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 January 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 717
4925 Greenville Avenue
Dallas, Texas
(Address of principal executive offices)
75206
(Zip Code)
(214) 361-8535
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
As of January 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>
January 31, 1998 October 31,
(Unaudited) 1997
---------------- ------------
ASSETS
Current assets:
Cash $ 2,806 $ 14,967
Accounts receivable-oil & gas 27,047 26,224
Accounts receivable-other 1,650 1,750
Prepaid expenses 4,115 4,819
----------- -----------
Total Current Assets 35,618 47,760
Royalty interest in oil and gas properties, less accumulated
depletion of $119,723 and $100,230 447,474 466,966
Prepaid Consulting Fees 46,242 50,717
Other assets, net of amortization
of $5,822 and $4,496 6,165 7,491
----------- -----------
Total Assets $ 535,499 $ 572,934
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 41,582 $ 24,886
Accounts payable-shareholder 2,216 4,808
Note payable shareholder 307,500 300,000
----------- -----------
Total current liabilities 351,298 329,694
Commitments
Total liabilities 351,298 329,694
----------- -----------
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, 5,000,000 shares authorized,
no shares issued or outstanding
Additional paid-in capital 1,245,647 1,245,647
Accumulated deficit (1,062,478) (1,003,439)
----------- -----------
Total stockholders' equity 184,201 243,240
----------- -----------
Total liabilities and stockholders' equity $ 535,499 $ 572,934
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months Ended
January 31,
--------------------------
1998 1997
----------- -----------
Revenues:
Oil and gas royalty income $ 41,756 $ 54,780
----------- -----------
Cost and expenses:
Production taxes and transportation costs 4,481 9,430
General and administrative 64,860 84,122
Amortization of deferred financing costs 1,135 25,154
Depreciation, depletion and amortization 19,683 14,253
Interest Expense 10,636 5,142
----------- -----------
Total Cost and expense $ 100,795 $ 138,101
----------- -----------
Net loss $ (59,039) $ (83,321)
=========== ===========
Basic and diluted net loss per common share (.06) (.09)
=========== ===========
Weighted average number of common
shares outstanding 1,031,500 910,000
=========== ===========
The accompanying notes are an integral part of the financial statements.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
January 31,
1998 1997
----------------------
Cash flows from operating activities:
Net loss $ (59,039) $ (83,321)
Adjustments to reconcile net loss to net cash used
in operating activities
Depletion and amortization 19,683 14,253
Amortization of deferred financing costs 1,135 25,154
Increase in accounts receivable (723) (13,342)
Decrease in prepaid expenses 5,179 2,466
Increase in accounts payable 14,104 22,522
Decrease in other assets -- (5,873)
--------- ---------
Net cash used in operating activities (19,661) (38,141)
Cash flows from investing activities:
Purchase of equipment -- (1,125)
--------- ---------
Net cash used in investing activities 0 (1,125)
Cash flows from financing activities:
Proceeds from borrowings 15,000 200,000
Payments on borrowings (7,500) (170,000)
--------- ---------
Net cash provided by financing activities 7,500 30,000
--------- ---------
Net decrease in cash (12,161) (9,266)
Cash at beginning of period 14,967 37,916
--------- ---------
Cash at end of period $ 2,806 $ 28,650
========= =========
Supplemental Information:
Cash paid for interest $ 10,586 $ 5,143
========= =========
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
<CAPTION>
GENERAL AMERICAN ROYALTY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<S> <C> <C>
Additional Total
Common Stock Paid-In Accumulated Stockholders'
---------------------- ----------- ----------- ------------
Shares Amount Capital Deficit Equity
--------- --------- ----------- ----------- ------------
Balance at October 31, 1997 1,031,500 $ 1,032 $ 1,245,647 $ (1,003,439) $ 243,240
Net loss - - - (59,039) (59,039)
---------- ---------- ---------- ----------- -------
Balance January 31, 1987 1,031,500 $ 1,032 $ 1,245,647 $ (1,062,478) $ 184,201
========== ========= ========== =========== =======
</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 January 31, 1998 and the results of operations and cash flows of General
American Royalty, Inc. (the "Company") for the three month period ended January
31, 1998 and January 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 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 three
months ended January 31,1998 of $5,314 and $.005, 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
<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 January 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 Company has negative working
capital of $315,680 at January 31, 1998 and has suffered significant losses from
operations, which raise substantial doubt about its ability to continue as a
going concern. It is management's opinion that sufficient capital can be raised
from various sources to provide funding to repay short term debt and allow the
Company to acquire additional producing royalty interests that will generate
sufficient cash flow to cover general and administrative expenses.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
Use of Estimates and Certain Significant Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the estimation of
future net cash flows, which as described above may affect the amount at which
oil and gas properties are recorded. It is at least reasonably possible those
estimates could be revised in the near term and those revisions could be
material.
2. Notes Payable
- -----------------
As of January 31, 1998, the Company has a $307,500 note payable to a shareholder
that bears interest at 14% and is due on March 31, 1998. Interest on this note
is payable monthly with the principal due at maturity. The note is
collateralized by all royalty and overriding royalty interests of the Company
and is personally guaranteed by the Company's president.
In connection with the note above, the Company recorded $5,961 of deferred
financing costs during fiscal 1997. For the three months ended January 31, 1998,
$1,135 of this amount was charged to operations.
3. Related Party Transactions
- ------------------------------
As of January 31, 1998 the Company has a non-interest bearing payable for
unreimbursed expenses due to the Company's president for approximately $2,200.
4. Equity Transactions
- -----------------------
During fiscal 1997, the Company issued options to three corporate entities in
exchange for financial public relations and investment banking services. The
fair market value of the options at the date of grant was $590,000. Of this
amount, $50,717 was recorded as prepaid consulting fees of which $4,475 of
amortization expense was included in general and administrative expense for the
three months ended January 31, 1998. The prepaid consulting fees are being
amortized over the three year life of the contracts.
<PAGE>
GENERAL AMERICAN ROYALTY, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
5. Stock Based Compensation
------------------------
Incentive Stock Option Plan
- ---------------------------
In September 1997, the Board of Directors approved an incentive stock option
plan for certain key officers and directors under which 2,500,000 shares of the
Company's common stock may be issued. The plan must be ratified and approved by
the Company's shareholders. There were 2,100,000 options granted to key officers
and directors during the three months ended January 31, 1998. The options are
exercisable, beginning November 1998, at $5.25 per share and expire in November
2002. The market price at the date of grant was $5.00 per share.
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Sales of crude oil and natural gas from royalty and overriding royalty
interests have been the Company's principal internal source of liquidity.
Monthly sales have not reached a sufficient level to cover administrative and
overhead expenses. Growth in the Company's sales is expected to be the result of
acquiring additional producing crude oil and natural gas royalty interests. As
of January 31, 1998 the Company had acquired, for approximately $567,000,
royalty and mineral interests that have generated net revenues of approximately
$243,000 since their acquisition by the Company.
The Company completed offerings of its common stock 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 the acquisition(s) of
producing royalty and mineral interests..
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 repay 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 March 31, 1998 and is expected to be
repaid with proceeds from the sale of producing royalty interests owned by the
Company, a private placement of equity securities or by refinancing with another
lender. If the Company is unable to satisfy or extend this obligation, it 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.
<PAGE>
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
Three Months Ended January 31, 1998 Compared
to the Three Months Ended January 31, 1997
Revenues
Revenues for the three months ended January 31, 1998 were $41,756
compared with $54,780 in 1997. The decrease in revenues for the three months
ended January 31, 1998 are due to the decreased crude oil and natural gas
production of approximately 18% and a 14.5% decrease in the price of natural
gas, although oil prices were comparable for both periods.
Costs and Expenses
Production Taxes and Transportation Costs. Production taxes and
---------------------------------------------
transportation costs, as a percentage of gross revenues, decreased 7%, for the
three months ended January 31, 1998 as compared to the three months ended
January 31, 1997. The decrease is attributable to a new gas sales contract which
eliminated processing and transportation costs on properties which account for
approximately 48% of the Company's revenues.
General and Administrative Expenses. General and administrative
---------------------------------------
expenses ("G&A") decreased from $84,122 for the three months ended January 31,
1997 to $64,860 for the comparable period in 1998. The decrease in G&A expenses
for 1998 was primarily attributable to a decrease in salaries paid to certain
officers.
Depletion, Depreciation and Amortization. Depletion, depreciation and
-----------------------------------------
amortization ("DD&A"), increased to $19,683 for the three months ended January
31, 1998 compared to $14,253 for the comparable period in 1997. The increase is
primarily due to a change, from 10 years to 7 years, in the estimate life used
in the straight-line depletion of the royalty interests in oil and gas
properties, as described in Note 1.
<PAGE>
Interest expense. The increase in interest expense from $5,142 for the
----------------
three months ended January 31, 1997 to $10,636 for the three months ended
January 31, 1998 is two fold, more debt and a higher interest rate. The Company
had debt of $200,000 at a rate of 10% in 1997 as compared to $307,500 at a rate
of 14% in 1998.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5 - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Item 3(i) and (ii). The articles of incorporation and by-laws, as filed in
Item 2 of Part III of the Company's Form 10-SB
dated March 26, 1997, are hereby incorporated by reference.
Item 27 Financial data schedule.
(b) Reports on Form 8-K. None filed.
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GENERAL AMERICAN ROYALTY, INC.
------------------------------
(Registrant)
Date March 17, 1998 ------------------------------
------------------- James F. Smith,
President and Chief Executive Officer
Date March 17, 1998 ------------------------------
------------------ Sam E. Nicholson,
Treasurer and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary Financial Information extracted
from January 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> NOV-01-1997
<PERIOD-END> JAN-31-1998
<EXCHANGE-RATE> 1
<CASH> 2,806
<SECURITIES> 0
<RECEIVABLES> 28,697
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 35,618
<PP&E> 569,187
<DEPRECIATION> 120,286
<TOTAL-ASSETS> 535,499
<CURRENT-LIABILITIES> 351,298
<BONDS> 0
0
0
<COMMON> 1,032
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 535,499
<SALES> 41,756
<TOTAL-REVENUES> 41,756
<CGS> 4,481
<TOTAL-COSTS> 4,481
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,636
<INCOME-PRETAX> (59,039)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (59,039)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
