UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington. D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 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 July 31, 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>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GENERAL AMERICAN ROYALTY, INC.
BALANCE SHEET
<S> <C>
July 31, 1998 October 31,
(Unaudited) 1997
----------- ----
ASSETS
Current assets:
Cash $ 88,608 $ 14,967
Accounts receivable-oil & gas -- 26,224
Accounts receivable expense advances- officers 2,516 --
Accounts receivable-other -- 1,750
Prepaid expenses -- 4,819
----------- -----------
Total Current Assets 91,124 47,760
Royalty interest in oil and gas properties, less accumulated
depletion of $87,658 -- 466,966
Prepaid Consulting Fees -- 50,717
Other assets, net of amortization of $6,740 and $7,218 2,525 7,491
----------- -----------
Total Assets $ 93,649 $572,934
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,619 $ 24,886
Accounts payable-shareholder -- 4,808
Note payable shareholder -- 300,000
----------- -----------
Total current liabilities 4,619 329,694
----------- -----------
Commitments
Total liabilities 4,619 329,694
----------- -----------
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 (1,157,649) (1,003,439)
----------- -----------
Total stockholders' equity 89,030 243,240
----------- -----------
Total liabilities and stockholders' equity $ 93,649 $ 572,934
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C>
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------- --------------------------
1998 1997 1998 1997
------ ------ ------ -----
Revenues:
Oil and gas royalty income $ -- $ 34,990 $ 53,522 $ 153,448
Other income -- -- 7,547 --
Gain (Loss) on sale of royalty interests (61,831) -- 29,100 --
----------- ----------- ----------- -----------
Total revenues (61,831) 34,990 90,169 153,448
----------- ----------- ----------- -----------
Cost and expenses:
Production taxes and transportation costs -- 6,242 5,790 31,595
General and administrative 72,307 78,522 186,422 264,741
Amortization of deferred financing costs -- -- 1,863 25,154
Depreciation, depletion and amortization 191 14,304 31,545 42,856
Interest Expense 1,227 9,887 18,759 20,147
----------- ----------- ----------- -----------
Total Cost and expense $ 73,725 $ 108,955 $ 244,379 $ 384,493
----------- ----------- ----------- -----------
Net loss $ (135,556) $ (73,965) $ (154,210) $ (231,045)
=========== =========== =========== ===========
Net loss per common share (.13) (.08) (.15) (.26)
=========== =========== =========== ===========
Weighted average number of
common shares outstanding 1,031,500 921,150 1,031,500 904,870
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
July 31,
------------------------
1998 1997
------ ------
Cash flows from operating activities:
Net loss $(154,210) $(231,045)
Adjustments to reconcile net loss to net cash used
in operating activities
Depreciation, depletion and amortization 31,545 42,856
Amortization of deferred financing costs 1,863 25,154
Gain on sale of royalty interests (29,100) --
Change in accounts receivable 25,458 3,373
Change in prepaid expenses 55,536 (6,610)
Change in accounts payable (25,075) (1,224)
Change in other assets 2,529 (206)
--------- ---------
Net cash used in operating activities (91,454) (167,702)
--------- ---------
Cash flows from investing activities:
Purchase of equipment -- (1,670)
Sale of royalty interests 465,095 --
--------- ---------
Net cash provided (used) in investing activities 465,095 (1,670)
--------- ---------
Cash flows from financing activities:
Issuance of common stock -- 55,750
Proceeds from borrowings 15,000 500,000
Payments on borrowings (315,000) (370,000)
--------- ---------
Net cash provided (used) by financing activities (300,000) 185,750
--------- ---------
Net increase in cash 73,641 16,378
Cash at beginning of period 14,967 37,916
--------- ---------
Cash at end of period $ 88,608 $ 54,294
========= =========
Supplemental Information:
Cash paid for interest $ 18,912 $ 16,687
========= =========
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
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 -- -- -- (154,210) (154,210)
----------- ----------- ----------- ----------- -----------
Balance July 31, 1998 1,031,500 $ 1,032 $ 1,245,647 $(1,157,649) $ 89,030
=========== =========== =========== =========== ===========
</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 July 31, 1998 and the results of operations and cash flows of General
American Royalty, Inc. (the "Company") for the three and nine month period ended
July 31, 1998 and July 31, 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 was engaged in the business of acquiring, managing
producing oil and gas royalty, overriding royalty and mineral interests in Texas
and New Mexico until it became necessary for the Company to sell all its
interests to satisfy short term debt requirements. The Company is currently
investigating business situations and opportunities which may or may not be
related to the energy business.
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, were 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. The Company sold its remaining royalty and mineral
interests effective May 1, 1998, therefore, this change in accounting estimate
had no effect on net income and in basic and diluted net income per share for
the three months ended July 31,1998, however, this change did cause an increase
in the net loss and basic and diluted net loss per share and for the nine months
ended July 31, 1998 of $9,292 and $.009. The Company annually reviewed
significant properties for impairment by comparing undiscounted estimated future
net cash flows to the carrying amount of the asset. If impairment was indicated,
the asset was 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 July 31, 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 sale of all of its oil and gas
royalty and mineral interests has positioned the Company with no debt and
positive working capital of $86,505, at July 31, 1998, . However, the Company
has no sources of income which raises substantial doubt about its ability to
continue as a going concern. It is management's opinion that it can find a
substantial private company, with demonstrated success in an attractive
industry, to merge into General American Royalty.
<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.
2. Notes Payable
-------------
On July 02, 1998, the Company paid off its $39,247 note payable to a shareholder
which was due on March 31, 1998. The principal balance of $315,000 was reduced
by $275,753 on March 26, 1998 and $39,247 on July 2, 1998, using proceeds from
the sale of royalty interests. As of July 31, 1998 the Company has no notes
payable.
In connection with the note above, the Company recorded $5,961 of deferred
financing costs. As of July 31, 1998, all remaining deferred financing costs of
$1,863, had been charged to operations.
3. Related Party Transactions
--------------------------
As of July 31, 1998 the Company has accounts receivable from travel advances due
from the Company's president of approximately $2,516.
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 $41,768 and
$50,717 of amortization expense was included in general and administrative
expense for the three and nine months ended July 31, 1998, respectively. The
prepaid consulting fees were being amortized over a three year life, however,
management determined that these fees no longer have a value to the Company and
elected to expense the remaining balance of $41,768 in the quarter ended July
31, 1998. 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 February, 1998. The options were exercisable at $5.25 per
share and expired 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. As of July 31, 1998 the
Company has no outstanding stock options.
<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 did not
reached a sufficient level to cover administrative and overhead expenses. All
crude oil and natural gas royalty interests owned by the Company were sold
during the current fiscal year which eleminates these revenues as a future
source of liquidity.
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 nine months ended July 31, 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 net sales
proceeds of $279,541 were used to reduce the Company's short-term debt
obligation of $315,000 by $275,753 and the balance was used for working capital.
In July 1998 the Company sold its remaining royalty and mineral
interests in Texas and New Mexico. The transaction was effective May 1, 1998.
The net sales proceeds of $185,554 were used to payoff the Company's short-term
debt obligation of $39,247 and payables. These interests had a net book value of
$247,385, which resulted in a loss of $61,831. During the 22 months the Company
owned the properties, net revenues of approximately $138,500 were recorded. The
Company now owns no oil and gas royalty or mineral interests.
The Company is currently seeking a substantial private company, with
demonstrated success in an attractive industry, to merge with. The Company will
be considering merger candidates engaged in industries other than the energy
industry.
<PAGE>
RESULTS OF OPERATIONS
Three and Nine Months Ended July 31, 1998 Compared
to the Three and Nine Months Ended July 31, 1997
Revenues
Oil and Gas Royalty Income. Revenues for the three and nine months
----------------------------
ended July 31, 1998 were $0 and $53,522 compared with $34,990 and $153,448 for
the comparable periods in 1997. The decrease in revenues for the three and nine
months ended July 31, 1998 as compared to the same periods in 1997 is primarily
attributable to the sale of all of the Company's oil and gas royalty interests
in two transactions, effective February 1 and May 1 of 1998.
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.
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 and in July of 1998 the Company
recognized a loss of $61,831 on the sale of the remainder of its royalty and
mineral interests located in Texas and New Mexico. These two sales resulted in a
net gain on the sale of royalty interests of $29,100, as of July 31, 1998.
Costs and Expenses
Production Taxes and Transportation Costs. The decrease of production
-------------------------------------------
taxes and transportation costs for the three and nine months ended July 31, 1998
as compared to the three and nine months ended July 31, 1997 is primarily
attributable to the sale of all of the Company's royalty interests which were
sold effective February 1 and May 1 of 1998.
<PAGE>
General and Administrative Expenses. General and administrative
---------------------------------------
expenses ("G&A") decreased from $78,522 and $264,741 for the three and nine
months ended July 31, 1997 to $72,307 and $186,422 for the comparable period in
1998. The decrease in G&A expenses for the three and nine months ended July 31,
1998 is primarily attributable to a decrease in salaries paid to certain
officers, a reduction of travel, a reduction in rent expense, expensing of
deferred financing costs, and the legal , accounting and professional costs
associated with becoming a public company incurred in 1997. It should be noted
that the expense to G&A, of the remaining $41,768 balance of prepaid consulting
fees, as described in Note 4 of the "Notes To Financial Statements", make the
substantial reduction in G&A for the three and nine months ended July 31, 1998
less apparent.
Depletion, Depreciation and Amortization. Depletion, depreciation and
-----------------------------------------
amortization ("DD&A"), decreased to $191 for the three months ended July 31,
1998 compared to $14,304 for the comparable period in 1997. The decrease was
attributable to the sale of the Company's royalty interests. For the nine months
ended July 31, 1998 and 1997 DD&A decreased from $42,856 to $31,545. The
decrease is attributable primarily to the sale of royalty interests which became
effective February 1 and May 1, 1998, and 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".
Interest expense. The decrease in interest expense from $9,887 and
-----------------
$20,147 for the three and nine months ended July 31, 1997 to $1,227 and $18,759
for the three and nine months ended July 31, 1998 is attributable to the
reduction in debt of $268,283 on March 26, 1998 and paying off the remaining
debt of $39,217 on July 2, 1998. Through out most of fiscal year 1997 the
Company's debt was approximately $200,000 compared to approximately $300,000 in
the current fiscal year.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
On June 20, 1998 Douglas Weedon 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.
On June 11, 1998 the registrant filed Form 8-K, Item 6, Resignation of
Directors.
On July 23, 1998 the registrant filed Form 8-K, Items 2 and 5,
Disposition of Assets and Other Events
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GENERAL AMERICAN ROYALTY, INC.
------------------------------
(Registrant)
Date September 8, 1998 /s/ James F. Smith
---------------------- -----------------------
James F. Smith,
President and Chief Executive Officer
Date September 8, 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 July 31, 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> MAY-01-1998
<PERIOD-END> JUL-31-1998
<EXCHANGE-RATE> 1
<CASH> 88,608
<SECURITIES> 0
<RECEIVABLES> 2,516
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 91,124
<PP&E> 1,991
<DEPRECIATION> 895
<TOTAL-ASSETS> 93,649
<CURRENT-LIABILITIES> 4,619
<BONDS> 0
0
0
<COMMON> 1,032
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 93,649
<SALES> 53,522
<TOTAL-REVENUES> 90,169
<CGS> 5,790
<TOTAL-COSTS> 5,790
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,759
<INCOME-PRETAX> (154,210)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (154,210)
<EPS-PRIMARY> (.15)
<EPS-DILUTED> (.15)
</TABLE>
