[PERIOD-TYPE] 9-MOS
<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 September 30, 1997 Commission File No. 0-22750
ROYALE ENERGY, INC.
California
(State or other jurisdiction of
incorporation or organization
33-0224120
(I.R.S. Employer
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 September 30, 1997, there were a total of 3,867,800 shares of
registrant's Common Stock outstanding.
<PAGE> 2
PART 1
Item 1. Financial Statements
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(Unaudited) (Audited)
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $1,851,731 $2,595,444
Accounts receivable 1,992,594 1,928,472
Receivables from related parties 42,773 34,897
Note receivable 112,145 131,847
Other current assets 104,736 190,535
----------- -----------
Total current assets 4,103,979 4,881,195
----------- -----------
Oil and gas properties, at cost, net of
reserve for impairment of $628,938 and
$428,938,respectively (successful
efforts method) 9,527,442 4,468,731
Equipment and fixtures 238,139 214,800
----------- -----------
9,765,581 4,683,531
Less accumulated depreciation,
depletion and amortization 1,602,986 1,204,824
----------- -----------
8,162,595 3,478,707
----------- -----------
Other assets:
Receivable from related parties, net 0 3,535
----------- -----------
0 3,535
----------- -----------
TOTAL ASSETS $12,266,574 8,363,437
============ ===========
(See Notes to Consolidated Financial Statements)
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1997 1996
(Unaudited) (Audited)
------------- -----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $2,118,467 $1,947,705
Deferred revenue from turnkey drilling 1,191,627 1,504,041
----------- -----------
Total current liabilities 3,310,094 3,451,746
----------- -----------
Long-Term Debt, net of current portion 3,400,000 300,000
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 (3,253,393) (4,292,682)
------------ ------------
Total paid in capital
and accumulated deficit 5,602,880 4,553,591
Less Cost of treasury stock, 23,100
and 4,200 shares,respectively (115,500) (21,000)
------------ ------------
Total Stockholders' equity 5,487,380 4,532,591
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $12,266,574 $8,363,437
============ ============
(See Notes to Consolidated Financial Statements)
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
September 30,
------------ ------------
1997 1996
(Unaudited) (Unaudited)
------------ ------------
<S> <C> <C>
Revenues:
Oil and gas sales $1,763,439 $730,715
Gas distribution 46,925 2,209,187
Turnkey drilling 4,264,423 3,785,422
Supervisory fees and other 303,433 264,049
----------- -----------
Total revenues 6,378,220 6,989,373
----------- -----------
Costs and expenses:
General and administrative 1,061,442 943,958
Turnkey drilling and development 2,276,000 1,410,339
Cost of Gas Distribution 23,741 2,155,734
Lease operating 395,647 231,720
Loss on lease impairment 200,000 257,813
Legal and accounting 465,633 158,167
Marketing 344,044 375,418
Depreciation, depletion and amortization 398,161 453,050
----------- ------------
Total costs and expenses 5,164,668 5,986,199
----------- ------------
Net operating income 1,213,552 1,003,174
Other expense:
Loss on sale of assets 0 126,054
Interest expense 86,903 15,090
----------- ------------
Net income before income tax $1,126,649 $862,030
Income tax expense 87,352 1,600
----------- ------------
Net income $1,039,297 $860,430
=========== ============
Net income per common and common
equivalent share $0.25 $0.23
=========== ============
Net income per share - fully diluted $0.25 $0.23
=========== ============
(See Notes to Consolidated Financial Statements)
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
-------------- ------------
1997 1996
(Unaudited) (Unaudited)
-------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,039,297 $860,430
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 398,161 453,050
Loss on sale of assets 126,054
Loss on impairment of assets 200,000 257,813
(Increase) decrease in:
Accounts receivable (64,122) (435,553)
Receivable from related parties (7,876) (242)
Prepaid expenses and other current assets 85,799 (93,079)
Other assets 0 1,132
Increase (decrease) in:
Accounts payable and accrued expenses 170,762 (427,376)
Deferred revenues - DWI (312,414) 92,949
----------- -----------
Net Cash Provided by Operating Activities 1,509,607 835,178
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties (5,258,718) (688,876)
Proceeds form sale of oil and gas properties 37,787
Other capital expenditures (23,339) (40,221)
----------- -----------
Net Cash Used by Investing Activities (5,282,057) (691,310)
----------- -----------
(See Notes to Consolidated Financial Statements)
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 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
Decrease in receivable from related
parties, net 3,535 34,398
(Increase) decrease in notes receivable 19,702 (101,344)
Increase in long-term debt 3,400,000 0
Principal payments on notes payable (300,000) (547,285)
Treasury stock purchased (94,500) 0
-------------- -----------
Net Cash Provided (Used) by Financing
Activities 3,028,737 (614,231)
-------------- -----------
Net (Decrease) in Cash and Cash
Equivalents (743,713) (470,363)
Cash at Beginning of Year 2,595,444 1,616,860
-------------- -----------
Cash at End of Period $1,851,731 $1,146,497
============== ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest $62,648 $21,944
============== ===========
Cash paid for taxes $87,352 $1,600
============== ===========
NONCASH TRANSACTIONS:
Series AA Preferred Stock exchanged
for common stock $260,000 $30,000
============== ===========
Series A Preferred Stock exchanged
for common stock $10,000 $50,000
============== ===========
(See Notes to Consolidated Financial Statements)
</TABLE>
6
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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 nine 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 September 30,
1997 1996
For earnings per common and common
equivalent shares 4,101,327 3,823,049
For earnings per share assuming
full dilution 4,079,890 3,823,049
7
<PAGE> 8
Item 2. Management's Discussion And Analysis of Financial
Condition And Results of Operations
RESULTS OF OPERATIONS
For the nine months ended September 30, 1997, the Company achieved a net
operating profit of $1,213,552, a $210,378 or 21% increase over the net
operating profit earned during the same period in 1996 of $1,003,174. The
Company's management attribute this improvement primarily to increased revenues
from oil and gas sales. For the nine months ended September 30, 1997, the
Company reported a net profit of $1,039,297, compared to the net profit of
$860,430 for the same period in 1996, a $178,867 or 20.8% increase. Total
revenues for the period were $6,378,220, which was a decrease of $611,153 or
8.7%, when compared to the period in 1996. The decrease in total revenues can
be primarily attributable to the Company's discontinuation of its natural gas
brokerage operations through the Royale Natural Gas Marketing Division. While
this division contributed largely to total revenue, its contribution to net
income was negligable.
During the first nine months of 1996, the Company's Royale Natural Gas
Marketing division recorded sales in the amount of $2,209,187 for which it
incurred costs of sales of $2,155,734. 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 56.6% decrease
from the 1996 profit of $53,453. The 1997 sale represents only an isolated
trade rather than a continuing marketing effort and may not be epeated. The
Company intends to take advantage of any such trading opportunities, should
they arise in the future.
Turnkey drilling revenues for the nine months ended September 30, 1997 were
$4,264,423 which were offset by drilling and development costs of $2,276,000.
For the same period in 1996, turnkey drilling revenues were $3,785,422, while
drilling and development costs were $1,410,339. This represents an increase in
revenues of $479,001 or 12.7% and an increase in costs of $865,661 or 61.4%.
The increase in drilling revenues and costs was mainly due to the drilling of
ten wells during the first nine months of 1997 versus the drilling of eight
wells during the same period in 1996. During the year to date in 1997, the
Company also experienced an increase in 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 nine months ended September 30, 1997 were
$1,763,439 compared to $730,715 for the same period in 1996, which represents a
$1,032,724 or 141% increase. This increase in revenues was mainly due to an
increase in the overall production of the Company and to the increase in the
price the Company received for its natural gas production, from wells drilled
and completed during 1996 and 1997 and from wells acquired by the Company during
1997.
8
<PAGE> 9
The Company's oil and gas production costs, which are chiefly comprised of
lease operating expenses,increased by $163,927, or 70.7%, to $395,647 for the
nine months ended September 30, 1997, from $231,720 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 nine months of 1997 when
compared to the first nine months of 1996.
The aggregate of supervisory fees and other income was $303,433 for the nine
months ended September 30, 1997, an increase of $39,384 (14.9%) from $264,049
during the same period in 1996. This increase was primarily due to the increase
in the number of wells the Company operated in 1997 when compared to 1996.
Depreciation, depletion and amortization expense decreased to $398,161 from
$453,050, a decrease of $54,889 (12.1%) for the nine months ended September 30,
1997, as compared to 1996. Because the depletion rate is calculated using
production as a percentage of reserves, the decrease in depletion was mainly
due to the increased reserves owned by the Company.
Management periodically assesses the value of significant proved and unproved
properties and charges impairments of value to expense. During the period
1997, $200,000 was recorded as an impairment loss based on this assessment.
In the same period in 1996, $257,813 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 administrative expenses increased by $117,484, or 12.5%, from
$943,958 for the nine months ended September 30, 1996 to $1,061,442 for the
same period in 1997. This increase was primarily due to increased staffing
due to the continued growth of the Company. Legal and accounting expense
increased to $465,633 for the period, compared to $158,167 for the first nine
months in 1996, a $307,466 (194%) increase. This increase can be attributed
to an increase in litigation costs during the first nine months of 1997.
Marketing expense for the nine months ended September 30, 1997, decreased
$31,374 or 8.4%, to $344,044, compared to $375,418 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 costs.
For the period ended September 30, 1997, the Company incurred interest expense
of $86,903 on $3,400,000 long term debt incurred in connection with the overall
increase in the Company's oil and gas properties, largely from the purchase of
producing propertie in the Sacramento Basin during the second quarter 1997. For
the first nine months of 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 September 30, 1997, the Company had current assets totaling $4,103,979 and
current liabilities totaling $3,310,094, a $793,885 working capital surplus.
Management believes that the Company has sufficient liquidity for the short
term.
OPERATING ACTIVITIES. For the nine months ended September 30, 1997, cash
provided by operating activities totaled $1,509,607 compared to $835,178
provided by operating activities for the same period in 1996. This increase in
cash can be mainly attributable to the increase in oil and gas sales and 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 $5,282,057 for the
period, compared to $691,310 used by investing activities for the same period in
1996. The primary reason for the difference was due to the Company's increased
natural gas drilling activities and the acquisition of the oil and gas
properties in the Sacramento Basin of California.
FINANCING ACTIVITIES. For the nine months ended September 30, 1997, net cash
provided by financing activities was $3,028,737, primarily due to the increase
in long term debt due to the overall increase in the Company's oil and gas
properties, compared to cash used by financing activities for the same period in
1996 of $614,231 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 damages award 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 magistrate judge indicated that she would reduced the amount of
the damages award against the Company, as well as concurrent damage awards
against its Chairman and President. On October 31, 1997, the parties to the
suit entered into an agreement to compromise and settle the dispute and end the
litigation. The agreement requires the terms of the settlement to remain
confidential.
10
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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.
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 a report on Form 8-K dated July 3, 1997, to report the civil
damages award entered in Worthington v. Royale Energy, Inc. That case was
settled by agreement of the parties on October 31, 1997. See, Part II, Item 1,
Legal Proceedings.
11
<PAGE> 12
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: November 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> SEP-30-1997
<CASH> $ 1,851,731
<SECURITIES> $ 0
<RECEIVABLES> $ 2,147,512
<ALLOWANCES> $ 0
<INVENTORY> $ 0
<CURRENT-ASSETS> $ 4,103,979
<PP&E> $ 9,765,581
<DEPRECIATION> $ 2,231,924
<TOTAL-ASSETS> $12,226,574
<CURRENT-LIABILITIES> $ 3,310,094
<BONDS> 0
$ 69,000
$ 200,000
<COMMON> $ 8,656,273
<OTHER-SE> $ 3,368,893
<TOTAL-LIABILITY-AND-EQUITY> $12,266,574
<SALES> $ 6,074,787
<TOTAL-REVENUES> $ 6,378,220
<CGS> $ 2,695,388
<TOTAL-COSTS> $ 5,164,668
<OTHER-EXPENSES> $ 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> $ 86,903
<INCOME-CONTINUING> $ 1,039,297
<DISCONTINUED> $ 0
<EXTRAORDINARY> $ 0
<CHANGES> $ 0
<NET-INCOME> $ 1,039,297
<EPS-PRIMARY> $ 0.25
<EPS-DILUTED> $ 0.25
