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, 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 October 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 September 30, 2002 (unaudited) 3
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2002 and 2001 (unaudited) 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 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
ITEM 3. CONTROLS AND PROCEDURES 17
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
SEPTEMBER 30, 2002
(unaudited)
ASSETS
Cash and cash equivalents $ 95,000
Receivables:
Oil and gas 122,000
Mortgage 34,000
Related party 2,000
Investment in LLC 546,000
Oil and gas interests, net 1,457,000
Deposits 650,000
Other assets 147,000
------------
$ 3,053,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 95,000
Notes payable and other debt 34,000
Related party notes payable 1,303,000
Accrued liabilities 40,000
------------
Total liabilities 1,472,000
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
Accumulated deficit (25,973,000)
Treasury stock, 1,967 shares at cost (11,000)
------------
1,581,000
------------
$ 3,053,000
============
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
-------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES:
Oil & gas revenue $ 160,000 $ 84,000 $ 397,000 $ 177,000
Interest and other income 33,000 13,000 43,000 55,000
--------- --------- --------- ---------
193,000 97,000 440,000 232,000
EXPENSES:
General and administrative 110,000 94,000 328,000 295,000
Depreciation, depletion and amortization 71,000 39,000 186,000 81,000
Oil & gas operations 45,000 49,000 135,000 95,000
Interest 15,000 15,000 43,000 28,000
--------- --------- --------- ---------
241,000 197,000 692,000 499,000
--------- --------- --------- ---------
NET LOSS $ (48,000) $(100,000) $(252,000) $(267,000)
========= ========= ========= =========
Basic and diluted net loss per share $ (0.01) $ (0.01) $ (0.04) $ (0.04)
========= ========= ========= =========
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
--------------------------------------
2002 2001
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net loss $ (252,000) $ (267,000)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation, depletion and amortization 186,000 81,000
Changes in assets and liabilities:
Decrease (increase) in accounts and mortgage receivable (53,000) 17,000
Increase in other assets (6,000) (55,000)
Increase in accounts payable 58,000 12,000
Increase (decrease) in accrued liabilities (15,000) 3,000
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (82,000) (209,000)
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Investment in LLC (14,000) (32,000)
Deposits (650,000) 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 (22,000) 0
----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,424,000) 39,000
----------- -----------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Payments on notes payable and other debt (2,000) (9,000)
Proceeds from note payable 400,000 0
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 398,000 (9,000)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,108,000) (179,000)
CASH AND CASH EQUIVALENTS, beginning of period 1,203,000 1,510,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 95,000 $ 1,331,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 43,000 $ 23,000
=========== ===========
Taxes paid during the period $ 1,000 $ 0
=========== ===========
Acquisition of assets and liabilities through
issuance of common stock:
Accounts receivable $ 0 $ 82,000
=========== ===========
Oil and gas interests $ 0 $ 976,000
=========== ===========
Accounts payable $ 0 $ 15,000
=========== ===========
Note payable $ 0 $ 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 September 30, 2002, the results of operations for the three
and nine months ended September 30, 2002 and 2001 and cash flows for the
nine months ended September 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 nine-month period ended September 30, 2002 are not
necessarily indicative of the results expected for fiscal year 2002.
2. During the quarter ended September 30, 2002, the Company made a
non-refundable deposit of $650,000 towards the purchase of real property
(the "Real Property") with other investors. This purchase is scheduled to
close in late 2002. Funds for the deposit came from Company cash of
$250,000 and a loan of $400,000 from a shareholder, due on the earlier of
June 30, 2003 or the "Closing Date" as defined by the Purchase and Sale
Agreement between the Company and the seller of the real estate property,
bearing an interest rate of 10%. The loan is secured by the Company's
interest in Triway Land Investors, L.L.C. ("Triway"). It is anticipated
that the Real Property, once it is purchased, will be immediately conveyed
by the Company and the other investors to a to-be-formed limited liability
company ("New LLC") in which the Company will own 80% percent of the
membership interests and be the manager. The Company will contribute
$750,000 in cash in return for its 80% membership interest in New LLC and
other investors will contribute $187,500 in cash in return for the
remaining 20% of the membership interests in New LLC. The $650,000 deposit
shall count towards the Company's cash contribution of $750,000 to New LLC.
New LLC will fund the purchase of the Real Property through a combination
of the cash contributions described above and loans to be obtained by New
LLC in the aggregate amount of $24,300,000.
3. On October 26, 2000, the Company through its membership in Triway, a
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 $14,000 equity
investment, proportionately, in accordance with the terms of the operating
agreement. The Company may still be required to contribute up to an
additional $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
6
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 is accounting for the Triway investment
under the cost method.
4. The Company calculates basic and diluted net loss per share in accordance
with the provisions of Statement of Financial Accounting Standards No. 128
"Earnings Per Share." Basic net 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 nine month periods ended September 30,
2002 and 7,141,768 and 6,842,712 for the three and nine month periods ended
September 30, 2001, respectively). Diluted net loss per share is the same
as basic net loss per share for the three and nine month periods ended
September 30, 2002 and 2001 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, 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 nine month periods ended
September 30, 2002 the Company recorded $34,000 and $101,000 in
amortization respectively leaving a net asset of $737,000 on the books of
the Company at September 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 Nine Months Ended
September 30 September 30
(unaudited) (unaudited),
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Total revenues $ 193,000 $ 97,000 $ 440,000 $ 403,000
Net loss $ (48,000) $ (100,000) $ (252,000) $ (196,000)
Net loss per share $ (0.01) $ (0.01) $ (0.04) $ (0.03)
Pro Forma weighted average
shares o/s: 6,878,105 7,141,768 6,878,105 7,141,768
6. 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 included oil and
gas interests of $687,000 and acquisition costs of $51,000 paid at closing.
Additional acquisition costs of $17,000, relating to the purchase, were
incurred. At September 30, 2002, $12,000 of these additional acquisition
costs remain in accounts payable. The total acquisition costs of $68,000
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. The oil
and gas interests of $687,000 are being depleted equally over a seven-year
period, which is the estimated life of the interests. Depletion expense of
$24,000 and $49,000 was recorded for the three and nine month periods ended
September 30, 2002, respectively, on the oil and gas interests, leaving a
net asset of $638,000 on the books of the Company at September 30, 2002.
Amortization expense of $2,000 and $4,000 recorded for the three and nine
month periods ending September 30, 2002 related to the acquisition costs,
leaving a net book value of $64,000 on the books of the Company at
September 30, 2002. The Company recognized revenue from the properties of
$68,000 and $142,000 for the three and nine month periods ending September
30, 2002.
8
7. On October 14, 2002, the Company received a $250,000 loan from the same
shareholder who advanced the $400,000 loan at September 30, 2002. These
proceeds were used to make an additional deposit on the real estate
property purchase. These additional funds increased the deposit from
$650,000 at September 30, 2002, to $900,000 and increased the note payable
to the shareholder from $400,000 at September 30, 2002 to $650,000. The
Company will receive $150,000 back contemporaneously with closing, assuming
that the transaction will close. The Company anticipates selling an
additional 2,000,000 shares of the Company's common stock for $500,000 with
the proceeds of such sale being used to pay off the $400,000 loan and
complete the Company's cash contribution to the New LLC. The remaining
$250,000 will be repaid through the above mentioned refund and cash from
operations.
8. 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 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 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 management's 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. Statement No. 145 will rescind
Statement 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 Statement 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. Statement No. 64
amended Statement No. 4, and is no longer necessary because
10
Statement 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 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 $48,000 and $252,000 for
the three and nine months ended September 30, 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 3, Note 5 and
Note 6, respectively, of the unaudited condensed consolidated financial
statements as of September 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
During the quarter ended September 30, 2002, the Company made a
non-refundable deposit of $650,000 towards the purchase of real property (the
"Real Property") with other investors. This purchase is scheduled to close in
late 2002. Funds for the deposit came from Company cash of $250,000 and a loan
of $400,000 from a shareholder. The loan is secured by the Company's interest in
Triway Land Investors, L.L.C. ("Triway"). It is anticipated that the Real
Property, once it is purchased, will be immediately conveyed by the Company and
the other investors to a to-be-formed limited liability company ("New LLC") in
which the Company will own 80% percent of the membership interests and be the
manager. The Company will contribute $750,000 in cash in return for its 80%
membership interest in New LLC and other investors will contribute $187,500 in
cash in return for the remaining 20% of the membership interests in New LLC. The
$650,000 deposit shall count towards the Company's cash contribution of $750,000
to New LLC. New LLC will fund the purchase of the Real Property through a
combination of the cash contributions described above and loans to be obtained
by New LLC in the aggregate amount of $24,300,000.
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 $687,000 included oil and gas
interests and acquisition costs of $51,000 paid at closing. Additional
acquisition costs of $17,000, relating to the purchase, were incurred. At
September 30, 2002, $12,000 of these additional acquisition costs remain in
accounts payable. Total acquisition costs of $68,000 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 September
30, 2002.
12
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.
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.
On October 26, 2000, the Company through its membership in Triway, a
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 $14,000
equity investment, proportionately, in accordance with the terms of the
operating agreement. The Company may still be required to contribute up to an
additional $166,600, proportionately, at a future date as specified by the
operating agreement. Any subsequent capital calls will be funded from operating
funds or shareholder loans. 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 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 previosly distributed. The Company will then share in 17.5% of the
results from the total project. Triway is now offering the property for sale.
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. Additionally there can be no assurance that the Company will
successfully complete the capital raising required to fund existing capital
commitments and the Company's operations.
RESULTS OF OPERATIONS - THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2002,
COMPARED WITH THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2001
The Company reported a net loss of $48,000 and $252,000 during the three
and nine month periods ended September 30, 2002 compared to a net loss of
$100,000 and $267,000 for the three and nine month periods ended September 30,
2001. Oil and gas revenue increased from $84,000 and $177,000 for the three and
nine month periods ended September 30, 2001 to $160,000 and $397,000 for the
three and nine month periods ended September 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 $89,000 and
$248,000 in revenue for the three and nine month periods ended September 30,
2002. The working interests in 23 oil and gas properties, acquired effective
April 1, 2002, generated $68,000 and $142,000 in revenue for three and nine
month periods ended September 30, 2002. Properties owned prior to the
acquisition of SA Oil and the June 5, 2002 purchase generated $3,000 and $7,000
in revenue for the three and nine month periods ended September 30, 2002.
Interest and other income increased from $13,000 to $33,000 for the three month
periods ended September 30, 2001 and 2002, respectively, and decreased from
$55,000 to $43,000 for the nine month periods ended September 30, 2001 and
September 30, 2002, respectively. The increase in interest and other income of
$20,000 for the three month period ended September 30, 2002 was due to a payment
received for final settlement of funds held by an insurance company for future
vehicle damage claims, subsequent to the Company's sale of Dollar-Rent-A-Car in
October of 1998, offset by reduced interest income earned on lower cash balances
as of September 30, 2002 compared to September 30, 2001. The decrease for the
nine month period ended September 30, 2002 was also due to a significant
reduction in interest income earned on lower cash balances as of September 30,
2002, offset by the payment of $32,000 received from the insurance company.
Interest income for the nine months ending September 30, 2002, was $11,000,
compared to interest income earned of $55,000 for the nine months ended
September 30, 2001.
13
General and administrative expenses increased from $94,000 and $295,000 for
the three and nine month month periods ended September 30, 2001 to $110,000 and
$328,000 for the three and nine month periods ended September 30, 2002. The
increase for the three month period ending September 30, 2002 is due primarily
to reduced rent reimbursements received from a sublease of the Company's offices
in 2002. Rental reimbursements received for the three month period ended
September 30, 2001 were $15,000 compared to rental reimbursements of $5,000
recorded for the three month period ended September 30, 2002. The increase in
general and administrative expense for the nine month period ending September
30, 2002 is due to the reduction in rental reimbursements received and an
increase in accounting expense recorded, offset by a decrease in officer
salaries. Rental reimbursements received for the nine month periods ending
September 30, 2001 and September 2002 were $45,000 and $17,000, respectively.
Depreciation, depletion and amortization expense increased from $39,000 and
$81,000 for the three and nine month periods ended September 30, 2001 to $71,000
and $186,000 for the three and nine month periods ended September 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,
depreciation and amortization of $39,000 and $117,000 recorded for the three and
nine month periods ended September 30, 2002 was due to the acquisition of the SA
Oil properties. Depletion and amortization of $27,000 and $54,000 recorded for
the three and nine month periods ended September 30, 2002, 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 $15,000 was recorded for the three and
nine month periods ended September 30, 2002 for the previously owned properties
and equipment.
Oil and gas operations expense decreased from $49,000 for the three month
period ended September 30, 2001 to $45,000 for the three month period ended
September 30, 2002 and increased from $95,000 for the nine month period ended
September 30, 2001 to $135,000 for the nine month period ended September 30,
2002. The decrease in oil and gas operations expense for the three month period
ended September 30, 2002 of $4,000 is due to reduced operating expense of $7,000
incurred on SA Oil and previously owned properties, offset by additional expense
recorded of $3,000 for the working interests in 23 oil and gas properties
purchased on June 5, 2002. The increase of $40,000 in oil and gas operations
expense for the nine month period ended September 30, 2002 is due to the oil and
gas properties acquired through SA Oil 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 $41,000 and $126,000 for the
three and nine month periods ended September 30, 2002. Operating expenses for
the working interests in 23 oil and gas properties purchased on June 5, 2002
were $3,000 and $5,000 for the three and nine month periods
14
ended September 30, 2002. Operating expenses for previously owned properties
were $1,000 and $4,000 for the three and nine month periods ended September 30,
2002.
Interest expense increased from $28,000 to $43,000 for the nine month
period ended September 30, 2001 and 2002, respectively, 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 $14,000 and $24,000 for the three and nine month periods
ended September 30, 2001 and $14,000 and $40,000 for the three and nine month
periods ended September 30, 2002. Interest expense on previous obligations was
$1,000 and $4,000 for the three and nine month periods ended September 30, 2001
and $1,000 and $3,000 for the three and nine month periods ended September 30,
2002.
During the three and nine month periods ended September 30, 2002, the
Company accrued expense reimbursements of $17,000 and $51,000, respectively, to
be received 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 nine month periods ended
September 30, 2002. At September 30, 2002, $2,000 of these reimbursements is
recorded in related party receivables.
During the three and nine month periods ended September 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 September
30, 2002, the Company had received all of the accrued rental reimbursements.
At September 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 September 30, 2002, $4,000 of accrued
interest on the note payable is included in accrued liabilities.
At September 30, 2002, a note payable of $400,000, due on the earlier of
June 30, 2003 or the "Closing Date" as defined by the Purchase and Sale
Agreement between the Company and the seller of the real estate property which
the Company currently has in escrow, bearing an interest rate of 10%, was owed
to a shareholder. On October 14, 2002, the shareholder loaned an additional
$250,000. The loan proceeds were used to increase the escrow deposit from
$650,000 at September 30, 2002 to $900,000. The total note payable of $650,000,
plus all accrued interest at 10%, is due to the shareholder under the terms
discussed above.
REAL ESTATE ACTIVITIES
During the quarter ended September 30, 2002, the Company made a
non-refundable deposit of $650,000 towards the purchase of real property (the
"Real Property") with other investors. This purchase is scheduled to close in
late 2002. Funds for the deposit came from Company cash of $250,000 and a loan
of $400,000 from a shareholder. The loan is secured by the Company's interest in
Triway Land Investors, L.L.C. ("Triway"). It is anticipated that the Real
Property, once it is purchased, will be immediately conveyed by the Company and
the other investors to a to-be-formed limited liability company ("New LLC") in
which the Company will own 80% percent of the membership interests and be the
manager. The Company will contribute $750,000 in cash in return for its 80%
membership interest in New LLC and other investors will contribute $187,500 in
cash in return for the remaining 20% of the membership interests in New LLC. The
$650,000 deposit shall count towards the Company's cash contribution of $750,000
to New LLC. New LLC will fund the purchase of the Real Property through a
combination of the cash contributions described above and loans to be obtained
by New LLC in the aggregate amount of $24,300,000.
15
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. Triway Land Investors L.L.C. is now
offering the property for sale. 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 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
During the quarter ended September 30, 2002, the Company made a
non-refundable deposit of $650,000 towards the purchase of the Real Property
with other investors. This purchase is scheduled to close in late 2002. Funds
for the deposit came from Company cash of $250,000 and a loan of $400,000 from a
shareholder. The loan is secured by the Company's interest in Triway. The
$650,000 deposit shall count towards the Company's cash contribution of $750,000
to New LLC. The Company anticipates selling an additional 2,000,000 shares of
the Company's common stock for $500,000 with the proceeds of such sale being
used to pay off the $400,000 loan and complete the Company's cash contribution
to the New LLC. See "Liquidity and Capital Resources."
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
16
sell the 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; the risk that the Company may not be able to sell
additional shares of its common stock to raise capital; the risk that the
Company may not be able to complete the purchase of the Real Property and the
investment in New LLC; the risk that any investment by the Company in New LLC
may not be profitable; 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.
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-14 under the Exchange Act, within the 90 days prior
to the filing date of this report, the Company carried out an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. This evaluation was carried out under the supervision and with
the participation of the Company's management, including our Chief Executive
Officer, our President and our Controller. Based upon that evaluation, our Chief
Executive Officer, our President and our Controller concluded that the Company's
disclosure controls and procedures are effective. There have been no significant
changes in the Company's internal controls or in other factors that could
significantly affect internal controls subsequent to the date the Company
carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include controls and procedures designed to ensure that information required to
be disclosed in Company reports filed under the Exchange Act is accumulated and
communicated to management, including the Company's Chief Executive Officer,
President and Controller as appropriate, to allow timely decisions regarding
required disclosure.
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
There were no reports filed on Form 8-K for the three months ended
September 30, 2002.
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: November 14, 2002 By /s/ Mel L. Shultz
-------------------------------------
Mel L. Shultz, President and Director
Date: November 14, 2002 By /s/ David H. Eaton
-------------------------------------
David H. Eaton, Chief Executive
Officer and Chairman of the Board
Date: November 14, 2002 By /s/ Daniel E. Matthews
-------------------------------------
Daniel E. Matthews, Controller,
Secretary and Treasurer
18
CERTIFICATIONS
I, Mel L. Shultz, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Stratford American
Corporation and Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors what could significantly affect internal controls
subsequent to the date or our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Mel L. Shultz
----------------------------------------
Mel L. Shultz
President and Director
19
CERTIFICATIONS
I, David H. Eaton, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Stratford American
Corporation and Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors what could significantly affect internal controls
subsequent to the date or our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ David H. Eaton
----------------------------------------
David H. Eaton
Chief Executive Officer and Chairman of
The Board
20
CERTIFICATIONS
I, Daniel E. Matthews, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Stratford American
Corporation and Subsidiaries;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors what could significantly affect internal controls
subsequent to the date or our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Daniel E. Matthews
----------------------------------------
Daniel E. Matthews
Controller, Secretary and Treasurer
21
EXHIBITS INDEX
Exhibit 10.2 and Exhibit 99 are 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
10.2 Letter Agreement between Stratford American Corporation, 23
JDMD Investments, L.L.C.; Diamond Ventures, Inc., Golden
Gate Apartments, Ltd., L.P., Auriga Properties, Inc.,
DRD-97 Trust and David Goldstein, dated September 27, 2002
99 Officer Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
22