 37,916
========= =========
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Contribution of securities by shareholder $ -- $ 109,000
=========
Purchase of royalty interests with stock $ -- $ 57,000
=========
Purchase of prepaid consulting fees with common stock options $ 50,717 $ --
========= =========
SUPPLEMENTAL INFORMATION -
Cash paid for interest $ 28,155 $ 4,126
========= =========
</TABLE>
See accompanying notes to these financial statements.
F-6
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
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 an increase in the net loss and basic and diluted net
loss per share for the year ended October 31,1997 of $22,128 and $.02,
respectively. 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. Depreciation and depletion expense for producing royalty interests
was $78,848 and $21,381 for the years ended October 31, 1997 and 1996,
respectively.
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. Depreciation expense for other property and equipment was $398
for the year ended October 31, 1997.
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 October 31, 1997 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.
F-7
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
Impact of Recently-Issued Accounting Standards
----------------------------------------------
Statement of Financial Accounting Standards 130, "Reporting Comprehensive
Income" establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is
defined to include all changes in equity except those resulting from
investments by owners and distributions to owners. Among other disclosures,
Statement 130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive income be
reported in a financial statement that is presented with the same
prominence as other financial statements. Statement 130 is effective for
financial statements for periods beginning after December 15, 1997 and
requires comparative information for earlier years to be restated. Because
of the recent issuance of this standard, management has been unable to
fully evaluate the impact, if any, the standard may have on the Company's
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
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 $281,934 at October 31, 1997 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 for the ongoing
operation and development of the Company and allow it to acquire additional
producing royalty interests.
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 October 31, 1997, the Company has a $300,000 note payable to a
shareholder that bears interest at 14% and is due on February 28, 1998.
Interest on this note is payable monthly with the principal due at
maturity. The note is collateralized by various royalty and overriding
royalty interests of the Company and is personally guaranteed by the
Company's president.
In connection with the note above and another note entered into and paid
during fiscal 1997, the Company recorded $12,021 of deferred financing
costs. For the year ended October 31, 1997, $10,159 of this amount was
charged to operations.
In connection with a note payable entered into by the Company during fiscal
1996, the Company's president transferred 110,000 shares of his benefically
owned common stock to the lender at closing in July 1996. The Company has
recorded $109,000 as contributed capital for the value of the shares
transferred and recognized the entire amount as deferred financing costs.
For the years ended October 31, 1997 and 1996, $25,154 and $83,846,
respectively, of this amount has been charged to operations.
F-8
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS
--------------------------
As of October 31, 1997 the Company has a non-interest bearing payable for
operating advances due to the Company's president for approximately $4,800.
4. EQUITY TRANSACTIONS
-------------------
The Company closed its initial offering of common stock and warrants on
October 31, 1996. The offering consisted of the sale of 90,000 units at
$5.00 per unit. Each unit consisted of one share of common stock and one
stock purchase warrant entitling the holder to one share of common stock of
the Company at a purchase price of $5.00. The Company could call in the
warrants on fifteen days notice, if not exercised by the holder prior to
the expiration of a fifteen-day notice period, if the Company's common
stock trade at or above $6.00 reported closing bid or trade price for ten
consecutive trading days. Costs incurred in connection with the stock
offering totaling $60,089 were recorded as a reduction of additional
paid-in capital. During fiscal 1997, warrants were exercised for 11,500
shares. The remaining warrants expired on July 31, 1997.
During fiscal 1997, the Company issued options to three different entities,
in exchange for services. Russo Securities, Inc., a member of the New York
Stock Exchange, received options to purchase 100,000 shares of common
stock. Another broker dealer, which is a member of the National Association
of Securities Dealers, was granted options to purchase 5,000 shares of
common stock. In addition, a financial public relations firm received
options to purchase 5,000 shares of common stock. All three entities
exercised their options in September 1997. The options are described in
Note 5. The fair market value of the options at the date of grant was
$590,700. Of this amount, $50,717 was recorded as prepaid consulting fees
and $539,983 was recorded as general and administrative expense for the
year ended October 31, 1997. The prepaid consulting fees are being
amortized over three years, on two of the contracts.
During fiscal 1996, the Company purchased two royalty interests for cash
and 57,000 shares of common stock valued at $1.00 per share.
5. STOCK BASED COMPENSATION
------------------------
Incentive Stock Option Plan
---------------------------
In September 1997, the Company adopted 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 option price will be determined
by the Board of Directors at the date of grant and the term will be five
years from the date of grant to expiration. There were no options issued
pursuant to this plan during fiscal 1997.
Stock Options
-------------
The Company granted non-qualified stock options to three corporations to
purchase the Company's common stock at $0.01 per share. The options were
exercisable from September 12, 1997 to September 11, 2000. The options were
exercised on September 18, 1997.
The following is a summary of activity for the stock options granted for
the year ended October 31, 1997 (there were no options granted during
1996):
F-9
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
--------------------
Weighted
Average
Number Exercise
of Shares Price
--------- --------
Outstanding, beginning of year -- --
Canceled or expired -- --
Granted 110,000 $ 0.01
Exercised (110,000) (0.01)
-------- --------
Outstanding, end of year -- --
======== ========
Presented below is a comparison of the weighted average exercise prices and
market prices of the Company's common stock on the measurement date for the
stock options granted during fiscal year 1997. The exercise price was less
than the market price on each of the options. There were no options granted
during 1996.
1997
----
Number Exercise Market
of Shares Price Price
--------- --------- ---------
110,000 0.01 $ 5.37
========= ========= =========
6. COMMITMENTS
-----------
The Company has entered into several non-cancellable operating leases for
office space and equipment. The office space lease requires monthly
payments of approximately $2,900 until October 1999. The equipment leases
require monthly payments totaling $400 until various dates, the last ending
December 2000. Rental expense was $34,970 and $1,928 for the years ended
October 31, 1997 and 1996, respectively.
Contractual payments under non-cancellable operating leases as of October
31, 1997 are as follows:
Year Ending October 31,
1998 $ 39,532
1999 39,565
2000 101
---------
$ 79,198
7. CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of oil and gas receivables. The receivables are primarily from
large companies in the oil and gas business. These parties are primarily
located in the Southwestern region of the United States.
F-10
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
The Company has the following concentrations in volume of oil and gas sales
revenue:
Customer 1997
-------- -----
A 48%
B 23%
Additionally, the two customers above accounted for a total of 69% of
accrued oil and gas sales as of October 31, 1997.
8. INCOME TAXES
------------
In fiscal 1997, the Company incurred a loss for both tax and financial
statement purposes and accordingly, recorded no Federal or state income tax
expense.
A reconciliation of income tax benefit computed at the federal statutory
rate and the Company's income tax provision of $0 for the year ended
October 31, 1996 is as follows:
Pretax loss at statutory rate $(16,410)
State taxes (1,158)
Meals and entertainment 1,024
Key man life insurance 131
--------
Deferred tax asset valuation allowance $ 16,413
========
The Company's deferred income tax balance at October 31, 1997 and 1996
consisted of the following:
OCTOBER 31,
----------------------
1997 1996
--------- ---------
Deferred tax assets:
Net operating loss carryforward $ 310,872 $ 16,413
Valuation allowance (310,872) (16,413)
--------- ---------
Net deferred income tax asset $ -- $ --
========= =========
The change in the valuation allowance of $294,459 for the year ended
October 31, 1997 is primarily due to the increase in the net operating
loss.
The Company has a net operating loss carryforward of approximately
$914,000, which will expire, if unused, in 2011 to 2012.
9. SUBSEQUENT EVENT
----------------
In November 1997, the Company granted 1,606,000 common stock options under
the incentive stock option plan to the members of the Board of Directors.
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.
F-11
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
10. SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED)
The following table sets forth certain information with respect to the oil
and gas producing activities of the Company:
Net capitalized costs related to oil and gas producing activities:
Proved properties $ 567,196
Less accumulated depletion, depreciation and amortization (100,230)
-------------
Net oil and gas property costs $ 466,966
=============
The Company incurred no exploration or development costs during the fiscal
years ended October 31, 1997 and 1996. The Company incurred proved property
acquisition costs of $0 and $567,196 in fiscal years 1997 and 1996,
respectively.
The following table, based on information prepared by an independent
petroleum engineer, summarizes changes in the estimates of the Company's
net interest in total proved reserves of crude oil and condensate and
natural gas, all of which are domestic reserves:
Oil Gas
(Barrels) (MCF)
Balance, October 31, 1996 13,209 462,601
Production (1,722) (62,244)
---------- ----------
Balance, October 31, 1997 11,487 400,357
========== ==========
The foregoing reserves are all classified as proved developed at October
31, 1997. Proved oil and gas reserves are the estimated quantities of crude
oil, condensate 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 oil and gas reserves are reserves that can be expected to
be recovered through existing wells with existing equipment and operating
methods. The above estimated net interests in proved reserves are based
upon subjective engineering judgments and may be affected by the
limitations inherent in such estimation. The process of estimating reserves
is subject to continual revision as additional information becomes
available as a result of drilling, testing, reservoir studies and
production history. Additionally, as the Company owns royalty interests
rather than working interests, and is not party to the operating agreements
of the various properties, there may be additional considerations
concerning the evaluated properties of which the Company and the
independent reserve engineer may not be aware. These considerations could
materially affect the reserve estimates.
11. STANDARDIZED MEASURE OF DISCOUNTED IN FUTURE NET CASH FLOWS (UNAUDITED)
----------------------------------------------------------------------
The standardized measure of discounted future net cash flows at October 31,
1997, relating to proved oil and gas reserves is set forth below. The
assumptions used to compute the standardized measure are those prescribed
by the Financial Accounting Standards Board and, as such, do not
necessarily reflect the Company's expectations of actual revenues to be
derived from those reserves nor their present worth. The limitations
inherent in the reserve quantity estimation process are equally applicable
to the standardized measure computations since these estimates are the
basis for the valuation process.
F-12
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS
Future cash inflows $ 1,298,000
Future ad valorem and severance taxes (111,000)
-----------
Future net cash flows, before income tax 1,187,000
Future income taxes --
Future net cash flows 1,187,000
10% annual discount (478,000)
Standardized measure of discounted future net cash flows $ 709,000
===========
Future net cash flows were computed using year-end prices and costs, and
year-end statutory tax rates (adjusted for permanent differences) that
relate to existing proved oil and gas reserves at year end. The following
are the principal sources of change in the standardized measure of
discounted net cash flows:
Sale of oil and gas produced, net of production costs $ (156,000)
Net changes in prices and production costs (81,000)
Revisions and other 27,000
Accretion of discount 68,000
Net change in income taxes 169,000
----------
Net change 27,000
Balance, beginning of year 682,000
----------
Balance, end of year $ 709,000
==========
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary Financial Information extracted from October
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> 12-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> OCT-31-1997
<EXCHANGE-RATE> 1
<CASH> 14,967
<SECURITIES> 0
<RECEIVABLES> 27,974
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 47,760
<PP&E> 569,187
<DEPRECIATION> 100,628
<TOTAL-ASSETS> 572,934
<CURRENT-LIABILITIES> 329,694
<BONDS> 0
0
0
<COMMON> 1,032
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 572,934
<SALES> 194,583
<TOTAL-REVENUES> 197,916
<CGS> 38,281
<TOTAL-COSTS> 38,281
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<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 28,769
<INCOME-PRETAX> (871,329)
<INCOME-TAX> 0
<INCOME-CONTINUING> (871,329)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (871,329)
<EPS-PRIMARY> (.94)
<EPS-DILUTED> (.94)
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