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 March 31, 1996 Commission File No. 0-22750
ROYALE ENERGY, INC.
CALIFORNIA 33-0224120
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization 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 TO SECTION 12(G) OF THE ACT:
Common Stock, no par value
(Title of Class)
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 March 31, 1996, there were outstanding a total of 3,995,549 shares of
registrant's Common Stock.
This document consists of 16 pages, Exhibit Index occurring on page 14.
<PAGE>
PART I
<TABLE>
Item 1. Financial Statements
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited) (Audited)
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $665,923 $1,616,860
Accounts receivable 970,171 879,165
Receivables from related parties 24,967 24,468
Note receivable 0 33,500
Other current assets 72,116 100,730
------------- -------------
Total current assets 1,733,177 2,654,723
------------- -------------
Oil and gas properties, at cost, net of reserve
for impairment of $213,938 and $213,938,
respectively (successful efforts method) 4,867,400 4,783,191
Equipment and fixtures 171,113 157,646
------------- -------------
5,038,513 4,940,837
Less accumulated depreciation,
depletion and amortization 1,315,529 1,201,199
------------- -------------
3,722,984 3,739,638
------------- -------------
Other assets:
Receivable from related parties, net of reserve
for doubtful accounts of $455,516.65 48,761 60,384
Investment in affiliate 10,000 10,000
Deferred costs on trust organization 125,250 125,250
Other 1,033 1,132
------------- -------------
185,044 196,766
------------- -------------
TOTAL ASSETS $5,641,205 $6,591,127
============= =============
(See Notes to Consolidated Financial Statements)
<PAGE>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited) (Audited)
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $1,766,613 $2,357,514
Current portion of long-term debt 0 113,621
Deferred revenue from turnkey drilling 298,193 532,940
------------- -------------
Total current liabilities 2,064,806 3,004,075
------------- -------------
Long-Term Debt, net of current portion 303,149 320,043
Redeemable preferred stock:
Series A convertible preferred stock, no par value,
authorized 259,250 shares, issued and
outstanding 36,875 and 36,875, respectively 129,100 129,100
------------- -------------
Stockholders' Equity:
Common stock, no par value, authorized
10,000,000 shares, issued and outstanding
3,994,299 and 3,980,549 shares, respectively 8,336,273 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 (5,652,123) (5,691,489)
------------- -------------
Total stockholders' equity 3,144,150 3,137,909
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,641,205 $6,591,127
============= =============
(See Notes to Consolidated Financial Statements)
<PAGE>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Three Months Ended March 31,
---------------------------
1996 1995
(Unaudited) (Unaudited)
------------- -------------
<S> <C> <C>
Revenues:
Oil and gas sales $231,148 $156,071
Gas Distribution 655,417 792,715
Turnkey drilling 839,118 25,200
DWI Production Income 0 13,000
Management fees and other 69,771 41,277
------------- -------------
Total revenues 1,795,454 1,028,263
------------- -------------
Costs and expenses:
General and administrative 302,681 347,874
Turnkey drilling and development 489,067 44,403
Gas Distribution - cost of goods 626,616 781,819
Lease operating 68,832 90,120
DWI production 0 9,285
Loss on lease impairment 0 31,138
Legal and accounting 52,784 69,577
Marketing 95,588 79,912
Depreciation, depletion and amortization 114,525 101,873
------------- -------------
Total costs and expenses 1,750,093 1,556,001
------------- -------------
Net income/(loss) 45,361 (527,738)
Other income and (expense):
Interest expense (8,387) (20,130)
------------- -------------
Net income (loss) before income tax 36,974 (547,868)
Income tax expense 0 2,032
------------- -------------
Net income (loss) 36,974 (549,900)
============= =============
Net income (loss) per common share $0.01 ($0.14)
============= =============
Weighted average common shares outstanding 3,982,570 3,960,299
============= =============
(See Notes to Consolidated Financial Statements)
<PAGE>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
(Unaudited) (Unaudited)
----------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss) 36,974 (549,900)
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation, depletion and amortization 114,525 101,873
Loss on impairment of assets 0 31,138
(Increase) decrease in:
Accounts receivable (91,006) 286,933
Receivable from related parties (499) 2,676
Prepaid expenses and other assets 28,614 (7,890)
Other 99 100
Increase (decrease) in:
Accounts payable and accrued expenses (590,901) (578,366)
Deferred revenues - DWI (234,747) 361,469
------------- -------------
Net Cash Provided (Used) by Operating Activities (736,941) (351,967)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties (94,607) 0
Other capital expenditures (13,467) (5,472)
------------- -------------
Net Cash Provided (Used) by Investing Activities (108,074) (5,472)
------------- -------------
(See Notes to Consolidated Financial Statements)
<PAGE>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Three Months Ended March 31,
---------------------------
1996 1995
(Unaudited) (Unaudited)
------------- -------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in receivable from related
parties, net 11,623 (2,361)
(Increase) decrease in notes receivable 15,000 0
Principal payments on notes payable (132,545) (120,991)
------------- -------------
Net Cash Provided (Used) by Financing Activities (105,922) (123,352)
------------- -------------
Net Increase (Decrease) In Cash and Cash Equivalents (950,937) (480,791)
Cash at Beginning of Year 1,616,860 679,863
------------- -------------
Cash at End of Period $665,923 $199,072
============= =============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $15,241 $20,097
============= =============
Cash paid for taxes $0 $2,032
============= =============
NONCASH TRANSACTIONS:
Series AA Preferred Stock exchanged
for common stock $30,000 $0
============= =============
(See Notes to Consolidated Financial Statements)
<PAGE>
<FN>
<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 three 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 state
ments be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report.
<F2>
2. The consolidated financial statements include the accounts of Royale Energy, Inc. and its 100% owned subsidiary, Royale
Covenant Securities Corporation (collectively referred to as the "Company"). All significant intercompany accounts and
transactions have been eliminated in consolidation.
</FN>
</TABLE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the first three months of 1996, the Company achieved a net operating profit
of $45,361, an improvement over the net operating loss in the first three
months of 1995 of $527,738. The Company's management attribute this improvement
to increased revenues from turnkey drilling and oil and gas sales. For the
quarter ended March 31, 1996, the Company reported a net profit of $36,974,
compared to the net loss of $549,900 for the same period in 1995. Total
revenues for the period were $1,795,454, which was an increase of $767,191 or
74.6%, when compared to the period in 1995. The increase in total revenues can
be primarily attributable to increased turnkey drilling.
The Company's Royale Natural Gas Marketing division recorded sales for the first
quarter of 1996 in the amount of $655,417 for which it incurred costs of sales
of $626,616. For the same period in 1995, sales were $792,715, which were
offset by cost of sales of $781,819. While this represents a decrease in sales
of $137,298 or 17.3% and a decrease in costs of $155,203 or 19.9%, the division
recognized an overall increase in net profit from $10,896 in the first quarter
of 1995 to $28,801 in the sampe period of 1996, a 164% increase. The decreases
in sales and costs were mainly due to increased volatility in the market for
natural gas, which decreased the sales the company was able to consumate.
Turnkey drilling revenues for the quarter ended March 31, 1996 were $839,118
which were offset by drilling and development costs of $489,067. For the same
period in 1995, turnkey drilling revenues were $25,200, while drilling and
development costs were $44,403. The drilling revenues in 1996 were mainly due
to the drilling of two wells in the first quarter, that were partially sold to
outside parties. The drilling revenues and costs in the first quarter of 1995
were a continuation of sales from the Company's 1994 drilling projects.
In 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 quarter of 1996.
Oil and gas revenues for the three months ended March 31, 1996 were $231,148
compared to $156,071 for the same period in 1995, which represents a $75,077 or
48.1% 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 $21,288, or 23.6%, to $68,832 for the three
months ended March 31, 1996, from $90,120 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 $69,771 for the quarter
ended March 31, 1996, an increase of $28,494 (69%) from $41,277 during the same
period in 1995. This increase was mainly due to the increase in the number of
the wells the Company operates and the drilling of the two wells during the
period in 1996.
Depreciation, depletion and amortization expense increased to $114,525 from
$101,873, an increase of $12,652 (12.4%) for the quarter ended March 31, 1996,
as compared to 1995. This increase was primarily due to the Company's increased
well ownership due to its 1995 drilling projects.
<PAGE>
In March 1995, the Company wrote off $31,138 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. There were no lease
impairment write off's in the first quarter of 1996.
General and administrative expenses decreased by $45,193, or 13%, from $347,874
for the quarter ended March 31, 1995 to $302,681 for the same period in 1996.
This decrease was mainly due to the decrease in payments made to outside
consultants in the first quarter of 1996. Legal and accounting expense
decreased to $52,784 for the period, compared to $69,577 for the quarter in
1995, a $16,793 (24.1%) decrease. The decrease can be attributed to tighter
management controls on the use of such services, and decreased litigation in the
first quarter of 1996. Marketing expense for the quarter ended March 31, 1996,
increased $15,676 or 19.6%, to $95,588, compared to $79,912 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 three months ended March 31, 1996, the Company incurred interest expense
of $8,387 on the note payable issued in connection with the purchase of
producing properties from Arkoma Production of California. Interest expense for
the period in 1995, for this note, was $20,130. The interest rate on the note
is tied to the prime interest rate, therefore the decrease was due to the
general decline in interest rates in 1995 and to the decline in the principal
balance of the note. Since inception of the note in April 1994, the original
principal balance of $1,065,144, has been reduced by $761,995, to $303,149.
CAPITAL RESOURCES AND LIQUIDITY:
At March 31, 1996, the Company had current liabilities totaling $2,064,806 and
current assets totaling $1,733,177. The Company's working capital deficit at
March 31, 1996, was $331,629. The primary reason for this deficit is the
Company's obligation to complete wells on behalf of outside parties who bought
fractional working interests from the Company. The Company records these
obligations as deferred revenue from turnkey drilling, a current liability,
until the drilling projects are completed. As of March 31, 1996, the Company
had $298,193 in deferred revenue from turnkey drilling. Management believes
that the Company has sufficient liquidity for the short term.
OPERATING ACTIVITIES. For the quarter ended March 31, 1996, cash used by
operating activities totaled $736,941 compared to $351,967 used by operations
for the same period in 1995. This increase in cash used can be mainly
attributable to the drilling of the two wells in the first quarter of 1996 which
decreased the deferred revenues from turnkey drilling account.
INVESTING ACTIVITIES. Net cash used by investing activities, primarily in
capital acquisitions of oil and gas properties, amounted to $108,074 for the
period, compared to $5,472 used by investing activities for the same period in
1995. The primary reason for the difference was due to the Company's drilling
of the two wells in the first quarter of 1996.
FINANCING ACTIVITIES. For the quarter ended March 31, 1996, net cash used by
financing activities was $105,922, 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 $123,352. This decrease in cash used
was due mainly to the settlement of a note receivable the Company had on its
books.
<PAGE>
PART II
ITEM 1. LEGAL PROCEEDINGS
On March 28, 1996, a U.S. Magistrate Judge for the Northern District of
Texas granted the Company's motion to transfer a suit filed in 1994 from Texas
to the Southern District of California, where the Company's headquarters are
located. This suit was filed on September 30, 1994, in U.S. District Court for
the Northern District of Texas against the Company, its then president,
executive vice president, a former officer of the Company, and two other members
of the board of directors, alleging violations of the registration and anti-
fraud provisions of federal securities laws, the Texas Securities Act, and
various other related causes of action arising from sales of undivided working
interests in oil and gas leases in Hood County, Texas, to one individual in 1990
and 1991, and seeking damages of $89,973 plus interest and attorney fees. The
had Company answered and filed a motion to transfer venue or dismiss the suit
based on the statute of limitations and failure to state a claim as to various
claims. The Company's management continue to deny any liability and intend to
vigorously contest the suit if it proceeds.
On March 11, 1996, the Superior Court of Tehama County, California, ruled
in favor of a motion by the Company to reduce a settlement agreement, into which
the Company had previously entered, to judgment. A suit had been filed on April
25, 1994, against a subsidiary of the Company and other, unaffiliated entities
by the surface owner and surface leaseholder of the property in Tehama County,
where the Company and its subsidiary own and operate two wells. The suit
alleged that the subsidiary had drilled and operated wells in violation of local
environmental laws and regulations and land use permits for the wells and
operated as a nuisance, and it sought an injunction and damages. In January
1996, a tentative settlement of the suit was reached during a mediation of the
dispute between the parties, and one Plaintiff executed a written settlement
agreement, but the remaining Plaintiffs thereafter refused to sign the
settlement agreement. The Court's ruling on March 11, 1996, entered the
settlement agreement as a judgment of the Court. The Company will continue to
operate the wells.
ITEM 2. CHANGES IN SECURITIES
None of the rights of any of the Company's securities were modified during
the period covered by this report. No class of securities of the Company was
issued or modified which materially limited or qualified any class of its
registered securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
During the period covered by this report there was no material default in
the payment of any principal, interest, sinking or purchase fund installment, or
any other material default with respect to any indebtedness of the Company
exceeding 5 per cent of the total assets of the Company and its consolidated
subsidiaries.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the period
covered by this report.
ITEM 5. OTHER INFORMATION
None.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
No. Description Page or Method of Filing
3.1 Restated Articles of Incorporated by reference
Incorporation of Royale to Exhibit 3.1 of the
Energy, Inc. Company's Form 10-SB
Registration Statement
3.2 Certificates of Amendment Incorporated by reference
to the Articles of to Exhibit 3.1 of the
Incorporation of Royale Company's Form 8-K dated
Energy, Inc. (effecting October 31, 1994
reverse stock split and
defining certain rights of
equity security holders)
3.3 Bylaws of Royale Energy, Incorporated by reference
Inc. to Exhibit 3.2 of the
Company's Form 10-SB
Registration Statement
4.1 Certificate of Incorporated by reference
Determination of the Series to Exhibit 4.1 of the
A Convertible Preferred Company's Form 10-SB
Stock Registration Statement
4.2 Certificate of Incorporated by reference
Determination of the Series to Exhibit 4.2 of the
AA Convertible Preferred Company's Form 10-SB
Stock Registration Statement
4.3 Certificate of Amendment to Incorporated by reference
the Articles of to Exhibit 3.1 of the
Incorporation of Royale Company's Form 8-K dated
Energy, Inc. (effecting October 31, 1994.
reverse stock split and
defining certain rights of
equity security holders).
10.1 Wellbore Farmout Agreement Incorporated by reference
between Royale Energy to Exhibit 10.2 of the
Funds, Inc., and Pacific Company's Form 10-SB
Gas and Electric Co., Dated Registration Statement
March 15, 1993
10.2 Purchase and Sale Agreement Incorporated by reference
between Arkoma Production to Exhibit 10.1 of the
of California, et al., and Company's Form 8-K dated
Royale Energy Funds, Inc. April 12, 1994
10.3 Form of Indemnification Incorporated by reference
Agreement to Exhibit 10.3 of the
Company's Form 10-SB
Registration Statement
10.4 Consulting Agreement with Incorporated by reference
Universal Solutions, Inc., to Exhibits 10.4 and 10.7
dated August 4, 1993, as of the Company's Form 10-SB
amended Registration Statement
10.5 Consulting Agreement with Incorporated by reference
SMI Capital Corp. dated to Exhibit 10.5 and 10.9 of
August 4, 1993, the Company's Form 10-SB
as amended Registration Statement
10.6 Consulting Agreement with Incorporated by reference
Investor Resource Services, to Exhibit 10.6 and 10.8 of
Inc., dated the Company's Form 10-SB
August 4, 1993, as amended Registration Statement
10.7 Purchase and sale agreement Incorporated by reference
between Arkoma Production to exhibit 10.1 of the
of California, et al., and Company's Form 8-K Report
Royale Energy Funds, Inc. dated April 12, 1994, as
amended
10.8 Promissory note and Incorporated by reference
security agreement dated to Exhibits 10.2 and 10.3
April 12, 1994 of the Company's Form 8-K
Report dated April 12,
1994, as amended.
(b) Reports on Form 8-K
In February 1996, the Company filed a report on Form 8-K dated as of
December 19, 1995, which reported that a lawsuit filed against the Company and
its former President in the Northern District of Indiana, South Bend Division,,
and alleging, among other things, violations of Section 10(b) of the Securities
Exchange Act of 1934, had been dismissed as to the Company and all parties. The
Court on December 19, 1995, granted defendants' motion for summary judgment on
the Section 10(b) claim and therefore dismissed that claim. With respect to the
other claims, the Court ruled the federal court in Indiana lacked personal
jurisdiction over the defendants and dismissed the claims without prejudice.
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ROYALE ENERGY INC,
DATE: MAY 14, 1996 /S/ DONALD H. HOSMER
DONALD H. HOSMER, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(See Notes to Consolidated Financial Statements)
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 665,923 1,616,860
<SECURITIES> 0 0
<RECEIVABLES> 995,138 937,151
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 1,733,177 2,654,723
<PP&E> 6,038,513 4,940,837
<DEPRECIATION> 1,315,529 1,201,199
<TOTAL-ASSETS> 5,641,205 6,591,127
<CURRENT-LIABILITIES> 2,064,806 3,004,075
<BONDS> 0 0
129,100 129,100
460,000 540,000
<COMMON> 8,336,273 8,289,398
<OTHER-SE> (5,652,123) (5,691,489)
<TOTAL-LIABILITY-AND-EQUITY> 5,641,205 6,591,127
<SALES> 1,725,683 973,986
<TOTAL-REVENUES> 1,795,454 1,028,263
<CGS> 1,184,515 916,342
<TOTAL-COSTS> 1,750,093 1,556,001
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (8,387) (20,130)
<INCOME-PRETAX> 36,974 (549,900)
<INCOME-TAX> 0 2,032
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 36,974 (549,900)
<EPS-PRIMARY> .01 (.14)
<EPS-DILUTED> 0 0
</TABLE>
