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 June 30, 2002
[ ] 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.)
At July 31, 2002, 6,878,105 shares of the issuer's common stock were issued and
outstanding.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
STRATFORD AMERICAN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheet as of June 30, 2002 (unaudited) 3
Condensed Consolidated Statements of Operations for the three and six
months ended June 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2002 and 2001 (unaudited) 5
Notes to Condensed Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
Signatures 18
2
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
JUNE 30, 2002
(unaudited)
ASSETS
Cash and cash equivalents $ 303,000
Receivables:
Oil and gas 127,000
Mortgage 35,000
Related party 17,000
Other 1,000
Investment in LLC 546,000
Oil and gas interests, net 1,520,000
Other assets 148,000
------------
$ 2,697,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 96,000
Notes payable and other debt 937,000
Accrued liabilities 35,000
------------
Total liabilities 1,068,000
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 6,878,105 shares 69,000
Additional paid-in capital 27,496,000
Retained earnings (deficit) (25,925,000)
Treasury stock, 1,967 shares at cost (11,000)
------------
1,629,000
------------
$ 2,697,000
============
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 six months ended
-------------------------- ------------------------
June 30 June 30
---------------------- ----------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES:
Oil & gas revenue $ 167,000 $ 88,000 $ 237,000 $ 93,000
Interest and other income 4,000 18,000 10,000 43,000
--------- --------- --------- ---------
171,000 106,000 247,000 136,000
EXPENSES:
General and administrative 116,000 106,000 218,000 201,000
Depreciation, depletion and amortization 71,000 37,000 115,000 43,000
Oil & gas operations 42,000 45,000 90,000 46,000
Interest 14,000 12,000 28,000 13,000
--------- --------- --------- ---------
243,000 200,000 451,000 303,000
--------- --------- --------- ---------
NET LOSS $ (72,000) $ (94,000) $(204,000) $(167,000)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.02)
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
4
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the six months ended June 30
--------------------------------
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (204,000) $ (167,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation, depletion and amortization 115,000 43,000
Changes in assets and liabilities:
Decrease (increase) in accounts and
mortgage receivable (74,000) 7,000
Increase in other assets 0 (34,000)
Increase in accounts payable 58,000 17,000
Decrease in accrued liabilities (20,000) (8,000)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (125,000) (142,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in LLC (14,000) 0
Purchase of oil and gas interests (738,000) 0
Acquisition of SA Oil & Gas Corporation,
net of cash acquired 0 71,000
Purchases of property and equipment (21,000) 0
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (773,000) 71,000
----------- -----------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Payments on notes payable and other debt (2,000) (6,000)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (2,000) (6,000)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (900,000) (77,000)
CASH AND CASH EQUIVALENTS, beginning of period 1,203,000 1,510,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 303,000 $ 1,433,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 29,000 $ 8,000
=========== ===========
Taxes paid during the period $ 0 $ 0
=========== ===========
Acquisition of assets and liabilities through
issuance of common stock:
Accounts receivable $ 82,000
===========
Oil and gas interests $ 976,000
===========
Accounts payable $ 15,000
===========
Note payable $ 903,000
===========
See accompanying notes to condensed consolidated financial statements.
5
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 June 30, 2002, the results of operations for the three and
six months ended June 30, 2002 and 2001 and cash flows for the six months
ended June 30, 2002 and 2001. 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, 2001. The results of operations
for the six-month period ended June 30, 2002 are not necessarily indicative
of the results expected for fiscal year 2002.
2. On October 26, 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. On March 29, 2002,
Triway made a capital call requiring the Company to contribute an
additional $13,900 equity investment, proportionately, in accordance with
the terms of the operating agreement. The Company may still be required to
contribute up to an additional $166,600, proportionately, at a future date
as specified by the operating agreement. From any distributions made by
Triway, the Company is to receive a priority payout of all capital
contributed to Triway, plus an amount required for the Company to receive a
9% per year rate of return through the date all permits related to the
proposed office development by Triway are issued, and a 10% rate of return
from the time all permits related to the proposed office development by
Triway are issued until all capital contributions are returned. After all
capital and priority returns have been distributed, the managing member of
Triway is to receive a distribution equal to 42.86% of amounts previously
distributed. The Company will then share in 17.5% of the results from the
total project. The Company has no other significant real estate operations.
6
3. 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 (6,878,105 shares for the three and six month periods
ended June 30, 2002 and 6,998,978 and 6,690,705 for the three and six month
periods ended June 30, 2001, respectively). Diluted net loss per share is
the same as basic net loss per share for the three and six month periods
ended June 30, 2002 and 2001 due to the antidilutive effect of dilutive
securities on net loss.
4. 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, a total value of $212,000. 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. Assets and liabilities acquired are as follows:
Accounts receivable $ 82,000
Oil and gas interests $ 938,000
Equipment $ 38,000
Accounts payable $ 15,000
Note payable $ 903,000
Oil and gas interests were recorded as $938,000 on the books of the Company and
are being amortized equally over a seven-year period which is the estimated life
of the wells. For the three and six month periods ended June 30, 2002 the
Company recorded $33,000 and $67,000 in amortization respectively leaving a net
asset of $771,000 on the books of the Company at June 30, 2002. In addition,
equipment acquired in the transaction totaled $38,000. This equipment is being
amortized equally over a five-year period.
7
Had the acquisition been completed as of January 1, 2001, the Company would have
reported the following:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- --------------------------
(unaudited) (unaudited)
--------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Total revenues $ 171,000 $ 123,000 $ 247,000 $ 301,000
Net loss $ (72,000) $ (99,000) $ (204,000) $ (117,000)
Net loss per share $ (0.01) $ (0.01) $ (0.03) $ (0.02)
Pro Forma weighted average
shares o/s: 6,878,105 7,141,768 6,878,105 7,141,768
5. On June 5, 2002, the Company, through it's wholly owned subsidiary,
Stratford American Energy Corporation, acquired working interests in 23 oil
and gas properties located in Oklahoma and Texas effective as of April 1,
2002 in exchange for $738,000 in cash. The purchase price of the 23 oil and
gas working interests was $687,000, and was recorded as oil and gas
interests. Acquisition costs of $51,000 were paid at closing. Additional
acquisition costs of $17,000, relating to the purchase, were incurred and
are in accounts payable at June 30, 2002. Total acquisition costs of
$68,000 were recorded and are being amortized equally over a seven-year
period. The Company anticipates revenues from the newly acquired working
interests in the oil and gas properties to be approximately $300,000 for
the first full year of operation. In addition to the working interests in
the properties acquired, the Company has agreed to participate on a
proportionate basis in the drilling of a development well on one of the
properties acquired. Oil and gas interests were recorded as $687,000 on the
books of the Company and are being depleted equally over a seven-year
period, which is the estimated life of the interests. Depletion expense of
$25,000 was recorded for the three and six month periods ended June 30,
2002 on the oil and gas interests, leaving a net asset of $662,000 on the
books of the Company at June 30, 2002. Acquisition costs of $68,000,
relating to the purchase were recorded on the books of the Company and are
being amortized equally over a seven-year period. Amortization expense of
$2,000 was recorded for the three and six month periods ending June 30,
2002 related to the acquisition costs, leaving a net book value of $66,000
on the books of the Company at June 30, 2002. The Company recognized
revenue from the properties of $74,000 for the three and six month periods
ending June 30, 2002.
8
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
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 has adopted the provisions of Statement No. 141 effective July
1, 2001. The Company has adopted Statement No. 142 effective 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 there was no impact of adopting
these Statements on the Company's financial statements, including whether
any transitional impairment losses which would be required to be recognized
as the cumulative effect of a change in accounting principle.
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
9
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 on 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 OCCURING 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. The Company has adopted the provisions of Statement No. 144
effective January 1, 2002. Management has determined that there was no
impact with the adoption of this statement on January 1, 2002 on the
Company's financial position.
In April 2002, the Financial Accounting Standards Board issued FASB
Statement No. 145, RESCISSION OF STATEMENT NO. 4, 44 AND 64, AMENDMENT OF
STATEMENT NO. 13, AND TECHNICAL CORRECTIONS (SFAS NO. 145). SFAS No. 145
will rescind SFAS No. 4 which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result of SFAS
No. 145, the criteria in 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 will now be used to classify those gains and losses. SFAS No.
64 amended SFAS No. 4, and is no longer necessary
10
because SFAS No. 4 has been rescinded. The provisions of Statement No. 145
are effective for fiscal years beginning after May 15, 2002. The Company
adopted Statement No. 145 upon issuance and the Company has determined that
there was no effect on the Company's financial statements.
In July 2002, the Financial Accounting Standards Board issued FASB
Statement No. 146, ACCOUNTING FOR COSTS ASSOCIATED WITH EXIT OR DISPOSAL
ACTIVITIES, which revises accounting for specified employee and contract
terminations that are part of restructuring activities. Statement No. 146
applies to costs associated with an exit activity (including restructuring)
or with a disposal of long-lived assets. Those activities can include
eliminating or reducing profit lines, terminating employees and contracts,
and relocating plant facilities or personnel. Under Statement No. 146, a
company will record a liability for a cost associated with an exit or
disposal activity when that liability is incurred and can be measured at
fair value. The new requirement can shift expense recognition from one
quarter or fiscal year to another. The provisions of Statement No. 146 are
effective prospectively for exit or disposal activities initiated after
December 31, 2002. Management does not expect the adoption of Statement No.
146 will have an effect on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company incurred a consolidated net loss of $72,000 for the second
quarter of 2002. Other than the real property acquisition made on October 26,
2000, the purchase of SA Oil and Gas Corporation ("SA Oil") on April 19, 2001,
and the purchase of working interests in 23 oil and gas properties on June 5,
2002, as discussed above in Note 2, Note 4 and Note 5, respectively, of the
unaudited condensed consolidated financial statements as of June 30, 2002, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Consolidated Balance Sheet and the Statements of Operations have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make
11
certain estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, the Company evaluates its estimates,
including those related to investments, oil and gas interests, contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. The Company accrues production income and
expense based upon historical performance, costs, and prices received for oil
and gas. Revisions in profit estimates are charged to income in the period in
which the facts that give rise to the revision become known. Future adverse
changes in market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value of the
investment's current carrying value, thereby possibly requiring an impairment
charge in the future.
LIQUIDITY AND CAPITAL RESOURCES
On June 5, 2002, the Company purchased working interests in 23 oil and gas
properties located in Oklahoma and Texas, effective April 1, 2002. The purchase
price was $738,000. The purchase price of the working interests in 23 oil and
gas properties was $687,000 and has been recorded as oil and gas interests.
Acquisition costs of $51,000 were paid at closing. Additional acquisition costs
of $17,000, relating to the purchase, were incurred and are in accounts payable
at June 30, 2002. Total acquisition costs of $68,000 were recorded and are being
amortized equally over a seven-year period. The Company anticipates revenues
from the newly acquired working interests in the oil and gas properties to be
approximately $300,000 for the first full year of production. In addition to the
working interests in the properties acquired, the Company has agreed to
participate on a proportionate basis in the drilling of a development well on
one of the properties acquired. Drilling costs of $12,000 for the development
well were pre-paid at closing and are included in the oil and gas interests at
June 30, 2002.
On December 21, 2001, the Company repurchased 263,663 shares of the
Company's common stock at a market price of $.17 per share. These shares were
subsequently cancelled.
12
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.
The Company expects that the current cash and cash equivalents will be
sufficient to meet its forecasted operating cash needs for the remainder of
2002. 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 SIX MONTH PERIODS ENDED JUNE 30, 2002,
COMPARED WITH THREE AND SIX MONTH PERIODS ENDED JUNE 30, 2001
The Company reported a net loss of $72,000 and $204,000 during the three
and six month periods ended June 30, 2002 compared to a net loss of $94,000 and
$167,000 for the three and six month periods ended June 30, 2001. Oil and gas
revenue increased from $88,000 and $93,000 for the three and six month periods
ended June 30, 2001 to $167,000 and $237,000 for the three and six month periods
ended June 30, 2002 due primarily to the April 19, 2001 acquisition of SA Oil,
including working interest and royalty interest revenue from additional oil and
gas properties, and due to revenue from the purchase of working interests in 23
oil and gas properties on June 5, 2002, effective April 1,2002. Separately, SA
Oil properties generated $91,000 and $159,000 in revenue for the three and six
month periods ended June 30, 2002. The newly acquired working interests in 23
oil and gas properties generated $74,000 in revenue for three and six month
periods ended June 30, 2002. Properties owned prior to the acquisition of SA Oil
and the June 5, 2002 purchase generated $2,000 and $4,000 in revenue for the
three and six month periods ended June 30, 2002. Interest and other income
decreased from $18,000 and $43,000 for the three and six month periods ended
June 30, 2001 to $4,000 and $10,000 for the three and six month periods ended
June 30, 2002 due to reduced interest income earned on lower cash balances from
2001 to 2002.
General and administrative expenses increased from $106,000 and $201,000
for the three and six month periods ended June 30, 2001 to $116,000 and $218,000
for the three and six month periods ended June 30, 2002 due to reduced rent
reimbursements received from a sublease of the Company's offices in 2002. Rental
reimbursements
13
received for the three and six month period ended June 30, 2001 were $15,000 and
$30,000 compared to rental reimbursements of $5,000 and $12,000 recorded during
the three and six month periods ended June 30, 2002. Depreciation, depletion and
amortization expense increased from $37,000 and $43,000 for the three and six
month periods ended June 30, 2001 to $71,000 and $115,000 for the three and six
month periods ended June 30, 2002 due to additional depletion related to the 87
oil and gas well interests acquired through the acquisition of SA Oil and
additional depletion related to the June 5, 2002, purchase of working interests
in 23 oil and gas properties. Depletion and amortization of $39,000 and $78,000
recorded for the three and six month periods ended June 30, 2002 was due to the
acquisition of the SA Oil properties. Depletion and amortization of $27,000
recorded for the three and six month periods was due to the June 5, 2002
purchase of working interests in 23 oil and gas properties. Depletion and
depreciation expense of $5,000 and $10,000 was recorded for the three and six
month periods ended June 30, 2002 for the previously owned properties and
equipment. Oil and gas operations expense decreased from $45,000 for the three
month period ended June 30, 2001 to $42,000 for the three month period ended
June 30, 2002 and increased from $46,000 for the six month period ended June 30,
2001 to $90,000 for the six month period ended June 30, 2002. The decrease in
oil and gas operations expense for the three month period ended June 30, 2002 is
due to reduced operating expense of $5,000 incurred on previously owned
properties, offset by additional expense recorded of $2,000 for the working
interests in 23 oil and gas properties purchased on June 5, 2002. The increase
of $44,000 in oil and gas operations expense for the six month period ended June
30, 2002 is due to the oil and gas properties acquired through SA Oil and Gas
Corporation and to the June 5, 2002 purchase of working interests in 23 oil and
gas properties, effective April 1, 2002. Operating expenses for the SA Oil
properties were $39,000 and $85,000 for the three and six month periods ended
June 30, 2002. Operating expenses for the working interests in 23 oil and gas
properties purchased on June 5, 2002 were $2,000 for the three and six month
periods ended June 30, 2002. Operating expenses for previously owned properties
were $1,000 and $3,000 for the three and six month periods ended June 30, 2002.
Interest expense increased from $12,000 and $13,000 for the three and six month
periods ended June 30, 2001 to $14,000 and $28,000 for the three and six month
periods ended June 30, 2002 due to the note payable of $903,000 acquired in the
acquisition of SA Oil. Interest expense on the note payable of $903,000 was
$11,000 for the three and six month periods ended June 30, 2001 and $13,000 and
$26,000 for the three and six month periods ended June 30, 2002. Interest
expense on previous obligations was $1,000 and $2,000 for the three and six
month periods ended June 30, 2001 and $1,000 and $2,000 for the three and six
month periods ended June 30, 2002.
During the three and six month periods ended June 30, 2002, the Company
accrued expense reimbursements of $17,000 and $34,000, respectively, to be
received
14
from two companies that are partially owned by four of the Company's executives.
These accrued receipts are full reimbursement for salaries and related taxes and
insurance expenses incurred by the Company on behalf of the related parties.
This arrangement allows the Company to reduce expense and still maintain
adequate staffing. The reimbursements are recorded as a reduction of general and
administrative expense for the three and six month periods ended June 30, 2002.
At June 30, 2002, $17,000 of these reimbursements are included in related party
receivables.
During the three and six month periods ended June 30, 2002, the Company
accrued rental reimbursements of $3,000 and $6,000 to be received from a Company
that is partially owned by four of the Company's executives for a month-to-month
sublease of a portion of the Company's offices. The rent is at market rate. This
is recorded as a reduction in rental expense. As of June 30, 2002, the Company
had received all of the accrued rental reimbursements.
At June 30, 2002, a note payable of $903,000, due in September of 2005,
bearing an interest rate of 6%, with interest due quarterly, was owed to a
minority shareholder of the Company. At June 30, 2002, $4,000 of accrued
interest on the note payable is included in accrued liabilities.
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 have been formulated for the
development of office condominium buildings totaling 100,000 sq. ft. The project
recently received approval on all permits and plans. Triway is now offering
buildings for sale on a pre-construction basis, build-to-suit, or the land for
sale inclusive of the approved working drawings and permits. See "Liquidity and
Capital Resources."
OIL AND GAS ACTIVITIES
The Company purchased, through it's wholly owned subsidiary, Stratford
American Energy Corporation, working interests in 23 oil and gas properties
located in Oklahoma and Texas in exchange for $738,000 in cash. The transaction
closed on June 5, 2002. The purchase was effective as of April 1, 2002, and
therefore, the operating results have been included with the Company from April
1, 2002. See "Liquidity and Capital Resources."
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
15
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
have been included 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 Triway may not be able to sell the
office condominium buildings or land as presently scheduled and the risk that
the Company's investment in Triway may not be profitable; the risk that the
working interests in 23 oil and gas properties and the operations of 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.
16
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 19
(b) REPORTS ON FORM 8-K
The following report on form 8-K was filed during the three months
ended June 30, 2002:
On June 18, 2002, the Company filed a Form 8-K dated June 5,
2002, relating to the Purchase and Sale Agreement between Crown
Energy Drilling Production Fund 2001-1 Limited Partnership and
Stratford American Energy Corporation ("SAEC"), a wholly owned
subsidiary of the Company, pursuant to which working interests in
23 oil and gas properties were purchased by SAEC.
17
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: August 14, 2002 By /s/ Mel L. Shultz
-------------------------------------
Mel L. Shultz, President and Director
Date: August 14, 2002 By /s/ Daniel E. Matthews
-------------------------------------
Daniel E. Matthews, Controller,
Secretary and Treasurer
18
EXHIBITS INDEX
Exhibit 99 is 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 2.2
was filed with the Company's Form 8-K filed with the Securities Exchange
Commission on June 18, 2002. 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
2.2 Purchase and Sale Agreement, dated June 5, 2002 by and
between Crown Energy Drilling Production Fund 2001-1
Limited Partnership and Stratford American Energy Corporation 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
99 Officer Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 N/A
19