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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-17018
STRATFORD AMERICAN CORPORATION
(Exact name of small business issuer as specified in its charter)
Arizona 86-0608035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 E. Arizona Biltmore Circle, Building 2, Suite 1270, Phoenix, Arizona 85016
(Address of principal executive offices)
Issuer's telephone number, including area code: (602) 956-7809
(Former name, former address and former fiscal year,
if changed since last report.)
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 [ ]
At October 31, 2001 7,141,768 shares of the issuer's common stock were issued
and outstanding.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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STRATFORD AMERICAN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of September 30, 2001 3
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
Signatures 12
2
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2001
(unaudited)
ASSETS
Cash and cash equivalents $ 1,331,000
Receivables:
Mortgage 39,000
Other 76,000
Investment in LLC 532,000
Oil and gas interests, net 757,000
Other assets 70,000
------------
$ 2,805,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 52,000
Notes payable and other debt 942,000
Accrued liabilities 35,000
------------
Total liabilities 1,029,000
Shareholders' equity:
Nonredeemable preferred stock, par value $.01 per share;
authorized 50,000,000 shares, none issued
Common stock, par value $.01 per share; authorized 100,000,000
shares; issued and outstanding 7,141,768 shares 71,000
Additional paid-in capital 27,327,000
Retained earnings (deficit) (25,611,000)
Treasury stock, 1,967 shares at cost (11,000)
------------
1,776,000
------------
$ 2,805,000
============
See accompanying notes to condensed consolidated financial statements.
3
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended For the nine months ended
September 30 September 30
-------------------------- -------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
REVENUES:
Oil & gas revenue $ 84,000 $ 3,000 $ 177,000 $ 6,000
Interest and other income 13,000 38,000 55,000 105,000
--------- --------- --------- ---------
97,000 41,000 232,000 111,000
EXPENSES:
General and administrative 94,000 114,000 295,000 466,000
Depreciation, depletion and amortization 39,000 5,000 81,000 16,000
Oil & gas operations 49,000 1,000 95,000 3,000
Interest 15,000 1,000 28,000 5,000
--------- --------- --------- ---------
197,000 121,000 499,000 490,000
--------- --------- --------- ---------
NET LOSS $(100,000) $ (80,000) $(267,000) $(379,000)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.01) $ (0.01) $ (0.04) $ (0.06)
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the nine months ended
September 30
-----------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (267,000) $ (379,000)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation, depletion and amortization 81,000 16,000
Changes in assets and liabilities:
Decrease (increase) in accounts, mortgage and note receivable 17,000 (685,000)
Decrease (increase) in other assets (55,000) 26,000
Increase (decrease) in accounts payable 12,000 (21,000)
Increase (decrease) in accrued liabilities 3,000 (5,000)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (209,000) (1,048,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash acquired in connection with the acquisition of SA Oil & Gas
Corporation 71,000
Redemption of minority interest (459,000)
Investment in LLC (32,000)
Purchases of property and equipment (11,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 39,000 (470,000)
----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments on notes payable and other debt (9,000) (9,000)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (9,000) (9,000)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (179,000) (1,527,000)
CASH AND CASH EQUIVALENTS, beginning of period 1,510,000 2,890,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 1,331,000 $ 1,363,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 23,000 $ 5,000
=========== ===========
Taxes paid during the period $ 0 $ 2,000
=========== ===========
Acquisition of assets and liabilities through issuance of common stock:
Accounts receivable $ 82,000 $ 0
=========== ===========
Oil and gas interests $ 765,000 $ 0
=========== ===========
Accounts payable $ 15,000 $ 0
=========== ===========
Note payable $ 903,000 $ 0
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See accompanying notes to condensed consolidated financial statements.
5
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
(unaudited)
1. In the opinion of the Company, the accompanying unaudited condensed
consolidated financial statements contain all adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the financial
position as of September 30, 2001, the results of operations for the three
and nine months ended September 30, 2001 and 2000 and cash flows for the
nine months ended September 30, 2001 and 2000. The accompanying condensed
consolidated financial statements and notes do not include all disclosures
considered necessary for a fair presentation in conformity with accounting
principles generally accepted in the United States of America. . Therefore,
it is recommended that these accompanying statements be read in conjunction
with the notes to consolidated financial statements appearing in the
Company's Form 10-KSB for the year ended December 31, 2000. The results of
operations for the nine-month period ended September 30, 2001 are not
necessarily indicative of the results expected for fiscal year 2001.
2. On October 27, 2000, the Company through its membership in Triway Land
Investors, L.L.C. ("Triway"), a newly formed limited liability company with
two additional members, entered into an operating agreement to acquire real
property in Scottsdale, Arizona for office development. The acquisition
price of the real property acquired by Triway, approximately 10 acres, was
$3,600,000. As a result the Company made a $500,000 equity investment in
Triway. According to the operating agreement, the Company and a majority
interest member of Triway may be required to make additional contributions
up to a proportionate specified amount. On September 20, 2001, the Company
contributed an additional $32,000 equity investment, proportionately, in
accordance with the terms of the operating agreement. The Company may still
be required to contribute up to an additional $180,500, proportionately, at
a future date as specified by the operating agreement. The Company is to
receive a priority payout of its current $532,000 investment and then share
in 17.5 percent of the results from the total project. Colonial Raintree,
LLC, one of the members of Triway, is managing Triway. The Company has no
other significant real estate operations.
3. On February 14, 2000, the Company paid all minority interest holders of
Stratford American Car Rental Systems, Inc. ("SCRS"), 100% of their
proportionate share of the outstanding minority interest liability as of
December 31, 1999, in exchange for 100% redemption of their stock held in
SCRS.
4. The Company calculates basic and diluted net income (loss) per share in
accordance with the provisions of Statement of Financial Accounting
Standards No. 128 "Earnings Per Share." Basic net income (loss) per share
is computed using the weighted average number of common shares outstanding
during each period (7,141,768 and 6,842,712 shares for the three and nine
month periods ended September 30, 2001 respectively and 6,371,787 shares
for the three and nine month periods ended September 30, 2000). Diluted net
loss per share is the same as basic net loss per share for the three and
nine month periods ended September 30, 2001 and 2000 due to the
antidilutive effect of dilutive securities on net loss.
5. On April 19, 2001, the Company purchased 100 percent of the capital stock
of SA Oil and Gas Corporation ("SA Oil"), from the shareholders of SA Oil,
in exchange for 755,948 shares of common stock of the Company. The fair
market value of the Company's common shares on the date of acquisition was
$0.28 per share. The purchase was pursuant to the terms of the Stock
Purchase Agreement by and among the Company, SA Oil and the shareholders of
SA Oil. SA Oil owns working interests and/or royalty interests in 87 oil
and gas properties located in Oklahoma and Texas. The acquisition has been
accounted for using the purchase method of accounting.
Had the acquisition been completed as of January 1, 2000, the Company would
have reported the following:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Total revenues $ 97,000 $ 187,000 $ 403,000 $ 518,000
Net loss $ (100,000) $ (38,000) $ (196,000) $ (229,000)
Net loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.03)
Pro Forma weighted
average shares o/s: $7,141,768 $7,127,735 $7,141,768 $7,127,735
6. In July 2001, the FASB issued Statement No. 141, BUSINESS COMBINATIONS and
Statement No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS. Statement No. 141
requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001 as well as all purchase method
business combinations completed after June 30, 2001. Statement No. 141 also
specifies criteria that intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
6
goodwill, noting that any purchase price allocable to an assembled
workforce may not be accounted for separately. Upon its initial adoption,
Statement No. 142 eliminated the amortization of all existing and newly
acquired goodwill on a prospective basis and requires companies to assess
goodwill impairment, at least annually, based on the fair value of the
reporting unit.
The Company is required to adopt the provisions of Statement No. 141
immediately. The Company will be required to adopt Statement No. 142 on
January 1, 2002; however, goodwill and intangible assets acquired after
June 30, 2001 would be subject to the amortization provisions of this
Statement immediately. Management has determined that the impact of
adopting these Statements on the Company's financial statements, including
whether any transitional impairment losses will be required to be
recognized as the cumulative effect of a change in accounting principle,
would be immaterial.
In June 2001, the Financial Accounting Standards Board issued Statement No.
143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and (or) normal use of the asset.
Statement No. 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. The fair value of the
liability is added to the carrying amount of the associated asset and this
additional carrying amount is depreciated over the life of the asset. The
liability is accreted at the end of each period through charges to
operating expense. If the obligation is settled for other than the carrying
amount of the liability, the Company will recognize a gain or loss on
settlement.
The Company is required and plans to adopt the provisions of Statement No.
143 for the quarter ending March 31, 2003. To accomplish this, the Company
must identify all legal obligations for asset retirement obligations, if
any, and determine the fair value of these obligations on the date of
adoption. The determination of fair value is complex and will require the
Company to gather market information and develop cash flow models.
Additionally, the Company will be required to develop processes to track
and monitor these obligations. Because of the effort necessary to comply
with the adoption of Statement No. 143, it is not practicable for
management to estimate the impact of adopting this Statement at the date of
this report.
On October 3, 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS, which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. While Statement No. 144 supersedes 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.
Statement No. 144 also supersedes the accounting and reporting provisions
of APB Opinion No. 30, REPORTING THE RESULTS OF OPERATIONS -- REPORTING THE
EFFECTS OF DISPOSAL OF A SEGMENT OF A BUSINESS, AND EXTRAORDINARY, UNUSUAL
AND INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a
segment of a business. However, it retains the requirement in Opinion No.
30 to report separately discontinued operations and extends that reporting
to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for
sale. By broadening the presentation of discontinued operations to include
more disposal transactions, the FASB has enhanced managements' ability to
provide information that helps financial statement users to assess the
effects of a disposal transaction on the ongoing operations of an entity.
Statement No. 144 is effective for fiscal years beginning after December
15, 2001. At the current time, management does not believe that the
adoption of this statement on January 1, 2002 will have a material impact
on the Company's financial position.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company incurred a consolidated net loss of $100,000 for the third
quarter of 2001. Other than the real property acquisition made on October 27,
2000 and the purchase of SA Oil and Gas Corporation ("SA Oil") on April 19,
2001, as discussed below and in Note 2 and Note 5 of the unaudited condensed
consolidated financial statements as of September 30, 2001, the Company
presently has no significant operations, and expects such losses to continue
unless and until the Company is able to make profitable acquisitions. There can
be no assurance that the Company will be able to make such acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
On April 19, 2001, the Company purchased 100 percent of the capital stock
of SA Oil from the shareholders of SA Oil, in exchange for 755,948 shares of
common stock of the Company. SA Oil owns working interests and/or royalty
interests in 87 oil and gas properties located in Oklahoma and Texas. SA Oil's
audited financial statements for the fiscal year ended December 31, 2000
reflected revenues of $561,000 and net income of $155,000.
On October 27, 2000, the Company through its membership in Triway Land
Investors, L.L.C. ("Triway"), a newly formed limited liability company with two
additional members, entered into an operating agreement to acquire real property
in Scottsdale, Arizona for office development. The acquisition price of the real
property acquired by Triway, approximately 10 acres, was $3,600,000. On
September 29, 2000, the Company advanced $775,000 through a promissory note to
one of the participating parties to assist in securing the acquisition of the
real property. On October 27, 2000 the entire promissory note, plus accrued
interest, was paid in full. Additionally, the Company made a $500,000 equity
investment in Triway. According to the operating agreement, the Company and a
majority interest member of Triway may be required to make additional
contributions up to a proportionate specified amount. On September 20, 2001, the
Company contributed an additional $32,000 equity investment, proportionately, in
accordance with the terms of the operating agreement. The Company may still be
required to contribute up to an additional $180,500, proportionately, at a
future date as specified by the operating agreement. The Company is to receive a
priority payout of its current $532,000 investment and then share in 17.5
percent of the results from the total project. Colonial Raintree, LLC, one of
the members of Triway, is managing Triway.
On February 14, 2000, the Company paid all minority interest
holders of Stratford American Car Rental Systems ("SCRS") 100% of their
proportionate share of the outstanding minority interest liability, totaling
$459,000 as of December 31, 1999, in exchange for 100% redemption of their stock
held in SCRS.
8
The Company anticipates that with its current cash position due to the sale
of its car rental business in 1998, the related sale of real estate property in
December 1999, the sale of Company shares in March 1999, its investment in the
real estate project described above, and its recent acquisition of SA Oil
described above, it should meet its operational cash flow needs for the
remainder of 2001. However, due to any unforeseen circumstances that could occur
outside the Company's control, there can be no assurance that adequate cash
flows from the Company's present cash position and current activity will be
achieved.
The Company continues to aggressively seek additional potential
acquisitions in establishing its future direction. There can be no assurance
that it will be able to locate suitable acquisition candidates or make any such
acquisitions, or that any acquisitions that are made will be profitable for the
Company.
RESULTS OF OPERATIONS - THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001,
COMPARED WITH THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000.
The Company reported a net loss of $100,000 and $267,000 during the three
and nine month periods ended September 30, 2001 compared to a net loss of
$80,000 and $379,000 for the three and nine month periods ended September 30,
2000. Oil and gas revenue increased from $3,000 and $6,000 for the three and
nine month periods ended September 30, 2000 to $84,000 and $177,000 for the
three and nine month periods ended September 30, 2001 due to the April 19, 2001
acquisition of SA Oil and Gas Corporation, including working interest and
royalty interest revenue from additional oil and gas properties. Interest and
other income decreased from $38,000 and $105,000 for the three and nine month
periods ended September 30, 2000 to $13,000 and $55,000 for the three and nine
month periods ended September 30, 2001 due to reduced interest income earned on
lower cash balances from 2000 to 2001.
General and administrative expenses decreased from $114,000 and $466,000
for the three and nine month periods ended September 30, 2000 to $94,000 and
$295,000 for the three and nine month periods ended September 30, 2001 due to
reduced officer salaries and decreased rent and other general and administrative
expenses which occurred in 2001. Depreciation, depletion and amortization
expense increased from $5,000 and $16,000 for the three and nine month periods
ended September 30, 2000 to $39,000 and $81,000 for the three and nine month
periods ended September 30, 2001 due to additional depletion related to the 87
oil and gas well interests acquired through SA Oil and Gas Corporation. Oil and
gas operation expense increased from $1,000 and $3,000 for the three and nine
month periods ended September 30, 2000 to $49,000 and $95,000 for the three and
nine month periods ended September 30, 2001 also due to the oil and gas
properties acquired through SA Oil and Gas Corporation.
9
REAL ESTATE ACTIVITIES
The Company entered into an agreement and made an investment in a limited
liability company acquiring real property for office development in Scottsdale,
Arizona in October 2000, as discussed above. Plans are being formulated for the
development of office condominium buildings totaling 100,000 sq. ft. The Company
plans to offer the buildings for sale on a pre-construction basis as early as
the end of 2001. See "Liquidity and Capital Resources."
OIL AND GAS ACTIVITIES
The Company acquired SA Oil through a stock exchange transaction in April
2001 as discussed above. SA Oil owns working and/or royalty interests in 87 oil
and gas properties located in Oklahoma and Texas. The acquisition has been
accounted for as a purchase and, therefore, the results of the business acquired
from SA Oil has been combined with the Company from April 19, 2001. See
"Liquidity and Capital Resources."
The Company also owns a nominal interest in four oil and gas wells in
Arkansas and Oklahoma that generate insignificant revenues.
CAPITAL REQUIREMENTS
The Company does not have any material plans for future capital
expenditures at the present time.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's results of
operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain statements contained in this report, including statements
containing the words "believes," "anticipates," "intends," "expects" and words
of similar import, constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995 and are subject to the safe
harbors created thereby. Such forward-looking statements involve known and
unknown risks, uncertainties and other important factors that may cause the
actual results to be materially different from the forward-looking statements.
Such factors include, among others, the following: the fact that the Company has
no significant operations; the risk that the Company will not be able to
complete any profitable acquisitions to re-
10
establish significant operations; the risk that Triway may not be able to begin
offering office condominium buildings for pre-construction sale by late 2001 as
presently scheduled and the risk that the Company's investment in Triway may not
be profitable; the risk that the operations of the newly acquired SA Oil & Gas
Corporation may not be profitable; the risk that the Company will continue to
recognize losses from operations unless and until the Company is able to make
profitable acquisitions; the risk that all of the foregoing factors or other
factors could cause fluctuations in the Company's operating results and the
price of the Company's common stock; and other risks detailed in this report and
from time to time in the Company's other filings with the Securities and
Exchange Commission. Given these uncertainties, readers should not place undue
reliance on such forward-looking statements.
PART II. OTHER INFORMATION
Responses to Items 1 through 5 are omitted since these items are either
inapplicable or the response thereto would be negative.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See index beginning on page 13
(b) There were no reports filed on Form 8-K for the three months ended
September 30, 2001.
11
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
STRATFORD AMERICAN CORPORATION
Registrant
Date: November 14, 2001 By /s/ Mel L. Shultz
------------------------------------------
Mel L. Shultz, President and Director
Date: November 14, 2001 By /s/ Timothy A. Laos
------------------------------------------
Timothy A. Laos, Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
12
EXHIBITS INDEX
There are no exhibits originally filed with this report. The Company hereby
incorporates all other exhibits by reference pursuant to Rule 12b-32, each of
which (except Exhibits 2.1, 3.3 and 10.1) was filed as an exhibit to the
Company's Registration on Form 10, which was filed July 22, 1988, and amended on
October 7, 1988, and December 8, 1988. Exhibit 2.1 was filed with the Company's
form 8-K filed with the Securities and Exchange Commission on May 2, 2001.
Exhibit 3.3 was filed with the Company's Registration Statement on Form S-1 on
June 12, 1989. Exhibit 10.1 was filed as Exhibit 10.14 to the Company's Form
10-KSB for the year ended December 31, 2000 which was filed with the Securities
and Exchange Commission on April 2, 2001.
Number Description Page
- ------ ----------- ----
2.1 Stock Purchase Agreement, dated March 22, 2001 by
and among SA Oil, the shareholders of SA Oil, and
the Company N/A
3.1 Articles of Incorporation N/A
3.2 By-laws N/A
3.3 Articles of Amendment to Articles of Incorporation N/A
4.1 Form of Common Stock Certificate N/A
4.2 Form of Series "A" Preferred Stock Certificate N/A
4.3 Article IV of the Articles of Incorporation N/A
4.4 Article III of the Bylaws N/A
10.1 Operating Agreement between DVI Raintree, LLC, Stratford
American Corporation and Colonial Raintree, LLC, dated
October 26, 2000 N/A
13