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Form 1O-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Under Section 13 or
15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2004
Commission File No. 0-1392
Central Natural Resources, Inc.
Incorporated in State of Delaware IRS Number: 44-0195290
911 Main Street, Suite 1710
Kansas City, Missouri 64105
Phone: 816-842-2430
The registrant (l) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months, and (2) has been subject to such filing
requirements for the past ninety days.
Yes [X] No [ ]
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
Common stock outstanding as of July 31, 2004
$1 par value; 493,637 shares
CENTRAL NATURAL RESOURCES, INC.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 2004 and
December 31, 2003
Consolidated Statements of Earnings and Retained Earnings
- Three months ended June 30, 2004 and 2003 and six
months ended June 30, 2004 and 2003
Consolidated Statements of Comprehensive Income
-Three months ended June 30, 2004 and 2003 and
six months ended June 30, 2004 and 2003
Consolidated Statements of Cash Flows - Six months
ended June 30, 2004 and 2003
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About
Market Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities, and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
CENTRAL NATURAL RESOURCES, INC.
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(Unaudited)
(amounts in unit dollars)
ASSETS 2004 2003
__________ __________
Current assets:
Cash and cash equivalents $ 325,312 629,719
Accounts receivable 214,378 127,570
Securities maturing within one year,
at amortized cost 2,999,434 2,999,314
Notes receivable, current - 21,651
Income tax receivable 128,555 110,289
Advance to operators 168,212 6,997
Other 42,440 16,633
__________ __________
Total current assets 3,878,331 3,912,173
__________ __________
Equity securities, at fair value (note 2) 544,090 603,481
Other Investments 262,720 262,720
Property, plant and equipment
Oil and gas producing properties
(successful efforts) 1,976,773 1,707,419
Mineral interest properties 1,668,137 1,668,137
__________ __________
3,644,910 3,375,556
Less accumulated depletion, depreciation
and amortization 708,037 630,550
__________ __________
Net property, plant and equipment 2,936,873 2,745,006
__________ __________
Total assets $ 7,622,014 7,523,380
See accompanying notes to consolidated financial statements.
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 39,203 44,066
__________ __________
Total current liabilities 39,203 44,066
__________ __________
Deferred income taxes 201,951 137,788
Stockholders' equity
Preferred stock of $1 par value; 100,000
Shares authorized; no shares issued - -
Common stock of $1 par value; 2,500,000
Shares authorized; 506,924 issued in 2004
and 503,924 in 2003 506,924 503,924
Additional paid in capital 33,750 -
Unearned restricted stock (28,125) -
Treasury stock 12,100 shares in 2004 and 2003 (161,775) (161,775)
Retained earnings 6,925,361 6,856,047
Accumulated other comprehensive income,
net of deferred taxes of $56,389 in 2004
and $77,175 in 2003 104,725 143,330
__________ __________
Total stockholders' equity 7,380,860 7,341,526
__________ __________
Total liabilities and stockholder's equity $ 7,622,014 7,523,380
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES, INC.
Consolidated Statements of Earnings and Retained Earnings
Six months ended June 30, 2004 and 2003 and
three months ended June 30, 2004 and 2003
(Unaudited)
(amounts in unit dollars)
Six months ended Three months ended
June 30, June 30,
2004 2003 2004 2003
_________ _________ _________ _________
Operating revenue:
Mineral royalties $ 315,057 330,902 187,587 184,838
Oil and gas production 500,576 191,632 257,328 98,157
_________ _________ _________ _________
Total operating revenue 815,633 522,534 444,915 282,995
Oil and gas operating expenses 102,383 68,723 48,110 19,268
Depreciation, depletion and
amortization 76,925 34,334 45,424 18,907
Exploration expenses 963 - - -
General and administrative
expenses 420,872 337,415 220,927 186,331
Gain on sales of real estate - (16,002) - -
_________ _________ _________ _________
Total expenses 601,143 424,470 314,461 224,506
_________ _________ _________ _________
Operating income 214,490 98,064 130,454 58,489
_________ _________ _________ _________
Nonoperating income:
Investment income (loss) 23,690 (44,576) 13,074 12,333
Other 2,516 644 2,500 32
_________ _________ _________ _________
Total nonoperating
income (loss) 26,206 (43,932) 15,574 12,365
_________ _________ _________ _________
Earnings before
income taxes 240,696 54,132 146,028 70,854
Income taxes 72,418 3,986 40,641 17,287
_________ _________ _________ _________
Net earnings 168,278 50,146 105,387 53,567
Retained earnings at
beginning of period 6,856,047 6,941,699 6,869,457 6,888,386
Deduct cash dividends paid
of $.20 per share in 2004
and 2003 (98,964) (99,786) (49,483) (49,894)
_________ _________ _________ _________
Retained earnings at end
of period $ 6,925,361 6,892,059 6,925,361 6,892,059
Earnings per share-
basic and diluted $ 0.34 0.10 0.21 0.11
_________ _________ _________ _________
Weighted average number
of shares of common stock
outstanding basic
and diluted 494,231 498,924 494,824 498,924
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES, INC.
Consolidated Statements of Comprehensive Income
Six months ended June 30, 2004 and 2003 and
three months ended June 30, 2004 and 2003
(Unaudited)
(amounts in unit dollars)
Six months ended Three months ended
June 30, June 30,
2004 2003 2004 2003
_________ _________ _________ _________
Net earnings $ 168,278 50,146 105,387 53,567
_________ _________ _________ _________
Other comprehensive income:
Realized gains and unrealized
appreciation (depreciation)
on investments (59,041) 6,751 (20,433) 9,421
Income taxes 20,664 (2,363) 7,151 (3,297)
_________ _________ _________ _________
Realized gains and
unrealized appreciation
(depreciation)
on investments, net (38,377) 4,388 (13,282) 6,124
_________ _________ _________ _________
Less:
Realized investment (gains)
losses included in net
earnings (350) (12,669) - 991
Income taxes 122 4,435 - (347)
_________ _________ _________ _________
(228) (8,234) - 644
_________ _________ _________ _________
(38,605) (3,846) (13,282) 6,768
_________ _________ _________ _________
Comprehensive income $ 129,673 46,300 92,105 60,335
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES, INC.
Consolidated Statements of Cash Flows
Six months ended June 30, 2004 and 2003
(Unaudited)
(amounts in unit dollars)
2004 2003
_________ _________
Cash flows from operating activities:
Net earnings $ 168,278 50,146
Adjustments to reconcile net earnings
to net cash provided by (used in)
operating activities:
Depletion, depreciation
and amortization 77,487 34,897
Amortization of premiums and discounts of
Securities, net (14,515) (17,355)
Impairment charge on other investments - 87,282
Gain on sales of real estate - (16,002)
Gain on sales of equity securities (350) (12,669)
Decrease in unearned restricted stock 5,625 -
Changes in assets and liabilities:
Accounts receivable and other assets (112,615) (75,024)
Advances to Operator (161,215) (48,870)
Deferred oil lease bonus - (11,250)
Accounts payable and accrued expenses (4,863) 7,613
Federal and state income taxes 66,683 232,525
_________ _________
Total adjustments (143,763) 181,147
_________ _________
Net cash provided by
operating activities 24,515 231,293
Cash flows from investing activities:
Proceeds from note receivable 21,651 6,145
Proceeds from matured/called investment
debt securities 9,000,000 9,000,000
Purchases of investment debt securities (8,985,605) (8,984,798)
Proceeds from sales of land - 16,297
Purchases of equity securities - (1,367)
Proceeds from sales of equity securities 350 71,034
Oil and Gas capital expenditures (269,354) (139,843)
Acquisition of oil and gas producing
properties - (1,080,000)
Sale of common stock 3,000 -
_________ _________
Net cash used in
investing activities (229,958) (1,112,532)
_________ _________
Cash flows from financing activities
Dividend paid (98,964) (99,786)
Net cash used in financing activities (98,964) (99,786)
Net increase in cash and cash eequivalents (304,407) (981,025)
Cash and cash equivalents,
beginning of year 629,719 1,956,795
_________ _________
Cash and cash equivalents,
end of period $ 325,312 975,770
See accompanying notes to consolidated financial statements.
CENTRAL NATURAL RESOURCES INC.
Notes to Unaudited Consolidated Financial Statements
June 30, 2004
Basis of Presentation
In the opinion of Central Natural Resources, Inc. (the Company), the
accompanying unaudited consolidated financial statements contain all
adjustments (consisting of only normal recurring accruals) necessary
to present fairly the financial position as of June 30, 2004, and the
results of operations and cash flows for the periods ended June 30,
2004 and 2003.
The consolidated financial statements are presented in accordance
with the requirements of Form 10-Q and, consequently, do not include
all the disclosures required by accounting principles generally
accepted in the United States of America. For further information,
refer to the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2003.
On June 30, 2004 the Company announced in an 8-K filing that it had
filed Form 15 with the SEC to cease to be an SEC reporting company,
as it was eligible to do so under applicable SEC regulations. Unless
this Form 15 filing is denied by the SEC, the Company will no
longer be required to make quarterly and yearly filings of reports
with the Securities and Exchange Commission.
The Company uses the Successful Efforts method of accounting for
revenue and expenses from oil and gas production that has been
detailed in the Company's 10-K and previous reports. Revenue and
expenses associated with oil and gas production is accrued in the
period the revenue or expenses are generated. Revenue and expenses
from oil and gas production in the period ended June 30, 2004 was
generated by working interests in oil and gas properties acquired in
February 2003 and working interests in unproved properties acquired
in July 2002. Exploration expenses, including geological and
geophysical costs, rental and exploratory dry holes, are charged
against income as incurred. Costs of successful wells and related
production equipment and developmental dry holes are capitalized
and amortized by field using the unit-of-production method as the
oil and gas are produced.
Undeveloped acreage costs are capitalized and amortized at rates that
provide full amortization on abandonment of unproductive leases.
Costs of abandoned leases are charged to the accumulated amortization
accounts, and costs of productive leases are transferred to the
developed property accounts.
Other - Property, plant and equipment is stated at cost less reserves
for depreciation, depletion and amortization. Maintenance and
repairs are expensed as incurred, except that costs of replacements
or renewals that improve or extend the lives of existing properties
are capitalized.
Impairment of Long-Lived Assets - Proved oil and gas properties are
reviewed for impairment on a field-by-field basis when facts and
circumstances indicate that their carrying amounts may not be
recoverable. In performing this review, future cash flows are
estimated by applying estimated future oil and gas prices to
estimated future production, less estimated future expenditures to
develop and produce the reserves. If the sum of these estimated
future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the property, an impairment loss is
recognized for the excess of the carrying amount over the estimated
fair value of the property based on estimated future cash flows.
CENTRAL NATURAL RESOURCES INC.
Notes to Unaudited Consolidated Financial Statement
Results of operations for interim periods are not necessarily indicative
of results to be expected for a full year.
Stock Based Compensation
In the first quarter of 2004 the Company granted 3,000 shares of
restricted stock to an employee of the Company, vesting in equal
amounts over three years. The employee purchased the 3,000
restricted shares at $1 per share and the difference between the
purchase price and the then fair market value of the stock was
recorded in shareholders equity as unearned restricted stock. The
unearned restricted stock is amortized ratably to expense over the
three-year vesting period.
Also in the first quarter of 2004, the Company granted 2,000 options,
vesting in equal amounts over four years, to another employee of the
Company. In the second quarter of 2004, the Company granted stock
options in the amount of 1,250 shares to each non-employee Director
under the Company's "Director Nonqualified Stock Option Agreement".
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations
in accounting for its fixed plan stock options. As such, compensation
expense would be recorded on the date of grant only if the then
current market price of the underlying stock exceeded the exercise
price. Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, established accounting and
disclosure requirements using a fair value-based method of accounting
for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic value-
based method of accounting described above, and has adopted the
disclosure requirements of SFAS No. 123. The following table
illustrates the effect on net income (loss) if the fair value based
method had been applied to all outstanding and unvested awards in
each period:
Six months ended Three months ended
June 30, June 30,
2004 2003 2004 2003
________ _______ _______ _______
Net Earnings:
As Reported $ 168,278 50,146 105,387 53,567
Less: Stock Options net
of taxes 15,678 4,762 13,530 4,762
Pro Forma net earnings 152,600 45,384 91,857 48,805
Earnings per share
(basis and diluted):
As Reported $ 0.34 0.10 0.21 0.11
Pro Forma 0.31 0.09 0.19 0.10
CENTRAL NATURAL RESOURCES INC.
Notes to Unaudited Consolidated Financial Statements
Options outstanding at June 30, 2004 and June 30, 2003 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.
(2) Investment Securities:
The amortized cost, gross unrealized holding gains, gross unrealized
holding losses, and fair value for held-to-maturity and
available-for-sale securities by major security type at June 30, 2004
and December 31, 2003 are as follows:
Gross Gross
unrealized unrealized
Amortized holding holding Fair
June 30, 2004 cost gains losses value
__________________ __________ __________ __________ __________
Held-to-maturity:
U. S. government
agency securities $ 2,999,434 - (184) 2,999,250
Available-for-sale:
Equity securities $ 382,975 161,115 - 544,090
December 31, 2003
_________________
Held-to-maturity:
U. S. government
agency securities $ 2,994,314 - (34) 2,994,280
Available-for-sale:
Equity securities $ 382,975 220,506 - 603,481
CENTRAL NATURAL RESOURCES INC.
Notes to Unaudited Consolidated Financial Statements
Investment income (loss) consists of the following for each of the
periods ended June 30:
Six months ended Three months ended
June 30, June 30,
2004 2003 2004 2003
________ _______ _______ _______
Realized gains on sales
of equity securities $ 350 12,669 - (991)
Impairment charge - (87,282) - -
Interest Income 20,245 26,101 11,274 11,459
Dividend Income 3,095 3,936 1,800 1,865
_______ _______ _______ _______
$ 23,690 (44,576) 13,074 12,333
Investments in debt securities are classified as held-to-maturity
securities, which are carried at amortized cost. Investments in
marketable equity securities are classified as available-for-sale
securities, which are carried at fair value, with unrealized gains
and losses excluded from earnings and reported in other
comprehensive income.
A decline in the market value of any available-for-sale or
held-to-maturity security below cost that is deemed to be other
than temporary results in a reduction in carrying amount to fair
value. The impairment is charged to earnings and a new cost basis
for the security is established. Other than temporary impairment is
analyzed quarterly on an individual security basis based on the
length of time and the extent to which market value has been less
than cost; the financial condition and any specific events which
effect the issuer; and the Company's intent and ability to hold the
security. During the six months ended June 30, 2004, the Company
recognized no impairment charge for marketable equity securities.
Other investments represent an equity interest in non-marketable
securities for which the Company does not possess significant
influence. These investments are accounted for at cost. An
impairment charge was recognized in the amount of $87,282 to
reflect an impairment in these securities in the first quarter of
2003.
(3) Oil and Gas Activity
Through the first six months of 2004, a wholly owned subsidiary of
the Company had committed to participate in the drilling of ten gas
wells in south and east Texas. At June 30, 2004, four wells had
been successfully completed, one well was in the process of being
completed, two wells were in the process of being drilled and
commitments had been made to participate in three additional wells
on which drilling activity had not yet begun. Oil and gas property
recorded on the balance sheet is comprised of property that is both
proved and unproved, although currently all costs carried on the
balance sheet relate to proved property.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The six months ended June 30, 2004 exhibit the results of the
Company's expanded efforts to increase oil and gas production through
aggressive exploration and development. Successful well completions
and workovers since the acquisition of producing properties in the
first quarter of 2003 resulted in the more than doubling of revenue
from oil and gas production during this time. To date in 2004, the
Company, through its wholly-owned subsidiary, CNR Production L.L.C.
(CNR), has participated in, or approved the participation in, 10
wells to further explore and develop its working interest properties.
In addition to exploration and development, CNR will continue to
evaluate potential additions to its oil and gas properties through
acquisitions. While no assurance can be given, assuming commodity
prices remain strong, and subject to other uncertainties set forth in
the section captioned "Forward-Looking Statements" below, management
expects that earnings will continue to grow as revenue from
production increases during 2004 with the addition of successful
wells.
The cost of maintaining a public, SEC reporting company continues to
rise and is reflected in the Company's General and Administrative
expenses discussed below. While these costs are borne by companies
of all sizes, the burden from both an expense and a management time
standpoint is often disproportionate for smaller companies such as
the Company. On June 30, 2004 the Company announced in an 8-K filing
that it had filed Form 15 with the SEC to cease to be an SEC
reporting company, as it was eligible to do so under applicable SEC
regulations. While the Company believes that this filing will not be
denied by the SEC, there is a 90-day review period during which the
SEC may deny the filing. Management believes that, due to the
cessation of SEC reporting requirements, the Company will be able to
achieve savings in General and Administrative expenses and will avoid
what was deemed by management as a certain increase in both costs and
time associated with future requirements. That said, further
government requirements that mandate additional disclosures or
specific procedures may increase costs in the future, as would the
need to hire outside experts as well as the need to hire additional
internal financial personnel to assist with the implementation of
these regulations.
Management continues to position the Company to take advantage of
extractive mineral opportunities and expects further revenue,
expenses and capital expenditures to be generated in these endeavors
in 2004, as they were in the first six months of 2004. In recent
periods, the Company has benefited from extremely strong commodity
oil and gas prices. While prices may remain at an elevated level, a
reduction in commodity oil and gas prices would have a negative
impact upon the Company's revenues and profitability.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Results of Operations
Total operating revenue increased substantially in the first six
months of 2004 over the first six months of 2003, and in the second
quarter of 2004 over the second quarter of 2003, due to increased
revenues from oil and gas production which was the result of an
increase in the volume of oil and gas produced during the current
periods under comparison, coupled with an increase in average prices
during the comparable periods. Although revenue from mineral
royalties increased slightly in the three months ended June 30, 2004
over the year prior period, revenue from mineral royalties in the
first six months of 2004 decreased slightly from 2003. The table
below shows gas production volume and average pricing for the periods
under comparison:
Six months ended Three months ended
June 30, June 30,
2004 2003 2004 2003
________ _______ _______ _______
Volume (MCF equiv.) $ 70,920 30,766 36,012 17,199
Avg Price $ 7.06 6.23 7.15 5.71
Total Revenue $ 500,576 191,632 257,328 98,157
*Note - Rounding may cause calculated totals to be slightly different
than above.
General and administrative expenses increased in both the first six
months of 2004 over the first six months of 2003, and in the second
quarter of 2004 over the second quarter of 2003 due primarily to
increases in auditing and legal fees. Oil and gas operating
expenses, which include lease operating costs, increased in the first
six months of 2004 over the first six months of 2003, and in the
second quarter of 2004 over the second quarter of 2003 due to the
substantial amount of additional developmental work completed in
recent months. Although total oil and gas operating expenses
increased during this period, the ratio of expenses to production
revenue remained relatively constant. Depletion, depreciation and
amortization increased in both the 2004 periods under comparison from
the prior year's periods due to the increased production in the
corresponding periods.
There was positive non-operating income in the first six months of
2004 compared to a non-operating loss in the first six months of
2003. Non-operating income increased slightly in the second quarter
of 2004 compared to the second quarter of 2003. In the first six
months of 2003 the Company recognized an impairment charge of $87,282
on the carrying value of an investment in non-marketable securities
held by the Company. There were no impairments or write-downs taken
during the first six months of 2004.
The Company recorded an increase in income tax expense in the first
six months of 2004 versus the same period in 2003 due to higher net
taxable earnings generated in 2004 versus the same period of 2003.
The increase in income tax expense was also greater in the second
quarter of 2004 than the comparable period in 2003 due to the
increase in earnings generated in 2004 versus the prior period under
comparison.
Financial Condition - Liquidity and Capital Resources
The financial condition of the Company continued to be strong through
the end of the first six months of 2004 as it was at the end of the
fiscal year in 2003, with substantial liquid assets, no debt and
positive net earnings. The Company continues to utilize available
liquidity to fund exploration and development of its working
interests in south Texas and east Texas through CNR. The liquidity
of the Company continues to be high as is evidenced by a continuing
favorable ratio of current assets to current liabilities of over
50:1, and the fact that a significant portion of the Company's stock
holders' equity continues to be represented by liquid assets.
Although, liquidity of the Company continues to be favorable, it is
affected by cash flows. The Consolidated Statement of Cash Flows in
the accompanying Consolidated Financial Statements illustrates that
there was a net decrease in cash and cash equivalents during the
first six months of 2004 and in the same period in 2003, although the
decrease was much greater in 2003 than the current period under
comparison. Summary cash flows for the two periods under comparison
are shown on the table below:
Six months ended
June 30,
2004 2003
________ _______
Cash provided by (used in):
Operating activities $ 24,515 231,293
Investing activities (229,958) (1,112,532)
Financiang activities-
dividends paid (98,964) (99,786)
Contributing to the cash used in operating activities for both
periods was an increase in the amount of accounts receivable and
advances to operators. Accounts receivable is increasing as gas
production rates continue to increase. Advances to operators have
increased in conjunction with drilling obligations. Also
contributing to the differences in cash from operating activities was
an adjustment for a non-cash impairment charge taken in 2003 and
differences in Federal and State income taxes. A significant use of
cash from investing activities in the 2003 periods under comparison
was the acquisition of working interests in oil and gas properties as
well as differences in the amount of proceeds from the sale of equity
securities and purchase of equity securities.
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 low amounts of accounts receivable and accounts
payable, its working capital needs are minimal, and since it has
significant liquid assets, and there are no current known material
demands, commitments or contractual obligations, Management believes
that liquidity should continue to be favorable and the financial
condition of the Company strong.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued
Regarding future capital expenditures, as reported in prior filings,
CNR is participating in an oil and gas exploration and development
venture in east Texas and continues to expand developmental efforts
on its south Texas properties. Through the first six months ended
June 30, 2004, CNR had committed to participate in a total of ten
wells as mentioned in Note 3, and CNR believes that additional
exploratory and developmental well potential exists in these areas.
CNR expects that in the near term, these activities will require
additional funds that, although uncertain in amount at the present
time, should be provided for by the current liquid assets of the
Company.
With regard to CNR's working interests in oil and gas properties
described above, it will be called upon, from time to time, to pay
its pro-rata share of expenses and capital expenditures associated
with the projects. Management believes that, based upon the CNR's
current liquidity level and the expected future revenue from these
ventures, sufficient financial resources will be available to meet
any and all funding requirements required by these projects. 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 5,014 5,014 0 0 0
Lease
Obligations
Purchase 163,655 163,655 0 0 0
Obligations*
Other Long- 0 0 0 0 0
Term
Liabilties
Total 168,669 168,669 0 0 0
*The entire amount shown in Purchase Obligations is for
Authorizations For Expenditures that were approved prior to
June 30, 2004.
Other than these projects, the Company has no specific commitment
for material expenditures at the present time. Management does,
however, continue to actively pursue other business opportunities
which may result in a more productive deployment of its assets and
ultimately increase earnings, and in pursuit of that objective has
focused on the possible acquisition of additional mineral
properties or working interests in selected oil and gas operations.
In addition, Management continues to aggressively pursue
development of its currently owned oil and gas and coal properties
and to attempt to lease more of its mineral properties in order to
generate additional rental, bonus and royalty income. The only
continuing commercial commitment is the operating lease for general
office space of the Company and commitments with respect to the
Texas oil and gas projects referred to above.
Accounting Policies, Recent Accounting Pronouncements and Other
Matters
A summary of significant accounting policies was contained in Note
1 to the consolidated financial statements of the Company filed
with Form 10-K for the year ended December 31, 2003. 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 could be materially
different reported results if different assumptions or conditions
were to prevail.
FASB's Emerging Issues Task Force has issued new guidance on "Other-
Than-Temporary Impairment" that is effective for reporting periods
beginning after June 15, 2004 and requires disclosure for annual
reporting periods ending after June 15, 2004. The new guidance
creates a model for many judgements and additional evidence
gathering and applies to investments in debt and equity securities.
Management has a system in place to periodically review its
investments in debt and equity securities for such impairments and
does not foresee that the new requirements will materially impact
the Company in the near future although fluctuations in the market
values of securities may prove otherwise.
Another example of a judgment made in applying a critical
accounting policy is the periodic review of long-lived assets for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. This
accounting policy has been applied in the past, for example, in
downward adjustments to the carrying value of the Company's coal
properties. However, this accounting policy does not permit an
upward adjustment in such carrying values, when Management believes
the current fair market value of an asset is greater than the
carrying value on the balance sheet and in fact Management believes
that this may be the case with respect to the carrying value of
certain assets on the balance sheet carried at their historical
cost.
Yet another example of judgment exercised in applying a critical
accounting policy is the election, approved by the Board of
Directors of the Company, to utilize the "Successful Efforts"
method of accounting with respect to the operation of the oil and
gas working interests described above. "Successful Efforts"
typically results in more of the costs of operations 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 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 cash dividend of $0.10 per share was paid in each of the first
and second quarters of 2004, and a cash dividend of the same amount
was paid in each quarter of 2003.
Forward-Looking Statements
This report contains forward-looking statements that are based on
current expectations, estimates, forecasts, and projections about
the business segment in which the Company operates, Management's
beliefs, and assumptions made by Management. These and other
written or oral statements that constitute forward-looking
statements may be made by or on behalf of the Company. These
statements are not guarantees of future performance and involve
assumptions and certain risks and uncertainties that are difficult
to predict, such as future changes in energy prices, including
fluctuations in prevailing prices for oil and gas, the Company's
ability to participate in or co-venture successful exploration or
production of natural resources (such as oil, gas, coal and other
minerals), results of drilling and other exploration and
development activities, uncertainties regarding future political,
economic, regulatory, fiscal, and tax policies and practices as
well as assumptions concerning a relatively stable national
economy, and the absence of a major disruption such as a domestic
act of terrorism and the uncertainties of even routine litigation
in which the Company is involved from time-to-time in the ordinary
course of its business operations. In addition, the Company relies
on professional and management services provided by third parties
in certain of its operating activities. Therefore, actual outcomes
and results may differ materially from what is expressed, implied,
or forecast in such forward-looking statements. The Company does
not, by including this statement, assume any obligation to review
or revise any particular forward-looking statement referenced
herein in light of future events.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The primary market risk exposures of the Company relate to changes
in interest rates, changes in equity security prices, and changes
in certain commodity prices.
The Company's exposure to market risk for changes in interest rates
relates solely to its fixed income portfolio which consists of U.
S. government agency securities. All such securities are
held-to-maturity and have original maturities of less than one
year. The Company does not use derivative financial instruments to
hedge interest rates on its fixed income investment securities.
The Company's exposure to market risk for changes in equity
security prices relates solely to its marketable equity investment
portfolio which consists primarily of common stocks of domestic,
publicly held enterprises.
The Company's exposure to market risk for changes in commodity
prices relates to changes in the prices of coal, oil, and natural
gas, and the effect thereof on its mineral royalties and oil and
gas production, as is discussed in more detail in Management's
Discussion and Analysis of Financial Condition and Results of
Operations, set forth in Part 1, Item 2 of this report. The Company
does not use derivative commodity instruments to hedge its
commodity risk exposures.
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2004, the Company's management, including the Chief
Executive Officer and the Chief Financial Officer, evaluated the
effectiveness of the design and operation of Central Natural
Resources, Inc.'s disclosure controls and procedures as defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934. Based on that evaluation, the Company's management, including
its Chief Executive Officer and its Chief Financial Officer,
concluded that its disclosure controls and procedures were
effective in timely alerting management, including the Chief
Executive Officer and the Chief Financial Officer, of material
information about the Company required to be included in periodic
Securities and Exchange Commission filings. However, in evaluating
the disclosure controls and procedures, management recognized that
any controls and procedures, no matter how well designed and
operated can provide only reasonable assurance of achieving the
desired control objectives, and management necessarily was required
to apply its judgment in evaluating the cost-benefit relationship
of possible controls and procedures. There have been no changes in
the Company's internal control over financial reporting or other
factors that occurred during the quarter ended June 30, 2004 that
have materially affected, or are reasonably likely to materially
affect, its internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings - None
Item 2. Changes in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - Attached
Item 5. Other Information - None
Item 6(a). Exhibits - Attached
31.1 Certification required by Rule 13a-14(a) or Rule
15d-14(a) for Chief Executive Officer
31.2 Certification required by Rule 13a-14(a) or Rule
15d-14(a) for Chief Financial Officer
32.1 Section 1350 Certification for Chief Executive Officer
32.2 Section 1350 Certification for Chief Financial Officer
Item 6(b). Reports on Form 8-K - Attached
PART II, ITEM 4. - SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held April 30, 2004.
in Pasadena, CA.
(b) The meeting involved the election of Directors, and the
following are the Directors elected at that meeting:
Bruce L. Franke
Ray A. Infantino
Patrick J. Moran
James R. Ukropina
Phelps C. Wood
Phelps M. Wood
There were no other Directors whose term of office as a Director
continued after the meeting.
(c)(i) For the election of Directors, the votes received by all
nominees were as follows:
Bruce L. Franke 400,426
Ray A. Infantino 400,426
Patrick J. Moran 400,426
James R. Ukropina 400,426
Phelps C. Wood 400,426
Phelps M. Wood 400,426
Cumulative voting is not permitted.
(ii) At the same meeting, the Stockholders ratified the
appointment by the Audit Committee of the accounting firm KPMG LLP as
independent public accountants to examine the financial statements of the
Company for the year ending December 31, 2004 and to perform other appropriate
accounting services. The holders of 397,634 shares cast their votes
in favor of that appointment, the votes of 266 shares were cast against
it, and the holders of 3,384 shares abstained.
(d) There were no settlements between the Company and any
other participants terminating any solicitation subject to Rule 14a-11.
PART II, ITEM 6. - Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K are as follows:
Exhibit 31.1 - Certification required by Rule 13a-14(a) or Rule 15d-14(a)
for Chief Executive Officer (Attached as Exhibit 31.1 hereto).
Exhibit 31.2 - Certification required by Rule 13a-14(a) or Rule
15d-14(a) for Chief Financial Officer (Attached as Exhibit 31.2 hereto).
Exhibit 32.1 - Section 1350 Certification for Chief Executive Officer
(Attached as Exhibit 32.1 hereto).
Exhibit 32.2 - Section 1350 Certification for Chief Financial Officer
(Attached as Exhibit 32.2 hereto).
PART II, ITEM 6(b). REPORTS ON FORM 8-K
On June 30, 2004, the Company filed an 8-K announcing the filing of
a Form 15 with the SEC to terminate registration of its common
stock under the Securities Exchange Act of 1934.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
CENTRAL NATURAL RESOURCES INC.
(Registrant)
Date: August 12, 2004
____________________________
By: /s/ Leonard L. Noah
____________________________
Leonard L. Noah,
Chief Financial Officer
Date: August 12, 2004
____________________________
By: /s/ Phelps C. Wood
____________________________
Phelps C. Wood
President, and
Chief Executive Officer