<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, 1998Commission 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 May 1, 1998, there were a total of 3,868,050 shares of registrant's Common
Stock outstanding.
<PAGE> 2
PART 1
Item 1. Financial Statements
ROYALE ENERGY, INC. AND SUBSIDIARIES
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December
31,
1998 1997
(Unaudited) (Audited)
----------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,587,877 $2,032,001
Accounts receivable 2,277,016 1,823,388
Receivables from related parties 42,484 34,218
Note receivable 155,937 159,024
Other current assets 126,774 136,459
----------- ----------
Total current assets 4,190,088 4,185,090
----------- ----------
Oil and gas properties, at cost, net of reserve for
impairment of $828,938 and $728,938,
respectively (successful efforts method) 11,330,914 11,098,362
Equipment and fixtures 292,259 282,153
----------- ----------
11,623,173 11,380,515
Less accumulated depreciation, depletion
and amortization 2,110,812 1,871,101
--------- ------------
9,512,361 9,509,414
--------- -----------
Other assets:
Receivable from related parties, net 0 9,652
--------- ----------
0 9,652
--------- ----------
TOTAL ASSETS $13,702,449 13,704,156
----------- -----------
</TABLE>
(See Notes to Consolidated Financial Statements)
2
<PAGE> 3<PAGE>
ROYALE ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited) (Audited)
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $1,929,132 $2,112,756
Deferred revenue from turnkey drilling 2,211,452 1,735,826
----------- ----------
Total current liabilities 4,140,584 3,848,582
----------- ----------
Long-Term Debt, net of current portion 3,500,000 3,900,000
Redeemable preferred stock:
Series A convertible preferred stock, no par value,
authorized 259,250 shares, issued and
outstanding 9,375 and 16,875, respectively 19,100 49,100
----------- ----------
Stockholders' Equity:
Common stock, no par value, authorized
10,000,000 shares, issued and outstanding
3,868,050 and 3,864,300 shares,
respectively 8,706,273 8,676,273
Series AA preferred stock, no par value,
authorized
147,500 shares, issued and outstanding
50,000 and 50,000, respectively 200,000 200,000
Accumulated deficit (2,676,008) (2,782,299)
----------- ------------
Total paid in capital and accumulated
deficit 6,230,265 6,093,974
Less Cost of treasury stock, 37,500 and 37,500 shares,
respectively (187,500) (187,500)
------------ ------------
Total Stockholders' equity 6,042,765 5,906,474
----------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $13,702,449 $13,704,156
----------- ------------
</TABLE>
(See Notes to Consolidated Financial Statements)
3
<PAGE> 4
ROYALE ENERGY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
<S> <C> <C>
1998 1997
(Unaudited) (Unaudited)
------------- ----------
Revenues:
Oil and gas sales $976,848 $485,303
Gas distribution 0 46,925
Turnkey drilling 416,182 898,804
Supervisory fees and other 98,749 112,603
----------- ----------
Total revenues 1,491,779 1,543,635
----------- -----------
Costs and expenses:
General and administrative 388,435 295,041
Turnkey drilling and development 134,423 697,283
Cost of Gas Distribution 0 23,741
Lease operating 200,377 93,642
Lease impairment 100,000 0
Legal and accounting 187,692 134,424
Marketing 63,265 113,811
Depreciation, depletion and amortization 239,711 69,285
---------- -----------
Total costs and expenses 1,313,903 1,427,227
----------- -----------
Net income 177,876 116,408
Other expense:
Interest expense 68,940 1,219
----------- -----------
Net income before income tax 108,936 $115,189
Income tax expense 2,641 47,150
----------- -----------
Net income $106,295 $68,039
----------- -----------
Diluted earnings per share $0.03 $0.02
----------- -----------
Basic earnings per share $0.03 $0.02
----------- -----------
</TABLE>
(See Notes to Consolidated Financial Statements)
4
<PAGE> 5
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
<S> <C> <C>
1998 1997
(Unaudited) (Unaudited)
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $106,295 $68,039
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation, depletion and amortization 239,711 69,285
Loss on impairment of assets 100,000 -
(Increase) decrease in:
Accounts receivable (453,628) 1,296,227
Receivable from related parties (8,266) (4,136)
Prepaid expenses and other current assets 9,685 84,669
Increase (decrease) in:
Accounts payable and accrued expenses (183,624) (409,396)
Deferred revenues - DWI 475,626 (548,613)
----------- ----------
Net Cash Provided (Used) by Operating
Activities 285,799 556,075
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties (332,556) (500,922)
Other capital expenditures (10,106) (2,833)
----------- ----------
Net Cash Used by Investing Activities ($342,662) (503,755)
----------- ----------
</TABLE>
(See Notes to Consolidated Financial Statements)
5
<PAGE> 6
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
<S> <C> <C>
1998 1997
(Unaudited) (Unaudited)
------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in receivable from related
parties, net $9,652 3,535
(Increase) decrease in notes receivable 3,087 7,043
Principal payments on notes payable (400,000) (300,000)
Treasury stock purchased 0 (31,500)
--------- ---------
Net Cash Provided (Used) by Financing
Activities (387,261) (320,922)
----------- ---------
Net Increase (Decrease) in Cash and Cash
Equivalents (444,124) (268,602)
Cash at Beginning of Year 2,032,001 2,595,444
----------- ---------
Cash at End of Period $1,587,877 $2,326,842
----------- ----------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $48,703 $1,219
----------- -----------
Cash paid for taxes $2,641 $47,150
----------- -----------
NONCASH TRANSACTIONS:
Series AA Preferred Stock exchanged
for common stock $0 $197,500
----------- -----------
Series A Preferred Stock exchanged
for common stock $30,000 $10,000 ----------- ----------
</TABLE>
(See Notes to Consolidated Financial Statements)
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 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.
2. Earnings Per Share (SFAS 128) - In February 1997, the
Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per
Share," which was adopted by the Company for the year ended
December 31, 1997. SFAS 128 replaces the presentation of primary
earnings per share with a presentation of basic earnings per
share based upon the weighted average number of common shares for
the period. It also requires dual presentation of basic and
diluted earnings per share for companies with complex structures.
Basic and diluted earnings per share are calculated as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31, 1998
----------------------------------
<S> <C> <C> <C>
Income Shares Per-Share
(Numerator) (Denominator) Amount
---------- ------------ ---------
Basic EPS
Income available to common
stockholders $106,295 3,864,845 $ .03
Effect of dilutive securities -----
stock options - 195,990
--------- ---------
Diluted EPS
Income available to common
stockholders $106,295 4,060,835 $ .03
---------- ---------- -----
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended March 31, 1997
----------------------------------
<S> <C> <C> <C>
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
Basic EPS
Income available to common
stockholders $ 68,039 3,837,555 $ .02
Effect of dilutive securities -----
stock options - 256,389
-------- ---------
Diluted EPS
Income available to common
stockholders $ 68,039 4,093,944 $ .02
--------- ---------- ------
</TABLE>
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 1998, the Company achieved a net operating
profit of $177,876, a $61,468 or 52.8% increase over the net operating
profit in the first three months of 1997 of $116,408. The Company's
management attribute this improvement to increased revenues from oil and
gas sales. For the quarter ended March 31, 1998, the Company reported
a net profit of $106,295, compared to the net profit of $68,039 for the
same period in 1997, a $38,256 or 56.2% increase. Total revenues for
the period were $1,491,779, which was a decrease of $51,856 or 3.4%,
when compared to the period in 1997. The decrease in total revenues can
be primarily attributable to a decrease in drilling, during the period
in 1998, due to severe weather conditions in Northern California.
Turnkey drilling revenues for the quarter ended March 31, 1998 were
$416,182 which were offset by drilling and development costs of
$134,423. For the same period in 1997, turnkey drilling revenues were
$898,804, while drilling and development costs were $697,283. This
represents a decrease in revenues of $482,622 or 53.7% and an decrease
in costs of $562,860 or 80.7%. The drilling revenues in 1997 were
mainly due to the drilling of two commercially successful wells in the
first quarter of 1997. The drilling revenues and costs in the first
quarter of 1998 were a continuation of sales from the Company's 1997
drilling projects.
Oil and gas revenues for the three months ended March 31, 1998 were
$976,848 compared to $485,303 for the same period in 1997, which
represents a $491,545 or 101% increase. This increase in revenues was
mainly due to the increase in the Company's overall production, mainly
from wells drilled, completed and acquired during 1997.
The Company's oil and gas production costs, which are comprised of lease
operating expenses, increased by $106,735, or 114%, to $200,377 for the
three months ended March 31, 1998, from $93,642 for the same period in
1997. This increase in costs can be attributed to the increase in the
number of productive wells operated by the Company in the first quarter
of 1998 when compared to the first quarter of 1997.
During the first quarter of 1997, the Company recorded gas distribution
revenue from a brokered natural gas sale in the amount of $46,925,
which was offset by cost of sales of $23,741. There were no such sales
of this type during the period in 1998. The 1997 sale was an isolated
trade.
<PAGE> 9
The aggregate of supervisory fees and other income was $98,749 for the
quarter ended March 31, 1998, a decrease of $13,854 (12.3%) from
$112,603 during the same period in 1997. This decrease was mainly due
to the decrease in interest income earned by the Company, during period
in 1997, from short-term investment of the Company's available cash
which is currently being utilized to decrease the Company's principal on
its credit line, thereby minimizing its interest expense.
Depreciation, depletion and amortization expense increased to $239,711
from $69,285, an increase of $170,426 (246%) for the quarter ended March
31, 1998, as compared to 1997. This increase in expense can be
attributed to the increase in the overall property, plant and equipment
owned by the Company.
General and administration expenses increased by $93,394, or 31.7%, from
$295,041 for the quarter ended March 31, 1997 to $388,435 for the same
period in 1998. Legal and accounting expense increased to $187,692 for
the period, compared to $134,424 for the quarter in 1997, a $53,268
(39.6%) increase. This increase can be attributed to an increase in
litigation costs during the first quarter of 1998. Marketing expense
for the quarter ended March 31, 1998, decreased $50,546 or 44.4%, to
$63,265, compared to $113,811 for the same period in 1997. 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.
The Company periodically assesses the value of significant proved and
unproved properties and charges impairments of value to expense. During
the first quarter of 1998, $100,000 was recorded as an impairment loss
based on this assessment. There were no such impairment losses recorded
in first quarter of 1997.
During the first half of 1997, the Company obtained a credit line from a
major commercial bank, which it used to purchase the California assets
of Vernon E. Faulconer, Inc. Because of borrowings pursuant to this
credit line, interest expense increased to $68,940 for the quarter ended
March 31, 1998 from $1,219 for the same period in 1997.
CAPITAL RESOURCES AND LIQUIDITY:
At March 31, 1998, the Company had current assets totaling $4,190,088
and current liabilities totaling $4,140,584, a $49,504 working capital
surplus. Management believes that the Company has sufficient liquidity
for the short term.
OPERATING ACTIVITIES. For the quarter ended March 31, 1998, cash
provided by operating activities totaled $285,799 compared to $556,075
provided by operating activities for the same period in 1997. This
decrease in cash provided can be mainly attributed to an increase in
accounts receivable and deferred revenues for the period in 1998 when
compared to 1997.
INVESTING ACTIVITIES. Net cash used by investing activities, primarily
in capital acquisitions of oil and gas properties, amounted to $342,662
for the period, compared to $503,755 used by investing activities for
the same period in 1997. The decrease in cash used can be primarily
<PAGE> 10
attributable to the decrease in drilling which occurred during the
period in 1998 when compared the period in 1997 due to weather delays
experienced in the region.
FINANCING ACTIVITIES. For the quarter ended March 31, 1998, net cash
used by financing activities was $387,261, primarily for principal
reduction of the Company's line of credit, compared to cash used by
financing activities for the same period in 1997 of $320,922. This
increase in net cash used was mainly due to the difference in principal
reduction of the Company's line of credit.
PART II
Item 2. Changes in Securities
During the first quarter of 1998, 3,750 shares of the Company's Common
Stock were issued to one holder of the Company's previously issued
Series A Preferred Convertible Stock, pursuant to the shareholder's
exercise of her 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 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 shareholder's conversion of
her Preferred shares to Common might be considered a sale of securities,
the 1997 issuance of Common pursuant to exercise of the holder's
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.
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.
<PAGE> 11
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
1998.
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 15, 1998 /s/ Donald H. Hosmer
--------------- ------------------------------------
Donald H. Hosmer, President and
Chief Executive Officer
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1998
<CASH> $ 1,587,877
<SECURITIES> $ 0
<RECEIVABLES> $ 2,277,016
<ALLOWANCES> $ 0
<INVENTORY> $ 0
<CURRENT-ASSETS> $ 4,190,088
<PP&E> $11,623,173
<DEPRECIATION> $ 2,110,812
<TOTAL-ASSETS> $13,702,449
<CURRENT-LIABILITIES> $ 4,140,584
<BONDS> 0
$ 19,100
$ 200,000
<COMMON> $ 8,706,273
<OTHER-SE> $ 2,863,508
<TOTAL-LIABILITY-AND-EQUITY> $13,702,449
<SALES> $ 1,393,030
<TOTAL-REVENUES> $ 1,491,779
<CGS> $ 334,800
<TOTAL-COSTS> $ 1,313,903
<OTHER-EXPENSES> $ 0
<LOSS-PROVISION> $ 0
<INTEREST-EXPENSE> $ 68,940
<INCOME-CONTINUING> $ 106,295
<DISCONTINUED> $ 0
<EXTRAORDINARY> $ 0
<CHANGES> $ 0
<NET-INCOME> $ 106,295
<EPS-PRIMARY> $ 0.03
<EPS-DILUTED> $ 0.03
