<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 March 31, 1997
Commission File No. 0-22750
ROYALE ENERGY, INC.
California 33-0224120
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization
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 May 15, 1997, there were a total of 3,866,237 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
March 31, December 31,
1997 1996
(Unaudited) (Audited)
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $2,326,842 $2,595,444
Accounts receivable 632,245 1,928,472
Receivables from related parties 39,033 34,897
Note receivable 124,804 131,847
Other current assets 105,866 190,535
---------- ----------
Total current assets 3,228,790 4,881,195
---------- ----------
Oil and gas properties, at cost, net of reserve for
impairment of $428,938 and $428,938,
respectively (successful efforts method) 4,969,646 4,468,731
Equipment and fixtures 217,633 214,800
---------- ----------
5,187,279 4,683,531
Less accumulated depreciation, depletion and
amortization 1,274,110 1,204,824
---------- ----------
3,913,169 3,478,707
---------- ----------
Other assets:
Receivable from related parties, net 0 3,535
---------- ----------
0 3,535
---------- ----------
TOTAL ASSETS $7,141,959 $8,363,437
(See Notes to Consolidated Financial Statements)
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1997 1996
(Unaudited) (Audited)
---------- ----------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $1,538,309 $1,947,705
Deferred revenue from turnkey drilling 955,428 1,504,041
---------- ----------
Total current liabilities 2,493,737 3,451,746
---------- ----------
Long-Term Debt, net of current portion 0 300,000
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
3,859,987 and 3,834,049 shares,
respectively 8,593,773 8,386,273
Series AA preferred stock, no par value,
authorized 147,500 shares, issued and
outstanding 65,625 and 115,000,
respectively 262,500 460,000
Accumulated deficit (4,224,651) (4,292,682)
---------- ----------
Total paid in capital and accumulated
deficit 4,631,622 4,553,591
Less Cost of treasury stock, 10,500
and 4,200 shares, respectively (52,500) (21,000)
---------- ----------
Total Stockholders' equity 4,579,122 4,532,591
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $7,141,959 $8,363,437
(See Notes to Consolidated Financial Statements)
</TABLE>
3
<PAGE> 4
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
March 31,
---------- ----------
1997 1996
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
Revenues:
Oil and gas sales $ 485,303 $ 231,148
Gas distribution 46,925 655,417
Turnkey drilling 898,804 839,118
Supervisory fees and other 112,603 69,771
---------- ----------
Total revenues 1,543,635 1,795,454
---------- ----------
Costs and expenses:
General and administrative 295,041 302,681
Turnkey drilling and development 697,283 489,067
Cost of Gas Distribution 23,741 626,616
Lease operating 93,642 68,832
Legal and accounting 134,424 52,784
Marketing 113,811 95,588
Depreciation, depletion and amortization 69,285 114,525
---------- ----------
Total costs and expenses 1,427,227 1,750,093
---------- ----------
Net income 116,408 45,361
Other income and (expense):
Interest expense (1,219) (8,387)
---------- ----------
Net income before income tax $ 115,189 $ 36,974
Income tax expense 47,150 0
---------- ----------
Net income $ 68,039 $ 36,974
========== ==========
Net income per common share $ 0.02 $ 0.01
Net income per share - fully diluted $ 0.02 $ 0.01
(See Notes to Consolidated Financial Statements)
</TABLE>
4
<PAGE> 5
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
---------- ----------
1997 1996
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 68,039 $ 36,974
Adjustments to reconcile net income to
net cash provided (used) by operating
activities:
Depreciation, depletion and amortization 69,285 114,525
(Increase) decrease in:
Accounts receivable 1,296,227 (91,006)
Receivable from related parties (4,136) (499)
Prepaid expenses and other current assets 84,669 28,614
Other assets 0 99
Increase (decrease) in:
Accounts payable and accrued expenses (409,396) (590,901)
Deferred revenues - DWI (548,613) (234,747)
---------- ----------
Net Cash Provided (Used) by Operating
Activities 556,075 (736,941)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties (500,922) (94,607)
Other capital expenditures (2,833) (13,467)
---------- ----------
Net Cash Used by Investing Activities (503,755) (108,074)
---------- ----------
(See Notes to Consolidated Financial Statements)
</TABLE>
5
<PAGE> 6
<TABLE>
<CAPTION>
ROYALE ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
---------- ----------
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 11,623
(Increase) decrease in notes receivable 7,043 15,000
Principal payments on notes payable (300,000) (132,545)
Treasury stock purchased (31,500) 0
---------- ----------
Net Cash Provided (Used) by Financing Activities (320,922) (105,922)
---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents (268,602) (950,937)
Cash at Beginning of Year 2,595,444 1,616,860
---------- ----------
Cash at End of Period $2,326,842 $ 665,923
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 1,219 $ 15,241
Cash paid for taxes $ 47,150 $ 0
NONCASH TRANSACTIONS:
Series AA Preferred Stock exchanged
for common stock $ 197,500 $ 0
Series A Preferred Stock exchanged
for common stock $ 10,000 $ 30,000
(See Notes to Consolidated Financial Statements)
</TABLE>
6
<PAGE> 7
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 three 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:
Three Months Ended March 31,
1997 1996
For earnings per common and common
equivalents shares 4,116,838 3,982,570
For earnings per share assuming
full dilution 4,093,944 3,982,570
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the first three months of 1997, the Company achieved a net
operating profit of $116,408, a $71,047 or 156.6% increase over
the net operating profit in the first three months of 1996 of
$45,361. The Company's management attributes this improvement to
increased revenues from oil and gas sales. For the quarter ended
March 31, 1997, the Company reported a net profit of $68,039,
compared to the net profit of $36,974 for the same period in 1996,
a $31,065 or 84% increase. Total revenues for the period were
$1,543,635, which was a decrease of $251,819 or 14%, 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 quarter of 1996, the Company's Royale Natural Gas
Marketing Division had recorded sales in the amount of $655,417
for which it incurred costs of sales of $626,616. 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 this quarter 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 only a slight decrease
from the first quarter 1996 Gas Marketing Division profit of
$28,801, because the 1997 sale was at a much higher margin than
the Gas Marketing Division had been able to achieve on a regular
basis, but 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 quarter ended March 31, 1997
were $898,804 which were offset by drilling and development costs
of $697,283. For the same period in 1996, turnkey drilling
revenues were $839,118, while drilling and development costs were
$489,067. This represents an increase in revenues of $59,686 or
7.1% and an increase in costs of $208,216 or 42.6%. The increased
drilling revenues and costs were mainly due to the drilling of two
commercially successful wells in the first quarter of 1997 versus
the drilling of one commercially successful well and one dry hole
during the first quarter in 1996. During the first quarter of
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 three months ended March 31, 1997,
were $485,303 compared to $231,148 for the same period in 1996,
which represents a $254,155 or 110% 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.
8
<PAGE> 9
The Company's oil and gas production costs, which are chiefly
comprised of lease operating expenses, increased by $24,810, or
36%, to $93,642 for the three months ended March 31, 1997, from
$68,832 for the same period in 1996. This increase in costs can
be attributed to the increase in the number of wells the company
operated in the first quarter of 1997 when compared to the first
quarter of 1996.
The aggregate of supervisory fees and other income was $112,603
for the quarter ended March 31, 1997, an increase of $42,832
(61.4%) from $69,771 during the same period in 1996. This
increase was mainly due to the increase in the number of the wells
the Company operates and an increase in interest income due to
increased cash available for short-term investment.
Depreciation, depletion and amortization expense decreased to
$69,285 from $114,525, a decrease of $45,240 (39.5%) for the
quarter ended March 31, 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.
General and administrative expenses decreased slightly by $7,640,
or 2.5%, from $302,681 for the quarter ended March 31, 1996 to
$295,041 for the same period in 1997. Legal and accounting
expense increased to $134,424 for the period, compared to $52,784
for the quarter in 1996, a $81,640 (155%) increase. This
increase can be attributed to an increase in litigation costs
during the first quarter of 1997. Marketing expense for the
quarter ended March 31, 1997, increased $18,223 or 19.1%, to
$113,811, compared to $95,588 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 quarter ended March 31, 1997, the Company incurred
interest expense of $1,219 on $300,000 of its revolving line of
credit for working capital purposes, which was repaid during the
quarter. For the same period in 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, of which the principal was retired
during the third quarter of 1996.
CAPITAL RESOURCES AND LIQUIDITY:
At March 31, 1997, the Company had current assets totaling
$3,228,790 and current liabilities totaling $2,493,737, a $735,053
working capital surplus. Management believes that the Company has
sufficient liquidity for the short term.
OPERATING ACTIVITIES. For the quarter ended March 31, 1997, cash
provided by operating activities totaled $556,075 compared to
$736,941 used 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.
9
<PAGE> 10
INVESTING ACTIVITIES. Net cash used by investing activities,
primarily in capital acquisitions of oil and gas properties,
amounted to $503,755 for the period, compared to $108,074 used by
investing activities for the same period in 1996. The primary
reason for the difference was due to the Company's increased
ownership interest in and the increase in the drilling and
development costs of the two wells the Company drilled in 1997
when compared to the two wells drilled in 1996.
FINANCING ACTIVITIES. For the quarter ended March 31, 1997, net
cash used by financing activities was $320,922, primarily for
principal reduction of the Company's revolving line of credit,
compared to cash used by financing activities for the same period
in 1996 of $105,922 primarily for principal reduction of the note
payable to Arkoma Production of California. This increase in net
cash used was due to the difference in principle reduction.
PART II
Item 2. Changes in Securities
During the first quarter of 1997, 25,938 shares of the Company's
Common Stock were issued to holders of the Company's previously
issued Series A and Series AA Preferred Convertible Stock,
pursuant to the individual exercise by six 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 A and 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 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.
10
<PAGE> 11
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 first quarter
of 1997.
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: May 29, 1997 /s/ DONALD H. HOSMER
Donald H. Hosmer, President and
Chief Executive Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 2,326,842
<SECURITIES> 0
<RECEIVABLES> 796,082
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,228,790
<PP&E> 5,187,279
<DEPRECIATION> 1,703,048
<TOTAL-ASSETS> 7,141,959
<CURRENT-LIABILITIES> 2,493,737
<BONDS> 0
69,100
262,500
<COMMON> 8,593,773
<OTHER-SE> (4,277,151)
<TOTAL-LIABILITY-AND-EQUITY> 7,141,959
<SALES> 1,431,032
<TOTAL-REVENUES> 1,543,635
<CGS> 814,666
<TOTAL-COSTS> 1,427,227
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,219
<INCOME-PRETAX> 115,189
<INCOME-TAX> 47,150
<INCOME-CONTINUING> 68,039
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 68,039
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
