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Form 1O-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or
15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2003
Commission File No. 0-1392
Central Natural Resources, Inc.
Incorporated in State of Delaware IRS Number: 44-0195290
911 Main Street, Suite 1710
Kansas City, Missouri 64105
Phone: 816-842-2430
Indicate by checkmark whether the registrant (l) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 duringthe preceding twelve months, and (2) has been subject
to suchfiling requirements for the past ninety days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in rule 12 6-2 of the Exchange Act)
Yes [ ] No [X]
Common stock outstanding as of July 31, 2003
$1 par value; 491,824 shares
CENTRAL NATURAL RESOURCES, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 2003 and
December 31, 2002
Consolidated Statements of Earnings and Retained Earnings
- Six months ended June 30, 2003 and 2002 and three
months ended June 30, 2003 and 2002
Consolidated Statements of Comprehensive Income
-Six months ended June 30, 2003 and 2002 and
three months ended June 30, 2003 and 2002
Consolidated Statements of Cash Flows - Six months
ended June 30, 2003 and 2002
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities, and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CENTRAL NATURAL RESOURCES, INC.
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002
(Unaudited)
(amounts in unit dollars)
ASSETS 2003 2002
__________ __________
Current assets:
Cash and cash equivalents $ 975,770 1,956,795
Accounts receivable 67,252 22,500
Securities maturing within one year,
at amortized cost (note 2) 2,996,501 2,994,347
Notes receivable, current 59,076 65,221
Income tax receivable 40,405 206,867
Deferred income taxes - 4,204
Other 90,558 11,416
__________ __________
Total current assets 4,229,562 5,261,350
__________ __________
Equity securities, at fair value (note 2) 579,720 642,637
Other Investments 262,720 350,002
Deferred income taxes 77,051 13,200
Coal deposits, surface land,leasehold
improvements and oil and gas property
(notes 3 and 4):
Coal deposits 1,602,882 1,602,882
Mineral rights 39,988 39,988
Surface land 25,267 25,562
Oil and gas property 1,369,978 150,135
__________ __________
3,038,115 1,818,567
Less accumulated depletion, depreciation
and amortization (618,645) (583,748)
__________ __________
Net coal deposits, surface land,
leasehold improvements and oil and
gas property 2,419,470 1,234,819
__________ __________
Total assets $ 7,503,164 7,502,008
__________ __________
See accompanying notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 27,892 20,279
Deferred income advance oil lease bonus - 11,250
Federal and state income taxes 58,279 -
__________ __________
Total current liabilities 86,171 31,529
__________ __________
Preferred stock of $1 par value; 100,000
Shares authorized; no shares issued - -
Common stock of $1 par value; 2,500,000
Shares authorized; 503,924 issued 503,924 503,924
Treasury stock 5,000 shares in 2003 and 2002 (71,250) (71,250)
Retained earnings 6,892,059 6,941,699
Accumulated other comprehensive income,
net of deferred taxes of $49,677 in 2003
and $51,749)in 2002 92,260 96,106
__________ __________
Total stockholders' equity 7,416,993 7,470,479
__________ __________
Total liabilities and stockholder's equity $ 7,503,164 7,502,008
__________ __________
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES, INC.
Consolidated Statements of Earnings and Retained Earnings
Six months ended June 30, 2003 and 2002 and
three months ended June 30, 2003 and 2002
(Unaudited)
(amounts in unit dollars)
Six months ended Three months ended
June 30, June 30,
2003 2002 2003 2002
_________ _________ _________ _________
Operating revenue:
Coal royalties $ 22,500 22,500 22,500 22,500
Oil and gas royalties 293,127 189,556 162,338 124,721
Oil and gas revenue 191,632 - 98,127 -
Oil and other mineral lease
rentals and bonuses 15,275 96,578 - 72,677
_________ _________ _________ _________
Total operating revenue 522,534 308,634 282,995 219,898
Oil and gas operating expenses 103,057 - 38,175 -
General and administrative
expenses 337,415 292,000 186,331 123,841
Gain on sales of real estate (16,002) - - -
_________ _________ _________ _________
Total expenses 424,470 292,000 224,506 123,841
_________ _________ _________ _________
Operating income 98,064 16,634 58,489 96,057
_________ _________ _________ _________
Nonoperating income (loss):
Investment income (loss) (44,576) (471,308) 12,333 (290,855)
Other 644 149 32 18
_________ _________ _________ _________
Total nonoperating
income (loss) (43,932) (471,159) 12,365 (290,837)
_________ _________ _________ _________
Earnings(loss)from
continuing operations
before income taxes 54,132 (454,525) 70,854 (194,780)
Income taxes 3,986 (215,033) 17,287 (74,228)
_________ _________ _________ _________
Net earnings (loss) 50,146 (239,492) 53,567 (120,552)
Retained earnings at
beginning of period 6,941,699 7,445,022 6,888,386 7,275,690
Deduct cash dividends paid
of $.20 per share in 2003
and $.20 per share in 2002 (99,786) (100,784) (49,894) (50,392)
_________ _________ _________ _________
Retained earnings at end
of period $ 6,892,059 7,104,746 6,892,059 7,104,746
Earnings (loss) per share-
basic and diluted $ 0.10 (0.48) 0.11 (0.24)
_________ _________ _________ _________
Weighted average number
of shares of common stock
outstanding
Basic 498,924 503,924 498,924 503,924
Diluted 498,924 503,998 498,924 503,924
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES, INC.
Consolidated Statements of Comprehensive Income
Six months ended June 30, 2003 and 2002 and
three months ended June 30, 2003 and 2002
(Unaudited)
(amounts in unit dollars)
Six months ended Three months ended
June 30, June 30,
2003 2002 2003 2002
_________ _________ _________ _________
Net earnings (loss) $ 50,146 (239,492) 53,567 (120,552)
_________ _________ _________ _________
Other comprehensive income:
Realized gains and unrealized
appreciation (depreciation)
on investments 6,751 16,311 9,421 (14,906)
Income taxes (2,363) (5,709) (3,297) 5,217
_________ _________ _________ _________
Realized gains and
unrealized appreciation 4,388 10,602 6,124 9,689
_________ _________ _________ _________
Less:
Realized investment (gains)
losses included in net
earnings (12,669) (17,169) 961 (8,433)
Income taxes 4,435 6,009 (336) 2,952
_________ _________ _________ _________
(8,234) (11,160) 625 (5,481)
_________ _________ _________ _________
(3,846) (558) 6,749 (15,170)
_________ _________ _________ _________
Comprehensive
income $ 46,300 (240,050) 60,316 (135,722)
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES, INC.
Consolidated Statements of Cash Flows
Six months ended June 30, 2003 and 2002
(Unaudited)
(amounts in unit dollars)
2003 2002
_________ _________
Cash flows from operating activities:
Net earnings (loss) $ 50,146 (239,492)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Gain on sales of equity securities (12,699) (17,169)
Gain on sales of real estate (16,002) -
Depletion, depreciation
and amortization 34,897 563
Amortization of premiums and discounts of
Securities, net (17,355) (34,128)
Impairment charge on equity securities - 535,133
Impairment charge on other investments 87,282 -
Changes in assets and liabilities:
Accounts receivable and other assets (123,894) 70,824
Income tax receivable 166,462 -
Deferred oil lease bonus (11,250) (47,353)
Accounts payable and accrued expenses 7,613 3,716
Federal and state income taxes 66,063 (195,256)
_________ _________
Net cash provided by
operating activities 231,293 76,838
_________ _________
Cash flows from investing activities:
Proceeds from note receivable 6,145 12,885
Proceeds from matured/called investment
debt securities 9,000,000 12,000,000
Purchases of investment debt securities (8,984,798) (11,957,392)
Proceeds from sales of land 16,297 -
Purchases of oil and gas lease property (1,219,843) -
Purchases of equity securities (1,367) (171,250)
Proceeds from sales of equity securities 71,034 60,390
_________ _________
Net cash used in
investing activities (1,112,532) (55,367)
_________ _________
Cash flows from financing activities
Dividend paid (99,786) (100,784)
Net increase in cash and cash equivalents (981,025) (79,313)
Cash and cash equivalents,
beginning of year 1,956,795 1,285,926
_________ _________
Cash and cash equivalents,
end of period $ 975,770 1,206,613
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 2003
(1) Basis of Presentation:
In the opinion of Central Natural Resources, Inc. (the Company),
the accompanying unaudited consolidated financial statements contain
all adjustments (consisting of only normal recurring accruals)
necessary to present fairly the financial position as of June 30, 2003,
and the results of operations and cash flows for the periods ended June
30, 2003 and 2002.
The consolidated financial statements are presented in accordance with
the requirements of Form 10-Q and, consequently, do not include all the
disclosures required by accounting principles generally accepted in the
United States of America. For further information, refer to the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
The Company has elected to utilize the Successful Efforts method of
accounting for revenue and expenses from oil and gas production which has
been detailed in the Company's 10-K and previous reports. Revenue and
expenses associated with oil and gas production is accrued in the period
the revenue or expenses are generated. Any needed adjustments are
made when payments are received. Revenue and expenses from oil and
gas production in the period ended June 30, 2003 was generated by working
interests in oil and gas properties acquired in February 2003. No revenue
or expenses from oil and gas production was recorded in the period ended
June 30, 2002.
Exploration and Production - Exploration expenses, including geological
and geophysical costs, rental and exploratory dry holes, are charged
against income as incurred. Costs of successful wells and related
production equipment and developmental dry holes are capitalized and
amortized by field using the unit-of-production method as the oil and
gas are produced.
Undeveloped acreage costs are capitalized and amortized at rates that
provide full amortization on abandonment of unproductive leases.
Costs of abandoned leases are charged to the accumulated amortization
accounts, and costs of productive leases are transferred to the
developed property accounts.
Other - Property, plant and equipment is stated at cost less reserves
for depreciation, depletion and amortization. Maintenance and repairs
are expensed as incurred, except that costs of replacements or renewals
that improve or extend the lives of existing properties are capitalized.
Impairment of Long-Lived Assets - Proved oil and gas properties are
reviewed for impairment on a field-by-field basis when facts and
circumstances indicate that their carrying amounts may not be recoverable.
In performing this review, future cash flows are estimated by applying
estimated future oil and gas prices to estimated future production,
less estimated future expenditures to develop and produce the
reserves. If the sum of these estimated future cash flows (undiscounted
and without interest charges) is less than the carrying amount of the
property, an impairment loss is recognized for the excess of the
carrying amount over the estimated fair value of the property
based on estimated future cash flows.
Results of operations for interim periods are not necessarily indicative
of results to be expected for a full year.
Stock Option Plans
In the second quarter of 2003 the Company granted stock options in the
amount of 1,250 shares to each Director under the Company's "Director
Nonqualified Stock Option Agreement". In addition, the Company approved
the grant of 6,000 options, vesting in equal amounts over three
years, to Phelps C. Wood, the Chief Executive Officer of the Company.
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations in accounting
for its fixed plan stock options. As such, compensation expense would be
recorded on the date of grant only if the then current market price of the
underlying stock exceeded the exercise price. Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation,
established accounting and disclosure requirements using a fair value-based
method of accounting for stock-based employee compensation plans. As allowed
by SFAS No. 123, the Company has elected to continue to apply the intrinsic
value-based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123. The following table illustrates
the effect on net income (loss) if the fair value based method had been
applied to all outstanding and unvested awards in each period:
Six months ended Three months ended
June 30, June 30,
2003 2002 2003 2002
________ _______ _______ _______
Net Earnings (loss):
As Reported $ 50,146 (239,492) 53,567 (120,552)
Pro Forma 45,384 (244,352) 48,805 (125,412)
Earnings (loss) per share:
As Reported $ 0.10 (0.48) 0.11 (0.24)
Pro Forma 0.09 (0.48) 0.10 (0.25)
_________ ________ _______ _________
(2) Investment Securities:
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for held-to-maturity and available-for-sale
securities by major security type at June 30, 2003 and December 31, 2002
are as follows:
Gross Gross
unrealized unrealized
Amortized holding holding Fair
June 30, 2003 cost gains losses value
__________________ __________ __________ __________ __________
Held-to-maturity:
U. S. government
agency securities $ 2,996,501 - (618) 2,995,883
Available-for-sale:
Equity securities $ 437,783 142,679 (742) 579,720
December 31, 2002
_________________
Held-to-maturity:
U. S. government
agency securities $ 2,994,347 - (347) 2,994,000
Available-for-sale:
Equity securities $ 494,782 153,461 (5,606) 642,637
CENTRAL NATURAL RESOURCES INC.
Notes to Unaudited Consolidated Financial Statements
Investment income (loss) consists of the following for each of the
periods ended June 30:
Six months ended Three months ended
June 30, June 30,
2003 2002 2003 2002
________ _______ _______ _______
Realized gains on sales
of equity securities $ 12,669 17,169 (991) 8,433
Impairment charge (87,282) (535,133) - (323,006)
Interest Income 26,101 44,052 11,459 22,416
Dividend Income 3,936 2,604 1,865 1,302
_______ _______ _______ _______
$ (44,576) (471,308) 12,333 (290,855)
Investments in debt securities are classifiedas held-to-maturity
securities, which are carried at amoritized cost. Investments
in marketable equity securitites are classified as available-for-sale
securities, which are carried at fairvalue, with unrealized gains and
losses excluded from earningsand reported in other comprehensive
income.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other
than temporary results in a reduction in carrying amount to
fair value. The impairment is charged to earnings and a new cost
basis for the security is established. Other than temporary
impairment is analyzed quarterly on an individual security
basis based on the length of time and the extent to which market
value has been less than cost; the financial condition and any
specific events which effect the issuer; and the Company's
intent and ability to hold the security. During the six
and three months ended June 30, 2003, the Company recognized
no impairment charge for marketable equity securities.
Other investments represent an equity interest in non-marketable
securities for which the Company does not possess significant
influence. These investments are accounted for at cost. An
impairment charge was recognized in the amount of $87,282 to reflect
an impairment in these securities in the first quarter of 2003.
(3) Investment in Oil and Gas Property
In the first quarter of 2003, the Company, through a wholly-owned
subsidiary, CNR Production, L.L.C., a Texas limited liability company
(hereinafter the "Subsidiary"), acquired an undivided two percent (2%)
interest in certain working interests in two oil and gas fields known
as the Bass Flores Field and Total Tabasco Field located in Hidalgo and
Starr Counties in south Texas. As consideration for this acquisition,
the Subsidiary paid $1,080,000. This area of Texas is active in the
production of gas and oil, and there are a number of operating oil and
gas wells located on the property acquired. This acquisition is recorded
on the prorata consolidation method and all revenue and expenses
associated with oil and gas production are accounted for on an accrual
basis. For the period ended June 30, 2003, this property generated 100%
of oil and gas production for the Company.
In May, the Subsidiary acquired a 2% working interest in 194.28 additional
unproved acres in the Flores Field in Hidalgo Co., Texas for $80,000.
This amount was paid by the Subsidiary from funds provided by the Company
from its available liquid resources by means of capital contributions and
loans to the subsidiary. The Subsidiary through the acceptance of an
Authorization For Expenditure (AFE), has elected to participate in the
drilling of an exploratory well on this property with an anticipated start
date of July 1, 2003.
Oil and gas property recorded on the balance sheet is comprised of
property that is both proved and unproved. At June 30,2003, leasehold
costs for unproven properties amounted to $275,921.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total operating revenue increased in the first six months of 2003
over the first six months of 2002, and in the second quarter of 2003
over the second quarter of 2002, due to increased revenues from oil
and gas royalties which, in turn, were due to increased production of
oil and gas during the current periods under comparison, coupled with
an increase in average prices during the comparable periods.
Additionally, revenue from oil and gas working interests acquired in
the first quarter of 2003, as described in Note 3 to the Financial
Statements, contributed to the increase in operating revenue in the
current period. Oil and other mineral lease rentals and bonuses
decreased in the first six months of 2003 from the first six months of
2002 and in the second quarter of 2003 from the second quarter of 2002
due to reduced lease and bonus activities in the periods under
comparison as well as lower income recognizable from these sources in
the current periods under consideration.
As mentioned in prior reports, a lessee continues to expand drilling
operations and production of coal bed methane gas from certain of the
Company's coal properties located in Sebastian County, Arkansas, with
revenue continuing to be received from royalties from this operation
during the current fiscal periods under comparison. Commercial
production has been somewhat consistent over the past two years,
however, the level of commercial production on an ongoing basis must
be considered uncertain at this time, as the amount of revenue which
will continue to be received from this source will be subject to the
uncertainties of volume of production and price fluctuations in the
market price of natural gas. For the six months ended June 30, 2003,
royalties from coal bed methane production associated with these
properties was $98,533 and are included in operating revenue in oil
and gas royalties.
General and administrative expenses increased in both the second
quarter of 2003 from the second quarter of 2002 and the first six
months of 2003 from the first six months of 2002 due to increased
compensation associated with the engagement of a full time chief
executive officer. Oil and gas operating expenses, which include
lease operating costs as well as depletion, depreciation and
amortization, increased due to the acquisition and subsequent
operation of the working interests discussed previously.
There was positive non-operating income in the second quarter of 2003
compared to a non-operating loss in the second quarter of 2002,
and non-operating losses decreased in the first six months of 2003
from the first six months of 2002 due to an investment gain in 2003
versus an impairment charge recognized on investments in 2002.
In the first six months of 2002 the Company recognized impairment
charges reflecting write-downs in the carrying value of certain
marketable investment securities as described in Note 2 because
decreases in current market values of those securities were deemed by
Management to be other than temporary. There was no impairment charge
recognized on investment equity securities in the first six months
of 2003 although during the first quarter of 2003 an impairment charge
of $87,282 was taken on the carrying value of an investment in
non-marketable securities held by the Company.
The Company recorded an increase in income taxes for the second quarter
of 2003 over the second quarter of 2002 as well as for the first six
months of 2003 over the first six months of 2002 due to increased taxable
earnings compared to losses in the prior periods under comparison.
Income tax benefits from 2002 reflect receipt of a refund of state
income taxes for prior years amounting to $70,093.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Financial Condition - Liquidity and Capital Resources
The financial condition of the Company continued to be strong through
the end of the first six months of 2003 as it was at the end of the
fiscal year in 2002. Although the Company utilized available liquidity
to fund the acquisition of working interests in south Texas as well
as exploratory drilling activities in east Texas, the liquidity of the
Company continues to be high as is evidenced by a continuing favorable
ratio of current assets to current liabilities, and the fact that a
significant portion of the Company's net worth continues to be
represented by liquid assets.
The Company continues to have no bank debt or other lender liability
outstanding and no significant other liabilities. There are no off
balance sheet arrangements. In addition, since the Company carries
no inventory and has low amounts of accounts receivable and accounts
payable, its working capital needs are minimal, and since it has
significant liquid assets, and there are no current known demands,
commitments or contractual obligations, Management believes that
liquidityshould continue to be favorable and the financial condition of
the Company strong.
Regarding future capital expenditures, as reported in prior filings,
the Company is participating in an oil and gas exploration venture in
east Texas. In May 2003, due to the funding requirements associated
with exploratory drilling operations, the Board authorized an
additional $250,000 (for a total authorization of up to $500,000) to
enable the Company's wholly-owned subsidiary, CNR Production LLC, to
participate further in the project. Approximately $195,325 has been
paid by the subsidiary through the close of the second quarter of 2003.
Exploratory drilling began on this property in the second quarter of
2003 and the subsidiary entered into an Operating Agreement with Smith
Production Inc. to manage the drilling and ongoing lease operating
activities associated with this project. It is expected that, in the
near term, these exploratory activities will require additional funds
pursuant to Authorizations for Expenditures as discussed hereafter.
With regard to the south Texas acquisition and the east Texas project
described above, the subsidiary will be called upon, from time to time,
to pay its pro-rata share of expenses and capital expenditures
associated with the projects. As discussed in past reports, prior to
expenditures being incurred on these properties, the project operator
will issue an Authorization for Expenditure (AFE) for review and
approval by the subsidiary.Management believes that, based upon the
subsidiary's current liquidity level and the expected future revenue
from these ventures, sufficient financial resources will be available
to meet any and all funding requirements required by these projects.
Other than these projects, the Company has no specific commitment for
material expenditures at the present time. Management does, however,
continue to actively pursue other business opportunities which may
result in a more productive deployment of its assets and ultimately
increase earnings, and in pursuit of that objective has focused on
the possible acquisition of additional mineral properties or working
interest in selected oil and gas operations. In addition, Management
continues to aggressively pursue development of its currently owned
oil and gas and coal properties and to attempt to lease more of its
mineral properties in order to generate additional rental, bonus and
royalty income. The only continuing commercial commitment is the
operating lease for general office space of the Company and
commitments with respect to the Texas oil and gas projects referred
to above.
Although as discussed above, the liquidity of the Company continues
to be favorable, it is affected by cash flows. The Consolidated
Statement of Cash Flows in the accompanying Consolidated Financial
Statements illustrates that there was a net decrease in cash and cash
equivalents during the first six months of 2003 and in the same period
in 2002, but the decrease was greater in the current period.
Contributing to the differences was an increase in the amount of
accounts receivable and advances to operators included in other assets
in 2003 and a decrease in deferred oil lease bonuses. Also contributing
to the increase in operating cash flows was the net gain in the first
six months of 2003 compared to the net loss in the first six months of
2002. The increase in cash flows from operating activities in the first
six months of 2003 versus the same period of 2002 was also affected by
the receipt of income tax refunds and the effect of depletion,
depreciation and amortization associated with income from the oil and
gas properties purchased in 2003. A significant use of cash from
investing activities in the current period was the acquisition of
working interests in oil and gas properties and differences in the
amount of proceeds from the sale of equity securities and purchase of
equity securities, and the amount of proceeds from matured/called
investment debt securities which were reinvested. Both the 2003 and the
2002 periods under comparison included certain impairment charges which
reduced earnings but did not reduce cash but the aggregate amount of such
impairment charges were significantly greater in 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Accounting Policies, Recent Accounting Pronouncements
and Other Matters
A summary of significant accounting policies was contained in
Note 1 to the consolidated financial statements of the Company
filed with Form 10-K for the year ended December 31, 2002. One
example of a judgment made in applying a critical accounting policy
is the impairment charge made relative to the decline in market
value of certain securities that is deemed to be other than temporary
as is referred to above. The impairment of the value of securities
is analyzed quarterly on an individual security basis based on the
length of time (generally six months), and the extent to which market
value has been less than cost; the financial condition and any
specific events which affect the issuers; and the Company's intent
and ability to hold the security. There would be materially different
reported results if different assumptions or conditions were to
prevail. In the judgment of Management and the Board of Directors, the
indicated charges were appropriate, however, they have taken note of
the fact that the overall return of the portfolio since inception is
positive. Another example of a judgment made in applying a critical
accounting policy is the periodic review of long-lived assets for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. This
accounting policy has been applied in the past, for example, in
downward adjustments to the carrying value of the Company's coal
properties. However, this accounting policy does not permit an
upward adjustment in such carrying values, when Management believes
the current fair market value of an asset is greater than the
carrying value on the balance sheet and in fact Management believes
that this may be the case with respect to the carrying value of
certain assets on the balance sheet carried at their historical cost.
Yet another example of judgment exercised in applying a critical
accounting policy is the election, approved by the Board of Directors
of the Company, to utilize the "Successful Efforts" method of
accounting with respect to the operation of the oil and gas working
interests described above. "Successful Efforts" typically results in
more of the costs of operations expensed and deducted as incurred.
A cash dividend of $0.10 per share was paid in both the first
quarter and the second quarter of 2003, and a cash dividend of the
same amount was paid in the first and second quarter of 2002. After
the close of the current quarter, the Board declared a dividend
of $0.10 to be paid in the third quarter of 2003.
The Company was required to adopt SFAS No. 143, Accounting for Asset
Retirement Obligations on January 1, 2003 and SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets on
January 1, 2002. The adoption of SFAS No.143 and SFAS No. 144 had no
material impact on the Company's financial statements.
Forward-Looking Statements
This report contains forward-looking statements that are based on
current expectations, estimates, forecasts, and projections about
the business segment in which the Company operates, Management's
beliefs, and assumptions made by Management. These and other written
or oral statements that constitute forward-looking statements may be
made by or on behalf of the Company. These statements are not
guarantees of future performance and involve assumptions and certain
risks and uncertainties that are difficult to predict, such as future
changes in energy prices, including fluctuations in prevailing prices
for oil and gas, the Company's ability to participate in or co-venture
successful exploration or production of natural resources (such as oil,
gas, coal and other minerals), results of drilling and other
exploration and development activities, uncertainties regarding future
political, economic, regulatory, fiscal, and tax policies and practices
as well as assumptions concerning a relatively stable national economy,
and the absence of a major disruption such as a domestic act of
terrorism and the uncertainties of even routine litigation in which
the Company is involved from time-to-time in the ordinary course of
its business operations. In addition, the company relies on professional
and management services provided by third parties in certain of its
operating activities. Therefore, actual outcomes and results may differ
materially from what is expressed, implied, or forecast in such
forward-looking statements. The Company does not, by including this
statement, assume any obligation to review or revise any particular
forward-looking statement referenced herein in light of future events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The primary market risk exposures of the Company relate to changes
in interest rates, changes in equity security prices, and changes in
certain commodity prices.
The Company's exposure to market risk for changes in interest rates
relates solely to its fixed income portfolio which consists of U. S.
government agency securities. All such securities are held-to-maturity
and have original maturities of less than one year. The Company does
not use derivative financial instruments to hedge interest rates on
its fixed income investment securities.
The Company's exposure to market risk for changes in equity security
prices relates solely to its marketable equity investment portfolio
which consists primarily of common stocks of domestic, publicly held
enterprises.
The Company's exposure to market risk for changes in commodity prices
relates to changes in the prices of coal, oil, and natural gas, and the
effect thereof on its royalties and rentals relating to coal deposits
and mineral rights, as is discussed in more detail in Management's
Discussion and Analysis of Financial Condition and Results of
Operations, set forth in Part 1, Item 2 of this report. The Company
does not use derivative commodity instruments to hedge its commodity
risk exposures.
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2003, the Company's management, including the Chief
Executive Officer and the Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's
disclosure controls and procedures as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934. Based on that
evaluation, the Company's management, including its Chief Executive
Officer and its Chief Financial Officer, concluded that its disclosure
controls and procedures were effective in timely alerting management,
including the Chief Executive Officer and the Chief Financial Officer,
of material information about the Company required to be included in
periodic Securities and Exchange Commission filings. However, in
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how
well designed and operated can provide only reasonable assurance of
achieving the desired control objectives, and management necessarily
was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures. There have been no
changes in the Company's internal control over financial reporting that
occurred during the quarter ended June 30, 2003 that have materially
affected, or are reasonably likely to materially affect, its internal
control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities, and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - Attached
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - Attached
PART II, ITEM 4. - SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
The following meeting of Stockholders was held during the second
quarter to which this report pertains.
(a) The Annual Meeting of Stockholders was held April 22, 2003.
in Pasadena, CA.
(b) The meeting involved the election of Directors, and the
following are the Directors elected at that meeting:
Bruce L. Franke
Ray A. Infantino
Patrick J. Moran
James R. Ukropina
Phelps C. Wood
Phelps M. Wood
There were no other Directors whose term of office as a Director
continued after the meeting.
(c)(i) For the election of Directors, the votes received by all
nominees were as follows:
Bruce L. Franke 378,738
Ray A. Infantino 392,536
Patrick J. Moran 378,738
James R. Ukropina 392,536
Phelps C. Wood 378,738
Phelps M. Wood 378,738
Cumulative voting is not permitted.
(ii) At the same meeting, the Stockholders ratified the
appointment by the Audit Committee of the accounting firm KPMG LLP as
independent public accountants to examine the financial statements of the
Company for the year ending December 31, 2003 and to perform other appropriate
accounting services. The holders of 392,596 shares cast their votes
in favor of that appointment, the votes of 242 shares were cast against
it, and the holders of 400 shares abstained.
(d) There were no settlements between the Company and any
other participants terminating any solicitation subject to Rule 14a-11.
PART II, ITEM 6. - Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K are as follows:
Exhibit 31.1 - Certification required by Rule 13a-14(a) or Rule 15d-14(a)
for Chief Executive Officer (Attached as Exhibit 31.1 hereto).
Exhibit 31.2 - Certification required by Rule 13a-14(a) or Rule
15d-14(a) for Chief Financial Officer (Attached as Exhibit 31.2 hereto).
Exhibit 32.1 - Section 1350 Certification for Chief Executive Officer
(Attached as Exhibit 32.1 hereto).
Exhibit 32.2 - Section 1350 Certification for Chief Financial Officer
(Attached as Exhibit 32.2 hereto).
(b) No Current Reports on Form 8-K were filed during the second
quarter
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL NATURAL RESOURCES INC.
(Registrant)
Date: August 14, 2003
____________________________
By: /s/ Phelps C. Wood
____________________________
Phelps C. Wood
President, and Chief Executive Officer
Date: August 14, 2003
____________________________
By: /s/ Leonard L. Noah
____________________________
Leonard L. Noah,
Chief Financial Officer