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, 1999
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 October 31, 1999, there were a total of 3,808,613 shares of
registrant's Common Stock outstanding.
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<PAGE>
PART I
Item 1. Financial Statements
ROYALE ENERGY, INC.
BALANCE SHEETS
September 30, December 31,
1999 1998
(Unaudited) (Audited)
------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $853,366 $1,016,306
Accounts receivable 1,903,806 1,531,259
Receivables from related parties 67,439 56,563
Note receivable 108,150 118,149
Other current assets 476,927 169,103
------------ -----------
Total current assets 3,409,688 2,891,380
------------ ------------
Oil and gas properties, at cost
(successful efforts method) 16,899,269 14,575,667
Equipment and fixtures 393,245 355,254
------------- -----------
17,292,514 14,930,921
Less accumulated depreciation,
depletion and amortization 4,395,911 3,333,094
-------------- ------------
12,896,603 11,597,827
--------------- ------------
Other assets:
Other capitalized costs, net 695,406 927,208
-------------- -------------
Total Other Assets 695,406 927,208
-------------- --------------
TOTAL ASSETS $17,001,697 $15,416,415
-------------- --------------
-------------- --------------
(See Notes to Financial Statements)
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<PAGE>
ROYALE ENERGY, INC.
BALANCE SHEETS
September 30, December 31,
1999 1998
(Unaudited) (Audited)
---------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $4,422,527 $1,249,127
Deferred revenue from turnkey drilling 1,264,917 2,834,976
--------------- ----------------
Total current liabilities 5,687,444 4,084,103
--------------- ----------------
Long-Term Debt, net of current portion 5,000,000 5,000,000
Redeemable preferred stock:
Series A convertible preferred stock,
no par value, authorized 259,250 shares,
issued and outstanding 9375 and 9375,
respectively 19,100 19,100
-------------- ----------
Stockholders' Equity:
Common stock, no par value, authorized
10,000,000 shares, issued and outstanding
3,808,613 and 3,808,613 shares,
respectively 8,240,605 8,240,605
Series AA preferred stock, no par value,
authorized 147,500 shares, issued and
outstanding 43,750 and 43,750,
respectively 175,000 175,000
Accumulated deficit (2,025,952) (2,007,893)
-------------- -------------
Total paid in capital and accumulated
deficit 6,389,653 6,407,712
Less Cost of treasury stock, 37,500 and
37,500 shares, respectively (94,500) (94,500)
---------------- --------------
Total Stockholders' equity 6,295,153 6,313,212
---------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,001,697 $15,416,415
-------------- --------------
-------------- --------------
(See Notes to Financial Statements)
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<PAGE>
ROYALE ENERGY, INC.
STATEMENTS OF INCOME
Nine Months Ended
September 30,
------------------------
1999 1998
(Unaudited) (Unaudited)
------------ -----------
Revenues:
Oil and gas sales $2,096,515 $3,323,012
Turnkey drilling 3,776,082 2,600,384
Supervisory fees and other 414,393 326,356
------------ ------------
Total revenues 6,286,990 6,249,752
------------ ------------
Costs and expenses:
General and administrative 1,196,573 1,247,903
Turnkey drilling and development 2,446,527 1,126,961
Lease operating 708,067 826,388
Lease impairment 0 280,000
Legal and accounting 117,370 418,630
Marketing 257,926 302,191
Depreciation, depletion and amortization 1,292,436 772,586
---------- ----------
Total costs and expenses 6,018,899 4,974,659
---------- ----------
Income from operations 268,091 1,275,093
Other expense:
Interest 286,150 239,572
------------ ----------
Income (loss) before income tax expense (18,059) 1,035,521
Income tax expense 0 28,020
------------ ----------
Net income (loss) ($18,059) $1,007,501
------------- ----------
------------- ----------
Diluted earnings per share ($0.00) $0.26
------------- ----------
------------- ----------
Basic earnings per share ($0.00) $0.27
------------- ----------
------------- ----------
(See Notes to Financial Statements)
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<PAGE>
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
--------------------------
1999 1998
(Unaudited) (Unaudited)
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($18,059) $1,007,501
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 1,292,436 772,586
Loss on impairment of assets 0 280,000
(Increase) decrease in:
Accounts receivable (372,547) (897,244)
Receivable from related parties (10,876) (40,164)
Prepaid expenses and other current
assets (307,824) 76,159
Increase (decrease) in:
Accounts payable and accrued expenses 3,173,400 43,375
Deferred revenues - DWI (1,570,059) 904,440
------------ ----------
Net Cash Provided by Operating Activities 2,186,471 2,146,653
--------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties (2,321,419) (3,371,949)
Other capital expenditures (37,991) (46,052)
--------------- -----------
Net Cash Used by Investing Activities ($2,359,410) (3,418,001)
--------------- -----------
(See Notes to Financial Statements)
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<PAGE>
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
------------------
1999 1998
(Unaudited) (Unaudited)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in receivable from related
parties, net $0 $9,652
Decrease in notes receivable 9,999 39,828
Increase in long-term debt 0 450,000
Treasury stock purchased 0 (386,244)
----------- -----------
Net Cash Used by Financing Activities (9,999) (113,236)
----------- -----------
Net Decrease in Cash and Cash Equivalents (162,940) (1,158,112)
Cash at Beginning of Year 1,016,306 2,032,001
----------- -----------
Cash at End of Period $853,366 $873,889
------------ ------------
------------ ------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $286,150 $239,572
------------ ------------
------------ ------------
Cash paid for taxes $0 $28,020
------------ ------------
------------ ------------
NONCASH TRANSACTIONS:
Series A Preferred Stock exchanged
for common stock $0 $30,000
------------ ------------
------------ ------------
(See Notes to Financial Statements)
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<PAGE>
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:
Nine Months Ended September 30, 1999
------------------------------------
Income Shares Pre-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Basic EPS
Income available to common
stockholders ($18,059) 3,808,613 ($ .00)
-------
Effect of dilutive securities
stock options - 294,883
--------- ---------
Diluted EPS
Income available to common
stockholders ($18,059) 4,103,496 ($ .00)
----------- --------- -------
Nine Months Ended September 30, 1998
------------------------------------
Income Shares Pre-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
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
------------ ----------- ------
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
During the first nine months of 1999, the Company's total revenues were
$6,286,990, a $37,238 or 0.60% increase from the total revenues in the first
nine months of 1998 of $6,249,752. This increase in total revenues can be
attributed to an increase in turnkey drilling during the period in 1999. For
the first nine months of 1999, the Company realized a net operating profit of
$268,091, a $1,007,002 or 79% decrease over the net operating profit in the
first nine months of 1998 of $1,275,093. For the nine months ended September
30, 1999, the Company reported a net loss of $18,059, compared to the net
profit of $1,007,501 for the same period in 1998, a $1,025,560 or 102%
decrease. The Company's management attribute this decrease in operating and
net profit to a decrease in revenues from oil and gas sales
Turnkey drilling revenues for the nine months ended September 30, 1999 were
$3,776,082 which were offset by drilling and development costs of $2,446,527.
For the same period in 1998, turnkey drilling revenues were $2,600,384, while
drilling and development costs were $1,126,961. This represents an increase
in revenues of $1,175,698 or 45.2% and an increase in costs of $1,319,566 or
117%. The increase in drilling revenues and costs in 1999 were primarily
due to the drilling of eleven wells during the first nine months of 1999
versus the drilling of five wells during the same period in 1998.
Oil and gas revenues for the nine months ended September 30, 1999 were
$2,096,515 compared to $3,323,012 for the same period in 1998, which
represents a $1,226,497 or 36.9% decrease. This decrease in revenues was
mainly due to a decrease in the price received for natural gas and lower
production during the period in 1999, which can be primarily attributable to
field delays in placing into production a number of successful wells drilled
by the Company.
The Company's oil and gas lease operating expenses decreased by $118,321, or
14.3%, to $708,067 for the nine months ended September 30, 1999, from
$826,388 for the same period in 1998. The increased costs in 1998 can be
attributed the Company's installation of dehydrating equipment on many of
its natural gas wells to increase efficiencies within its transportation
system.
The aggregate of supervisory fees and other income was $414,393 for the nine
months ended September 30, 1999, an increase of $88,037 (27%) from $326,356
during the same period in 1998. This increase was mainly due to an increase
in fees received, during the period in 1999, from new pipeline and
compressors placed in service during the year in 1998.
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<PAGE>
Depreciation, depletion and amortization expense increased to $1,292,436 from
$772,586, an increase of $519,850 (67.3%) for the nine months ended September
30, 1999, as compared to 1998. This increase in expense can be attributed to
the increase in the total of oil and gas assets owned by the Company.
General and administration expenses decreased by $51,330, or 4.1%, from
$1,247,903 for the nine months ended September 30, 1998 to $1,196,573 for the
same period in 1999. Legal and accounting expense decreased to $117,370 for
the period, compared to $418,630 for the first nine months of 1998, a
$301,260 (72%) decrease. This decrease can be attributed to lower litigation
costs during the period in 1999. Marketing expense for the nine months ended
September 30, 1999, decreased by $44,265 or 14.7%, to $257,926, compared to
$302,191 for the same period in 1998. 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. There were no such impairment losses recorded in first
nine months of 1999.
During the year in 1998, the Company extended an existing credit line from a
major commercial bank. Because of borrowings pursuant to this credit line,
interest expense increased to $286,150 for the nine months ended September
30, 1999 from $239,572 for the same period in 1998, a $46,578 or 19.4%
increase.
CAPITAL RESOURCES AND LIQUIDITY:
At September 30, 1999, the Company had current assets totaling $3,409,688 and
current liabilities totaling $5,687,444, a $2,277,756 working capital
deficit. The primary reason for this working capital deficit is an increase
in the Company's accounts payable due to drilling and completion of a greater
number of wells during the period in order to fulfill much of the Company's
drilling obligations on behalf of investors who bought fractional working
interests. 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, 1999, cash
provided by operating activities totaled $2,186,471 compared to $2,146,653
provided by operating activities for the same period in 1998. This increase
in cash provided can be mainly attributed to an increase in accounts payable
related to increased drilling activity for the period in 1999 when compared
to 1998.
INVESTING ACTIVITIES. Net cash used by investing activities, primarily in
capital acquisitions of oil and gas properties, amounted to $2,359,410 for
the first nine months of 1999, compared to $3,418,001 used by investing
activities for the same period in 1998. The decrease in cash used in 1999
can be primarily attributable to an increase in pipeline and dehydrating
equipment acquired during the period in 1998.
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<PAGE>
FINANCING ACTIVITIES. For the nine months ended September 30, 1999, net
cash provided by financing activities was $9,999, primarily from a decrease
in notes receivable, compared to cash provided by financing activities for
the same period in 1998 of $113,236. This decrease in net cash provided was
mainly due to the Company's repurchase of its own common stock in order to
retire it, during the period in 1998.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on August 19,1999.
At the meeting, the shareholders voted to re-elect each of the Company's
seven directors to serve until the 2000 annual meeting. The board of
directors and management had solicited proxies in favor of each of the
proposals and election of seven directors. No proxies were solicited in
opposition to any proposal nor opposing the nominees for director that were
recommended by the board, and the following seven directors were re-elected:
Harry E. Hosmer, Donald H. Hosmer, Stephen M. Hosmer, Rodney Nahama, Oscar
A. Hildebrandt, Gilbert C. L. Kemp, and George Watters. Each director was
re-elected by a vote of 2,768,515 for, 0 against, 15,700 not voting.
The shareholders also voted to approve the appointment of Brown, Armstrong,
Randall & Reyes as the Company's independent accountants, by a vote of
2,766,085 for, 6,200 against, 11,930 not voting.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
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<PAGE>
We filed no reports on Form 8-K during the third quarter of 1999.
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 15, 1999 /s/ Donald H. Hosmer
--------------------------
Donald H. Hosmer, President and
Chief Executive Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> $ 853,366
<SECURITIES> $ 0
<RECEIVABLES> $ 2,079,395
<ALLOWANCES> $ 0
<INVENTORY> $ 0
<CURRENT-ASSETS> $ 3,409,688
<PP&E> $17,292,514
<DEPRECIATION> $ 4,395,911
<TOTAL-ASSETS> $17,001,697
<CURRENT-LIABILITIES> $ 5,867,444
<BONDS> $ 0
$ 19,100
$ 175,000
<COMMON> $ 8,240,605
<OTHER-SE> $ 1,931,452
<TOTAL-LIABILITY-AND-EQUITY> $17,001,697
<SALES> $ 5,872,597
<TOTAL-REVENUES> $ 6,286,990
<CGS> $ 3,154,594
<TOTAL-COSTS> $ 6,018,899
<OTHER-EXPENSES> $ 0
<LOSS-PROVISION> $ 0
<INTEREST-EXPENSE> $ 286,150
<INCOME-PRETAX> $ (18,059)
<INCOME-TAX> $ 0
<INCOME-CONTINUING> $ (18,059)
<DISCONTINUED> $ 0
<EXTRAORDINARY> $ 0
<CHANGES> $ 0
<NET-INCOME> $ (18,059)
<EPS-BASIC> $ 0
<EPS-DILUTED> $ 0
</TABLE>
