U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended January 31, 2003
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
Commission file number 0-1394
SEVEN J STOCK FARM, INC.
(Name of small business issuer as specified in its charter)
Texas 74-1110910
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(State of incorporation) (I.R.S. Employer Identification No.)
16945 Northchase Dr., Suite 1800 Houston, TX 77060
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(Address of principal executive offices)
(281) 875-9100
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(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ( )
As of March 17, 2003 there were 1,451,000 shares of Seven J Stock Farm, Inc.
common stock $1.00 par value outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE DATA)
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
JANUARY 31,
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2003 2002
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REVENUES
Pipeline operations $ 148 $ 119
Net oil and gas royalties 54 47
Ranch lease rentals 48 48
Farm produce sales 13 56
Contract and irrigation services 3 6
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TOTAL REVENUES 266 276
COSTS AND EXPENSES
Operating expenses 181 173
General and administrative expenses 97 47
Depreciation and amortization 43 44
Equity in loss of 50% owned affiliate 18 282
Other costs and expenses - 1
Interest expense 11 2
Taxes - other than income taxes 11 9
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TOTAL COSTS AND EXPENSES 361 558
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LOSS BEFORE INCOME TAXES (95) (282)
INCOME TAX BENEFIT - 57
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NET LOSS $ (95) $ (225)
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LOSS PER SHARE - Basic and Diluted
(1,451,000 weighted - average shares outstanding) $ (0.07) $ (0.16)
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DIVIDENDS PER SHARE None None
See notes to the condensed consolidated financial statements.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
JANUARY 31, 2003
(IN THOUSANDS EXCEPT FOR SHARE DATA)
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 145
Accounts receivable - trade 34
Accounts receivable - related parties 196
Deferred income taxes 3
Other current assets 3
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TOTAL CURRENT ASSETS 381
PROPERTY AND EQUIPMENT, net 1,482
OTHER ASSETS 55
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TOTAL ASSETS $ 1,918
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 79
Accounts payable - related parties 56
Accrued expenses 12
Accrued taxes other than income taxes 11
Accrued income taxes 5
Note payable 3
Current maturities of long-term debt 12
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TOTAL CURRENT LIABILITIES 178
LONG-TERM DEBT 650
DEFERRED INCOME TAXES 26
ACCRUED LOSS CONTINGENCY FOR 50% OWNED AFFILIATE 184
DEFERRED REVENUES 4
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TOTAL LIABILITIES 1,042
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share;
authorized 1,500,000 shares; issued and
outstanding 1,451,000 shares 1,451
Accumulated deficit (575)
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TOTAL SHAREHOLDERS' EQUITY 876
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TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,918
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See notes to the condensed consolidated financial statements.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE
MONTHS ENDED
JANUARY 31,
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2003 2002
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(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (95) $ (225)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 43 44
Deferred income taxes - (57)
Equity in loss of 50% owned affiliate 18 282
Changes in operating assets and liabilities:
Accounts receivable - trade 180 62
Accounts receivable - related parties 181 87
Other current assets 2 -
Accounts payable, accrued expenses, and
deferred revenues (236) (79)
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NET CASH PROVIDED BY OPERATING
ACTIVITIES 93 114
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to 50% owned affiliate (18) (82)
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt and note payable repayments (2) (29)
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NET INCREASE IN CASH AND CASH EQUIVALENTS 73 3
CASH AND CASH EQUIVALENTS - beginning of period 72 25
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CASH AND CASH EQUIVALENTS - end of period $ 145 $ 28
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SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period for:
Interest $ - $ 2
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See notes to the condensed consolidated financial statements.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements are
unaudited and include the accounts of Seven J Stock Farm, Inc. and its
wholly owned subsidiary, Madison Pipe Line Company, collectively referred to
as the "Company".
The unaudited interim condensed consolidated financial statements and
related notes have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United
States have been omitted pursuant to such rules and regulations. The
accompanying unaudited interim condensed consolidated financial statements and
related notes should be read in conjunction with the financial statements and
related notes included in the Company's 2002 Annual Report to Shareholders.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the Company's financial position as of January 31, 2003 and
the results of their operations and their cash flows for the periods ended
January 31, 2003 and 2002. Such adjustments consisted only of normal
recurring items. The results of operations for the periods ended
January 31, 2003 and 2002 are not necessarily indicative of the results
to be expected for the full year. Interim results are subject to year-end
adjustments and audit by independent public accountants.
Certain items and amounts for the prior period have been reclassified
to conform to the current period presentation. The reclassifications have
no effect on net income.
Recent Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143").
SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 applies to legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and normal use of the asset. SFAS 143
applies to all entities and amends FASB Statement No. 19, "Financial
Accounting and Reporting by Oil and Gas Producing Companies". SFAS 143
requires that the fair value of a liability for an asset retirement obligation
be recognized in the period in which it is incurred if a reasonable estimate
of fair value can be made. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. The adoption of SFAS 143 had no impact on the Company's
condensed consolidated financial statements during the first quarter of
fiscal 2003.
In August 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). While SFAS 144
supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of", it retains many
of the fundamental provisions of that Statement. We adopted SFAS 144 on
November 1, 2002. The adoption of SFAS 144 had no impact on the Company's
condensed consolidated financial statements during the first quarter of
fiscal 2003.
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146
replaces Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. SFAS 146 is effective for disposal
activities initiated after December 31, 2002. SFAS 146 is not expected to have
a material impact on the Company's financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees and Indebtedness of Others", an interpretation
of FASB Statement Nos. 5, 57 and 107, and rescission of FASB Interpretation
No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others". FIN
No. 45 elaborates on the disclosures to be made by the guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition
and measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002;
while, the provisions of the disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has adopted the disclosure requirements of FIN 45
(see Note 2).
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Company has guaranteed certain bank loans of Trinity Valley Pecan
Company, a 50% owned affiliate ("Trinity"). The guaranteed loans include a
plant construction loan and working capital lines-of-credit with principal
balances totaling approximately $367,000 at January 31, 2003. The loans bear
interest ranging from 7.95% to 9.5% and mature beginning March 2003 through
October 2004. The loans are also guaranteed jointly and severally by another
related party. The Company has accrued a loss contingency of approximately
$184,000 related to the guaranteed loans of Trinity at January 31, 2003.
NOTE 3 - FARM AND RANCH OPERATIONS
The HAYCO operation was an informal joint venture undertaken through a
memorandum dated June 1, 2001. The joint venture was undertaken to produce
the hay required by a related party and other local area ranchers on a
profitable basis. This operation required the purchase of some new equipment.
This equipment was purchased at a cost of approximately $5,000. Due to the
Company entering into a new ranch lease agreement for the land used in the HAYCO
operations, HAYCO ceased operations in March 2003. As a result, the Company will
no longer have revenues or expenses from this operation. The Company has not
recorded any impairment on the equipment associated with the HAYCO operations
since the equipment can be sold and any potential loss would be immaterial.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF FISCAL QUARTERS ENDING JANUARY 31, 2003 and 2002
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REVENUES
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Pipeline Operations - The Company's subsidiary, Madison Pipe Line Co. owns
a 50% interest in a joint venture called Fort Trinidad Pipe Line System.
Pipeline gathering revenue for the first quarter of 2003 was $147,634 and for
the first quarter of 2002 was $118,816, which represents an increase of 25%.
The increase in pipeline revenue in 2003 is attributable to an increase in fuel
gas surcharge. Total sales volume in 2003, however decreased 14% from
First quarter 2003 to first quarter 2002. There has been no change in the
number of wells connected to the gathering system.
Net Oil and Gas Royalties - First quarter net oil and gas royalties
Increased 15% between 2002 and 2003, respectively $47,000 and $54,000. First
quarter oil and gas production decreased respectively by 32.5% and 37.2%
during the period. The increase in 2003 is primarily due to the increase in
oil and gas prices. First quarter average price for natural gas was $2.68 in
2002 and $4.89 in 2003. First quarter price for oil and condensate was $22.20
in 2002 and $28.27 in 2003.
Farm Produce Sales - Farm produce sales for first quarter 2003 were $13,000
and $56,000 for first quarter 2002. In the past, farm produce sales have
consisted of sales of hay (through HAYCO), grain, cotton and pecans. The HAYCO
joint venture has been dissolved and the equipment will be sold. The Company
plans no more share crop farming of cotton or grain. Instead of share crop
farming, the Company has leased its farmland directly to non-affiliated
farmers at the rate of $35 per acre for dry land and $60 per acre for
irrigated land. The only farm produce sales that will remain will be pecans
from the Company's orchard. First quarter commercial pecan sales increased
from $0.00 in 2002 to approximately $8,000 in 2003, and are expected to
increase each year for the next several years, subject to weather and growing
conditions.
Ranch Lease Rentals - Ranch Lease rental consists of rentals for 6257.96
acres of ranch land to a related party and 1183.72 acres of ranch land to an
unrelated party at $16.00 per net acre per year, leases of plant site to
Trinity Valley Pecan Company and leases of office space in the Sand Ridge,
Texas office to related parties. Ranch Lease Rentals had an insignificant
change from the first quarter of 2002 to the first quarter 2003. The lease of
6,257.96 acres by the Ranch Trust, a related party, was terminated and the
Company executed a new 60-month lease commencing on March 1, 2003 for
approximately 6,600 net acres at a rate of $12.00 per acre with an unrelated
party; however, the related party will pay the Company the $4.00 difference in
the annual rental per acre through fiscal year 2004. For fiscal years through
2004 there will be no significant change in income from rental of this land;
thereafter, the Company's ranch lease rental revenues will be reduced by
approximately $20,000 annually.
Contract and Irrigation Services - First quarter contract and irrigation
service income was $5,730 in 2002 compared to $3,075 in 2003. Contract mowing
services decreased by 50%, and will continue to be a part of the Company's
income stream based on need for such services in the local market area.
Irrigation services are now billed directly through the farm lease and appear
under farmland rental rather than irrigation services.
Costs and Expenses
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Operating Expenses for first quarter 2003 increased $8,000 or 5%, as compared
to first quarter 2002. The increase for 2003 is attributable to an increase in
pipeline expenses.
Pipeline Operating Expenses increased 27% for first quarter 2003 as compared
to first quarter 2002 as a result of an increase in compressor fuel costs. Gas
usage in fiscal 2002 was 16,892 mmbtu at an avg. price of $2.57 compared to
21,030 mmbtu at an avg. price of $4.16 in 2003. Gas is sold to an independent
non-affiliated third party purchaser at a price pegged to the posted price for
Houston Ship Channel gas.
Ranch Operating Expenses increased 53% for first quarter 2003 compared to
first quarter 2002. Although the percentage increase is high for this normally
quiet period, the total differential is approximately $10,000.
Farm operating expense decreased 61%, or $35,000, for first quarter 2003 as
compared to first quarter 2002. The decrease is due to lower repairs and
maintenance of a tractor, lower amounts for levee repair, fertilizer, and the
reduction in the costs of operating HAYCO.
General and Administrative Expenses increased 107%, or $50,000, for first
quarter 2003 as compared to first quarter 2002. The increase is primarily due
to increased consulting and legal fees due to the costs of taking the Company
private incurred during the fiscal year.
Equity in loss of 50% owned affiliate -The Company's share of loss from its
50% owned affiliate, Trinity Valley Pecan Company for the three months ended
January 31, 2003 was approximately $4,500 and in 2002 was $17,000. The
Company's financial statements reflect a loss of $18,000 and $282,000 for the
three months ended January 31, 2003 and 2002, respectively to the extent of its
investment, loan, advances, future commitment, and risk of loss in its 50% owned
affiliate. The Company guarantees 50% of Trinity Valley Pecan Company's debt.
The other 50% is guaranteed by the Ranch Trust (that has the financial ability
To pay its share of Trinity Valley Pecan Company's losses). John R. Parten also
personally guaranteed all of this debt.
Interest Expense - Interest expense for first quarter 2003 as compared to
first quarter 2002, increased due to an increase in notes payable.
LIQUIDITY AND CAPITAL RESOURCES
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After the first quarter of 2003, an independent third party plans to commence
drilling one well on Company property. The Company cannot predict whether the
well will be successful, but if it is successful, it is possible that revenues
could increase.
The Company signed a new agreement with a non-affiliated Ranch Lease
tenant to lease the Company's acreage starting March 1, 2003. It is $12 per
net acre and the term of the lease is for sixty (60) months, which is $4.00
per acre lower that the current lease with the Ranch Trust. Under this new
lease, the Company's liquidity will not be affected in 2003 because the Ranch
Trust will continue to pay its lease obligations. Once the Ranch Trust lease
expires in October 2004, however, the Company's revenues will decrease.
The Company's long term debt (including current maturities) is $662,000 at
January 31, 2003 compared to $215,000 at January 31, 2002. A Trinity Valley
Pecan note will be renewed in March 2003. The loan is also guaranteed jointly
and severally by another related party.
Net cash provided by our operating activities was $93,000 for the first
quarter 2003, compared to $114,000 for first quarter 2002. The decline is
primarily due to increased payments to vendors and other third parties as a
result of proceeds from the new loan which was obtained in October, 2002.
The costs of the going private transaction will significantly affect cash flow
in 2003, but the Company currently believes it will have sufficient cash flow
to pay these costs on a timely basis.
The Company's liquidity could be adversely affected due to losses from and
loan guarantees for Trinity Valley Pecan Company, a 50% owned affiliate. Both
the Company, the Ranch Trust and John R. Parten guarantee a portion of Trinity
Valley Pecan Company's debt ($367,000 at January 31, 2003). Additional
provisions of $18,000 and $282,000 were recorded in the first quarters 2003
and 2002, respectively, relating to operating advances or additional
provisions for guarantees of such debt of Trinity. With new capital and
reduced debt, the Company believes that Trinity can amortize its remaining
debt and generate an operating profit.
As of January 31, 2003, the Company's working capital was $203,000.
Payment of approximately $12,000 attributable to notes payable and long-term
debt is required during the next twelve months. It is not anticipated that
dividends will be paid in the near future.
The Company has no current commitments for any capital expenditures in the
future. The Company's source of liquidity is cash received from continuing
operations and the borrowing activities described above. If cash from
continuing operations is insufficient to fund future capital expenditures the
deficit will have to be covered by future borrowings.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the management of the
Company, including the chief executive officer and chief financial officer,
the Company has established a system of controls and other procedures designed
to ensure that information required to be disclosed in its periodic reports
filed under the Securities Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. These disclosure
controls and procedures have been evaluated under the direction of the chief
executive officer and chief financial officer within the last 90 days. Based
on such evaluations, the chief executive officer and chief financial officer
have concluded that the disclosure controls and procedures are effective.
There have been no significant changes in the system of internal controls or
in other factors that could significantly affect internal controls subsequent
to the evaluation by the chief executive officer and chief financial officer.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
No. Description
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(3) Articles of Incorporation and Bylaws (1)
(10.1) Ranch Lease with Burdette Property Management dated February 2003.
(10.2) Agricultural Lease with Roy Dyches dated October 2002.
(10.3) Agricultural Lease with Wayne Dyches dated October 2002.
(99.1) Certification of Periodic Report by the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99.2) Certification of Periodic Report by the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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(1) EXHIBIT D to Registration Statement, Form 10, filed with the Securities
and Exchange Commission on June 3, 1965, is incorporated by reference.
REPORTS ON FORM 8-K
No reports on Form 8-K have been filed for the quarter ended January 31, 2003.
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.
Date: March 17, 2003 SEVEN J STOCK FARM, INC.
(Registrant)
/s/ John R. Parten
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John R. Parten, President and
Director (Chief Executive Officer)