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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 September 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 October 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 - September 30, 2003 and
December 31, 2002
Consolidated Statements of Earnings and Retained Earnings
- Nine months ended September 30, 2003 and 2002 and three
months ended September 30, 2003 and 2002
Consolidated Statements of Comprehensive Income
-Nine months ended September 30, 2003 and 2002 and
three months ended September 30, 2003 and 2002
Consolidated Statements of Cash Flows - Nine months
ended September 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
September 30, 2003 and December 31, 2002
(Unaudited)
(amounts in unit dollars)
ASSETS 2003 2002
__________ __________
Current assets:
, Cash and cash equivalents $ 728,369 1,956,795
Accounts receivable 52,750 22,500
Securities maturing within one year,
at amortized cost (note 2) 2,998,586 2,994,347
Notes receivable, current 58,151 65,221
Income tax receivable 44,468 206,867
Deferred income taxes - 4,204
Other 61,689 11,416
__________ __________
Total current assets 3,944,013 5,261,350
__________ __________
Equity securities, at fair value (note 2) 620,869 642,637
Other Investments 262,720 350,002
Deferred income taxes - 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 1,535,426 150,135
__________ __________
3,203,563 1,818,567
Less accumulated depletion, depreciation
and amortization 632,928 583,748
__________ __________
Net coal deposits, surface land,
leasehold improvements and oil and
gas property 2,570,635 1,234,819
__________ __________
Total assets $ 7,398,237 7,502,008
__________ __________
See accompanying notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 37,329 20,279
Deferred income advance oil lease bonus - 11,250
Federal and state income taxes 55,154 -
__________ __________
Total current liabilities 92,483 31,529
__________ __________
Deferred income taxes 17,052 -
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 12,100 shares in 2003
and 5,000 shares in 2002 (161,775) (71,250)
Retained earnings 6,808,307 6,941,699
Accumulated other comprehensive income,
net of deferred taxes of $74,437 in 2003
and $51,749 in 2002 138,246 96,106
__________ __________
Total stockholders' equity 7,288,702 7,470,479
__________ __________
Total liabilities and stockholder's equity $ 7,398,237 7,502,008
__________ __________
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES, INC.
Consolidated Statements of Earnings and Retained Earnings
Nine months ended September 30, 2003 and 2002 and
three months ended September 30, 2003 and 2002
(Unaudited)
(amounts in unit dollars)
Nine months ended Three months ended
September 30, September 30,
2003 2002 2003 2002
_________ _________ _________ _________
Operating revenue:
Coal royalties $ 45,000 45,000 22,500 22,500
Oil and gas royalties 445,781 312,957 152,654 123,401
Oil and gas revenue 291,183 - 99,551 -
Oil and other mineral lease
rentals and bonuses 23,985 100,415 8,710 3,837
_________ _________ _________ _________
Total operating revenue 805,949 458,372 283,415 149,738
Oil and gas operating expenses 94,898 - 26,175 -
DD&A expense 49,180 1,125 14,283 563
Exploration Expenses 165,503 - 165,503 -
General and administrative
expenses 482,588 416,409 145,736 124,972
Gain on sales of real estate (16,002) - - -
_________ _________ _________ _________
Total expenses 776,167 417,534 351,697 125,534
_________ _________ _________ _________
Operating income (loss) 29,782 40,838 (68,282) 24,204
_________ _________ _________ _________
Nonoperating income:
Investment expense (income) (14,001) (664,979) 30,575 (193,671)
Other 656 2,431 12 2,280
_________ _________ _________ _________
Total nonoperating
income (loss) (13,345) (662,548) 30,587 (191,391)
_________ _________ _________ _________
Earnings(loss)from
continuing operations
before income taxes 16,437 (621,710) (37,695) (161,187)
Income taxes 861 (280,115) (3,125) (64,918)
_________ _________ _________ _________
Net earnings (loss) 15,576 (341,595) (34,570) (102,269)
Retained earnings at
beginning of period 6,941,699 7,445,022 6,892,059 7,104,910
Deduct cash dividends paid
of $.30 per share in 2003
and $.30 per share in 2002 (148,968) (151,177) (49,182) (50,393)
_________ _________ _________ _________
Retained earnings at end
of period $ 6,808,307 6,952,248 6,808,307 6,952,248
Earnings (loss) per share-
basic and diluted $ 0.03 (0.68) (0.07) (0.20)
_________ _________ _________ _________
Weighted average number
of shares of common stock
outstanding
Basic 497,103 503,924 493,522 503,924
Diluted 497,103 503,924 493,522 503,924
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES, INC.
Consolidated Statements of Comprehensive Income
Nine months ended September 30, 2003 and 2002 and
three months ended September 30, 2003 and 2002
(Unaudited)
(amounts in unit dollars)
Nine months ended Three months ended
September 30, September 30,
2003 2002 2003 2002
_________ _________ _________ _________
Net earnings (loss) $ 15,576 (341,595) (34,570) (102,269)
_________ _________ _________ _________
Other comprehensive income:
Realized gains and unrealized
appreciation (depreciation)
on investments 93,031 (41,814) 86,281 (58,125)
Income taxes (32,559) 14,635 (30,198) 20,344
_________ _________ _________ _________
Realized gains and
unrealized appreciation 60,472 (27,179) 56,083 (37,781)
_________ _________ _________ _________
Less:
Realized investment (gains)
losses included in net
earnings (28,203) 48,497 (15,534) 65,666
Income taxes 9,871 (16,974) 5,437 (22,983)
_________ _________ _________ _________
(18,332) 31,523 (10,097) 42,683
_________ _________ _________ _________
42,140 4,344 45,986 4,902
_________ _________ _________ _________
Comprehensive
income (loss) $ 57,716 (337,251) 11,416 (97,367)
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES, INC.
Consolidated Statements of Cash Flows
Nine months ended September 30, 2003 and 2002
(Unaudited)
(amounts in unit dollars)
2003 2002
_________ _________
Cash flows from operating activities:
Net earnings (loss) $ 15,576 (341,595)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in)
operating activities:
Depletion, deprecition, and amortization 49,180 1,125
Amortization of premiums and discounts of
Securities, net (24,181) (51,138)
Impairment charge on equity securities - 686,229
Impairment charge on other investments 87,282 -
Gain on sales of real estate (16,002) -
Loss(gain)on sales of equity
securities (28,203) 48,497
Changes in assets and liabilities:
Accounts receivable and other assets (80,523) 94,816
Income tax receivable 162,399 -
Deferred oil lease bonus (11,250) (47,353)
Accounts payable and accrued expenses 17,050 15,966
Federal and state income taxes 66,922 (259,237)
_________ _________
Total adjustments 222,674 488,905
_________ _________
Net cash provided by
operating activities 238,250 147,310
_________ _________
Cash flows from investing activities:
Proceeds from note receivable 7,070 12,885
Proceeds from matured/called investment
debt securities 12,000,000 16,000,000
Purchases of investment debt securities (11,980,058) (15,946,547)
Proceeds from sales of land 16,297 -
Purchases of oil and gas lease property (1,219,843) -
Purchases of equity securities (1,367) (296,138)
Proceeds from sales of equity securities 116,426 149,067
Purchase of oil and gas lease property (1,385,291) -
Purchase of other investments - (143,256)
_________ _________
Net cash provided by
investing activities (1,227,183) (233,989)
_________ _________
Cash flows from financing activities:
Purchase of treasury stock (90,525) -
Payment of dividends (148,968) (151,177)
_________ _________
Net cash used in financing activities (239,493) (151,177)
_________ _________
Net increase in cash and cash equivalents (1,228,426) (227,856)
Cash and cash equivalents,
beginning of year 1,956,795 1,285,926
_________ _________
Cash and cash equivalents,
end of period $ 728,369 1,058,070
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES INC.
Notes to Unaudited Consolidated Financial Statements
September 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 September 30, 2003, and the results of operations and cash
flows for the periods ended September 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 uses the Successful Efforts method of accounting for
revenue and expenses from oil and gas production that 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. Revenue and
expenses from oil and gas production in the period ended
September 30, 2003 was generated by working interests in oil and
gas properties acquired in February 2003 and working interests in
unproved properties acquired in July 2002. No revenue or expenses
from oil and gas production was recorded in the period ended
September 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 first nine months of 2003 the Company granted stock
options in the amount of 1,250 shares to each of the Directors
under the Company's "Director Nonqualified Stock Option Plan".
Also in the first nine months of 2003, 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. In the third quarter of 2003 the Company made no grants
to Directors or to employees 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:
Nine months ended Three months ended
September 30, September 30,
2003 2002 2003 2002
________ _______ _______ _______
Net Earnings (loss):
As Reported $ 15,576 (341,595) (34,570) (102,269)
Stock Options (4,762) (4,860) (4,762) (4,860)
Pro Forma 10,814 (346,455) (39,332) (107,129)
Earnings (loss) per share:
As Reported $ 0.03 (0.68) (0.07) (0.20)
Pro Forma 0.02 (0.71) (0.08) (0.21)
_________ ________ _______ _________
(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
September 30, 2003 and December 31, 2002 are as follows:
Gross Gross
unrealized unrealized
Amortized holding holding Fair
September 30, 2003 cost gains losses value
__________________ __________ __________ __________ __________
Held-to-maturity:
U. S. government
agency securities $ 2,998,586 - (3) 2,998,583
Available-for-sale:
Equity securities $ 408,185 213,264 (580) 620,869
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 September 30:
Nine months ended Three months ended
September 30, September 30,
2003 2002 2003 2002
________ _______ _______ _______
Realized gains on sales
of equity securities $ 28,203 (48,497) 15,534 (65,666)
Impairment charge (87,282) (686,229) - (151,096)
Interest Income 39,507 62,943 13,406 18,891
Dividend Income 5,571 6,804 1,635 4,200
_______ _______ _______ _______
$ (14,001) (664,979) 30,575 (193,671)
Investments in debt securities are classified as held-to-maturity
securities, which are carried at amortized cost. Investments in
marketable equity securities are classified as available-for-sale
securities, which are carried at fair value, with unrealized
gains and losses excluded from earnings and 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 three months ended September 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
For the period ended September 30, 2003, working interests in oil
and gas producing properties acquired by the Company's wholly-
owned subsidiary, CNR Production, L.L.C. (CNR) in the first
quarter of 2003, and discussed in previous reports, generated
100% of oil and gas production. In the third quarter of 2003,
CNR began development work on its working interest properties in
the Flores and the Tabasco fields in Hidalgo and Starr Counties
in south Texas. Through the end of the third quarter CNR had
paid $245,750 on four wells in this area (including an
exploratory well on unproved property for which a 2% working
interest was acquired in May, 2003, as discussed in a previous
report). At quarter end, two wells were in the process of being
completed while drilling activity continued on the remaining two
wells.
Through the end of the third quarter of 2003, CNR had paid
$154,870 toward exploratory well development on CNR's east Texas
working interest property located in Liberty County. This amount
includes $92,785 expensed on the income statement under
"Exploration expenses" due to unsuccessful exploratory wells.
At quarter end, one well was in the process of being completed
while drilling activity continued on the second well (known as
the Grayburg #1). After the close of the quarter, the operator
of the property made the determination that the Grayburg #1 was a
dry-hole and would need to be plugged and abandoned. Costs
incurred on this well in the third quarter are included in
Exploration expenses described above.
Oil and gas property recorded on the balance sheet is comprised
of property that is both proved and unproved. At September 30,
2003, unproved properties amounted to $227,406, which is net of
a write-down of $72,718 associated with exploratory dry-holes
expensed in the third quarter of 2003 under Exploration Expenses
on the Income Statement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Total operating revenue increased in the first nine months of 2003
over the first nine months of 2002, and in the third quarter of
2003 over the third quarter of 2002, due partially to increased
revenue 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 more detail 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 nine months of 2003 from the first nine months of 2002
despite a slight increase in the third quarter of 2003 over the
third quarter of 2002. The decrease during the comparable nine-
month periods was 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 lessee plans to
further develop this property over the next 12 to 18 months. If
this development is successful, it could result in increased
production and a corresponding increase in the amount of revenue
that the Company receives from this lessee. Current and future
revenue from this source will continue to be subject to the
uncertainties of volume of production and price fluctuations in
the market price of natural gas. For the nine months ended
September 30, 2003, royalties from coal bed methane production
associated with these properties was $147,221 and are included
in operating revenue in oil and gas royalties.
General and administrative expenses increased in both the third
quarter of 2003 from the third quarter of 2002 and the first nine
months of 2003 from the first nine months of 2002 due partially to
increased compensation associated with the engagement of a full
time chief executive officer. Expenses associated with oil and gas
operations, which include lease operating costs, depletion,
depreciation and amortization, and exploration expenses, increased
due to the acquisition and subsequent operation of the working
interests discussed previously. Exploration expenses increased in
the third quarter due to exploration activity in the Company's
working interest properties. Exploration expenses for both the
quarter and the nine month period ended September, 30, includes
costs relating to unsuccessful well attempts as well as the
write-down of capitalized lease costs related to those wells.
There was positive non-operating income in the third quarter of
2003 compared to a non-operating loss in the third quarter of 2002,
and non-operating losses decreased in the first nine months of 2003
from the first nine months of 2002. In the first nine 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 nine 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 a decrease in income tax benefits for the
third quarter of 2003 from the third quarter of 2002 due to reduced
losses in the current period under comparison. Income taxes
increased in the first nine months of 2003, from the first nine
months of 2002 due to taxable earnings generated in the current
period versus a net loss in the comparable 2002 period.
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 nine 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 and developmental drilling
activities in east Texas and south Texas by the Company's wholly-
owned subsidiary, CNR Production L.L.C. (CNR), 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 liquidity should continue to be favorable
and the financial condition of the Company strong.
Regarding future capital expenditures, as reported in prior
filings, CNR is participating in an oil and gas exploration venture
in east Texas and continues to expand both developmental and
exploratory efforts on its south Texas properties. Through the
close of the third quarter of 2003, CNR had committed to
participate in a total of seven wells as mentioned in Note 3, and
CNR believes that additional exploratory and developmental well
potential exists in these areas. CNR expects that in the near
term, these activities will require additional funds pursuant to
Authorizations for Expenditures as discussed hereafter.
With regard to CNR's working interests in oil and gas properties
described above, it 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 CNR. Management believes that, based upon
the CNR'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 interests 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, 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 nine months of 2003 and in the same period in 2002, but
the decrease was greater in the current period. Contributing to
the differences was positive net earnings in the first nine months
of 2003 compared to a net loss in the first nine months of 2002 and
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. The increase in cash flows from
operating activities in the first nine months of 2003 versus the
same period of 2002 was also affected by differences in income tax
liability including the receipt of a refund of state income taxes
for prior years amounting to $70,093 in 2002. 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. A purchase of Treasury Stock
in the first nine months of 2003 reduced cash compared to the
comparable period 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 as
incurred.
A cash dividend of $0.10 per share was paid in each of the first,
second and third quarters of 2003, and a cash dividend of the same
amount was paid in the first, second and third quarters of 2002.
After the close of the current quarter, the Board declared a
dividend of $0.10 to be paid in the fourth quarter.
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 September 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 Central Natural
Resources, Inc.'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 September 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 - None
Item 5. Other Information - None
Item 6. Exhibits and Reports on Form 8-K - Attached
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: November 13, 2003
____________________________
By: /s/ Phelps C. Wood
____________________________
Phelps C. Wood
President, and Chief Executive Officer
Date: November 13, 2003
____________________________
By: /s/ Leonard L. Noah
____________________________
Leonard L. Noah,
Chief Financial Officer