<PAGE> 1
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 June 30, 1997
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 June 30, 1997, there were a total of 3,867,800 shares of registrant's
Common Stock outstanding.
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PART 1
Item 1. Financial Statements
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, June 30,
1997 1996
(Unaudited) (Audited)
----------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,689,403 $2,595,444
Accounts receivable 607,448 1,928,472
Receivables from related parties 43,613 34,897
Note receivable 120,938 131,847
Other current assets 65,499 190,535
----------- -----------
Total current assets 2,526,901 4,881,195
----------- -----------
Oil and gas properties, at cost, net of
reserve for impairment of $528,938
and $428,938, respectively
(successful efforts method) 9,174,626 4,468,731
Equipment and fixtures 229,491 214,800
----------- -----------
9,404,117 4,683,531
Less accumulated depreciation,
depletion and amortization 1,441,878 1,204,824
----------- -----------
7,962,239 3,478,707
----------- -----------
Other assets:
Receivable from related parties, net 0 3,535
----------- -----------
0 3,535
----------- -----------
TOTAL ASSETS $10,489,140 $8,363,437
(See Notes to Consolidated Financial Statements)
</TABLE>
2
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<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
1997 1996
(Unaudited) (Audited)
----------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $1,516,449 $1,947,705
Deferred revenue from turnkey drilling 907,637 1,504,041
----------- -----------
Total current liabilities 2,424,086 3,451,746
----------- -----------
Long-Term Debt, net of current portion 3,000,000 300,000
Redeemable preferred stock:
Series A convertible preferred stock,
no par value, authorized 259,250 shares,
issued and outstanding 21,875 and
24,375, respectively 69,100 79,100
----------- -----------
Stockholders' Equity:
Common stock, no par value, authorized
10,000,000 shares, issued and outstanding
3,867,800 and 3,834,049 shares, respectively 8,656,273 8,386,273
Series AA preferred stock, no par value,
authorized 147,500 shares, issued and
outstanding 50,000 and 115,000,
respectively 200,000 460,000
Accumulated deficit (3,776,319) (4,292,682)
----------- -----------
Total paid in capital
and accumulated deficit 5,079,954 4,553,591
Less cost of treasury stock 16,800 and
4,200 shares, respectively (84,000) (21,000)
----------- -----------
Total stockholders' equity 4,995,954 4,532,591
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,489,140 $8,363,437
============ ===========
(See Notes to Consolidated Financial Statements)
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Six Months Ended
June 30,
----------- -----------
1997 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Revenues:
Sale of oil and gas $916,123 $439,591
Gas distribution 46,925 1,477,279
Turnkey drilling 2,907,923 2,015,078
Supervisory fees and other 192,857 196,559
----------- -----------
Total Revenues 4,063,828 4,128,507
----------- -----------
Costs and expenses:
General and administrative 668,732 639,162
Turnkey drilling and development 1,675,291 643,678
Cost of gas distribution sales 23,741 1,427,695
Lease operating 209,826 144,000
Loss on lease impairment 100,000 165,000
Legal and accounting 301,050 83,439
Marketing 247,313 262,198
Depreciation, depletion and amortization 237,054 200,964
----------- -----------
Total costs and expenses 3,463,007 3,566,136
----------- -----------
Net income 600,821 562,371
Other expense:
Loss on sale of assets 0 126,054
Interest expense 23,300 15,090
----------- -----------
Net income before income tax 577,521 421,227
Income tax expense 61,150 1,600
----------- -----------
Net income $516,371 $419,627
=========== ===========
Net income per common and common share
equivalent share $0.13 $0.11
=========== ===========
Net income per share - fully diluted $0.13 $0.11
=========== ===========
(See Notes to Consolidated Financial Statements)
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
1997 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 516,371 419,627
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation, depletion and amortization 237,054 200,964
Loss on sale of assets 126,054
Loss on impairment of assets 100,000 165,000
(Increase) decrease in:
Accounts receivable 1,321,024 (233,926)
Receivable from related parties (8,716) (815)
Prepaid expenses and other current assets 125,036 (216,469)
Other assets 0 1,132
Increase (decrease) in:
Accounts payable and accrued expenses (431,256) (966,159)
Deferred revenues - DWI (596,404) 861,429
----------- -----------
Net Cash Provided (Used) by
Operating Activities 1,263,109 356,837
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties (4,805,903) (147,886)
Proceeds from sale of oil and gas properties 0 37,787
Other capital expenditures (14,691) (21,737)
----------- -----------
Net Cash Used by Investing Activities (4,820,594) (131,836)
----------- -----------
(See Notes to Consolidated Financial Statements)
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30
1997 1996
(Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
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 3,535 34,248
(Increase) decrease in notes receivable 10,909 (101,344)
Increase in long-term debt 3,000,000
Principal payments on notes payable (300,000) (307,456)
Treasury stock purchased (63,000) 0
----------- -----------
Net Cash Provided (Used) by Financing
Activities 2,651,444 (374,552)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents (906,041) (149,551)
Cash at Beginning of Year 2,595,444 1,616,860
----------- -----------
Cash at End of Period $1,689,403 $1,467,309
=========== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $1,219 $21,944
=========== ===========
Cash paid for taxes $61,150 $6,171
=========== ===========
NONCASH TRANSACTIONS:
Series AA Preferred Stock exchanged
for common stock $260,000 $30,000
=========== ===========
Series A Preferred Stock exchanged
for common stock $10,000 $0
=========== ===========
(See Notes to Consolidated Financial Statements)
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 six month period are 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.
2. Earnings Per Share - The computation of earnings per common
and common equivalent share is based upon the weighted average
number of common shares outstanding during the period plus (in
periods in which they have dilutive effect) the effect of common
shares contingently issuable, primarily from stock options and
warrants.
The fully diluted per share computation reflects the effect of
warrants in periods in which such exercise would cause dilution.
Fully diluted earnings per share also reflect additional dilution
related to stock options due to the use of the market price at
the end of the period, when market price is higher than the
average price for the period, and convertible preferred stock.
The weighted average number of common and common equivalent
shares used to compute earnings per share is:
For the period ended June 30,
1997 1996
For earnings per common and common
equivalents shares 4,101,590 3,819,498
For earnings per share assuming
full dilution 4,024,459 3,819,498
7
<PAGE> 8
Item 2. Management's Discussion And Analysis of Financial
Condition And Results of Operations
RESULTS OF OPERATIONS
In June 1997, the Company acquired interests in the Faulconer
properties, which contain sixteen gas wells and one salt water
disposal well in the Sacramento Basin in Northern California, for
a purchase price of approximately $3.3 million. The lease interests
acquired cover a total of approximately 10,000 acres, and contain
potential sites for additional developmental well drilling, and the
Company intends further developmental drilling on these leases. The
Company used approximately $300,000 in cash and bank financing of
$3,000,000 to make the aquisition.
For the first six months of 1997, the Company achieved a net
operating profit of $600,821, a $38,450 or 6.8% increase over the
net operating profit in the first six months of 1996 of $562,371.
The Company's management attribute this improvement to increased
revenues from oil and gas sales. For the six months ended June
30, 1997, the Company reported a net profit of $516,371, compared
to the net profit of $419,627 for the same period in 1996, a
$96,744 or 23% increase. Total revenues for the period were
$4,063,828, which was a decrease of $64,679 or 1.6%, when
compared to the period in 1996. The decrease in total revenues
can be primarily attributable to the Company's discontinuing of
its natural gas brokerage operations through the Royale Natural
Gas Marketing Division. While this division contributed a large
portion of the revenues, its margins were relatively narrow.
During the first six months of 1996, the Company's Royale Natural
Gas Marketing division recorded sales in the amount of $1,477,279
for which it incurred costs of sales of $1,427,695. Although the
gas marketing division had been discontinued prior to the first
quarter of 1997, the Company recorded gas distribution revenue
from a brokered natural gas sale during the first quarter of 1997
of $46,925, which was offset by cost of sales of $23,741. The
net profit of $23,184 from the isolated 1997 sale was a 52%
decrease from the 1996 profit of $49,584. The 1997 sale
represents only an isolated trade rather than a continuing
marketing effort and may not be repeated. The Company intends to
take advantage of any such trading opportunities, should they
arise in the future.
Turnkey drilling revenues for the six months ended June 30, 1997
were $2,907,923 which were offset by drilling and development
costs of $1,675,291. For the same period in 1996, turnkey
drilling revenues were $2,015,078, while drilling and development
costs were $643,678. This represents an increase in revenues of
$892,845 or 44.3% and an increase in costs of $1,031,613 or 160%.
The increase drilling revenues and costs was mainly due to the
drilling of six wells during the first six months of 1997 versus
the drilling of three wells during the same period in 1996.
During the first quarter of 1997, the Company also experienced an
increase in the drilling and development costs because two of
its wells, begun in 1996, were completed at more than their
original estimated costs.
Oil and gas revenues for the six months ended June 30, 1997 were
$916,123 compared to $439,591
8
<PAGE> 9
for the same period in 1996, which
represents a $476,532 or 108% 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 wells drilled and
completed during 1996.
The Company's oil and gas production costs, which are chiefly
comprised of lease operating expenses, increased by $65,826, or
45.7%, to $209,826 for the six months ended June 30, 1997, from
$144,000 for the same period in 1996. This increase in costs can
be attributed to the increase in the number of wells the company
owned and operated in the first half of 1997 when compared to the
first half of 1996.
The aggregate of supervisory fees and other income was $192,857
for the six months ended June 30, 1997, a decrease of $3,702
(1.9%) from $196,559 during the same period in 1996. This
decrease was primarily the result of a $70,000 gain, during the
period in 1996, due to the partial forgiveness of the note
payable to Arkoma Production of California.
Depreciation, depletion and amortization expense increased to
$237,054 from $200,964, an increase of $36,090 (18%) for the six
months ended June 30, 1997, as compared to 1996. This increase
is mainly due to the increased oil and gas properties owned by
the Company
Management periodically assesses the value of significant proved
and unproved properties and charges impairments of value to
expense. During the second quarter of 1997, $100,000 was
recorded as an impairment loss based on this assessment. In the
second quarter of 1996, $165,000 was recorded as an impairment as
a result of a similar assessment. Also during the second quarter
of 1996 the Company sold its oil and gas producing lease
interests in Hood County, Texas, resulting in a loss of $144,836.
There were no such sales during the period in 1997.
General and administration expenses increased by $29,570, or
4.6%, from $639,162 for the six months ended June 30, 1996 to
$668,732 for the same period in 1997. Legal and accounting
expense increased to $301,050 for the period, compared to $83,439
for the first six months in 1996, a $217,611 (261%) increase.
This increase can be attributed to an increase in litigation
costs during the first six months of 1997. Marketing expense for
the six months ended June 30, 1997, decreased $14,885 or 5.7%, to
$247,313, compared to $262,198 for the same period in 1996.
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 ended June 30, 1997, the Company incurred interest
expense of $23,300 on $3,000,000 long term debt incurred in
connection with the purchase of the Faulconer properties. For
the same 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, of which the principal was retired during the third
quarter of 1996.
9
<PAGE> 10
CAPITAL RESOURCES AND LIQUIDITY:
At June 30, 1997, the Company had current assets totaling
$2,526,901 and current liabilities totaling $2,424,086, a
$102,815 working capital surplus. Management believes that the
Company has sufficient liquidity for the short term.
OPERATING ACTIVITIES. For the six months ended June 30, 1997,
cash provided by operating activities totaled $1,263,109 compared
to $356,837 provided by operating activities for the same period
in 1996. This increase in cash can be mainly attributable to the
decrease in accounts receivable for the period in 1997 when
compared to the same period in 1996.
INVESTING ACTIVITIES. Net cash used by investing activities,
primarily in capital acquisitions of oil and gas properties,
amounted to $4,820,594 for the period, compared to $131,836 used
by investing activities for the same period in 1996. The primary
reason for the difference was due to the Company's acquisition of
the oil and gas properties from Faulconer.
FINANCING ACTIVITIES. For the six months ended June 30, 1997,
net cash provided by financing activities was $2,651,444,
primarily due to the increase in long term debt due to the
Faulconer acquisition, compared to cash used by financing
activities for the same period in 1996 of $374,552 primarily for
principal reduction of the note payable to Arkoma Production of
California.
PART II
Item 1. Legal Proceedings
On July 3, 1997, a civil judgment was entered against Royale
Energy, Inc. (the "Company"), for a total of $321,735.43 by the
U.S. District Court for the Southern District of California,
following a jury trial and verdict in Stanley L. Worthington v.
Royale Energy, Inc., et al., No. 96c644CGA. At a hearing in
August 1997, the majistrate judge indicated that she would reduce
the amount of the damage award against the Company, as well as
concurrent damage awards previously made against its Chairman and
its President. The judgment includes an award of court costs and
post judgement interest.
The court's award was based on jury findings of breach of
contract and common law fraud concerning the plaintiff's 1990 and
1991 investment in wells drilled by the Company in Hood County
Texas. The evidence presented at trial indicated that, among
other things, a former salesman had made representations to the
plaintiff which the Company did not authorize.
The Company strongly disagrees with the verdict and has
announced its intent to move for a new trial and to appeal the
judgement.
10
<PAGE> 11
Item 2. Changes in Securities
During the first six months of 1997, 7,813 shares of the
Company's Common Stock were issued to holders of the Company's
previously issued Series AA Preferred Convertible Stock, pursuant
to the individual exercise by two Preferred shareholders of their
right to convert their shares of Preferred Stock to Common Stock.
The sole consideration received by the Company was the Preferred
Stock surrendered in the conversion. Each outstanding share of
Series AA Preferred Stock is convertible to Common Stock at a
ratio of one share of Common Stock to be issued for each two
shares of Preferred. The Preferred Stock had originally been
issued prior to 1993 in private placements pursuant to Section
4(2) of the Securities Act of 1933, and to the extent, if any,
that the individual shareholders' conversion of their Preferred
shares to Common might be considered a sale of securities, the
1997 issuance of Common pursuant to exercise of the holders'
conversion privileges was also made pursuant to Section 4(2) of
the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on May
26, 1997. At the meeting, the shareholders voted to re-elect
each of the Company's seven directors to serve until the 1998
annual meeting. The following directors were elected without
opposition: Donald H. Hosmer, Harry E. Hosmer, Stephen M. Hosmer,
Rodney Nahama, Oscar A. Hildebrandt, Henry C. Thorne, and George
M. Watters. The shareholders also voted to approve the appointment
of Brown, Armstrong, Randall & Reyes as the Company's independent
accountants. The board of directors and management solicited
proxies in favor of each of the proposals and election of seven
directors. No proxies were solicited in opposition to any
proposal nor opposing the nominees for director that were
recommended by the board.
The following table indicates the votes cast at the annual
meeting for approval of the independent accountants.
Item For Against Withheld
Appoint Brown, Armstrong, Randall & Reyes 2,779,162 557 15,500
as the Company's independent auditors
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Articles of Incorporation of Royale Energy, Inc.,
incorporated by reference to Exhibit 3.1 of the Company's
Form 10-SB Registration Statement.
11
<PAGE> 12
3.2 Certificate of Amendment to the Articles of Incorporation of
Royale Energy, Inc. (effecting reverse stock split and
defining certain rights of equity security holders),
incorporated by reference to Exhibit 3.1 of the Company's
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 the Series A Convertible
Preferred Stock, incorporated by reference to Exhibit 4.1 of
the Company's Form 10-SB Registration Statement.
4.2 Certificate of Determination of the Series AA Convertible
Preferred Stock, incorporated by reference to Exhibit 4.2 of
the Company's Form 10-SB Registration Statement.
10.1 Wellbore Farmout Agreement between Royale Energy Funds,
Inc., and Pacific Gas & Electric Co., dated March 15, 1993,
incorporated by reference to Exhibit 10.2 of the Company's
Form 10-SB Registration Statement.
10.2 Form of Indemnification Agreement, incorporated by reference
to Exhibit 10.3 of the Company's Form 10-SB Registration
Statement.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the second
quarter of 1997. The Company filed a report on Form 8-K dated
July 3, 1997, to report the civil judgement entered in
Worthington v. Royale Energy, Inc. See, Part II, Item 1, Legal
Proceedings.
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 FUNDS, INC.
Date: August 14, 1997 /s/ Donald H. Hosmer
Donald H. Hosmer, President
and Chief Executive Officer
12
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> JUN-30-1997
<CASH> 1,689,403
<SECURITIES> 0
<RECEIVABLES> 771,999
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,526,901
<PP&E> 9,404,117
<DEPRECIATION> 1,970,816
<TOTAL-ASSETS> 10,489,140
<CURRENT-LIABILITIES> 2,424,086
<BONDS> 0
69,100
200,000
<COMMON> 8,656,273
<OTHER-SE> (3,860,319)
<TOTAL-LIABILITY-AND-EQUITY> 10,489,140
<SALES> 3,870,971
<TOTAL-REVENUES> 4,063,828
<CGS> 1,908,858
<TOTAL-COSTS> 3,463,007
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST EXPENSE> 23,300
<INCOME-PRETAX> 557,521
<INCOME-TAX> 61,150
<INCOME-CONTINUING> 516,371
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 516,371
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
