[DESCRIPTION] FORM 10-QSB
<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, 1998 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: 619-881-2800
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 July 31, 1998, there were a total of 3,857,721 shares of registrant's
Common Stock outstanding.
<PAGE> 2<PAGE>
PART I
Item 1. Financial Statements
ROYALE ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited) (Audited)
-------------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $1,064,191 $2,032,001
Accounts receivable 3,193,110 1,823,388
Receivables from related parties 56,802 34,218
Note receivable 132,624 159,024
Other current assets 76,224 136,459
-------------------- -----------
Total current assets $4,522,951 $4,185,090
-------------------- -----------
Oil and gas properties, at cost,
net of reserve for
impairment of $928,938 and
$728,938, respectively
(successful efforts method) 13,005,426 11,098,362
Equipment and fixtures 303,087 282,153
-------------------- -------------
13,308,513 11,380,515
Less accumulated depreciation,
depletion and amortization 2,359,992 1,871,101
-------------------- -------------
10,948,521 9,509,414
-------------------- -------------
Other assets:
Receivable from related
parties, net 0 9,652
-------------------- -------------
0 9,652
-------------------- -------------
TOTAL ASSETS $15,471,472 13,704,156
_________________ _____________
</TABLE>
(See Notes to Financial Statements)
<PAGE> 3
ROYALE ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(Unaudited) (Audited)
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $3,214,949 $2,112,756
Deferred revenue from turnkey
drilling 1,985,600 1,735,826
------------- -----------
Total current liabilities 5,200,549 3,848,582
------------- -----------
Long-Term Debt, net of current portion 3,800,000 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
3,834,900 and 3,864,300
shares, respectively 8,548,530 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 (2,108,064) (2,782,299)
------------- -----------
Total paid in capital and
accumulated deficit 6,640,466 6,093,974
Less Cost of treasury stock,
37,500 and 37,500 shares,
respectively (188,643) (187,500)
------------- -----------
Total Stockholders' equity 6,451,823 5,906,474
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $15,471,472 $13,704,156
_____________ ___________
</TABLE>
(See Notes to Financial Statements)
<PAGE> 4
ROYALE ENERGY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Six Months Ended
June 30,
------------------------------------
1998 1997
(Unaudited) (Unaudited)
-------------------- -----------
<S> <C> <C>
Revenues:
Oil and gas sales $2,183,887 $916,123
Gas distribution 0 46,925
Turnkey drilling 2,121,902 2,907,923
Supervisory fees and other 211,301 192,857
-------------- -----------
Total revenues 4,517,090 4,063,828
-------------- -----------
Costs and expenses:
General and administrative 827,462 668,732
Turnkey drilling and
development 1,052,706 1,675,291
Cost of gas distribution sales 0 23,741
Lease operating 574,021 209,826
Lease impairment 200,000 100,000
Legal and accounting 362,979 301,050
Marketing 188,227 247,313
Depreciation, depletion
and amortization 488,891 237,054
----------- -------------
Total costs and
expenses 3,694,286 3,463,007
----------- -------------
Income from operations 822,804 600,821
Other expense:
Interest 143,524 23,300
----------- -------------
Income before income tax expense 679,280 577,521
Income tax expense 5,041 61,150
----------- -------------
Net income $674,239 $516,371
=========== =============
Diluted earnings per share $0.17 $0.13
=========== =============
Basic earnings per share $0.18 $0.13
=========== =============
</TABLE>
(See Notes to Financial Statements)
<PAGE> 5
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1998 1997
(Unaudited) (Unaudited)
--------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $674,239 $ 516,371
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation, depletion and
amortization 488,891 237,054
Loss on impairment of assets 200,000 100,000
(Increase) decrease in:
Accounts receivable (1,369,722) 1,321,024
Receivable from
related parties (22,584) (8,716)
Prepaid expenses and
other current assets 60,235 125,036
Increase (decrease) in:
Accounts payable and
accrued expenses 1,102,193 (431,256)
Deferred revenues - DWI 249,774 (596,404)
------------- ------------
Net Cash Provided (Used)
by Operating Activities 1,383,026 1,263,109
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil
and gas properties (2,107,068) (4,805,903)
Other capital expenditures (20,934) (14,691)
------------- ------------
Net Cash Used by Investing
Activities ($2,128,002) (4,820,594)
-------------- ------------
</TABLE>
(See Notes to Financial Statements)
<PAGE> 6
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1998 1997
(Unaudited) (Unaudited)
--------------- ------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in receivable from
related parties, net $9,652 3,535
Decrease in notes receivable 26,400 10,909
Increase in long-term debt 0 3,000,000
Principal payments on notes
payable (100,000) (300,000)
Treasury stock purchased (158,886) (63,000)
------------ ------------
Net Cash Provided (Used)
by Financing Activities (222,834) 2,651,444
------------ ------------
Net Decrease in Cash and Cash
Equivalents (967,810) (906,041)
Cash at Beginning of Year 2,032,001 2,595,444
------------- ------------
Cash at End of Period $1,064,191 $1,689,403
============= ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $143,524 $1,219
============= ============
Cash paid for taxes $5,041 $61,150
============= ============
NONCASH TRANSACTIONS:
Series AA Preferred Stock
exchanged for common stock $0 $260,000
============= ============
Series A Preferred Stock
exchanged for common stock $30,000 $10,000
============= ============
</TABLE>
(See Notes to Financial Statements)
<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 six 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>
Six Months Ended June 30, 1998
------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Income available to
common stockholders $674,239 3,832,629 $ .18
-------
Effect of dilutive
securities stock
options - 178,599
--------- ---------
Diluted EPS
Income available to
common stockholders $674,239 4,011,228 $ .17
--------- ---------- -------
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30, 1997
------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Basic EPS
Income available to
common stockholders $516,371 3,845,062 $ .13
-------
Effect of dilutive
securities stock
options - 179,397
--------- ----------
Diluted EPS
Income available to
common stockholders $516,371 4,024,459 $ .13
--------- ---------- -------
</TABLE>
<PAGE> 8
PART II.
Item 1. Legal Proceedings
On May 15, 1998, the Company settled the case of Lucille f. Biegel, et
al., v. Royale Energy, et al., San Diego, California, Superior Court, No.
710630. This case had been filed in May 1997 against the Company, its
chairman, its president, and other defendants alleging fraud, breach of
contract, and related claims by several direct working interest owners and
one Company shareholder who invested primarily in wells drilled by the
Company in Texas between 1989 and 1994. The settlement agreement requires
its terms to remain confidential. The Company believes that the settlement
terms have no material adverse effect on the Company's financial position.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the first six months of 1998, the Company achieved a net operating profit
of $822,804, a $221,983 or 37% increase over the net operating profit in the
first six months of 1997 of $600,821. The Company's management attributes
this improvement to increased revenues from oil and gas sales. For the six
months ended June 30, 1998, the Company reported a net profit of $674,239,
compared to the net profit of $516,371 for the same period in 1997, a
$157,868 or 30.6% increase. Total revenues for the period were $4,517,090,
which was an increase of $453,262 or 11.2%, when compared to the period in
1997. The increase in total revenues is primarily attributable to the
increase in revenues from oil and gas sales.
Turnkey drilling revenues for the six months ended June 30, 1998 were
$2,121,902 which were offset by drilling and development costs of $1,052,706.
For the same period in 1997, turnkey drilling revenues were $2,907,923, while
drilling and development costs were $1,675,291. This represents a decrease in
revenues of $786,021 or 27% and an decrease in costs of $622,585 or 37.2%.
The decrease in drilling revenues and costs were primarily due to drilling of
seven wells during the first six months of 1997 versus the drilling of five
wells during the same period in 1998.
Oil and gas revenues for the six months ended June 30, 1998 were $2,183,887
compared to $916,123 for the same period in 1997, which represents a
$1,267,764 or 138% 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 $364,195, or 174%, to $574,021 for the six
months ended June 30, 1998, from $209,826 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 half of 1998 when
compared to the first half 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.
The aggregate of supervisory fees and other income was $211,301 for the six
months ended June 30, 1998, an increase of $18,444 (9.6%) from $192,857
during the same period in 1997. This
<PAGE> 9
increase was mainly due to the increase in the number of wells the Company
operated during the first half of 1998 when compared to the first half of
1997.
Depreciation, depletion and amortization expense increased to $488,891 from
$237,054, an increase of $251,837 (106%) for the six months ended June 30,
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 $158,730, or 23.7%, from
$668,732 for the six months ended June 30, 1997 to $827,462 for the same
period in 1998. Legal and accounting expense increased to $362,979 for the
period, compared to $301,050 for the first six months of 1997, a $61,929
(20.6%) increase. This increase can be attributed to an increase in
litigation costs during the first half of 1998. Marketing expense for the
six months ended June 30, 1998, decreased $59,086 or 23.9%, to $188,227,
compared to $247,313 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 six months of 1998, $200,000 was recorded as an impairment loss based
on this assessment. For the same period in 1997, based on this assessment,
$100,000 was recorded as an impairment loss.
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 $143,524 for the six months ended June
30, 1998 from $23,300 for the same period in 1997.
CAPITAL RESOURCES AND LIQUIDITY:
At June 30, 1998, the Company had current assets totaling $4,522,951 and
current liabilities totaling $5,200,549, a $677,598 working capital deficit.
The primary reason for this deficit is the Company's obligation to complete
wells on behalf of investors who bought fractional working interests from the
Company. The Company records these obligations as unexpended drilling funds
until the drilling projects are completed. For the industry as a whole, a
working capital deficit is not uncommon. Management believes that the Company
has sufficient liquidity for the short term.
OPERATING ACTIVITIES. For the six months ended June 30, 1998, cash provided
by operating activities totaled $1,383,026 compared to $1,263,109 provided by
operating activities for the same period in 1997. This increase in cash
provided can be mainly attributed to an increase in deferred revenues for the
period in 1998 when compared to 1997.
<PAGE> 10
INVESTING ACTIVITIES. Net cash used by investing activities, primarily in
capital acquisitions of oil and gas properties, amounted to $2,128,002 for
the period, compared to $4,820,594 used by investing activities for the same
period in 1997. The decrease in cash used can be primarily attributable to
the Company's acquisition, during the period in 1997, of the oil and gas
properties from Vernon E. Faulconer, Inc.
FINANCING ACTIVITIES. For the six months ended June 30, 1998, net cash used
by financing activities was $222,834, compared to cash provided by financing
activities for the same period in 1997 of $2,651,444. The primary reason for
the difference was due to the increase in long term debt due to the Faulconer
property acquisition during the period in 1997. In addition, since April
1998, the Company began repurchasing its own common stock in order to retire
it. For the period, the Company repurchased approximately 33,150 shares for
$157,512 with an average share price of $4.75.
PART II
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.
<PAGE> 11
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 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: August 14, 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> JUN-30-1998
<CASH> $ 1,064,191
<SECURITIES> $ 0
<RECEIVABLES> $ 3,382,536
<ALLOWANCES> $ 0
<INVENTORY> $ 0
<CURRENT-ASSETS> $ 4,522,951
<PP&E> $13,308,513
<DEPRECIATION> $ 2,359,992
<TOTAL-ASSETS> $15,471,472
<CURRENT-LIABILITIES> $ 5,200,549
<BONDS> 0
$ 19,100
$ 200,000
<COMMON> $ 8,548,530
<OTHER-SE> $ 2,296,707
<TOTAL-LIABILITY-AND-EQUITY> $15,471,472
<SALES> $ 4,305,789
<TOTAL-REVENUES> $ 4,517,090
<CGS> $ 1,626,727
<TOTAL-COSTS> $ 3,694,286
<OTHER-EXPENSES> $ 0
<LOSS-PROVISION> $ 0
<INTEREST-EXPENSE> $ 143,524
<INCOME-CONTINUING> $ 674,239
<DISCONTINUED> $ 0
<EXTRAORDINARY> $ 0
<CHANGES> $ 0
<NET-INCOME> $ 674,239
<EPS-PRIMARY> $ 0.18
<EPS-DILUTED> $ 0.17
