_____________________________________________________________________________
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, 2000 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 September 30, 2000, there were a total of 3,808,613 shares of registrant's
Common Stock outstanding.
<PAGE> 2
PART I
Item 1. Financial Statements
ROYALE ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited) (Audited)
---------------- ----------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 624,985 $ 1,016,979
Accounts receivable 2,990,733 1,745,408
Note receivable 84,988 84,662
Other current assets 373,144 336,722
---------------- ----------------
Total current assets 4,073,850 3,183,771
---------------- ----------------
Oil and gas properties, at cost
(successful efforts method) 18,046,480 17,178,517
Equipment and fixtures 433,027 391,087
---------------- ----------------
18,479,507 17,569,604
Less accumulated depreciation,
depletion and amortization 5,496,250 4,520,525
---------------- ----------------
12,983,257 13,049,079
---------------- ----------------
Other assets:
Other capitalized costs, net 386,337 618,139
---------------- ----------------
Total Other Assets 386,337 618,139
---------------- ----------------
TOTAL ASSETS $ 17,443,444 $ 16,850,989
================ ================
</TABLE>
(See Notes to Financial Statements)
2
<PAGE> 3
ROYALE ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited) (Audited)
---------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 4,715,310 $ 3,854,159
Deferred revenue from turnkey drilling 1,030,910 1,464,615
---------------- ----------------
Total current liabilities 5,746,220 5,318,774
---------------- ----------------
Long-Term Debt, net of current portion 4,150,000 5,050,000
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 (792,981) (1,857,990)
---------------- ---------------
Total paid in capital and accumulated
deficit 7,622,624 6,557,615
Less Cost of treasury stock,
37,500 and 37,500 shares, respectively (94,500) (94,500)
---------------- ---------------
Total Stockholders' equity 7,528,124 6,463,115
---------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 17,443,444 $ 16,850,989
================ ================
</TABLE>
(See Notes to Financial Statements)
3
<PAGE>4
ROYALE ENERGY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
<S> <C> <C>
2000 1999
(Unaudited) (Unaudited)
---------------- --------------
Revenues:
Sale of oil and gas $ 3,034,560 $ 2,096,515
Turnkey drilling 3,758,152 3,776,082
Supervisory fees and other 563,647 414,393
---------------- --------------
Total revenues 7,356,359 6,286,990
---------------- --------------
Costs and expenses:
General and administrative 1,232,552 1,196,573
Turnkey drilling and development 1,568,529 2,446,527
Lease operating 724,284 708,067
Lease impairment 311,088 0
Legal and accounting 405,387 117,370
Marketing 507,211 257,926
Depreciation, depletion and amortization 1,207,527 1,292,436
---------------- --------------
Total costs and expenses 5,956,578 6,018,899
---------------- --------------
Income from operations 1,399,781 268,091
Other expense:
Interest 334,772 286,150
---------------- --------------
Income (loss) before income tax expense 1,065,009 (18,059)
Income tax expense 0 0
---------------- --------------
Net income (loss) $ 1,065,009 $ (18,059)
=============== ===============
Diluted earnings per share $ 0.28 $ (0.00)
=============== ===============
Basic earnings per share $ 0.28 $ (0.00)
=============== ===============
</TABLE>
(See Notes to Financial Statements)
4
<PAGE> 5
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
<S> <C> <C>
2000 1999
(Unaudited) (Unaudited)
---------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,065,009 $ (18,059)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 1,207,527 1,292,436
Loss on impairment of assets 311,088 0
(Increase) decrease in:
Accounts receivable (1,245,325) (372,547)
Receivable from related parties 0 (10,876)
Prepaid expenses and other current assets (36,422) (307,824)
Increase (decrease) in:
Accounts payable and accrued expenses 861,151 3,173,400
Deferred revenues - DWI (433,705) (1,570,059)
---------------- --------------
Net Cash Provided by Operating Activities 1,729,323 2,186,471
---------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for oil and gas properties (1,179,051) (2,321,419)
Other capital expenditures (41,940) (37,991)
---------------- --------------
Net Cash Used by Investing Activities $ (1,220,991) $ (2,359,410)
---------------- --------------
</TABLE>
(See Notes to Financial Statements)
5
<PAGE> 6
ROYALE ENERGY, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
<S> <C> <C>
2000 1999
(Unaudited) (Unaudited)
---------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(Increase) decrease in notes receivable $ (326) $ 9,999
Principal payments on notes payable (900,000) 0
---------------- --------------
Net Cash Provided (Used) by
Financing Activities (900,326) 9,999
---------------- --------------
Net Decrease in Cash and Cash Equivalents $ (391,994) $ (162,940)
Cash at Beginning of Year 1,016,979 1,016,306
---------------- --------------
Cash at End of Period $ 624,985 $ 853,366
=============== ==============
SUPPLEMENTAL INFORMATION:
Cash paid for interest $ 334,772 $ 286,150
=============== ==============
Cash paid for taxes $ 0 $ 0
=============== ==============
</TABLE>
(See Notes to 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 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 30,2000
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS
Income available to common
stockholders $1,065,009 3,808,613 $ .28
Effect of dilutive securities
stock options - 2,288
----------- -------------
Diluted EPS
Income available to common
stockholders $1,065,009 3,810,901 $ .28
----------- ------------- ---------
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,1999
-------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
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)
----------- ------------- ---------
</TABLE>
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2000, Compared to the Same Period Last
Year.
For the nine months ended September 30. 2000, Royale Energy achieved a net
profit of $1,065,009, a $1,083,068 increase over the net loss in the first
nine months of 1999 of $18,059. Royale's management attribute this
increase to an increase in oil and gas revenues resulting from higher
natural gas prices. Total revenues for the period were $7,356,359,
a $1,069,369 or 17% increase from the total revenues in 1999 of
$6,286,990, again as a result of higher natural gas prices. During the
period in 2000, Royale's net operating profit was $1,399,781, a $1,131,690
or 422% increase over the net operating profit of $268,091 in the first
nine months of 1999.
Oil and gas revenues for the nine months ended September 30, 2000 were
$3,034,560 compared to $2,096,515 for the same period in 1999, which
represents a $938,045 or 44.7% increase. This increase in revenues was
mainly due to an increase in the price Royale received for its natural
gas production during the period in 2000. Royale's oil and gas lease
operating expenses for the period increased by only 2.29% or $16,217,
to $724,284 for the nine months ended September 30, 2000, from $708,067
for the same period in 1999.
Turnkey drilling revenues for the nine months ended September 30, 2000 were
$3,758,152 which were offset by drilling and development costs of $1,568,529.
For the same period in 1999, turnkey drilling revenues were $3,776,082, while
drilling and development costs were $2,446,527. This represents a decrease in
revenues of $17,930 or .47% and a decrease in costs of $877,998 or 35.9%. The
decrease in turnkey drilling revenues and costs in 2000 were mainly due to the
drilling of more wells in the first nine months of 1999 as compared to the same
period in 2000 as well as the recognition of expense on more land and
geological and geophysical during the period in 1999.
The aggregate of supervisory fees and other income was $563,647 for the nine
months ended September 30, 2000, an increase of $149,254 (36%) from $414,393
during the same period in 1999. This increase was mainly due to partial
collection on a stipulated judgement in favor of Royale Energy against a former
consultant.
Depreciation, depletion and amortization expense decreased to $1,207,527 from
$1,292,436, a decrease of $84,909 or 6.6%, for the nine months ended September
30, 2000, as compared to 1999. The depletion rate is calculated using
production as a percentage of reserves, and the decrease in the depletion rate
was due to increased reserves during the year in 1999.
General and administration expenses increased by only $35,979, or 3%, from
$1,196,573 for the nine months ended September 30, 1999 to $1,232,552 for the
same period in 2000. Legal and accounting expense increased to $405,387 for
the period, compared to $117,370 for the period in 1999, a $288,017 or 245%
increase. This increase can be attributed to the higher cost of regulatory
compliance and litigation costs during the first nine months of 2000.
Marketing expense for the nine months ended September 30, 2000, increased
$249,285 or 96.7%, to $507,211, compared to $257,926 for the same period in
1999. Royale's marketing expense varies from period to period according to the
number of marketing events attended by Company personnel and associated travel
costs.
Royale Energy periodically assesses the value of significant proved and
unproved properties and charges impairments of value to expense. During the
first nine months of 2000, $311,088 was recorded as a lease impairment based
on this assessment. There were no such impairment charges recorded in first
nine months of 1999.
During the year in 1998, Royale extended an existing credit line from a major
commercial bank. Because of borrowings pursuant to this credit line and an
increase in the rate of interest, interest expense increased to $334,772 for
the nine months ended September 30, 2000 from $286,150 for the same period
in 1999, a $48,622 or 17% increase.
CAPITAL RESOURCES AND LIQUIDITY:
At September 30, 2000, Royale Energy had current assets totaling $4,073,850 and
current liabilities totaling $5,746,220, a $1,672,370 working capital deficit.
The primary reason for this working capital deficit is Royale's obligation to
complete wells on behalf of investors who bought fractional working interests.
Royale 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 Royale
Energy has sufficient liquidity for the short term.
OPERATING ACTIVITIES. For the nine months ended September 30, 2000, cash
provided by operating activities totaled $1,729,323 compared to $2,186,471
provided by operating activities for the same period in 1999. This decrease
in cash provided can be mainly attributed to the decrease in accounts payable
and an increase in accounts receivable for the period in 2000 when compared to
1999.
INVESTING ACTIVITIES. Net cash used by investing activities, primarily in
capital acquisitions of oil and gas properties, amounted to $1,220,991 for the
first nine months of 2000, compared to $2,359,410 used by investing activities
for the same period in 1999. The decrease in cash used in the 2000 period was
due to increased turnkey drilling which occurred during the period in 1999 when
compared the period in 2000.
FINANCING ACTIVITIES. For the nine months ended September 30, 2000, net cash
used by financing activities was $900,326, compared to cash provided by
financing activities for the same period in 1999 of $9,999. This increase in
net cash used was mainly due to the decrease in the use of Royale's credit line
during the period in 2000 when compared to 1999.
PART II
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the Company was held on October 9, 2000.
At the meeting, the shareholders voted to re-elect each of the Company's seven
directors to serve until the 2001 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 3,042,731
for, 0 against, 32,107 not voting.
The shareholders also voted to approve the appointment of Brown, Armstrong,
Randall, Reyes, Paulden and McCown Accountancy Corporation as the Company's
independent accountants by a vote of 3,058,238 for, 12,100 against, 4,500 not
voting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the third quarter of 2000.
8
<PAGE> 9
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 14, 2000
/s/ Donald H. Hosmer
--------------------------------------
Donald H. Hosmer, President and
Chief Executive Officer
9
