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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2003
Commission File No. 0-1392
CENTRAL NATURAL RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 44-0196290
__________________ __________________
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
911 Main Street Suite 1710, Kansas City, Missouri 64105
______________________________________________________ _____
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 816/842-2430
____________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
___________________ ________________________
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common stock ($1 par value)
___________________________
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ X ]
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes [ ] No [ X ]
The aggregate market value of the voting stock held by
nonaffiliates of the registrant (201,770 shares), as of June 30, 2003
was $2,623,010.
The number of shares outstanding of the issuer's only class of
common stock as of March 1, 2004 is as follows:
Common Stock ($1.00 Par Value) . . . . . . 494,824
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement to be furnished to security holders and
the Securities and Exchange Commission on April 1, 2004, relative
to the Annual Meeting of Stockholders to be held on April 30, 2004.
(Part III)
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
PART I
ITEM 1. BUSINESS
(a) General Development of Business. Central Natural
Resources, Inc. (hereinafter "the Company") is a Delaware
corporation and the general development of its current one
business segment, the Energy Business Segment, is described in
the narrative description of the business contained in Section
1(c) hereafter. The Company historically has been involved
principally in that business.
Since the beginning of the fiscal year there has been no
material change in the mode of conducting the business of the
Company. In addition, there have been no bankruptcy, receivership or
similar proceedings with respect to the Company; there has been no
material reclassification, merger or consolidation of the Company;
other than the acquisition of a working interest in properties
described in Item 2, there has been no acquisition or disposition
of any material amount of assets other than in the ordinary course
of business.
In 2003, a wholly-owned subsidiary of the Company, CNR Production,
LLC. (CNR), acquired certain working interests in oil and gas that CNR
intends to further develop and extend over time. These interests
substantially expanded the Company's prior involvement in the oil and
gas industry. (The Company and CNR and other consolidated subsidiaries
of the Company are herein referred to collectively as "The Company").
The Company considers these asset additions to be in the Energy
Business Segment and intends to continue to expand its interests in
this area through both organic growth and, when opportunities present
themselves, future acquisitions. Continued expansion in this area
will increase the amount of oil and gas assets that the Company
records on its balance sheet and may result in increased expenses and
liabilities related to the exploration and production of oil and gas.
(b) Financial Information about Industry Segments. During
the year 2003, the Company had one reportable segment that is
identified as the Energy Business Segment.
(c) Narrative Description of Business. The activities of
the Company within the Energy Business Segment consist of the
management of its interests in real properties and the participation
in working interests as described hereinafter. Certain real
property interests have been held and managed by the Company for
lease to others for their exploration and the extraction of coal
and oil and gas and for surface use. From time to time sales
of portions of such properties have been made. The properties
owned at the end of the fiscal year are described in Item 2.
The Company's liquid assets are invested in a portfolio of
marketable securities, including United States government and
agency obligations.
Other than as described above, the Company produces no
products nor renders any services; however, as more fully
explained in Item 2, oil, gas and coal are extracted by lessees
from properties owned by the Company, and oil and gas is produced
from property in which the Company holds a working interest.
Bethlehem Steel Corporation was the lessee under a coal
lease from the Company for a term of 40 years commencing in June,
1969, providing for minimum royalties of $50,000 annually for
each of the first three years and $90,000 annually for the next
36 years, together with provisions for royalties of 22-1/2 cents
per ton of coal mined and shipped against which the minimum
royalties are to be applied. On October 1, 1984, this lease was
amended to increase the royalty to the greater of $1.00 per ton
or 3% of the F.O.B. mine selling price for all coal paid for by
actual royalty or minimum royalty after that date, and Bethlehem
assigned the lease to another.
A portion of the leased property was subsequently subleased
by the assignee to another party, but Bethlehem continues to
guarantee the total royalty payment. A small amount of mining
has been done on the lease. The Company believes that the assignee
will contine to make the $90,000 annual minimum royalty payments
until the lease termination in 2009.
The Company does not posess certain attributes. For example
there have been no new products or industry segments requiring
the investment of a material amount of assets of the Company, and
there have been no public announcements nor has information
otherwise become public involving any such new products or
industry segments.
Raw materials are not essential to the Company's businesses.
There are no patents, trademarks, licenses, franchises and
concessions held by the Company.
No business of any industry activity of the Company is or
may be seasonal.
-2-
The Company has no significant practices relating to working
capital since it carries no significant amount of inventory and
does not provide extended payment terms to customers.
The Company's business do not have any backlog of unfilled
orders.
No material portions of the businesses of the Company may be
subject to renegotiation of profits or termination of contracts
or subcontracts at the election of the Government.
Except as shown on the table below, there are no customers
to which sales are made in an amount which equals ten percent or
more of the Company's consolidated revenue in 2003.
Customer Relationship Revenue Amount % of 2003
Category Received Revenue
_______ ____________ __________ ________ _________
Smith
Production WI Operator Oil & Gas
Production $377,328 34.9%
Royal Oil Lessee Mineral
Royalties $198,525 18.4%
CDX Gas Lessee Mineral
Royalties $187,251 17.3%
SEECO Lessee Mineral
Royalties $121,651 11.3%
Mineral
Wilkem,Inc Assignee* Royalties $90,000 8.3%
*The Bethlehem lease referred to previously, was assigned to
Wilkem.
Competition
The Energy Business Segment is extremely competitive and
cyclical. The Company competes for property acquisitions with
natural gas and oil companies that range in size from small,
family owned operations to large independents to multinational
corporations. The Company also competes for the equipment and
labor required to operate and to develop these properties. Many
competitors have substantially greater financial and other
resources and may be able to sustain wide fluctuations in the
economics of this industry more easily than the Company can.
Since certain aspects of this Energy Business Segment are
regulated, competitors may be able to absorb the burden of any
changes in federal, state and local laws and regulations more
easily than the Company can. The ability of the Company to
acquire and develop additional properties in the future will
depend upon its ability to evaluate and select suitable
properties, to secure adequate financing, to consummate
transactions and to engage strategic partners in this highly
competitive environment.
The Company spent no money during any of the last three
fiscal years on material company-sponsored research and
development activities as determined in accordance with generally
accepted accounting principles. In addition, the Company spent
no money during such years on material customer-sponsored
research activities relating to the development of new products,
services or techniques or the improvement of existing products,
services or techniques. It is anticipated that compliance with
Federal, State and local provisions regulating the discharge
of materials into the environment, or otherwise relating to
the protection of the environment will have no material
effect upon the capital expenditures, earnings and competitive
position of the Company. There are no material estimated
capital expenditures for environmental control facilities for
the remainder of the current fiscal year and the succeeding
fiscal year or for any further periods that the Company deems
material.
As to future business intended by the Company, it has,
during the last five years, investigated several new business
opportunities, both in the Energy Business Segment and in other
reportable business segments. Management of the Company
continues to seek out and investigate such new business
opportunities or expansion of existing leasing activities or
working interests in oil and gas operations. Such investments could
result in a more productive deployment of the Company's assets in an
effort to generate more operating, rental, bonus, and royalty income,
and the Company is considering acquiring additional mineral properties
or additional working interests in selected oil and gas operations.
While the Company has not limited itself geographically with
respect to future working interest opportunities, the Company has
focused primarily on properties in the continental United States
that are located on or near areas with historic production.
The total number of persons employed by the Company, as
of the end of the fiscal year, was 3.
(d) Financial Information about Geographic Areas. The
Company does not engage in operations in foreign countries, nor
are portions of sales or revenues derived from customers in
foreign countries.
-3-
ITEM 2. PROPERTIES
(a) The Company has working interests in primarily
natural gas producing properties in a total of approximately
28,000 acres in Texas in addition to whole or partial
interests in approximately 61,000 acres of real property
located in Arkansas, Louisiana, Texas, Kansas, Oklahoma and
Missouri. Coal deposits that total approximately 84,000,000 tons
(of which 50% to 90% could be expected to be recoverable) are
leased under the previously mentioned agreement with Bethlehem
Steel Corporation and its assignees. Coal deposits aggregating
approximately 92,000,000 tons in place with a net carrying value
of approximately $700,000 at December 31, 2003 are not presently
leased or producing coal in commercial quantities. In later
parts of this Item 2 references are made to the ownership of
"minerals." The Company is the owner of all or part of the
subsurface minerals on large portions of the properties involved,
but the only minerals of primary interest to the Company are
coal, oil and gas. The Consolidated Properties of the Company are
detailed on the following table:
Location Description Total Acreage Utilization Production
________ ___________ _____________ __________ __________
C>
Liberty & Oil & Gas 2% Working Active
Hardin Co. Working Interest in Exploration &
TX Interest 25,769 acres Production Oil & Gas
Starr & Oil & Gas 2% Working Active
Hidalgo Working Interest in Exploration &
Co., TX Interest 2,619 acres Production Oil & Gas
Cherokee &
Crawford Coal & 3 Fee Simple 0 acres under
Co., KS Mineral Rights 2,518 Mineral lease No Activity
Craig Co.
OK & 710 Fee
Labette Coal, Mineral 9,904 Coal 0 acres under
Co., KS and Fee Simple Only lease No Activity
Over 13,600
acres leased
or HBP for a
combination
of Coal, Coal-
bed Methane
Sebastian Coal, Mineral 1,759 Fee Simple and Oil & Gas Coalbed Methane
Co., AR and Fee Simple 16,545 Mineral Development Oil & Gas
640 Fee Simple
Pittsburg Coal, Mineral 80 Mineral 600 acres
Co., OK and Fee Simple 1,200 Coal Only under lease No Activity
Macon &
Randolph Coal, Mineral 2 Fee Simple 0 acres under
Co., MO and Fee Simple 6,147 Mineral lease No Activity
Vernon &
Beauregard 1280 acres
Parish, LA Mineral Rights 10,619 Mineral HBP Oil & Gas
Walker,
Montgomery
& San 4,017 acres
Jacinto,TX Mineral Rights 11,880 Mineral HBP Oil & Gas
LeFlore Coal &
Co., OK Mineral Rights 90 Mineral 90 acres HBP Coalbed Methane
HBP - Stands for "Held By Production" and refers to acreage that
is held by current oil or gas production.
(b) In 2003, the Company produced oil and gas from properties
in which it maintains a working interest. Through the
acquisition of certain producing properties as well as through
the exploration and development of unproved property in which the
Company holds a working interest, these activities increased
substantially in 2003. The Company's working interest in these
oil and gas properties entitles it to a share of revenue
proportionate to its net revenue interest. Additionally, the
Company is responsible for a share of the operating costs,
severance taxes and additional expenses that are applicable to
the operation and development of these properties.
-4-
In 2002, the Company did not participate in any producing
oil and gas operations. However, the Company is the owner of
certain properties (fully described above in this Item), part of
which are leased to outside interests for the production of oil
and gas. The Company receives bonuses, rentals and royalties for
the use of the land and mineral interests leased by it.
Acquisitions and Dispositions
On February 28, 2003 the Company, through its wholly-owned
subsidiary, CNR Production, L.L.C., (CNR) a Texas limited liability
company acquired an undivided two percent (2%) interest in
certain properties constituting 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. This area of
Texas has been active in the production of gas and oil,and there
are a number of operating oil and gas wells located on the property
acquired.
As consideration for this acquisition, CNR paid $1,080,000.
This amount was paid by CNR from funds provided by the Company
from its available liquid resources. The purchase price was
allocated to leasehold costs and lease and well equipment based
upon proved reserve information available at the time of purchase.
Natural Gas Reserves
The following table presents the Company's estimated net
proved natural gas reserves (unaudited) at December 31, 2003
based on reserve reports prepared by T.J. Smith & Company, Inc..
As of Dec. 31, 2003 Proved Reserves
Developed Undeveloped Total
_________ _______________ _______
Natural Gas Reserves,
MMcf equiv. 1,409.0 785.2 2,194.2
Further information regarding natural gas and oil reserves is
contained in Note 10 to the consolidated financial statements, "Supplemental
Information - Natural Gas Reserves (Unaudited)"
Drilling Activity and Productive Well Count
Exploratory
Productive Wells Dry Holes Total
Gross Net Gross Net Gross Net
________________ _____________ ___________
2003 2.00 0.04 2.00 0.04 4.00 0.08
2002 0 0 0 0 0 0
2001 0 0 0 0 0 0
Developmental
Productive Wells Dry Holes Total
Gross Net Gross Net Gross Net
________________ _____________ ___________
2003 5.00 0.11 0 0 5.00 0.11
2002 0 0 0 0 0 0
2001 0 0 0 0 0 0
Wells in Progress as of December 31, 2003
Gross Net
Exploratory 0 0
Development 1.00 0.02
___________ ___________
Total 1.00 0.02
-5-
The following table presents the number of productive natural gas
wells in which the Company owned an interest as of December 31, 2003.
Natural Gas wells Gross Net
44.00 0.83
Production and Pricing
In 2003 the Company produced 57,443 Mcf equivalents of
natural gas from the working interest properties detailed
previously with an average price per Mcf equivalent of $6.04.
The bulk of the Company's production and proved reserves consists
of natural gas and natural gas condensates with a very small amount
of oil produced from certain gas wells. The form with which the
Company reports production, Mcf equivalents, takes oil production
into account. Additionally, the Company's producing properties have
gas with a relatively high Btu value. Since natural gas is generally
sold on a per Btu basis, on certain properties the Company will,
from time to time, receive a slight premium on a per Mcf basis.
ITEM 3. LEGAL PROCEEDINGS
(a) Currently, there are no material pending legal
proceedings, other than ordinary routine litigation incidental to
the business, to which the Company or any of its subsidiaries is
a party or of which any of its property is the subject, and there
are no material proceedings to which any director, officer of
affiliate of the Company, any owner of record or beneficially of
more than five percent of any class of voting securities of the
Company, or any associate of any such director, officer or
security holder is a party adverse to the Company or any of its
subsidiaries or has a material interest adverse to the Company or
any of its subsidiaries. Further, there are no administrative or
judicial proceedings involving the Company or any of its
subsidiaries arising under any federal, state or local provisions
that have been enacted or adopted regulating the discharge of
materials into the environment or primarily for the purpose of
protecting the environment.
(b) There were no such material legal proceedings that were
terminated during the fourth quarter of the fiscal year covered
by this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the fiscal
year covered by this report to a vote of security holders through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) The common stock of the Company is traded over the
counter. The range of bid and asked quotations and the
dividends paid on such securities for each quarterly period
during the Company's two most recent fiscal years as required by
Item 201 of Regulation S-K is set forth in the following table:
Period Low High Dividends/Share
______ ____ ____ _______________
4Q2003 13.10 15.50 $0.10
3Q2003 12.75 13.50 $0.10
2Q2003 12.87 13.10 $0.10
1Q2003 13.12 13.90 $0.10
4Q2002 13.20 14.25 $0.10
3Q2002 14.50 16.25 $0.10
2Q2002 16.00 17.00 $0.10
1Q2002 16.81 17.20 $0.10
-6-
(b) The approximate number of stockholders as of March 1,
2004 was 311.
There have been no sales of either registered or unregistered
securities by the Company during the past three years.
(c) Dividends - The frequency and amount of any cash
dividends declared on each class of its common equity by the
Company for the two most recent fiscal years is set forth in that
table included in Item (a) above.
(d) Securities Authorized for Issuance Under Compensation
Plans as of December 31, 2003:
Plan (a) Number of (b) Weighted- (c) Number of
Category Securities to average securities remaining
be issued exercise available for future
upon exercise price of issuance under
of outstanding equity compensation
outstanding options, plans (excluding
options, warrants and securities reflected
warrants and rights. in column (a))
rights.
__________ _____________ ____________ ___________________
Equity 33,500 $15.66 91,500
compensation
plans
approved by
securities
holders
Equity 0 0 0
compensation
plans not
approved by
securities
holders
Total 33,500 $15.66 91,500
(e) Recent Sales of Unregistered Securities
There have been no sales of either registered or unregistered
securities by the Company during the past three years.
(f) Purchases of Equity Securities by the Issuer and Affiliated
Purchasers
Period (a) (b) (c) Total Number (d) Maximum
Total Average of Shares Number (or
Number Price Purchased as Approx. Dollar
of Paid per Part of Publicly Value) of Shares
Shares Share Announced Plans that May Yet Be
Purchas or Programs Purchased Under
ed the Plans or
Programs
_____ ______ _______ _______________ ________________
Month 0 0 0 N/A
#4
(Oct. 1
- - Dec.
31,
2003)
Total 0 0 0 0
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is set forth in the
table below:
Years ended 2003 2002 2001 2000 1999
December
___________ __________ ________ ________ ________ ________
Total Operating $1,080,496 $613,391 $769,909 $741,489 $615,875
Revenue
Net Earnings 112,499 (301,754) 246,296 856,581 651,010
Net Earnings per 0.23 (0.60) 0.49 1.58 0.92
common share
Cash Dividends per 0.40 0.40 0.88 0.88 0.63
common share
Total Assets 7,523,380 7,502,008 8,039,160 8,584,503 12,272,117
-7-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
In 2003 the Company accomplished several steps toward
increasing its operating activities in the production of oil and
gas. Prior to 2003, the Company derived all its mineral revenue
from royalties and bonuses related to the leasing of its oil, gas
and coal properties. In 2003, with the acquisition of a working
interest in oil and gas producing properties in south Texas by a
wholly owned subsidiary of the Company, CNR Production L.L.C.
(CNR), as well as through participation in exploration and
development of properties in southern and eastern Texas, the
Company initiated the first steps of what is a long term plan to
expand further into oil and gas exploration and production.
While the Company has historically been involved in oil and
gas, its revenue previously has been derived primarily from
royalty interests and lease bonus activity. As stated in prior
reports, Management believes that opportunities to increase
shareholder value exist in oil and gas exploration and production
and is positioning the Company to take advantage of these
potential opportunities. Consequently, 2003 consolidated financial
statements show substantial revenue, expenses and capital
expenditures incurred in this endeavor. Management believes these
factors should continue to impact the Company and its subsidiaries
in the future as it further develops its activities in this area.
Results of Operations
Total operating revenue on a consolidated basis rose
substantially in 2003 from 2002 and declined in 2002 from 2001.
The increase in 2003 was due primarily to the acquisition of
working interests in gas producing properties and the revenue
derived from this production. Additionally, in 2003 the Company
received increased royalty income derived from the Company's
mineral properties under lease as a result of higher average
natural gas prices and expanded production. The decrease in 2002
compared to 2001 was due primarily to decreased revenues from
mineral gas royalties which,in turn, was due to decreased production
of oil and gas by lessees during the current periods under
comparison, coupled with a slight decrease in average energy
prices during the comparable periods.
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 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 Company has been
advised that the lessee plans to further develop this property
over the next 12 months. If this development is successful,
it could result in increased production and a corresponding
increase in the amount of royalty 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 twelve months ended December 31, 2003,
royalties from coal bed methane production associated with these
properties were $187,251 and are included in operating revenue
in mineral royalties.
For the year ended 2003, the Company increased its oil and
gas reserves through the acquisition of producing properties
described in detail in Item 1 and Item 2 of this report as well
as through further exploration and development of its
working interest properties. Detailed reserve estimates are
provided in Note 10 - "Supplemental Information - Natural Gas
Reserves (Unaudited)" of the consolidated financial
statements.
The Company posted nonoperating income in 2003 versus a
nonoperating loss in 2002. This positive income is due to
gains on sales of securities as well as greatly reduced
impairment charges in 2003 versus 2002. In 2002 versus 2001,
nonoperating income decreased substantially with nonoperating
losses occurring in 2002 versus nonoperating income in 2001.
This decrease resulted from lower rates of return on temporary
fixed income investments, reduced investment income resulting
from reduced capital gains on sales of securities and the reduced
size of the portfolio of fixed income investments during the
current period. Additionally, as explained in detail in the Notes
to the accompanying Financial Statements, the Company recognized
impairment charges in 2003, 2002 and 2001 reflecting write-downs
in the carrying value of certain equity securities and certain
other investments because decreases in the then current market
values of those securities were deemed by Management to be other
than temporary. There were such write-downs in each of the years
ending 2003, 2002 and 2001, although the write-downs were
substantially lower in 2003 than in the prior periods. There is
a deferred tax benefit relative to such write-downs recognizable
for income tax purposes upon future sales or disposition of the
securities.
Expenses associated with the acquired producing properties
increased in 2003. Oil and gas operating expenses increased and
relate to the lease operating costs of managing the Company's
working interest properties. Exploration expenses also increased
and includes the cost of unsuccessful exploratory wells as well
as the amortization of associated leasehold costs. Depreciation,
depletion and amortization also increased in 2003 due to the
increase of depreciable lease and well equipment and leasehold
costs associated with acquired working interest properties.
General and administrative expenses increased in each of the
years 2003, 2002 and 2001 due primarily to increased auditing
and insurance costs as well as compensation associated with the
engagement of a full-time chief executive officer.
-8-
As described in the Notes to the accompanying consolidated
financial statements, the Company recorded an income tax benefit
in 2003 and 2002 versus an income tax expense in 2001. In
2003 the amount of percentage depletion in excess of tax basis
was almost the same as the pre-tax earnings resulting in a slight
income tax benefit on pre-tax earnings of $110,383. Income tax
benefits for 2002 includes receipt of a refund of state income
taxes for prior years amounting to $70,093 as well as percentage
depletion in excess of tax basis which increased the effective
tax benefit rate to 45.9%. During 2001, the effective tax rate
was 29.1% primarily due to percentage depletion in excess of
tax basis.
Net cash provided by operating activities increased for the
year 2003 over 2002, and for 2002 over 2001. Cash and cash
equivalents decreased in 2003 from 2002, but increased in 2002
over 2001. Detailed cash flow analysis follows under Financial
Condition - Liquidity and Capital Resources below.
Because of the nature of the Company's business, inflation
has little impact on its expenses. It is not anticipated that
changes in the price of coal will have much impact on the total
income of the Company because of the continuing low activity of
coal extraction and because the Company's existing coal leases
have fixed prices per ton and are not affected by market changes.
Substantially increased prices could cause an increase in the
amount of coal mined, however.
As is indicated in the discussion above concerning oil and
gas revenue, changes in the price of oil and natural gas do have
an impact on the consolidated income of the Company, and at times
it can be dramatic. The fluctuation in the price of oil and gas
in the years under comparison contributed to increased revenue
from that source when prices increased, while the decrease in
prices commencing in 2001 resulted in somewhat lower revenue from
mineral royalties in the latter quarters of 2001 and early
quarters of 2002. Sustained higher average oil and gas prices in
the latter part of 2002 through 2003 contributed to increased
revenue from oil and gas during those periods. Additionally,
changes in the prices of oil and gas tend to have a compounding
effect as increased prices generally drive added production, when
feasible, and lower prices often cause unprofitable wells to be
shut in, thus reducing overall production.
Financial Condition - Liquidity and Capital Resources
The financial condition of the Company continued to be
strong during 2003, as it was in 2002 and 2001. The liquidity of
the Company continues to be high as is evidenced by a 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. During the first quarter of 2003,
CNR acquired a working interest in oil and gas producing
properties in south Texas for $1,080,000 and acquired additional
undeveloped property in south Texas in the second quarter for
$80,000. The source of funds used for both transactions were
available liquid assets of the Company previously invested in
U.S. Government agency obligations. The liquidity of the Company
was somewhat reduced as a result of this transaction, but overall
the Company continues to enjoy very high liquidity, with current
assets greatly exceeding current liabilities and a significant
portion of its net worth represented by liquid assets.
Due to the uncertain fixed income and equity market
conditions in 2003 and 2002, the Company reduced its equity and
longer-term fixed income positions in favor of shorter-term fixed
income and cash positions. These activities resulted in a
current tax benefit from the realization of losses on the sale
of equity securities, more favorable cash positions for the
company and as described in Notes to the financial statements,
gross unrealized gains on investment securities at the end of both
2003 and 2002.
Although as discussed above, the liquidity of the Company
continues to be favorable, it is affected by cash flows. The
Consolidated Statements of Cash Flows in the accompanying
Consolidated Financial Statements illustrate that there was a net
decrease in cash and cash equivalents in 2003, while there was a
net increase in cash and cash equivalents in 2002. In 2001,
there was a net decrease in cash and cash equivalents. Cash from
operating activities increased in 2003 over 2002 and in 2002 over
2001. There were net earnings in 2003 compared to a net loss in
2002, and net earnings in 2001. The net loss in 2002 included
certain impairment charges on equity securities described above
which reduced earnings but did not reduce cash, while the amount
of such impairment charges was lower in both 2003 and 2001.
A significant component contributing to the decrease in cash
in 2003 was a use of cash for investing purposes versus a net
increase in cash for investing purposes in 2002. A substantial
factor contributing to the increase in cash in 2002 was the net
increase in cash provided by investing activities versus a use of
cash for these purposes in 2001; specifically, differences in the
amount of proceeds from the sale of equity securities and
purchase of equity securities during each such period,
differences in the amount of proceeds from matured/called
investment debt securities which were reinvested, and the
purchase of a lesser amount of other investments in 2003 and 2002
from 2001. Additionally, in 2003, the decrease in cash provided
by investing activities was due to the funding of the acquisition
of oil and gas properties with available cash.
-9-
Another significant component of the changes between the
periods under comparison was the difference in cash used in
financing activities; specifically, differences in the amount of
cash used in the payment of dividends, which was less in 2003 and
2002 than in 2001 due to a reduction in the amount of the
quarterly dividend.
Contractual Obligations, Commitments and Off Balance-Sheet
Arrangements
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 no significant amount of
accounts receivable or 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. The only continuing commercial commitment is
the operating lease for general office space of the Company. The
Company is presently located at 911 Main St., Suite 1710, Kansas
City, MO, 64105. The phone number is (816) 842-2430.
With respect to CNR's working interests in oil and gas, it
will be called upon, from time to time, to pay its pro-rata share
of expenses and capital expenditures associated with both ongoing
operations as well as exploratory and developmental projects.
Prior to capital expenditures being incurred on these properties,
the project operator issues CNR an Authorization for Expenditure
(AFE) for review and approval. Management believes that, based
upon the CNR's current liquidity level and the expected future
revenue from these ventures, sufficient financial resources should
be available to meet any and all capital requirements required by
these projects.
A tabular presentation of contractual obligations is
presented below:
Payments Due by Period
Contractual < 1 Year 1-3 3-5 > 5
Obligations Total Years Years Years
___________ _____ ______ _____ _____ _____
Long-Term 0 0 0 0 0
Debt
Obligations
Capital Lease 0 0 0 0 0
Obligations
Operating 6,686 6,686 0 0 0
Lease
Obligations
Purchase 23,281 23,281 0 0 0
Obligations*
Other Long- 0 0 0 0 0
Term
Liabilties
Total 29,967 29,967 0 0 0
*The entire amount shown in Purchase Obligations is for an AFE that
was approved prior to Dec. 31, 2003.
Other than these projects, the Company has no specific
commitment for material capital 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 mineral
properties and to attempt to lease more of its mineral properties
in order to generate additional rental, bonus and royalty income.
There was one new oil and gas lease made on Company property in
2003 in Sebastian County, Arkansas but as of year-end no new
production had commenced. Three new oil and gas leases were
made on Company property in 2002, two in Sebastian County,
Arkansas and one in Pittsburg County, Oklahoma with production
started on one of the leases in Sebastian County, Arkansas.
In 2001, one new oil and gas lease was made on Company property in
Arkansas and Oklahoma. As yet there has been no production under
the lease made in 2001 but bonuses were received by the Company at
the time each lease was entered into, as was the case for leases made
in 2002 and 2003.
Accounting Policies, Recent Accounting Pronouncements and
Other Matters
A summary of significant accounting policies is contained in
the Notes to the accompanying consolidated financial statements.
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. This accounting policy
does not permit an upward adjustment of book 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.
-10-
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 being
deducted as incurred rather than those expenditures being
capitalized. The Company uses the units-of-production method to
amortize oil and gas properties. This method requires the Company
to amortize the capitalized costs incurred in developing a property
in proportion to the amount of oil and gas produced as a percentage
of the amount of proved reserves contained in the property.
Accordingly, any changes in reserve estimates as described above
will cause corresponding changes in depletion expense recognized
in periods subsequent to the reserve estimate revision. Although
every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the
subjective decisions and variances in available data for various
fields make these estimates generally less precise than other
estimates included in the financial statement disclosures.
Data for a given fields may change substantially over time as a
result of numerous factors including, but not limited to,
additional development activity, evolving production history and
continual reassessment of the viability of production under
varying economic conditions. As a result, material revisions to
existing reserve estimates may occur from time to time.
A one share for one share stock dividend was distributed to
stockholders in February of 2001. All per share data in the
consolidated financial statements accompanying this report, and
related notes, retroactively reflect the stock dividend for all
periods presented. Cash dividends totaling of $0.40 per share
were paid in 2003 and 2002 compared to $0.875 per share paid in
2001. While the Board of Directors had expressed the intention
early in 2001 to continue paying a $0.25 per share quarterly
dividend if the operating results and financial condition of the
Company continued to justify it, the Board subsequently expressed
a consensus that in subsequent quarters the Board might
reevaluate the quarterly dividend policy in light of possible
needs to retain liquidity for potential acquisitions or other
projects under consideration and for other possible areas of
internal growth.
In the fourth quarter of 2001, the Board declared a dividend
for that quarter of $0.125 per share and explained that since
total year to date earnings for that year were somewhat below
total net earnings for the same period of the previous year, due
in substantial part to a then recent decrease in energy prices,
and in furtherance of the objective to retain liquidity for
potential acquisitions under consideration and for other possible
areas of internal growth, it would be advisable to reduce the
quarterly dividend payment accordingly. In the first quarter of
2002, the Board reduced the quarterly dividend to $0.10 per share
because earnings were again down due, in part, to a continuation
of lower energy prices and reduced production and the decision
to acquire a working interest in oil and gas properties in
Texas as described above.
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.
-11-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Concerning quantitative and qualitative disclosures
concerning 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
relate solely to its fixed income portfolio that 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 it 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 minerals, predominantly natural gas and the effect thereof on
its royalties and rentals relating to coal deposits and mineral
rights as discussed above in addition to its oil and gas working
interests which are subject to market rists for changes in
material gas prices. The Company has not entered into any futures
contract to hedge the prices of any commodities as of 12/31/03 or
during the year ended 12/31/03. The Company does not use derivative
commodity instruments to hedge its commodity risk exposure.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary financial
information that are required to be included pursuant to this
Item 8 are listed in Item 15, "Exhibits, Financial Statement
Schedules, and Reports On Form 8-K", under the caption "Index to
Consolidated Financial Statements" in the Annual Report, together
with the respective pages in this Annual Report where such
information is located. The financial statements and supplementary
financial information specifically referenced in such list are
incorporated in this Item 8 by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
(a) The only independent accountant who was engaged during
the Company's two most recent fiscal years or any subsequent
interim period as the principal accountant to audit the Company's
financial statements has not resigned (nor indicated it has
declined to stand for re-election after the completion of the
current audit) nor was dismissed.
(b) No new independent accountant has been engaged as the
principal accountant to audit the Company's financial statements
during the Company's two most recent fiscal years or any
subsequent interim period.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this annual report,
the Company conducted an evaluation of the effectiveness of the
design and operation of its disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15(d)-15(e) under the
Securities Exchange Act of 1934). The evaluation was conducted
with the participation of Management and under the supervision of
the Chief Executive Officer and the Chief Financial Officer.
Based on the evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective.
There have been no significant changes in the Company's
internal controls over financial reporting or other factors that
materially affected, or is reasonably likely to materially
affect, these controls over financial reporting.
-12-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information required by this item is set forth on
pages 4 through 6 of the Company's definitive proxy statement to
befiledwith the Securities and Exchange Commission pursuant to
Schedule 14A promulgated under the Securities Exchange Act of
1934 on April 1, 2004, under the caption "ELECTION OF DIRECTORS",
which portion of said definitive proxy statement is incorporated
hereinby this reference.
The Board of Directors has approved a Code of Ethics that
applies to the Company's Chief Executive Officer, Chief Financial
Officer and other financial officers. This Code of Ethics is
included as Exhibit 14 to this report.
Based on a review of copies of forms furnished to the
Company by its directors, executive officers, and the beneficial
owners of more than ten percent of the Company's stock pursuant
to Section 16(a) of the Securities Exchange Act of 1934, and
written representations from the individuals concerned, the
Company believes that during 2003 all Section 16(a) filing
requirements applicable to such persons were complied with.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth on pages
6 through 9 of the Company's definitive proxy statement to be
filed with the Securities and Exchange Commission pursuant to
Schedule 14A promulgated under the Securities Exchange Act of
1934 filed April 1, 2004, under the caption "ELECTION OF
DIRECTORS", which portion of said definitive proxy statement is
incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth on
pages 3 through 5 of the Company's definitive proxy
statement filed with the Securities and Exchange Commission
pursuant to Schedule 14A promulgated under the Securities
Exchange Act of 1934, under the captions "VOTING SECURITIES
OUTSTANDING AND VOTING RIGHTS " and "ELECTION OF DIRECTORS", which
portions of said definitive proxy statement are incorporated
herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth on
pages 4 through 6 of the Company's definitive proxy
statement filed with the Securities and Exchange Commission
pursuant to Schedule 14A promulgated under the Securities
Exchange Act of 1934, under the caption "ELECTION OF DIRECTORS,"
which portion of said definitive proxy statement is incorporated
herein by this reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is set forth on pages
11 through 12 of the Company's definitive proxy statement
filed with the securities and exchange commission pursuant to
schedule 14A promulgated under the Securities Exchange Act of
1934, under the captions "Ratification of Independent Public
Accountants," which portion of said definitive proxy statement is
incorporated herein by this reference.
-13-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
1. Index to Consolidated Financial Statements
The following fincancial statements are included at the incicated
page in this Annual Report on Form 10-K and incorporated in this
Item 15 by reference:
Page
Independent Auditors' Report 35
Consolidated Balance Sheets as of December 31, 2003 and 2002 36-37
Consolidated Statements of Operations - years ended December 31,
2003, 2002 and 2001 38
Consolidated Statements of Stockholders' Equity - years ended
December 31, 2003, 2002 and 2001 39
Consolidated Statements of Comprehensive Income(Loss) - years
ended December 31, 2003, 2002 and 2001 40
Consolidated Statements of Cash Flows - years ended December 31,
2003, 2002 and 2001 41
Notes to Consolidated Financial Statements 42
2. Consolidated Financial Statement Schedules:
All schedules are omitted as none are currently required.
3. Index to Exhibits
The exhibits listed in the accompanying index to exhibits are
incorporated by reference as part of this Annual Report on
Form 10-K. 54
(b) No reports on Form 8-K were filed during the last
quarter of the period covered by this report.
-14-
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Central Natural Resources, Inc.:
We have audited the accompanying consolidated balance sheets of Central
Natural Resources, Inc. and subsidiaries (the Company) as of December
31, 2003 and 2002, and the related consolidated statements of
operations, stockholders' equity, comprehensive income (loss), and
cash flows for each of the years in the three year period ended
December 31, 2003. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Central Natural Resources, Inc. and subsidiaries as of December 31,
2003 and 2002, and the results of their operations and their cash flows
for each of the years in the three year period ended December 31, 2003,
in conformity with accounting principles generally accepted in the United
States of America.
KPMG LLP
Kansas City, Missouri
March 12, 2004
-15-
CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2002
(amounts in unit dollars)
ASSETS 2003 2002
__________ __________
Current assets:
Cash and cash equivalents $ 629,719 1,956,795
Accounts receivable 127,570 22,500
Securities maturing within one year,
at amortized cost 2,999,314 2,994,347
Note receivable, current 21,651 65,221
Income tax receivable 110,289 206,867
Deferred income taxes - 4,204
Other 23,630 11,416
__________ __________
Total current assets 3,912,173 5,261,350
Equity securities, at fair value 603,481 642,637
Other investments 262,720 350,002
Deferred income taxes - 13,200
Property, plant and equipment
Oil and gas producing properties
(successful efforts) 1,707,419 150,135
Mineral interest properties 1,668,137 1,668,432
__________ _________
3,375,556 1,818,567
__________ __________
Less accumulated depletion, depreciation
and amortization 630,550 583,748
__________ __________
Net property, plant and equipment 2,745,006 1,234,819
__________ __________
Total assets $ 7,523,380 7,502,008
-16-
CENTRAL NATURAL RESOURCES, INC. SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2003 and 2002
(amounts in unit dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
_________ _________
Current liabilities:
Accounts payable and accrued expenses 44,066 20,279
Deferred income-advance oil lease bonus 0 11,250
__________ __________
Total current liabilities 44,066 31,529
Deferred income taxes 137,788 0
Stockholders' equity:
Preferred stock of $1 par value; 100,000
shares authorized; no shares issued 0 0
Common stock of $1 par value. Authorized
2,500,000 shares; issued 503,924 shares
in 2003 and 2002 503,924 503,924
Treasury Stock-12,100 shares at December
31, 2003, 5,000 shares at December 31, 2002 (161,775) (71,250)
Retained earnings 6,856,047 6,941,699
Accumulated other comprehensive income
net of deferred taxes of $77,175 in 2003
and $51,749 in 2002 143,330 96,106
__________ __________
Total stockholders' equity 7,341,526 7,470,479
Commitments and contingencies
__________ __________
Total liabilities and stockholders' equity $ 7,523,380 7,502,008
See accompanying notes to consolidated financial statements.
-17-
CENTRAL NATURAL RESOURCES,INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2003, 2002 and 2001
(amounts in unit dollars)
2003 2002 2001
_________ _________ _________
Operating revenue:
Mineral royalties $ 703,168 613,391 769,099
Oil and gas production 377,328 0 0
_________ _________ _________
Total operating revenue 1,080,496 613,391 769,099
Oil and gas operating expenses 139,929 0 0
Depreciation, depletion and
amortization 46,802 2,250 2,260
Exploration expenses 195,695 0 0
General and administrative
expenses 646,648 550,750 510,861
Gain on sale of real estate (16,002) 0 (1,106)
_________ _________ ________
Total expenses 1,013,072 553,000 512,015
_________ _________ ________
Operating income 67,424 60,391 257,084
_________ _________ ________
Nonoperating income:
Investment income (loss) 42,291 (620,647) 85,124
Other 668 2,446 5,048
_________ _________ _________
Total nonoperating income(loss) 42,959 (618,201) 90,172
_________ _________ _________
Earnings (loss) before income taxes 110,383 (557,810) 347,256
Income taxes (2,116) (256,056) 100,960
_________ _________ _________
Net Earnings(loss) $ 112,499 (301,754) 246,296
_________ _________ _________
Earnings(loss)per share - basic
and diluted $ 0.23 (0.60) 0.49
Weighted average number of shares of
common stock outstanding - basic
and diluted 495,773 503,603 503,924
See accompanying notes to consolidated financial statements.
-18-
CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2003, 2002 and 2001
(amounts in unit dollars)
Accumulated
other
Common Additional Retained Treasury comprehensive
stock capital earnings stock income Total
_______ _________ _________ _________ ________ ___________
Balance,
December
31, 2000 $ 503,924 0 7,639,660 0 217,455 8,361,039
Net earnings 0 0 246,296 0 0 246,296
Cash dividends
($0.88 per
share) 0 0 (440,934) 0 0 (440,934)
Net unrealized
depreciation
on investments
available-for-
sale 0 0 0 0 (225,544) (225,544)
_______ _________ _________ ________ ________ _________
Balance,
December
31, 2001 503,924 0 7,445,022 0 (8,089) 7,940,857
Net loss 0 0 (301,754) 0 0 (301,754)
Cash dividends
($0.40 per
share) 0 0 (201,569) 0 0 (201,569)
Purchase of
$5,000 shares
of common stock
for treasury 0 0 0 (71,250) 0 (71,250)
Net unrealized
depreciation
on investments
available-for-
sale 0 0 0 0 104,195 104,195
_______ _________ __________ ________ ________ ________
Balance,
December
31, 2002 $ 503,924 0 6,941,699 (71,250) 96,106 7,470,479
Net earnings 0 0 112,499 0 0 112,499
Cash dividends
($0.40 per
share) 0 0 (198,151) 0 0 (198,151)
Purchase of
7,100 shares of
common stock for
treasurey 0 0 0 (90,525) 0 (90,525)
Net unrealized
depreciation
on investments
available-for-
sale 0 0 0 0 47,224 47,224
________ _________ _________ ________ ________ ________
Balance,
December
31, 2003 $ 503,924 0 6,856,047 (161,775) 143,330 7,341,526
________ _________ _________ _______ ________ _________
See accompanying notes to consolidated financial statements.
-19-
CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
Years ended December 31, 2003, 2002 and 2001
(amounts in unit dollars)
2003 2002 2001
___________ ___________ ___________
Net earnings (loss) $ 112,499 (301,754) 246,296
___________ ___________ ___________
Other comprehensive income:
Realized gains and unrealized
appreciation (depreciation)
on investments 145,860 134,062 (209,118)
Income taxes (51,050) (46,922) 73,191
___________ ___________ ___________
Realized gains and unrealized
appreciation on
investments, net 94,810 87,140 (135,927)
___________ ___________ ___________
Less:
Realized investment(gains)
losses included in net
earnings (73,210) 26,238 (137,873)
Income taxes 25,624 (9,183) 48,256
___________ __________ ___________
(47,586) 17,055 (89,617)
___________ __________ ___________
47,224 104,195 (225,544)
___________ __________ ___________
Comprehensive (loss)
income $ 159,723 (197,559) 20,752
See accompanying notes to consolidated financial statements.
-20-
CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2002 and 2001
(amounts in unit dollars)
2003 2002 2001
___________ ___________ ___________
Cash flows from operating
activities:
Net earnings (loss) $ 112,499 (301,754) 246,296
Adjustments to reconcile net
earnings to net cash
provided by operating
activities:
Depletion, depreciation
and amortization 46,802 2,250 2,260
Amortization of premiums and
discounts of securities net (32,106) (66,491) (163,417)
Amortization of unproved
properties 84,758 0 0
Impairment charge on
equity securities 0 686,229 274,296
Impairment charge on other
investments 87,282 0 0
Gain on sales of real estate (16,002) 0 (1,106)
Loss (Gain) on sales of equity
securities (73,210) 26,238 (137,873)
Deferred income taxes 129,766 15,694 (117,749)
Changes in assets and
liabilities:
Accounts receivables and
other assets (117,284) 80,979 (82,331)
Deferred oil lease bonus (11,250) (36,103) 47,353
Accounts payable and accrued
expenses 23,787 15,441 (6,108)
Federal and state income
taxes 96,578 (252,979) (16,413)
___________ ___________ ___________
Net cash provided by
operating activities 331,620 169,504 45,208
___________ ___________ ___________
Cash flows from investing
activities:
Proceeds from note receivable 43,570 18,084 16,702
Proceeds from matured/called
investment debt securities 15,000,000 24,000,000 20,000,000
Purchases of investment debt
securities (14,972,861) (22,928,535) (19,864,798)
Proceeds from sales of land 16,297 0 1,125
Purchases of equity securities (16,882) (449,827) (478,972)
Proceeds from sales of equity
securities 201,898 284,597 509,085
Oil and gas capital expeniditures (562,042) (150,135) 0
Acquisition of oil and gas
producing properties (1,080,000) 0 0
Purchase of other investments 0 0 (250,000)
___________ ___________ ___________
Net cash (used in) provided by
investing activities (1,370,020) 774,184 (66,858)
___________ ___________ ___________
Cash flows from financing
activities:
Purchase of common stock for
treasury (90,525) (71,250) 0
Dividends paid (198,151) (201,569) (440,934)
___________ ___________ ___________
Net cash used in financing
activities (288,676) (272,819) (440,934)
___________ ___________ ___________
Net(decrease)increase in cash
and cash equivalents (1,327,076) 670,869 (462,584)
Cash and cash equivalents,
beginning of year 1,956,795 1,285,926 1,748,510
___________ ___________ ___________
Cash and cash equivalents,
end of year $ 629,719 1,956,795 1,285,926
___________ ___________ ___________
Income taxes (received)
paid during year $ (228,799) 51,348 235,630
See accompanying notes to consolidated financial statements.
-21-
CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001
(1) Summary of Significant Accounting Policies
Basis of Consolidation
The accompanying consolidated financial statements include the
accounts of Central Natural Resources, Inc. (the Company) and its wholly
owned subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
All operating data relating to the number of acres, tons and estimated
reserve volumes represent unaudited information.
Cash and Cash Equivalents
Cash and cash equivalents consist of demand deposit accounts and a
money market deposit account. For purposes of the consolidated statements
of cash flows, the Company considers all highly liquid debt instruments
with original maturities of three months or less to be cash equivalents.
Investment Securities
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. Other than temporary impairment is measured
based on the individual security's quoted market price.
Premiums and discounts are amortized or accreted over the life of the
related held-to-maturity security as an adjustment to yield using the
effective interest method. Dividend and interest income are recognized when
earned. Realized gains and losses for securities classified as
available-for-sale are included in net earnings and are derived using the
specific identification method for determining the cost of securities sold.
Purchases and sales of securities are recorded on a trade-date basis.
Accounts receivable at December 31, 2003 included $39,338 due from a broker
for securities sold.
Coal Deposits, Real Estate, Equipment, and Leasehold Improvements
Coal deposits, mineral rights, surface land, and equipment are stated
at cost. Maintenance and repairs are charged to expense as incurred.
Renewals and betterments which extend the useful life of the asset are
capitalized.
Coal deposits with a net carrying value of approximately $700,000 at
December 31, 2003 are not presently leased or producing coal in commercial
quantities.
Depreciation, Depletion, and Amortization
Equipment, which is fully depreciated at December 31, 2003, is depreciated
using the straight-line method over its estimated useful life.
Depletion of coal deposits is computed at the rate of $0.025 per ton
of coal produced or purchased, which approximates depletion computed on a
wasting-asset basis.
-22-
Oil, and Gas Properties
Coal royalties are based on a percentage of the production of land
leased from the Company or, in the case of no production, the minimum
annual royalty. Oil and gas royalties are based on a percentage of the
production on land leased from the Company. Oil and other mineral lease
rentals and bonuses are derived from the leasing of land and mineral rights
prior to production.
Oil lease bonuses which relate to future periods are deferred and
recognized as income over the related future periods (generally one year).
The Company uses the Successful Efforts method of accounting for
revenue and expenses from oil and gas production. Revenue and expenses
associated with oil and gas production are accrued in the period the
revenue or expenses are generated. Revenue and expenses from oil and gas
production in the period ended December 31, 2003 were generated by working
interests in 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
December 31, 2002 or December 31, 2001.
Exploration and Production - Exploration expenses, including
geological and geophysical costs, 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 gas is 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.
Oil and Gas Reserves
The process of estimating quantities of natural gas reserves is complex
and requires significant decisions in the evaluation of all available
geological, geophysical, engineering and economic data. Data for a
given fields may change substantially over time as a result of numerous
factors including, but not limited to, additional development activity,
evolving production history and continual reassessment of the viability
of production under varying economic conditions. As a result, material
revisions to existing reserve estimates may occur from time to time.
Although every reasonable effort is made to ensure that reserve
estimates reported represent the most accurate assessments possible, the
subjective decisions and variances in available data for various fields
make these estimates generally less precise than other estimates included
in the financial statement disclosures. The Company uses the units-of-
production method to amortize gas properties. This method requires
the Company to amortize the capitalized costs incurred in developing a
property in proportion to the amount of gas produced as a
percentage of the amount of proved reserves contained in the property.
Accordingly, any changes in reserve estimates as described above will
cause corresponding changes in depletion, depreciation and amortization
expense recognized in periods subsequent to the reserve estimate revision.
Reserve information (unaudited) is detailed further in Note
10 - Supplemental Information of the consolidated financial statements.
Other Investments
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. The carrying amount is
periodically reviewed for other than temporary impairment.
Income Taxes
The Company and its subsidiaries file a consolidated federal income
tax return.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities for subsequent changes in
tax rates are recognized in income in the period that includes the tax rate
change.
-23-
Stock Option Plan
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:
2003 2002 2001
__________ __________ __________
Net Earnings:
As reported $ 112,499 (301,754) 246,296
Stock Options (13,688) (19,760) (13,100)
Pro forma 98,811 (321,514) 233,196
Earnings per share (loss):
Basic and diluted
as reported 0.23 (0.60) 0.49
Pro forma $ 0.20 (0.64) 0.46
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of the asset to the
estimated future undiscounted net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment
recognized is measured by the amount by which the carrying amount exceeds
the fair value. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell.
Proved 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 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.
Earnings and Dividends Per Share
Basic and diluted earnings per share are based on the weighted average
number of common shares outstanding.
Dividends per share are based on the number of shares outstanding on the
dividend dates of record.
Comprehensive Income
Comprehensive income consists of net income and net unrealized gains
(losses) on available-for-sale securities and is presented in the
consolidated statements of comprehensive income.
Segment Information
The Company operates in the energy segment. The energy segment
consists of the exploration and production of oil and gas as well as the
leasing of real properties and mineral interests in the mid-western and
southern United States. The Company has no foreign revenues. Oil and gas
production revenue was received from a single customer in 2003. During
2003, three mineral royalty customers accounted for 18%, 17% and 12% of
consolidated operating revenue. During 2002 four mineral royalty customers
accounted for 27%, 22%, 15% and 12% of consolidated operating revenue.
During 2001, two mineral royalty customers accounted for 45% and 12% of
consolidated operating revenue.
-24-
Use of Estimates
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets, liabilities, revenues, and
expenses, and the disclosure of contingent assets and liabilities to
prepare these consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America.
Actual results could differ from those estimates.
2) Acquisition of producing properties
In February 2003, the Company, through a wholly-owned subsidiary, CNR
Production, L.L.C.. a Texas limited liability company (hereinafter "CNR),
executed and closed the acquisition of an undivided two percent (2%)
interest in certain property rights constituting working interests in
two 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 amount was paid by CNR from funds provided by the Company from
its available liquid resources. Of the total purchase price , $864,000
was allocated to leasehold costs and $216,000 was allocated to lease and
well equipment. CNR participated in additional developmental work on this
property in 2003.
(3) 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 December 31, 2003 and 2002 are
presented below. Substantially all equity securities represent common
stocks of domestic corporations.
Gross Gross
unrealized unrealized
Amortized holding holding Fair
2003 cost gains losses value
__________________ __________ __________ __________ __________
Held-to-maturity-
U. S. government
agency securities $ 2,999,314 0 (34) 2,999,280
Available-for-sale-
Equity securities 382,975 220,506 0 603,481
2002
_________________
Held-to-maturity-
U. S. government
agency securities $ 2,994,347 0 (347) 2,994,000
Available-for-sale-
Equity securities 494,782 153,461 (5,606) 642,637
At December 31, 2003 and 2002, all U. S. government agency
securities mature within one year.
The Company recognized impairment charges for declines in market
values of equity securities considered to be other than temporary of
$686,229 during 2002 and $274,296 during 2001. The Company recognized an
impairment charge on other investments in 2003 of $87,282.
-25-
Investment income consists of the following for each of the years
ended December 31:
2003 2002 2001
__________ __________ __________
Interest $ 48,797 81,346 213,386
Dividends 7,566 10,474 8,161
Gross gains on sales of equity
securities 78,376 50,132 206,466
Gross losses on sales of equity
securities (5,166) (76,370) (68,593)
Impairment charge on equity
securities 0 (686,229) (274,296)
Impairment charge on other
investments (87,282) 0 0
__________ __________ __________
$ 42,291 (620,647) 85,124
(4) Income Taxes
Total income taxes for the years ended December 31, 2003, 2002, and
2001 were allocated as follows:
2003 2002 2001
__________ __________ __________
Statement of Operations $ (2,116) (256,056) 100,960
Stockholders' equity, for unrealized
appreciation (depreciation) on
equity securities 25,426 56,105 (121,447)
__________ __________ __________
$ 23,310 (199,951) (20,487)
The components of income tax expense from operations
are as follows:
2003 2002 2001
________ ________ ________
Federal $ (2,116) (182,374) 87,280
State 0 (73,682) 13,680
________ ________ ________
Total $ (2,116) (256,056) 100,960
Total income tax expense for 2003, 2002, and 2001 includes deferred
income tax expense (benefit) of $129,766, $15,694, and $(117,749),
respectively.
Income tax expense (benefit) relating to operations has been provided
at effective rates of (1.9)%, (45.9)% and 29.1% for the years ended
December 31, 2003, 2002, and 2001, respectively. The reasons for the
difference between the effective tax rates and the corporate federal income
tax rate of 34.0% are as follows:
2003 2002 2001
_____ _____ _____
Expected statutory tax rate 34.0% (34.0)% 34.0%
State income taxes, net of federal
income tax effect 0 (8.6) 2.6
Percentage depletion in excess
of tax basis (27.2) (4.0) (9.6)
Other, net (8.7) 0.7 2.1
_____ _____ _____
Effective tax rate (1.9)%(45.9)% 29.1%
-26-
State income taxes for 2002 include a refund relating to prior
years of $70,093.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 2003 and 2002 are presented below:
Deferred tax assets: 2003 2002
________ ________
Equity securities
and other investments $ 84,830 103,020
Property plant
& equipment* 118,655 90,343
Deferred income-advance oil lease
bonus 0 4,204
Other 6,535 6,635
________ ________
210,020 204,202
Less valuation allowance (45,095) (45,095)
________ ________
Deferred tax assets 164,925 159,107
________ ________
Deferred tax liabilities:
Property, plant
& equipment (225,538) (89,954)
Equity securities and other investments (77,175) (51,749)
________ ________
Deferred tax liabilities (302,713) (141,703)
________ ________
Net deferred tax (liabilities) asset $ (137,788) 17,404
________ ________
* "Property, plant & equipment" includes a deferred tax asset relating
to a 1993 writedown of coal properties. The resulting deferred
tax asset relating to this writedown has been fully reserved through
the establishment of a $45,095 valuation allowance as the Company
believes it is more likely than not that the asset will not be realized
(5) Operating Leases
The Company has a five-year operating lease for its office space in
Kansas City, Missouri, which became effective September 1, 2002. However,
the Company can terminate the lease after 2 years. The lease agreement
provides for annual rental payments of approximately $10,000 through 2004.
Rent expense amounted to $10,082, $9,934, and $13,182 for the years ended
December 31, 2003, 2002, and 2001, respectively.
(6) Disclosures About Fair Value of Financial Instruments
Cash, cash equivalents, trade receivables, and trade payables - The
carrying amount approximates fair value because of the short maturity of
these financial instruments.
Debt and equity securities - The fair values of debt and equity
securities are based on quoted market prices. The fair value of debt and
equity securities are disclosed in note 3.
(7) Stock Option Plans
Nonqualified Stock Option Plan
In April 1995, the Company adopted a nonqualified stock option plan
(the Plan) pursuant to which the Company's board of directors may grant
stock options to directors in lieu of cash compensation. The Plan
authorizes grants of options to purchase up to 50,000 shares of common
stock. Stock options are granted with an exercise price equal to the
stock's fair market value at the date of grant. All stock options have a
term of ten years and vest and become fully exercisable six months after
the date of grant. In 2003, 7,500 nonqualified stock options were granted
under this plan, while 6,000 shares were issued in both 2002 and 2001.
-27-
Stock Incentive Plan
In February 2001, the Company adopted a stock incentive plan pursuant
to which the Company's board of directors may issue stock awards to key
employees and directors of the Company. This plan allows for stock options,
stock appreciation rights, restricted stock, stock bonuses, performance
share awards, dividend equivalents, or deferred payment rights.
The maximum number of shares of common stock that may be delivered
under this plan shall not exceed 75,000 shares. The maximum number of
shares of common stock that may be delivered pursuant to options qualified
as incentive stock options granted under this plan is 45,000 shares. The
maximum number of shares of common stock that may be delivered to non-
employee directors shall not exceed 20,000 shares. The maximum number of
shares subject to those options and stock appreciation rights that are
granted during any calendar year to any individual shall be limited to
15,000, and the maximum individual limit on the number of shares in the
aggregate subject to all awards that during any calendar year are granted
under this plan shall be 25,000. Each of these limits is subject to
adjustment as set forth in the plan.
In 2003, 6,000 incentive stock options were granted under this plan
and in 2001, 2,000 incentive stock options were granted. No incentive
options were issued in 2002. Incentive stock options are granted with an
exercise price equal to the stock's fair market value at the date of grant,
or 110% of the fair market value of the date of grant in the case of a 10%
shareholder. Incentive stock options issued to date have a term of between
five and ten years and are exercisable in annual installments of between
three and four years.
A summary of stock option activity, including incentive stock options,
during 2003, 2002, and 2001 is as follows:
Year Ended
____________________________________________________
2003 2002 2001
________________ _________________ _________________
Weighted Weighted Weighted
average average average
exercise exercise exercise
Options price Options price Options price
Options outstanding,
beginning of period 20,000 $16.93 14,000 17.00 6,000 17.00
Granted 13,500 13.79 6,000 16.75 8,000 17.00
Exercised 0 0 0 0 0 0
Forfeited 0 0 0 0 0 0
_____ ______ ______ _____ ______ _____
Options outstanding,
end of period 33,500 15.66 20,000 16.93 14,000 17.00
______ ______ ______ _____ ______ _____
Options exercisable
end of period 26,500 15.88 18,500 16.92 12,000 17.00
Exercise prices for options outstanding as of December 31, 2003 were
$13.20 (7,500 shares), $14.52 (6,000 shares), $16.75 (6,000 shares) and
$17.00 (14,000 shares). Exercise prices for options exercisable as of
December 31, 2003 were $13.20 (7,500 shares), $16.75 (6,000 shares) and
$17.00 (13,000 shares).
Options outstanding of 33,500, 20,000, and 14,000 at December 31,
2003, 2002, and 2001 are not considered dilutive as the exercise price was
greater than the market price at the close of each period under
consideration. However, if the market price were to increase in a future
period to be greater than the exercise price, these options could become
dilutive.
The per share weighted average fair value of stock options granted
during 2003, 2002 and 2001 was $1.01, $1.50 and $1.65, respectively, on the
date of grant using the Black Scholes option-pricing model with the
following weighted average assumptions: 2003-expected dividend yield of
3.03%, expected volatility of 11.64%, risk-free interest rate of 2.97%, and
an expected life of five years; 2002-expected dividend yield of 2.53%,
expected volatility of 11.64%, risk-free interest rate of 3.03%, and an
expected life of five years; 2001-expected dividend yield of 5.26%,
expected volatility of 17.63%, risk-free interest rate of 4.290%, and an
expected life of five years.
-28-
(8) Related Party Transactions
The Company paid $20,834 in 2002 and $21,666 in 2001 to a company
affiliated with one of its directors for its participation in a strategic
planning project undertaken on behalf of the Company.
(9) Natural Gas Producing Activities
All of the Company's gas and oil properties are located in the United
States. The table below sets forth the results of operations from gas and
oil producing activities:
2003 2002 2001
__________ __________ __________
Revenues $ 377,328 0 0
Production Costs (118,049) 0 0
Depreciation, depletion and
amortization (44,552) 0 0
Exploration expenses (195,695) 0 0
__________ __________ __________
Operating income $ 19,032 0 0
Total oil & gas property 1,707,419 150,135 0
Additions to oil & gas properties $ 1,557,284 150,135 0
Costs Incurred
Costs incurred in natural gas and oil property acquisition,
exploration and development activities are summarized below:
2003 2002 2001
__________ _________ __________
Property acquisition costs
Unproved $ 154,562 150,135 0
Proved 1,080,000 0 0
Unsuccessful exploratory wells 110,937 0 0
Development costs 407,480 0 0
_________ _________ __________
$1,752,979 150,135 0
Exploration Expense for 2003 includes $84,758 in amortized unproved
property costs associated with two unsuccessful exploratory wells,
resulting in total capitalized additions of oil and gas properties on the
balance sheet of $1,557,284.
(10) Supplemental Information - Natural Gas Reserves
(Unaudited)
Proved reserves are estimated quantities of natural gas which geological
and engineering data demonstrate with reasonable certainty to be recoverable
in future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are proved reserves that can reasonably
be expected to be recovered through existing wells with existing equipment
and operating methods. Proved undeveloped reserves are reserves that are
expected to be recovered from new wells on undrilled acreage or from
existing wells where a relatively major expenditure is required for
recompletion.
Reserve quantities as well as certain information regarding future
production and discounted cash flows were prepared by independent petroleum
engineers T.J.Smith & Company, Inc. for all years where reserve estimates
are presented. These reserve quantities exclude the Company's mineral
interests.
-29-
The following table sets forth our net proved and proved developed gas
reserves stated in MMCF in equirements at December 31, 2001, 2002 and 2003
and the changes in net proved gas reserves for the years ended
December 31, 2001, 2002 and 2003.
Natural Gas MMCF
Equiv.
______________
Revisions of previous estimates 0
Extensions and discoveries 1,256
Purchase of properties 995
Dispositions of properties 0
Production (57)
______________
Proved Reserves at December 31, 2003 2,194
Proved Developed Reserves at:
December 31, 2001 0
December 31, 2002 0
December 31, 2003 1,409
Standardized Measure
The standardized measure of discounted future net cash flows relating
to proved natural gas reserves as of year-end is shown below (in
thousands):
2003 2002 2001
__________ __________ __________
Future cash inflows $ 13,932 0 0
Future operating expenses (2,654) 0 0
Future development costs (995)
_________ _________ __________
Future net cash flows 10,283 0 0
Future income taxes (3,843) 0 0
_________ _________ __________
Future net cash flows, after
income taxes 6,440 0 0
10% annual discount (3,051) 0 0
_________ __________ __________
Standardize measure of discounted
future net cash flows $ 3,389 0 0
Future cash inflows are computed by applying year-end prices of oil
and gas to the year-end estimated future production of proved oil and gas
reserves. The base prices used for the Pretax PV-10 calculation were public
market prices on December 31 adjusted by differentials to those market
prices. Appropriate price differentials were applied to these prices for
each property based upon its respective historical product pricing
experience to adjust for Btu content and marketing and transportation
costs. The Henry Hub and West Texas/New Mexico Intermediate prices, before
adjustment for quality and transportation, utilized in the PV-10 value at
December 31, 2003 were $5.965 per MMBtu of natural gas and $29.95 per
barrel of oil, respectively. Forecasted operating costs were based upon
the average of the actual monthly costs for 2003 as provided by the
operator of the properties. Estimated capital expenditures were provided by
the operator of the properties and both operating costs and capital
expenditures were held constant throughout the life of the properties. We
will incur significant capital expenditures in the further development of
our oil and gas properties. We believe with reasonable certainty that we
will be able to obtain such capital in the normal course of business. A
Statutory tax rate of 37.4% is used to estimate the effect of future income
taxes. The estimated future net cash flows are then discounted using a rate
of 10 percent per year to reflect the estimated timing of the future cash
flows. The standardized measure of discounted cash flows is the future net
cash flows less the computed discount.
-30-
Changes in Standardized Measure
Changes in standardized measure of future net cash flows relating to
proved natural gas reserves are summarized below (in thousands):
2003 2002 2001
__________ __________ __________
Beginning of year $ 0 0 0
Revisions of previous estimates 0 0 0
Extensions and discoveries 4,183 0 0
Purchase of mineral-in-place 1,080 0 0
Development costs incurred 407 0 0
Disposition of properties 0 0 0
Changes in cash flows due to
income taxes (2,022) 0 0
Sales of oil & gas, net of
production costs (259) 0 0
_________ _________ __________
End of Year $ 3,389 0 0
_________ _________ __________
Sales of natural gas, net of natural gas operating expenses, are based
on historical pre-tax results. Disposition of properties, extensions and
discoveries, purchases of minerals-in-place and the changes due to
revisions in standardized variables are reported on a pre-tax discounted
basis.
(11) Supplementary Quarterly Data (Unaudited)
2003
______________________________________
First Second Third Fourth
quarter quarter quarter quarter
_______ _______ _______ _______
Operating revenue $ 239,539 282,995 283,415 274,547
Investment Income (loss) (40,295) 12,365 30,587 39,634
Net earnings (loss) (3,421) 53,567 (34,570) 96,923
Earnings per share
basic and diluted (0.01) 0.11 (0.07) 0.20
_______ _______ _______ _______
2002
______________________________________
First Second Third Fourth
quarter quarter quarter quarter
_______ _______ _______ _______
Operating revenue $ 88,736 219,898 149,738 155,019
Investment Income (loss) (180,453) (290,855) (193,671) 44,332
Net earnings (118,940) (120,552) (102,269) 40,007
(Loss) earnings per share
basic and diluted (0.24) (0.24) (0.20) 0.08
_______ _______ _______ _______
Investment income for 2003 reflects an impairment charge in the first
quarter of $87,282. Investment income for 2002 reflects impairment charges
in the first, second, and third quarters of $212,127, $323,006, and
$151,096, respectively. Investment income for 2001 reflects impairment
charges in the second, third, and fourth quarters of $46,088, $66,414 and
$161,794, respectively.
-31-
INDEX TO EXHIBITS
(3)(i)Amended and Restated Certificate of Incorporation is
incorporated herein by reference to Exhibit (3)(i) to the Annual
Report on Form 10-K for the Company for the fiscal year ended
December 31, 2000.
(3)(ii) Bylaws are incorporated herein by reference to Exhibit
(3)(ii) to the Annual Report on Form 10-K for the Company for the
fiscal year ended December 31, 2003.
(10) Material Contracts:
(i) Agreement of Settlement and Release dated February 29, 2000
is incorporated by reference to Exhibit 10(i) to the Annual Report
on Form 10-K for the Company for the fiscal year ended December 31,
1999.
(iii)(A) Central Coal & Coke Corporation's Directors Non-Qualified
Stock Option Plan is incorporated herein by reference to Exhibit
(10)(iii)(A) to the Annual Report on Form 10-K for the Company for
the fiscal year ended December 31, 1994. This Plan was approved
by the Company's stockholders at the Annual Meeting held April 19,
1995, and is discussed in the Definitive Proxy Statement for that
meeting previously filed with the Commission.
(iv) Central Natural Resources, Inc. 2001 Stock Incentive Plan
approved by the Board of Directors February 7, 2001 and approved
by the Stockholders at the Annual Meeting of Stockholders held
April 19, 2001. This Plan is discussed in the Definitive Proxy
Statement for that meeting and was filed with the Commission with
that Proxy Statement and is incorporated herein by this reference.
(v) Purchase and Sale Agreement Between Smith Production, Inc.
as Seller and CNR Production, LLC as Purchaser, dated
February 28, 2003, by and between Smith Production, Inc. a Texas
corporation, as "Seller," and CNR Production, LLC, a Texas limited
liability company and a wholly-owned subsidiary of the
Company, as "Purchaser," is incorporated herein by reference to
Exhibit 10(D) of the Quarterly Report on Form 10-Q for the Company
for the Quarter Ended March 31, 2003.
(14) Code of Ethics (attached as Exhibit 14 hereto)
(21) Subsidiaries of the Company (attached as Exhibit 21 hereto)
(23) Consent of Independent Petroleum Engineers (attached as
Exhibit 23 hereto)
(31.1) Certification required by Rule 13a-14(a) or Rule 15d-
14(a) for Chief Executive Officer (attached as Exhibit 31.1
hereto).
(31.2) Certification required by Rule 13a-14(a) or Rule 15d-
14(a) for Chief Financial Officer (attached as Exhibit 31.2
hereto).
(32.1) Section 1350 Certification for Chief Executive Officer
(attached as Exhibit 31.1 hereto).
(32.2) Section 1350 Certification for Chief Financial Officer
(attached as Exhibit 32.2 hereto).
-32-
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) 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
By /s/ Phelps C. Wood
________________________________
Phelps C. Wood, President
Date: March 29, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
By /s/ Phelps C. Wood
________________________________
Phelps C. Wood, President
Principal Executive Officer
Date: March 29, 2004
By /s/ Leonard L. Noah
________________________________
Leonard L. Noah
Chief Financial Officer Principal
Financial Officer, and
Date: March 29, 2004 Principal Accounting Officer
By /s/ Bruce L. Franke
________________________________
Bruce L Franke, Director
Date: March 29, 2004
By /s/ Ray A. Infantino
________________________________
Ray A. Infantino, Director
Date: March 29, 2004
By /s/ Patrick J. Moran
________________________________
Patrick J. Moran, Director
Date: March 29, 2004
By /s/ James R. Ukropina
________________________________
James R. Ukropina, Director
Date: March 29, 2004
By /s/ Phelps C.Wood
________________________________
Phelps C. Wood, Director
Date: March 29, 2004
By /s/ Phelps M. Wood
________________________________
Phelps M. Wood, Director
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