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 March 31, 2003
( ) 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 April 30, 2003, 10,078,105 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
Consolidated Balance Sheet as of March 31, 2003 (unaudited) 3
Consolidated Statements of Operations for the three months
ended March 31, 2003 and 2002 (unaudited) 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2003 and 2002 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. CONTROLS AND PROCEDURES 23
PART II. OTHER INFORMATION 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
Signatures 24
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
March 31, 2003
(unaudited)
ASSETS
Cash and cash equivalents $ 124,000
Receivables:
Oil and gas 137,000
Mortgage 31,000
Related party 16,000
Other 201,000
Investment in Triway Land Investors, LLC 564,000
Real estate investments, net 24,966,000
Oil and gas interests, net 1,337,000
Loan fees, net 331,000
Other assets 159,000
------------
$ 27,866,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 107,000
Notes payable and other debt 25,322,000
Accrued liabilities 91,000
------------
Total liabilities 25,520,000
Minority interest in consolidated subsidiary 181,000
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
10,078,105 shares 101,000
Additional paid-in capital 28,204,000
Accumulated deficit (26,129,000)
Treasury stock, 1,967 shares at cost (11,000)
------------
2,165,000
------------
$ 27,866,000
============
See accompanying notes to consolidated financial statements.
3
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the three months ended
March 31
----------------------
2003 2002
--------- ---------
REVENUES:
Oil & gas revenue $ 204,000 $ 70,000
Property rental income 524,000 0
Interest and other income 1,000 6,000
--------- ---------
729,000 76,000
EXPENSES:
General and administrative 133,000 102,000
Depreciation, depletion and amortization 207,000 44,000
Oil & gas operations 48,000 48,000
Interest 403,000 14,000
--------- ---------
791,000 208,000
--------- ---------
Net loss before minority interest and income taxes (62,000) (132,000)
Minority interest share of net loss 4,000 0
--------- ---------
Net loss before income taxes (58,000) (132,000)
Income tax expense 1,000 0
--------- ---------
Net loss $ (59,000) $(132,000)
========= =========
Basic and diluted net loss per share $ (0.01) $ (0.02)
========= =========
See accompanying notes to consolidated financial statements.
4
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the three months ended
March 31
--------------------------
2003 2002
----------- -----------
CASH FLOWS FROM CONTINUING OPERATIONS:
Net loss $ (59,000) $ (132,000)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Minority interest loss (4,000) 0
Depreciation, depletion and amortization 207,000 44,000
Amortization of deferred loan fees 7,000 0
Changes in assets and liabilities:
Decrease (increase) in accounts and mortgage receivable (4,000) 5,000
Decrease (increase) in other assets (1,000) 6,000
Increase (decrease) in accounts payable (9,000) 39,000
Decrease in accrued liabilities (38,000) (21,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 99,000 (59,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in LLC 0 (14,000)
Purchases of property and equipment (16,000) (20,000)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (16,000) (34,000)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on notes payable and other debt (114,000) (1,000)
----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (114,000) (1,000)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (31,000) (94,000)
CASH AND CASH EQUIVALENTS, beginning of period 155,000 1,203,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 124,000 $ 1,109,000
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 411,000 $ 14,000
=========== ===========
Taxes paid during the period $ 4,000 $ 0
=========== ===========
See accompanying notes to consolidated financial statements.
5
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - UNAUDITED FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position of the
Company as of March 31, 2003, the results of operations for the three months
ended March 31, 2003 and 2002 and cash flows for the three months ended March
31, 2003 and 2002. The accompanying 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, 2002. The results of
operations for the three-month period ended March 31, 2003 are not necessarily
indicative of the results expected for fiscal year 2003.
NOTE 2 - INVESTMENT IN SCOTTSDALE THOMPSON PEAK, LLC
On December 11, 2002, the Company, along with other investors, completed
the purchase of an office building leased by a single tenant located at 20225
North Scottsdale Road, Scottsdale, Arizona (the "Property") for $25,484,000,
which reflects the purchase price of $24,988,000 and closing costs incurred of
$496,000. The Company intends to continue this use of the building. The purchase
was pursuant to the Purchase and Sale Agreement, dated July 17, 2002, by and
between Opus West Corporation, a Minnesota corporation, and the Company (the
"Purchase and Sale Agreement"). The Property, after being purchased by the
Company and the other investors, was immediately conveyed to Scottsdale Thompson
Peak, LLC, a newly formed Arizona limited liability company ("STP"). The Company
owns 80% of the membership interests in, and is the manager of STP. The Company
contributed $750,000 in cash and its 80% undivided interest in the Property in
return for its 80% membership interest in STP, and other investors contributed
$187,000 in cash and their 20% undivided interest in the Property in return for
the remaining 20% of the membership interests in STP. The Company's cash
contribution of $750,000 came from company cash of $250,000 and the proceeds of
the sale by the Company of 2,000,000 shares of Company common stock, in December
2002, for $500,000. STP funded the purchase of the Property through a
combination of the cash contributions described above and loans obtained by STP,
in the aggregate amount of $24,300,000. A loan of $20,000,000 is financed with a
5.9% interest rate, 22 year straight-line amortization note and is guaranteed by
JDMD Investments, LLC, a major shareholder of the Company, as described in the
Guarantee Agreement dated December 11, 2002 and described below. A loan of
$2,500,000 is financed with a 6% interest rate, interest only note, for a period
of two years, due December 11, 2004, and is guaranteed 50% by JDMD Investments,
LLC and 50% by Diamond Ventures, Inc. A loan of $1,800,000 is financed with a
6
10% interest rate note, interest only, for a period of two years, due December
2, 2004. The Company also issued a total of 1,200,000 shares shares of its
common stock, in December 2002, to JDMD Investments, LLC, a major shareholder of
the Company, for its agreement to guarantee payment of certain exceptions or
carve outs on the first mortgage, the guarantee of 50% of a $2,500,000 bank
loan, the assignment of all its interests in finding and negotiating the
purchase of the Property, and obtaining the mortgage loan and other financing
involved.
Had the purchase been completed as of January 1, 2002, the Company would have
reported the following:
FOR THE THREE MONTHS ENDED
MARCH 31,
--------------------------
(Unaudited)
2003 2002
---------- ----------
Total revenue $ 729,000 $ 600,000
Net loss $ (59,000) $ (124,000)
Net loss per share $ (.01) $ (.01)
Pro Forma weighted
average shares outstanding 10,078,105 10,078,105
On July 25, 2002, the Company used $250,000 of its cash and on September
27, 2002, borrowed $400,000 from a shareholder to make a $650,000 deposit on the
Property. On October 14, 2002, the Company borrowed an additional $250,000 from
the same shareholder to make an additional deposit on the Property. Total funds
deposited were $900,000. The Property, after being purchased by the Company and
other investors was immediately conveyed to STP, as described above. At the
close of escrow on December 11, 2002, $700,000 of the deposit funds was returned
to the Company, with $200,000 being held by the lender pending final inspection
on March 31, 2003 of the construction work. On December 12, 2002, the Company
issued 2,000,000 shares of its common stock in exchange for $500,000 in cash.
With the $1,200,000 the Company received in December 2002, $750,000 was used to
make an equity contribution to STP, and $450,000 was used to repay a portion of
the above described shareholder loan. On March 31, 2003, the lender made the
final inspection of the construction, and on April 1, 2003, the remaining
$200,000 holdback of deposit funds was returned to the Company. Also on April 1,
2003, the Company used the $200,000 to repay the shareholder in full for all
funds advanced.
NOTE 3 - INVESTMENT IN TRIWAY LAND INVESTORS, LLC
On October 26, 2000, the Company through its membership in Triway Land
Investors, LLC ("Triway"), a limited liability company with two additional
members, entered into an operating agreement to acquire real property in
Scottsdale, Arizona. 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
April 10, 2002, the Company contributed an additional $14,000 equity investment,
proportionately, in accordance with the terms of the operating agreement. On
October 31, 2002, Triway made a capital call requiring the Company to contribute
an additional $18,000 equity investment, proportionately, in accordance with the
terms of the operating agreement. The capital call was recorded to accounts
payable at December 31, 2002 and paid on January 27, 2003. The Company may still
be required to contribute up to an additional $148,000, proportionately, at a
future date as specified by the operating agreement. Any subsequent capital call
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 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
7
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. All permits have been obtained but the
property is currently being marketed for sale as real estate. The Company is
accounting for the Triway investment under the cost method.
NOTE 4 - NET LOSS PER COMMON SHARE
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 (10,078,105
shares for the three month period ended March 31, 2003 and 6,878,105 for the
three month period ended March 31, 2002). Diluted net loss per share is the same
as basic net loss per share for the three month periods ended March 31, 2003 and
2002. In calculating diluted net loss per share for the three month periods
ended March 31, 2003 and 2002, respectively, 480,000 and 480,000 dilutive
securities equivalents consisting of stock options have been excluded because
their inclusion would have been antidilutive.
NOTE 5 - EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
interpretations in accounting for its employee stock options and to adopt the
"disclosure only" alternative treatment under Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). SFAS 123
requires the use of fair value option valuation models that were not developed
for use in valuing employee stock options. Under SFAS No. 123, deferred
compensation is recorded for the excess of the fair value of the stock on the
date of the option grant, over the exercise price of the option. The deferred
compensation is amortized over the vesting period of the option.
In December 2002, the Financial Accounting Standards Board issued Statement
No. 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE,
an amendment to FASB Statement 123." Statement 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, Statement 148
amends the disclosure requirements of Statement 123," ACCOUNTING FOR STOCK-BASED
COMPENSATION," to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of Statement 148 effective December 31, 2002.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's pro forma net
loss would have been:
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2003 2002
--------- ----------
Net loss:
As reported $ (59,000) $ (132,000)
========= ==========
Pro forma $ (59,000) $ (132,000)
========= ==========
Diluted loss per share:
As reported $ (0.01) $ (0.02)
========= ==========
Pro forma $ (0.01) $ (0.02)
========= ==========
NOTE 6 - OIL AND GAS INTERESTS "SA OIL AND GAS CORPORATION"
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
8
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 depleted equally over a seven-year period, which is the estimated
life of the wells. The Company recorded depletion expense of $34,000 for the
three month periods ended March 31, 2003 and 2002, leaving a net asset on the
books of the Company of $670,000 at March 31, 2003. In addition, equipment
acquired in the transaction totaled $38,000. This equipment is being amortized
equally over a five-year period. In 2001, a net $52,000 of additional equipment
and intangible development costs were capitalized and depreciation and
amortization of $17,000 was recorded, leaving a net asset of $73,000 on the
books of the Company at December 31, 2001. In 2002, $7,000 of equipment and
intangible development costs were capitalized and depreciation and amortization
of $15,000 was recorded, leaving a net asset of $65,000 in equipment and
intangible development costs on the books of the Company at December 31, 2002.
During the three month period ended March 31, 2003, an additional $2,000 of
equipment and intangible drilling costs were capitalized and depreciation and
amortization of $6,000 was recorded, leaving a net asset of $61,000 on the books
of the Company at March 31, 2003. The Company recognized gross revenue of
$118,000 and $68,000 for the three month periods ended March 31, 2003 and 2002,
respectively, on these interests.
NOTE 7 - OIL AND GAS INTERESTS "STRATFORD AMERICAN ENERGY CORPORATION"
On June 5, 2002, the Company, through it's wholly owned subsidiary,
Stratford American Energy Corporation, purchased 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. The total
acquisition costs of $68,000 are being amortized equally over a seven-year
period. For the three months ended March 31, 2003, the Company recorded $2,000
in amortization, leaving net acquisition costs of $59,000 on the books of the
Company at March 31, 2003. Additional intangible development costs of $7,000
were incurred in 2002 for a treatment to enhance production of one of the
producing properties. As of March 31, 2003, total amortization expense of $1,000
has been recorded, leaving net intangible development costs of $6,000 on the
books of the Company at March 31, 2003. In addition to the working interests in
the properties acquired, the Company 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
9
March 31, 2003. This well is now completed and is a producing property. 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
$25,000 was recorded for the three month period ended March 31, 2003, on the oil
and gas interests, leaving a net asset of $589,000 on the books of the Company
at March 31, 2003. The Company recognized gross revenue from the properties of
$79,000 for the three month period ended March 31, 2003.
NOTE 8 - OPERATING SEGMENTS
Revenue is now generated from two operating segments after the purchase of
the Property on December 11, 2002, as described in Note 2. The Property consists
of an office building that is leased to a single tenant. Although the tenant has
entered into a 22 year bondable lease agreement with multiple parties that
guarantee payment under terms of the agreement, if the financial condition of
the tenant and the other guarantors were to deteriorate and the tenant could not
pay rents under the terms of the lease agreement, it would have a material
adverse effect on the Company. The Company owns working and/or royalty interests
in oil and gas properties that are primarily located in Oklahoma and Texas, as
described in Notes 6 and 7. The Company has also invested in a venture formed to
purchase separate real estate property in Scottsdale, Arizona, as described in
Note 3. This property is now being marketed for sale as real estate along with
all of the permits that have been obtained to date. No revenue or expense has
been reported from this investment.
10
The following summarizes information about the Company's operations by operating
segments for the three month periods ended March 31, 2003 and 2002:
OIL & GAS REAL ESTATE OTHER TOTAL
------------ ------------ ------------ ------------
MARCH 31, 2003:
- ---------------
Total revenue $ 204,000 $ 524,000 $ 1,000 $ 729,000
Operating profit (loss) 74,000 (2,000) (130,000) (58,000)
Identifiable assets 1,657,000 25,335,000 877,000 27,869,000
Depreciation, depletion and
amortization expense 70,000 133,000 4,000 207,000
Interest expense 13,000 389,000 1,000 403,000
Interest income 0 0 1,000 1,000
Income tax expense 1,000 0 0 1,000
Expenditures for additions
(long lived assets) 2,000 0 14,000 16,000
OIL & GAS REAL ESTATE OTHER TOTAL
------------ ------------ ------------ ------------
MARCH 31, 2002:
- ---------------
Total revenue 70,000 0 6,000 76,000
Operating profit (loss) (30,000) 0 (102,000) (132,000)
Identifiable assets 1,036,000 0 1,713,000 2,749,000
Depreciation, depletion and
amortization expense 41,000 0 3,000 44,000
Interest expense 13,000 0 1,000 14,000
Interest income 0 0 6,000 6,000
Expenditures for additions
(long lived assets) 5,000 0 15,000 20,000
11
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, CONSOLIDATION OF VARIABLE INTEREST ENTITIES.
Interpretation 46 clarifies the application of Accounting Research Bulletin No.
51, "Consolidated Financial Statements," to certain entities in which equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
recognition and measurement provisions of Interpretation 46 are effective for
newly created variable interest entities formed after January 31, 2003, and for
existing variable interest entities, on the first interim or annual reporting
period beginning after June 15, 2003. The Company will adopt the provisions of
Interpretation 46 for existing variable interest entities on July 1, 2003, which
will not have a material effect on the Company's financial statements.
In December 2002, the Financial Accounting Standards Board issued Statement
No. 148, ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE, an
amendment to FASB Statement 123. Statement 148 provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, Statement 148 amends the
disclosure requirements of Statement 123," ACCOUNTING FOR STOCK-BASED
COMPENSATION," to require prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. The Company
adopted the disclosure provisions of Statement 148 effective December 31, 2002.
In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR
GUARANTEES, INCLUDING INDIRECT GUARANTEES OF INDEBTEDNESS OF OTHERS.
Interpretation 45 describes the disclosures to be made by a guarantor in interim
and annual financial statements about obligations under certain guarantees the
guarantor has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair value of
the obligation undertaken in issuing the guarantee. The initial recognition and
measurement provisions of Interpretation 45 are applicable on a prospective
basis to guarantees issued or modified after December 15, 2002. The adoption of
Interpretation 45 did not have a material effect on the Company's financial
statements. The Company adopted the disclosure provisions of Interpretation 45
effective December 31, 2002.
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
12
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.
The adoption of Statement No. 146 did not have an effect on the Company's
financial statements.
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 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 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 has adopted the provisions of Statement No. 143
for the quarter ending March 31, 2003. The Company has determined that there are
no legal obligations for asset retirement obligations. Management has determined
that there was no cost associated with asset retirement obligations, therefore,
there is no fair value assigned for the liability of asset retirement
obligations.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company incurred a consolidated net loss of $59,000 from operations for
the three months ended March 31, 2003. During 2002, the Company purchased an
office building in Scottsdale, Arizona, effective December 11, 2002 as discussed
below and discussed above in Note 2 of the consolidated financial statements as
of March 31, 2003. The Property, after being purchased by the Company and the
other investors, was immediately conveyed to STP. The Company owns 80% of the
membership interests in, and is the manager of STP. On June 5, 2002, the Company
purchased working interests in 23 oil and gas properties, as discussed below and
in Note 7 of the consolidated financial statements as of March 31, 2003. The
Company, through its membership in Triway, acquired real property on October 26,
2000 as discussed below and in Note 3 of the consolidated financial statements
as of March 31, 2003. The Company purchased 100% of the capital stock of SA Oil
on April 19, 2001 as discussed below and in Note 6 of the consolidated financial
statements as of March 31, 2003. The Company also owns a nominal interest in
four oil and gas wells in Arkansas and Oklahoma that generate insignificant
revenues.
Other than the transactions described above, the Company has no significant
operations. 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's operations
will be profitable.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Consolidated Balance Sheet and the Consolidated Statements of
Operations have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial
statements requires the Company to make 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
14
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.
Real estate investments are carried at book value, less depreciation. The
Company's investments in real property are subject to many inherent risks that
cannot be controlled, including general economic conditions and the availability
of mortgage funds for operations or refinancing. Future adverse changes could
result in losses or an inability to recover the carrying value of the
investments current carrying value, thereby possibly requiring an impairment
charge in the future. In accordance with SFAS No. 144, long-lived assets, such
as property, plant and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. Assets to be disposed of would be separately presented
in the balance sheet and reported at the lower of the carrying amount or fair
value less costs to sell, and are no longer depreciated. The assets and
liabilities of a disposed group classified as held for sale would be presented
separately in the appropriate asset and liability sections of the balance sheet.
LIQUIDITY AND CAPITAL RESOURCES
On December 11, 2002, the Company, along with other investors, completed
the purchase of an office building leased by a single tenant located at 20225
North Scottsdale Road, Scottsdale, Arizona (the "Property") for $25,484,000,
which reflects the purchase price of $24,988,000 and closing costs incurred of
$496,000. The Company intends to continue this use of the building. The lease is
a bondable, triple-net lease, commencing on December 9, 2002, expiring on
December 31, 2024, excluding unexercised extensions. The annual basic rent for
years one through five is $2,096,000 per year. The Property, after being
purchased by the Company and the other investors, was immediately conveyed to
Scottsdale Thompson Peak, LLC, a newly formed Arizona limited liability company
("STP"). The Company owns 80% of the membership interests in, and is the manager
of STP. The Company contributed $750,000 in cash and its 80% undivided interest
in the Property in return for its 80% membership interest in STP, and other
investors contributed $187,000 in cash and their 20% undivided interest in the
Property in return for the remaining 20% of the membership interests in STP. The
Company's cash contribution of $750,000 came from company cash of $250,000 and
the proceeds of the sale by the Company of 2,000,000 shares of Company common
stock for $500,000 to
15
certain of the other investors. STP funded the purchase of the Property through
a combination of the cash contributions described above and loans obtained by
STP in the aggregate amount of $24,300,000. The $20,000,000 loan is financed
with a 5.9% interest rate, 22 year straight-line amortization note and is
guaranteed by JDMD Investments, LLC, a major shareholder of the Company, as
described in the Guarantee Agreement dated December 11, 2002 and described
below. The $2,500,000 loan is financed with a 6% interest rate, interest only
note, for a period of two years, due December 11, 2004, and is guaranteed 50% by
JDMD Investments, LLC, a major shareholder of the Company, and 50% by Diamond
Ventures, Inc. The $1,800,000 loan is financed with a 10% interest rate note,
interest only, for a period of two years, due December 2, 2004. The Company also
issued a total of 1,200,000 shares of its common stock to JDMD Investments, LLC,
a major shareholder of the Company, for its agreement to guarantee payment of
certain exceptions or carve outs on the first mortgage, the guarantee of 50% of
a $2,500,000 bank loan, the assignment of all its interests in finding and
negotiating the purchase of the Property, and obtaining the mortgage loan and
other financing involved.
On June 5, 2002, the Company, through it's wholly owned subsidiary,
Stratford American Energy Corporation, purchased 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. The total
acquisition costs of $68,000 are being amortized equally over a seven-year
period. For the three months ended March 31, 2003, the Company recorded $2,000
in amortization, leaving net acquisition costs of $59,000 on the books of the
Company at March 31, 2003. Additional intangible development costs of $7,000
were incurred in 2002 for a treatment to enhance production in one of the
producing properties. As of March 31, 2003, total amortization expense of $1,000
has been recorded, leaving net intangible development costs of $6,000 on the
books of the Company at March 31, 2003. In addition to the working interests in
the properties acquired, the Company 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 March 31, 2003. This well is now
completed and is a producing property. 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 $25,000 was recorded for the three month
period ended March 31, 2003, on the oil and gas interests, leaving a net asset
of $589,000 on the books of the Company at March 31, 2003. The Company
recognized gross revenue from the properties of $79,000 for the three month
period ending March 31, 2003.
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.
16
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. 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, in accordance with the terms of the operating agreement. On
April 10, 2002, the Company contributed an additional $14,000 equity investment,
in accordance with the terms of the operating agreement. On October 31, 2002,
Triway made a capital call requiring the Company to contribute an additional
$18,000 equity investment, in accordance with the terms of the operating
agreement. The capital call was recorded to accounts payable at December 31,
2002 and paid on January 27, 2003. The Company may still be required to
contribute up to an additional $148,000, at a future date as specified by the
operating agreement. Any subsequent capital call 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 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. All permits have been issued, but efforts are
currently being made to sell the property, either in parcels or in its entirety.
The Company's cash and cash equivalents were generated by the sale of its
car rental business in 1998, the related sale of real estate property in
December 1999, the sale of Company shares in March 1999, the sale of Company
shares in December 2002, the monthly building rentals received, and the revenues
received from the oil and gas properties. The Company expects that the current
cash and cash equivalents will be sufficient to meet its forecasted operating
cash needs for the remainder of 2003. 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
17
that are made will be profitable for the Company. Additionally there can be no
assurance that the Company's operations will be profitable.
RESULTS OF OPERATIONS - THREE MONTH PERIOD ENDED MARCH 31, 2003,
COMPARED WITH THREE MONTH PERIOD ENDED MARCH 31, 2002
The Company reported a net loss of $59,000 during the three month period
ended March 31, 2003 compared to a net loss of $132,000 for the three month
period ended March 31, 2002. Oil and gas revenue increased from $70,000 for the
three month period ended March 31, 2002 to $204,000 for the three month period
ended March 31, 2003 due primarily to the June 5, 2002 purchase by the Company,
through its wholly owned subsidiary Stratford American Energy Corporation, of
working interests in 23 oil and gas properties, effective April 1, 2002, along
with rising prices received for oil and gas sold in the first quarter of 2003.
Separately, SA Oil properties generated $118,000 in gross revenue for the three
month period ended March 31, 2003. The working interests in the 23 oil and gas
properties, acquired effective April 1, 2002, generated $79,000 in gross revenue
for the three month period ended March 31, 2003. Properties owned prior to the
acquisition of SA Oil and the June 5, 2002 purchase generated $7,000 in gross
revenue for the three month period ended March 31, 2003. The increase in rental
income of $524,000 reported for the three month period ended March 31, 2003 over
that reported for the same period ended March 31, 2002, was due to the December
11, 2002 purchase by the Company and other investors, of an office building
located in Scottsdale, Arizona. Interest and other income decreased from $6,000
for the three month period ended March 31, 2002 to $1,000 for the three month
period ended March 31, 2003. The decrease of $5,000 in interest income can be
attributed to reduced interest earned on lower cash balances during the quarter
ended March 31, 2003 compared to March 31, 2002.
General and administrative expenses increased from $102,000 for the three
month period ended March 31, 2002 to $133,000 for the three month period ended
March 31, 2003. The increase for the three month period ended March 31, 2003 is
due to increased office rent expense in the amount of $5,000, increased
professional fees of $12,000, increased insurance premiums of $10,000 and an
increase of $4,000 in associated overhead. The increase in office rent was due
primarily to reduced rental reimbursements received from a sublease of the
Company's offices in 2003 and to increased common area charges and taxes billed
to the Company by the landlord for the Company's office space. Rental
reimbursements received for the three month period ended March 31, 2002 were
$8,000 compared to rental reimbursements of $5,000 received for the three month
period ended March 31, 2003. $2,000 of increased common area charges and
related taxes were billed to the Company during the three months ended March 31,
18
2003. The increase in professional fees can be attributed to an increase in the
accrual for accounting fees and for legal fees incurred for services relating to
the filing of required reports during February 2003.
Depreciation, depletion and amortization expense increased from $44,000 for
the three month period ended March 31, 2002 to $207,000 for the three month
period ended March 31, 2003 due to additional depletion of $28,000 related to
the June 5, 2002, purchase of working interests in 23 oil and gas properties,
additional depletion of $2,000 related to the SA Oil properties and to
additional depreciation of $133,000 related to the December 11, 2002, purchase
of the office building. The Property after being purchased was immediately
conveyed to STP. The Company owns 80% of the membership interests in and is the
manager of STP.
Although oil and gas operations expense of $48,000 remained the same for
the three month periods ended March 31, 2003 and 2002, additional expense of
$4,000 recorded for the three month period ended March 31, 2003 was related to
the June 5, 2002 purchase of 23 oil and gas properties, effective April 1, 2002.
This increase was offset by reduced operating expense of $4,000 recorded for the
SA Oil properties. Operating expenses for the SA Oil properties were $43,000 for
the three month period ended March 31, 2003. Operating expenses for the working
interests in 23 oil and gas properties purchased on June 5, 2002 were $4,000 for
the three month period ended March 31, 2003. Operating expenses for previously
owned properties were $1,000 for the three month period ended March 31, 2003.
Interest expense increased from $14,000 for the three month period ended
March 31, 2002 to $403,000 for the three month period ended March 31, 2003, due
to interest expense of $382,000 incurred on the debt relating to the December
11, 2002 purchase of the office building in Scottsdale, Arizona and to
amortization of $7,000 on loan fees also relating to the December 11, 2002
purchase of the office building. The Property after being purchased was
immediately conveyed to STP. The Company owns 80% of the membership interests
in, and is the manager of STP. Total interest expense recorded for the three
month period ended March 31, 2003 for the debt and the loan fees related to the
December 11, 2002 purchase of the office building was $389,000. Interest expense
for previous obligations was $14,000 for both the three month periods ended
March 31, 2003 and 2002.
During the three month period ended March 31, 2003, the Company accrued
expense reimbursements of $17,000, to be received from two companies that are
partially owned by four of the Company's executives or directors. These receipts
are reimbursements for administrative 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 month period ended
March 31, 2003. At March 31, 2003, $16,000 of the expense reimbursements is
recorded in related party receivables.
19
During the three month period ended March 31, 2003, the Company accrued
rental reimbursements of $3,000 to be received from a Company that is partially
owned by four of the Company's executives or directors 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, included in general and
administrative expense. As of March 31, 2003, all of the rental reimbursements
had been received.
At March 31, 2003, a note payable of $200,000, due no later than June 20,
2003, bearing an interest rate of 10%, with interest and principal and interest
due at maturity, was owed to a majority shareholder of the Company. At March 31,
2003, $6,000 of accrued interest on this related party note payable is included
in accrued liabilities. On April 1, 2003, the note and all accrued interest was
paid in full. (See Note 2 of the Company's Consolidated Financial Statements.)
At March 31, 2003, a note payable of $1,800,000, due December 2, 2004,
bearing an interest rate of 10%, with interest due monthly, was owed to a
majority shareholder of the Company.
At March 31, 2003, 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 March 31, 2003, $4,000 of accrued
interest on the note payable is included in accrued liabilities.
REAL ESTATE ACTIVITIES
The Company's real estate assets are held by limited liability companies.
On October 6, 2000, the Company through its membership in Triway Land Investors,
LLC purchased approximately 10 acres of land in Scottsdale, Arizona for
$3,600,000. Original plans called for the development of office buildings for
lease or sale. Due to market conditions and vacancy rates in the area, members
of Triway have agreed to market the property without substantial improvements.
Efforts are currently being made to sell the property, either in parcels or in
its entirety.
On December 11, 2002, the Company through its membership in Scottsdale
Thompson Peak, LLC purchased a 157,566 square foot office building that is 100%
percent leased by a single tenant for a term of 22 years. Under terms of the
office building lease Scottsdale Thompson Peak, LLC is to receive annual rents
of $2,096,000, paid in equal monthly installments during the first five years of
the lease. In years six, eleven and sixteen of the lease annual rents are
escalated by 10% of annual rents paid in the preceding year. All repairs and
maintenance, insurance, real estate taxes and utilities are the responsibility
of the tenant. The Company owns an 80% interest in Scottsdale Thompson Peak, LLC
and is the manager of, the LLC. For the three months ended March 31, 2003 the
Company recognized gross rental revenues of $524,000. Depreciation expense for
that same period was $133,000. Total interest
20
expense of $389,000 was recorded, of which $382,000 was interest expense related
to the debt and $7,000 was amortization of loan fees paid at closing.
Had the purchase been completed as of January 1, 2002, the Company would have
reported the following:
For the three months ended March 31,
(Unaudited)
2003 2002
------------ ------------
Total revenue $ 729,000 $ 600,000
Net loss $ (59,000) $ (124,000)
Net loss per share $ (.01) $ (.01)
Pro Forma weighted
average shares outstanding 10,078,105 10,078,105
The Company has never recognized any income or expense on its investment in
Triway and will not do so unless part or all of the property is sold or market
conditions warrant an impairment charge.
OIL AND GAS ACTIVITIES
Gross revenues from oil and gas operations increased from $70,000 for the
three months ended March 31, 2002 to $204,000 for the three months ended March
31, 2003, and accounted for 28% of the total revenue reported by the Company.
The increase was due largely to the April 1, 2002 purchase of 23 oil and gas
properties, along with rising prices received for oil and gas sold in the first
quarter of 2003. For the three months ended March 31, 2003, depletion,
depreciation and amortization expense of $70,000 was recorded, compared to
$41,000 for the three months ended March 31, 2002. Operating profits from the
oil and gas activities were $74,000 for the three months ended March 31, 2003
compared to a net loss of $30,000 for the three months ended March 31, 2002.
CAPITAL REQUIREMENTS
On July 25, 2002, the Company used $250,000 of its cash to make a deposit
towards the purchase of the Property. On September 27, 2002 the Company borrowed
$400,000 from a shareholder to make an additional deposit on the Property. On
October 14, 2002, the Company borrowed another $250,000 from the same
shareholder to make an additional deposit on the property. Total funds deposited
were $900,000. The Property, after being purchased by the Company and other
investors was immediately conveyed to Scottsdale Thompson Peak, LLC. At the
close of escrow on December 11, 2002, $700,000 of the deposit funds was returned
to the Company, with $200,000 being held by the lender pending final inspection
of the construction work on March 31, 2003. On December 12, 2002, the Company
issued 2,000,000 shares of its common stock in exchange for $500,000 in cash.
With the $1,200,000 the Company received in December
21
2002, $750,000 was used to make an equity contribution to Scottsdale Thompson
Peak, LLC, and $450,000 was used to repay a portion of the above described
shareholder loan.
On March 31, 2003, the lender made the final inspection of the
construction, and on April 1, 2003, the remaining $200,000 holdback of deposit
funds was returned to the Company. On April 1, 2003, the Company used the
$200,000 to repay the shareholder in full for all funds advanced.
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 risk that Triway may not
be able to sell the land as presently priced 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 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 investment by the Company in Scottsdale Thompson Peak, 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.
22
ITEM 3. CONTROLS AND PROCEDURES
As required by Rule 13a-14 under the Securities Exchange Act of 1934, as
amended (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 inapplicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See index beginning on page 28
(b) REPORTS ON FORM 8-K
On February 24, 2003, the Company filed a Form 8-KA dated December 11,
2002, relating to the Purchase and Sale Agreement between the Company
and Opus West Corporation pursuant to which real property was
purchased by the Company and other investors and immediately conveyed
to Scottsdale Thompson Peak, LLC, an 80% subsidiary of the Company.
23
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
STRATFORD AMERICAN CORPORATION
Registrant
Date: May 15, 2003 By /s/ Mel L. Shultz
-------------------------------------
Mel L. Shultz, President and Director
Date: May 15, 2003 By /s/ David H. Eaton
-------------------------------------
David H. Eaton, Chief Executive
Officer and Chairman of the Board
Date: May 15, 2003 By /s/ Daniel E Matthews
-------------------------------------
Daniel E. Matthews, Controller,
Secretary and Treasurer
24
CERTIFICATIONS
I, Mel L. Shultz, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Stratford American
Corporation and its 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: May 15, 2003
/s/ Mel L. Shultz
----------------------------------------
Mel L. Shultz
President and Director
25
CERTIFICATIONS
I, David H. Eaton, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Stratford American
Corporation and its 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: May 15, 2003
/s/ David H. Eaton
----------------------------------------
David H. Eaton
Chief Executive Officer and Chairman of
The Board
26
CERTIFICATIONS
I, Daniel E. Matthews, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Stratford American
Corporation and its 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: May 15, 2003
/s/ Daniel E. Matthews
----------------------------------------
Daniel E. Matthews
Controller, Secretary and Treasurer
27
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, 2.2, 2.3, 3.3, 10.1, 10.2 and 10.3) 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 and
Exchange Commission on June 18, 2002. Exhibit 2.3 was filed as Exhibit 2.1 with
the Company's Form 8-K filed with the Securities and Exchange Commission on
December 26, 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. Exhibit 10.2
was filed with the Company's Form 10-QSB filed with the Securities and Exchange
Commission on November 14, 2002. Exhibit 10.3 was filed as Exhibit 10.19 to the
Company's Form 10-KSB for the year ended December 31, 2002, which was filed with
the Securities and Exchange Commission on March 31, 2003.
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
2.3 Purchase and sale Agreement, dated July 17, 2002, by and between
Opus West Corporation, a Minnesota corporation, and Stratford
American Corporation
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
28
10.2 Letter Agreement between Stratford American Corporation,
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 N/A
10.3 Operating Agreement of Scottsdale Thompson Peak, LLC N/A
99 Officer Certification pursuant to Section 906 of the 30
Sarbanes-Oxley Act of 2002
29