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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT No. 3)
Filed by the Registrant /X/ Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2)
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-12
SEVEN J STOCK FARM, INC.
(name of Registrant Specified in its Charter)
------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box)
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
Common Stock, $1 par value
2) Aggregate number of securities to which transaction applies: 58,000
3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee
is calculated and state how it was determined) $3.89*
4) Proposed maximum aggregate value of transaction: $225,620
5) Total fee paid: $18.25
* The price per unit is the product of the pre-reverse split price of $3.89
per share of old common stock to be paid for fractional shares.
/X/ Fee paid previously with preliminary materials
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
Amount Previously Paid: ______________
Form or Registration Number: _________
Filing Party: ________________________
Date Filed: __________________________
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SEVEN J STOCK FARM, INC.
16945 Northchase Drive, Suite 1800
Houston, Texas 77060
281-874-2101
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD September 24, 2003
As a shareholder of Seven J Stock Farm, Inc. (the "Company"), you are hereby
given notice of and invited to attend in person or by proxy a Special Meeting of
the Shareholders of the Company to be held at the Company's corporate offices at
16945 Northchase Drive, Suite 1800, Houston, Texas 77060 on September 24, 2003
at 10:00 a.m. for the following purposes:
1. To consider and act upon a proposed Reverse Stock Split of the
Company's existing common stock that would result in:
a. The shareholders receiving one share of new common stock
for every one thousand shares of our old common stock that they
currently own, and
b. An amendment to the Company's Articles of Incorporation
to reduce the Company's authorized existing common stock from
1,500,000 to 1,500 authorized shares, which is in proportion to the
Reverse Stock Split. The Reverse Stock Split and related cash
purchase by the Company of fractional shares for $3.89 per share of
old Common Stock resulting from the Reverse Stock Split is proposed
to take the Company private and take it out of the reporting system
of the Securities Exchange Act of 1934, as amended.
2. To transact such other business as may properly come before the
meeting and any adjournments thereof.
The Board of Directors has fixed the close of business on July 31, 2003 as the
record date (the "Record Date") for the determination of shareholders entitled
to notice of and to vote at such meeting and any adjournment thereof. Only
shareholders at the close of business on the Record Date are entitled to notice
of the meeting and a vote at such meeting. The transfer books will not be
closed.
You are cordially invited to attend the meeting. WHETHER OR NOT YOU EXPECT TO
ATTEND THE MEETING, MANAGEMENT DESIRES TO HAVE THE MAXIMUM REPRSENTATION AT THE
MEETING AND RESPECTFULLY REQUESTS THAT YOU DATE, EXECUTE AND MAIL PROMPTLY THE
ENCLOSED PROXY IN THE ENCLOSED STAMPED ENVELOPE FOR WHICH NO ADDITIONAL POSTAGE
IS REQUIRED IF MAILED IN THE UNITED STATES. A proxy may be revoked by a
shareholder by notifying the Secretary of the Company in writing at any time
prior to its use, by executing and delivering a subsequent proxy or by
personally appearing at the Special Meeting and casting your vote, each as
specified in the enclosed proxy statement.
BY ORDER OF THE BOARD OF DIRECTORS
/s/John R. Parten
-----------------
John R. Parten, Chairman
August 25, 2003
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SUMMARY TERM SHEET
WHY IS THE COMPANY PROPOSING A REVERSE STOCK SPLIT?
The one for one thousand Reverse Stock Split and purchase of fractional shares
has been unanimously approved by our Board of Directors and is proposed to take
us private by reducing the number of shareholders of record to fewer than 300,
thereby: (i) relieving us of the costs of filing public documents, (ii)
relieving the Company from the ongoing and increasing risks and obligations of
regulation under the Securities Exchange Act of 1934, as amended, and (iii)
allowing us to continue our long-term business plans.
Please refer to the discussion set forth herein under the caption "PURPOSE AND
REASONS FOR THE REVERSE STOCK SPLIT."
WHAT WILL I RECEIVE IF THE REVERSE STOCK SPLIT IS APPROVED?
If the Reverse Stock Split is approved by the shareholders and implemented:
- -Each share of existing Common Stock, par value $1.00 (the "Old Common Stock")
will be exchanged for 1/1,000 of a share of new common stock, par value $1,000
(the "New Common Stock").
- -No new certificates representing fractional shares will be issued. Instead,
fractional shares will be purchased from holders at a rate of $3.89 per whole
share of Old Common Stock. This transaction will not involve commissions or
transaction fees that would be charged if you sold shares on the open market. We
estimate that up to an aggregate of approximately $225,620 will be paid to
approximately 730 of our shareholders for their resulting fractional shares.
A detailed discussion is set forth herein under the captions "EXCHANGE OF
CERTIFICATES AND PAYMENT OF FRACTIONAL SHARES," "CERTAIN EFFECTS OF REVERSE
STOCK SPLIT PROPOSAL ON THE COMPANY'S SHAREHOLDERS," and "FEDERAL INCOME TAX
CONSEQUENCES."
HOW WILL THE ARTICLES OF INCORPORATION BE AMENDED?
Our Articles of Incorporation will be amended to reduce the number of authorized
shares of our Old Common Stock in the same one for one thousand ratio, from
1,500,000 shares to 1,500 authorized shares, which is in proportion to the
Reverse Stock Split.
See the information set forth herein under the caption "PROPOSAL-REVERSE STOCK
SPLIT AND RELATED AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION."
WHAT DOES GOING PRIVATE MEAN?
If the Reverse Stock Split is approved, after the transaction is completed, we
estimate that we will have approximately 33 shareholders, which is fewer than
300 shareholders of record remaining. Therefore, we will terminate the
registration of our Old Common Stock under the Securities Exchange Act of 1934,
as amended, as soon as possible after the approval by the shareholders by filing
a Form 15 with the Securities and Exchange Commission. As a result, after the
registration is terminated, our Old Common Stock will no longer be traded
over-the-counter in the Pink Sheets, and there will be no public market for the
New Common Stock.
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Additionally, once our registration is terminated, we will not have to provide
our shareholders with information that we currently provide, such as annual,
quarterly and other reports required to be filed by us with the Securities and
Exchange Commission (the "SEC").
Please refer to the discussion herein under the caption "CERTAIN EFFECTS OF
REVERSE STOCK SPLIT PROPOSAL ON THE COMPANY'S SHAREHOLDERS."
DO I HAVE APPRAISAL OR DISSENTER'S RIGHTS?
Under Texas law, the law governing the Reverse Stock Split, you do not have the
right to demand the appraised value of your shares (dissenter's rights) if you
vote against the proposed transaction.
More detailed information is set forth herein under the caption "APPRAISAL
RIGHTS AND DISSENTER'S RIGHTS."
TABLE OF CONTENTS
<Table>
VOTING PROCEDURES................................................................6
SPECIAL FACTORS..................................................................6
INFORMATION ABOUT AFFLIATES......................................................9
JOHN R. PARTEN...................................................................9
BETTY ANNE FRANKE TRUST.........................................................10
WILLIAM C. BENNETT..............................................................10
BRUCE FRANKE....................................................................10
JOHN R. PARTEN..................................................................11
BETTY ANNE FRANKE TRUST.........................................................11
WILLIAM C. BENNETT..............................................................11
BRUCE FRANKE....................................................................12
BACKGROUND......................................................................13
PRICE RANGE OF COMMON STOCK.....................................................14
REPORTS RELATING TO THE REVERSE STOCK SPLIT.....................................14
REPORT OF HOWARD, FRAZIER, BARKER & ELLIOTT, INC................................15
VALUATION ANALYSIS............................................................17
ANALYSIS OF COMPARABLE PUBLICLY-TRADED COMPANIES..............................17
SELECTED MERGER & ACQUISITION TRANSACTIONS....................................17
DISCOUNTED CASH FLOW ANALYSIS.................................................18
NET ASSET VALUE...............................................................18
LIQUIDATION ANALYSIS..........................................................21
HISTORICAL TRADING PRICES.....................................................22
ALTERNATIVES..................................................................22
VALUATION CONCLUSION..........................................................23
SMITH REPORT....................................................................23
HUDDLESTON REPORT...............................................................24
HAWKINS REPORT..................................................................26
BOARD OF DIRECTORS DETERMINATION................................................26
FAIRNESS OF THE REVERSE STOCK SPLIT PROPOSAL....................................29
EXCHANGE OF CERTIFICATES AND PAYMENT OF FRACTIONAL SHARES.......................32
CERTAIN EFFECTS OF REVERSE STOCK SPLIT PROPOSAL ON THE COMPANY'S SHAREHOLDERS...33
FEDERAL INCOME TAX CONSEQUENCES.................................................34
APPRAISAL RIGHTS AND DISSENTER'S RIGHTS.........................................35
OWNERSHIP OF VOTING SECURITIES OF THE COMPANY...................................35
PERSONS MAKING THE SOLICITATION.................................................36
ACCOUNTANTS.....................................................................36
REVOCABILITY OF PROXY...........................................................36
OTHER MATTERS...................................................................37
ANNUAL MEETING OF THE SHAREHOLDERS..............................................37
FINANCIAL INFORMATION AND INCORPORATION BY REFERENCE............................37
</Table>
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<Table>
AVAILABLE INFORMATION...........................................................37
EXHIBIT I - ARTICLES OF AMENDMENT...............................................38
EXHIBIT II - FORM 10-KSB/A NO.1.................................................40
EXHIBIT III - FORM 10-QSB.......................................................91
EXHIBIT IV - INDEPENDENT AUDITORS' REPORT......................................106
</Table>
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS TO BE
HELD ON SEPTEMBER 24, 2003
Proxies in the form enclosed with this Proxy Statement are being solicited by
the Board of Directors of Seven J Stock Farm, Inc., a Texas corporation ("Seven
J" or the "Company"), for use at the Special Meeting of Shareholders (the
"Meeting") to be held September 24, 2003 at 10:00 a.m. at the offices of the
Company at 16945 Northchase Drive, Suite 1800, Houston, Texas 77060-2151. This
Proxy Statement is dated August 25, 2003. This Proxy Statement and the form of
proxy will be first mailed to shareholders on or about August 25, 2003.
At the Meeting, the shareholders will consider and vote upon a proposal to amend
the Company's Articles of Incorporation to effect a one for one thousand reverse
stock split of the Company's Old Common Stock, par value $1.00 and the issuance
of cash in lieu of fractional shares to holders who, as a result of that split,
will hold less that one share of the Company's New Common Stock (the "Reverse
Stock Split").
The Company's Board of Directors knows of no other matters that are expected to
come before the Meeting.
Only holders of record as of the close of business on July 31, 2003 (the "Record
Date"), of the Company's Old Common Stock, $1.00 par value per share will be
entitled to notice of, and to vote at, the Meeting. As of the date of this Proxy
Statement, 1,451,000 shares of Old Common Stock were issued and outstanding. Old
Common Stock is the only class of stock of the Corporation issued and
outstanding. Holders of Old Common Stock are entitled to one vote per share held
by them, and holders of Old Common Stock generally vote together as a class on
all matters.
The Board of Directors of the Company, as a group, has the right to vote 74.28%
of the Old Common Stock of the Company and has indicated that it will vote the
shares of Old Common Stock for which it has voting authority in favor of the
proposal set forth in this Proxy Statement. Therefore, we anticipate that the
proposal will be approved.
Shareholders may vote in person or by proxy. Granting a proxy does not affect a
shareholder's right to attend the Meeting and vote in person. Any shareholder of
the Company has the unconditional right to revoke a proxy at any time prior to
the voting thereof by (i) notifying the Secretary of the Company with a written
notice thereof addressed to the Company at 16945 Northchase Drive, Suite 1800,
Houston, Texas 77060; (ii) executing and delivering a subsequent proxy; or (iii)
personally appearing at the Meeting and casting a contrary vote. No revocation
shall be effective unless and until notice of such revocation has been received
by the Company at or prior to the Meeting.
The persons named as attorneys in the proxy are John R. Parten and Virginia
Cortinas.
Employees of Seven J will respond to inquiries from the public with respect to
this proxy solicitation.
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An annual report to the shareholders on Form 10-KSB for the fiscal year ended
October 31, 2002 and the Quarterly Reports on Form 10-QSB for the quarters ended
January 31 and April 30, 2003 have been furnished to all shareholders entitled
to vote concurrently with these proxy materials. Certain matters which are
identified below, set forth in the Forms 10-KSB and 10-QSB referenced above have
been incorporated by reference into this Proxy Statement.
VOTING PROCEDURES
John R. Parten and Virginia Cortinas will vote all shares represented by
properly executed proxies returned in time to be counted at the Meeting. The
presence, in person or by proxy, of at least a majority of the issued and
outstanding shares of Old Common Stock entitled to vote at the Meeting is
necessary to establish a quorum for the transaction of business. As John R.
Parten, the President of Seven J, has beneficial ownership of 74.25% of the
Company's Old Common Stock, the presence of Mr. Parten at the Meeting or by
proxy will constitute a quorum at the Meeting.
All properly executed proxies delivered pursuant to this solicitation and not
revoked will be voted at the Meeting as specified by such proxies. Where a vote
has been specified in a proxy with respect to the matters identified in the
Notice of the Special Meeting, the shares represented by proxy will be voted in
accordance with those voting specifications. Shares represented by the proxy
will be voted in accordance with those voting specifications. Shares represented
by proxy will be voted in favor of each proposal identified in the Notice of the
Special Meeting if no voting instructions are indicated. If any other matter
should be presented at the Meeting upon which a vote may properly be taken, John
R. Parten and Virginia Cortinas, in their capacity as proxies, will vote shares
represented by all proxies received by the Board of Directors in accordance with
their judgment.
Any shareholder of the Company has the unconditional right to revoke a proxy at
any time prior to the voting thereof by (i) notifying the Secretary of the
Company with a written notice thereof addressed to the Company at 16945
Northchase Drive, Suite 1800, Houston, Texas 77060; (ii) executing and
delivering a subsequent proxy; or (iii) personally appearing at the Meeting and
casting a contrary vote. No revocation shall be effective unless and until
notice of such revocation has been received by the Company at or prior to the
Meeting.
Votes at the Meeting will be tabulated by one or more independent inspectors of
elections appointed by the Company's Board of Directors.
The affirmative vote of two-thirds (2/3) of shares present (in person or by
proxy) and voting on that matter is required for approval of the Reverse Stock
Split. Shares voted to abstain and broker-non votes, since they are not
affirmative votes for a matter, will have the same effect as votes against that
matter.
Because the members of the Company's Board of Directors have indicated that they
intend to vote in favor of the proposal, and since the Board of Directors as a
group controls 74.28% of the outstanding shares of Old Common Stock, the
proposal is expected to be approved, regardless of the vote of Seven J's other
shareholders.
SPECIAL FACTORS
PURPOSE AND REASONS FOR THE REVERSE STOCK SPLIT
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The Company and John R. Parten, Robert F. Pratka, W.C. Bennett and Bruce Franke
(collectively, the "Filing Persons") have determined that the purpose for the
Reverse Stock Split is to maximize shareholder value by relieving the Company of
the costs and obligations of remaining a public company reporting pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
providing a source of liquidity for shareholders of small amounts of stock. The
Filing Persons believe that because of the Company's continuing losses and
illiquid assets, the Old Common Stock has and will continue to remain at a low
value and to remain very thinly traded. The Company has sustained losses over
the last several years, and the Filing Persons hope that the reduction in
expenses by going private may permit the Company to reach a break even point
once again. The Company has two primary business segments, ranching and oil and
gas royalty interests (including pipeline income). While the ranching operations
are a significant asset in the balance sheet, it has been very difficult to
maintain positive revenues from those operations and, in fact, most cash
revenues supporting the Company have been derived from its royalty income and
associated pipeline activities. The oil and gas production from the Company's
property is mature and actual production has been decreasing, and is expected to
continue to decline. For the foreseeable future, the Filing Persons believe that
these business segments and their related income streams will not increase, and
in fact, may decrease, making cost cutting an imperative action for the
Company's continuing viability. There can be no assurance, however, that the
expense of going private can be offset by the reduction in costs, or that the
reduction in costs will be sufficient to restore the Company to a break-even
point, in light of its declining revenues.
In its analysis of costs and benefits, the Company prepared the following table
summarizing the Company's experience over the last five years of the costs and
benefits derived as a public company.
<Table>
<Caption>
5 Year
Total** Average Annual
------------ --------------
Net Loss $ (715,000) $ (143,000)
Dividends Paid $ 58,000 $ 11,600
Salaries of Officers* $ 100,800 $ 20,160
Legal and Accounting Costs of
Public Company Reporting $ 339,576 $ 67,915
</Table>
*also shareholders.
**fiscal years 1998, 1999, 2000, 2001, 2002
During the immediately preceding 5-year period, the Filing Persons believe that
the legal and accounting costs of remaining a public company have exceeded the
total benefits received by the shareholders for the same time. Approximately 80%
of the legal and accounting costs of the period are due directly to the
Company's status as a public company. The Filing Persons believe that
eliminating the expenses associated with maintaining public company status will
increase the Company's ability to reduce the losses it is currently suffering,
while giving a fair price to those shareholders being cashed out. Additionally,
the Filing Persons believe that the costs of maintaining public company status
will increase significantly following the implementation of the Sarbanes-Oxley
Act reforms. The Filing Persons expect no change in the situation regarding the
value and trading history of the Old Common Stock for the foreseeable future and
have determined that this is an appropriate time to engage in the going private
transaction.
More specifically, the Filing Persons believe that there are considerable and
inappropriate costs to the Company and its affiliated and nonaffiliated
shareholders in remaining a public reporting company. As part of its
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registration under the Exchange Act, the Company incurs significant direct and
indirect costs associated with compliance with the filing and reporting
requirements imposed on public companies. Examples of direct cost savings from
termination of registration of the Old Common Stock include lower legal and
accounting fees; printing and mailing costs; less complicated disclosure due to
the Company's private status; reduction in direct expenses such as EDGARizing
and related charges associated with Securities and Exchange Commission ("SEC")
filings; and elimination of the charges of brokers and transfer agents in
forwarding materials to beneficial owners. The Filing Persons believe the
Company can eliminate eighty percent (80%) of its accounting and legal expenses
by terminating its public company status. Additional compliance procedures
mandated by the Sarbanes-Oxley Act are likely to further increase the costs of
reporting under the Exchange Act and increase the Company's audit fees. For
those shareholders remaining, however, there can be no assurance that the cost
of the going private transaction can be recouped from the cost savings and that
these cost savings will ultimately permit the Company to restore its operations
to break-even.
Based on its experience in prior years, the Company's direct costs, which
include a portion of the fees and expenses of independent auditors, printing,
and mailing are estimated at approximately $76,000 annually. This amount is just
an estimate, and the actual savings to be realized may be higher or lower than
such estimate. The Company cannot guarantee that the benefits of going private
will be accomplished as rapidly as currently expected, or at all.
The Reverse Stock Split would not only reduce the direct and indirect costs of
maintaining public company status, but would also provide a cash payment to
holders in lieu of fractional shares. Unaffiliated and affiliated shareholders
will benefit from the Reverse Stock Split in that they will receive a cash
payment for all or a portion of their existing holdings. Unaffiliated and
affiliated holders of fewer than 1,000 shares would receive a cash payment for
their entire interest in the Company, which the Company believes provides a
substantial benefit since there is currently not a vibrant trading market for
the Company's Old Common Stock. Both affiliated and unaffiliated shareholders of
1,000 or more shares of the Company's Old Common Stock would receive New Common
Stock for the whole number of shares they will own and a cash payment in lieu of
the fractional shares they would otherwise be entitled to receive as a result of
the Reverse Stock Split. The holders of New Common Stock will continue their
interests in the Company's businesses.
The receipt of New Common Stock solely in exchange for Old Common Stock will not
result in recognition of gain or loss to the remaining shareholders. The
adjusted tax basis of the shareholder's New Common Stock will be the same as the
shareholder's adjusted tax basis in the Old Common Stock. The holding period of
New Common Stock received solely in exchange for New Common Stock will include
the shareholder's holding period in the Old Common Stock. No gain or loss will
be recognized by the Company upon the Reverse Stock Split.
Shareholders who receive cash in lieu of fractional shares of New Common Stock
will be treated as receiving cash as payment in exchange for their fractional
shares of New Common Stock, and they will be entitled to recognize a gain or
loss on sale, and based on the difference between the amount of cash received
and the adjusted basis of the fractional shares surrendered for cash. The gain
or loss may qualify as a capital gain or loss, depending on the holding period
and the nature of the holding.
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INFORMATION ABOUT AFFLIATES
With respect to affiliates, there are six affiliated persons participating as
shareholders. Three of those persons (who collectively own a total of 357
shares) will be cashed out completely and no longer be shareholders of the
Company. As a result, they will experience a taxable gain on the completion of
the Reverse Stock Split. Of the three remaining affiliates, two will own less
than 7% of the New Common Stock, and will also receive cash for a total of 1,071
shares. The sixth shareholder, John R. Parten, currently owns 1,077,425 shares
of Old Common Stock and will own 1077 shares of New Common Stock and receive
cash for 425 shares of Old Common Stock. The three affiliates who continue as
holders of New Common Stock will experience gain with respect to the shares
cashed out, and will maintain their current tax basis in the shares they will
receive in the Reverse Stock Split. Of the Filing Persons, Mr. Parten, Mr.
Franke, Mr. Bennett and Mr. Pratka will personally participate as shareholders
in the Reverse Stock Split, and Mr. Franke, Mr. Bennett and Mr. Pratka will have
all interests they personally own cashed out as fractional shares. Farmers Oil
Company is owned and controlled by Mr. Parten, and owns shares in the Company.
Mr. Franke is a beneficiary of the Betty Anne Franke Trust, although he
disclaims direct ownership or control as the trust is administered by an
independent trustee. Farmers Oil Company and the Betty Anne Franke Trust will
remain as shareholders of New Common Stock and will also receive cash for their
fractional shares.
While the Company believes the Reverse Stock Split will result in the benefits
described, there are certain disadvantages. Affiliated and unaffiliated
shareholders owning fewer than 1,000 shares of Old Common Stock will lose their
ownership interest in the Company and will not participate in the future growth
of the Company. The Company will become a private company, and continuing
shareholders will not have the opportunity for a public market for the Company's
securities to develop unless the Company re-registers under the Exchange Act in
the future, which is not anticipated. Termination of the Company's reporting
obligations under the Exchange Act will substantially reduce the information
that the Company is required to furnish to its affiliated and unaffiliated
shareholders or make publicly available. Additionally, various provisions of the
Exchange Act, such as the short-swing profit recovery provisions of Section
16(b) of the Exchange Act, proxy statement disclosure in connection with
shareholders meetings and the related requirement of an annual report to
shareholders will no longer apply to the Company. Executive officers, directors
and other affiliates will no longer be subject to any of the reporting
requirements and restriction of the Exchange Act, including without limitation
the reporting and short-swing profit provisions of Section 16 and reporting
requirements of Section 13(d).
The following sets forth a pro forma analysis of the number of shares and book
value per share of each affiliate participating in the going private
transaction.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
EFFECTS OF THE GOING PRIVATE TRANSACTION ON EACH AFFILIATE'S INTEREST
(IN THOUSANDS EXCEPT FOR SHARE, NET BOOK VALUE, AND NET EARNINGS DATA) AS OF AND
FOR THE YEAR ENDED OCTOBER 31, 2002 (restated as of June 2003)
<Table>
<Caption>
New Common
AFFILIATES: Old Common Stock Adjustment Stock
JOHN R. PARTEN
SHARES OF COMMON STOCK 1,077,425 (425) 1,077
NET BOOK VALUE - DOLLAR $ 666,801{A2} $ 147,243 $ 519,558
NET BOOK VALUE - PERCENTAGE 74.25% 3.06% 77.32%
</Table>
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<Table>
NET EARNINGS - DOLLAR $ 49,750{A3} $ 2,051 $ 51,801
NET EARNINGS (LOSS) - PERCENTAGE 74.25% 3.06% 77.32%
BETTY ANNE FRANKE TRUST
SHARES OF COMMON STOCK 58,614 (614) 58
NET BOOK VALUE - DOLLAR $ 36,275{A2} $ (8,295) $ 27,980{B2}
NET BOOK VALUE - PERCENTAGE 4.04% 0.12% 4.16%
NET EARNINGS - DOLLAR $ 2,707{A3} $ 83 $ 2,790{B3}
NET EARNINGS (LOSS) - PERCENTAGE 4.04% 0.12% 4.16%
FARMERS OIL COMPANY
SHARES OF COMMON STOCK 29,457 (457) 29
NET BOOK VALUE - DOLLAR $ 18,230{A2} $ (4,241) $ 13,990{B2}
NET BOOK VALUE - PERCENTAGE 2.03% 0.05% 2.08%
NET EARNINGS - DOLLAR $ 1,360{A3} $ 35 1,395{B3}
NET EARNINGS (LOSS) - PERCENTAGE 2.03% 0.05% 2.08%
WILLIAM C. BENNETT
SHARES OF COMMON STOCK 142 (142) -
NET BOOK VALUE - DOLLAR $ 88{A2} $ (88) $ -{B2}
NET BOOK VALUE - PERCENTAGE 0.01% -0.01% 0.00%
NET EARNINGS - DOLLAR $ 7{A3} $ (7) $ -{B3}
NET EARNINGS (LOSS) - PERCENTAGE 0.01% -0.01% 0.00%
-
ROBERT F. PRATKA
SHARES OF COMMON STOCK 131 (131) -
NET BOOK VALUE - DOLLAR $ 81{A2} $ (81) $ -{B2}
NET BOOK VALUE - PERCENTAGE 0.01% -0.01% 0.00%
NET EARNINGS - DOLLAR $ 6{A3} $ (6) $ -{B3}
NET EARNINGS (LOSS) - PERCENTAGE 0.01% -0.01% 0.00%
-
BRUCE FRANKE
SHARES OF COMMON STOCK 84 (84) -
NET BOOK VALUE - DOLLAR $ 52{A2} $ (52) $ -{B2}
NET BOOK VALUE - PERCENTAGE 0.01% -0.01% 0.00%
NET EARNINGS - DOLLAR $ 4{A3} $ (4) $ -{B3}
NET EARNINGS (LOSS) - PERCENTAGE 0.01% -0.01% 0.00%
-
<Caption>
New Common
TOTAL AFFILIATED SECURITY HOLDERS Old Common Stock Adjustment Stock
AFFILIATED SECURITY HOLDERS
SHARES OF COMMON STOCK 1,165,853 (1,853) 1,164
NET BOOK VALUE - DOLLAR $ 721,527{A2} $ (160,000) $ 561,528{B2}
NET BOOK VALUE - PERCENTAGE 80.35% 3.21% 83.56%
NET EARNINGS - DOLLAR $ 53,833{A3} $ 2,152 $ 55,986{B3}
NET EARNINGS (LOSS) - PERCENTAGE 80.35% 3.21% 83.56%
</Table>
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<Table>
<Caption>
New Common
UNAFFILIATED SECURITY HOLDERS Old Common Stock Adjustment Stock
UNAFFILIATED SECURITY HOLDERS
SHARES OF COMMON STOCK 285,147 (56,147) 229
NET BOOK VALUE - DOLLAR $ 176,473{A2} $ (66,000) $ 110,472{B2}
NET BOOK VALUE - PERCENTAGE 19.65% -3.21% 16.44%
NET EARNINGS - DOLLAR $ 13,167{A3} $ (2,152) $ 11,014{B3}
NET EARNINGS (LOSS) - PERCENTAGE 19.65% -3.21% 16.44%
</Table>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
EFFECTS OF THE GOING PRIVATE TRANSACTION ON EACH AFFILIATE'S INTEREST
(IN THOUSANDS EXCEPT FOR SHARE, NET BOOK VALUE, AND NET EARNINGS DATA)
AS OF AND FOR THE SIX MONTH'S ENDED APRIL 30, 2003
<Table>
<Caption>
New Common
AFFILIATES: Old Common Stock Adjustment Stock
JOHN R. PARTEN
SHARES OF COMMON STOCK 1,077,425 (425) 1,077
NET BOOK VALUE - DOLLAR $ 517,550{A2} $ (153,396) $ 364,154
NET BOOK VALUE - PERCENTAGE 74.25% 3.06% 77.32%
NET EARNINGS (LOSS) - DOLLAR $ (149,250){A3} $ (6,153) $ 155,403
NET EARNINGS (LOSS) - PERCENTAGE 74.25% 3.06% 77.32%
BETTY ANNE FRANKE TRUST
SHARES OF COMMON STOCK 58,614 (614) 58
NET BOOK VALUE - DOLLAR $ 28,156{A2} $ (8,545) 19,611{B2}
NET BOOK VALUE - PERCENTAGE 4.04% 0.12% 4.16%
NET EARNINGS (LOSS) - DOLLAR $ (8,102){A3} $ (249) $ (8,369){B3}
NET EARNINGS (LOSS) - PERCENTAGE 4.04% 0.12% 4.16%
FARMERS OIL COMPANY
SHARES OF COMMON STOCK 29,457 (457) 29
NET BOOK VALUE - DOLLAR $ 14,150{A2} $ (4,344) $ 9,805{B2}
NET BOOK VALUE - PERCENTAGE 2.03% 0.05% 2.08%
NET EARNINGS (LOSS) - DOLLAR $ (4,081){A3} $ (104) $ (4,184){B3}
NET EARNINGS (LOSS) - PERCENTAGE 2.03% 0.05% 2.08%
WILLIAM C. BENNETT
SHARES OF COMMON STOCK 142 (142) -
NET BOOK VALUE - DOLLAR $ 68{A2} $ (68) $ -{B2}
NET BOOK VALUE - PERCENTAGE 0.01% -0.01% 0.00%
NET EARNINGS (LOSS) - DOLLAR $ (20){A3} $ 20 $ -{B3}
NET EARNINGS (LOSS) - PERCENTAGE 0.01% -0.01% 0.00%
-
ROBERT F. PRATKA
SHARES OF COMMON STOCK 131 (131) -
NET BOOK VALUE - DOLLAR $ 63{A2} $ (63) $ -{B2}
NET BOOK VALUE - PERCENTAGE 0.01% -0.01% 0.00%
NET EARNINGS (LOSS) - DOLLAR $ (18){A3} $ 18 $ -{B3}
</Table>
11
<Page>
<Table>
NET EARNINGS (LOSS) - PERCENTAGE 0.01% -0.01% 0.00%
-
BRUCE FRANKE
SHARES OF COMMON STOCK 84 (84) -
NET BOOK VALUE - DOLLAR $ 40{A2} $ (40) $ -{B2}
NET BOOK VALUE - PERCENTAGE 0.01% -0.01% 0.00%
NET EARNINGS (LOSS) - DOLLAR $ (12) 4{A3} $ 12 $ -{B3}
NET EARNINGS (LOSS) - PERCENTAGE 0.01% -0.01% 0.00%
-
<Caption>
New Common
TOTAL AFFILIATED SECURITY HOLDERS Old Common Stock Adjustment Stock
AFFILIATED SECURITY HOLDERS
SHARES OF COMMON STOCK 1,165,853 (1,853) 1,164
NET BOOK VALUE - DOLLAR $ 560,027{A2} $ (166,457) $ 393,571{B2}
NET BOOK VALUE - PERCENTAGE 80.35% 3.21% 83.56%
NET EARNINGS (LOSS) - DOLLAR $ (161,500){A3} $ (6,457) $ (167,957){B3}
NET EARNINGS (LOSS) - PERCENTAGE 80.35% 3.21% 83.56%
<Caption>
New Common
UNAFFILIATED SECURITY HOLDERS Old Common Stock Adjustment Stock
UNAFFILIATED SECURITY HOLDERS
SHARES OF COMMON STOCK 285,147 (56,147) 229
NET BOOK VALUE - DOLLAR $ 136,973{A2} $ (59,543) $ 77,429{B2}
NET BOOK VALUE - PERCENTAGE 19.65% -3.21% 16.44%
NET EARNINGS (LOSS) - DOLLAR $ (39,500){A3} $ 6,457 $ (33,043){B3}
NET EARNINGS (LOSS) - PERCENTAGE 19.65% -3.21% 16.44%
</Table>
*The pro forma adjustments above represent the adjustments reflecting the
approval of the 1000 for 1 Reverse Stock Split in which each share of $1 par
value Old Common Stock is reclassified into 1/1000 of a share of $1,000 par
value New Common Stock. As part of the Reverse Stock Split, 58,000 fractional
shares are to be cashed-out and payments made to shareholders in lieu of
fractional shares at a per share price of $3.89 totaling $225,620. The pro forma
adjustment of $58,000 represents the purchase of the fractional shares at par
value ($1.00/share) and is charged to common stock. The pro forma adjustment of
$167,620 represents the excess purchase price ($3.89/share) over the par value
($1.00/share) of the fractional shares and is charged to accumulated deficit in
accordance with the retirement method of acquiring treasury stock. The pro forma
weighted average number of shares outstanding and net loss per share information
has been restated to reflect the effects of the Reverse Stock Split.
{A1} Common stock, par value $1 per share: authorized 1,500,000 shares; issued
and outstanding 1,451,000 shares
{B1} Common stock, par value $1,000 per share: authorized 1,500 shares; issued
and outstanding 1,393 shares
{A2} 1,451,000 shares outstanding.
{B2} 1,393 shares outstanding.
{A3} 1,451,000 weighted average shares outstanding.
{B3} 1,393 weighted average shares outstanding.
If the Reverse Stock Split is approved and implemented, the Company believes
12
<Page>
that the number of shareholders of record of the Company's common shares will be
fewer than 300. The Company intends to terminate the registration of the Old
Common Stock under the Exchange Act pursuant to Section 12(g)(4) of the Exchange
Act. The decision by the Company to terminate Exchange Act registration upon
implementation of the Reverse Stock Split does not require shareholder approval
and will not be voted on at the Meeting. The Company's duty to file periodic
reports with the SEC, such as quarterly and annual reports, will end and the
Company's Old Common Stock will no longer be traded over-the-counter in the Pink
Sheets.
In consideration of the aforementioned reasons, the Company's Board of Directors
on October 30, 2002 approved, subject to approval by the Company's shareholders,
a proposal to effect the Reverse Stock Split and the Amendment of the Articles.
The Board of Directors subsequently met on February 17, 2003 and ratified its
original approval of the Reverse Stock Split and Amendment of the Articles.
BACKGROUND
The Company had 1,451,000 shares of Old Common Stock issued on the Record Date.
If the Reverse Stock Split is approved and implemented, each share of Old Common
Stock will automatically be reclassified into 1/1000 of a fully paid and
non-assessable share of New Common Stock without any further action on the part
of the shareholders. Assuming no change in the number of outstanding shares from
the Record Date, if the Reverse Stock Split is approved, the currently
outstanding shares of Old Common Stock will be converted into approximately
1,393 shares of New Common Stock held by 33 shareholders. The Company estimates
that approximately 730 shareholders will hold fractional shares after the
Reverse Stock Split which fractional shares will be purchased at a total cost of
approximately $225,620. The total average number of shares to be cashed out is
79 shares per shareholder and the average number of shares to be cashed out by
shareholders owning fewer than 1,000 shares is 66.
To those shareholders who would be cashed out, the Reverse Stock Split would
terminate their interest in the ongoing business of the Company and provide a
cash payment to holders in lieu of their shares. The Company and the Filing
Persons believe that the cash price per share provides a substantial benefit
since there is currently no established trading market for the Company's Old
Common Stock, so the ability of all of the unaffiliated shareholders to
liquidate their stock is limited. Further, the Company's ongoing business is
comprised of two elements: ranching and operations related to its oil and gas
royalties, including royalty income and pipeline income. The Company does not
currently believe it will experience significant growth or asset appreciation in
either business segment and believes it is offering a fair cash price in
exchange for an illiquid stock with low prospects for added value.
While the Company and the Filing Persons believe the Reverse Stock Split will
result in the benefits described above, there are certain disadvantages.
Affiliated and unaffiliated shareholders owning fewer than 1,000 shares of Old
Common Stock will lose their ownership interest in the Company and will not
participate in the future business of the Company. If Management's conclusions
about the decreasing business opportunities prove incorrect, shareholders who
cashed out would not participate in any unexpected growth. Shareholders who are
cashed out will also not be able to easily monitor any progress or change in the
Company because public information will no longer be available. Continuing
shareholders will not have the opportunity for a public market for the Company's
securities to continue. Termination of the Company's reporting obligations under
the Exchange Act will substantially reduce the information that the Company is
required to furnish to its shareholders or
13
<Page>
make publicly available. The anti-fraud provisions of Section 10b-5 and related
state law provisions, however, will continue to apply after the going private
transaction. Provisions of the Exchange Act, such as the short-swing profit
recovery provisions of Section 16(b) of the Exchange Act, proxy statement
disclosure in connection with shareholders meetings and the related requirement
of an annual report to shareholders will no longer apply to the Company.
Executive officers, directors and other affiliates will no longer be subject to
any of the reporting requirements and restriction of the Exchange Act, including
without limitation the reporting and short-swing profit provisions of Section 16
or Section 13(d).
PRICE RANGE OF COMMON STOCK
The Company's securities are not traded on any public exchange, but are traded
over the counter in the Pink Sheets under the symbol SEVJ. There is no
established trading market for the securities, except for limited or sporadic
quotations. The prices reflect interdealer prices without retail mark-ups,
markdowns or commissions, and may not necessarily represent actual transactions.
The most recent quarterly high and low trading prices for the Company are as
follows:
<Table>
<Caption>
2003 2002 2001
QUARTER High Low High Low High Low
-----------------------------------------------------------------------------------
First $ 4.008 $ 3.509 $ 2.50 $ 2.50 $ 3.00 $ 3.00
Second $ 4.008 $ 3.01 $ 3.50 $ 2.50 $ 3.00 $ 2.00
Third $ 4.008 $ 3.125 $ 3.50 $ 3.50 $ 3.00 $ 2.00
Fourth $ 3.50 $ 3.45 $ 2.50 $ 2.50
</Table>
The Company has not paid any dividends with respect to any of its securities
during the fiscal years ended October 31, 2002 and 2001.
The Reverse Stock Split is estimated to reduce the number of shareholders of
record to 33, based on the number of outstanding shares and shareholders of the
Company on the Record Date.
REPORTS RELATING TO THE REVERSE STOCK SPLIT
The Board of Directors retained Howard Frazier Barker Elliott, Inc. ("HFBE") to
prepare a valuation report and render an opinion with respect to fairness, from
a financial point of view to the Company shareholders of the proposed purchase
price for fractional shares. In requesting HFBE's report and related fairness
opinion, the Board did not give any special instructions to HFBE or impose any
limitations upon the scope of the investigations that HFBE deemed necessary to
enable it to deliver its opinion. The report of HFBE is summarized below.
At the request of HFBE to complete its analysis, the Management of the Company,
on behalf of the Board, also retained certain parties to conduct an appraisal of
the assets of the Company. The Board retained James Connor Smith, MAI, ARA
("Smith") to appraise the Company's real estate, Huddleston & Co., Inc.
("Huddleston") to appraise the estimated future reserves and revenues of certain
oil and gas interests held by the Company, and Hawkins James & Still Equipment
Co. ("Hawkins") to appraise the fair market value of the Company's equipment.
The Company selected each of these appraisers based on their experience
evaluating the specific assets they were engaged to appraise. The Company
selected Smith based on his qualifications as a Texas state certified general
real estate appraiser, an Appraisal Institute Member, Accredited Rural Appraiser
and Texas Real Estate Broker and his experience valuing real estate
14
<Page>
in this particular region in Texas for thirty-seven years. The Board selected
Huddleston because its longstanding reputation in the industry for oil reserve
valuations and its thirty-four years of experience. The Company selected Hawkins
to value the Company's equipment because the Company believes that Hawkins has
the most experience in buying and selling farm and ranch equipment in the locale
of the Company's ranching operations and is well qualified to assess the market
value of equipment in Houston County, Texas and the surrounding areas. In
requesting the appraisals from Smith, Huddleston, and Hawkins, the Board did not
give any special instructions or impose any limitations upon the scope of the
investigations that each appraiser deemed necessary to enable it to deliver its
appraisal.
In connection with the preparation of the initial filing of the materials for
the going private transaction, the Company received reports from the asset
appraisers and HFBE. Since the initial filing, the Company has revisited the
appraisals, and is satisfied that the appraisal of the real estate and equipment
remain accurate. The Company, however, determined that due to the significant
fluctuations in oil and gas prices at year end 2002, a more current analysis
from Huddleston & Co would be appropriate. As a result, there are two updated
reports on the value of the Company's royalty interests as of January 2, 2003,
one a fair market value report and one a report based on the "SEC case," that is
a report that would be rendered in connection with an Annual Report on Form
10-KSB. HFBE also reviewed its valuation report and related fairness opinion
based on audited financial statements for the year ended October 31, 2002 and on
the revised Huddleston reports. In June, the Company determined to restate its
financial statements in connection with the accounting treatment of its 50%
owned subsidiary, Trinity Valley Pecan Company. The Management reviewed the
restatement and conferred with HFBE who then concluded that the restated
financial statements would not have a material affect on the valuation of the
Company. The primary effect of the restatement was to cause expenses for Trinity
to be recognized in earlier periods. The financial results and related financial
statements were not a meaningful basis of the evaluation of the Company, since
the primary analysis for the valuation was prepared based on the appraised value
of the assets. Therefore, the restatement did not affect the determination of
the per share price to be offered for the fractional shares. All reports,
opinions and appraisals will be made available for inspection and copying at the
principal executive offices of the Company during its regular business hours by
any interested security holder of the Company or representative of a security
holder who has been so designated in writing. A copy of any report, opinion or
appraisal will be transmitted to any interested security holder or designated
representative of a security holder upon written request at the expense of the
requesting security holder.
REPORT OF HOWARD, FRAZIER, BARKER & ELLIOTT, INC.
Howard Frazier Barker Elliott, Inc. ("HFBE") has acted as our financial advisor
in connection with rendering a fairness opinion with respect to the Reverse
Stock Split. HFBE has advised our Board of Directors that, in its opinion, the
consideration to be received by the shareholders whose stock is to be redeemed
pursuant to the Reverse Stock Split is fair, from a financial point of view, to
such shareholders. HFBE originally issued a valuation report as of October 29,
2002, with a related fairness opinion and has amended its report as of February
14, 2003, based on the audited financial statements for the year ended October
31, 2002 and the fair market value report from Huddleston. In addition, in June
2003, HFBE reviewed the restated financial statements of the Company and
confirmed its fairness opinion. The full text of the original HFBE valuation
report and fairness opinion prepared for the
15
<Page>
Board of Directors and the amended HFBE report prepared for the Board of
Directors in February and June 2003 are included as Exhibits (c)(1) and (c)(6),
respectively, to the Schedule 13e-3. We urge you to read the full reports and
opinions.
HFBE'S FAIRNESS OPINION, AS REVISED, IS DIRECTED TO OUR BOARD OF DIRECTORS AND
ADDRESSES ONLY THE FAIRNESS FROM A FINANCIAL POINT OF VIEW OF THE CONSIDERATION
PAYABLE TO THE SHAREHOLDERS WHOSE STOCK IS TO BE REDEEMED PURSUANT TO THE
REVERSE STOCK SPLIT. IT DOES NOT ADDRESS THE UNDERLYING BUSINESS DECISION TO
PROCEED WITH THE REVERSE STOCK SPLIT AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY SHAREHOLDER AS TO HOW THE SHAREHOLDER SHOULD VOTE WITH RESPECT TO THE
REVERSE STOCK SPLIT OR ANY OTHER RELATED MATTER. HFBE'S FAIRNESS OPINION IS
BASED ON ANALYSES WHICH CONTAIN ESTIMATES AND VALUATION RANGES WHICH ARE NOT
NECESSARILY INDICATIVE OF ACTUAL VALUES OR PREDICTIVE OF FUTURE RESULTS OR
VALUES.
In arriving at its amended written opinion, HFBE, among other things:
- reviewed Seven J's Annual Report on Form 10-KSB and related financial
information for the fiscal years ended October 31, 2000, October 31,
2001, and October 31, 2002 and Quarterly Reports on Form 10-QSB and
related financial information for the quarters ended January 31, 2002,
April 30, 2002 and July 31, 2002;
- reviewed information, including the public reports, giving details of
the business, earnings, cash flow, assets and prospects of Seven J
with respect to its business segments furnished to HFBE by Seven J;
- conducted discussions with members of senior management of Seven J
concerning its businesses and prospects;
- reviewed the historical market prices and trading activity for Seven
J's common stock;
- reviewed the proxy statement and Schedule 13e-3 filings;
- reviewed the appraisals of the assets as described above; and
- reviewed such other matters as HFBE deemed necessary, including an
assessment of general economic, market and monetary conditions.
In preparing its opinion, HFBE relied on the accuracy and completeness of all
information supplied or otherwise made available to it by Seven J. HFBE did not
obtain any material non-public information or projections prepared by or
concerning the Company. HFBE did not independently verify the furnished
information, or undertake an independent appraisal of the assets of Seven J.
HFBE's opinion is based upon market, economic, financial and other conditions as
they exist and can be evaluated as of the date of the amended opinion, February
14, 2003. HFBE was not requested to and did not solicit third party indications
of interest in acquiring all or part of Seven J. HFBE assumes that there has
been no material change in Seven J's financial condition, results of operations,
business or prospects since the date of the last financial statements made
available to HFBE.
The preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant quantitative and qualitative methods of financial
analyses and the application of those methods to particular circumstances.
Therefore, the HFBE opinion is not readily susceptible to partial analysis or
summary description. Furthermore, in arriving at its
16
<Page>
opinion, HFBE did not attribute any particular weight to any analysis or factor
considered by it, but rather made qualitative judgments as to the significance
and relevance of each analysis or factor. Accordingly, HFBE believes that its
analysis must be considered as a whole and that considering any portion of its
analysis and the factors considered, without considering all analyses and
factors, could create a misleading or incomplete view of the process underlying
its opinion. In its analyses, HFBE made assumptions with respect to industry
performance, general business and economic conditions and other matters, many of
which are beyond the control of Seven J. Estimates contained in these analyses
are not necessarily indicative of actual values or predictive of future results
or values. In addition, analyses relating to the value of the business do not
purport to be appraisals or to reflect the prices at which businesses may
actually be sold. The type and amount of consideration payable in the Reverse
Stock Split and the decision to enter into the Reverse Stock Split transaction
was solely determined by the Board of Directors of Seven J. HFBE's opinion and
financial analyses were only one of several factors considered by the Board of
Directors of Seven J in its evaluation of the Reverse Stock Split and should not
be viewed as determinative of the views of the Seven J Board of Directors or
management with respect to the Reverse Stock Split.
HFBE is a recognized business valuation and investment banking firm with
expertise in, among other things, valuing businesses and securities and
rendering fairness opinions. HFBE is continually engaged in the valuation of
businesses and securities in connection with mergers and acquisitions, private
placements of equity and debt, corporate reorganizations, employee stock
ownership plans and other general corporate purposes. Seven J selected HFBE
because of its experience and expertise in performing valuation and fairness
opinion analyses. HFBE does not beneficially own nor has it ever beneficially
owned any interest in Seven J. Furthermore, HFBE has no agreement or
understanding to provide additional services to Seven J beyond the scope of this
fairness opinion.
VALUATION ANALYSIS
ANALYSIS OF COMPARABLE PUBLICLY-TRADED COMPANIES
HFBE noted that, given the nature and diversity of business units of Seven J and
the relatively small size of each unit, there were no publicly-traded companies
that were comparable to Seven J. HFBE conducted a search for comparable
companies, but could not locate any companies, primarily due to the small size
of Seven J.
Furthermore, because Seven J generated net losses during three of the four
latest fiscal years, historical earnings figures cannot be used to make
meaningful valuation judgments. Also, Seven J's earnings before interest, taxes,
depreciation and amortization ("EBITDA") for the prior periods were not
significant, also rendering this pricing parameter unusable. Although royalty
and pipeline operations generated positive cash flow, this cash flow was not
sufficient to offset losses from other operations (pecan processing) and the
general and administrative expenses of the Company. As a result, HFBE determined
the comparable public company method would not yield any meaningful parameters.
SELECTED MERGER & ACQUISITION TRANSACTIONS
HFBE conducted a search for recent merger and acquisition transactions involving
companies that were comparable to Seven J. HFBE noted that, given the nature of
the two business units of Seven J and the relatively small size
17
<Page>
of each unit, there were no merger and acquisition transactions that were
comparable to Seven J. Assuming that each unit of the business segment of Seven
J were analyzed separately, the relative size of each business unit would be so
small that any comparison to merger and acquisition multiples would not be a
reliable measure.
Similarly to the comparable public company analysis, because Seven J generated
net losses during three of the most recent four fiscal years, historical
earnings figures cannot be used to make meaningful valuation judgments.
Furthermore, Seven J's EBITDA was not significant during the most recent fiscal
years, rendering this pricing parameter unusable. As a result, HFBE determined
the selected merger and acquisition transaction method would not yield any
meaningful parameters.
Furthermore, because these methodologies would produce either significantly low
or negative values using an earnings or EBITDA multiple, HFBE believes it is
highly unlikely that any implied equity value for Seven J derived from the
comparable company or comparable merger and acquisition transaction
methodologies would result in an implied equity value greater than the value
derived under the Net Asset Value approach (see "Net Asset Value" below).
Furthermore, given the diversity of the Company's operations and relatively
small size of each business segment (revenues less than $1 million each), HFBE
believes it would be extremely difficult to locate a buyer for the entire
Company. Based on HFBE's experience in valuations, fairness opinions and merger
and acquisition transactions and given current market conditions, HFBE believes
that businesses of this size typically sell for 3-5 times EBITDA. Given that the
Company has not consistently generated positive cash flow or EBITDA in several
years and does not expect to generate positive cash flow or EBITDA in the
foreseeable future, a positive implied value cannot be calculated. In these
circumstances, tangible book value or multiples of revenue may be used as
pricing parameters. For Seven J, book value is not an appropriate measure
primarily because of the appreciated value of the real estate owned by the
Company. Further, HFBE believes, based on the industry segments and size of
Seven J, that the Company would most likely sell for less than 1 times revenues
(in this case, approximately $1.2 million). Therefore, it is highly unlikely
that the comparably public company methodology or the comparable merger and
acquisition transaction methodology would imply a higher value than the net
asset value approach.
DISCOUNTED CASH FLOW ANALYSIS
Typically, a discounted cash flow valuation analysis would also be performed,
but due to the difficulty in projecting future financial results for Seven J and
management's expectation that cash flows will continue to be negative for the
foreseeable future, HFBE concluded that the discounted cash flow analysis would
not be a reliable valuation measure. Again, while the primary source of cash
flow of Seven J has resulted from its oil and gas royalties and pipeline
operations, these revenues have not been sufficient to cover losses from other
operations and corporate overhead expenses.
NET ASSET VALUE
HFBE determined that the Net Asset Value was the most appropriate method to
calculate the fair market value of the shares of Seven J. Utilizing appraisals
of the value of certain assets provided by management, including the real estate
appraisal by James Connor Smith, MAI, ARA, the oil & gas reserve report by
Huddleston & Co., Inc., and the equipment appraisal by Hawkins James & Still
Equipment Co., HFBE calculated the net asset value of Seven J. The net asset
value is calculated by adjusting the book value of the
18
<Page>
assets of the Company, as reported in the Company's balance sheet, to current
fair market values. The amounts set forth below are based on the valuations of
the oil and gas interests as of December 31, 2002 and the financial statements
dated October 31, 2002 (restated as of June 2003). Based on the balance sheet as
of October 31, 2002, as restated, the value of Seven J's assets was $9,513,000
and the value of liabilities was $1,231,000, resulting in a net asset value of
$8,282,000 or $5.71 per share before the effect of the Reverse Stock Split. HFBE
did not assign any net asset value to the pipeline, primarily because the
pipeline has no value as an individual asset. It is important to note that the
net asset value excludes liquidation expenses, and a liquidation analysis is set
forth in the following paragraph.
The following is a table showing the actual calculation of Net Asset Value and
related adjusted balance sheet entries:
SEVEN J STOCK FARM, INC.
NET ASSET VALUE SUMMARY
AS OF OCTOBER 31, 2002
(IN $000S, EXCEPT PER SHARE AMOUNT)
(BASED ON FINANCIAL STATEMENTS DATED OCTOBER 31, 2002, RESTATED AS OF JUNE
2003)
<Table>
<Caption>
Market % of
Value Assets
---------------------
Assets
Current assets $ 549 6%
Property and equipment, net 8,909 93%
Other assets 55 1%
---------------------
Total assets $ 9,513 100%
=====================
Liabilities and shareholders' equity
Liabilities
Current liabilities $ 416 4%
Long-term debt 650 7%
Deferred revenues and other 165 2%
---------------------
Total liabilities 1,231 13%
Shareholders' equity 8,282 87%
---------------------
Total liabilities and Shareholders' equity $ 9,513 100.0%
=====================
Net asset value ("NAV") of the Company $ 8,282
NAV per share of common stock $ 5.71
Shares outstanding 1,451,000
</Table>
19
<Page>
To calculate the appropriate market value of the shares of the Company's Old
Common Stock to be redeemed, HFBE applied both a minority interest discount and
a marketability discount to the net asset value of the Company. The minority
interest discount was applied due to the small percentage ownership represented
by the shares to be purchased pursuant to this transaction due to the fact that
both before and after the transaction, Management will maintain voting control
of the Company. HFBE determined the appropriate minority interest discount by
analyzing a study of real estate limited partnership interests trading in the
secondary market because such assets tend to sell on the basis of underlying
asset value and yield. The annual re-sale discount study is published in the
May/June 2002 issue of THE PARTNERSHIP SPECTRUM. HFBE determined that the
Company was most similar to the Undeveloped Land partnerships because the bulk
of the Company's income from the land derives from farming or leasing activities
rather than real estate development. According to the study, Undeveloped Land
partnerships have an average minority discount rate of 35%. Based on its
analysis of the study, HFBE determined that 30% was an appropriate conservative
minority interest discount for Seven J.
The marketability discount was applied as a result of the thinly traded nature
of the Company's stock. In determining the correct marketability discount, HFBE
analyzed several studies comparing marketability discounts applied in different
situations. According to the SEC Institutional Study, the midpoint of the range
of marketability discounts for OTC reporting companies was 20-30%. According to
a 1991 article in the Financial Analyst Journal written by Dr. William Silber,
the Company most closely resembled companies with a marketability discount
greater than 35%. HFBE reviewed a number of other studies that considered
marketability discounts based on revenues, profitability and price/earnings
ratio. Based on its analysis of these studies, HFBE determined that 25% was an
appropriate marketability discount.
Based on the net asset value analysis, HFBE calculated the per share market
value as of October 31, 2002 (restated as of June 2003) of the stock as follows:
<Table>
NAV per share of common stock $ 5.71
Minority interest discount 30% (1.71)
---------
Marketable minority interest value per share $ 4.00
=========
--------------------------------------------------------------------
Marketable minority interest value per share $ 4.00
Discount for lack of marketability (a) 25% (1.00)
---------
FAIR MARKET VALUE PER SHARE $ 3.00
=========
</Table>
20
<Page>
LIQUIDATION ANALYSIS
The following sets forth a calculation of the estimated sales proceeds
distributable to shareholders if the assets of the Company were promptly sold at
the estimated fair market values set forth herein.
SEVEN J STOCK FARM
LIQUIDATION ANALYSIS
ESTIMATED MARKET VALUE OF ASSETS AS OF 10/31/2002
<Table>
Current assets $ 549
Real estate 8,469
Farm equipment 102
Oil & gas interests 338
---------------------------
8,909
Other assets 55
Total assets 9,513
Current liabilities 416
Long term debt 650
Deferred income taxes 38
Accrued loss contingency 123
Deferred revenues 4
---------------------------
815
Total liabilities $ 1,231
ESTIMATED LIQUIDATION PROCEEDS - SALE OF ASSETS
Gross proceeds before expenses $ 8,909
Less sales commission on land (5%) (423)
Other expenses (a) (250)
---------------------------
Corporate Tax:
Gross Proceeds: 8,236
---------------------------
Less Basis (1,525)
---------------------------
6,711
---------------------------
Tax Rate 34%
---------------------------
Corporate taxes (2,282)
---------------------------
</Table>
21
<Page>
<Table>
Gross Proceeds 8,236
---------------------------
Less corporate taxes (2,282)
---------------------------
After Tax proceeds 5,954
---------------------------
Payment of liabilities (1,231)
---------------------------
Net Proceeds $ 4,723
---------------------------
Shares outstanding 1,451
---------------------------
Per Share (b) $ 3.25
---------------------------
</Table>
(a) Includes legal, environmental study and remediation, title and other
closing costs.
(b) Dividends paid to shareholders are taxed as ordinary income.
HISTORICAL TRADING PRICES
Since the beginning of 2002, Seven J's Old Common Stock price has been $3.50
per share through November 2002 and $4.00 thereafter. As of the date of HFBE's
opinion, the Old Common Stock price remained at $3.50 per share. The trades
reviewed by HFBE were made on October 10, 2002 at $3.50 per share when 200
shares were traded and December 4, 2002 at $4.00 when 200 shares were traded.
Between January 1 and July 31, 2003, a total of 11,143 shares of Seven J's Old
Common Stock have been transferred. HFBE noted that the lack of any significant
trading volume has a substantial impact on the ability of Seven J Shareholders
to sell their shares. Further, most of the Shareholders affected by the going
private transaction own odd-lots (average holdings are 66 shares per
Shareholder), thus increasing the costs to liquidate their shares. HFBE also
believes that because of the thin trading volume, no significant block of shares
could be sold without a serious impact on per share prices. HFBE also noted that
amount to be paid to the shareholders in the redemption of their shares provided
a certainty of a return to such shareholders in contrast to the speculative
nature of a continuing interest in Seven J.
ALTERNATIVES
In assessing the fairness of the transaction to Seven J's public shareholders
from a financial point of view, HFBE also compared the consideration to be
received in the redemption of shares after the Reverse Stock Split to the most
likely alternatives of the redemption including a status quo scenario in which
Seven J continued to operate in the absence of the Reverse Stock Split and a
third party investor/acquirer.
In considering the status quo alternative, HFBE considered that there were no
material growth prospects for the business, and Management did not have any
plans to seek acquisitions or pursue other strategies to grow the business. With
respect to the farming and ranching operations, Management expects that there
will be continued downward pressure on revenues and cash flow. As reported in
the most recent annual report on Form 10-KSB for the year ended October 31,
2002, the Company anticipates that the amount per acre will drop to $12 per acre
from the current $16 per acre. Additionally, the Company will no longer be
entitled to US Department of Agriculture subsidies for its farm crops, which
will most likely increase its losses in farming activities. The royalty income
and related pipeline income are also declining from natural and expected
depletion of the properties, and the Company does not expect the depletion to be
reversed. HFBE reviewed all trades in the Company's stock
22
<Page>
between April 9, 2002 and December 4, 2002 reported in the Pink Sheets. During
this time period, only 3,900 shares were sold, all at $3.50 per share, except
for one trade of 200 shares at $4.00 on December 4, 2002. Furthermore, as
discussed above, given the lack of trading volume in Seven J Old Common Stock,
it is unlikely that a shareholder could locate a buyer for any significant block
of shares and, most likely, our experience and related research indicates that
an attempted sale of a larger number of shares in the market would be at a price
substantially below the current market price per share.
In assessing the prospect of a third party acquirer, HFBE noted that there were
no offers to purchase the business of Seven J, and it was unlikely that a
potential buyer would value the business at a higher price than the net asset
value previously calculated. In the event a buyer could be located, the
estimated per share distribution available to shareholders after sale of the
assets would be lower than the proposed purchase price in the going private
transaction. See "Liquidation Analysis" above. Furthermore, given the ownership
structure of Seven J, any transaction would have to be approved by Management
and the majority shareholders of Seven J. Management has indicated to HFBE that
they have no desire to sell the company now or any time in the foreseeable
future.
VALUATION CONCLUSION
Based on its analysis of the asset based approach, HFBE determined that the fair
market value of the fractional shares of Seven J to be redeemed was $3.00 per
share, based on the valuation of the oil and gas interests as of December 31,
2002 and the financial statements dated October 2002, restated as of June 2003,
as set forth in the calculations in Net Asset Value, above. As described in Net
Asset Value above, HFBE performed the following estimated per share calculation
of the fair market value of one share of Stock.
<Table>
Net Asset Value $ 5.71
Less Minority Interest Discount-30% (1.71)
--------
Marketable Minority Interest Value Per Share 4.00
Less Marketability Discount-25% (1.00)
--------
Fair Market Value Per Share (rounded) $ 3.00
</Table>
The shareholders whose stock is to be redeemed pursuant to the plan are to
receive $3.89 per share of Old Common Stock in the Reverse Stock Split
transaction. Since the market value of the fractional shares was estimated to be
$3.00 per share, HFBE concluded that the consideration to be received by such
shareholders is fair, from a financial point of view, to such shareholders.
Seven J paid HFBE a non-contingent fee of $25,000 for its opinion and has
incurred additional advisory fees of $11,216.50 since the initial filing. In
addition, Seven J has agreed to reimburse HFBE for all its related expenses, and
to indemnify HFBE against certain liabilities, including liabilities under
federal securities laws. There is no other material relationship between HFBE
and the Company. The Company has not paid any other fees to HFBE in the previous
two years.
SMITH REPORT
Smith is a Texas state certified general real estate appraiser, an Appraisal
Institute Member, Accredited Rural Appraiser, Texas Real Estate Broker and
member of the National Association of Realtors and the Realtors Land Institute.
He has been engaged as an independent appraiser and consultant specializing in
23
<Page>
the valuation and counseling for rural and commercial property since 1965.
Smith appraised the value of the surface estate interest in the 10,927.857 acre
property owned by the Company located approximately 19 miles southwest of
Crockett, Texas. Smith determined that a fair market value for this property on
August 14, 2002 was $775 per acre or a total of $8,469,089 based on a marketing
period of 18-24 months. Smith's methodology involved the following steps:
1. Inspect the property and surrounding neighborhood;
2. Gather appropriate site, neighborhood and economic data;
3. Investigate, confirm, and inspect comparable unimproved land sales to
determine land component unimproved land sales to determine land component
contributory values.
a. Date range of search: January 1, 1999 to July 30, 2002
b. Geographical limits of search: Houston County, Texas
c. Size limits of search: 500 to 15,000 acres
d. Use or zoning limits of search: Livestock Ranches with
improved pasture, native pasture/wooded pasture and
cropland components
4. Estimate the reproduction cost of building and land improvements and
deduct accrued depreciation from all causes to estimate their
contributory value for use in the cost and sales comparison
approaches.
5. Investigate, confirm, and inspect comparable improved sales to
estimate the value of the subject property via the direct sales
comparison approach.
a. Date range of search: January 1, 1999 to July 30, 2002
b. Geographical limits of search: Houston County, Texas
c. Size limits of search: 500 to 15,000 acres
d. Use or zoning limits of search: Livestock Ranches with
residential/agricultural improvements
6. Analyze the time on the market of the comparable sales to develop an
estimated marketing period for the subject property
7. Reconcile the value indications from the two approaches to develop a
concluded value range and a final market value estimate of the
subject property
The Company paid Smith $20,410.18 for his appraisal of the real estate. There is
no other material relationship between the Company and Smith. The Company has
not paid any other fees to Smith in the previous two years.
HUDDLESTON REPORT
Huddleston & Co., Inc. is a corporation that provides petroleum and geological
engineering services, located in Houston, Texas. Huddleston has conducted
appraisals of oil and gas interests since 1968.
The Company requested Huddleston to provide Seven J with an estimate of fair
market value for the properties evaluated in this report. Huddleston estimated
the fair market value using the average of four methods that are commonly used
in the industry. It is the fair market value report that the Board considered in
its evaluation of the fairness of this transaction.
The four methods that have been considered in preparing our estimate of fair
market value follow:
1. Calculation of value on the basis of a 1.75:1 return on investment (or
about 57% of undiscounted future net revenues) over the economic life
of the properties;
24
<Page>
2. Calculation of 70% of future revenues, discounted at 10%;
3. 100% of future net revenue, discounted at 15%; and
4. Cumulative undiscounted future net revenues recovered over the first
three and one-half years following the effective date of the report
(3.5 year payout).
Fair market value was then determined by calculating the average of the four
methods. Huddleston estimated the fair market value for the properties evaluated
in this report to be $309,253.
RESERVE ESTIMATES
The reserve estimates for the Proved Developed Producing properties were based
on the extrapolation of historical production data. All of the producing
properties had reported production and all had sufficient data to suggest a
decline trend.
PRODUCT PRICES
The product prices utilized in this report were the actual NYMEX Strip prices
offered on December 19, 2002. Product prices were put into the cash flow model
annually for 2003, 2004, 2005 and 2006. Beginning January 1, 2007, prices were
escalated at 2% per year through the life of the properties.
Market prices for both oil and gas continue to be subject to a substantial
degree of variation as a result of a variety of market and seasonal factors.
Therefore, actual future receipts are likely to vary from the projections and
fluctuations of market prices will affect the projections of both future
reserves and revenues. The variations in product prices as shown on the summary
projections result from the net effect of computer averaging of the aggregate of
gross revenues and net revenues with varying rates of decline.
A comparison of the average product prices, weighted as a composite for all
properties over life, follows: (Gas prices have been adjusted for heating value
and are reported as dollars per Mcf).
<Table>
<Caption>
Escalated Pricing Case Oil/Cond., $/bbl Gas, $/Mcf
- ---------------------------------------------------------------------
2003 25.81 3.80
2004 21.96 3.30
2005 21.30 3.14
2006 20.96 3.07
Maximum 25.81 4.04
Average over life 23.00 3.44
</Table>
OPERATING EXPENSES, TAXES AND CAPITAL EXPENDITURES
Seven J supplied operating income/expense statements for the properties
evaluated in the Huddleston report. As a royalty interest owner, Seven J is not
directly burdened by operating expenses. Seven J is indirectly burdened by
operating expenses in that such expenses were considered in the cash flow model
to calculate the economic limit of the individual properties.
Beginning January 1, 2003, operating expenses were escalated at 2% per year
through the life of the properties.
Severance and ad valorem taxes were scheduled for each property where
applicable.
VALUES AND COSTS NOT CONSIDERED
General home office overhead (G&A), federal income taxes, and allowances for
depreciation, depletion, and amortization have not been deducted from
25
<Page>
estimated revenues. Values were not assigned to nonproducing acreage or to the
salvage value of surface and subsurface equipment.
The Company has agreed to pay Huddleston approximately $2,000 for its appraisal.
There is no other material relationship between the Company and Huddleston. The
Company has not previously hired Huddleston, however three affiliates, Parten
Operation Company, Texas Epic Oil Company and Farmers Oil Company, paid
Huddleston a combined total of $7,067 for reserve evaluations in August of 2002.
HAWKINS REPORT
Hawkins is an agricultural equipment dealer located in Crockett, Texas. Hawkins
reviewed each piece of equipment and estimated the value based on the sales
price at which, in its experience, it could sell the used farm equipment in the
local area where it conducts business. Based on Hawkins experience evaluating
and dealing in new and used agricultural equipment in Houston County, Texas,
Hawkins determined that the fair market value of the Company's equipment was
$102,150 on August 19, 2002.
The Company did not pay Hawkins for its appraisal and has not paid Hawkins for
any appraisals in the previous two years. The Company has purchased equipment
from Hawkins in the past, and may purchase additional equipment from Hawkins in
the future.
BOARD OF DIRECTORS DETERMINATION
At a meeting of the Board of Directors on March 19, 2002, the Company's Board of
Directors, and the executive officers, John R. Parten, Robert F. Pratka and
Virginia O. Cortinas (such executive officers are collectively, "Management")
expressed their view that the Company and its shareholders are deriving little
benefit from the Company's status as a public company. The Company and its
officers and directors incur substantial risks. The Company also incurs
substantial costs to maintain this status. Despite these expenditures, the
nature of the assets held by the Company does not provide any synergies for the
status as a public company. The primary assets of the Company are raw land that
is leased as ranch land and farm land, royalty interests in oil and gas leases,
a pipeline and a pecan processing plant. The use and value of the assets has not
substantially changed during the Company's forty-year status as a reporting
company, and the assets do not produce an income stream that makes the public
nature of the stock a useful commodity or maintains the cost of a public
company. More specifically, the revenues from the oil and gas royalties and
pipeline operations have historically sustained the Company and those assets,
and related revenues are depleting and declining.
The Board determined it would be in the best interests of the Company to
maintain this asset base and to cease being a public company. The Board
considered the advantages of being a public company such as access to public
trading markets, public availability of Company information, and liquidity for
the shareholders. The Board also considered the disadvantages of being a public
company such as the costs of maintaining public company status. The Board also
considered that the Company has historically not been able to capitalize on its
public company status because it is a small, thinly traded company. The Board
considered the advantages and disadvantages of being a private company and
unanimously directed Management to conduct a preliminary cost and feasibility
study of going private, including a determination of the rights of dissenting
shareholders.
26
<Page>
Between March and October of 2002, the Company's Management held a series of
meetings with the Company's accountants, investment bankers and outside legal
counsel to discuss a Reverse Stock Split as well as other options for taking the
Company private. The Management considered a merger or a tender offer as
possible means of taking the Company private. After discussion with its advisors
of the options available, Management determined to recommend to the Board that a
Reverse Stock Split was the most feasible in the Company's current situation.
Management determined that the other means of taking the Company private would
not be appropriate in this situation due either to the proposed structure
(tender offer) or their cost and complexity (merger). Based on these
deliberations, Management engaged its outside auditors, its investment bankers
and its legal counsel to assist the Company in pursuing the proposed Reverse
Stock Split.
Management was also charged with the responsibility of recommending to the Board
of Directors a fair price to be paid for the fractional shares resulting from
the Reverse Stock Split. Management reviewed several valuation models, including
cash flow analysis, trading prices of common stock, comparable publicly traded
company and related comparable transactions and book value. As a result,
Management requested a valuation of the Company, and due to the initial
analysis, appraisals of all assets that could be marketed independently (which
excluded only the pipeline) In fulfilling their responsibility to provide the
Board with an analysis of the proposed transaction, the Management considered
several factors relating to the fair value of the Company's Old Common Stock:
- The nature of the income stream and underlying assets of the Company;
- The current and historic market value of the Old Common Stock, which
ranged between a high of $4.00 and a low of $2.00 for the period from
October 1999 through October, 2002;
- The net losses incurred for the fiscal years 1999, 2000 and 2001;
- The absence of a meaningful market for the Company's shares as reflected
in the fact that only 10,822 shares have traded during the first three
quarters of the 2002 fiscal year, ending in October 2002;
- The $0.62 book value per share of Old Common Stock (as of October 31,
2002, restated as of June 2003.)
- The value of the Company's assets based on the independent appraisals of
Smith, Huddleston and Hawkins; and
- The HFBE valuation report.
The Board and Management determined that net book value ($0.62 at October 31,
2002, restated as of June 2003) not appropriate to consider because it
significantly undervalued the real estate. Management prepared a calculation of
Net Asset Value based on adjustments for estimated current market prices of the
assets. Based on the Net Asset Value calculation, and with reference to the
other possible basis for valuation, especially the historical trading price of
the Old Common Stock, Management determined to recommend $3.89 as the purchase
price for a share of Old Common Stock for the October meeting of the Board of
Directors.
At the Board of Directors October 30, 2002 meeting, Management discussed the
preparations made and presented the valuation report prepared by HFBE.
Management reported that taking the Company private could be accomplished
through the process of a Reverse Stock Split, with cash being paid for
fractional shares that result. Management reported that based on the results of
its analysis, a 1-to-1,000 Reverse Stock Split would take the number of
shareholders of record to approximately 33, and to a number appropriate for a
27
<Page>
privately held company. In Management's opinion the 1-to-1,000 ratio was
preferable for accomplishing both goals.
In addition to the valuation materials, the Board reviewed the duties of
Directors under Texas law in evaluating a Reverse Stock Split and reviewed the
documents to be filed with the SEC in this regard. Also at this meeting, the
Board reviewed and discussed the valuation report of Howard Frazier Barker &
Elliott, Inc. as well as the Smith, Huddleston and Hawkins appraisals obtained
with respect to the assets. The analysis by the Board of Directors of the
valuation report and the fairness of the transaction at the Board of Directors
Meeting is set forth below, in "--Fairness of the Reverse Stock Split Proposal."
The Board of Directors determined that the Smith report is an adequate
reflection of the value of the real estate, but considered additional
information concerning the marketing and sale of the particular parcel of land,
especially its unusually large size, in its evaluation of the Smith appraisals.
Additionally, the Board reviewed the previously filed financial statements of
the Company, including the reports of the historical trading prices of the Old
Common Stock.
After the lengthy review of these materials and analysis by the Board it
authorized by a unanimous vote, with no member dissenting or abstaining, a
1-to-1,000 Reverse Stock Split and directed that a proposed amendment to the
Articles of Incorporation to reduce the authorized capital be submitted to the
shareholders for approval, with a price of $3.89 for any fractional shares.
Based on the valuation materials prepared by HFBE, the Board sought and received
a fairness opinion concerning the price it had determined to offer for the
fractional shares from HFBE immediately after the October meeting of the Board.
After the filing of the preliminary proxy materials, the Company was required to
prepare and file its Annual Report on Form 10-KSB for the year ended October 31,
2002. In connection with the review and preparation of the report, Management
re-examined the data originally prepared for the October filings. While
Management determined that the real estate and equipment appraisals continued to
be accurate, oil and gas prices had changed significantly at the end of 2002,
and Management requested and received a revised engineering report based on
increased prices. The numerical amounts contained in these materials are based
on the amended calculations made in February 2003. The appraised value of the
oil and gas properties was slightly higher, producing a new, unadjusted net
asset value per share of $5.71 (based on the financial statements dated October
31, 2002, restated as of June 2003), compared to the amount originally
calculated as of October 2002 of $5.55.
As a result of that report, and in review of audited financial information in
the Form 10-KSB for the year ended October 31, 2002, HFBE reviewed its valuation
report and issued an amendment to its fairness opinion. The Board of Directors
met via telephone on February 17, 2003 to review the revised analysis and
confirmed that the price of $3.89 per share of Old Common Stock would be paid
for fractional shares, resulting from the Reverse Stock Split, and that, in
light of current oil and gas prices, such price would be fair to the
shareholders. The Board determined not to revise the per share price because the
percentage discount applied to the February calculations remained in the
original ranges of percentages for the discount for lack of marketability,
within the range of sum of the minority discount and the discount for lack of
marketability proposed by HFBE, and generally above the historical trading
prices, so that the Board considered the price to remain fair.
28
<Page>
FAIRNESS OF THE REVERSE STOCK SPLIT PROPOSAL
The directors of the Company, in their capacity as directors and as filing
persons, believe this transaction is fair to and in the best interests of the
Company and its affiliated and unaffiliated shareholders. In determining the
fairness of the Reverse Stock Split, the Board considered a number of factors
prior to approval of the proposed transaction. The Board reviewed the fairness
of the transaction in the October 30, 2002 meeting, and confirmed the fairness
of the transaction in the February 17, 2003 meeting.
The Board recognized the concerns of shareholders owning a limited number of
shares of Old Common Stock, with reduced liquidity, because typical transaction
costs for public sale of their shares in most cases represents a large
percentage of the value of their holdings at current stock price trends. The
Reverse Stock Split will allow such shareholders to liquidate their holdings at
a fair value without these transaction costs by receiving cash for their
fractional shares.
Shareholders receiving New Common Stock are anticipated to benefit from the
reduction of direct and indirect costs borne by the Company to maintain its
public company status. The Board of Directors also believes that the Company
will be more stable, given the nature of its assets and business, if it ceases
the costs and obligations of a publicly traded company. No assurances can be
given to the remaining shareholders, however, that the costs of the going
private transaction will be lower than the ongoing reporting costs or that the
Company will be able to recoup the costs of going private from its revenues.
The Board also considered the financial condition of the Company and the cost of
the Reverse Stock Split and the cost of the continued reporting obligations
under the Exchange Act. The Board considered that the costs of public reporting
continue to increase, as well as the amount and nature of the obligations of a
reporting company. Notwithstanding the increase in regulation, the business of
the Company has not significantly changed, and, in fact, the revenues and
related asset base, particularly the oil and gas royalty interests, are
deteriorating. The Board also determined that a change in the amount or the
nature of the business was not likely, therefore continuing to reduce the value
of the status of the Company as a public company.
The Board considered that during the preceding twelve month period, the Company
had not received any bona fide offers from any person for (i) the merger or
consolidation of the Company into or with any person, (ii) the sale or transfer
of all or any substantial part of the assets of the Company, or (iii) securities
of the Company which would enable the holder thereof to exercise control of the
Company. The Company during this period did not solicit any third party offers
to merge or acquire the Company, not did it authorize any member of the Board of
Directors or unaffiliated party to do so. The Board determined that it was not
in the best interests of the Company to sell.
The Board reviewed the valuation materials prepared on its behalf in connection
with determining the fairness of the price to be offered for the fractional
shares, including the appraisals of the assets of the Company and the HFBE
valuation report. Due to the relative illiquidity of the stock, the Management
and the Board placed more emphasis on the appraisals of the assets and related
Net Asset Value analysis in the HFBE valuation report than on the other possible
valuation techniques.
In the view of the Board, the HFBE valuation report considered and consolidated
the several elements of value of the Company and the several
29
<Page>
methods of evaluating the Company. The Board noted that HFBE recommended a Net
Asset Value determination over the other possible valuations methods, due to the
inability to find comparable companies or transactions and due to the low net
income and EBITDA amounts that produced valuations significantly lower that the
Net Asset Value calculation. In the Net Asset Value calculation, the HFBE report
considered the value of the surface real estate, as valued by Smith. In
addition, the Board believes that the value of the surface real estate set forth
by Smith was somewhat speculative because to their personal knowledge, no tract
of land of the size owned by the Company has been sold recently in Houston
County. Further, portions of the Company's tract of land do not have access to
roads, electricity or other utilities that would make it feasible to sell
smaller parcels at the same price the entire parcel could be sold. The large
size of the tract would also prolong the time and relative cost to market and
sell. It considered the value of the underlying minerals as valued by Huddleston
and agreed with the report. It considered the value of the machinery and
equipment as valued by Hawkins and agreed with the report. It considered the
other assets and liabilities of the Company as reflected in the financial
statements. None of the asset appraisals, on their own, ever purported to
reflect the true value of the stock of the Company. Notwithstanding, the
Management of the Company and the Board of Directors has adopted each of the
independent appraisals, with respect to the assets appraised, that were
considered by HFBE.
Based on the data presented to the Management and the Board of Directors, they
each reviewed the current prices at which the Old Common Stock of the Company
traded, as well as the historical market prices. Attention to going concern
value was minimal because the cash flow and revenue of the Company had largely
been negative, so the going concern value would produce a significantly lower
valuation than the Net Asset Value, as adjusted for current asset values.
Similarly, because of the poor cash flow and revenue situation, as well as the
fact that the business segments and their component units are small, the Company
could not consider comparable companies or comparable merger and acquisition
transactions. An analysis of liquidation value produced results lower than the
Net Asset Value calculation.
In the October 2002 Board meeting, HFBE suggested that $2.90 (not adjusted)
would be a fair value to pay for fractional shares, which was the original Net
Asset Value per share amount of $5.55 (not adjusted), with two successive
discounts applied, one for lack of marketability and one for minority discount.
At the October meeting, the Board of Directors determined not to adopt two
discounts, and determined to adopt a marketability discount at 30%. The Board
considered each discount, the minority discount and the lack of marketability
discount. The proposed value calculated with two discounts resulted in a
proposed price lower than the historical trading prices. As a result, the Board
determined to adopt only a marketability discount, but to apply a marketability
discount of 30%, which resulted in a price of $3.89 for fractional shares of Old
Common Stock. The percentage for the marketability discount adopted by the Board
was within the ranges of the discounts suggested by HFBE and discussed by the
Board, and placed the proposed price above the historical trading prices.
Specifically, Management and the Board of Directors of the Company adopted the
price of $3.89 per share after considering that it was in excess of the
estimated liquidation value of the Company ($3.25)(based on the financial
statements dated October 31, 2002, restated as of June 2003), in excess of the
most regular pink sheet value of the stock ($3.50) and considerably in excess of
the fully discounted minority share value of the stock ($3.00) (based on the
financial statements dated October 31, 2002, restated as of June 2003). The
Board reviewed the valuation again in February, in light of changes in oil and
gas prices, and reaffirmed the fairness of the $3.89 price per share for
fractional shares. Although the price resulted in a discount for marketability
of 32.5%, once
30
<Page>
again, 32.5% was within the range of discounts discussed in the HFBE report, and
remained largely above the historical trading prices for the Old Common Stock.
Each member of the Board of Directors, in their capacity as Board members and as
filing persons, believes that this method of valuation represents a fair
valuation of the Old Common Stock.
The transaction is not structured to require a majority of the unaffiliated
security holders because over half of the security holders' location is unknown
to the Company. Specifically, out of approximately 730 security holders, 360
have known addresses and 370 security holders' whereabouts are unknown. No
unaffiliated representative has been retained to act solely on behalf of
unaffiliated security holders for the purpose of negotiating the terms of Rule
13-E transaction and/or preparing the report or transaction. Even though the
transaction will not require the approval of a majority of the unaffiliated
security holders and no unaffiliated representative was retained, the Board and
the Filing Persons believe the determination of the valuation of the Company's
stock was substantively and procedurally fair to the affiliated and
nonaffiliated shareholders because (i) affiliated and unaffiliated shareholders
are treated identically in the Reverse Stock Split; (ii) the Reverse Stock Split
does not significantly impact control of the Company; and (iii) the Board, based
on careful review of the independent appraisals and fairness opinion of HFBE,
believes that the outside independent analysis supports their conclusion as to
the fairness of the transaction.
While the Board considered the asset appraisals, the ability of the Company to
place the value of the assets directly into the hands of the shareholders
through liquidation or sale of assets is difficult because of the costs of the
transaction, including brokerage costs, transaction costs and tax consequences
of such a transaction. As described in the liquidation analysis set forth above,
while the $5.71 is a Net Asset Value per share (based on the December 31, 2002
evaluations), it does not account for the significant corporate or shareholder
expenses that would occur under a liquidation, and the projected liquidation
value is lower than amounts proposed to be paid in the Reverse Stock Split.
In determining whether the price to be paid to the Company's shareholders for
fractional shares was fair, the Board received a valuation report from an
independent financial adviser. See "Report of Howard, Frazier, Barker & Elliott,
Inc." above. After the Board meeting in October, the Board requested and
received a fairness opinion from HFBE based on the valuation report prepared by
HFBE and used by the Board.
As described above, in connection with the year-end reports (Form 10-KSB for the
year ended October 31, 2002), the Company revisited its oil and gas reserve
valuation. The valuation of the oil and gas interests in December was higher
when compared to the October analysis because of the higher prices received for
the oil and gas sold. This affected the total adjusted net asset value. On
review, however, the Board determined to confirm the $3.89 price per share for
fractional shares because the price was well within the valuation parameters and
discounts in the valuation originally prepared by HFBE. Originally, the $3.89
price resulted from a 30% marketability discount. At the new valuations, the
discount became 32.5%, which was still within the ranges for discounts suggested
by HFBE and reviewed by the Board. In February, the Board sought and received an
amendment from HFBE to confirm the fairness of the $3.89 price per share after
the fiscal year-end review of the 2002 financial statements and related
analysis.
In June, the Company determined to restate its financial statements to correct
the accounting treatment of the losses incurred with respect to the Trinity
31
<Page>
Valley Pecan Company. As a result of the restatement, losses with respect to
Trinity occurred in earlier periods, thus reducing the total assets, but
increasing the most current year's revenue. Management reviewed the restatement,
and conferred with HFBE, and determined that because the fairness opinion was
based on an adjusted net asset model, and not on the financial performance of
the Company, the restatement would not affect the fairness determination of the
price offered for fractional shares.
To the Company's knowledge, each executive officer and director of the Company
will vote all shares of Old Common Stock those persons have proxy authority for,
for the proposed Reverse Stock Split and related Amendment to the Company's
Articles of Incorporation. These shares represent approximately 74.28% of the
voting power on the Record Date.
EXCHANGE OF CERTIFICATES AND PAYMENT OF FRACTIONAL SHARES
If the shareholders approve the Reverse Stock Split, the Company will file the
amendment with the Secretary of State of Texas. The Reverse Stock Split will
become effective on the date the Certificate of Amendment is issued by the
Secretary of State of Texas (the "Effective Date").
As soon as practicable after the Effective Date, each holder of an outstanding
certificate theretofore representing Old Common Stock will receive from the
Company instructions for the surrender of such certificate. The instructions
will include a Letter of Transmittal to be completed and returned to the Company
with such certificate or an affidavit of lost certificate. As soon as
practicable after the surrender to the Company of any certificate which
represented shares of Old Common Stock (or affidavit as to loss), together with
a duly executed Letter of Transmittal and other documents the Company may
specify, the Company shall deliver to the person in whose name such certificates
have been issued, (i)certificates registered in the name of such person
representing the number of full shares of New Common Stock into which the shares
of Old Common Stock represented by the surrendered certificate shall have been
reclassified, and/or (ii) cash for fractional shares. Until surrendered as
contemplated by the preceding sentence, each certificate which represented
shares of Old Common Stock shall be deemed at and after the Effective Date to
represent the number of full shares of New Common Stock contemplated by the
preceding sentence.
For the purpose of determining ownership of Old Common Stock at the effective
Date, shares will be considered to be held by the person in whose name those
shares are registered in the stock records of the Company, regardless of the
beneficial ownership of those shares. No service charges, brokerage commission
or transfer taxes shall be payable by any holder of any certificate which prior
to the approval of the Reverse Stock Split represented any shares of Old Common
Stock, except that if any certificates for New Common Stock are to be issued in
a name other than that in which the certificates for shares of Common Stock
surrendered are registered, it shall be a condition of such issuance that (i)
the person requesting such issuance pay to the Company any transfer taxes
payable by reason thereof (or prior transfer of such surrendered certificate, if
any) or establish to the satisfaction of the Company that such taxes have been
paid or are not payable, and (ii) such surrendered certificate shall be properly
endorsed and otherwise in proper form for transfer, or the holder will supply a
duly executed affidavit of lost certificate.
No certificates or scrip representing fractional shares of New Common Stock
shall be issued in connection with the Reverse Stock Split. Instead,
shareholders holding a number of shares of Old Common Stock not evenly
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divisible by one thousand, and shareholders holding fewer than one thousand
shares of Old Common Stock, upon surrender of their old certificates will
receive cash in lieu of fractional shares of New Common Stock. The price payable
by the Company for fractional shares will be determined by multiplying the
fraction of a share of Old Common Stock by $3.89, the fair market value of a
share of Old Common Stock.
The Company currently estimates that approximately 370 of the 730 shareholders
that will hold fractional shares have had their proxy materials returned,
undeliverable to the Company for more than two years. Texas Business Corporation
Act ("TBCA") Article 2.25B states that notice otherwise required to be given to
any shareholder pursuant to the TBCA, or the articles or bylaws of the
corporation need not be given if (i) notice of two consecutive annual meetings
and all notices of meetings held during the period between those annual
meetings; or (ii) all (no less than two) payments of distributions or interest,
sent by first class mail during a 12 month period have been mailed to the
shareholder, addressed to the address shown on the transfer records of the
corporation have been returned undeliverable. The Company will make efforts to
locate missing shareholders by checking addresses with internal resources such
as phone books and publicly available resources on the internet. Any unclaimed
funds payable to the shareholders who cannot be located by the Company will be
tendered to the State of Texas pursuant to its escheat laws.
Approval of the Reverse Stock Split will require approval by two-thirds (2/3) of
the shares of Old Common Stock that were outstanding on the Record Date.
Accordingly, the Reverse Stock Split will be approved if at least 967,333 shares
of Old Common Stock are voted in favor of the Reverse Stock Split.
CERTAIN EFFECTS OF REVERSE STOCK SPLIT PROPOSAL ON THE COMPANY'S SHAREHOLDERS
1. RIGHTS, PREFERENCES AND LIMITATIONS. There are no differences
between the respective rights, preferences or limitations of the Old
Common Stock and the New Common Stock. If the Reverse Stock Split is
approved and implemented, each shareholder's percentage interest will
be the same as it was prior to the approval of the proposal, except
for the effect of the elimination of fractional shares. There will be
no differences with respect to dividend, voting, liquidation or other
rights associated with the Company's Old Common Stock before or after
the Reverse Stock Split.
2. FINANCIAL EFFECT. The Company expects that the total cost of the going
private transaction will be approximately $431,620, including an
estimated $216,500 in expenses and an estimated $225,620 to purchase
fractional shares. Most of the purchase of fractional shares pursuant
to the going private transaction will be funded pursuant to a loan
secured by the real estate of the Company, as described below. The
other expenses of the transaction will be paid out of the operating
cash flow of the Company.
The Company borrowed $610,000 on October 28, 2002 from Capital Farm
Credit at 6.65% annual interest pursuant to a 15-year note (the
"Note"). Approximately $200,000 of the proceeds of this Note will be
used in conjunction with the going private transaction. The Company
plans to repay the Note out of the operating cash flow of the Company.
Of the $610,000 borrowed, approximately $200,000 will be used to fund
the repurchase of shares of the Company. The remaining costs
(primarily expenses of the transaction) have been funded from the
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Company's operating cash flow. The remaining proceeds of the Note
have been contributed to TVPC in connection with transactions not
related to the Reverse Stock Split. The loan was used as a capital
contribution to TVPC which allowed it to repay certain outstanding
bank debt (on which the Company was a guarantor, and for which
guarantee the Company had begun to accrue). The Company's potential
liability as a guarantor of the TVPC debt will be reduced to $123,000
as a result of the reduction in amounts owed by TVPC. Additionally,
TVPC paid to the Company $120,000 owed, increasing the cash of the
Company and reducing its receivables.
The Reverse Stock Split will require a restatement of the Company's
earnings per share and book value per share, but we do not believe the
restatement is material. The restatement is found in the amended
Schedule 13e-3 under the heading "Financial Statements."
3. EFFECT ON MARKET FOR SHARES. The Company estimates that the number of
shares of New Common Stock outstanding after the Reverse Stock Split, if
effected will be approximately 1,393 in the hands of approximately 33
shareholders. As a result, there will be no organized market for the Company's
shares. The Company has no current plans to issue additional shares of stock,
but the Company reserves the right to do so at any time and from time to time at
such prices and on such terms as the Board determines to be in the best
interests of the Company and its then shareholders. Persons who continue as
shareholders following implementation of the Reverse Stock Split proposal will
not have any preemptive or other preferential rights to purchase any of the
Company's stock that may be issued by the Company in the future, unless such
rights are currently specifically granted to such shareholder.
4. TERMINATION OF EXCHANGE ACT REGISTRATION OF NEW COMMON STOCK. The
Reverse Stock Split proposal will terminate the public registration of
the Old Common Stock with the SEC under the Exchange Act, and the
Company intends to terminate this registration as soon as practicable
after approval of the Reverse Stock Split proposal by the
shareholders. The Company may terminate registration under the
Exchange Act if the New Common Stock is no longer held by 300 or more
shareholders of record. Termination of registration of the Old Common
Stock under the Exchange Act would substantially reduce the
information required to be furnished by the Company to its
shareholders and to the SEC and would make certain provisions of the
Exchange Act, such as the requirement of providing annual and
quarterly reports to shareholders, no longer applicable to the
Company.
With respect to the executive officers and directors of the Company,
in the event of the intended termination of registration of the Old
Common Stock under the Exchange Act: a) executive officers, directors
and other affiliates would no longer be subject to many of the
reporting requirements and restrictions of the Exchange Act, including
without limitation, the reporting requirements and short-swing profit
provisions of Section 16 thereof. Upon termination of Exchange Act
registration, the Company will continue to be subject to the general
anti-fraud provisions of federal and applicable state securities laws.
FEDERAL INCOME TAX CONSEQUENCES
THE FOLLOWING DISCUSSION SUMMARIZING FEDERAL TAX CONSEQUENCES IS BASED ON
CURRENT LAW.
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The receipt of New Common Stock solely in exchange for Old Common Stock will not
result in recognition of gain or loss to the remaining shareholders. The
adjusted tax basis of the remaining shareholder's New Common Stock will be the
same as the shareholder's adjusted tax basis in the Old Common Stock. The
holding period of New Common Stock received solely in exchange for Old Common
Stock will include the shareholder's holding period in the Old Common Stock. No
gain or loss will be recognized by the Company upon the Reverse Stock Split.
Shareholders who receive cash in lieu of fractional shares of New Common Stock
will be treated as receiving cash as payment in exchange for their fractional
shares of New Common Stock, and they will be entitled to recognize a gain or
loss on sale, based on the difference between the amount of cash received and
the adjusted basis of the fractional shares surrendered for cash. The gain or
loss may qualify as a capital gain or loss, depending on the holding period and
the nature of the holding.
APPRAISAL RIGHTS AND DISSENTER'S RIGHTS
The shareholders do not have the right to demand the appraised value of their
shares (dissenter's rights) in conjunction with the Reverse Stock Split under
the Texas Business Corporations Act. There may exist other rights or actions
under the Texas Business Corporations Act, Texas common law or federal or state
securities laws for shareholders who are aggrieved by the Reverse Stock Split
generally. Although the nature and extent of such rights or actions are
uncertain and may vary depending on facts or circumstances, shareholder
challenges to corporate action in general are related to the fiduciary
responsibilities of corporate officers and directors and to the fairness of
corporate transactions.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED ON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT SHAREHOLDERS VOTE "FOR" THE
REVERSE STOCK SPLIT AND THE RELATED AMENDMENT TO THE COMPANY'S ARTICLES OF
INCORPORATION.
OWNERSHIP OF VOTING SECURITIES OF THE COMPANY
The following table contains information concerning the persons known by the
Company to be the beneficial owners of more than five percent of the Common
Stock of the Company at the close of business on August 1, 2003:
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF COMMON STOCK
- -------------------------- ------------------------- ----------------------- -----------------------
Common Stock, par value $1 John R. Parten 1,077,425 74.25%
16945 Northchase Drive,
Suite 1800,
Houston, Texas
77060-2151
Common Stock, par value $1 Patrick J. Moran 73,017(2) 5.03%
2803 Sackett
Houston, Texas
77098-1125
</Table>
(1) Based on information furnished by the respective shareholders.
(2) Included are 14,800 shares of Old Common Stock of the Company held by
The Moran Employees Trust. Patrick J. Moran is co-trustee of such Trust
35
<Page>
and has shared power to vote the shares held by the Trust, however he
disclaims any beneficial interest in such shares.
The following table contains information as to the Old Common Stock of the
Company beneficially owned as of August 1, 2003, by all directors and
executive officers as a group.
<Table>
<Caption>
NAME AND ADDRESS OF AMOUNT AND NATURE OF
TITLE OF CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) PERCENT OF COMMON STOCK
-------------------------- ------------------------- ----------------------- -----------------------
Common Stock, par value $1 John R. Parten 1,077,425 74.25%
Chairman, President and
Director
16945 Northchase Drive,
Suite 1800,
Houston, TX 77060
Common Stock, par value $1 R.F. Pratka 131 .01%
Vice President, Treasurer and
Director
16945 Northchase Drive,
Suite 1800,
Houston, TX 77060
Common Stock, par value $1 William C. Bennett 142 .01%
Director
P.O. Box 666
Madisonville, Texas 77864
Common Stock, par value $1 Bruce Franke 84 -
Director
P.O. Box 557
Willis, Texas 77378
Common Stock, par value $1 Virginia Cortinas 0 -
Secretary
16945 Northchase Drive,
Suite 1800,
Houston, TX 77060
Common Stock, par value $1 All Directors and Executive 1,077,782 74.28%
Officers as a Group (five in
number)
</Table>
(1) Based on information furnished by the respective shareholders.
PERSONS MAKING THE SOLICITATION
The enclosed proxy is solicited on behalf of the Board of Directors of the
Company. The cost of soliciting proxies on the accompanying forms will be borne
by the Company. In addition to the use of mail, officers of the Company may
solicit proxies by telephone or telegraph. Upon request, the Company will
reimburse brokers, dealers, banks and trustees or their nominees, for reasonable
expenses incurred by them in forwarding proxy material to beneficial owners of
shares of Old Common Stock.
ACCOUNTANTS
Representatives of the principal accountants for the current year and for the
most recently completed fiscal year are expected to be present at the Meeting,
will have the opportunity to make a statement if they desire to do so, and are
expected to be available to respond to appropriate questions.
REVOCABILITY OF PROXY
Shares represented by valid proxies will be voted in accordance with
instructions contained therein, or, in the absence of such instructions, in
accordance with the Board of Directors' recommendations. Any shareholder of the
Company has the unconditional right to revoke a proxy at any time prior to the
voting thereof by (i) notifying the Secretary of the Company with a
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<Page>
written notice thereof addressed to the Company at 16945 Northchase Drive, Suite
1800, Houston, Texas 77060; (ii) executing and delivering a subsequent proxy; or
(iii) personally appearing at the Meeting and casting a contrary vote. No
revocation shall be effective unless and until notice of such revocation has
been received by the Company at or prior to the Meeting.
OTHER MATTERS
The Board of Directors is not aware of any matter to be presented for action at
the Meeting other than the matters set forth herein. If any other matter should
be presented at the Meeting upon which a vote may properly be taken, John R.
Parten and Virginia Cortinas will vote shares represented by all proxies
received by the Board of Directors in accordance with their judgment.
ANNUAL MEETING OF THE SHAREHOLDERS
The annual meeting of the shareholders of Seven J is typically held in March of
each year. The deadline for the submission of timely shareholder proposals to
the Company is November 18, 2002. Shareholder proposals received thereafter will
not be included with the materials for the annual shareholder meeting. The Board
of Directors has determined to delay the annual meeting during the pendency of
the Reverse Stock Split transaction.
FINANCIAL INFORMATION AND INCORPORATION BY REFERENCE
A copy of the Company's Annual Report on Form 10-KSB for the year ended October
31, 2002 and Quarterly Reports on Form 10-QSB for the quarters ended January 31
and April 30, 2003 are incorporated herein by reference. Copies of these reports
accompany this Proxy Statement and are available for review from the EDGAR
filings obtained through the SEC's Internet Website (http://www.sec.gov). UPON
REQUEST TO THE COMPANY'S OFFICES AT 16945 NORTHCHASE DRIVE, SUITE 1800, HOUSTON,
TEXAS 77060, PHONE 281-874-2101, THE COMPANY WILL PROVIDE TO ANY SHAREHOLDER OF
THE COMPANY, WITHOUT CHARGE, A COPY OF ANY AND ALL DOCUMENTS FILED WITH THE SEC
AND INCORPORATED BY REFERENCE HEREIN THAT ARE NOT INCLUDED WITH THIS PROXY
STATEMENT.
AVAILABLE INFORMATION
The Company is subject to the information requirement of the Exchange Act of
1934, as amended, and in accordance therewith, files reports, proxy statements
and other information with the SEC. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549 and the regional office of the SEC at Suite 1400, Citicorp Center, 14th
Floor, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
materials can also be obtained at prescribed rates by writing to the Public
Reference Section of the SEC at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C 20549. In addition, such reports, proxy statements and other
information are available from the EDGAR filings obtained through the SEC's
Internet Website (http://www.sec.gov).
THE COMPANY HAS FAILED TO ELECTRONICALLY FILE ITS ANNUAL MEETING INFORMATION
STATEMENT (SCHEDULE 14C) MATERIALS WITH THE SECURITIES AND EXCHANGE COMMISSION
BETWEEN 1996 AND 2001. THE COMPANY INCORRECTLY BELIEVED THAT IT COULD CONTINUE
TO FILE PAPER COPIES OF THE SCHEDULE 14C MATERIALS AND DID NOT REALIZE IT WAS
SUBJECT TO ELECTRONIC FILING REQUIREMENTS. THE COMPANY DID MAIL ITS SCHEDULE 14C
MATERIALS TO EACH OF THE SHAREHOLDERS IN CONJUNCTION WITH ITS ANNUAL REPORT. THE
COMPANY HAS NOT SOLICITED ANY PROXIES SINCE 1996, BUT HAS HELD SHAREHOLDER
MEETINGS WITHOUT FILING ITS MATERIALS PROPERLY WITH THE SECURITIES AND EXCHANGE
COMMISSION. UPON REQUEST TO THE COMPANY'S
37
<Page>
OFFICES AT 16945 NORTHCHASE DRIVE, SUITE 1800, HOUSTON, TEXAS 77060, PHONE
281-874-2101, THE COMPANY WILL PROVIDE TO ANY SHAREHOLDER OF THE COMPANY,
WITHOUT CHARGE, A COPY OF ANY AND ALL SCHEDULE 14C DOCUMENTS.
BY ORDER OF THE BOARD OF DIRECTORS
/s/John R. Parten
-----------------------------------------
John R. Parten, Chairman and President
EXHIBIT I - ARTICLES OF AMENDMENT
THESE ARE THE PROPOSED ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION
OF SEVEN J STOCK FARM, INC. THESE ARTICLES OF AMENDMENT WILL BE FILED WITH
THE SECRETARY OF STATE OF TEXAS TO BECOME EFFECTIVE ONLY UPON RECEIPT OF THE
APPROVAL OF THE SHAREHOLDERS TO THE TRANSACTIONS PROPOSED IN THIS PROXY
STATEMENT.
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
SEVEN J STOCK FARM, INC.
Pursuant to the provisions of Article 4.04 of the Texas Business
Corporation Act, the undersigned corporation adopts the following articles of
amendment to its articles of incorporation.
ARTICLE ONE
The name of the corporation is Seven J Stock Farm, Inc.
ARTICLE TWO
The following amendments to the articles of incorporation (the
"Articles"),were adopted by the shareholders of the corporation on September 24,
2003. The shareholders of the corporation approved an amendment to conduct a
1-for-1000 Reverse Stock Split whereby the one million five hundred thousand
(1,500,000) authorized shares of common stock with $1.00 par value were
reclassified and changed into one thousand five hundred (1,500) shares of common
stock with $1,000 par value.
1. AMENDMENT ONE alters or changes Article VI of the Articles, and the full
text of the provision as altered is as follows:
The issued and outstanding one million four hundred fifty one thousand
(1,451,000) shares of common stock of the corporation, with $1.00 par value, are
hereby reclassified and changed into one thousand four hundred fifty one (1,451)
shares of common stock with $1,000 par value.
The aggregate number of shares which the Corporation shall have the
authority to issue is one thousand five hundred (1,500) of the par value of one
thousand dollars ($1,000) each. No shareholder shall have a pre-emptive right to
acquire which may, at any time, be issued, sold or offered for sale by the
Corporation.
ARTICLE THREE
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<Page>
The number of shares of the corporation outstanding at the time of adopting
these amendments was one million four hundred fifty one thousand (1,451,000);
and the number of shares entitled to vote thereon was one million four hundred
fifty one thousand (1,451,000).
ARTICLE FOUR
The number of shares that voted for the amendment is ______________ and the
number of shares that voted against the amendment is _________.
ARTICLE FIVE
The manner in which any exchange, reclassification or cancellation of
issued shares provided for in Amendment One shall be effected is as follows:
Each one thousand shares of common stock with $1.00 par value previously
issued and outstanding at the time of the adoption of these amendments shall be
exchanged will be purchased at a rate of $3.89 per 1 share of the old common
stock.
ARTICLE SIX
Amendment One will not effect a change in the amount of stated capital.
EXECUTED, by the undersigned, this ___ day of September, 2003.
SEVEN J STOCK FARM, INC.
By:
------------------------------------
John R. Parten, President
39
<Page>
EXHIBIT II - FORM 10-KSB/A NO.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB/A NO. 1
<Table>
(MARK ONE)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 0-1394
SEVEN J STOCK FARM, INC.
(Name of small business issuer as specified in its charter)
<Table>
TEXAS 74-1110910
(State of incorporation) (I.R.S. Employer Identification No.)
16945 NORTHCHASE DR., SUITE 1800, HOUSTON, TX 77060
(Address of principal executive offices) (Zip Code)
</Table>
Issuer's telephone number (281) 874-2101
Securities registered under Section 12(b) of the Exchange Act:
NONE
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $1.00 A SHARE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-KSB or any amendment to this Form 10-KSB. /X/
Issuer's revenues for the fiscal year ended October 31, 2002 were
$1,374,000.
The aggregate market value of common stock held by non-affiliates on
December 15, 2002 was $1,309,618.45.
As of December 20, 2002 there were outstanding 1,451,000 shares of Seven J
Stock Farm, Inc. common stock $1.00 par value.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
40
<Page>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
INTRODUCTION
THE COMPANY HAS FAILED TO ELECTRONICALLY FILE ITS ANNUAL MEETING INFORMATION
STATEMENT (SCHEDULE 14C) MATERIALS WITH THE SECURITIES AND EXCHANGE COMMISSION
BETWEEN 1996 AND 2001. THE COMPANY INCORRECTLY BELIEVED THAT IT COULD CONTINUE
TO FILE PAPER COPIES OF THE SCHEDULE 14C MATERIALS AND DID NOT REALIZE IT WAS
SUBJECT TO ELECTRONIC FILING REQUIREMENTS. THE COMPANY DID MAIL ITS SCHEDULE 14C
MATERIALS TO EACH OF THE SHAREHOLDERS IN CONJUNCTION WITH ITS ANNUAL REPORT. THE
COMPANY HAS NOT SOLICITED ANY PROXIES SINCE 1996, BUT HAS HELD SHAREHOLDER
MEETINGS WITHOUT FILING ITS MATERIALS PROPERLY WITH THE SECURITIES AND EXCHANGE
COMMISSION. UPON REQUEST TO THE COMPANY'S OFFICES AT 16945 NORTHCHASE DRIVE,
SUITE 1800, HOUSTON, TEXAS 77060, PHONE 281-874-2101, THE COMPANY WILL PROVIDE
TO ANY SHAREHOLDER OF THE COMPANY, WITHOUT CHARGE, A COPY OF ANY AND ALL
SCHEDULE 14C DOCUMENTS.
Seven J Stock Farm, Inc. (the "Company") was incorporated in Texas in 1948
for the purpose of purchasing a cotton plantation for oil and gas exploration.
The oil and gas lease, still in force, was executed in 1949 to three owners, the
Woodley Petroleum Company, Moran Resources Company and Jubal R. Parten. In the
ensuing years, the ownership of the Company and the leasehold interests diverged
as the ownership in each has been sold and transferred. In 1960, the Company
became subject to 1934 reporting requirements when the interest in Seven J Stock
Farm held by Woodley Petroleum Company was distributed to its shareholders.
These spun off shares are the source of the minority shareholders in the Company
today.
In subsequent years, the Company ceased its cattle operations because of
significant losses and determined to lease its land for farming operations,
while maintaining income from its royalty interests. At the time, the lease for
farming operations was the income used to retire a significant debt that had
accumulated in the Company. In recent years, the Company has entered into
related farming businesses, such as pecan processing, pecan production, hay
production and pine tree farming, but has not yet experienced particular
success. The Company also extended its pipeline facilities in the 1980s to
gather production from new wells drilled at that time. Currently, the income
from royalty and pipeline operations is declining as the production from the
Company's lands and the surrounding areas is depleting, and the related farming
businesses have not produced positive cash flow, thus requiring the Company to
continue to search for ways to increase revenues and decrease expenses.
The 2002 Farm Bill makes the Company ineligible for federally subsided
insurance, disaster, and price support payments. Therefore, in 2003 the Company
has leased its farmland to two unrelated farmers on a cash basis instead of a
share crop basis. The Company has also received notice that the J.R. Parten
Ranch Trust will probably cease ranch operations in early 2003. The Company has
entered negotiations with an unrelated party to lease the ranchland formerly
leased to the J.R. Parten Ranch Trust. It appears that this lease will be at a
lower lease rate than that with the J.R. Parten Ranch Trust. The J.R. Parten
Ranch Trust will continue to be responsible for the lease payments until the end
of the lease term in October 2004 or, if a new lease is made at a lesser rate,
for the difference between the new rate and the higher rate in their lease for
that period. If the Ranch Trust ceases operations, it is probable that HAYCO
will also cease operations.
41
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The Company owns two subsidiaries, Madison Pipe Line Co., which is 100%
owned and Trinity Valley Pecan Company, which is 50% owned. Madison Pipe Line
Co. conducts its operations in a joint venture called Fort Trinidad Pipeline,
where it has a 50% interest (the other 50% venturer is Rainbow Pipe Line Company
which is wholly owned by John R. Parten). The Company is also a 50% venturer in
a joint venture called "HAYCO" which grows, cuts and sells hay (the other 50%
venturer is the J. R. Parten Ranch Trust).
The principal operations of Seven J Stock Farm, Inc., directly or through
its subsidiaries consist of the following:
- Ranch Land Leases
- Farm Land Share Crop Leases
- Oil and Gas Royalty Interests
- Natural Gas Gathering, Compression and Dehydration
- Producing Crops of Pecans and Hay
- Pecan Processing and Seasonal Pecan Gift Pack Sales
- Irrigation and Mowing
The Company has income from office space reimbursement from its affiliates
and other related insignificant leasing activities.
Other than compliance with reporting requirements as a public company, the
Company does not believe that governmental regulations have a material impact on
operations. The 2002 Farm Bill will make the Company ineligible for generally
subsidized insurance, disaster, and price support payments effectively
precluding the Company from farming directly in any manner.
As disclosed below, the Company receives some of its revenues from
transactions with related parties. The related parties directly transacting
business with the Company are described as follows:
- The J. R. Parten Ranch Trust (the "Ranch Trust") is a testamentary trust
established under the will of Jubal R. Parten, founder of the Company and
is administered by John R. Parten and Robert F. Pratka. The J. R. Parten
Ranch Trust owns or operates separate farm and ranch lands of about 11,000
acres, 3,000 acres of which is not adjacent to the property of the
Company. The Company derives revenue from a ranch lease to the Ranch Trust
for approximately 6,258 acres of the Company's ranch land. The Ranch Trust
also rents two employee housing units and office space at the Company's
ranch headquarters in Sand Ridge, Texas. The Ranch Trust owns 50% of the
stock of Trinity Valley Pecan Company and owns 50% of HAYCO, as well as
purchasing hay from HAYCO. The Ranch Trust is a royalty owner in some of
the gas that is transported and compressed by Madison Pipe Line Co.
Madison Pipe Line Co. owns its pipeline system and holds several pipeline
rights-of-way on land owned by the Ranch Trust. The Company believes that
the rental rates paid by the Ranch Trust are on terms that are at least as
favorable as it could have negotiated with a third party. As stated above,
the Ranch Trust plans to cease ranching operations in 2003. While they
will continue to be responsible for insuring that the Company gets its
full share of lease payments until the end of the term of the lease in
October 2004, the Company will have no lease payment from the Ranch Trust
after that date. The Ranch Trust also intends to cease its leases of
employee housing units and office space at Sand Ridge, Texas. We
anticipate that HAYCO will not operate in 2003 growing season.
- Fort Trinidad Pipeline. Madison Pipe Line Co. ("Madison") is a wholly
owned subsidiary of the Company engaged in gathering natural gas from
wells on and off the Company's land in the West Fort Trinidad area. Its
assets consist of approximately five miles of pipe lines and the
42
<Page>
related rights of way for its pipe lines. Madison operates through a joint
venture called Fort Trinidad Pipeline, which is 50% owned by Madison and
50% owned by Rainbow Pipe Line Company. Rainbow Pipe Line Company is owned
by John R. Parten, and owns a pipe line system with approximately 12 miles
of pipe line adjacent to the Company's land. Madison contributes the use
of its pipelines and 50% of the costs of operation of the system. Rainbow
Pipe Line Company contributes the use of a connecting set of pipelines and
pays its 50% of the operating costs of the system. Madison pays Rainbow
Pipe Line Company $1,000 per month to provide all of the office space,
administration and overhead required to operate Fort Trinidad Pipeline.
The Company determined that $2,000 was the approximate cost of providing
these services to Fort Trinidad Pipeline on a monthly basis and pays its
allocated 50% ($1,000). Rates for gathering and transporting gas are set
in negotiations with independent third party purchasers of the gas
transported.
- Trinity Valley Pecan Company is a 50% owned subsidiary of the Company
engaged in pecan processing and seasonal gift-pack sales. The other 50%
owner is the Ranch Trust (see description above). Trinity Valley was
formed in 1997. The Company leases to Trinity Valley a plant site
(including the land, slab, scale and utilities), pecan store and one
employee housing unit at Sand Ridge, Texas.
- Saturn Gas Systems, Inc. is owned over 90% by John R. Parten and is a
vehicle lessor and fueling station operator at Sand Ridge, Texas. Saturn
has a ground lease from the Company for its fueling station at Sand Ridge,
Texas at $100 per year. Saturn Gas Systems, Inc. provides fuel (road
gasoline and diesel) to the Company and other adjacent agricultural users
on a card-key system. Saturn Gas Systems also sells off-road diesel to the
Company for use in its agricultural operations. Because the off-road
diesel is sold for agricultural purposes, as required by Texas law, the
prices of this fuel are equal to Saturn's cost of the fuel with no mark
up.
In addition to these major transactions, the Company shares office space and
employees with entities controlled by John R. Parten, as described below in
"--Office Space" and "--Employees." John R. Parten personally leases six acres
of land from the Company for a residence at Sand Ridge, as described below in
"--Other Leases and Miscellaneous Activities."
RANCH LAND LEASES
The Company's ranch land is leased as follows:
<Table>
<Caption>
PERCENT OF
TOTAL COMPANY
LAND LEASED TO AREA LEASED LAND
- -------------- ------------- --------------
Unrelated parties:
Ranch land lease 1183.72 acres 10.6
Related parties:
Ranch Trust 6257.96 acres 56.2%
Land Lease
John R. Parten, 6 acres 0.1%
Trinity Valley Pecan Company 2 acres --%
</Table>
In accordance with the ranch land leases encompassing 7,442 acres or 66.8%
of Company land, the annual rent, payable monthly, is $16 per net acre, and the
unrelated parties pay the same rental amount as the Ranch Trust. The Company is
liable for payment of property taxes, repairs to water wells, and a portion of
maintenance expense of the levee system. The ranch lease with the unrelated
party was renewed on June 23, 1998 for a term of five years ending July 31,
2003. The ranch lease was originally signed with Jubal R. Parten in
November 1990 and was later renewed by the J.R. Parten Ranch Trust in
November 1994 and November 1999 for an additional five years, terminating
43
<Page>
October 31, 2004. The Company does not expect the lease to be renewed. HAYCO
uses land leased to the Ranch Trust set forth above and uses land owned by the
Ranch Trust. The Company does not pay any additional consideration for the cost
of the land used by HAYCO.
FARM LAND SHARE CROP LEASES
The Company's farm land is leased as follows:
<Table>
<Caption>
PERCENT OF
TOTAL COMPANY
LAND LEASED TO AREA LEASED PERCENT
- -------------- ------------ --------------
Unrelated parties:
Farm Land Share Crop Leases 2,612 acres 21.6%
</Table>
In December 2002, the leases with two unrelated farmers were renewed for a
term of five years. The consideration in the leases will be $35 per acre for dry
land and $60 per acre for irrigated land. This method replaces the share crop
leases used in prior years. This will provide to the Company a more stable cash
flow from leasing. The Company will cease independent irrigation services (the
tenant pays for irrigation through the higher price per acre). The Company will
continue to provide contract mowing to its tenants and unrelated third parties.
OIL AND GAS ROYALTIES
The Company receives oil and gas royalties attributable to thirty-three
producing oil and gas wells on Company land or on units including Company land.
The royalties were primarily created by a lease for 10,463.54 acres executed in
1949. They are received from sales of oil and gas to independent third parties
at prevailing market rates. Distributions of the royalties are made, at the
expense of the working interest owners, by the operators under the lease, which
are various oil and gas companies that have succeeded the original lessee,
including related parties. Of the wells for which the Company receives
royalties, all but two are operated by Parten Operating, Inc., (owned by John R.
Parten) which does not allocate or charge any costs of operation to the Company.
Parten Operating, Inc. does not own any working interests, but John R. Parten,
his family and related entities own approximately 40% of the working interests
outside the designated Units, and approximately 20% of the working interests
inside the Units. The other two wells are operated by Texas Moran Exploration
Company, which is owned by a significant shareholder of the Company. Royalties
are paid before any operating expenses are paid, so the Company does not pay any
revenues to the operators for operations. The royalty income is of a passive
nature as the Company does not explore for oil and gas and does not participate
in the drilling of oil and gas wells. For the fiscal years ended October 31,
2002 and 2001, net royalty income represented 17% and 21%, respectively, of the
Company's total revenue. Substantially all Company property is leased for oil
and gas exploration. Substantially all of the lessees have always been related
parties, but sales of oil and gas from which the royalties are derived have been
made to unrelated third parties at prevailing market rates.
The Company holds mineral interests under its original 10,463.54-acre tract
of land subject to non-executory royalty interests over 40 years old (they were
originally granted prior to the lease executed by Woodley). The Company also
owns varying interests in minerals in the few small tracts that have been
purchased since 1948. Since none of these small tracts is currently producing
any significant income, this discussion is limited to the royalty ownership in
the original 10,463.54-acre tract. An oil and gas lease to Woodley Petroleum
Company, dated November 30, 1949 covers this tract. The lease provided a gross
royalty of 0.125 of the production of oil and gas from the premises. Before the
formation of the Company, the original owners of the mineral royalty granted
non-executory royalty
44
<Page>
interests, so that the Company's net royalty is .084146. The table below
summarizes the current status of the wells in which the Company owns an
interest.
<Table>
<Caption>
TOTAL PRODUCING SHUT
CATEGORY WELLS WELLS WELLS ROYALTY CALCULATION
- -------- -------- --------- -------- ----------------------------------
Lease Wells on Seven J land 15 8 7 .084146 of production
Wells on Ft. Trinidad Dexter Unit+ 13 11 2 .084146 of all production
allocated to Tract 2 of the Unit*
Wells on Ft. Trinidad Upper Glen
Rose Unit+ 27 14 13 .084146 of all production
allocated to Tract 51 of the Upper
Glen Rose Unit**
</Table>
- ------------------------
+ Unitization under Texas law is a mechanism, which allows all owners of all
wells in an oil or gas field to share in production from all wells in the
field regardless of the location of those wells.
* Tract 2 (Seven J tract) comprises .207890 of the Ft. Trinidad Dexter Unit
** Tract 51 (Seven J tract) comprises .115429 of the Ft. Trinidad Upper Glen
Rose Unit
Note: Parten Operating, Inc. is the operator of all of the above wells except
Seven J #42 and Seven J #43, which are operated by Texas Moran Exploration.
MADISON PIPE LINE CO. OPERATIONS
In 1977, Madison Pipe Line Co., a wholly-owned subsidiary of the Company,
which owns a gas gathering system, commenced operation of its natural gas
pipelines. For fiscal years ended October 31, 2002 and 2001, pipeline income
represented 38% and 44%, respectively, of the Company's total revenue. The
principal service rendered by Madison Pipe Line Co. is to maintain and operate
gas gathering pipeline systems that deliver natural gas to various third party
pipelines for sale to the public, including gas from royalty interests owned by
the Company.
Effective December 1, 1996, Madison Pipe Line Co. entered into Fort Trinidad
Pipeline, a joint operating agreement with another pipeline company, Rainbow
Pipe Line Company, wholly owned by John R. Parten. Under the agreements for Fort
Trinidad Pipeline, Madison Pipe Line Co. and Rainbow Pipe Line Company shared
the cost of constructing a central compression and dehydration facility on an
equal basis, and then modified their systems to reduce the required amount of
pipeline used and required metering systems, thus reducing overall operating and
compression costs. The two participants have shared on an equal basis the
revenues, costs and expenses of operating the combined gathering system
pipelines and central compression and dehydration facilities. The term of the
agreement is for one year and for month-to-month thereafter until cancelled. The
combined gathering systems and pipelines are currently servicing twenty
producing wells, of which eight are on lands in which the Company owns mineral
rights. Eighteen wells are operated by Parten Operating, Inc., which is owned by
John R. Parten. The Fort Trinidad Pipeline does not pay any fees or overhead
expenses to Parten operating for operating the wells for which Fort Trinidad
Pipeline transports gas. In the year 2002, approximately 14.7% of the gas
flowing through the jointly operated system was produced from wells located on
the Company's land. Fort Trinidad Pipeline set the rates its charges for
gathering and compression by negotiation with independent third party purchasers
of the gas.
PRODUCING CROPS
The Company operates a pecan orchard of approximately 3,250 trees on
approximately 100 acres of its land and planted in several varieties of hybrid
papershell pecans. The Company began planting these trees in 1993, and completed
the planting in four years. These trees bore their first harvestable
45
<Page>
crop in 2001 of approximately 8,000 pounds. Experts indicate that this
production should double each year, depending on weather conditions, and reach a
maximum production of about 300,000 pounds in approximately 20 years. This pecan
orchard is not owned by Trinity Valley Pecan Company.
Under memorandum of agreement dated June 1, 2001, the Company participates
in a joint venture, named "HAYCO", with the Ranch Trust on an equal basis. The
Ranch Trust provides the hay fields (including lands leased from the Company) to
HAYCO for no consideration. HAYCO pays the costs for fertilization, irrigation,
cutting, raking, baling, and if not sold in the field, hauling the hay. It sells
hay to the Ranch Trust and other unrelated parties at local market rates, so
that the Ranch Trust pays the same price as the unrelated parties. All sales and
expenses are shared 50/50 between the two participants. The Company believes
that HAYCO will not operate in 2003 and future years.
The Company planted a stand of pine trees for harvest in 1998, in an effort
to increase the crops for sale by the Company. There was no joint venture
involved in this activity. The seedlings were destroyed by drought over a two
year period, and the Company has written off its investment as of 2001.
OTHER LEASES AND MISCELLANEOUS ACTIVITIES
Under a lease agreement beginning December 15, 1997, the Company leased
approximately six acres of land to John R. Parten. Under the terms of the lease
agreement, the Company is entitled to an annual rent of $200, subject to
escalation after ten years. The lessee is responsible for property taxes,
utilities, insurance, and the cost of construction of any buildings or
improvements. Upon lease termination, any buildings or improvements constructed
on the leased land becomes the Company's property. The lease term is fifty
years.
Under a lease agreement beginning July 7, 1998, the Company leased
approximately two acres of land and improvements to Trinity Valley Pecan
Company. Under the terms of the lease agreement, the Company is entitled to rent
of $1,500 per month, subject to escalation after ten years. The lessee is
responsible for property taxes, utilities, insurance, and the cost of
construction, repairs, or maintenance of any buildings or improvements. The
lease term is fifty years. Upon lease termination, any buildings or improvements
constructed on the leased land becomes the Company's property.
Parten Operating, Inc. also rents two pipe yards near Sand Ridge from the
Company at a monthly rental rate of $100 per month, each.
For the two fiscal years ended October 31, 2002 and 2001, revenue generated
from the leasing activities, including share of crops, represented 15% and 14%,
respectively, of the Company's total revenue.
46
<Page>
In addition to leasing, the Company has generated revenues from providing
irrigation services and mowing services to the tenant farmers of the Company.
Because of the new lease arrangements, revenues from irrigation will cease and
be included in the higher price for rental. The Company anticipates it will
continue mowing operations.
TRINITY VALLEY PECAN COMPANY OPERATIONS
Trinity Valley Pecan Company was started in 1997 as an incorporated joint
venture between the Company and the J.R. Parten Ranch Trust, with each owning
50%. In 1998, Trinity Valley Pecan Company leased a former feed mill site from
the Company at Sand Ridge, Texas. Trinity Valley Pecan Company renovated the
plant site and installed pecan processing equipment which would allow Trinity
Valley Pecan Company to process several millions pounds of nuts per year.
Trinity Valley Pecan Company also built out a store facility to be operated
during the holiday season at Sand Ridge. Trinity Valley also leases one employee
housing unit at Sand Ridge, Texas from the Company. In 2001, Trinity Valley
discontinued its wholesale pecan purchases and sales of nuts (except for the
quantity needed for its retail sales) and plans in the future to limit its
activities to custom pecan shelling for unrelated third parties and its seasonal
retail sales.
MAJOR CUSTOMERS
Customers comprising 10% or greater of the Company's revenues for the fiscal
years ended October 31, 2002 and 2001 are summarized as follows:
PIPELINE OPERATIONS--Gathering, transportation and compression income is
attributable to gas wells partially owned by related parties. All revenues of
Madison Pipe Line Co. come from one purchaser who is an independent third party.
The rates paid for gathering, transportation and compression, however, are
negotiated with and paid by the independent third party who purchases the gas on
the open market.
<Table>
<Caption>
YEAR
ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN
THOUSANDS)
$515 $632
==== ====
Percentage to total revenues 37% 43.7%
==== ====
</Table>
EMPLOYEES
The Company presently employs two full-time ranch employees and four
part-time individuals through a labor sharing arrangement with related parties,
including the J.R. Parten Ranch Trust, Trinity Valley Pecan Company and HAYCO.
If J.R. Parten Ranch Trust and HAYCO cease operations in 2003, the Company will
add one additional full time employee to replace shared employees. None of these
individuals are represented by a union, and management considers its relations
with the individuals to be satisfactory. The Company has not experienced serious
difficulty in hiring qualified employees.
OFFICE SPACE
The Company shares office space with all other entities owned by John R.
Parten in two locations: Sand Ridge, Texas, the site of the ranch, and 16945
Northchase Drive, Suite 1800, Houston, Texas. Approximately nine entities share
office space in Houston and approximately four entities share office space in
Sand Ridge, including the related parties described above. Office space and
related overhead
47
<Page>
expenditures have been allocated among the entities according to the number of
personnel required and related space needs. Under these arrangements, at Sand
Ridge, Texas, the J.R. Parten Ranch Trust, Parten Operating, Inc. and Rainbow
Pipe Line Company all pay $650, $3050 and $650, respectively in monthly office
rent to the Company. The Company pays $2,000 a month to Parten Operating, Inc.
for its share of office space and overhead in the Houston office. In 2003, the
J.R. Parten Ranch Trust will vacate its office and employees at Sand Ridge, and
cease paying rent.
GENERAL
The Company does not own any patents, trademarks, licenses, franchises or
concessions which might be deemed important to the Company or to any of its
segments. The Company does not have backlog orders or contractual commitments.
The Company has not expended any funds in research activities. The Company
anticipates no material effects on its business concerning compliance with
federal, state and local provisions which have been enacted or adopted
concerning environmental matters. The Company operates in the United States and
does not have foreign operations or export sales.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company owns in fee approximately 11,140 acres of land in Houston
County, Texas, adjoining the Trinity River located about 100 miles north of
Houston, Texas. Of this land, approximately 33% is planted as native pasture,
approximately 34% is improved pasture consisting of coastal bermuda and bahia
grasses, approximately 22% is cropland cultivated in cotton, wheat, milo, and
corn, approximately 1% is pecan orchards and approximately 10% is wooded pasture
or wasteland. Improvements include approximately twenty miles of roads,
approximately eighty four miles of perimeter and cross fencing, nine water
wells, a levee approximately ten miles long with pumping stations, five single
family residences, three buildings, seven barns or warehouses, two sheds, four
corrals, and one stable/tack room. Oil and gas royalties are received from sales
of oil and gas from the minerals owned by and located on the Company's acreage.
The Company shares in production from thirty-three wells either located on the
Company's land or on units in which some of the Company's land is included.
Seven wells located on Company land and fifteen of the wells located on the
units are shut-in, currently incapable of production. The lessees of the
minerals underlying Company land are related parties. The purchasers of the oil
and gas production are independent third parties.
Madison Pipe Line Co. property consists of three pipelines currently
servicing twenty wells located on Company land and in nearby fields. Madison
Pipe Line Co. also owns a 50% undivided interest in a compression and
dehydration facilities located on Company land.
Trinity Valley Pecan Company property consists of a pecan processing plant
and a retail store located on Company land at Sand Ridge, Texas.
The Company leases office space, pipe yards and employee housing to its
affiliates at its facilities at Sand Ridge, Texas and leases office space from
an affiliate for its Houston office, as described above in "Description of
Business--Office Space." The Company anticipates that leases from the Ranch
Trust for office space and employee housing may terminate if the Company is able
to find a third party tenant for its ranch lease lands and the Ranch Trust
ceases to be the lessee of the Ranch Lease.
ITEM 3. LEGAL PROCEEDINGS
Trinity Valley Pecan Company has been sued in the District Court of the 3d
Judicial District of Houston County, Texas (Case No. 00-0199) by Marion W. Lucky
d/b/a BL Pecans in conjunction with a contractual dispute concerning three loads
of pecans valued at approximately $81,000. The Company believes that the pecans,
when delivered, were infested with worms, and the pecan owner is suing for full
payment for the delivery. This suit was filed in September 2000 and is pending.
48
<Page>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock, not listed in any established public trading
market, is traded over-the-counter under the symbol SEVJ. The quoted average
prices of the common shares for the fiscal years ended October 31, 2002 and 2001
are as follows:
<Table>
<Caption>
QUOTED
AVERAGE
PRICE
-------------------
QUARTER 2002 2001
- ------- -------- --------
First $2.509 $2.00
Second 3.500 2.20
Third 3.509 3.25
Fourth 3.509 3.25
</Table>
The above quoted average prices were compiled from sporadic market
quotations which may not necessarily represent actual transactions.
As of November 7, 2002, the Company had approximately 730 shareholders.
No dividends were paid to shareholders during the fiscal years ended
October 31, 2002 and 2001.
Although no restrictions exist for the payment of dividends, any future
payment of cash dividends will depend upon the Company's earnings, financial
condition, capital requirements, and other factors deemed relevant by the Board
of Directors.
49
<Page>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes for the period indicated the percentage
increase (decrease) of revenues and costs and expenses as compared to the prior
period:
<Table>
<Caption>
PERIOD-TO-PERIOD INCREASE
(DECREASE) FOR FISCAL YEARS
-----------------------------------------
2002 2001
------------------- -------------------
REVENUES:
Pipeline operations $ 515 (18.5)% $ 632 (6.2)%
Net oil and gas royalties $ 228 (26)% $ 308 (8.1)%
Ranch lease rentals $ 199 (3)% $ 205 28.9%
Farm produce sales $ 393 58% $ 248 39.3%
Contract and irrigation services $ 39 (19)% $ 48 100.0%
Other revenues $ -- (100)% $ 5 25.0%
Total revenues $1,374 (5)% $1,446 13.8%
COSTS AND EXPENSES:
Operating expenses $ 740 (14)% $ 860 16.2%
General and administrative expenses $ 302 27% $ 237 (25.7)%
Depreciation and amortization $ 170 (3)% $ 176 37.5%
Equity in loss of 50% owned affiliate $ 73 (47)% $ 139 (55.0)%
Interest expense $ 14 (39)% $ 23 15.0%
Taxes--other than income taxes $ 45 (12)% $ 51 6.3%
Total costs and expenses $1,344 (10)% $1,486 (5.0)%
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES $ 30 175% $ (40) 86.0%
Provision (benefit) for income taxes $ (37) (629)% $ 7 (86.0)%
</Table>
The following is a discussion of material changes in the results of
operations of the Company.
COMPARISON OF FISCAL YEARS 2002 AND 2001
REVENUES
PIPELINE OPERATIONS--The Company's subsidiary, Madison Pipeline Co. owns a
50% interest in a joint venture called Fort Trinidad Pipeline System. Pipeline
gathering revenue for fiscal year 2001 increased 6% as compared to fiscal year
2000. Pipeline gathering revenue for fiscal year 2002 decreased 18.5% as
compared to fiscal year 2001. The decrease in pipeline revenue in 2002 is
attributable to an application of a fuel gas surcharge for compression. However,
total sales volume in 2002 increased 3.84% from 2001 to 2002. The increase in
pipeline revenue in 2001 is attributable to greater compression required by the
wells serviced by the gathering system. In 2002, approximately 14.7% of Fort
Trinidad Pipelines's throughput is attributable to wells on Company property.
There has been no change in the number of wells connected to the gathering
system.
The Company entered into a joint operating agreement effective December 1,
1996 to jointly operate its gas gathering system with a gathering system owned
by Rainbow Pipe Line Company, a company owned by John R. Parten. Under the terms
of the joint operating agreement, the Company was charged for its 50% share of
the cost of equipment and labor to construct, as part of the system, a central
compression and dehydration facility required to compress and remove excess
water content from the gas before delivery to a gas pipeline owned by an
unrelated party. The Company and Rainbow Pipe Line Company share equally in the
income, costs and expenses of operating the gathering system, including the
compression and dehydration facility. Rainbow Pipe Line Company is
50
<Page>
designated operator of the joint venture. Fifty percent of the expenses from
operating the joint venture, including the cost of labor, vehicles, tools and
administrative expenses related to the Sand Ridge office are paid by Madison
Pipe Line Co. to Rainbow Pipe Line Company. The expenses paid by Madison Pipe
Line Co. are approximately 23% of Rainbow's total expenses, which roughly
correlates to the percentage of throughput in the joint venture owned by Madison
Pipe Line Co. as compared to Rainbow Pipe Line's total through-put.
Additionally, Madison Pipe Line Co. pays 50% of the $2,000 per month
administrative fee owed to Rainbow Pipe Line Company in conjunction with the use
of office space and administrative and accounting services for Fort Trinidad
Pipeline at the Houston office. Rates for transportation, gathering and
compression are set by negotiation with the independent third party purchasers
of the gas.
The following chart describes the volume of gas transported by each well
connected to the Fort Trinidad Pipeline system by the 8/8ths interest in each
well. The number of wells serviced has not changed during the periods reported.
<Table>
<Caption>
SEVEN J 1998 1999 2000 2001 2002
WELL NAME INTEREST GAS VOL. GAS VOL. GAS VOL. GAS VOL. GAS VOL.
- --------- -------- --------- --------- -------- -------- --------
Adams, Andrew NO 0 0 370 12,037 10,823
Bayless, Roscoe NO 165,761 161,784 163,812 155,373 147,111
Brown, H D NO 19,992 18,844 12,796 5,680 5,560
Dorrell, Esther NO 254,253 243,635 190,081 138,616 165,337
Farmers #2 NO 154,106 150,834 96,799 103,588 99,244
Farmers #3 NO 260,974 225,058 197,309 142,121 143,944
Gould, Myra NO 148,981 126,334 96,853 82,175 68,268
Ivey, Will NO 447 0 571 1,310 1,441
Ivey-Richardson NO 42,395 36,671 34,296 27,140 38,939
Moody Cotton #5 NO 0 0 6,079 5,187 4,277
Richardson-Ivey NO 2,556 6,916 4,756 4,904 3,371
Seven J #14 YES 7,711 9,085 12,212 9,874 7,693
Seven J #15 YES 7,711 15,960 12,212 11,157 9,540
Seven J #20 YES 27,146 24,991 23,794 21,227 14,055
Seven J #30 YES 20,131 14,666 14,911 12,532 7,567
Seven J #33 YES 0 1,059 27,420 35,500 22,065
Seven J #39 YES 10,932 24,657 17,152 14,105 13,539
Seven J #42 & 43 YES (2) 93,173 53,655 21,047 43,846 50,858
Wakefield #3 NO 32,545 30,282 32,700 35,597 38,014
TOTAL 8 1,248,814 1,144,431 965,170 861,969 851,646
</Table>
NET OIL AND GAS ROYALTIES--Net oil and gas royalties for fiscal year 2001
decreased 8% as compared to fiscal year 2000, and decreased 26% in fiscal year
2002 compared to fiscal year 2001. The decrease in 2001 is primarily due to the
reduction in oil and gas production. Oil production decreased by 1% and gas
production decreased by 8%. In September 2001, there was an increase in the oil
field clean up fee from .0333% to .0667%. The decrease in 2002 is primarily due
to the reduction in oil and gas production and price. In 2002, oil production
decreased by 15% and gas production decreased by 7%. Average price per MCF for
natural gas is $5.56 in fiscal 2001 and $3.29 in fiscal year 2002. Average price
per barrel for oil and condensates is $22.76 in fiscal 2001 and $21.81 in 2002.
51
<Page>
The table below summarizes the production trend for the Company's royalty
interest in the 8 wells and 2 units in which Seven J has an interest:
<Table>
<Caption>
1998 PROD. 1999 PROD. 2000 PROD. 2001 PROD. 2002 PROD.
------------------- ------------------- ------------------- ------------------- -----------------
OIL GAS OIL GAS OIL GAS OIL GAS OIL GAS
WELL (BBL) (MCF) (BBL) (MCF) (BBL) (MCF) (BBL) (MCF) (BBL) (MCF)
- ---- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------
Seven J #14, #15, #39 2,199 1,530 2,229 4,229 2,227 3,770 2,234 2,838 2,246 2,651
Seven J #20 & #30 659 4,094 541 3,376 523 3,269 490 2,949 408 2,000
Seven J #33 236 0 216 0 2,510 2,159 3,049 2,800 2,031 1,983
Seven J #42 & 43 6,403 5,529 4,551 4,148 2,686 2,682 2,227 3,225 1,764 4,645
Dexter Unit 1,476 0 2,400 0 1,726 0 1,638 0 1,740 0
Upper Glen Rose Unit 234 5,332 225 5,120 212 4,581 196 3,307 146 2,795
</Table>
Production volumes typically trend down over time. Prices of oil and gas
have been very volatile in the last 10 years. Oil and gas royalty fluctuations
are based on both fluctuations in production (which generally trend downward)
and commodity prices for oil and gas (which can trend any direction).
FARM PRODUCE SALES--Farm produce sales consists of the Company's share of
cotton, corn, wheat and milo from farm land share crop leases, the Company's 50%
share of hay sales by HAYCO and the Company's direct sales of its pecan crop.
For the year 2002, of the $393,000 in revenues, $161,000 was derived from sale
of hay through HAYCO and $91,000 of that was derived from sales of hay to the
Ranch Trust. The remainder of the farm produce sales is attributable to sales
from leased lands, with a neglible amount attributable to pecan sales. During
the fiscal year ended 2002, 921 acres and 1691 acres were leased to two separate
tenant farmers under agricultural leases. Farm produce sales for fiscal year
2001 increased 39% as compared to fiscal year 2000, and a 58% increase in fiscal
year 2002 compared to fiscal year 2001. The increase in 2001 was the result of
sales of hay by HAYCO, which began in June 2001. Farm produce sales for fiscal
year 2002 increased due to cotton sales, hay sales and hay baling operations.
- The farmland share crop lease agreements that the Company has with two
non-affiliated farmers require the Company to pay a share of the costs of
the farming operation and share in that same percentage of the production
from the farming operation. In the case of cotton, the Company's
percentage is 25%, in the case of grain (corn or milo) the Company's
percentage is 30%. The cost, which the Company is required to share, is
the cost of fertilizer, insecticide, irrigation and transportation (to the
gin or to market). While the Company has the right to take its share of
production in kind, in fact the Company in most cases has opted to sell
its produce along with the farmer, and receives the same price as the
farmer. In addition, the Company receives its percentage of any insurance
or crop subsidy payments that are provided by the US Department of
Agriculture. Agricultural prices vary greatly from year to year. The table
below summarizes the highs and lows for each crop over the preceding
five-year period.
<Table>
<Caption>
LOW YEAR HIGH YEAR
--------- -------- ------------- --------
Cotton Price .4159/lb. 2000 .5684/lb. 2001
Milo Price 2.60/Bu. 1999 4.09/Bu. 2001
Corn Price 1.70/Bu. 2000 2.89/Bu. 2002
Cotton Volume 0 per ac. 1998 875.72 lb/ac. 2002
Milo Volume 0 per ac. 2001 85.7 Bu./ac. 1999
Corn Volume 0 per ac. 1998 130 Bu/ac. 1999
Farmland Operating Income $19,000 2001 $121,000 2002
</Table>
52
<Page>
Agricultural prices are determined by International Commodity Markets wholly
outside the control of the Company or the tenant farmer. Cotton is sold FOB the
COOP Gin in Houston County, Texas, and grain is sold FOB Port of Houston and
locally. In the past, price fluctuations did not have a material effect because
if prices fell, the Company received its shares of the U.S. Department of
Agriculture subsidy. These subsidies end this year. The new lease arrangements,
however, are not based on sales proceeds of crops and are cash rentals owed to
the Company based on acreage. Production volumes are determined in part by
weather, which is outside of the control of the Company or tenant farmer, and
partly by decisions made by the tenant farmer, such as what crops to plant and
what methods to employ. Beginning in 2003, the agricultural leases call for a
cash rental of $35 per acre for dry land and $60 per acre for irrigated land.
The Company believes that the new arrangement will be a more stable income
stream, and will provide the Company with revenue in excess of its lowest
receipts, but not as great as its maximum year. The Company will also no longer
have revenue directly from irrigation, but the revenue is built into the higher
rate paid by the tenant for irrigated land. The Company will continue to provide
contract mowing.
The HAYCO operation is an informal joint venture undertaken through a
memorandum dated June 1, 2001. The joint venture was undertaken because
the hay contractor for Rattlesnake Ranch (owned by the Ranch Trust) went
out of business and the management of the Company and the Trustees of the
Ranch Trust reasoned that by combining their existing equipment and
utilizing their existing labor pool they could produce the hay required by
the Ranch Trust and other local area ranchers on a profitable basis. This
required some new equipment, including a large baler and cutter. This
equipment was purchased through credit obtained by the Ranch Trust at a
cost of $110,000. The terms of the agreement call for the following:
- Reimbursing the Ranch Trust for the Company's 50% share of note payments
on the new equipment.
- Ranch Trust local market rates for the use of its existing equipment.
- Paying Ranch Trust the cost for using its labor.
- Paying the Company local market rates for the use of its existing
equipment.
- Paying the Company cost for using its labor.
- Selling the hay at local market rates to the Ranch Trust or to other
non-affiliated local ranchers.
The first year's hay operation has been marginally profitable. HAYCO gross
sales in fiscal 2002 and 2001 were $161,000 and $106,000 respectively.
HAYCO sells different sizes of hay bales including large bales (average
price per bale of $30), small square bales (average price per bale of
$3.50), and round bales (average price per bale of $29). The Company
believes that HAYCO will cease operations in 2003. As a result, the
Company will no longer have revenues or expenses from this operation.
- Pecan Sales for fiscal 2002 were $1,381.00.
RANCH LEASE RENTALS--Ranch Lease rentals consists of rentals for 6257.96
acres of ranch land to a related party and 1183.72 acres of ranch land to an
unrelated party at $16.00 per net acre per year, leases of plant site to Trinity
Valley Pecan Company and leases of office space in the Sand Ridge, Texas office
to related parties. Ranch Lease rentals increased from 2000 to 2001 29%
partially due to a lease by affiliated companies for office space in the Sand
Ridge, Texas office. Ranch Lease rentals had an insignificant change from fiscal
2001 to fiscal 2002. The Company believes that the lease of 6257.96 acres by the
Ranch Trust not be renewed. While the Company has not executed a new lease, it
is negotiating with a new tenant at a rate of $12 per acre. If the Company
succeeds in this negotiation,
53
<Page>
the Ranch Trust will pay the $4.00 difference through the term of its lease, so
that during 2003, there will be no change in income. Thereafter, the Company's
revenues will be reduced.
CONTRACT AND IRRIGATION SERVICES--Contract and irrigation services for
fiscal year 2001 increased 100% as compared to fiscal year 2000, and a 19%
decrease in fiscal year 2002 from 2001. This was the result of contract work
performed during the years and the farm land share crop leases including the
rental of the pivot system for irrigation of the land. The rental of the pivot
irrigation system is an annual rental payment from each tenant that is due
October each year. Irrigation revenue will be changed in 2003 so that there is
not direct irrigation revenue, but there is a higher rental rate paid by the
tenant for irrigated land. Contract mowing revenues are anticipated to continue.
COSTS AND EXPENSES
OPERATING EXPENSES--Operating expenses for the twelve months ended
October 31, 2001 increased $120,000 or 16% as compared to the twelve months
ended October 31, 2000, and for the 12 months ended for 2002 decreased $120,000
or 14% as compared to fiscal year 2001. The increase for 2001 is attributable to
an increase in the expenses for HAYCO including repair and maintenance of the
pivot irrigation system, the annual cost of fertilizers, and the operation of
the hay equipment. The decrease for 2002 is primarily due to a decrease in
pipeline operating expenses.
Pipeline operating expenses decreased 28% for fiscal year 2002 as compared
to fiscal year 2001 as the result of a decrease in compressor fuel. Gas usage in
fiscal 2001 69,345 mmbtu at avg. price of $4.40 compared to 74,850 mmbtu at an
avg. price of $2.90 in 2002. Price is based on Houston Ship channel posted price
that is stated in the contract with the independent third party purchaser.
Ranch operating expenses decreased 31% for fiscal year 2001 as compared to
fiscal year 2000 primarily as the result of an decrease in outside service costs
and a reduction in the superintendent's salary. Ranch operating expenses
decreased 17% for fiscal year 2002 as compared to fiscal year 2001 primarily as
the result of an decrease in outside service costs and in repairs and
maintenance on equipment.
Farm operating expense increased 226% for fiscal year 2001 as compared to
fiscal year 2000. The increase is due to additional repairs and maintenance of a
tractor and the pivot irrigation system, fertilizer, and the cost of operating
HAYCO. Farm operating expense increased 32% for fiscal year 2002 as compared to
fiscal year 2001. The increase is due to an additional repairs and maintenance
of the levee flood control gate, fertilizer and labor necessary for the HAYCO
operation.
General and Administrative Expenses decreased 26% for fiscal year 2001 as
compared to fiscal year 2000. The decrease is primarily due to decreased
allocated salaries, payroll taxes, office rent, consulting fees, and other
expenses from related entities. General and administrative expenses increased
27% for fiscal year 2002 as compared to fiscal year 2001. The increase is
primarily due to increased consulting and legal fees due to the costs of taking
the Company private incurred during the fiscal year.
DEPRECIATION, AMORTIZATION, AND IMPAIRMENT--Depreciation, amortization, and
impairment for fiscal year 2001 increased 38% as compared to fiscal year 2000.
The increase is attributable to additions of farm equipment, and the pecan
orchard irrigation system. Additionally, the pine plantation planted in 1998 was
deemed to be impaired (a total loss) due to severe drought conditions
experienced during 1998 and 1999. All of the costs associated with the pine
plantation totaling approximately $24,000, were written off to impairment. The
changes in depreciation and amortization for fiscal year 2002 were
insignificant.
EQUITY IN LOSS OF 50% OWNED AFFILIATE--The October 31, 2002 and 2001
consolidated financial statements have been restated to correct an error in the
calculation of the Company's
54
<Page>
investment and related equity method losses in Trinity Valley Pecan Company
("Trinity")(SEE PART I. FINANCIAL INFORMATION, NOTE 16). In the previously
reported financial statements, the Company recorded its share of losses in
Trinity up to the amount of its investment. On a separate basis, once the
investment in Trinity had been written down to zero, the Company quit applying
the equity method and accounted for the guarantees separately by expensing on an
annual basis the amount the Company estimated would be due pursuant to the
guarantees. The restatement ceased the separate evaluation of the investment and
the guarantees, and the Company has continued to apply the equity method of
accounting and recognition of the losses of Trinity, even though the investment
has been reduced to zero, because of the guarantees. The Company, John R. Parten
and another related party jointly and severally guarantee certain of Trinity's
debt. The guaranteed loans include a plant construction loan and working capital
lines-of-credit with principal balances totaling approximately $367,000 and
$933,000 at October 31, 2002 and 2001, respectively. The loans bear interest at
rates ranging from 7.95% to 9.50% and mature beginning March 2003 through
October 2004. As a result of recognizing the Company's share of losses from
Trinity for the years ended October 31, 2002 and 2001 approximately $73,000 and
$139,000, respectively, of losses were recognized in earnings based on Trinity's
losses of approximately $146,000 and $277,000 for the years ended October 31,
2002 and 2001, respectively. The decrease in Trinity's net losses from
approximately $277,000 in 2001 to $146,000 in 2002 is due to the restructuring
of its pecan operations. In 2001, Trinity restructured its pecan operations by
discontinuing its wholesale pecan purchases and sales of nuts (except for the
quantity needed for its retail sales) and limiting its activities primarily to
custom pecan shelling for unrelated third parties and to seasonal retail sales.
As part of Trinity's restructuring of its pecan operations, it eliminated all
unnecessary labor, which comprises the bulk of its pecan operating expenses.
INTEREST EXPENSE--Interest expense for fiscal year 2001 increased by 15% as
compared to fiscal year 2000. The increase is attributable to an increase in
average notes payable outstanding during the year. Interest expense for fiscal
year 2002 decreased by 39% as compared to fiscal year 2001. The decrease is
attributable to average notes payable outstanding during the year.
Provision for Income Taxes--Provision for income taxes for fiscal year 2001
decreased 86% as compared to fiscal year 2000. The decrease is attributable to a
decrease in deferred tax liabilities. The benefit for income taxes for fiscal
year 2002 is primarily the result of a decrease in the current tax liability due
to the current deductible depletion attributable to oil and gas royalties. The
current deductible depletion is the result of the utilization of the available
depletion calculated for income taxes based on the current year and past years
income tax depletion calculations.
LIQUIDITY AND CAPITAL RESOURCES
In the early 1990's, gas production began to drop in volume and pressure
thereby greatly reducing the Company's profitability and further necessitating
compression of the gas in the pipe lines. Royalty income is expected to continue
to decline. As a result of the reduction in gas production revenue, management
began to seek other opportunities to create profits for the Company and means of
reducing operating expenses. After the end of fiscal 2002, however, an
independent third party plans to commence drilling one well on Company property.
The Company cannot predict whether the well will be successful, but if it is
successful, it is possible that revenues could increase.
In 1996, the Company entered an expense reducing project related to its pipe
line business, the Fort Trinidad Pipeline joint venture with the Company's
wholly owned subsidiary, Madison Pipe Line Co. and Rainbow Pipe Line Company, a
pipe line company operating in nearby Madison County owned by John R. Parten. By
combining operations, the Company reduced its expenses of operations by using
portions of the facilities of Rainbow Pipe Line Company instead of the higher
cost of maintaining a completely separate staff. The Company expects revenues to
continue to decline.
55
<Page>
Another venture pursued by the Company was the pecan business. Ranches
adjacent to the land owned by the Company have a significant production of
native pecans. In approximately 1993, the Company sought to capitalize on this
opportunity by planting 3,250 pecan trees. Additionally, the Company became a
50% owner of the Trinity Valley Pecan Company ("TVPC") with the Ranch Trust in
1997. Initially, TVPC was involved with the purchase and sale of nuts, but was
unprofitable with these activities. Currently, TVPC has limited its activities
to custom pecan shelling and seasonal retail sales. The Company anticipates that
its net revenues will stabilize and grow from this operation since the
determination to cease wholesale pecan purchases.
In 1998, the Company invested $24,000 planting a pine plantation.
Unfortunately, the pine venture was unsuccessful as severe drought conditions
killed most of the plantation.
In 2000, the custom hay cutter for the Ranch Trust ceased operating. The
manager of the Company and the manager of the Ranch Trust property determined
that using the existing labor pool and equipment, they could enter the business
of growing, cutting and baling hay. The Company determined this could be a
profitable venture and entered the HAYCO venture with the Ranch Trust. Each
entity owns 50% of the venture and additional equipment purchased is owned
jointly. HAYCO produces hay on property leased by the Company to the Ranch Trust
and on Ranch Trust property (and the Company pays no costs for the use of the
land), and the Company shares equally in the profits from selling the hay
produced. The Company believes that HAYCO will cease operations in 2003, which
will reduce revenues and expenses of the Company.
The Company is actively seeking another Ranch Lease tenant besides the Ranch
Trust to lease the Company's acreage. It is negotiating, but has not executed a
new lease at $12 per acre, which is $4.00 lower that the current lease. The
proposed new tenant is an unrelated third party. If the Company executes the new
lease, liquidity will not be affected in 2003 because the Ranch Trust will
continue to pay its lease obligations. Once the Ranch Trust lease expires in
2004, however, the Company's revenues will decrease.
The Company further sought to improve its profitability by reducing
administration costs. In 2000, administrative and accounting functions were
moved from Robert Pratka's group to labor provided by John R. Parten.
Mr. Parten believed he could provide these services at a lower fixed cost.
Additionally, John R. Parten cut his consulting fee in half to $1000 per month.
The Company also sought to reduce its auditing fees by changing audit firms, but
did not find that it could reduce its fees. Most recently, the Company
investigated the feasibility of conducting a going private transaction to reduce
the costs of maintaining public company status. The Company is proceeding with
the privatization transaction, but actual costs have been higher than
anticipated. The Company has retained proceeds from a loan to pay for fractional
shares created in the going private transaction and intends to pay for the costs
out of cash flow.
The Company has used debt to finance part of the operations of the business.
As further described in Note 3 of the financial statements, the Company had
$662,000 in long term debt (including current maturities) October 31, 2002,
compared with $244,000 in long term debt October 31, 2001. In October 2002 the
Company has a new outstanding note of $610,000 which paid off an existing note
in the amount of $176,000 and also made a $400,000 capital contribution to
Trinity that would help reduce their debt and provide Trinity with working
capital. The Company intends to repay its debt out of its revenues and related
cash flow.
Net cash provided by our operating activities was $106,000 for the year
ended October 31, 2002, compared to $285,000 for 2001. The decline was primarily
due to a decline in revenue from pipeline operations and oil and gas royalties.
This was partially offset by increased in farm produce sales. However, much of
the cash collections of the 2002 farm produce sales will not take place until
the subsequent fiscal year. The costs of the going private transaction will
significantly affect cash flow, but the Company currently believes it will have
sufficient cash flow to pay these costs.
56
<Page>
The Company's liquidity could be adversely affected due to losses from and
loan guarantees for Trinity Valley Pecan Company, a 50% owned affiliate. Both
the Company, the Ranch Trust and John R. Parten guarantee a portion of Trinity
Valley Pecan Company's debt ($367,000 at October 31, 2002). The Company invested
or advanced approximately $467,000 and $141,000 during the fiscal years ended
October 31, 2002 and 2001, respectively, that was used to pay down existing debt
and to provide Trinity with working capital. With new capital and reduced debt,
the Company believes that Trinity can handle its remaining debt and generate an
operating profit.
As of October 31, 2002, the Company's working capital was $133,000. Payment
of approximately $12,000 attributable to notes payable and long-term debt is
required during the fiscal year ending October 31, 2003. It is not anticipated
that dividends will be paid in the near future.
The Company has no current commitments for any capital expenditures in the
future. The Company's source of liquidity is cash received from continuing
operations and the borrowing activities described above. If cash from continuing
operations is insufficient to fund future capital expenditures the deficit will
have to be covered by future borrowings.
57
<Page>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2002 AND 2001
C O N T E N T S
<Table>
<Caption>
PAGE
--------
Independent Auditors' Report................................ 59
Consolidated Balance Sheets................................. 60
Consolidated Statements of Operations....................... 61
Consolidated Statements of Shareholders' Equity............. 62
Consolidated Statements of Cash Flows....................... 63
Notes to Consolidated Financial Statements.................. 64
</Table>
58
<Page>
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Seven J Stock Farm, Inc.
We have audited the accompanying consolidated balance sheets of Seven J
Stock Farm, Inc. and Subsidiary (the "Company") as of October 31, 2002 and 2001,
and the related consolidated statements of operations, shareholders' equity and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Seven J Stock Farm, Inc. and Subsidiary as of October 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
As disclosed in Note 15, the Company has not presented certain supplementary
information for oil and gas activities that the Financial Accounting Standards
Board has determined is necessary to supplement, although not required to be
part of, the basic consolidated financial statements as of and for the year
ended October 31, 2001.
As disclosed in Note 16 to the consolidated financial statements, the 2002
and 2001 consolidated financial statements have been restated to correct errors
in the method of recognizing equity method income (losses) from the investment
in the Company's 50% owned affiliate.
/s/ MANN FRANKFORT STEIN & LIPP CPAs, LLP
Houston, Texas
December 17, 2002, except for Note 16, for which the date is June 19, 2003
59
<Page>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<Table>
<Caption>
OCTOBER 31,
-------------------
2002* 2001*
-------- --------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 72 $ 25
Accounts receivable--trade 214 105
Accounts receivable--related parties 255 158
Deferred income taxes 3 17
Other current assets 5 3
------ ------
TOTAL CURRENT ASSETS 549 308
PROPERTY AND EQUIPMENT, net 1,525 1,689
OTHER ASSETS 55 55
------ ------
TOTAL ASSETS $2,129 $2,052
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable--trade $ 138 $ 118
Accounts payable--related parties 207 113
Accrued expenses 49 66
Accrued taxes other than income taxes -- 48
Accrued income taxes 5 4
Note payable 5 --
Current maturities of long-term debt 12 104
------ ------
TOTAL CURRENT LIABILITIES 416 453
LONG-TERM DEBT 650 140
DEFERRED INCOME TAXES 38 97
ACCRUED LOSS CONTINGENCY FOR 50% OWNED AFFILIATE 123 526
DEFERRED REVENUES 4 5
------ ------
TOTAL LIABILITIES 1,231 1,221
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share: authorized 1,500,000
shares; issued and outstanding 1,451,000 shares 1,451 1,451
Accumulated deficit (553) (620)
------ ------
TOTAL SHAREHOLDERS' EQUITY 898 831
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,129 $2,052
====== ======
</Table>
- ------------------------
* RESTATED (SEE NOTE 16)
See notes to consolidated financial statements.
60
<Page>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE DATA)
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
-------------------
2002* 2001*
-------- --------
REVENUES
Pipeline operations $ 515 $ 632
Net oil and gas royalties 228 308
Ranch lease rentals 199 205
Farm produce sales 393 248
Contract and irrigation service 39 48
Other revenues -- 5
----- -----
TOTAL REVENUES 1,374 1,446
COSTS AND EXPENSES
Operating expenses 740 860
General and administrative expenses 302 237
Depreciation, amortization, and impairment 170 176
Equity in loss of 50% owned affiliate 73 139
Interest expense 14 23
Taxes--other than income taxes 45 51
----- -----
TOTAL COSTS AND EXPENSES 1,344 1,486
----- -----
INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES 30 (40)
INCOME TAX BENEFIT (PROVISION) 37 (7)
----- -----
NET INCOME (LOSS) $ 67 $ (47)
===== =====
NET INCOME (LOSS) PER SHARE--BASIC AND DILUTED (1,451,000
weighted--average shares outstanding) $ .05 $(.03)
===== =====
</Table>
- ------------------------
* RESTATED (SEE NOTE 16)
See notes to consolidated financial statements.
61
<Page>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<Table>
<Caption>
COMMON STOCK TOTAL
------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT DEFICIT EQUITY
-------- -------- ------------- --------------
Balances at October 31, 2000, as previously
reported $1,451 $1,451 $(121) $1,330
Prior period adjustment -- -- (452) (452)
------ ------ ----- ------
Balances at October 31, 2000, as
restated 1,451 1,451 (573) 878
Net loss* -- -- (47) (47)
------ ------ ----- ------
Balances at October 31, 2001* 1,451 1,451 (620) 831
Net income* -- -- 67 67
------ ------ ----- ------
Balances at October 31, 2002* $1,451 $1,451 $(553) $ 898
====== ====== ===== ======
</Table>
- ------------------------
* RESTATED (SEE NOTE 16)
See notes to consolidated financial statements.
62
<Page>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<Table>
<Caption>
YEAR
ENDED
OCTOBER 31,
-------------------
2002* 2001*
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 67 $(47)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation, amortization, and impairment 170 176
Deferred income taxes (45) (3)
Equity in loss of 50% owned affiliate 73 139
Changes in operating assets and liabilities:
Accounts receivable (206) (40)
Refundable and accrued income taxes 1 6
Other current assets (2) 10
Accounts payable, accrued expenses and unearned
income 48 44
---- ----
Net cash provided by operating activities 106 285
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property and equipment (6) (27)
Investments in and advances to 50% owned affiliate (476) (141)
---- ----
Net cash used in investing activities (482) (168)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt and note payable 616 71
Payment on long-term debt (193) (209)
---- ----
Net cash provided by (used in) financing activities 423 (138)
---- ----
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 47 (21)
CASH AND CASH EQUIVALENTS--beginning of year 25 46
---- ----
CASH AND CASH EQUIVALENTS--end of year $ 72 $ 25
==== ====
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the year for:
Income taxes $ 8 $ 5
==== ====
Interest $ 14 $ 26
==== ====
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital expenditures for property and equipment financed
by debt $ -- $ 63
==== ====
Capital expenditures for other assets financed by debt $ -- $ 54
==== ====
</Table>
- ------------------------
* RESTATED (SEE NOTE 16)
See notes to consolidated financial statements.
63
<Page>
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Seven J Stock Farm, Inc. was incorporated in Texas in 1948. The principal
operations of Seven J Stock Farm, Inc., and Subsidiary (the "Company") which are
conducted on approximately 11,000 acres of land consist of producing and selling
agricultural field crops, leasing pastures, and gathering natural gas through
pipelines. In addition, the Company receives oil and gas royalties for minerals
underlying the land owned in fee. The Company owns a fifty percent interest in
Trinity Valley Pecan Company which is in the business of shelling and marketing
pecans and pecan products. All operations are located and conducted in the State
of Texas.
Preparation of Consolidated Financial Statements--The financial statements
include the accounts of Seven J Stock Farm, Inc. and its wholly-owned
Subsidiary, Madison Pipe Line Co. All significant inter-company accounts and
transactions have been eliminated. The equity method of accounting is used for
investments in affiliates owned between 20% and 50%.
Use of Estimates--The preparation of consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Recently Issued Accounting Pronouncements--In June 2001, the Financial
Accounting Standards Board ("FASB") issued SFAS 143, "Accounting for Asset
Retirement Obligations". In August 2001, the FASB issued SFAS 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". SFAS 143 addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002, and interim periods within those years. SFAS 144
replaced SFAS 121, "Accounting for Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" and other related provisions. SFAS 144
provides updated guidance concerning the recognition and measurement of an
impairment loss for certain types of long-lived assets. It also expands the
scope of a discontinued operation to include a component of an entity, and it
eliminates the current exemption to consolidation when control over a subsidiary
is likely to be temporary. SFAS 144 is effective for financial statements issued
for fiscal years beginning after December 15, 2001, and interim periods within
those years. Management believes that the adoption of the provisions of
SFAS 143 and SFAS 144 will not have a significant impact on the Company's
results of operations, financial position or cash flows.
Revenue and Expense Recognition--Revenues are reflected in operations when
earned and expenses when incurred utilizing the accrual method of accounting.
Revenue from pipeline operations is recognized based on dates natural gas is
gathered.
Revenue from net oil and gas royalties is recognized based on dates of
production.
Revenue from farm produce sales is recognized when field crops are harvested
and sold. Costs associated with farm produce sales, including fertilizer,
irrigation, and related costs are charged to operations as incurred since
accumulating such costs would not have a material effect on the Company's
financial statements due to the small quantity of inventory at year-end.
Revenue from ranch lease rentals is recognized based on lease periods.
Property and Equipment--Property and equipment is recorded at cost. The
straight-line method of computing depreciation and amortization is used for
financial reporting purposes. Maintenance and repairs are included in expenses
when incurred. Renewals and betterments which extend the useful life of the
equipment are capitalized. At the time properties are retired or otherwise
disposed of, the cost
64
<Page>
of the property and accumulated depreciation are removed from the accounts. The
difference between the net book value and the amount received by sale or salvage
is included in the results of operations.
The cost of planting pecan groves and the yearly maintenance and development
costs are capitalized until the grove is ready for commercial production. Net
proceeds from sale of pecans before commercial production are recorded as a
reduction of capitalized costs. Normal losses of trees due to disease and other
conditions during the development stage are not treated as a reduction to the
capitalized cost; however, abnormal losses are charged to current operations.
The capitalized cost is depreciated over its estimated economic life, beginning
in the first year of commercial production.
The Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate that the book value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred which indicate possible impairment. The carrying
value of a long-lived asset is considered impaired when the anticipated
cumulative undiscounted cash flows of the related asset or group of assets is
less than the carrying value. In that event, a loss is recognized based on the
amount by which the carrying value exceeds the estimated fair market value of
the long-lived asset. Approximately $0 and $24,000 of impairment was recognized
by the Company for the fiscal years ended October 31, 2002 and 2001,
respectively, related to a pine grove.
Cash and Cash Equivalents--The Company considers all highly liquid
investment purchases with an original maturity of three months or less to be
cash equivalents.
Deferred Income Taxes--In accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes", the Company utilizes the asset
and liability approach in computing deferred income taxes. Under the asset and
liability approach to accounting for income taxes, a deferred income tax
liability, calculated using projected tax rates, is recognized on temporary
differences which will result in projected future net taxable amounts. In
addition, a deferred income tax asset, calculated using projected tax rates,is
recognized on temporary differences which will result in projected future net
deductible amounts. The deferred income tax asset is reduced by a valuation
allowance based on management's estimate of the amount that will ultimately be
realized or deducted in future years.
Earnings Per Share--Basic earnings per share is computed based on the
weighted average number of common shares outstanding, while diluted earnings per
share is computed based on the weighted average number of common shares
outstanding adjusted by the number of additional shares that would have been
outstanding had potentially dilutive common shares been issued. No potentially
dilutive common shares were outstanding as of October 31, 2002 and 2001.
Reclassifications--Certain items and amounts in the October 31, 2001
consolidated financial statements have been reclassified to conform with the
October 31, 2002 presentation. The reclassifications have no effect on net
income.
NOTE 2--NOTE PAYABLE
<Table>
<Caption>
OCTOBER 31,
--------------------
2002 2001
-------- ---------
(IN THOUSANDS)
Installment note with an insurance company of $6,000;
principal and interest payable in 9 monthly installments;
maturing June 2003; bearing interest at 9 0% $5 $ --
== =========
</Table>
65
<Page>
NOTE 3--LONG-TERM DEBT
Long-term debt consists of the following:
<Table>
<Caption>
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Note payable of $210,000 to a bank; principal and interest
payable in equal monthly installments of $8,049 beginning
June 2001, maturing October 2003; bearing interest at 1%
over prime rate; secured by a deed of trust on the
Company's mineral interest, and guaranteed by an officer
and shareholder of the Company and another related party;
paid in October 2002 $ -- $176
Installment note with a finance company; principal and
interest payable in three annual installments; maturing
September 2002; interest at 9%; secured by equipment; paid
in September 2002 -- 5
Installment note with a finance company; principal and
interest payable in five annual installments; maturing
August 2006; bearing interest at 6.9%; secured by
equipment 52 63
Note payable of $610,000 to a financial institution;
principal payable in annual installments beginning
November 2003, maturing November 2018; bearing interest at
6.65%; secured by a deed of trust on various parcels of
land, and guaranteed by an officer and shareholder of the
Company 610 --
---- ----
662 244
Less current maturities of long-term debt 12 104
---- ----
$650 $140
==== ====
</Table>
Maturities of long-term debt are as follows: 2003--$12,000; 2004--$78,000;
2005--$79,000; 2006--$80,000; 2007--$65,000; thereafter--$348,000.
NOTE 4--PROPERTY AND EQUIPMENT
Property and equipment consists of:
<Table>
<Caption>
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Buildings and building improvements $ 433 $ 431
Levee, drainage, irrigation, roads, and flood control
facilities 508 508
Farm implements, trucks, and tractors 184 184
Fences, corrals, and other equipment 941 937
Gathering system and dehydration facility 886 886
Pecan grove and irrigation system 137 137
------ ------
3,089 3,083
Less accumulated depreciation, amortization and
impairment 1,885 1,715
------ ------
1,204 1,368
Land 321 321
------ ------
Property and equipment, net $1,525 $1,689
====== ======
</Table>
66
<Page>
Depreciation and amortization of property and equipment is based on the
estimated useful lives. Estimated useful lives for depreciation and amortization
are as follows:
<Table>
<Caption>
YEARS
--------
Buildings and building improvements 5 - 40
Levee, drainage, irrigation, roads, and flood control
facilities 7 - 50
Farm implements, trucks, and tractors 5 - 10
Fences, corrals, and other equipment 5 - 20
Gathering system and dehydration facility 10 - 20
Pecan grove and irrigation system 10 - 20
</Table>
NOTE 5--50% OWNED AFFILIATE
On July 2, 1998, the Company purchased a 50% interest in Trinity Valley
Pecan Company (the "50%-owned affiliate"). Condensed financial statements of the
50%--owned affiliate, are as follows:
<Table>
<Caption>
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
BALANCE SHEETS
ASSETS
Current assets $ 78 $ 110
Noncurrent assets (primarily property and equipment) 587 630
------ ------
TOTAL ASSETS $ 665 $ 740
====== ======
LIABILITIES
Current liabilities $1,175 $1,298
Noncurrent liabilities 434 1,040
SHAREHOLDERS' EQUITY
Common stock and paid-in capital 1,300 500
Deficit (2,244) (2,098)
------ ------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 665 $ 740
====== ======
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
STATEMENTS OF OPERATIONS
Revenues $ 275 $ 271
Costs and expenses 421 548
----- -----
Loss before provision for income taxes (146) (277)
----- -----
Net loss $(146) $(277)
===== =====
</Table>
The Company's investment in its 50% owned affiliate, Trinity Valley Pecan
Company ("Trinity") at October 31, 2002 and 2001 was $0. The Company's share of
Trinity's losses for the years ended October 31, 2002 and 2001 of approximately
$73,000 and $139,000, respectively, were recognized in earnings since the
Company jointly and severally guarantees bank loans of Trinity (SEE NOTE 6).
During fiscal year 2001, Trinity discontinued its wholesale operations; however,
it continues its retail and shelling operations.
67
<Page>
As disclosed in Note 3, during 2002, the Company obtained long-term
financing in the amount of $610,000. Of this amount, $400,000 was contributed to
Trinity to pay down existing debt and other liabilities, and to provide Trinity
with working capital. During 2001, Trinity obtained short-term financing with a
bank for $25,000 for working capital. This loan, which matured in April 2002,
was collateralized by inventory and trade receivables.
NOTE 6--COMMITMENTS AND CONTINGENCIES
The Company has jointly and severally guaranteed certain bank loans of
Trinity Valley Pecan Company, a 50% owned affiliate ("Trinity"). The guaranteed
loans include a plant construction loan and working capital lines-of-credit with
principal balances totaling approximately $367,000 and $933,000 at October 31,
2002 and 2001, respectively. The loans bear interest at rates ranging from 7.95%
to 9.50% and mature beginning March 2003 through October 2004. The loans are
also guaranteed jointly and severally by a related party. In accordance with
Accounting Principles Board ("APB") Opinion No. 18, "The Equity Method Of
Accounting For Investments In Common Stock", the Company continues to record its
share of Trinity's losses even though its investment in Trinity is $0 due to the
Company's guarantee of Trinity's debt. The October 31, 2002 and 2001
consolidated financial statements have been restated to correct an error in the
calculation of the Company's investment and related losses in Trinity (SEE NOTE
16).
NOTE 7--RANCH AND LAND LEASES
Company property is subject to two separate ranch leases at an annual rental
of $16 per net acre. One lease agreement with an unrelated party, which covers
approximately 1,200 net acres was renewed July 1998, for an additional five year
term. The other lease for approximately 6,300 net acres with a related party was
renewed October 1999, for an additional five year term.
Under a fifty year lease agreement beginning September 1997, the Company
leased approximately six acres of land to an officer, director and shareholder
of the Company at an annual rental rate of $200. The lease is subject to
escalation after ten years, and the lessee is responsible for property taxes,
utilities, insurance, and the cost of construction of any buildings or
improvements. Upon lease termination, any buildings or improvements constructed
on the leased land becomes the property of the Company. Under a fifty year lease
agreement beginning September 1998, the Company leased approximately two acres
of land to it's 50% owned affiliate. Under the terms of the lease agreement, the
Company is entitled to rent of $1,500 per month, subject to escalation after ten
years, and the lessee is responsible for property taxes, utilities, insurance
and the cost of construction, repairs, or maintenance of any buildings or
improvements. Upon lease termination, any buildings or improvements constructed
on the leased land becomes the Company's property.
NOTE 8--AGRICULTURAL LEASES
During the fiscal years 2002 and 2001, approximately 2,600 acres of the
Company land, respectively, was leased to unrelated parties under two lease
agreements. Under the terms of the lease agreements, the Company is entitled to
25% of the cotton production and 30% of the milo, wheat, and corn production
from the leased lands. The Company pays its respective share of certain costs of
crop production. The leases are for a three year term and expired on the date
the 2002 crops were harvested, but were continued on an annual basis for an
additional two year period after the expiration.
68
<Page>
NOTE 9--BUSINESS SEGMENTS
The Company operates in two principal industries, agriculture and oil and
gas. The Company's agricultural industry segments consist of the producing and
selling of agricultural crops and the leasing of ranch land not used in farming
operations. The Company's oil and gas industry segment consists of oil and gas
royalty interests in minerals underlying the land owned in fee and gathering and
transportation of natural gas through pipelines.
Financial information concerning the Company's business segments for the
fiscal years ended October 31, 2002 and 2001 follows. There were no material
intersegment sales or transfers. Income before provision for income taxes
represents revenues less operating expenses for each segment and excludes
general corporate expenses, loss from 50% owned affiliate and other income and
expenses of a general corporate nature. Identifiable assets by segment are those
assets that are used in the Company's operations within that industry. Corporate
assets are those assets maintained for general purposes, principally cash and
cash equivalents, receivables and other assets.
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
REVENUES
Agriculture:
Farm produce $ 393 $ 248
Ranch leases 199 205
Contract and irrigation service 39 48
Other -- 5
-------- ------
631 506
Oil and gas:
Net oil and gas royalties 228 308
Pipeline operations 515 632
-------- ------
743 940
-------- ------
Total revenues $ 1,374 $1,446
======== ======
OPERATING PROFIT
Agriculture:
Farm produce $ 121 $ 43
Ranch leases 122 111
Contract and irrigation service 32 18
Other -- 5
-------- ------
275 177
Oil and gas:
Net oil and gas royalties 228 308
Pipeline operations 131 101
-------- ------
359 409
-------- ------
Total operating profit 634 586
Interest expense (14) (23)
Loss from 50% owned affiliate (73) (139)
General corporate expenses (517) (464)
-------- ------
Income (loss) before provision for income taxes $ 30 $ (40)
======== ======
</Table>
69
<Page>
<Table>
<Caption>
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
IDENTIFIABLE ASSETS
Agriculture $1,537 $1,578
Oil and gas 343 256
Corporate assets 249 218
------ ------
Total assets $2,129 $2,052
====== ======
</Table>
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
TOTAL CAPITAL EXPENDITURES
Agriculture $ 6 $ 90
Oil and gas -- --
---- ----
Total capital expenditures $ 6 $ 90
==== ====
DEPRECIATION, AMORTIZATION, AND IMPAIRMENT
Agriculture $131 $137
Oil and gas 39 39
---- ----
Total depreciation and amortization $170 $176
==== ====
MAJOR CUSTOMERS
Customers comprising 10% or greater of the Company's net
revenues are summarized as follows by business segments:
Pipeline operations--Gathering income attributable to
gas wells partially owned by related parties $515 $632
==== ====
Percentage to total revenues 37% 44%
==== ====
</Table>
NOTE 10--RELATED PARTY TRANSACTIONS
John R. Parten and Robert F. Pratka, officers, directors and shareholders of
the Company are Co-Trustees of the J. R. Parten Ranch Trust, a trust created
under the will of J. R. Parten.
Information concerning guarantees of certain debts and ranch and land leases
to related parties are also disclosed in Note 3 and Note 7, respectively, of the
notes to consolidated financial statements.
70
<Page>
The following is a description of significant related party transactions for
the fiscal years ended October 31, 2002 and 2001:
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
DESCRIPTION OF RELATED PARTY TRANSACTIONS:
50% share in revenue from gathering systems operated by
pipeline company owned by John R. Parten $515 $632
50% share of operating expenses of gathering systems
operated by pipeline company owned by John R. Parten $384 $531
Net oil and gas royalties from companies owned by a current
stockholder and by a company owned by John R. Parten $228 $308
Ranch lease rentals received from the J.R. Parten Ranch
Trust created under the will of J.R. Parten $100 $100
Farm produce sales received from the J.R. Parten Ranch
Trust $ 91 $ 83
Allocated salaries, payroll taxes, office rent, and other
operating expenses by the J.R. Parten Ranch Trust $ 38 $ 36
Rental income received from:
Pipeline company owned by John R. Parten $ 8 $ 8
Company owned by John R. Parten $ 37 $ 37
Other related parties $ 10 $ 10
Trinity Valley Pecan Co. $ 18 $ 18
</Table>
NOTE 11--FEDERAL INCOME TAXES
Federal taxable income is reported by Seven J Stock Farm, Inc. on the cash
basis and by its subsidiary on the accrual basis.
The benefit (provision) for income taxes consisted of:
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Current tax expense:
U. S. federal $(1) $(4)
U. S. state and other (7) (6)
--- ---
Total current expense (8) (10)
Deferred tax benefit (expense):
U. S. federal 44 3
U. S. state and other 1 --
--- ---
Net deferred tax benefit (expense) 45 3
--- ---
Total benefit (expense) $37 $(7)
=== ===
</Table>
71
<Page>
The significant items giving rise to the deferred tax assets and
(liabilities) are as follows:
<Table>
<Caption>
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Deferred tax assets:
Use of cash basis accounting by parent company $ 3 $ 24
Percentage depletion carryover 2 1
Guarantee of 50% affiliate's debt 18 179
Other 4 2
---- ----
27 206
Valuation allowance (18) (179)
Deferred tax liabilities:
Property and equipment (44) (107)
---- ----
Net deferred tax liabilities $(35) $(80)
==== ====
</Table>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The valuation allowance at October 31, 2002 and
2001 is related to a deferred tax asset on the accrued loss contingency for
Trinity. Payments equivalent to the accrued loss contingency for Trinity must be
paid by the Company in order to realize the deferred tax asset. Management
believes it is more likely than not that these payments will not be made by the
Company.
A reconciliation of the Company's income tax benefit (provision) and the
amount computed by applying the statutory Federal income tax rates to earnings
before income taxes for the fiscal years ended October 31, 2002 and 2001 is as
follows:
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Computed federal income tax benefit (expense) at statutory
rate of 34% $(10) $14
Tax benefit of graduated Federal income tax rates 8 11
Percentage depletion attributable to oil and gas
royalties 85 17
State income taxes (7) (6)
Equity in loss of 50% owned affiliate (185) (48)
Use of cash basis by parent company (21) --
Income tax credits 2 5
Change in valuation allowance 160 --
Other 5 --
---- ---
Benefit (provision) for income taxes $ 37 $(7)
==== ===
</Table>
The Company has a percentage depletion carryover of approximately $15,000
available to use in future years until utilized.
For state tax purposes, the Company had a net operating loss carryforward
("NOL") of approximately $147,000 and $96,000 for the years ended October 31,
2002 and 2001, respectively. These NOLs must be utilized prior to their
expiration, which is between 2005 and 2006.
72
<Page>
NOTE 12--CONCENTRATIONS OF CREDIT RISK
The Company maintains cash deposits with banks which from time to time may
exceed federally insured limits. Management periodically assesses the financial
condition of the institutions and believes that any possible loss is minimal.
A substantial amount of receivables and revenues are derived from related
parties.
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value estimates of the Company's financial instruments are made at
discrete points in time based on relevant market information. These estimates
may be subjective in nature and involve uncertainties and matters of significant
judgment and, therefore, cannot be determined with precision. The Company
believes that the carrying amounts of its current assets and current liabilities
approximate the fair value of such items. The carrying amount of cash and cash
equivalents approximates fair value due to short-term maturities of these
instruments. The carrying value of long-term debt approximates fair value as the
obligations' interest rates approximate current rates.
NOTE 14--SUBSEQUENT EVENT
REVERSE STOCK SPLIT
On November 6, 2002, the Company filed Schedule 13E-3 with the Securities
and Exchange Commission ("SEC") for the purpose of satisfying reporting
requirements related to a proposed one-for-one thousand reverse split of the
Company's common stock, par value $1 ("common stock"), with a cash payment of
$3.89 per share of old common stock in lieu of fractional shares ("reverse stock
split"). The purpose of the reverse stock split would be to take the Company
private by reducing the number of shareholders of record to fewer than 300,
thereby (i) relieving the Company of the costs of filing public documents,
(ii) relieving the Company from the ongoing and increasing risks and obligations
of regulation under the Securities Exchange Act of 1934, as amended, and
(iii) allowing the Company to continue its long-term business plans. As a
private company, it would no longer be able to sell shares of common stock that
are freely tradable. The reverse stock split would not involve commissions or
transaction fees that would be charged if the shares were sold on the open
market. The Company estimates that up to an aggregate of approximately $205,000
would be paid to approximately 695 shareholders for their resulting fractional
shares. The stock would be repurchased utilizing available cash and borrowings
under the Company's current debt agreements as described in Note 3. The reverse
stock split is pending approval by the shareholders of the Company.
NOTE 15--SUPPLEMENTAL OIL AND GAS INFORMATION--UNAUDITED
The following supplemental information regarding the oil and gas activities
of the Company is presented pursuant to the disclosure requirements promulgated
by the Securities and Exchange Commission ("SEC") and SFAS No. 69, DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES ("Statement 69"). In connection with the
reverse stock split (Note 14), a reserve study was performed for the Company's
royalty interests as of January 1, 2002 as part of the valuation of the Company.
Prior to 2002, reserve information was not available to the Company as a royalty
interest owner, and accordingly, the related information required by Statement
69 has not been presented as of and for the year ended October 31, 2001.
PROVED OIL AND GAS RESERVES QUANTITIES
Set forth below is a summary of the changes in the estimated quantities of
the Company's crude oil and condensate, and natural gas reserves for the period
indicated, as estimated by Huddleston & Co., Inc. as of January 1, 2002 with
estimated changes in reserves based on production for the periods
73
<Page>
between November 2001 and December 2001 and between January 2002 and
October 2002. All of the Company's reserves are located within the United
States. Proved reserves cannot be measured exactly because the estimation of
reserves involves numerous judgmental determinations. Accordingly, reserve
estimates must be continually revised as a result of new information obtained
from drilling and production history, new geological and geophysical data and
changes in economic conditions.
Proved reserves are estimated quantities of natural gas, crude oil, and
condensate which geological and engineering data demonstrate, with reasonable
certainty, to be recoverable in future years from known reservoirs under
existing economic and operating conditions. Proved developed reserves are proved
reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods.
QUANTITY OF OIL AND GAS RESERVES
<Table>
<Caption>
OIL AND NATURAL
CONDENSATE GAS
(BBLS) (MCF)
---------- --------
Total proved reserves at November 1, 2001 22,991 30,607
Revisions to previous estimates 2,234 6,214
Production (8,335) (14,075)
------ -------
Total proved reserves at October 31, 2002 16,890 22,746
====== =======
Proved developed reserves:
October 31, 2002 16,890 22,746
====== =======
</Table>
74
<Page>
The Company's share of oil and condensate and natural gas produced for its
royalty interests for the fiscal year ended October 31, 2001 is as follows:
<Table>
<Caption>
OIL AND NATURAL
CONDENSATE GAS
(BBLS) (MCF)
---------- --------
9,834 15,120
</Table>
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
<Table>
<Caption>
YEAR ENDED
OCTOBER 31,
-------------------
2002 2001
-------- --------
(IN THOUSANDS)
Sales revenues $228 $308
Production costs -- --
Exploration expenses -- --
Depreciation, depletion, and amortization, and valuation
provisions -- --
---- ----
228 308
Income tax expense (22) (34)
---- ----
Results of operations from producing activities (excluding
corporate overhead and interest costs) $206 $274
==== ====
</Table>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The following table reflects the estimated Standardized Measure of
Discounted Future Net Cash Flows related to the Company's interest in proved oil
and condensate and natural gas reserves as of October 31, 2002:
<Table>
Future cash inflows $ 521,604
Future development costs --
Future production costs --
---------
Future net cash inflows before income taxes 521,604
Future income taxes (50,330)
---------
Future net cash flows 471,274
10% discount factor (136,036)
---------
Standardized measure of discounted future net cash inflow $ 335,238
=========
</Table>
Future net cash flows at year end, as reported in the above schedule, was
determined by summing the estimated annual net cash flows computed by
multiplying estimated quantities of proved reserves to be produced during each
year by current prices.
Income taxes were computed by applying year end statutory rates to pretax
net cash flows. The annual future net cash flows were discounted, using a
prescribed 10% rate, and summed to determine the standardized measure of
discounted future net cash flow.
The Company cautions readers that the standardized measure information which
places a value on proved reserves is not indicative of either fair market value
or present value of future cash flows. Other logical assumptions could have been
used for this computation which would likely have resulted in significantly
different amounts. Such information is disclosed solely in accordance with
Statement 69
75
<Page>
and the requirements promulgated by the SEC to provide readers with a common
base for use in preparing their own estimates of future cash flows and for
comparing reserves among companies. Management of the Company does not rely on
these computations when making investment and operating decisions. Principal
changes in the Standardized Measure of Discounted Future Net Cash Flows
attributable to the Company's proved oil and condensate and natural gas reserves
for the year ended October 31, 2002 is as follows:
<Table>
Sales and transfers of oil and condensate and natural gas
produced during the period $(289,682)
Revisions in previous quantity estimates 87,414
Net changes in sales and transfer prices, net of production
costs 118,480
Accretion of discount 41,299
Net change in income taxes 27,902
---------
Net change $ (14,587)
=========
</Table>
NOTE 16--PRIOR PERIOD ADJUSTMENT
The accompanying consolidated financial statements for the fiscal years
ended October 31, 2002 and 2001 have been restated to correct an error in the
calculation of equity method losses associated with the Company's investment in
and advances to Trinity (SEE NOTE 6). All periods presented herein have been
restated. The cumulative effect of the prior period adjustment on the Company's
October 31, 2000 accumulated deficit balance resulted in a charge of
approximately $452,000 (net of income tax benefits of approximately $36,000).
The effect of such prior period accounting errors resulted in the following
changes for the fiscal years and for each quarter in the fiscal years ended
October 31, 2002 and 2001:
<Table>
<Caption>
FOR THE YEAR FOR THE YEAR
ENDED ENDED
OCTOBER 31, 2002 OCTOBER 31, 2001
--------------------- ---------------------
REPORTED RESTATED REPORTED RESTATED
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
CONDENSED CONSOLIDATED BALANCE SHEET:
Accounts receivable--related parties $ 377 $255 $ 223 $ 158
Accrued income taxes payable 5 5 -- 4
Net deferred income tax liability 23 35 57 80
Accrued loss contingency for 50% owned
affiliate 184 123 133 526
Accumulated deficit (480) (553) (135) (620)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS:
Equity in loss of 50% owned affiliate 469 73 96 139
Income (Loss) before income taxes (366) 30 3 (40)
Income tax benefit (provision) 21 37 (17) (7)
Net income (loss) $(345) $ 67 $ (14) $ (47)
===== ==== ===== =====
NET INCOME (LOSS) PER SHARE--BASIC AND DILUTED
(1,451,000 weighted average shares
outstanding) $(.24) $.05 $(.01) $(.03)
===== ==== ===== =====
</Table>
76
<Page>
<Table>
<Caption>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
JANUARY 31, 2002 JANUARY 31, 2001
--------------------- ---------------------
REPORTED RESTATED REPORTED RESTATED
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
CONDENSED CONSOLIDATED BALANCE SHEET:
Accounts receivable--related parties $ 142 $142 $174 $131
Accrued income taxes payable -- 4 -- 4
Net deferred income tax liability -- 75 75 104
Accrued loss contingency for 50% owned
affiliate 333 498 133 467
Accumulated deficit (360) (608) (110) (520)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS:
Equity in (income) loss of 50% owned
affiliate 282 (12) -- 39
Income (Loss) before income taxes (282) 12 40 80
Income tax benefit (provision) 57 -- (29) (27)
Net income (loss) $(225) $ 12 $ 11 $ 53
===== ==== ==== ====
NET INCOME (LOSS) PER SHARE--BASIC AND DILUTED
(1,451,000 weighted average shares
outstanding) $(.16) $.01 $.01 $.04
===== ==== ==== ====
</Table>
<Table>
<Caption>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
APRIL 30, 2002 APRIL 30, 2001
--------------------- ---------------------
REPORTED RESTATED REPORTED RESTATED
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
CONDENSED CONSOLIDATED BALANCE SHEET:
Accounts receivable--related parties $184 $ 184 $ 184 $ 90
Accrued income taxes payable 14 18 -- 8
Net deferred income tax liability -- 59 51 72
Accrued loss contingency for 50% owned
affiliate 333 547 133 538
Accumulated deficit (357) (634) (139) (667)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS:
Equity in loss of 50% owned affiliate 4 53 -- 123
Income (Loss) before income taxes 21 (28) (53) (176)
Income tax benefit (provision) (18) 2 24 29
Net income (loss) $ 3 $ (26) $ (29) $(147)
==== ===== ===== =====
NET INCOME (LOSS) PER SHARE--BASIC AND DILUTED
(1,451,000 weighted average shares
outstanding) $.01 $(.02) $(.02) $(.10)
==== ===== ===== =====
</Table>
77
<Page>
<Table>
<Caption>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
JULY 31, 2002 JULY 31, 2001
--------------------- ---------------------
REPORTED RESTATED REPORTED RESTATED
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
CONDENSED CONSOLIDATED BALANCE SHEET:
Accounts receivable--related parties $ 172 $ 177 $ 182 $ 166
Accrued income taxes payable -- 16 -- 11
Net deferred income tax liability -- 13 59 84
Accrued loss contingency for 50% owned
affiliate 333 550 133 528
Accumulated deficit (455) (696) (222) (669)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS:
Equity in (income) loss of 50% owned
affiliate 18 16 46 (42)
Income (Loss) before income taxes (98) (96) (74) 14
Income tax benefit (provision) -- 34 (9) (16)
Net loss $ (98) $ (62) $ (83) $ (2)
===== ===== ===== =====
NET LOSS PER SHARE--BASIC AND DILUTED
(1,451,000 weighted average shares
outstanding) $(.07) $(.04) $(.06) $(.01)
===== ===== ===== =====
</Table>
<Table>
<Caption>
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
OCTOBER 31, 2002 OCTOBER 31, 2001
--------------------- ---------------------
REPORTED RESTATED REPORTED RESTATED
--------- --------- --------- ---------
(IN THOUSANDS) (IN THOUSANDS)
CONDENSED CONSOLIDATED BALANCE SHEET:
Accounts receivable--related parties $ 377 $255 $223 $158
Accrued income taxes payable 5 5 -- 4
Net deferred income tax liability 23 35 57 80
Accrued loss contingency for 50% owned
affiliate 184 123 133 526
Accumulated deficit (480) (553) (135) (620)
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS:
Equity in loss of 50% owned affiliate 165 16 50 19
Income (Loss) before income taxes (7) 142 90 42
Income tax benefit (provision) (18) 1 (3) 7
Net income (loss) $ (25) $143 $ 87 $ 49
===== ==== ==== ====
NET INCOME (LOSS) PER SHARE--BASIC AND DILUTED
(1,451,000 weighted average shares
outstanding) $(.02) $.10 $.06 $.03
===== ==== ==== ====
</Table>
78
<Page>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
THE COMPANY HAS FAILED TO ELECTRONICALLY FILE ITS ANNUAL MEETING INFORMATION
STATEMENT (SCHEDULE 14C) MATERIALS WITH THE SECURITIES AND EXCHANGE COMMISSION
BETWEEN 1996 AND 2001. THE COMPANY INCORRECTLY BELIEVED THAT IT COULD CONTINUE
TO FILE PAPER COPIES OF THE SCHEDULE 14C MATERIALS AND DID NOT REALIZE IT WAS
SUBJECT TO ELECTRONIC FILING REQUIREMENTS. THE COMPANY DID MAIL ITS SCHEDULE 14C
MATERIALS TO EACH OF THE SHAREHOLDERS IN CONJUNCTION WITH ITS ANNUAL REPORT. THE
COMPANY HAS NOT SOLICITED ANY PROXIES SINCE 1996, BUT HAS HELD SHAREHOLDER
MEETINGS WITHOUT FILING ITS MATERIALS PROPERLY WITH THE SECURITIES AND EXCHANGE
COMMISSION. UPON REQUEST TO THE COMPANY'S OFFICES AT 16945 NORTHCHASE DRIVE,
SUITE 1800, HOUSTON, TEXAS 77060, PHONE 281-874-2101, THE COMPANY WILL PROVIDE
TO ANY SHAREHOLDER OF THE COMPANY, WITHOUT CHARGE, A COPY OF ANY AND ALL
SCHEDULE 14C DOCUMENTS.
79
<Page>
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS, COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT
<Table>
<Caption>
POSITION WITH THE COMPANY; FIRST
PRINCIPAL OCCUPATION FOR THE PAST BECAME
NAME AGE FIVE YEARS(1); DIRECTORSHIPS DIRECTOR
- ---- -------- ------------------------------------------------------------ ---------
John R. Parten 54 Director, President and Chairman of the Company 1973
(1992-Present); President and Director, Parten Operating,
Inc. (an operator of 96 oil and gas wells in Houston County,
Texas and surrounding counties) (1); Director, Madison Pipe
Line Co. (a wholly-owned subsidiary of the Company engaged
in natural gas gathering and compression); Director, Trinity
Valley Pecan Company (A 50% subsidiary of the Company
engaged in pecan processing and seasonal gift pack sales);
Director, Farmers Oil Company (An oil and gas exploration
company focused in the East Texas area, John R. Parten is
the majority shareholder); Director, Rainbow Pipe Line
Company (a natural gas gathering and compression company
wholly-owned by John R. Parten); Director, The Parten
Foundation (a charitable foundation). Approximately 10% of
Mr. Parten's time is spent on the operations of Seven J
Stock Farm, Inc.
R. F. Pratka 80 Director, Vice President and Treasurer of the Company 1964
(1964-Present) (1); Director, Madison Pipe Line Co.;
Director, Trinity Valley Pecan Company; Director, Farmers
Oil Company; Director, The Parten Foundation.
William C. Bennett 58 Director of the Company; Banker, President and Banker, 1998
President and Director, Madisonville State Bank (A State
chartered bank in Madisonville, Texas) (1993-Present) (1);
Director and Chairman, Madison St. Joseph Health Center (A
local hospital in Madisonville, Texas); Director, Brazos
Valley Affordable Housing Corp. (A local low income housing
authority); Director and President, Madison County Economic
Development Corporation (A local economic development
agency).
Patrick J. Moran 52 President, Moran Resources Company (An oil & gas exploration 1997
company with Pat Moran as major shareholder) (1990-Present) April 30,
(1); Director, Texas Gas Company (An oil & gas exploration 2002
company with Pat Moran as major shareholder); Director,
Moran Minerals Company (An oil & gas exploration company
with Pat Moran as major shareholder); Director, Central Coal
& Coke Company (An oil & gas exploration company with Pat
Moran as major shareholder); Director, Moran Gas Systems,
Inc. (An oil & gas exploration company with Pat Moran as
major shareholder).
Bruce Franke 56 Part owner of Franke Interests, (A company that owns working May 2002
and royalty interests in oil and gas wells in Texas)
(1998-Present); Board of Director, Central Natural Resources
(A company engaged in oil and gas, real estate holdings,
coal reserves and stock equity, located in Kansas City,
Missouri) (1997-Present)
</Table>
- ------------------------
(1) Indicates principal occupation unless otherwise noted.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors and beneficial owners of more than 10% of a registered
class of the Company's equity securities to file reports of ownership and
changes in ownership with the Securities and Exchange Commission ("SEC").
Officers, directors and greater than 10% shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms they
file.
Based solely upon a review of such forms furnished to the Company during or
with respect to its fiscal year ended October 31, 2002 by the persons and
entities filing same, the Company believes that during its fiscal year ended
October 31, 2002, all beneficial ownership reports required to be filed
80
<Page>
pursuant to Section 16(a) by directors and officers of the Company and by
beneficial owners of more than 10% of the Company's outstanding common stock
have been filed on a timely basis.
ITEM 9A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
<Table>
<Caption>
NAME AGE POSITION
- ---- -------- ----------------------------------
John R. Parten Chairman of the Board and
54 President
R. F. Pratka 80 Vice-President and Treasurer
Virginia O. Cortinas 47 Secretary
</Table>
On November 18, 1992, John R. Parten was elected President of the Company.
He served the Company as Vice-President from 1987 to November 18, 1992.
R. F. Pratka has served the Company as Vice-President and Treasurer since
1970.
Virginia O. Cortinas was elected Secretary on March 20, 2001.
ITEM 10. EXECUTIVE COMPENSATION
Set forth below is information regarding compensation arrangements and
benefits paid or made available to the Company's President (who also serves as
the Company's chief executive officer) and the Vice President and Treasurer for
the past three years ended October 31, 2002. No other reportable compensation
was paid to the Company's executive officers. The Company has no other executive
officers except as listed below.
<Table>
<Caption>
ANNUAL
COMPENSATION
-------------------
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER
- --------------------------- -------- -------- -------- --------
John R. Parten
President (Chief Executive Officer) 2001 $-0- $-0- $12,000(1)
2000 -0- -0- $12,000(1)
-0- -0- $24,000(2)
R. F. Pratka
Vice President and Treasurer 2002 $-0- $-0- $ -0-
2001 -0- -0- $ 1,200(3)
2000 -0- -0- $ 1,200(3)
</Table>
- ------------------------
(1) Consists of a monthly fee of $1,000 paid to Mr. Parten for services provided
to the Company.
(2) Consists of a monthly fee of $2,000 paid to Mr. Parten for services provided
to the Company.
(3) Represents an annual fee paid to Mr. Pratka for treasurer services provided
to the Company.
81
<Page>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table contains information concerning the persons known by the
Company to be the beneficial owners of more than five percent of Common Stock of
the Company at the close of business on October 31, 2002:
<Table>
<Caption>
AMOUNT AND
NAME AND ADDRESS OF NATURE OF
TITLE OF BENEFICIAL BENEFICIAL PERCENT OF
CLASS OWNER OWNERSHIP(1) COMMON STOCK
- -------------------------------- -------------------------------- ------------ ------------
Common Stock Par value $1 John R. Parten 1,077,425 74.25%
16945 Northchase Drive
Suite 1800
Houston, TX 77060-2151
</Table>
- ------------------------
(1) Based on information furnished by the respective stockholders. Shares are
held individually, unless otherwise noted.
(2) Included are 14,800 shares of Common Stock of the Company held by The Moran
Employees Trust. Patrick J. Moran is a Co-Trustee of such Trust and has
shared power to vote the shares held by the Trust. However, he disclaims any
beneficial interest in such shares.
The following table contains information as to the Common Stock of the
Company beneficially owned as of October 31, 2002, by all directors, nominees
and executive officers as a group:
<Table>
<Caption>
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP
TITLE OF AS OF OCTOBER 31, PERCENT OF
NAME CLASS 2002(1) COMMON STOCK
- ---- ----------------------------- ----------------------- ------------
John R. Parten Common Stock 1,077,425 74.25%
Chairman, President and Par Value $1
Director
R. F. Pratka Common Stock 131 --
Vice President, Treasurer Par Value $1
and Director
William C. Bennett Common Stock 142 --
Director Par Value $1
Bruce Franke Common Stock 85 --
Director Par Value $1
All Directors, Nominees and Common Stock 1,077,783 74.28%
Executive Officers as a Par Value $1
Group (four in number)
</Table>
- ------------------------
(1) Based on information furnished by the respective directors and officers.
Shares are held individually, unless otherwise noted.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
As described in more detail above, the Company is involved in certain
transactions with related parties.
1. The Company has a Ranch Lease with the J.R. Parten Ranch Trust. See
Item 1--"Description of Business--Introduction, and--Ranch Land Leases." The
Company believes that
82
<Page>
the rental rate is on terms at least as favorable as it would receive from
an unrelated third party. The Ranch Trust is also a 50% owner or venturer in
Trinity Valley Pecan Company and HAYCO. The Ranch Trust has purchased farm
produce (hay from HAYCO) from the Company's joint venture. The Ranch Trust
also leases space from the Company. In 2001, the Ranch Trust also operated
on a short term basis a Ranch Lease on lands returned to the Company, while
the Company searched for a new tenant.
2. The Company participates on an equal basis in the HAYCO joint
venture with the J.R. Parten Ranch Trust. Revenues and expenses of the
operation are split equally, although most of the property on which hay is
grown is owned or controlled by the Ranch Trust, and the Company makes no
payment for the use of the land. The hay sold by the joint venture is sold
at prevailing market rates to the Ranch Trust and to unrelated third
parties.
3. The Company is a 50% owner of Trinity Valley Pecan Company. The
other 50% owner is the J.R. Parten Ranch Trust. The Company has guaranteed
all of the debt of Trinity Valley Pecan Company and the Ranch Trust and John
R. Parten have also guaranteed the debt of Trinity Valley Pecan Company.
4. As described above, the Company's wholly owned subsidiary, Madison
Pipe Line Co., is involved with Rainbow Pipe Line Company in a joint venture
pertaining to the compression, dehydration and transportation of gas through
their pipe lines. Fees charged for transportation and compression are set by
negotiations with the independent third party purchasers and the fees are
split equally. The cost of the joint venture are primarily allocated equally
between the joint venturers.
5. All royalty income received by the Company is distributed by an
affiliate of John R. Parten, and John R. Parten and certain affiliates own
part of the working interests, but the sales proceeds from which the royalty
income is derived is from sales of oil and gas to unrelated third parties.
No operating costs for royalties are paid by or allocated to the royalty
income of the Company.
6. The Company has arrangements to allocate land use, office salaries,
payroll taxes, office rent, and other office expenses agreements with
various related entities as described above in "Description of
Business--Office Space." It leases space at Sand Ridge, Texas to affiliates,
and leases space from an affiliate in the Houston office. Allocations of
expenses have been made according to actual usage of the footage under
lease. As a result, The Company both pays related parties for rent and
overhead expenses and receives income from related parties for rent of
facilities.
7. John R. Parten, President of the Company, has a ground lease from
the Company for 50 years for a home site of six acres at a rental of $200
per year.
8. John R. Parten personally guaranteed the $610,000 note of the
Company.
The Company believes that the terms and conditions of the above listed
transactions are on terms at least as favorable as those that could be obtained
from unrelated third parties.
83
<Page>
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
<Table>
<Caption>
NO. DESCRIPTION
- --- ------------------------------------------------------------
(2) Articles of Incorporation and Bylaws(1)
(10.1) Material Contract--Ranch Lease--J. R. Parten Ranch Trust
dated March 4, 1993(2)
(10.2) Ranch Lease with J.R. Parten Ranch Trust dated November
1999.(3)
(10.3) Ranch Lease with Risinger Ranches Corporation dated June
1998.(3)
(10.4) Ground Lease with John R. & Nancy K. Parten dated December
15, 1997.(3)
(10.5) Agricultural Lease with Roy Dyches dated 1999.(3)
(10.6) Agricultural Lease with Wayne Dyches dated 1999.(3)
(10.7) Oil, Gas and Mineral Lease with Woodley Petroleum Company
dated November 30, 1949.(3)
(10.8) Lease with Trinity Valley Pecan Company dated July 7,
1998.(3)
(10.9) Fort Trinidad Pipeline Joint Operating Agreement between
Rainbow Pipe Line Company and Madison Pipe Line Co. dated
December 1996.(3)
(10.10) Memorandum concerning HAYCO between the Company and J.R.
Parten Ranch Trust dated June 1, 2001.(3)
(10.11) Memorandum concerning office rent to Company affiliates
dated October 23, 2000.(3)
(10.12) Note dated October 28, 2002.(4)
(10.13) Guarantee executed by John R. Parten in conjunction with the
Note dated October 28, 2002.(5)
(22) Subsidiary of the Registrant.(5)
(23) Consent of Huddleston & Co., Inc. dated June 27, 2003.
(99.1) Certification of Periodic Report by the Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(99.2) Certification of Periodic Report by the Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
</Table>
- ------------------------
(1) EXHIBIT D to Registration Statement, Form 10, filed with the Securities and
Exchange Commission on June 3, 1965, is incorporated by reference.
(2) Incorporated by reference, Form 10-KSB for the fiscal year ended October 31,
1994 filed with the Securities and Exchange Commission on January 30, 1995.
(3) Incorporated by reference, Form 10-KSB/A for the fiscal year ended October
31, 2001 filed with the Securities and Exchange Commission on January 28,
2002.
(4) Incorporated by reference, Schedule 13E-3, filed with the Securities and
Exchange Commission on November 6, 2002.
(5) Incorporated by reference to the to Form 10-KSB for the fiscal year ended
October 31, 2002 as filed with the Securities and Exchange Commission on
January 29, 2003.
REPORTS ON FORM 8-K
No reports on Form 8-K have been filed for the quarter ended October 31,
2002.
ITEM 14. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the management of the
Company, including the chief executive officer and chief financial officer, the
Company has established a system of controls and other procedures designed to
ensure that information required to be disclosed in its periodic reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. These disclosure controls and procedures
have been evaluated under the direction of the chief executive officer and chief
financial officer within the last 90 days. Based on such evaluations, the chief
executive officer and chief financial officer have concluded that the disclosure
controls and procedures are effective. There have been no significant changes in
the system of internal controls or in other factors that could significantly
affect internal controls subsequent to the evaluation by the chief executive
officer and chief financial officer.
84
<Page>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
<Table>
SEVEN J STOCK FARM, INC.
June 27, 2003 /s/ ROBERT F. PRATKA
------------------------------------------
By R. F. Pratka, Vice-President and Treasurer
</Table>
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<Table>
/s/ JOHN R. PARTEN
------------------------------------------------------------
June 27, 2003 John R. Parten, President and Director (Chief Executive
Officer)
/s/ ROBERT F. PRATKA
------------------------------------------------------------
June 27, 2003 Robert F. Pratka, Vice-President, Treasurer and Director
(Chief Financial and Accounting Officer)
/s/ WILLIAM C. BENNETT
------------------------------------------------------------
June 27, 2003 William C. Bennett
Director
/s/ BRUCE FRANKE
------------------------------------------------------------
June 27, 2003 Bruce Franke
Director
</Table>
85
<Page>
I, John R. Parten, certify that:
1. I have reviewed this annual report on Form 10-KSB/A of Seven J Stock
Farm, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 27, 2003
<Table>
/s/ JOHN R. PARTEN
------------------------------------------------------------
John R. Parten,
Chief Executive Officer and President
</Table>
86
<Page>
I, Robert F. Pratka, certify that:
1. I have reviewed this annual report on Form 10-KSB/A of Seven J Stock
Farm, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 annual 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
annual report (the "Evaluation Date"); and
c) presented in this annual 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
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: June 27, 2003
<Table>
/s/ ROBERT F. PRATKA
------------------------------------------------------------
Robert F. Pratka,
Vice President and Treasurer
</Table>
87
<Page>
EXHIBIT 23
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, we hereby consent to the use of our
reports and to all references to our firm included in or made a part of the
First Amended Form 10-KSB for the year ended October 31, 2002 for Seven J Stock
Farm, Inc.
<Table>
HUDDLESTON & CO., INC.
By: /s/ PETER D. HUDDLESTON
------------------------------------------------
Peter D. Huddleston, President
</Table>
Houston, Texas
June 27, 2003
88
<Page>
EXHIBIT 99.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(12 U.S.C. (S)1350, AS ADOPTED)
Pursuant to Section 906 of the Corporate Fraud Accountability Act of 2002 (18
U.S.C. Section 1350, as adopted), John R. Parten the Chief Executive Officer and
President of Seven J Stock Farm, Inc. (the "Company") hereby certifies that, to
the best of his knowledge:
1. The Company's amended Annual Report on Form 10-KSB/A for the period ended
October 31, 2002, and to which this Certification is attached as
Exhibit 99.1 (the "Periodic Report"), fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: June 27, 2003
/s/ JOHN R. PARTEN
- --------------------------------------
John R. Parten
Chief Executive Officer and President
89
<Page>
EXHIBIT 99.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(12 U.S.C. (S) 1350, AS ADOPTED)
Pursuant to Section 906 of the Corporate Fraud Accountability Act of 2002 (18
U.S.C. Section 1350, as adopted), Robert F. Pratka the Vice President and
Treasurer of Seven J Stock Farm, Inc. (the "Company") hereby certifies that, to
the best of his knowledge:
1. The Company's amended Annual Report on Form 10-KSB/A for the period ended
October 31, 2002, and to which this Certification is attached as
Exhibit 99.2 (the "Periodic Report"), fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: June 27, 2003
/s/ ROBERT F. PRATKA
- --------------------------------------
Robert F. Pratka
Vice President and Treasurer
90
<Page>
EXHIBIT III - FORM 10-QSB
U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-QSB
<Table>
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2003
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM TO
</Table>
COMMISSION FILE NUMBER 0-1394
SEVEN J STOCK FARM, INC.
(Name of small business issuer as specified in its charter)
<Table>
TEXAS 74-1110910
(State of incorporation) (I.R.S. Employer Identification No.)
</Table>
16945 NORTHCHASE DR., SUITE 1800 HOUSTON, TX 77060
--------------------------------------------------
(Address of principal executive offices)
(281) 874-2101
--------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes (X) No ( )
As of June 16, 2003 there were 1,451,000 shares of Seven J Stock Farm, Inc.
common stock $1.00 par value outstanding.
91
<Page>
PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT FOR SHARE DATA)
(UNAUDITED)
<Table>
<Caption>
FOR THE THREE FOR THE SIX
MONTHS ENDED MONTHS ENDED
APRIL 30, APRIL 30,
------------------ ------------------
2003 2002* 2003 2002*
-------- -------- -------- --------
REVENUES
Pipeline operations $ 179 $ 126 $ 327 $ 245
Net oil and gas royalties 64 51 118 98
Ranch lease rentals 47 47 95 95
Farm produce sales 16 15 29 71
Contract and irrigation service 10 5 13 11
Other revenues 3 7 3 7
-------- -------- -------- --------
TOTAL REVENUES 319 251 585 527
COSTS AND EXPENSES
Operating expenses 252 130 433 303
General and administrative expenses 104 49 201 96
Depreciation and amortization 43 33 86 77
Equity in loss of 50% owned affiliate 10 53 28 42
Other costs and expenses - 1 - 2
Interest expense 11 2 22 4
Taxes - other than income taxes 12 11 23 20
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 432 279 793 544
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES (113) (28) (208) (17)
INCOME TAX BENEFIT 7 2 7 3
-------- -------- -------- --------
NET LOSS $ (106) $ (26) $ (201) $ (14)
======== ======== ======== ========
NET LOSS PER SHARE -
BASIC AND DILUTED
(1,451,000 weighted average shares
outstanding) $ (.07) $ (.02) $ (.14) $ (.01)
======== ======== ======== ========
DIVIDENDS PER SHARE None None None None
</Table>
* RESTATED (SEE NOTE 4)
See notes to the condensed consolidated financial statements.
92
<Page>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
APRIL 30, 2003
(IN THOUSANDS EXCEPT FOR SHARE DATA)
(UNAUDITED)
<Table>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 165
Accounts receivable - trade 28
Accounts receivable - related parties 177
Deferred income taxes 20
Other current assets 1
-----------
TOTAL CURRENT ASSETS 391
PROPERTY AND EQUIPMENT, net 1,476
OTHER ASSETS 55
-----------
TOTAL ASSETS $ 1,922
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable - trade $ 95
Accounts payable - related parties 104
Accrued expenses 40
Accrued taxes other than income taxes 23
Accrued income taxes 5
Deferred revenues 8
Note payable 1
Current maturities of long-term debt 36
-----------
TOTAL CURRENT LIABILITIES 312
LONG-TERM DEBT 625
DEFERRED INCOME TAXES 39
ACCRUED LOSS CONTINGENCY FOR 50% OWNED AFFILIATE 246
DEFERRED REVENUES 3
-----------
TOTAL LIABILITIES 1,225
SHAREHOLDERS' EQUITY
Common stock, par value $1 per share;
authorized 1,500,000 shares; issued and
outstanding 1,451,000 shares 1,451
Accumulated deficit (754)
-----------
TOTAL SHAREHOLDERS' EQUITY 697
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,922
===========
</Table>
See notes to the condensed consolidated financial statements.
93
<Page>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<Table>
<Caption>
FOR THE SIX
MONTHS ENDED
APRIL 30,
-----------------------
2003 2002*
---------- ----------
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (201) $ (14)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 86 77
Deferred income taxes (16) (21)
Equity in loss of 50% owned affiliate 28 42
Changes in operating assets and liabilities:
Accounts receivable - trade 186 68
Accounts receivable - related parties 201 (26)
Other current assets 4 2
Accounts payable - related parties (103) 30
Income taxes payable - 14
Accounts payable, accrued expenses, and
deferred revenues (22) (101)
--------- ----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 163 71
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to 50% owned affiliate (28) (21)
Purchase of property and equipment (37) -
--------- ----------
NET CASH USED IN INVESTING
ACTIVITIES (65) (21)
CASH FLOWS FROM FINANCING ACTIVITIES
Long-term debt and note payable repayments (5) (51)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 93 (1)
CASH AND CASH EQUIVALENTS - beginning of period 72 25
--------- ----------
CASH AND CASH EQUIVALENTS - end of period $ 165 $ 24
========= ==========
SUPPLEMENTAL CASH FLOW DATA:
Cash paid during the period for:
Interest $ - $ 4
=========== ==========
Income taxes $ 9 $ 8
=========== ==========
</Table>
* RESTATED (SEE NOTE 4)
See notes to the condensed consolidated financial statements.
94
<Page>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements are
unaudited and include the accounts of Seven J Stock Farm, Inc. and its
wholly owned subsidiary, Madison Pipe Line Company, collectively referred to
as the "Company".
The unaudited interim condensed consolidated financial statements and
related notes have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, certain information
and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United
States have been omitted pursuant to such rules and regulations. The
accompanying unaudited interim condensed consolidated financial statements and
related notes should be read in conjunction with the financial statements and
related notes included in the Company's 2002 Annual Report to Shareholders.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the Company's financial position as of April 30, 2003 and
the results of their operations and their cash flows for the periods ended
April 30, 2003 and 2002. Such adjustments consisted only of normal
recurring items, except for the prior period restatements (see Note 4). The
results of operations for the periods ended April 30, 2003 and 2002 are not
necessarily indicative of the results to be expected for the full year. Interim
results are subject to year-end adjustments and audit by independent public
accountants.
Certain items and amounts for the prior period have been reclassified
to conform to the current period presentation. The reclassifications have
no effect on net income.
Recent Accounting Standards
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees and Indebtedness of Others", an interpretation
of FASB Statement Nos. 5, 57 and 107, and rescission of FASB Interpretation
No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others". FIN
No. 45 elaborates on the disclosures to be made by the guarantor in its
interim and annual financial statements about its obligations under certain
guarantees that it has issued. It also requires that a guarantor recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. The initial recognition
and measurement provisions of this interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
while the provisions of the disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The Company has adopted the disclosure requirements of FIN 45
(see Note 2).
95
<Page>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION (continued)
In January 2003, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation No. 46 ("FIN 46"), Consolidation of Variable Interest
Entities, an Interpretation of APB No. 50. FIN 46 requires certain variable
interest entities to be consolidated by the primary beneficiary of the entity
if the equity investors in the entity 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. FIN 46 is effective for all new variable interest
entities created or acquired after January 31, 2003. For variable interest
entities created or acquired prior to February 1, 2003, the provisions of FIN 46
must be applied for the first interim or annual period beginning after June 15,
2003. The Company does not expect to identify any variable interest entities
that must be consolidated. In the event a variable interest entity is
identified, the Company does not expect the requirements of FIN No. 46 to have a
material impact on its financial condition or results of operations.
NOTE 2 - COMMITMENTS AND CONTINGENCIES
The Company has jointly and severally guaranteed certain bank loans of
Trinity Valley Pecan Company, a 50% owned affiliate ("Trinity"). The guaranteed
loans include a plant construction loan and working capital lines-of-credit with
principal balances totaling approximately $361,000 at April 30, 2003. The loans
bear interest at rates ranging from 7.95% to 9.50% and mature beginning August
2004 through October 2005. The loans are also guaranteed jointly and severally
by a related party. In accordance with Accounting Principles Board ("APB")
Opinion No. 18, "The Equity Method Of Accounting For Investments In Common
Stock", the Company continues to record its share of Trinity's losses even
though its investment in Trinity is $0 due to the Company's guarantee of
Trinity's debt. The 2002 condensed consolidated financial statements have been
restated to correct an error in the calculation of the Company's investment and
related losses in Trinity (SEE NOTE 4).
NOTE 3 - RESTRUCTURING OF AGRICULTURAL OPERATIONS
During March 2003, the Company signed new lease agreements with non-
affiliated farm and ranch lease tenants to lease approximately 8,900 acres of
land previously leased on a share-crop basis and used in the production of
agricultural products and in the HAYCO joint venture. The new lease agreements
entitle the Company to annual lease rentals ranging from $12 to $60 per net acre
with terms ranging from forty-eight (48) to sixty (60) months. The annual lease
rental income for each lease is recognized in earnings over the applicable
twelve month term specified in each lease agreement. The lease income from the
new agricultural leases totaled $13,000 for the six months ended April 30, 2003.
As a result of the restructuring of the Company's agricultural operations,
instead of receiving its share of revenues from agricultural products sold and
paying its share of the related expenses, the Company will receive income from
the lease of its land to tenant farmers.
96
<Page>
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - PRIOR PERIOD ADJUSTMENT
The accompanying condensed consolidated financial statements for the three
and six months ended April 30, 2002 and the three months ended January 31, 2003
have been restated to correct an error in the calculation of equity method
losses associated with the Company's investment in and advances to Trinity (SEE
NOTE 2). The effect of such prior period accounting errors resulted in the
Following changes:
<Table>
<Caption>
FOR THE THREE FOR THE SIX FOR THE THREE
MONTHS ENDED MONTHS ENDED MONTHS ENDED
APRIL 30, 2002 APRIL 30, 2002 JANUARY 31, 2003
-------------- -------------- ----------------
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
-------- -------- -------- -------- -------- --------
(in thousands) (in thousands) (in thousands)
CONDENSED CONSOLIDATED
BALANCE SHEET:
Accrued income taxes
payable $ 14 $ 18 $ 14 $ 18 $ 5 $ 5
Net deferred income
tax liability - 59 - 59 23 36
Accrued loss
contingency for 50%
owned affiliate 333 547 333 547 184 246
Accumulated deficit (357) (634) (357) (634) (575) (648)
CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS:
Equity in loss of 50%
owned affiliate 4 53 286 42 18 18
Income (Loss) before
income taxes 21 (28) (261) (17) (95) (95)
Income tax benefit
(provision) (18) 2 39 3 - -
Net income (loss) $ 3 $ (26) $ (222) $ (14) $ (95) $ (95)
======= ======= ======= ======= ====== ========
NET INCOME (LOSS) PER
SHARE - BASIC AND
DILUTED
(1,451,000 weighted
average shares
outstanding) $ .01 $ (.02) $ (.15) $ (.01) $(.07) $ (.07)
======= ======= ======= ======= ====== ========
</Table>
97
<Page>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
COMPARISON OF FISCAL QUARTERS ENDING APRIL 30, 2003 and 2002
- --------------------------------------------------------------
REVENUES
- --------
Pipeline Operations - Pipeline gathering revenue for the 3 months ended April
30, 2003 and 2002 were $179,000 and $126,000 respectively. For the six months
ended April 30, 2003 and 2002 pipeline gathering revenue was $327,000 and
$245,000, respectively, which represents an increase of 33% from 2002 to 2003.
The increase in pipeline gathering revenues in 2003 is attributable to an
increase in fuel gas surcharges that was partially offset by the decreased sales
volume of 15% for 2003 as compared to 2002. There has been no change in the
number of wells connected to the gathering system.
Net Oil and Gas Royalties - Net oil and gas royalties for the three months ended
April 30, 2003 increased 25% or $13,000 compared to the three months ended April
30, 2002. For the six months ended April 30, 2003 there was an increase of 20%
or $20,000 compared to the six months ended April 30, 2002. Gas production
decreased by 38% and 43% for the six months and three months ended April 30,
2003 and 2002, respectively. The increase in net oil and gas royalties for the
six months ended April 30, 2003 as compared to the six months ended April 30,
2002 is primarily due to an increase in oil and gas prices. The six month
average price for natural gas was $2.64 in 2002 and $5.64 in 2003. The six month
average price for oil and condensate was $19.54 in 2002 and $29.57 in 2003.
Farm Produce Sales - Farm produce sales for the six months and three months
ended April 30, 2003 and 2002 were $29,000 and $71,000 and $16,000 and $15,000,
respectively. The decrease from 2002 to 2003 for the six months ended April 30
is due to the dissolution of the HAYCO operation in the first quarter of 2003.
In the past, farm produce sales have consisted of sales of hay (through HAYCO),
grain, cotton and pecans. The HAYCO joint venture was dissolved and the
equipment will be sold. The Company does not plan on participating in any other
share-crop farming of cotton or grain. Instead of share-crop farming, the
Company has leased its farmland directly to non-affiliated farmers at the rate
of $35 per acre for dry land and $60 per acre for irrigated land. The Company
does not consider these operations to be discontinued operations because the
Company will continue to receive income from the lease of its land to tenant
farmers. The only farm produce sales that will remain will be pecans from the
Company's orchard. Commercial pecan sales increased from $1,381 for the six
months ended April 30, 2002 to $9,967 for the six months ended April 30, 2003.
Ranch Lease Rentals - Ranch lease rentals consist of a lease of the plant site
to Trinity Valley Pecan Company and leases of office space in the Sand Ridge,
Texas office to related parties. Ranch lease rentals did not significantly
change for the three months and six months ended April 30, 2003 and 2002. The
lease of 6,257.96 acres by the Ranch Trust, a related party, was terminated and
the Company executed a new 60-month lease commencing on March 1, 2003 for
approximately 6,600 net acres at a rate of $12.00 per acre with an unrelated
party; however, the related party will pay the Company the $4.00 difference in
the annual rental per acre through fiscal year 2004. For fiscal years through
2004 there will be no significant change in income from rental of this land;
thereafter, the Company's ranch lease rental revenues will be reduced by
approximately $20,000 annually.
Contract and Irrigation Services - Income for contract and irrigation services
for the three months ended April 30 were $5,000 for 2002 and $10,000 for 2003.
For the six months ended April 30, there was a $2,000 or 18% increase for
contract and irrigation service income. Contract mowing services increased by
18%, and will continue to be a part of the Company's income stream based on need
for such services in the local market area. Irrigation services are now
recognized as part of income from farm leases rather than irrigation services.
98
<Page>
Costs and Expenses
- ------------------
Operating expenses for six months ended April 30, 2003 increased $130,000 or
43%, as compared to the six months ended April 30, 2002. The increase for 2003
is attributable primarily to an increase in pipeline operating expenses.
Pipeline operating expenses increased 67% or approximately $120,000 for the six
months ended April 30, 2003 as compared to the six months ended April 30, 2002
as a result of an increase in compressor fuel costs. Gas usage in 2002 was
32,431 mmbtu at an avg. price of $1.59 compared to 41,294 mmbtu at an avg. price
of $5.21 in 2003. Gas is sold to an independent non-affiliated third party
purchaser at a price indexed to the posted price for Houston Ship Channel gas.
Ranch operating expenses increased 142% or approximately $50,000 for the six
months ended April 30, 2003 compared to the six months ended April 30, 2002. The
increase is due to repair and maintenance costs on the ranch houses and fence
and costs of supplies and tools.
Farm operating expense decreased 48% or approximately $40,000, for the six
months ended April 30, 2003 as compared to the six months ended April 30, 2002.
he decrease is due to lower repair and maintenance costs on a tractor and levee,
reduced costs for fertilizer, the reduction in the costs of operating HAYCO and
other reduced farming costs due to the Company no longer participating in share-
crop farming.
General and administrative expenses increased 112%, or $55,000, for the three
months ended April 30, 2003 and increased 109% or $105,000 for the six months
ended April 30, 2003 as compared to the three months and six months ended April
30, 2002. The increase is primarily due to increased consulting and legal fees
associated with the costs of taking the Company private incurred during the six
months ended April 30, 2003.
Equity in loss of 50% owned affiliate -The Company's share of losses from its
50% owned affiliate, Trinity Valley Pecan Company ("Trinity") for the six months
and three months ended April 30, 2003 and 2002 were approximately $28,000 and
$42,000 and $10,000 and $53,000, respectively. The Company's equity in loss of
50% owned affiliate is calculated based on fifty percent of Trinity's net
losses of $56,000 and $20,000 and $84,000 and $107,000 for the six and three
months ended April 30, 2003 and 2002. The Company and another related party
jointly and severally guarantee Trinity Valley Pecan Company's debt. John R.
Parten also personally guarantees all of this debt. The guaranteed loans include
a plant construction loan and working capital lines-of-credit with principal
balances totaling approximately $361,000 at April 30, 2003. The loans bear
interest at rates ranging from 7.95% to 9.50% and mature beginning August 2004
through October 2005. In accordance with Accounting Principles Board ("APB")
Opinion No. 18, "The Equity Method Of Accounting For Investments In Common
Stock", the Company continues to record its share of Trinity's losses even
though its investment in Trinity is $0 due to the Company's guarantee of
Trinity's debt. The 2002 condensed consolidated financial statements have been
restated to correct an error in the calculation of the Company's investment and
related losses in Trinity (SEE PART I. FINANCIAL INFORMATION, NOTE 4). The
Company expects to incur additional equity method losses in 2003 of
approximately $30,000 from its investment in Trinity based on historical and
current financial information provided by Trinity. Additional equity method
losses in excess of Trinity's debt jointly and severally guaranteed by the
Company will be recognized to the extent that additional investments to or
advances are made to Trinity.
Interest Expense - Interest expense for the three months and six months ended
April 30, 2003 increased $9,000 and $18,000 as compared to the three and six
months ended April 30, 2002. The increase is due to
99
<Page>
the increase in outstanding long-term debt during the six months ended April
30, 2003 as compared to the six months ended April 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the six months ended April 30, 2003, an independent third party drilled
a well on the Company's property. The Company has not determined whether the
well was successful, but if it was successful, it is possible that revenues
could increase.
The Company signed a new agreement with a non-affiliated Ranch Lease tenant to
lease the Company's acreage starting March 1, 2003. It is $12 per net acre and
the term of the lease is for sixty (60) months, which is $4.00 per acre lower
that the current leases with the Ranch Trust. Under this new lease, the
Company's liquidity will not be affected in 2003 because the Ranch Trust will
continue to pay its lease obligations. Once the Ranch Trust lease expires in
October 2004, however, the Company's revenues will decrease.
The Company's long term debt (including current maturities) is approximately
$661,000 at April 30, 2003 compared to approximately $193,000 at April 30, 2002.
The Company was able to accelerate collection of its accounts receivable
compared to the six months ended April 30, 2002; thereby, generating additional
cash flows. The additional cash flows were partially offset by the payment of
and corresponding decrease in the Company's accounts payable balance.
The Company's liquidity could be adversely affected due to losses from and loan
guarantees for Trinity Valley Pecan Company, a 50% owned affiliate. Both the
Company, the Ranch Trust and John R. Parten guarantee a portion of Trinity
Valley Pecan Company's debt ($361,000 at April 30, 2003).
As of April 30, 2003, the Company's working capital was $79,000. Payment of
approximately $37,000 attributable to notes payable and long-term debt is
required during the next twelve months. It is not anticipated that dividends
will be paid in the near future.
The Company has no current commitments for any capital expenditures in the
future. The Company's source of liquidity is cash received from continuing
operations and the borrowing activities described above. If cash from continuing
operations is insufficient to fund future capital expenditures the deficit will
have to be covered by future borrowings.
ITEM 3. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the management of the
Company, including the chief executive officer and chief financial officer, the
Company has established a system of controls and other procedures designed to
ensure that information required to be disclosed in its periodic reports filed
under the Securities Exchange Act of 1934, as amended, is recorded,
processed,summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. These disclosure controls
and procedures have been evaluated under the direction of the chief executive
officer and chief financial officer within the last 90 days. Based on such
evaluations, the chief executive officer and chief financial officer have
concluded that the disclosure controls and procedures are effective. There have
been no significant changes in the system of internal controls or in other
factors that could significantly affect internal controls subsequent to the
evaluation by the chief executive officer and chief financial officer.
100
<Page>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
<Table>
<Caption>
No. Description
- --- -----------
(2) Articles of Incorporation and Bylaws (1)
(99.1) Certification of Periodic Report by the Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99.2) Certification of Periodic Report by the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</Table>
- ----------
(1) EXHIBIT D to Registration Statement, Form 10, filed with the Securities
and Exchange Commission on June 3, 1965, is incorporated by reference.
REPORTS ON FORM 8-K
No reports on Form 8-K have been filed for the quarter ended APRIL 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 16, 2003 SEVEN J STOCK FARM, INC.
(Registrant)
/s/ John R. Parten
------------------------------------
John R. Parten, President and
Director (Chief Executive Officer)
101
<Page>
Certifications:
I, John R. Parten, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Seven J Stock Farm,
Inc.;
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 that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 16, 2003
/s/ John R. Parten
------------------------------------
John R. Parten,
Chief Executive Officer and President
102
<Page>
I, Robert F. Pratka, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Seven J Stock Farm,
Inc.;
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 that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: June 16, 2003
/s/ Robert F. Pratka
------------------------------------
Robert F. Pratka,
Vice President and Treasurer
103
<Page>
Exhibit 99.1
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(12 U.S.C.(S)1350, AS ADOPTED)
Pursuant to Section 906 of the Corporate Fraud Accountability Act of 2002
(18 U.S.C. Section 1350, as adopted), John R. Parten the Chief Executive Officer
and President of Seven J Stock Farm, Inc. (the "Company") hereby certifies that,
to the best of his knowledge:
1. The Company's Quarterly Report on Form 10Q-SB for the period ended April 30,
2003, and to which this Certification is attached as Exhibit 99.1 (the "Periodic
Report"), fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: June 16, 2003
/s/ John R. Parten
------------------------------------
John R. Parten
Chief Executive Officer and President
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Exhibit 99.2
CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
(12 U.S.C. (S) 1350, AS ADOPTED)
Pursuant to Section 906 of the Corporate Fraud Accountability Act of 2002
(18 U.S.C. Section 1350, as adopted), Robert F. Pratka the Vice President and
Treasurer of Seven J Stock Farm, Inc. (the "Company") hereby certifies that, to
the best of his knowledge:
1. The Company's Quarterly Report on Form 10Q-SB for the period ended April 30,
2003, and to which this Certification is attached as Exhibit 99.2 (the "Periodic
Report"), fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
2. The information contained in the Periodic Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Date: June 16, 2003
/s/ Robert F. Pratka
------------------------------------
Robert F. Pratka
Vice President and Treasurer
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EXHIBIT IV - INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors
of Seven J Stock Farm, Inc.
We have audited the consolidated balance sheets of Seven J Stock Farm, Inc. and
Subsidiary (the "Company") as of October 31, 2002 and 2001, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Seven J
Stock Farm, Inc. and Subsidiary as of October 31, 2002 and 2001, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
As disclosed in Note 15, the Company has not presented certain supplementary
information for oil and gas activities that the Financial Accounting Standards
Board has determined is necessary to supplement, although not required to be
part of, the basic consolidated financial statements as of and for the year
ended October 31, 2001.
As disclosed in Note 16 to the consolidated financial statements, the 2002 and
2001 consolidated financial statements have been restated to correct errors in
the method of recognizing equity method income (losses) from the investment in
the Company's 50% owned affiliate.
/s/ Mann Frankfort Stein & Lipp, LLP
Houston, Texas
December 17, 2002, except for Note 16, for which the date is June 19, 2003
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PROXY
SEVEN J STOCK FARM, INC.
ANNUAL MEETING OF SHAREHOLDERS
September 24, 2003
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints John R. Parten and Virginia
Cortinas, or either of them, as the true and lawful attorneys and proxies of the
undersigned with full power of substitution to represent the undersigned and to
vote, as designated, all of the shares of Common Stock of Seven J Stock Farm,
Inc. ("the Company") that the undersigned is entitled to vote at the Special
Meeting of Shareholders of the Company to be held on September 24, 2003 and at
any adjournments thereof.
PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE /X/
APPROVAL OF A PROPOSED REVERSE STOCK SPLIT OF THE COMPANY'S COMMON STOCK THAT
WOULD RESULT IN:
a. THE SHAREHOLDERS RECEIVING ONE SHARE OF COMMON STOCK FOR
EVERY ONE THOUSAND SHARES OF OUR COMMON STOCK THAT THEY
CURRENTLY OWN, AND
b. AN AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO
REDUCE THE COMPANY'S AUTHORIZED COMMON STOCK FROM 1,500,000
TO 1,500 AUTHORIZED SHARES, WHICH IS IN PROPORTION TO THE
REVERSE STOCK SPLIT. THE REVERSE STOCK SPLIT AND RELATED
CASH PURCHASE BY THE COMPANY OF FRACTIONAL SHARES FOR $3.89
PER SHARE OF OLD COMMON STOCK RESULTING FROM THE REVERSE
STOCK SPLIT IS PROPOSED TO TAKE THE COMPANY PRIVATE AND TAKE
IT OUT OF THE REPORTING SYSTEM OF THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED.
FOR / /
AGAINST / /
WITHHOLD AUTHORITY / /
TO BE SIGNED ON THE REVERSE SIDE
Proxy card side one
THIS PROXY WILL BE VOTED AS SPECIFIED, IF NO SPECIFIC DIRECTIONS ARE GIVEN, THIS
PROXY WILL BE VOTED "FOR" EACH OF THE PROPOSALS SET FORTH HEREON.
PLEASE SIGN EXACTLY AS THE NAME APPEARS ON THE CERTIFICATE OR CERTIFICATES
REPRESENTING SHARES TO BE VOTED BY THIS PROXY. WHEN SIGNING AS EXECUTOR,
ADMINISTRATOR, ATTORNEY, TRUSTEE, OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH.
IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY PRESIDENT OR OTHER
AUTHORIZED PERSON. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
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DATED:____________________
--------------------------
SIGNATURE OF SHAREHOLDER
--------------------------
SIGNATURE IF JOINTLY OWNED
Proxy card side two
108