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, 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 July 30, 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
June 30, December 31,
1999 1998
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents 581,836 $1,016,306
Accounts receivable 1,568,698 1,531,259
Receivables from related parties 57,137 56,563
Note receivable 112,150 118,149
Other current assets 156,808 169,103
---------- ----------
Total current assets 2,476,629 2,891,380
---------- ----------
Oil and gas properties, at cost
(successful efforts method) 15,984,484 14,575,667
Equipment and fixtures 393,245 355,254
---------- -----------
16,377,729 14,930,921
Less accumulated depreciation, depletion
and amortization 4,021,095 3,333,094
---------- ----------
12,356,634 11,597,827
---------- ----------
Other assets:
Other capitalized costs, net 772,673 927,208
---------- ----------
Total Other Assets 772,673 927,208
----------- ---------
TOTAL ASSETS $15,605,936 $15,416,415
(See Notes to Financial Statements)
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<PAGE>
ROYALE ENERGY, INC.
BALANCE SHEETS
June 30, December 31,
1999 1998
(Unaudited) (Audited)
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $2,887,733 $1,249,127
Deferred revenue from turnkey drilling 1,661,846 2,834,976
---------- ----------
Total current liabilities 4,549,579 4,084,103
---------- ----------
Long-Term Debt, net of current portion 4,800,000 5,000,000
Redeemable preferred stock:
Series A convertible preferred stock, no par
value, authorized 259,250 shares, issued and
outstanding 9,375 and 9,375, 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 (2,083,848) (2,007,893)
----------- -----------
Total paid in capital and accumulated deficit 6,331,757 6,407,712
Less Cost of treasury stock, 37,500 and 37,500
shares, respectively (94,500) (94,500)
----------- -----------
Total Stockholders' equity 6,237,257 6,313,212
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,605,936 $15,416,415
----------- -----------
----------- -----------
(See Notes to Financial Statements)
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<PAGE>
ROYALE ENERGY, INC.
STATEMENTS OF INCOME
Six Months Ended
June 30,
------------------------------
1999 1998
(Unaudited) (Unaudited)
----------------- -----------
Revenues:
Oil and gas sales $1,920,477 $2,183,887
Turnkey drilling 2,394,050 2,121,902
Supervisory fees and other 267,111 211,301
---------- ---------
Total revenues 3,951,638 4,517,090
---------- ---------
Costs and expenses:
General and administrative 784,885 827,462
Turnkey drilling and development 1,390,982 1,052,706
Lease operating 467,975 574,021
Lease impairment 0 200,000
Legal and accounting 169,083 362,979
Marketing 190,674 188,227
Depreciation, depletion and amortization 842,535 488,891
---------- --------
Total costs and expenses 3,846,134 3,694,286
---------- ---------
Income from operations 105,504 822,804
Other expense:
Interest 181,459 143,524
--------- ---------
Income (loss) before income tax expense (75,955) 679,280
Income tax expense 0 5,041
---------- ---------
Net income (loss) ($75,955) $674,239
-------------------------
-------------------------
Diluted earnings per share ($0.02) $0.17
-------------------------
-------------------------
Basic earnings per share ($0.02) $0.18
-------------------------
-------------------------
(See Notes to Financial Statements)
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<PAGE>
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
----------------------------
1999 1998
(Unaudited) (Unaudited)
----------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($75,955) $674,239
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 842,535 488,891
Loss on impairment of assets 0 200,000
(Increase) decrease in:
Accounts receivable (37,439) (1,369,722)
Receivable from related parties (574) (22,584)
Prepaid expenses and other current assets 12,295 60,235
Increase (decrease) in:
Accounts payable and accrued expenses 1,638,606 1,102,193
Deferred revenues - DWI (1,173,130) 249,774
----------------------------
----------------------------
Net Cash Provided by Operating Activities 1,206,338 1,383,026
------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties (1,408,816) (2,107,068)
Other capital expenditures (37,991) (20,934)
----------------------------
Net Cash Used by Investing Activities ($1,446,807) (2,128,002)
----------------------------
(See Notes to Financial Statements)
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<PAGE>
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
----------------------------
1999 1998
(Unaudited) (Unaudited)
----------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in receivable from related
parties, net $0 $9,652
Decrease in notes receivable 5,999 26,400
Increase in long-term debt 0 0
Principal payments on notes payable (200,000) (100,000)
Treasury stock purchased 0 (158,886)
--------- ---------
Net Cash Used by Financing Activities (194,001) (222,834)
---------- ---------
Net Decrease in Cash and Cash Equivalents (434,470) (967,810)
Cash at Beginning of Year 1,016,306 2,032,001
---------- ----------
Cash at End of Period $581,836 $1,064,191
---------------------------
---------------------------
SUPPLEMENTAL INFORMATION:
Cash paid for interest $181,459 $143,524
---------------------------
---------------------------
Cash paid for taxes $0 $5,041
---------------------------
---------------------------
NONCASH TRANSACTIONS:
Series A Preferred Stock exchanged
for common stock $0 $30,000
------------ ---------
------------ ---------
(See Notes to Financial Statements)
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<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. In the opinion of management, the accompanying unaudited financial
statements include all adjustments, consisting only of normally recurring
adjustments, necessary to present fairly the Company's financial position and
the results of its operations and cash flows for the periods presented. The
results of operations for the six month period is not, in management's
opinion, indicative of the results to be expected for a full year of
operations. It is suggested that these consolidated financial statements be
read in conjunction with the financial statements and the notes thereto
included in the Company's latest annual report.
2. Earnings Per Share (SFAS 128) - In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
128 (SFAS 128), "Earnings Per Share," which was adopted by the Company for the
year ended December 31, 1997. SFAS 128 replaces the presentation of primary
earnings per share with a presentation of basic earnings per share based upon
the weighted average number of common shares for the period. It also requires
dual presentation of basic and diluted earnings per share for companies with
complex structures.
Basic and diluted earnings per share are calculated as follows:
Six Months Ended June 30, 1999
----------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- ------------- ----------
Basic EPS
Income available to common stockholders
($ 75,955) 3,808,613 ($ .02)
---------
Effect of dilutive securities stock options
- 294,883
--------
Diluted EPS
Income available to common stockholders
($ 75,955) 4,103,496 ($ .02)
--------------- ------------- ---------
Six Months Ended June 30, 1998
Income Shares Per-Share
(Numerator) (Denominator) Amount
--------------- -------------- ---------
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
--------- ------------ ------
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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 six months of 1999, the Company's total revenues were
$3,951,638, a $565,452 or 12.5% decrease from the total revenues in the first
half of 1998 of $4,517,090. This decrease in total revenues can be attributed
to a decrease in oil and gas revenues during the period in 1999. For the
first half of 1999, the Company realized a net operating profit of $105,504,
a $717,300 or 87.2% decrease over the net operating profit in the first six
months of 1998 of $822,804. For the six months ended June 30, 1999, the
Company reported a net loss of $75,955, compared to the net profit of
$674,239 for the same period in 1998, a $750,194 or 111% 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 six months ended June 30, 1999 were
$2,394,050 which were offset by drilling and development costs of $1,390,982.
For the same period in 1998, turnkey drilling revenues were $2,121,902, while
drilling and development costs were $1,052,706. This represents an increase in
revenues of $272,148 or 12.8% and an increase in costs of $338,276 or 32.1%.
The increase in drilling revenues and costs in 1999 were primarily due to the
drilling of eight wells during the first six months of 1999 versus the
drilling of five wells during the same period in 1998.
Oil and gas revenues for the six months ended June 30, 1999 were $1,290,477
compared to $2,183,887 for the same period in 1998, which represents a
$893,410 or 40.9% decrease. This decrease in revenues was mainly due to a
decrease in the Company's natural gas 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 $106,046, or
18.5%, to $467,975 for the six months ended June 30, 1999, from $574,021 for
the same period in 1998. The increased costs in 1998 can be attributed to
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 $267,111 for the six
months ended June 30, 1999, an increase of $55,810 (26.4%) from $211,301
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 $842,535 from
$488,891, an increase of $353,644 (72.3%) for the six months ended June 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 $42,577, or 5.2%, from
$827,462 for the six months ended June 30, 1998 to $784,885 for the same
period in 1999. Legal and accounting expense decreased to $169,083 for the
period, compared to $362,979 for the first half of 1998, a $193,896 (53.4%)
decrease. This decrease can be attributed to lower litigation costs during
the period in 1999. Marketing expense for the six months ended June 30, 1999,
increased slightly by $2,447 or 1.3%, to $190,674, compared to $188,227 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 six
months of 1998, $200,000 was recorded as an impairment loss based on this
assessment. There were no such impairment losses recorded in first six
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 $181,459 for the six months ended June 30, 1999
from $143,524 for the same period in 1998, a $37,935 or 26.4% increase.
CAPITAL RESOURCES AND LIQUIDITY:
At June 30, 1999, the Company had current assets totaling $2,476,629 and
current liabilities totaling $4,549,579, a $2,072,950 working capital deficit.
The primary reason for this working capital 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
deferred revenue from turnkey drilling 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, 1999, cash provided
by operating activities totaled $1,206,338 compared to $1,383,026 provided by
operating activities for the same period in 1998. This decrease in cash
provided can be mainly attributed to the decrease in oil and gas sales 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 $2,128,002 for the
first half of 1999, compared to $2,128,068 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.
FINANCING ACTIVITIES. For the six months ended June 30, 1999, net cash used
by financing activities was $194,001, primarily for principal reduction of the
Company's line of credit, compared to cash used by financing activities for
the same period in 1998 of $222,834. This decrease in net cash used was
mainly due to the Company's repurchase of its own common stock in order to
retire it, during the period in 1998.
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<PAGE>
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.
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.
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<PAGE>
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 13, 1999 /s/ Donald H. Hosmer
--------------------- ------------------------------
Donald H. Hosmer, President
and Chief Executive Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> $ 581,836
<SECURITIES> $ 0
<RECEIVABLES> $ 1,683,870
<ALLOWANCES> $ 0
<INVENTORY> $ 0
<CURRENT-ASSETS> $ 2,422,514
<PP&E> $ 16,377,729
<DEPRECIATION> $ (4,021,095)
<TOTAL-ASSETS> $ 15,551,821
<CURRENT-LIABILITIES> $ 4,559,199
<BONDS> $ 0
$ 19,100
$ 175,000
<COMMON> $ 8,240,605
<OTHER-SE> $ (2,242,083)
<TOTAL-LIABILITY-AND-EQUITY> $ 15,551,821
<SALES> $ 3,620,792
<TOTAL-REVENUES> $ 3,887,903
<CGS> $ 1,858,957
<TOTAL-COSTS> $ 3,846,134
<OTHER-EXPENSES> $ 0
<LOSS-PROVISION> $ 0
<INTEREST-EXPENSE> $ 181,469
<INCOME-PRETAX> $ (139,690)
<INCOME-TAX> $ 0
<INCOME-CONTINUING> $ (139,690)
<DISCONTINUED> $ 0
<EXTRAORDINARY> $ 0
<CHANGES> $ 0
<NET-INCOME> $ (139,690)
<EPS-BASIC> $ (0.03)
<EPS-DILUTED> $ (0.04)
</TABLE>
