NOTICE
OF ANNUAL MEETING OF SHAREHOLDERS
Royale
Energy, Inc.
DATE:
|
June
11, 2007
|
TIME:
|
10:00
a.m.
|
PLACE:
|
7676
Hazard Center Blvd.
|
|
Suite
1500
|
|
San
Diego, California 92108
|
Matters
to be Voted on:
1. Authorization
to expand the maximum size of the board of directors from seven to
eleven;
2. Election
of directors to serve for the ensuing year;
2.
Transaction of such other business as may properly come before the meeting
and
any adjournment thereof.
Who
May Attend and Vote at the Meeting
Shareholders
of record at the close of business on May 11, 2007, and valid proxy holders
may
attend and vote at the meeting. If your shares are registered in the name of
a
brokerage firm or trustee and you plan to attend the meeting, please obtain
from
the firm or trustee a letter or other evidence of your beneficial ownership
of
those shares to facilitate your admittance to the meeting.
By
Order
of the Board of Directors,
Donald
H. Hosmer
President
and CEO
Date:
May
11, 2007
PROXY
STATEMENT
Royale
Energy’s board of directors solicits your proxy, using the enclosed proxy card,
for use at the annual meeting of shareholders to be held June 11, 2007, and
at
any adjournment thereof. This proxy statement has information about the annual
meeting and was prepared by Royale Energy’s management for the board of
directors. Your vote at the annual meeting is important to us. Please vote
your
shares of common stock by completing the enclosed proxy card and returning
it to
us in the enclosed envelope.
GENERAL
INFORMATION
The
only
items of business which management intends to present at the meeting are listed
in the preceding Notice of Annual Meeting of Shareholders and are explained
in
more detail on the following pages. By returning your signed proxy, you
authorize management to vote your shares as you indicate on these items of
business and to vote your shares in accordance with management’s best judgment
in response to proposals initiated by others at the meeting.
1)
Changing
or Revoking Your Proxy Vote
You
may
revoke your signed proxy at any time before it is exercised at the annual
meeting. You may do this by advising Royale Energy’s secretary in writing of
your desire to revoke your proxy, or by submitting a duly executed proxy bearing
a later date. We will honor the proxy card with the latest date. You may also
revoke your proxy by attending the annual meeting and indicating that you wish
to vote in person.
2)
Who may Vote
Each
shareholder of record at the close of business on May 11, 2007, is entitled,
for
each share then held, to one vote on each proposal or item that comes before
the
annual meeting, except that under certain circumstances shareholders may be
entitled to cumulate their votes in voting for directors. (See
Proposal 2: Election of Directors.)
On March
31,
2007, Royale Energy had outstanding 7,916,408
shares of common stock and 57,416 shares of Series AA convertible preferred
stock entitled to vote at the meeting.
3)
Voting in
Person
Although
we encourage you to complete and return your proxy to ensure that your vote
is
counted, you can attend the annual meeting and vote your shares in
person.
4)
Voting
by Street Name Holders
If
your
shares are held in a brokerage account or by another nominee, you are considered
the “beneficial owner” of shares held in “street name,” and these proxy
materials are being forwarded to you by your broker or nominee (the “record
holder”) along with a voting instruction card. As the beneficial owner, you have
the right to direct your record holder how to vote your shares, and the record
holder is required to vote your shares in accordance with your instructions.
If
you do not give instructions to your record holder by 11:59 pm on June 8,
2007, the record holder will be entitled to vote your shares in its discretion
on Proposal 2 (Election of Directors), but will not be able to vote your
shares on either of the second proposal, and your shares will be considered
a
“broker non-vote” on those proposals.
As
the
beneficial owner of shares, you are invited to attend the annual meeting. Please
note, however, that if you are a beneficial owner, you may not vote your shares
in person at the meeting unless you obtain a “legal proxy” from the record
holder that holds your shares.
5)
How your Votes are Counted
We
will
hold the annual meeting on June 11, 2007, if holders of a majority of the shares
of common stock entitled to vote either sign and return their proxy cards or
attend the meeting. If you sign and return your proxy card, your shares will
be
counted to determine whether we have a quorum even if you abstain or fail to
vote on any of the matters listed on the proxy card.
If
you
mark “Abstain” with respect to any proposal on your proxy, your shares will be
counted in the number of votes cast, but will not be counted as votes for or
against the proposal. If a broker or other nominee holding shares for a
beneficial owner does not vote on a proposal, the shares will not be counted
in
the number of votes cast.
This
proxy statement and the accompanying proxy form were first mailed on or about
May 11, 2007, to shareholders entitled to vote at the meeting.
ITEMS
OF BUSINESS
Proposal
1: AUTHORITY
TO INCREASE THE SIZE OF THE BOARD OF DIRECTORS
Our
board
of directors has consisted of seven directors since 1995. Our bylaws limit
the
maximum number of directors to seven, and the limit set in the bylaws can only
be changed by a vote of the shareholders to amend the bylaws. We are asking
the
shareholders to amend the bylaws to increase the maximum number of directors
to
eleven. If the amendment is approved, we will expand the size of the board
to
eight and elect eight directors at the 2007 shareholders’ meeting.
With
the
adoption of the Sarbanes-Oxley Act in 2002 and the greater emphasis on increased
oversight of corporations by their board, both under federal law and under
the
rules of the NASDAQ Stock Market where our stock trades, we believe that an
increase in the number of our directors will enable the board to do a better
job
of oversight. NASDAQ rules require that a majority of our board be “independent”
directors, and currently four of our seven directors meet the NASDAQ definition
of independence. Because we have only four independent directors, there is
some
overlap of functions in services on board committees, such as our nominations,
audit and compensation committees, in which all members must be independent.
Expanding the board size to eight will make it easier to have a division of
responsibility in the service of our independent directors.
The
nominations committee has nominated seven candidates whom they have found to
be
qualified and willing to serve on the board for the coming year. The nominations
committee and the full board will likely consider whether to further expand
the
board in the future to include more independent members. For this reason, we
are
seeking authority to expand the board to up to eleven members, although it
is
our intent to elect only eight directors this year.
The
text
of the proposed bylaw amendment is attached to this proxy statement as Appendix
1. A vote of a majority of the shares present in person or by proxy at the
meeting is required to adopt this proposed a bylaw amendment.
The
board of directors recommends a vote FOR the proposal to amend the bylaws to
permit expansion of the board to up to eleven members.
Proposal
2: ELECTION
OF DIRECTORS
Seven
directors will be elected to serve on our board of directors until the next
annual meeting of shareholders or until their successors are elected and
qualified.
a)
The
Director Nomination Process
All
of
the nominees for our board of directors were approved unanimously by the two
independent directors who serve on the nominations committee. Six nominees
are
current board members who are standing for re-election, each of whom have been
members of our board since at least 1998. One new nominee for director is
proposed. One director, Rod Nahama, is not standing for re-election to the
Board. The board has not solicited nor received any nominations or
recommendations for director from other shareholders.
b)
Voting
The
seven
nominees receiving the highest number of votes will be elected. Signed proxies
received will be voted for the election of the nominees listed in this proxy
statement, all of whom have agreed to serve if elected. Should any of the
nominees become unavailable at the time of the meeting to accept nomination
or
election as a director, the proxy holders named in the enclosed proxy will
vote
for substitute nominees at their discretion. Votes
withheld for a nominee will not be counted.
c)
Cumulative
Voting
Cumulative
voting allows a shareholder to cast for any one or more candidates a number
of
votes greater than their number of shares. For cumulative voting to be in
effect, at least one shareholder must give notice of their intent to cumulate
votes prior to the commencement of voting. If any shareholder has given notice
of the intent to cumulate votes, then each shareholder has the right to give
one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of shares held by the shareholder, or distributing
such
number of votes among as many candidates as the shareholder sees fit. For
example, if you have 100 shares and there are seven seats to be filled on the
board, you will have 700 votes. If any shareholder gives notice of intent to
cumulate votes, you could give all your votes to one nominee or distribute
your
votes among as many nominees as you would like.
d)
Nominees
for the Board of Directors
The
board of directors recommends a vote FOR the election of each of the following
eight nominees for director.
Proxies
solicited by the board of directors will be voted in favor of each nominee
unless shareholders specify otherwise in their proxies. The following pages
describe the nominees for director, including their principal occupations for
the past five years, certain other directorships, age, and length of service
as
director of Royale Energy. Membership on board committees, attendance at board
and committee meetings, and ownership of stock in Royale Energy are indicated
in
separate sections following the individual resumes of the nominees.
Each
nominee has agreed to be named in this proxy statement and to serve as a
director if elected. The ages listed are as of May 1, 2007.
Nominees
for Director
Name
|
Age
|
First
Became Director or
Executive
Officer
|
Positions
Held
|
|
|
|
|
Harry
E. Hosmer
|
76
|
1986
|
Chairman
of the Board
|
Donald
H. Hosmer
|
53
|
1987
|
President
and Director
|
Stephen
M. Hosmer(2)
|
40
|
1996
|
Executive
Vice President, Chief Financial Officer and Director
|
Oscar
Hildebrandt (1)
(2)
|
71
|
1995
|
Secretary
and Director
|
George
M. Watters (1)
(2)
|
87
|
1991
|
Director
|
Gilbert
C. L. Kemp(1)
|
73
|
1998
|
Director
|
Tony
Hall
|
65
|
-
|
Nominee
for Director
|
(1) Member
of
the audit committee.
(2) Member
of
the compensation committee.
The
board
has determined that directors Tony Hall, Oscar Hildebrandt, George M. Watters
and Gilbert C. L. Kemp qualify as independent directors under Nasdaq
rules.
e)
Nominee
Profiles
The
following summarizes the business experience of each director and executive
officer for the past five years.
Harry
E. Hosmer
- Chairman of the Board
Harry
E.
Hosmer has served as chairman since Royale Energy began in 1986, and from
inception in 1986 until June 1995, he also served as president and chief
executive officer.
Donald
H. Hosmer
- President, Chief Executive Officer, Secretary and
Director
Donald
H.
Hosmer has served as an executive officer and director of Royale Energy since
its inception in 1986, and in June 1995 he became president and chief executive
officer. Prior to becoming president, he was executive vice president,
responsible for marketing working interests in oil and gas projects developed
by
Royale Energy. He was also responsible for investor relations and
communications. Donald H. Hosmer is the son of Harry E. Hosmer and brother
of
Stephen M. Hosmer.
Stephen
M. Hosmer
- Executive Vice President, Chief Financial Officer,
Director
Stephen
M. Hosmer joined Royale Energy as the management information systems manager
in
May 1988, responsible for developing and maintaining Royale Energy’s computer
software. Mr. Hosmer developed programs and software systems used by Royale
Energy. From 1991 to 1995, he served as president of Royale Operating Company,
Royale Energy’s operating subsidiary. In 1995, he became chief financial officer
of Royale Energy. In 1996, he was elected to the board of directors of Royale
Energy. In 2003, he was elected executive vice president. Mr. Hosmer served
seven years on the board of directors of Youth for Christ, a charitable
organization in San Diego, California. Stephen M. Hosmer is the son of Harry
E.
Hosmer and brother of Donald H. Hosmer. Mr. Hosmer holds a Bachelor of Science
degree in Business Administration from Oral Roberts University in Tulsa,
Oklahoma, as well as earning his MBA degree via the prestigious President/Key
Executive program at Pepperdine University in Malibu, California.
Oscar
Hildebrandt, D.V.M.
- Director
Dr.
Hildebrandt served as an advisory member of Royale Energy’s board of directors
from 1994 to 1995 and became a director in 1995. He serves as chairman of Royale
Energy’s audit committee. Dr. Hildebrandt practiced veterinary medicine as
President of Medford Veterinary Clinic, Medford, Wisconsin, from 1960 to 1990.
Since 1990, Dr. Hildebrandt has engaged independently in veterinary practice
consulting services. He has served on the board of directors of Fidelity
National Bank - Medford, Wisconsin, and its predecessor bank from 1965 to the
present and is past chairman of the board of the Bank. From 1990 to the present
he has acted as a financial advisor engaged in private business interests.
Dr.
Hildebrandt received a Bachelor of Science degree from the University of
Wisconsin in 1954 and a Doctor of Veterinary Medicine degree from the University
of Minnesota in 1958.
George
M. Watters
- Director
Mr.
Watters has been retired from full time employment during the last five years.
Mr. Watters retired from AMOCO Corporation in 1983 after serving for 24 years
in
senior management positions with AMOCO Corporation and its affiliates. From
1987
to the present Mr. Watters has managed his personal investments. Mr. Watters
received his B.S. degree from Massachusetts Institute of Technology in
1942.
Gilbert
C.L.
Kemp
- Director
Mr.
Kemp
has since 2002 served as an independent consultant for seismic operations in
the
oil and gas industry. He managed the California operations of Western Atlas,
Inc., a New York Stock Exchange company from 1998 until 2002. Mr. Kemp was
a
founding member of 3-D Geophysical, Inc., where he served as Vice President
from
1996 until March 1998. In March 1998 3-D Geophysical, whose stock had been
listed on the Nasdaq National Market System since February 1996, merged with
Western Atlas, Inc. During the years 1987 to 1995, Mr. Kemp served as president
and CEO of Kemp Geophysical Corporation, which owned and operated seismic crews
in the United States and Canada.
Tony
Hall - Nominee
for Director
Ambassador
Hall served as a member of the United States House of Representatives,
representing the people of the Third District of Ohio, for almost twenty-four
years, from 1979 to 2002. In 2002 he was appointed U.S. Ambassador to the United
Nations Agencies for Food and Agriculture. He served as chief of the U.S.
Mission to the U.N. Agencies in Rome - the Work Food Program, Food and
Agriculture Organization and International Fund for Agricultural Development.
He
has been nominated for the Nobel Peace Prize on three occasions for his
humanitarian and hunger-related work. He received his A. B. degree from Denison
University, Granville, Ohio, in 1964.
f)
Board
of Directors; Committee
Assignments
Five
meetings of the board of directors were held in 2006. All members of the board
attended all board meetings in 2006.
Audit
Committee
Purpose:
To
assist the board of directors in carrying out its responsibility as to the
independence and competence of the Company’s independent public accountants. The
audit committee operates pursuant to an audit committee charter which has been
adopted by the board of directors to define the committee’s responsibilities. A
copy of the audit committee charter is posted on our website,
www.royl.com.
The
board has determined that Oscar Hildebrand qualifies as an “audit committee
financial expert” as defined in Item 401(e) of Regulation S-K, promulgated by
the Securities and Exchange Commission.
Number
of Meetings Held in 2006:
Five
Members:
|
Gilbert
C. L. Kemp
|
|
George
M. Watters
|
|
Oscar
Hildebrandt
|
Attendance:
All
committee members attended all committee meetings in 2006.
Compensation
Committee
Purpose:
To
review and make recommendations to the board of directors on setting the
salaries of the company’s officers and the compensation to be paid to members of
the board of directors who are not employees of the Company.
Number
of Meetings Held in 2006: Two
Members:
|
Rodney
Nahama
|
|
Oscar
A. Hildebrandt
|
|
George
M. Watters
|
Attendance:
All
committee members attended the committee meeting held in 2006.
No
Compensation Committee Interlocks
None
of
our executive officers has served on the board of directors or on the
compensation committee for any other entity in which any member of our board
is
an officer in the last fiscal year.
Nominations
Committee
Purpose:
To
review and make recommendations to the board of directors concerning the
nominees proposed for election of directors at the annual meeting of
directors.
Number
of Meetings Held in 2006: One
Members
(current)
|
Oscar
A. Hildebrandt
|
|
George
M. Watters
|
|
|
Attendance:
All
committee members attended the committee meeting held in 2006.
g)
Executive
Compensation
The
following table summarizes the compensation of the chief executive officer
and
the three other most highly non-executive employees (the “named executives and
employees”) of Royale Energy and its subsidiaries during the past
year.
Name
and Principal Position
|
Year
|
Salary
|
Bonus
|
All
Other Compensation (1)
|
Total
|
|
|
($)
|
($)
|
($)
|
($)
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
Donald
Hosmer
|
2006
|
$212,234
|
-
|
$20,515
|
$232,749
|
President
|
2005
|
$204,615
|
-
|
$ 6,138
|
$210,753
|
|
2004
|
$185,143
|
$
85,000
|
$ 5,726
|
$275,869
|
|
|
|
|
|
|
Stephen
Hosmer
|
2006
|
$203,397
|
-
|
$20,517
|
$223,914
|
Exec.
V.P.
|
2005
|
$194,385
|
-
|
$ 5,832
|
$200,217
|
&
CFO
|
2004
|
$175,223
|
$
85,000
|
$ 5,419
|
$265,642
|
|
|
|
|
|
|
John
Caprara (2)
|
2006
|
$151,252
|
-
|
$42,133
|
$193,385
|
Chief
Geologist
|
2005
|
$140,222
|
$10,000
|
$4,207
|
$154,429
|
|
2004
|
$125,602
|
-
|
-
|
$125,602
|
|
|
|
|
|
|
Lauren
Hartwell (2)
|
2006
|
$110,004
|
-
|
$19,477
|
$129,481
|
Land
Manager
|
2005
|
$23,341
|
-
|
$10,000
|
$33,341
|
|
2004
|
-
|
-
|
-
|
-
|
(1)
All
Other Compensation:
The components of “All Other Compensation” in 2006 are as
follows:
|
|
|
Donald
Hosmer received a $14,160 car allowance and $6,355 as a matching
contribution to our simple IRA plan.
|
|
|
Stephen
Hosmer received a $14,000 car allowance and $6,517 as a matching
contribution to our simple IRA plan.
|
|
|
John
Caprara received a $36,482 drilling allowance, which gave him a
participating working interest in each well the we drilled, and $5,651
as
a matching contribution to our simple IRA plan.
|
|
|
Lauren
Hartwell received $19,477 as a housing allowance in 2006 due to her
relocation to the San Diego area.
|
|
(2)
Mr. Caprara and Ms. Hartwell are highly compensated employees under
SEC
rules who did not serve as executive officers during
2006.
|
Compensation
Discussion and Analysis
The
elements of executive compensation at Royale Energy consist mainly of cash
salary and, if appropriate, a cash bonus at year end. The compensation committee
makes recommendations to the board of directors annually on the compensation
of
the two top executives: the President and the Executive Vice President and
Chief
Financial Officer. See
Compensation Committee Report.
We do
not have employment contracts with either of our executive
officers.
Royale
Energy has not for the past several years awarded stock options or other equity
based compensation to its officers because we prefer to avoid the dilution
to
non-employee shareholders that such compensation can bring. Each of our
executive shareholders currently own more than 10% of the outstanding shares
of
our common stock, and thus they already have a strong incentive to manage the
company in ways that will increase share values.
Royale
Energy also does not provide extensive personal benefits to its executives
beyond those benefits, such as health insurance, that are provided to all
employees. Each executive does receive an annual car allowance.
No
Stock Options, Stock Awards, Nonqualified Deferred Compensation or Pension
Plans
We
did
not grant any stock options, stock appreciation rights or non-equity incentive
plan awards to our named executives and employees during 2006. No stock options
were exercised by named executive officers in 2006, and none remained
outstanding as of December 31, 2006. No nonqualified deferred compensation
plans
are in existence for named executives and employees. The named executives and
employees are not beneficiaries or members of any defined compensation or other
pension plans.
Compensation
Committee Report
Our
executive compensation policy is designed to motivate, reward and retain the
key
executive talent necessary to achieve our business objectives and contribute
to
our long-term success. Our compensation policy for our executive officers
focuses primarily on determining appropriate salary levels and performance-based
cash bonuses.
Policy
The
compensation committee’s primary responsibility is making recommendations to the
board of directors relating to compensation of our officers. The committee
also
makes recommendations to the board of directors regarding employee benefits,
our
defined benefit plans, defined contribution plans, and stock based
plans.
Determination
To
determine executive compensation, the committee, in December each year, meets
with our
officers
to review our compensation programs, discuss the performance of the company,
the
duties and responsibilities of each of the officers pay levels and business
results compared to others similarly situated within the industry. The committee
then makes recommendations to the board of directors for any adjustment to
the
officers compensation levels.
Compensation
Elements
Base.
Base
salaries for our executive officers are established based on the scope of their
responsibilities, taking into account competitive market compensation paid
by
our peers. Base salaries are reviewed annually. The salaries we paid to our
most
highly paid executive officers for the last three years are set forth in the
Summary Compensation Table included under Executive
Compensation.
Bonus.
The
compensation committee meets annually to determine the quantity, if any, of
the
cash bonuses of executive officers. The amount granted is based, subjectively,
upon the company’s stock price performance, earnings, revenue, reserves and
production. The committee does not use quantifiable metrics for these criteria;
but rather uses each in balance to assess the strength of the company’s
performance. The committee believes that formulaic approaches to cash incentives
can foster an unhealthy balance between short-term and long-term goals. In
2006,
the compensation committee did not award bonuses to any of the company’s
executive officers.
Members
of the Compensation Committee:
Oscar
A.
Hildebrandt, Chair
Rodney
Nahama
George
M.
Watters
Compensation
of Directors
The
following table describes the compensation paid to our directors who are not
also named executives for their services in 2006.
Name
|
Fees
Earned or Paid in Cash
|
All
Other Compensation
|
Total
|
|
($)
|
($)
|
($)
|
(a)
|
(b)
|
(c)
|
(d)
|
Harry
E. Hosmer
|
$152,370
|
$14,358
|
$166,728
|
Oscar
A. Hildebrandt
|
17,700
|
-
|
17,700
|
George
M. Watters
|
15,300
|
-
|
15,300
|
Gilbert
C. L. Kemp
|
13,100
|
-
|
13,100
|
Rodney
Nahama
|
14,200
|
-
|
14,200
|
Each
director who is not an employee of Royale Energy receives a quarterly fee for
his services, which in 2006 was set at $3,275, and a fee of $550 for attendance
at each audit committee meeting and $275 for attendance at each compensation
committee meeting. In addition, Royale Energy reimburses directors for the
expenses they incur for their service. No directors received any stock options
or other equity based compensation in 2006.
In
addition, Royale Energy's Chairman of the Board and former President, Harry
E.
Hosmer, renders management consulting services to Royale Energy on an ongoing
basis. See
Certain Relationships and Related Transactions, page 10.
l)
Security Ownership of Certain Beneficial Owners and
Management
Common
Stock
On
December 31, 2006, 7,916,408 shares of Royale Energy’s common stock were
outstanding.
The
following table contains information regarding the ownership of Royale Energy’s
common stock as of March 31, 2007, by:
i) each
person who is known by Royale Energy to own beneficially more than 5% of the
outstanding shares of each class of equity securities;
ii) each
director of Royale Energy, and
iii) all
directors and officers of Royale Energy as a group. Except pursuant to
applicable community property laws and except as otherwise indicated, each
shareholder identified in the table possesses sole voting and investment power
with respect to its or his shares. The holdings reported are based on reports
filed with the Securities and Exchange Commission and the Company by the
officers, directors and 5% shareholders pursuant to Section 16 of the Securities
Exchange Act of 1934.
Stockholder
(1)
|
|
Number
|
|
Percent
|
|
|
|
|
|
Donald
H. Hosmer (2)
|
|
990,343
|
|
12.51%
|
|
|
|
|
|
Harry
E. Hosmer (2)
|
|
964,840
|
|
9.93%
|
|
|
|
|
|
Oscar
A. Hildebrandt
|
|
75,735
|
|
Less
than 1%
|
|
|
|
|
|
Stephen
M. Hosmer (2)
|
|
1,164,504
|
|
14.71%%
|
|
|
|
|
|
Gilbert
C. L. Kemp
|
|
16,962
|
|
Less
than 1%
|
|
|
|
|
|
Rodney
Nahama
|
|
-
|
|
(3)
|
|
|
|
|
|
George
M. Watters
|
|
58,841
|
|
Less
than 1%
|
|
|
|
|
|
All
officers and directors as a group
|
|
3,271,225
|
|
41.32%
|
(1)
The
mailing address of each listed stockholder is 7676 Hazard Center Drive, Suite
1500, San Diego, California 92108.
(2)
Donald H. Hosmer and Stephen M. Hosmer are sons of Harry E. Hosmer, Chairman
of
the Board.
(3)
Less
than 1% of outstanding stock.
Preferred
Stock
Holders
Series AA Convertible Preferred Stock have voting rights equal to the number
of
shares into which they are convertible. On March 31, 2007, 57,416 shares of
Series AA Convertible Preferred Stock outstanding. The shares of each series
of
Preferred shares are convertible into shares of Royale Energy's Common Stock
at
the option of the security holder, at the rate of two shares of Convertible
Preferred Stock for each share of Common Stock. The Preferred Stock is not
registered under the Securities Exchange Act of 1934, and no market exists
for
the Preferred Stock. The total number of shares of Common Stock issuable on
conversion of all outstanding shares of Preferred Stock equals less than 1%
of
the outstanding Common Stock of Royale Energy. To Royale Energy's knowledge,
none of the Preferred shareholders would own more than 1% of Royale Energy's
Common Stock, if their Preferred shares were converted to Common
shares.
m)
Certain
Relationships and Related Transactions
Investments
in Wells by Directors
In
1989,
the Board of Directors adopted a policy (the “1989 policy”) that permits each
director and officer of Royale Energy to purchase from Royale Energy, at its
cost, up to one percent (1%) fractional interest in any well to be drilled
by
Royale Energy. When an officer or director elects to make such a purchase,
the
amount charged per each percentage working interest is equal to Royale Energy's
actual pro rata cost of drilling and completion, rather than the higher amount
that Royale Energy charges to working interest holders for the purchase of
a
percentage working interest in a well. Of the current officers and directors,
Donald Hosmer, Stephen Hosmer, Harry E. Hosmer, George Watters and Oscar
Hildebrandt at various times have elected under the 1989 policy to purchase
interests in certain wells Royale Energy has drilled.
Under
the
1989 policy, officers and directors may elect to participate in wells at any
time up until drilling of the prospect begins. Participants are required to
pay
all direct costs and expenses through completion of a well, whether or not
the
well drilling and completion expenses exceed Royale Energy's cost estimates,
instead of paying a set, turnkey price (as do outside investors who purchase
undivided working interests from Royale Energy). Thus, they participate on
terms
similar to other oil and gas industry participants or joint venturers.
Participants are invoiced in advance for their share of estimated direct costs
of drilling and completion and later actual costs are reconciled, as Royale
Energy incurs expenses and participants make further payments as
necessary.
Officer
and director participants under this program do not pay some expenses paid
by
outside, retail investors in working interests, such as sales commissions,
if
any, or marketing expenses. The outside, turnkey drilling agreement investors,
on the other hand, are not obligated to pay additional costs if a drilling
project experiences cost overruns or unanticipated expenses in the drilling
and
completion stage. Accordingly, Royale Energy's management believes that its
officers and directors who participate in wells under the Board of Directors'
policy do so on terms the same as could be obtained by unaffiliated oil and
gas
industry participants in arms-length transactions, albeit those terms are
different than the turnkey agreement under which outside investors purchase
fractional undivided working interests from Royale Energy.
Donald
and Stephen Hosmer each have participated individually in 128 and 129 wells
respectively under the 1989 policy. The Hosmer Trust, a trust for the benefit
of
family members of Harry E. Hosmer, has participated in 128 wells.
Investments
in wells under the 1989 policy for the three years ended December 31, 2006,
2005
and 2004 are as follows:
|
Year
|
#
of fractional interests
|
Amount
|
Don
Hosmer
|
2006
|
16
|
$ 86,785
|
|
2005
|
14
|
$104,441
|
|
2004
|
14
|
$137,716
|
Stephen
Hosmer
|
2006
|
15
|
$ 49,162
|
|
2005
|
15
|
$112,020
|
|
2004
|
14
|
$132,878
|
Hosmer
Trust
|
2006
|
16
|
$ 47,106
|
|
2005
|
15
|
$109,413
|
|
2004
|
14
|
$138,492
|
Current
officers and directors were billed $49,898, $130,473 and $196,323 for their
interests for the three years ended December 31, 2006, 2005 and 2004,
respectively.
Royale
Energy's Chairman of the Board and former President, Harry E. Hosmer, renders
management consulting services to Royale Energy on an ongoing basis. Royale
Energy compensated Mr. Hosmer $152,724, $151,437 and $138,600 for his consulting
services in 2006, 2005 and 2004, respectively, and pays his medical insurance
costs. Mr. Hosmer's consulting services are in conjunction with his service
on
the board of directors, for which he receives reimbursement of expenses to
attend meetings.
For
the
year ended December 31, 2005, Royale Energy repurchased 19,615 stock options
held by Stephen Hosmer amounting to $188,912. For the year ended December 31,
2004, the company repurchased 14,063 stock options held by Harry Hosmer, and
11,078 held by Don Hosmer, amounting to $160,178 and $126,178
respectively.
Code
of Business Conduct and Ethics
We
have
adopted a code of business conduct and ethics for our directors and executive
officers. The code is posted on our website, www.royl.com.
Proposal
2: OTHER
MATTERS
At
the
date of mailing of this proxy statement, we are not aware of any business to
be
presented at the annual meeting other than those items previously discussed.
The
proxy being solicited by the board of directors provides authority for the
proxy
holders, Donald H. Hosmer and Stephen M. Hosmer, to use their discretion to
vote
on such other matters as may lawfully come before the meeting, including matters
incidental to the conduct of the meeting, and any adjournment
thereof.
OTHER
INFORMATION
a)
Independent
Auditors - Auditors’ Fees
Sprouse
& Anderson, LLP has served as our independent accountants since 2004. The
aggregate fees billed by them for the years ended December 31, 2006 and 2005
are
as follows:
|
|
2006
|
|
2005
|
|
Audit
fees (1)
|
|
$
|
100,513
|
|
$
|
86,903
|
|
Audit-related
fees (2)
|
|
|
-
|
|
|
-
|
|
Tax
fees (3)
|
|
|
-
|
|
|
-
|
|
All
other fees (4)
|
|
|
-
|
|
|
-
|
|
Total
|
|
$
|
100,513
|
|
$
|
86,903
|
|
|
|
|
|
|
|
|
|
During
2004, UHY Mann, Frankfort, Stein & Lipp Advisors became our independent tax
consultants. For the years ended December 31, 2006 and 2005, $56,352 and $68,280
were billed, respectively.
(1)
Audit
fees are fees for professional services rendered for the audit of Royale
Energy’s annual financial statements, reviews of financial statements included
in the company’s Forms 10-Q, and reviews of documents filed with the U.S.
Securities and Exchange Commission.
(2)
Audit
related fees consist of fees for services reasonably related to performance
of
the audit or review of Royale Energy’s financial statements. For 2006 and 2005,
these services include quarterly reviews of financial information.
(3)
Tax
fees consist of tax planning, consulting and tax return reviews.
(4)
Other
fees consist of work on registration statements under the Securities Act of
1933.
The
audit
committee of Royale Energy has adopted policies for the pre-approval of all
audit and non-audit services provided by the company’s independent auditor. The
policy requires pre-approval by the audit committee of specifically defined
audit and non-audit services. Unless the specific service has been previously
pre-approved with respect to that year, the audit committee must approve the
permitted service before the independent auditor is engaged to perform
it.
No
representatives of Sprouse & Anderson are expected to be present at the
annual meeting. Although the audit committee has the sole responsibility to
appoint the auditors as required under the Securities Exchange Act of 1934,
the
committee welcomes any comments from shareholders on auditor selection or
performance. Comments may be
sent
to
the audit committee chair, Dr. Oscar A. Hildebrandt, care of Royale Energy’s
executive office, 7676 Hazard Center Drive, Suite 1500, San Diego, California
92108.
b)
Annual Report
An
annual
report to shareholders on Form 10-K accompanies this proxy
statement.
c)
Method and Cost of Soliciting Proxies
The
accompanying proxy is being solicited on behalf of the board of directors of
Royale Energy. the expense of preparing, printing and mailing the form of proxy
and the material used in the solicitation thereof will be borne by Royale
Energy. Proxies may be solicited by officers, directors, and employees of Royale
Energy in person, or by mail, courier, telephone or facsimile. In addition,
Royale Energy has retained ADP Proxy Services to solicit proxies by mail,
courier, telephone and facsimile and to request brokerage houses and other
nominees to forward soliciting material to beneficial owners. For these services
Royale Energy will pay a fee of approximately $750.
d)
Section 16(a) Beneficial Ownership Reporting
Requirement
Section
16(a) of the Securities Exchange Act of 1934 and Securities and Exchange
Commission regulations require that Royale Energy's directors, certain officers,
and greater than 10 percent shareholders file reports of ownership and changes
in ownership with the SEC and the NASD and furnish Royale Energy with copies
of
all such reports they file. Based solely upon a review of the copies of the
forms furnished to Royale Energy, or representations from certain reporting
persons that no reports were required, Royale Energy believes that no other
persons failed to file required reports on a timely basis for 2006.
e)
Additional Information
Other
reports that we file with the SEC may also be obtained from the SEC’s website,
www.sec.gov.
f)
Proposals by Shareholders - 2007
Any
proposal by a shareholder to be submitted for inclusion in proxy soliciting
material for the 2007 annual shareholders meeting must be received by the
corporate secretary of Royale Energy no later than January 31,
2008.
g)
Other Matters
No
proposals have been received from shareholders for inclusion in the proxy
statement or action at the 2006 annual meeting. Management does not know of
any
matter to be acted upon at the meeting other than the matters above described.
However, if any other matter should properly come before the meeting, the proxy
holders named in the enclosed proxy will vote the shares for which they hold
proxies in their discretion. Your vote at the annual meeting is important to
us.
Please vote your shares of common stock by completing the enclosed proxy card
and returning it to us in the enclosed envelope.
|
|
By
Order of the Board of Directors,
|
|
|
|
Date:
May 11, 2007
|
|
Donald
H. Hosmer
|
|
|
President
and CEO
|
APPENDIX
1
PROPOSED
AMENDMENT TO BYLAW 3.02
3.02
Number
And Qualification Of Directors.
Subject
to the remaining Sections of this Article 3,the number of directors which shall
constitute the whole Board of Directors shall be not less than three (3) nor
more than {eleven
(11)} seven
(7);
the
exact number of directors to be determined from time to time solely by
resolution adopted by the affirmative vote of a majority of the directors or
by
the vote or written consent of a majority of shareholders.
ROYALE
ENERGY, INC.
PROXY
FOR ANNUAL MEETING OF SHAREHOLDERS
SOLICITED
BY THE BOARD OF DIRECTORS
The
undersigned hereby appoints Stephen M. Hosmer and Donald H. Hosmer as Proxies
with the power to appoint their substitutes, and hereby authorizes them to
represent and to vote, as designated below, all the shares of common stock
of
Royale Energy, Inc. held on record by the undersigned on June 14, 2006, at
the
Annual Meeting of Shareholders to be held in at the office of the Company,
7676
Hazard Center Blvd., Suite 1500, San Diego, California 92108, on August 21,
2006, at 11:00 a.m., Pacific Daylight Time.
1.
|
To
amend Bylaw 3.02 to expand the maximum number of directors on the
board of
directors from seven to eleven.
|
|
For
|
|
|
|
Against
|
|
|
|
Abstain
|
|
|
|
|
|
|
2.
|
ELECTION
OF DIRECTORS or any adjournment thereof.
FOR
ALL NOMINEES LISTED BELOW (EXCEPT AS MARKED TO THE CONTRARY
BELOW).
|
|
|
|
|
|
(To
withhold authority to vote for any individual nominee, strike a line
through the nominee’s name in the list below.)
|
|
Harry
E. Hosmer
Donald
H. Hosmer
|
|
Stephen
M. Hosmer
Oscar
Hildebrandt
|
|
George
M. Watters
Rodney
Nahama
|
|
Gilbert
C.L. Kemp
|
|
|
|
|
3.
|
To
transact such other business as may properly come before the Annual
Meeting and any adjournments thereof.
|
|
For
|
|
|
|
Against
|
|
|
|
Abstain
|
|
|
|
|
THE
SHARES REPRESENTED HEREBY SHALL BE VOTED AS SPECIFIED. IF NO SPECIFICATION
IS
MADE, SUCH SHARES SHALL BE VOTED FOR PROPOSALS 1 and 2.
Please
sign and date this Proxy. When signing as attorney, executor, administrator,
trustee, guardian, corporate officer, etc., please indicate your full title.
Proxies received in this office later than 5:00 P.M. on August 20, 2006, will
not be voted upon unless the shareholders are present to vote their
shares.
Dated:
----------------------
(Please
mark, sign, date and return the Proxy Card promptly.)
_________________________
|
|
Signature
|
Signature
if held jointly
|