[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 September 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 __________, 1998, there were a total of _____________ shares of
registrant's Common Stock outstanding.
<PAGE> 2
PART I
Item 1. Financial Statements
<TABLE>
<CAPTION>
ROYALE ENERGY, INC.
BALANCE SHEETS
September 30, December 31,
1998 1997
(Unaudited) (Audited)
--------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $873,889 $2,032,001
Accounts receivable 2,720,632 1,823,388
Receivables from related parties 74,382 34,218
Note receivable 119,196 159,024
Other current assets 60,300 136,459
---------- -----------
Total current assets 3,848,399 4,185,090
---------- -----------
Oil and gas properties, at cost, net of
reserve for impairment of $1,008,938
and $728,938, respectively
(successful efforts method) 14,190,307 11,098,362
Equipment and fixtures 328,205 282,153
---------- -----------
14,518,512 11,380,515
Less accumulated depreciation,
depletion and amortization 2,643,687 1,871,101
---------- -----------
11,874,825 9,509,414
---------- -----------
Other assets:
Receivable from related parties, net 0 9,652
----------- -----------
0 9,652
----------- -----------
TOTAL ASSETS $15,723,224 13,704,156
============= =============
</TABLE>
(See Notes to Financial Statements)
<Page 3>
<TABLE>
<CAPTION>
ROYALE ENERGY, INC.
BALANCE SHEETS
September 30, December 31,
1998 1997
(Unaudited) (Audited)
-------------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $2,156,131 $2,112,756
Deferred revenue from turnkey
drilling 2,640,266 1,735,826
------------- ----------
Total current liabilities 4,796,397 3,848,582
------------- ----------
Long-Term Debt, net of current portion 4,350,000 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 3,813,960 and
3,864,300 shares, respectively 8,320,029 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 (1,774,802) (2,782,299)
-------------- -----------
Total paid in capital and
accumulated deficit 6,745,227 6,093,974
Less cost of treasury stock,
37,500 and 37,500 shares,
respectively (187,500) (187,500)
------------- -----------
Total Stockholders' equity 6,557,727 5,906,474
-------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $15,723,224 $13,704,156
============= ==========
</TABLE>
(See Notes to Financial Statements)
<Page 4>
<TABLE>
<CAPTION>
ROYALE ENERGY, INC.
STATEMENTS OF INCOME
Nine Months Ended
September 30,
------------------------------
1998 1997
(Unaudited) (Unaudited)
------------- -----------
<S> <C> <C>
Revenues:
Oil and gas sales $3,323,012 $1,763,439
Gas distribution 0 46,925
Turnkey drilling 2,600,384 4,264,423
Supervisory fees and other 326,356 303,433
-------------- ----------
Total revenues 6,249,752 6,378,220
-------------- ----------
Costs and expenses:
General and administrative 1,247,903 1,061,442
Turnkey drilling and development 1,126,961 2,276,000
Cost of gas distribution sales 0 23,741
Lease operating 826,388 395,647
Lease impairment 280,000 200,000
Legal and accounting 418,630 465,633
Marketing 302,191 344,044
Depreciation, depletion and
amortization 772,586 398,161
------------- ----------
Total costs and expenses 4,974,659 5,164,668
------------- ----------
Income from operations 1,275,093 1,213,552
Other expense:
Interest 239,572 86,903
------------- ----------
Income before income tax expense 1,035,521 1,126,649
Income tax expense 28,020 87,352
------------- ----------
Net income $1,007,501 $1,039,297
========== ==========
Diluted earnings per share $0.26 $0.25
========== ==========
Basic earnings per share $0.27 $0.27
========== ==========
</TABLE>
(See Notes to Financial Statements)
<Page 5>
<TABLE>
<CAPTION>
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
------------------------------
1998 1997
(Unaudited) Unaudited)
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $1,007,501 $1,039,297
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation, depletion and
amortization 772,586 398,161
Loss on impairment of assets 280,000 200,000
(Increase) decrease in:
Accounts receivable (897,244) (64,122)
Receivable from related parties (40,164) (7,876)
Prepaid expenses and other
current assets 76,159 85,799
Increase (decrease) in:
Accounts payable and accrued expenses 43,375 170,762
Deferred revenues - DWI 904,440 (312,414)
---------- -----------
Net Cash Provided by
Operating Activities 2,146,653 1,509,607
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and
gas properties (3,371,949) (5,258,718)
Other capital expenditures (46,052) (23,339)
----------- -----------
Net Cash Used by Investing
Activities ($3,418,001) ($5,282,057)
----------- -------------
</TABLE>
(See Notes to Financial Statements)
<PAGE 6>
<TABLE>
<CAPTION>
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
-------------------------
1998 1997
(Unaudited) (Unaudited)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Decrease in receivable from related
parties, net $9,652 3,535
Decrease in notes receivable 39,828 19,702
Increase in long-term debt 450,000 3,400,000
Principal payments on notes payable 0 (300,000)
Treasury stock purchased (386,244) (94,500)
------------ ------------
Net Cash Provided by Financing
Activiti es 113,236 3,028,737
------------ ------------
Net Decrease in Cash and Cash
Equivalents (1,158,112) (743,713)
Cash at Beginning of Year 2,032,001 2,595,444
------------ ------------
Cash at End of Period $873,889 $1,851,731
=========== ============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $239,572 $62,648
=========== ============
Cash paid for taxes $28,020 $87,352
=========== ============
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 nine 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>
Nine Months Ended September 30, 1998
--------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
<S> <C> <C> <C>
Basic EPS
Income available
to common stockholders $1,007,501 3,797,636 $ .27
-------
Effect of dilutive
securities stock options - 128,498
---------- ---------
Diluted EPS
Income available to common
stockholders $1,007,501 3,926,134 $ .26
---------- --------- -------
Nine Months Ended September 30, 1997
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------- ----------
Basic EPS
Income available to
common stockholders $1,039,297 3,853,569 $ .27
------
Effect of dilutive
securities stock options - 226,321
----------- ----------
Diluted EPS
Income available to
common stockholders $1,039,297 4,079,890 $ .25
----------- ---------- -----
</TABLE>
<Page 8>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
For the first nine months of 1998, the Company had a net operating profit of
$1,275,093, a $61,541 or 5.1% increase over the net operating profit in the
first nine months of 1997 of $1,213,552. The Company's management attribute
this improvement to increased revenues from oil and gas sales. For the nine
months ended September 30, 1998, the Company reported a net profit of
$1,007,501, compared to the net profit of $1,039,297 for the same period in
1997, a $31,796 or 3.1% decrease. Total revenues for the period were
$6,249,752, which was a decrease of $128,468 or 2%, when compared to the
period in 1997. The decrease in total revenues can be primarily attributable
to the decrease in revenues from turnkey drilling during the period when
compared to 1997.
Turnkey drilling revenues for the nine months ended September 30, 1998 were
$2,600,384 which were offset by drilling and development costs of $1,126,961.
For the same period in 1997, turnkey drilling revenues were $4,264,423, while
drilling and development costs were $2,276,000. This represents a decrease in
revenues of $1,664,039 or 39% and an decrease in costs of $1,149,039 or
50.5%. The decrease in drilling revenues and costs were primarily due to
drilling of ten wells during the first nine months of 1997 versus the
drilling of five wells during the same period in 1998. The Company
experienced a delay in the drilling of its wells during the third quarter of
1998 due to the processing and analyzing of its seismic data obtained during
the fourth quarter of 1997 and first half of 1998. The Company has shifted
the drilling of a number of its wells to the fourth quarter of 1998.
Oil and gas revenues for the nine months ended September 30, 1998 were
$3,323,012 compared to $1,763,439 for the same period in 1997, which
represents a $1,559,573 or 88.4% increase. This increase in revenues was
mainly due to the increase in the Company's overall natural gas 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 $430,741, or 109%, to $826,388 for the nine
months ended September 30, 1998, from $395,647 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 nine months of 1998
when compared to the same period in 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 $326,356 for the nine
months ended September 30, 1998, an increase of $22,923 (7.6%) from $303,433
during the same period in 1997.
<Page 9>
This increase was mainly due to the increase in the number of wells the
Company operated during the first nine months of 1998 when compared to the
first nine months of 1997.
Depreciation, depletion and amortization expense increased to $772,586 from
$398,161, an increase of $374,425 (94%) for the nine months ended September
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 $186,461, or 17.6%, from
$1,061,442 for the nine months ended September 30, 1997 to $1,247,903 for the
same period in 1998. Legal and accounting expense decreased to $418,630 for
the period, compared to $465,633 for the first nine months of 1997, a $47,003
(10.1%) decrease. This decrease can be attributed to a decrease in
litigation costs during the third quarter of 1998. Marketing expense for the
nine months ended September 30, 1998, decreased $41,853 or 12.2%, to
$302,191, compared to $344,044 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 nine months of 1998, $280,000 was recorded as an impairment loss based
on this assessment. For the period in 1997, based on this assessment,
$200,000 was recorded as an impairment loss.
During the first half of 1997, the Company extended an existing 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 $239,572 for the nine months ended
September 30, 1998 from $86,903 for the same period in 1997.
CAPITAL RESOURCES AND LIQUIDITY:
At September 30, 1998, the Company had current assets totaling $3,848,399 and
current liabilities totaling $4,796,397, a $947,998 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 nine months ended September 30, 1998, cash
provided by operating activities totaled $2,146,653 compared to $1,509,607
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 due to the decrease in drilling
for the period in 1998.
<Page 10>
INVESTING ACTIVITIES. Net cash used by investing activities, primarily in
capital acquisitions of oil and gas properties, amounted to $3,418,001 for
the period, compared to $5,282,057 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. and to the delay in drilling during
the period in 1998.
FINANCING ACTIVITIES. For the nine months ended September 30, 1998, net
cash provided by financing activities was $113,236, compared to cash provided
by financing activities for the same period in 1997 of $3,028,737. 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 72,150 shares for $295,262 with an average share price of
$4.09.
YEAR 2000 PREPAREDNESS
The Company believes that it is prepared for the challenges to management
information and other computer systems presented by Year 2000 ("Y2K"). The
majority of computer software used by the Company are Off the Shelf
applications, which have released updates to correct for the Y2K issue.
The Off the Shelf software updates have been implemented on or after their
originally scheduled update cycle, and therefore did not cause the Company
any incremental expense. The Company's major "Off the Shelf" systems include
its accounting system and its seismic, geologic, and engineering software.
The Company has also recently implemented a proprietary customer relations
system which was developed internally, and which has been written within the
last 12 months and were designed to handle dates through 12/31/9999. This
application was were not created to fix an existing Y2K problem, but rather
to accomplish new tasks which the Company had previously not performed.
The Company has been informed and believes that all outside systems and
vendors with which the company communicates, have implemented corrective
procedures, or are using non-electronic data interchange, thereby allowing
the Company to correctly interface to internal systems.
In short, the Company believes that there will be no significant disruption
of its business or its financial condition, resulting from the turn of the
Millennium.
<PAGE 11>
PART II
Item 1. Legal Proceedings
In May 1998 the Company settled a suit filed against the Company and its
chairman, its president, and other defendants (Lucille F. Beigel, et al., v.
Royale Energy, Inc., et al., San Diego County, California, Superior Court No.
710630). The plaintiffs in that case had alleged fraud, breach of contract,
and related claims in connection with investments by direct working interest
owners and one Company shareholder who invested primarily in wells developed
in Texas between 1989 and 1994. The parties to the suit entered into an
agreement to compromise and settle the dispute and end the litigation. The
agreement, which settled the dispute and ended the litigation, required the
terms of the settlement to remain confidential. Management believes that the
settlement did not have a material adverse effect on the Company's operations
or financial condition.
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 no reports on Form 8-K during the third quarter of 1998.
<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 13, 1998 /s/ Donald H. Hosmer
-------------------- ------------------------------
Donald H. Hosmer, President and
Chief Executive Officer
