SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 14 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
ROYALE ENERGY, INC.
CALIFORNIA 0-22750
33-0224120
(State or other jurisdiction of (Commission
(I.R.S. Employer
incorporation or organization) File Number)
Identification No.)
7676 HAZARD CENTER DRIVE, SUITE 1500
SAN DIEGO, CA 92108
(Address of principal executive
offices)
Issuer's telephone number:
619-297-8505
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Check whether the issuer (1) filed all reports required to be
filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such shorter
period that the registrant has been
required to file such reports), and (2) has been subject to such
filing requirements for the past
90 days. Yes ..X.. No ......
At September 30, 1996, there were a total of 3,834,049 shares of
registrant s Common Stock
outstanding.
<PAGE>
PART 1
<TABLE>
Item 1. Financial Statements
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited) (Unaudited)
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,146,497 $1,616,860
Accounts receivable 1,314,718 879,165
Receivables from related
parties 24,710 24,468
Note receivable 0 33,500
Other current assets 193,809 100,730
-------------- -----------------
Total current assets 2,679,734 2,654,723
-------------- -----------------
Oil and gas properties,
at cost, net of reserve
for impairment of
$428,938 and $213,938,
respectively (successful
efforts method) 4,653,964 4,783,191
Equipment and fixtures 197,867 157,646
----------------- -----------------
4,851,831 4,940,837
Less accumulated depreciation,
depletion and amortization 1,177,496 1,201,199
----------------- -----------------
3,674,335 3,739,638
----------------- -----------------
Other assets:
Receivable from related
parties, net of reserve
for doubtful accounts of
$455,516.65 25,968 60,384
Note receivable - long term 0 134,844
Investment in affiliate 10,000 10,000
Deferred costs on
trust organization 125,250 125,250
Other 0 1,132
----------------- -----------------
296,080 196,766
----------------- -----------------
TOTAL ASSETS $6,650,149 $6,591,127
(See Notes to Consolidated Financial Statements)
<PAGE>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
September 30, December 31,
1996 1995
(Unaudited) (Unaudited)
----------------- ---------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities:
Accounts payable
and accrued expenses $1,930,138 $2,357,514
Current portion
of long-term debt 0 113,621
Deferred revenue
from turnkey drilling 625,889 532,940
----------------- -----------------
Total current liabilities 2,556,027 3,004,075
----------------- -----------------
Long-Term Debt, net
of current portion 0 320,043
Redeemable preferred stock:
Series A convertible
preferred stock,
no par value, authorized
259,250 shares, issued and
outstanding 24,375
and 36,875, respectively 79,100 129,100
----------------- -----------------
Stockholders Equity:
Common stock, no par
value, authorized
10,000,000 shares, issued
and outstanding 3,834,049
and 3,980,549 shares,
respectively 8,386,273 8,289,398
Series AA preferred stock,
no par value, authorized
147,500 shares, issued and
outstanding 115,000 and
135,000, respectively 460,000 540,000
Accumulated deficit (4,831,251) (5,691,489)
----------------- -----------------
Total stockholders equity 4,015,022 3,137,909
----------------- -----------------
TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY $6,650,149 $6,591,127
(See Notes to Consolidated Financial Statements)
<PAGE>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Nine Months Ended
September 30
1996 1995
(Unaudited) (Unaudited)
----------------- -----------------
<S> <C> <C>
Revenues:
Oil and gas sales $730,715 $502,785
Gas Distribution 2,209,187 2,597,629
Turnkey drilling 3,785,422 2,106,138
DWI Production Income 0 13,000
Management fees and other 264,049 153,284
----------------- ---------------
Total revenues 6,989,373 5,372,836
----------------- --------------
Costs and expenses:
General and administrative 943,958 876,224
Turnkey drilling
and development 1,410,339 691,325
Gas Distribution -
costs of goods 2,155,734 2,531,169
Lease operating 231,720 340,407
DWI production 0 9,285
Loss on lease impairment 257,813 31,638
Legal and accounting 158,167 145,030
Marketing 375,418 161,374
Depreciation, depletion
and amortization 453,050 387,692
---------------- ---------------
Total costs and expenses 5,986,199 5,174,144
----------------- ---------------
Net income/(loss) 1,003,174 198,692
Other income and (expense):
Loss on sale of assets (126,054) 0
Interest expense (15,090) (58,309)
----------------- --------------
Net income (loss)
before income tax 862,030 140,383
Income tax expense 1,600 7,916
----------------- --------------
Net income (loss) 860,430 132,467
Net income (loss) per
common share $0.23 $0.03
Weighted average common
shares outstanding 3,823,049 3,962,359
(See Notes to Consolidated Financial Statements)
<PAGE>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
September 30
1996 1995
(Unaudited) (Unaudited)
----------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss) 860,430 132,467
Adjustments to reconcile
net income to net cash
provided (used) by
operating activities:
Depreciation, depletion
and amortization 453,050 387,692
Loss on sale of assets 126,054
Loss on impairment of
assets 257,813 31,638
(Increase) decrease in:
Accounts receivable (435,553) (542,787)
Receivable from
related parties (242) (15,317)
Other current assets (93,079) 12,603
Other assets 1,132 300
Increase (decrease) in:
Accounts payable and
accrued expenses (427,376) (196,565)
Deferred revenues - DWI 92,949 765,528
----------------- -----------------
Net Cash Provided (Used)
by Operating Activities 835,178 575,559
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil
and gas properties (688,876) (253,797)
Proceeds from sale of
oil and gas properties 37,787 0
Other capital expenditures (40,221) (7,564)
----------------- -----------------
Net Cash Provided (Used)
by Investing Activities (691,310) (261,361)
----------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (expenditures) from
issuance (redemption) of:
Common stock and warrants $0 $0
(Increase) decrease in
receivable from related
parties, net 34,398 (13,804)
(Increase) decrease in
notes receivable (101,344) 0
Principal payments on
notes payable (547,285) (219,452)
----------------- -----------------
Net Cash Provided (Used)
by Financing Activities (614,231) (233,256)
----------------- -----------------
Net Increase (Decrease) in
Cash and Cash Equivalents (470,363) 80,942
Cash at Beginning of Year 1,616,860 679,863
----------------- -----------------
Cash at End of Period $1,146,497 $760,805
(See Notes to Consolidated Financial Statements)
<PAGE>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Nine Months Ended
September 30
1996 1995
(Unaudited) (Unaudited)
----------------- -----------------
<S> <C> <C>
SUPPLEMENTAL INFORMATION:
Cash paid for interest $21,944 $52,191
----------------- -----------------
Cash paid for taxes $1,600 $7,916
----------------- -----------------
NONCASH TRANSACTIONS:
Series AA Preferred Stock
exchanged for
common stock $30,000 -
----------------- -----------------
Series A Preferred Stock
exchanged for
common stock $50,000 -
----------------- -----------------
(See Notes to Consolidated Financial Statements)
<PAGE>
<FN>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
<F1>
1. In the opinion of management, the accompanying unaudited
financial statements include all adjustments, consisting
only of normally recurring adjustments,
necessary to present fairly the Company's
financial position and the results of its operations
and cash flows for the periods presented. The
results of operations for the nine month period
is not, in management's opinion, indicative of the
results to be expected for a full year of
operations. It is suggested that these
consolidated financial statements be read in conjunction with the
financial statements and the
notes thereto included in the Company's latest annual report.
<FN>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Company reported a net operating profit of $1,003,174 for the
first nine months of 1996.
During the period in 1996, the Company's management continued to
concentrate on the
Company's primary operations, drilling and operating natural gas
wells in Northern California.
Based on these efforts, the Company has drilled eight wells
during the first nine months of 1996
and is also receiving higher natural gas prices for its increased
production.
RESULTS OF OPERATIONS
For the first nine months of 1996, the Company achieved a net
operating profit of $1,003,174,
a significant improvement over the net operating profit in the
first nine months of 1995 of
$198,692, an increase of $804,482 or 405%. The Company's
management attribute this
improvement to increased revenues from natural gas sales and
increased turnkey drilling. For
the nine months ended September 30, 1996, the Company reported a
net profit of $860,430,
compared to the net profit of $132,467 for the same period in
1995, an increase in net profit of
$727,963 or 550%. Total revenues for the period were
$6,989,373, which was an increase of
$1,616,537 or 30.1%, when compared to the period in 1995. The
increase in total revenues can
be primarily attributable to higher natural gas prices and
increased turnkey drilling.
For the nine months ended September 30, 1996, turnkey drilling
revenues increased $1,679,284,
from $2,106,138 for the period in 1995 to $3,785,422, or 79.7%
for the period in 1996. The
Company also experienced a $719,014 or 104% increase in drilling
and development costs from
$691,325 for the period in 1995 to $1,410,339 for the period in
1996. This increase in turnkey
revenues and expenses was mainly due to the Company's drilling of
eight wells, that were
partially sold to outside parties, during the period in 1996,
compared to the drilling of three wells,
that were partially sold to outside parties, for the period in
1995.
The Company's Royale Natural Gas Marketing division recorded
sales for the first nine months
of 1996 in the amount of $2,209,187 for which it incurred costs
of sales of $2,155,734. For the
same period in 1995, sales were $2,597,629, which were offset by
cost of sales of $2,531,169.
This represents a decrease in sales of $388,442 or 15% and a
decrease in costs of $375,435 or
14.8%. The decreases in sales and costs were due to the efforts
of management to increase focus
on the core business of Exploration and Production. The
increased volatility of gas prices,
including their rise to a mid term record of $2.16 in August has
led to increased competition in
this market sector, and therefore decreased margins, and overall
sales. As a result of these factors
the company will continue to service existing accounts, but does
not plan to actively solicit new
accounts.
During the second quarter of 1996, the Company sold its oil and
gas producing lease interests
in Hood County, Texas. The sale of these interests resulted in a
loss of $144,836. Also, during
the second quarter 1996, the Company through its reevaluating of
non-core business operations
with a view to disposing of less profitable operations, sold its
subsidiary, Royale Covenant
Securities Corporation, which resulted in a $18,781 gain.
During the first quarter of 1995, the Company sold production
interests in producing properties,
which were a continuation of the 1994 drilling programs, in the
amount of $13,000 while
recording costs of these sales of $9,285. The Company did not
record any sales or costs of this
type in the first nine months of 1996.
Oil and gas revenues for the nine months ended September 30, 1996
were $730,715 compared
to $502,785 for the same period in 1995, which represents a
$227,930 or 45.3% increase. This
increase in revenues was mainly due to the increase in the price
the Company received for its
natural gas production and an increase in the overall production
of the Company, mainly from
newly drilled wells.
The Company's oil and gas production costs, which are chiefly
comprised of lease operating
expenses, decreased by $108,687, or 31.9%, to $231,720 for the
nine months ended September
30, 1996, from $340,407 for the same period in 1995. This
decrease in costs can be attributed
to operating efficiencies realized by changes made in compression
facilities made during 1995.
The aggregate of management fees and other income was $264,049
for the nine months ended
September 30, 1996, an increase of $110,765 (72.3%) from $153,284
during the same period in
1995. This increase was the result of a $70,000 gain due to the
partial forgiveness of the note
payable to Arkoma Production of California and an increase in
interest income of $33,268 due
to increased short-term investment of the Company's available
cash.
Depreciation, depletion and amortization expense increased to
$453,050 from $387,692, an
increase of $65,358 (16.9%) for the nine months ended September
30, 1996, as compared to
1995. This increase was primarily due to the increased well
inventory in 1996 when compared
to the same period in 1995.
Management periodically assesses the value of significant proved
and unproved properties and
charges impairments of value to expense. During the period in
1996, $257,813 was recorded
as an impairment loss based on this assessment. During the same
period in 1995, the Company
wrote off $31,638 as lease impairment expense for a gas lease in
Texas. The decline in gas
prices in 1994 had caused the existing well on this lease to fall
below its economic threshold,
whereupon the Company discontinued production, causing the lease
to terminate.
General and administration expenses increased by $67,734, or
7.7%, from $876,224 for the nine
months ended September 30, 1995 to $943,958 for the same period
in 1996. This increase was
mainly due to a one time payment to the Company's outside
directors for services performed in
prior periods. Legal and accounting expense increased to
$158,167 for the period, compared to
$145,030 for the nine months in 1995, a $13,137 (9.1%) increase.
The increase can be attributed
to slightly increased legal fees during the period in 1996.
Marketing expense for the nine
months ended September 30, 1996, increased $214,044 or 133%, to
$375,418, compared to
$161,374 for the same period in 1995. Marketing expense for the
Company varies from period
to period according to the number of marketing events attended by
Company personnel and
associated travel costs.
For the period in 1996, the Company incurred interest expense of
$15,090 on the note payable
issued in connection with the purchase of producing properties
from Arkoma Production of
California. Interest expense for the first nine months in 1995,
for this note, was $58,309. In July
1996, a final payment of $169,817 was made to Arkoma Production
of California, retiring the
note, which had an inception date of April 1994 and an original
principal balance of $1,065,144.
CAPITAL RESOURCES AND LIQUIDITY:
At September 30, 1996, the Company had current assets totaling
$2,679,734 and current liabilities
totaling $2,556,027. Management believes that the Company has
sufficient liquidity for the short
term.
OPERATING ACTIVITIES. For the nine months ended September 30,
1996, cash provided by
operating activities totaled $835,178 compared to $575,559
provided by operations for the same
period in 1995. This increase in cash provided can be mainly
attributable to the increase in
natural gas prices the Company received for its production.
INVESTING ACTIVITIES. Net cash used by investing activities,
primarily in capital
acquisitions of oil and gas properties, amounted to $691,310 for
the period, compared to
$261,361 used by investing activities for the same period in
1995. The primary reason for the
difference was due to the Company's drilling of eight wells, in
which the company kept a higher
percentage of the lease interest, during the period in 1996
compared to the drilling of three wells
during the same period in 1995.
FINANCING ACTIVITIES. For the nine months ended September 30,
1996, net cash used by
financing activities was $614,231, primarily for principal
reduction of the note payable to Arkoma
Production of California, compared to cash used by financing
activities for the same period in
1995 of $233,256. This increase in cash used was due mainly to
principal payments to retire the
note payable to Arkoma Production of California.
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NO. DESCRIPTION
PAGE OR METHOD OF FILING
3.1 Restated Articles of Incorporation Incorporated by reference
of Royale Energy, Inc. to Exhibit 3.1 of the Company's
Form 10-SB Registration
Statement
3.2 Certificates of Amendment to the Incorporated by reference to
Articles of Incorporation of Exhibit 3.1 of the Company's
Royale Energy, Inc. Form 8-K dated October 31, 1994
3.3 Bylaws of Royale Energy, Inc. Incorporated by reference to
Exhibit 3.2 of the Company's
Form 10-SB Registration Statement
4.1 Certificate of Determination of Incorporated by reference to
the Series A Convertible Preferred Exhibit 4.1 of the Company's
Stock Form 10-SB Registration
Statement
4.2 Certificate of Determination of Incorporated by reference to
Series AA Convertible Preferred Exhibit 4.2 of the Company's
Stock Form 10-SB Registration
Statement
4.3 Certificate of Amendment to the Incorporated by reference to
Articles of Incorporation of Exhibit 3.1 of the Company's
Royale Energy, Inc. Form 8-K dated October 31, 1994
10.1 Wellbore Farmout Agreement Incorporated by reference to
between Royale Energy Funds, Inc. Exhibit 10.2 of the Company's
and Pacific Gas & Electric Co., Form 10-SB Registration
dated March 15, 1993 Statement
10.2 Purchase and Sale Agreement between Incorporated by reference to
Arkoma Production of California, Exhibit 10.1 of the Company's
et al., and Royale Energy Funds, Form 8-K dated April 12, 1994
Inc.
10.3 Form of Indemnification Agreement Incorporated by reference to
Exhibit 10.3 of the Company's
Form 10-SB Registration
Statement
10.4 Promissory note and security Incorporated by reference to
agreement Exhibit 10.3 of the Company's
Form 8-K dated April 12, 1994
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated September 23, 1996,
which reported that the
Company had retained National Investors Council, a financial
public relations firm, to provide
investor relations consulting services to the Company.
The Company filed a report on Form 8-K dated October 10, 1996, to
report that the Company
had retained Peter Grandich Company to provide investor relations
consulting services to the
Company.
SIGNATURES
Pursuant to 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.
ROYALE ENERGY INC,
DATE: NOVEMBER 14, 1996 /S/ DONALD H. HOSMER
DONALD H. HOSMER, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,146,497
<SECURITIES> 0
<RECEIVABLES> 1,339,428
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,679,734
<PP&E> 4,851,831
<DEPRECIATION> 1,777,496
<TOTAL ASSETS> 6,650,149
<CURRENT-LIABILITIES> 2,556,027
<BONDS> 0
79,100
460,000
<COMMON> 8,386,273
<OTHER-SE> (4,831,251)
<TOTAL-LIABILITY-AND-EQUITY> 6,650,149
<SALES> 6,725,324
<TOTAL-REVENUES> 6,989,373
<CGS> 3,797,793
<TOTAL-COSTS> 5,986,199
<OTHER-EXPENSES> 126,054
<LOSS-PROVISION> 0
<INTEREST EXPENSE> 15,090
<INCOME-PRETAX> 862,030
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 860,430
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
</TABLE>
