UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 10-QSB
(Mark One)
(X) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2004
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 0-17018
STRATFORD AMERICAN CORPORATION
(Exact name of small business issuer as specified in its charter)
Arizona 86-0608035
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2400 E. Arizona Biltmore Circle, Building 2, Suite 1270, Phoenix, Arizona 85016
(Address of principal executive offices)
Issuer's telephone number, including area code: (602) 956-7809
(Former name, former address and former fiscal year,
if changed since last report.)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
11,078,105 shares of the issuer's common stock, par value $.01 per share, were
issued and outstanding at the close of business on October 31, 2004.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
STRATFORD AMERICAN CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet as of September 30, 2004 (unaudited) 3
Consolidated Statements of Operations for the three and nine
months ended September 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the three and nine
months ended September 30, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 14
ITEM 3. CONTROLS AND PROCEDURES 19
PART II. OTHER INFORMATION 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
Signatures 21
2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004
(unaudited)
ASSETS
Cash and cash equivalents $ 751,000
Receivables:
Oil and gas 129,000
Related party 14,000
Other 1,000
Oil and gas interests, net 1,175,000
Assets held for sale 25,215,000
Other assets 102,000
------------
$ 27,387,000
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable 39,000
Accrued liabilities 63,000
Liabilities held for sale 23,941,000
------------
Total liabilities 24,043,000
Shareholders' equity:
Non-redeemable preferred stock, par value $.01 per
share; authorized 50,000,000 shares, none issued
Common stock, par value $.01 per share; authorized
100,000,000 shares; issued and outstanding
11,078,105 shares 111,000
Additional paid-in capital 28,511,000
Accumulated deficit (25,267,000)
Treasury stock, 1,967 shares at cost (11,000)
------------
3,344,000
------------
$ 27,387,000
============
See accompanying notes to consolidated financial statements.
3
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
REVENUES:
Oil & gas revenue $ 285,000 $ 166,000 $ 712,000 $ 583,000
Gain on restructuring of payables 0 614,000 0 614,000
Interest and other income 2,000 116,000 5,000 119,000
------------ ------------ ------------ ------------
287,000 896,000 717,000 1,316,000
EXPENSES:
General and administrative 140,000 125,000 437,000 405,000
Depreciation, depletion and amortization 77,000 72,000 227,000 218,000
Oil & gas operations 60,000 48,000 167,000 142,000
Interest 0 10,000 0 38,000
------------ ------------ ------------ ------------
277,000 255,000 831,000 803,000
------------ ------------ ------------ ------------
Income (loss) from continuing
operations before income taxes 10,000 641,000 (114,000) 513,000
Income tax expense 1,000 6,000 2,000 15,000
------------ ------------ ------------ ------------
Income (loss) from continuing
operations 9,000 635,000 (116,000) 498,000
Income from discontinued operations,
net of tax 126,000 7,000 297,000 22,000
------------ ------------ ------------ ------------
Net income $ 135,000 $ 642,000 $ 181,000 $ 520,000
============ ============ ============ ============
Basic and diluted net income (loss) per share:
Income (loss) from continuing operations $ 0.00 $ 0.06 $ (0.01) $ 0.05
Income from discontinued operations,
net of tax 0.01 0.00 0.03 0.00
------------ ------------ ------------ ------------
Basic and diluted net income per share $ 0.01 $ 0.06 $ 0.02 $ 0.05
============ ============ ============ ============
Shares used to compute net income (loss)
per share 11,078,105 10,371,583 11,078,105 10,177,006
============ ============ ============ ============
See accompanying notes to consolidated financial statements
4
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
For the Nine Months Ended
September 30,
--------------------------
2004 2003
----------- -----------
CASH FLOWS FROM CONTINUING OPERATING ACTIVITIES:
Net income (loss) from continuing operations $ (116,000) $ 498,000
Adjustments to reconcile net income (loss) to
net cash provided by continuing operating activities:
Gain on restructuring of payables 0 (614,000)
Gain on sale of investment in LLC 0 (114,000)
Depreciation, depletion and amortization 227,000 218,000
Changes in assets and liabilities:
Decrease (increase) in accounts and mortgage receivable (32,000) 269,000
Decrease in other assets 19,000 23,000
Decrease in accounts payable (20,000) (64,000)
Increase in accrued liabilities 21,000 12,000
----------- -----------
NET CASH PROVIDED BY CONTINUING
OPERATING ACTIVITIES 99,000 228,000
----------- -----------
CASH FLOWS FROM CONTINUING INVESTING ACTIVITIES:
Proceeds from sale of investment in LLC 0 684,000
Investment in LLC 0 (6,000)
Purchase of oil and gas interests (151,000) (56,000)
Purchases of property and equipment 0 (21,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) CONTINUING
INVESTING ACTIVITIES (151,000) 601,000
----------- -----------
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES:
Payments on notes payable 0 (233,000)
----------- -----------
NET CASH USED IN CONTINUING FINANCING ACTIVITIES 0 (233,000)
----------- -----------
NET CASH PROVIDED BY DISCONTINUED OPERATIONS 98,000 112,000
NET INCREASE IN CASH AND CASH EQUIVALENTS 46,000 708,000
CASH AND CASH EQUIVALENTS, beginning of period 705,000 155,000
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 751,000 $ 863,000
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid during the period $ 1,061,000 $ 1,169,000
=========== ===========
Taxes paid during the period $ 6,000 $ 11,000
=========== ===========
See accompanying notes to consolidated financial statements.
5
STRATFORD AMERICAN CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Stratford
American Corporation and subsidiaries (the "Company") have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
contain all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management, all adjustments consisting of a normal
and recurring nature considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30, 2004 may not
necessarily be indicative of the results that may be expected for the year ended
December 31, 2004.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates. These interim financial statements should be read in conjunction with
the consolidated financial statements and accompanying notes included in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 2003 as
filed with the Securities and Exchange Commission.
Certain amounts in the accompanying financial statements for the three and
nine month periods ended September 30, 2003 have been reclassified to conform
with the presentation for the three and nine month periods ended September 30,
2004 to reflect the discontinued operations of the real estate segment as
discussed further in Note 2.
Note 2 - ASSETS AND LIABILITIES HELD FOR SALE/DISCONTINUED OPERATIONS
On August 30, 2004, Scottsdale Thompson Peak, LLC, of which the Company
owns an 80% membership interest, entered into a Purchase and Sale Agreement
("the Agreement") with an unrelated third party to sell the Company's real
estate segment, which consists primarily of the office building located at 20225
North Scottsdale Road, Scottsdale, Arizona. The "Agreement" called for the
closing of sale of the property by the end of November 2004 at a price of
$31,400,000. The transaction closed on November 9, 2004. The following
summarizes the Company's assets and liabilities held for sale at September 30,
2004:
6
Carrying Amount as of
September 30, 2004
---------------------
Assets held for sale:
Real estate interests, net $24,211,000
Loan fees, net 292,000
Deferred rent 665,000
Prepaid interest 47,000
-----------
$25,215,000
===========
Liabilities held for sale:
Notes payable (See Note 7) $23,434,000
Minority interest in consolidated subsidiary 324,000
Other accrued liabilities 183,000
-----------
$23,941,000
===========
Net cash proceeds to Scottsdale Thompson Peak, LLC from the sale were
approximately $7,468,000. Such net cash receipts and the related gain from this
transaction of approximately $5,939,000 will be reflected in the Company's
consolidated financial statements in the quarter ending December 31, 2004. The
accompanying financial statements reflect this agreement for sale of the
Company's real estate segment as discontinued operations for all periods
presented.
Note 3 - NET INCOME (LOSS) PER COMMON SHARE
The Company calculates basic and diluted net income (loss) per share in
accordance with the provisions of Statement of Financial Accounting Standards
No. 128 "Earnings Per Share." Basic net income (loss) per share is computed
using the weighted average number of common shares outstanding during each
period (11,078,105 shares for the three and nine month periods ended September
30, 2004 and 10,371,583 and 10,177,006 for the three and nine month periods
ended September 30, 2003, respectively). Diluted net income (loss) per share is
the same as basic net income (loss) per share for the three and nine month
periods ended September 30, 2004 and 2003. Available stock options of 480,000
for each of the three and nine month periods ended September 30, 2004 and 2003,
were antidilutive and not considered common stock equivalents for the purpose of
computing net income (loss) per common share.
Note 4 - EMPLOYEE STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB 25) and related
interpretations in accounting for its employee stock options and to adopt the
"disclosure only" alternative treatment under Statement of Financial Accounting
Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION (SFAS 123). SFAS 123
requires the use of fair value option valuation models that were not developed
for use in valuing employee stock options. Under SFAS No. 123, deferred
compensation is recorded for the excess of the fair value of the stock on the
date of the option grant, over the exercise price of the option. The deferred
compensation is amortized over the vesting period of the option.
7
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's pro forma net
income would have been:
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income :
As reported $ 135,000 $ 642,000 $ 181,000 $ 520,000
============ ============ ============ ============
Pro forma $ 135,000 $ 642,000 $ 181,000 $ 520,000
============ ============ ============ ============
Diluted income per share:
As reported $ 0.01 $ 0.06 $ 0.02 $ 0.05
============ ============ ============ ============
Pro forma $ 0.01 $ 0.06 $ 0.02 $ 0.05
============ ============ ============ ============
Note 5 - INVESTMENT IN SCOTTSDALE THOMPSON PEAK, LLC
On December 11, 2002, the Company, along with other investors, completed
the purchase of an office building leased by a single tenant located at 20225
North Scottsdale Road, Scottsdale, Arizona (the "Property") for $25,484,000,
which reflects the purchase price of $24,988,000 and closing costs incurred of
$496,000. The Property, upon purchase, was immediately conveyed to Scottsdale
Thompson Peak, LLC, a newly formed Arizona limited liability company ("STP").
The Company owns 80% of the membership interests in, and is the manager of STP.
Further, STP is a consolidated subsidiary of the Company. STP funded the
purchase of the Property through a combination of cash contributions and loans
obtained by STP, in the aggregate amount of $24,300,000. A $20,000,000 loan is
financed with a 5.9% interest rate, twenty-two year straight-line amortization
note and is guaranteed by JDMD Investments, LLC, a major shareholder of the
Company. A loan of $2,500,000 is financed with a 6% interest rate, interest only
note, for a period of two years, due December 11, 2004, and is guaranteed 50% by
JDMD Investments, LLC and 50% by Diamond Ventures, Inc., an affiliate of The DRD
97 Trust, a major shareholder of the Company. A loan of $1,800,000, from a major
shareholder, is financed with a 10% interest rate note, interest only, for a
period of two years, due December 2, 2004. The Company also issued a total of
1,200,000 shares of its common stock (valued at $0.20 per share) to JDMD
Investments, LLC, a major shareholder of the Company, for its agreement to
guarantee payment of certain exceptions or carve outs on the first mortgage, the
guarantee of 50% of the $2,500,000 bank loan, the assignment of all its
interests in finding and negotiating the purchase of the Property, and obtaining
the mortgage loan and other financing involved. This $240,000 is recorded as a
loan fee and was being amortized monthly, pro-rata over the life of the loans.
At September 30, 2004, the net book value of the above loan fee was $200,000. An
additional loan fee of $100,000, paid at closing to a mortgage broker, was being
amortized monthly over the life of the $20,000,000 loan. At September 30, 2004,
the net book value of this loan fee was $92,000. Remaining closing costs of
$156,000 were capitalized with the purchase price of the building. Amortization
expense on the above mentioned loan fees ceased as of August 30, 2004, when it
was determined that the criteria had been met to classify the building as an
asset held for sale. (See Note 2)
8
The building is leased 100% by a single tenant and used as their corporate
office. The tenant is engaged in selling and installing new tires for autos and
trucks. Under the terms of the lease agreement, STP is to receive annual basic
rents of $2,096,000, paid in equal monthly installments during the first five
years of the lease. In years six, eleven, and sixteen of the lease, the annual
rents are escalated by 10% of the prior years rent. The Company is reporting
results from this lease as an operating lease. As such, total revenue
anticipated for the life of the lease is recognized in equal annual
installments. Differences between cash received and revenue recognized are
recorded as deferred rent. The lease is a bondable, fully triple net twenty-two
year lease. The lease commenced on December 9, 2002 and will expire on December
31, 2024 (excluding unexercised options). Three, five-year renewal options are
available to the tenant. The building has an expected life of forty years and
the Company is using straight-line depreciation over this forty-year period. As
of September 30, 2004, accumulated depreciation of $933,000 and accumulated loan
fee amortization of $48,000 had been recorded, leaving net assets of $24,503,000
on the books of the Company. Depreciation expense ceased as of August 30, 2004,
when it was determined that the building met the criteria to be classified as an
asset held for sale. The Company believes the building is adequately covered by
insurance.
As discussed above in Note 2, on August 30, 2004 Scottsdale Thompson Peak,
LLC entered into a Purchase and Sale Agreement with an unrelated third party to
sell the office building located at 20225 North Scottsdale Road, Scottsdale,
Arizona. The Agreement called for the closing of sale of the property by the end
of November 2004 at a price of $31,400,000. The transaction closed on November
9, 2004. The assets and liabilities which represent the Company's real estate
segment in its entirety are recorded within assets and liabilities held for sale
for all periods presented in the accompanying unaudited consolidated financial
statements.
Note 6 - OIL AND GAS INTERESTS
On June 5, 2002, the Company, through its wholly owned subsidiary Stratford
American Energy Corporation ("SAEC"), purchased working interests in 23 oil and
gas properties located in Oklahoma and Texas, effective April 1, 2002. The
Company has paid $109,000 in costs to test and equip four wells that were
completed during the nine months ended September 30, 2004.
The Company also elected to participate in the drilling of a development
well during the three months ended September 30, 2004, and has prepaid $27,000
in costs. The funds came from Company cash. Total capitalized costs of the SAEC
properties and accumulated depletion and amortization are as follows:
September 30, 2004
------------------
Oil and gas interests $ 783,000
2004 development cost additions 136,000
Less accumulated depletion and amortization (265,000)
---------
Net oil and gas interests $ 654,000
=========
9
The Company recognized depletion expense of $32,000 and $90,000 for the
three and nine month periods ended September 30, 2004, respectively, and $25,000
and $74,000 for the three and nine month periods ended September 30, 2003,
respectively.
In addition to the oil and gas interests, acquisition costs of $68,000 are
being amortized equally over a seven-year period. The Company recognized
amortization expense of $2,000 and $6,000 for the three and nine month periods
ended September 30, 2004, respectively, and $3,000 and $7,000 for three and nine
month periods ended September 30, 2003, respectively. Total accumulated
amortization of acquisition costs at September 30, 2004 is $24,000, leaving net
acquisition costs of $44,000 on the books of the Company.
On April 19, 2001, the Company purchased 100% of the capital stock of SA
Oil and Gas Corporation ("SA Oil"), from the shareholders of SA Oil, in exchange
for 755,948 shares of common stock of the Company. SA Oil owns working and/or
royalty interests in 87 oil and gas properties located in Oklahoma and Texas.
Total capitalized costs of the SA Oil properties and accumulated depletion and
amortization are follows:
September 30, 2004
------------------
Oil and gas interests $ 3,656,000
2004 development cost additions 15,000
Less accumulated depletion and amortization (3,150,000)
-----------
Net oil and gas interests $ 521,000
===========
Oil and gas interests are being depleted equally over a seven-year period,
which is the estimated life of the wells. The Company recognized depletion
expense of $34,000 and $101,000 for each of the three and nine month periods
ended September 30, 2004 and 2003, respectively. The Company recorded
amortization on intangible drilling costs and depreciation on equipment of
$3,000 and $10,000 for the three and nine month periods ended September 30,
2004, respectively, and $4,000 and $15,000 for the three and nine month periods
ended September 30, 2003, respectively.
In addition to the oil and gas interests, acquisition costs of $48,000 are
being amortized equally over a seven-year period. The Company recognized
amortization expense of $2,000 and $6,000 for the three and nine month periods
ended September 30, 2004 and $2,000 and $5,000 for the three and nine month
periods ended September 30, 2003, respectively. Total accumulated amortization
of the acquisition costs at September 30, 2004 is $25,000 leaving net
acquisition costs of $23,000 on the books of the Company.
Stratford American Resource Corporation ("SARC") originally paid $38,000
for a nominal working interest in four oil and gas wells. The wells were fully
depleted at September 30, 2004.
Total net oil and gas interests at September 30, 2004 are $1,175,000. Total
net acquisition costs relating to the oil and gas properties are $67,000 and are
recorded within other assets at September 30, 2004.
10
For each of the oil and gas interests described above, the Company is a
minority participant (an average of less than 3.0%) in joint interest operations
and as such is not subject to disclosure requirements for oil and gas
operations.
Note 7 - NOTES PAYABLE
Notes payable consist of the following as of September 30, 2004 and are
recorded within liabilities held for sale:
Note payable to Allianz Life Insurance Company, due
November 15, 2024, principal and interest due monthly
at 5.9%, collateralized by the Deed of Trust, Assignment
of Rents and Security Agreement $ 19,134,000
Note payable to Woodforest National Bank, due
December 11, 2004, interest due monthly at 6% 2,500,000
Note payable to Southwest Holdings, Ltd, a related party,
due December 2, 2004, interest due monthly at 10% 1,800,000
-------------
$ 23,434,000
=============
Principal payments on notes payable are as follows:
Year ending September 30:
2005 $ 4,813,000
2006 544,000
2007 577,000
2008 612,000
2009 649,000
Thereafter 16,239,000
-----------
$23,434,000
===========
As discussed above in Note 2, the Property was sold, effective November 9,
2004. Part of the proceeds from the sale were used to payoff the outstanding
debt related to the disposal group of $23,434,000.
Note 8 - OPERATING SEGMENTS
The following tables summarize information about the Company's operations
by business operating segments, before discontinued operations, for the three
and nine month periods ending September 30, 2004 and 2003. The segment "Oil &
Gas" includes working and/or royalty interests in oil and gas properties that
are primarily located in Oklahoma and Texas, as described above in Note 6. The
segment "Other" includes corporate activities. The segment "Elimination"
includes inter-company eliminations. The segment historically reported as "Real
Estate" included an office building, leased to a single tenant, located in
Scottsdale, Arizona. The results reported for this segment have been recorded
within assets and liabilities held for sale and income from discontinued
operations as a result of the transaction discussed in Note 2.
11
OIL & GAS OTHER ELIMINATION TOTAL
----------- ----------- ----------- -----------
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2004
(UNAUDITED):
Total revenue $ 285,000 $ 18,000 $ (16,000) $ 287,000
Net income (loss) before
income taxes 152,000 (142,000) 0 10,000
Identifiable assets 1,468,000 704,000 0 2,172,000
Depreciation, depletion
and amortization expense 75,000 2,000 0 77,000
Interest and other income 0 2,000 0 2,000
Income tax expense 0 1,000 0 1,000
Expenditures for additions
(long lived assets) 51,000 0 0 51,000
OIL & GAS OTHER ELIMINATION TOTAL
----------- ----------- ----------- -----------
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2003
(UNAUDITED):
Total revenue 166,000 746,000 (16,000) 896,000
Net income before
income taxes 45,000 596,000 0 641,000
Identifiable assets 1,528,000 735,000 0 2,263,000
Depreciation, depletion
and amortization expense 69,000 3,000 0 72,000
Interest expense 10,000 0 0 10,000
Interest and other income 0 116,000 0 116,000
Income tax expense 6,000 0 0 6,000
Expenditures for additions
(long lived assets) 54,000 6,000 0 60,000
12
OIL & GAS OTHER ELIMINATION TOTAL
----------- ----------- ----------- -----------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2004
(UNAUDITED):
Total revenue $ 712,000 $ 53,000 $ (48,000) $ 717,000
Net income (loss) before
income taxes 326,000 (440,000) 0 (114,000)
Identifiable assets 1,468,000 704,000 0 2,172,000
Depreciation, depletion
and amortization expense 219,000 8,000 0 227,000
Interest and other income 0 5,000 0 5,000
Income tax expense 0 2,000 0 2,000
Expenditures for additions
(long lived assets) 151,000 0 0 151,000
OIL & GAS OTHER ELIMINATION TOTAL
----------- ----------- ----------- -----------
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
(UNAUDITED):
Total revenue 583,000 781,000 (48,000) 1 316,000
Net income before
income taxes 197,000 316,000 0 513,000
Identifiable assets 1,528,000 735,000 0 2,263,000
Depreciation, depletion
and amortization expense 208,000 10,000 0 218,000
Interest expense 36,000 2,000 0 38,000
Interest and other income 0 119,000 0 119,000
Income tax expense 15,000 0 0 15,000
Expenditures for additions
(long lived assets) 56,000 21,000 0 77,000
13
Note 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 ("Interpretation
46"), CONSOLIDATION OF VARIABLE INTEREST ENTITIES, AN INTERPRETATION OF ARB NO.
51. This interpretation of Accounting Research Bulletin No. 51, CONSOLIDATED
FINANCIAL STATEMENTS, addresses consolidation by business enterprises of
variable interest entities (selected entities with related contractual,
ownership, voting or other monetary interests, including certain special purpose
entities), and requires certain additional disclosure with respect to these
entities. The provisions of Interpretation 46 are immediately applicable to
variable interest entities created after January 31, 2003. In December 2003, the
FASB issued a revision to Interpretation 46, commonly referred to as
Interpretation No. 46R ("Interpretation 46R"). The objective of Interpretation
46R was to provide additional clarification to Interpretation 46 and require
public entities to identify those entities that are considered special purpose
entities (SPEs) in which they have variable interests and to apply the
provisions of either Interpretation 46 or 46R at December 31, 2003. The full
provisions of Interpretation 46R will be required by the Company for the first
annual reporting period beginning after December 15, 2004. The Company believes
that the adoption of Interpretation 46R will not have a material effect on the
Company's financial condition or results of operations.
Note 10 - INCOME TAXES
The Company recorded income tax expense from continuing operations of
$1,000 and $2,000 for the three and nine month periods ending September 30,
2004, respectively. The income tax expense of $2,000 reported for the nine
months ended September 30, 2004 was the result of an under accrual of the
Company's 2003 income tax liability. The accrual for the 2003 income tax was
based on information available at that time. The effective tax rate was 0.74%
and 1.09% for the three and nine month periods ended September 30, 2004,
respectively, and 0.93% and 2.80% for the three and nine month periods ended
September 30, 2003, respectively. In determining the effective tax rates, the
Company utilizes net operating loss carryforwards for which valuation allowances
have previously been provided.
As a result of the gain on the sale of the building by Scottsdale Thompson
Peak, LLC, an 80% owned subsidiary, the Company projects that it will have a tax
liability of approximately $131,000 in federal income tax and $502,000 in state
income tax which will be reflected in the Company's consolidated financial
statements in the quarter ending December 31, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This quarterly report contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 (forward-looking statements) that involve
certain risks and uncertainties. The following discussion and analysis should be
read in conjunction with our unaudited consolidated financial statements and
notes thereto appearing elsewhere in this report. Except for the historical
information contained herein, any statements that refer to expectations,
projections or other characterization of future events or circumstances, and
especially those which include variations of the words "believes," "intends,"
"estimates," "anticipates," "expects," "plans," or similar words or variations
14
thereof, are likely to be forward-looking statements, and as such, are likely to
concern matters involving risk, uncertainty, unpredictability and other factors
that could materially and adversely affect the outcome or results indicated by
or inferred from the statements themselves. Such factors include, among others,
the following: the risk that the working interests in the SAEC oil and gas
properties and the operations of SA Oil may not be profitable; the risk that the
Company will recognize losses from operations; the risk that all of the
foregoing factors or other factors could cause fluctuations in the Company's
operating results and the price of the Company's common stock; and other risks
detailed in this report and from time to time in the Company's other filings
with the Securities and Exchange Commission. Therefore, the reader is advised
that the following discussion should be considered in light of the discussion of
risks and other factors contained in this quarterly report on Form 10-QSB and in
the Company's other filings with the Securities and Exchange Commission, and
that no statements contained in the following discussion or in this Form 10-QSB
should be construed as a guarantee or assurance of future performance or future
results, and the reader is cautioned to not place undue reliance on such
forward-looking statements. The forward-looking statements made herein are only
made as of the date of this quarterly report on Form 10-QSB, and we undertake no
obligation to publicly update such forward-looking statements to reflect
subsequent events or circumstances.
GENERAL
As of September 30, 2004, the Company owned 80% of the membership interests
of Scottsdale Thompson Peak, LLC, which owned an office building leased by a
single tenant located at 20225 North Scottsdale Road, Scottsdale, Arizona.
Scottsdale Thompson Peak, LLC sold the office building on November 9, 2004. As
discussed in Note 2 and Note 5 of the unaudited consolidated financial
statements, the Company met the criteria for classifying the office building as
an asset held for sale during the third quarter of fiscal year 2004. This
transaction represents the sale of the Company's real estate segment.
Accordingly, the results of operations of this segment are recorded within
income from discontinued operations for all periods presented in the
accompanying consolidated financial statements.
The Company also owns working interests in oil and gas properties primarily
located in Oklahoma and Texas, as discussed above in Note 6 of the unaudited
consolidated financial statements.
Other than the transactions described above, the Company has no significant
operations and there can be no assurance that the Company's operations will be
profitable. With the sale of the real estate segment, management is currently
evaluating the future direction of the business in order to maximize shareholder
return. Potential courses of action for the Company are to continue to look for
investment opportunities, most likely in either oil and gas interests or real
estate, or to consider liquidation and dissolution of the operations of the
Company with a liquidating dividend to the shareholders of the Company. In
determining potential courses of action, management will be considerate of
several factors including the management's outlook for the Company's current
operations, potential future investment opportunities, the existence of
competitors in our industry with greater resources at their disposal and the
regulatory and reporting environment of the Company.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Consolidated Balance Sheet and Statements of Operations have been
prepared in accordance with accounting principles generally accepted in the
15
United States of America. The preparation of these financial statements requires
the Company to make certain estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the Company evaluates
its estimates, including those related to investments, oil and gas interests,
contingencies and litigation. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements. The Company accrues production income and
expense based upon historical performance, costs, and prices received for oil
and gas. Revisions in profit estimates are charged to income in the period in
which the facts that give rise to the revision become known. Future adverse
changes in market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value of the
investment's current carrying value, thereby possibly requiring an impairment
charge in the future.
As noted above and in Note 2 and Note 5, as of September 30, 2004, the
Company's real estate investment is currently held for sale. Accordingly, the
assets to be disposed of are separately presented in the balance sheet and
reported at the lower of the carrying amount or fair value less costs to sell,
and are no longer depreciated. The assets and liabilities of the disposal group
are classified as held for sale and are presented separately in the appropriate
asset and liability sections of the balance sheet and in income from
discontinued operations in the consolidated statements of operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2004, the Company had $751,000 in available cash
resources.
As discussed above, the Company along with other investors, completed the
purchase of an office building located at 20225 North Scottsdale Road,
Scottsdale, Arizona (the "Property") for $25,484,000, effective December 11,
2002. The Property after being purchased by the Company and the other investors,
was immediately conveyed to STP. The purchase was funded through a combination
of cash contributions and loans obtained by STP in the aggregate amount of
$24,300,000. A loan of $20,000,000 is financed with a 5.9% interest rate,
twenty-two year straight-line amortization note and is guaranteed by JDMD
Investments, LLC, a major shareholder of the Company. A loan of $2,500,000 is
financed with a 6% interest rate, interest only note, for a period of two years,
due December 11, 2004, and is guaranteed 50% by JDMD Investments, LLC, a major
shareholder of the Company, and 50% by Diamond Ventures, Inc., an affiliate of
The DRD 97 Trust, a major shareholder of the Company. A loan of $1,800,000, from
a major shareholder, is financed with a 10% interest rate note, interest only,
for a period of two years, due December 2, 2004. The lease with the sole tenant
for the entire building is a bondable, triple-net lease, commencing on December
9, 2002, expiring on December 31, 2024, excluding unexercised extensions. The
annual basic rent for years one through five is $2,096,000 per year. In years
six, eleven and sixteen of the lease annual rents are escalated by 10% of annual
rents paid in the preceding year.
16
The following table summarizes the Company's contractual obligations at
September 30, 2004:
Payments Due by Period
-------------------------
Contractual Less Than More Than
Obligations Total 1 Year 1-3 Years 3-5 Years 5 Years
- ---------------- ----------- ----------- ----------- ----------- -----------
Long-term debt
obligations $23,434,000 $ 4,813,000 $ 1,121,000 $ 1,261,000 $16,239,000
Operating lease
obligations 319,000 97,000 222,000 0 0
----------- ----------- ----------- ----------- -----------
Total $23,753,000 $ 4,910,000 $ 1,343,000 $ 1,261,000 $16,239,000
=========== =========== =========== =========== ===========
As discussed in Note 2 to the unaudited consolidated financial statements,
the office building was sold, effective November 9, 2004. As discussed in Note 7
to the unaudited consolidated financial statements, debt service obligations of
$23,434,000, which were inclusive of the $20,000,000, 5.9% loan, the $2,500,000,
6% loan and the $1,800,000, 10% loan, were paid out of the cash proceeds from
the sale of the office building.
During the three months ended September 30, 2004, the Company through its
wholly owned subsidiary, SAEC, paid $16,000 in drilling and equipment costs for
wells it had previously elected to participate proportionately in and prepaid
$27,000 in costs to participate proportionately in a new development well. Also,
during the three months ended September 30, 2004, the Company through its wholly
owned subsidiary, SA Oil, paid $8,000 in equipment costs. Total year to date
drilling and equipment costs of $151,000, of which $136,000 were through SAEC
and $15,000 were through SA Oil, were paid out of Company cash.
The primary sources of the Company's cash and cash equivalents are the
revenues received from the working interests in the oil and gas properties,
rental revenues from the office building, and the one-time sale of the Company's
investment in Triway Land Investors, LLC in 2003. The Company expects that the
current cash and cash equivalents will be sufficient to meet its forecasted
operating cash needs for the remainder of 2004. However, due to any unforeseen
circumstances that could occur outside the Company's control, there can be no
assurance that adequate cash flows from the Company's present cash position and
current activity will be achieved. The Board of Directors is presently
considering options as to the future direction of the Company.
As discussed above in Note 2, net cash proceeds from the November 9, 2004
sale of the Company's real estate segment to Scottsdale Thompson Peak, LLC, of
which the Company owns 80% of the membership interests in, were approximately
$7,468,000. The Company's 80% share of the proceeds was approximately
$5,974,000. The Company has not made any decisions as to the use of the proceeds
of the sale of the property and is currently evaluating the best use of these
proceeds.
RESULTS OF OPERATIONS - THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004,
COMPARED WITH THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2003
OIL AND GAS REVENUES. Oil and gas revenues increased from $166,000 and
$583,000 for the three and nine month periods ended September 30, 2003 to
$285,000 and $712,000 for the three and nine month periods ended September 30,
2004, respectively. Oil and gas revenues accounted for 32% and 28% of the total
17
revenue reported by the Company for the three and nine month periods ended
September 30, 2004. The increase is primarily due to the receipt of revenues
from a property that underwent extensive repairs during prior periods, the
increase in prices currently being received for oil and gas, and to the receipt
of revenues from four development wells that are now producing. Separately, SA
Oil properties generated $174,000 and $459,000 in revenue for the three and nine
month periods ended September 30, 2004, and $114,000 and $348,000 for the three
and nine month periods ended September 30, 2003, respectively. The SAEC working
interests in 23 oil and gas properties, acquired effective April 1, 2002,
generated $107,000 and $243,000 in revenue for the three and nine month periods
ended September 30, 2004 and $49,000 and $223,000 for the three and nine month
periods ended September 30, 2003, respectively. The SARC properties generated
$4,000 and $10,000 in revenue for the three and nine month periods ended
September 30, 2004 and $3,000 and $12,000 for the three and nine month periods
ended September 30, 2003, respectively.
PROPERTY RENTAL INCOME. Property rental income increased from $524,000 and
$1,572,000 for the three and nine month periods ended September 30, 2003 to
$616,000 and $1,848,000 for the three and nine month periods ended September 30,
2004, respectively. The 2004 results reflect scheduled rental income of $524,000
and $1,572,000 for the three and nine month periods ended September 30, 2004 and
deferred rent of $92,000 and $276,000 for the three and nine month periods ended
September 30, 2004, respectively. Property rental income for the three and nine
month periods ended September 30, 2004 and 2003 is included within income from
discontinued operations. As discussed above in Note 2, Scottsdale Thompson Peak,
LLC sold the office building, effective November 9, 2004.
OIL AND GAS OPERATIONS. Oil and gas operations expense increased from
$48,000 and $142,000 for the three and nine month periods ended September 30,
2003, respectively, to $60,000 and $167,000 for the three and nine month periods
ended September 30, 2004, respectively. The increase for the nine months ended
September 30, 2004 is due primarily to equipment repair costs in 2004 of $23,000
and to professional fees incurred of $2,000.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased from $125,000 and $405,000 for the three and nine month periods ended
September 30, 2003 to $140,000 and $437,000 for the three and nine month periods
ended September 30, 2004, respectively. The increase of $15,000 for the three
months ended September 30, 2004 was primarily due to increased professional fees
relating to costs associated with the reporting requirements under the
Securities Exchange Act of 1934, as amended. The increase of $32,000 for the
nine months ended September 30, 2004 was due to increased insurance premiums of
$17,000, increased professional fees, as described above, of $7,000, and to a
general increase in associated overhead costs of $8,000.
INTEREST EXPENSE. There is no interest expense from continuing operations
for the three and nine month periods ended September 30, 2004. The decrease from
$10,000 and $38,000 for the three and nine month periods ended September 30,
2003 is due to the restructuring of payables in September of 2003, which
eliminated debt and resulted in a decrease in interest expense of $36,000 and
due to the satisfaction of a mortgage payable in June of 2003 which resulted in
a decrease in interest expense of $2,000. Interest expense from discontinued
operations, included within income from discontinued operations, decreased from
$382,000 and $1,151,000 for the three and nine month periods ended September 30,
2003 to $372,000 and $1,126,000 for the three and nine month periods ended
September 30, 2004. This decrease is primarily due to the monthly amortization
18
of interest paid in 2004 on the debt on the office building purchased by the
Company and other investors, and immediately conveyed to STP, in December of
2002.
RELATED PARTY TRANSACTIONS
During the three and nine month periods ended September 30, 2004, the
Company received $17,000 and $34,000, respectively, from two companies that are
partially owned by four of the Company's executives or directors. These receipts
were reimbursements for administrative expenses incurred by the Company on
behalf of the related parties. These are recorded as a reduction of general and
administrative expense for the three and nine month periods ended September 30,
2004. At September 30, 2004, $14,000 of these reimbursements are included in
related party receivables.
At September 30, 2004, a note payable of $1,800,000, due December 2, 2004,
bearing an interest rate of 10%, with interest due monthly, was owed to
Southwest Holdings, Ltd, an affiliate of The DRD 97 Trust, a major shareholder
of the Company. At September 30, 2004 all of the accrued interest on the
above-mentioned related party note payable had been paid. On November 9, 2004,
the principal amount of $1,800,000 was paid in full to Southwest Holdings, Ltd
as discussed above in Note 7.
CAPITAL REQUIREMENTS
During the nine months ended September 30, 2004, the Company, through its
wholly owned subsidiaries, SAEC and SA Oil, paid a total of $124,000 in drilling
and equipment costs for development wells it had previously elected to
participate proportionately in. In July 2004, the Company, through its wholly
subsidiary SAEC, elected to participate proportionately in the drilling of a
development well and prepaid $27,000 in costs. If hydrocarbons are located in
commercial quantity, the Company will be responsible for approximately $18,000
in additional costs to complete the well. The funds will come from Company cash.
Other than the capital requirements described above, the Company does not
have any material plans for future capital expenditures at the present time.
IMPACT OF INFLATION
Inflation has not had a significant impact on the Company's results of
operations.
ITEM 3. CONTROLS AND PROCEDURES
Our Chief Executive Officer, our President and our Controller, based on the
evaluation of our disclosure controls and procedures (as defined in rules
13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934, as amended)
required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that, as
of September 30, 2004, our disclosure controls and procedures were effective to
ensure that the information we are required to disclose in reports that we file
or submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms. During the three months ended September 30,
2004 there was no change in our internal control over financial reporting
identified in connection with the evaluation required by paragraph (d) of Rule
13a-15 or Rule 15d-15 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
19
PART II. OTHER INFORMATION
Responses to Items 1 through 5 are omitted since these items are not
applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See index beginning on page 22
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed for the three months ended
September 30, 2004
The following reports on Form 8-K were filed subsequent to the three
months ended September 30, 2004:
On November 10, 2004, the Company filed a Form 8-K dated November 10,
2004, relating to the Press Release announcing that Scottsdale
Thompson Peak, LLC, a subsidiary that the Company owns 80% of the
membership interests in, sold the office building located at 20225
North Scottsdale Road, Scottsdale, Arizona
On November 15, 2004, the Company filed a Form 8-K dated November 9,
2004, relating to the Purchase and Sale Agreement between Scottsdale
Thompson Peak, LLC, a subsidiary that the Company owns 80% of the
membership interests in, and Holualoa Arizona, Inc., pursuant to which
the office building located at 20225 North Scottsdale Road,
Scottsdale, Arizona was sold to Holualoa Arizona, Inc.
20
SIGNATURES
In accordance with the requirements of Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
STRATFORD AMERICAN CORPORATION
Registrant
Date: November 15, 2004 By /s/ Mel L. Shultz
-------------------------------------------
Mel L. Shultz, President and Director
Date: November 15, 2004 By /s/ David H. Eaton
-------------------------------------------
David H. Eaton, Chief Executive Officer
and Chairman of the Board
Date: November 15, 2004 By /s/ Daniel E. Matthews
-------------------------------------------
Daniel E. Matthews, Controller, Secretary
and Treasurer
21
EXHIBITS INDEX
Exhibits 31.1, 31.2, 31.3 and 32 are originally filed with this report. The
Company hereby incorporates all other exhibits by reference pursuant to Rule
12b-32, each of which (except Exhibits 2.1, 2.2, 2.3, 3.3, 10.1, 10.2, 10.3,
10.4 and 10.5) was filed as an exhibit to the Company's Registration on Form 10,
which was filed July 22, 1988, and amended on October 7, 1988, and December 8,
1988. Exhibit 2.1 was filed with the Company's Form 8-K filed with the
Securities and Exchange Commission on May 2, 2001. Exhibit 2.2 was filed with
the Company's Form 8-K filed with the Securities and Exchange Commission on June
18, 2002. Exhibit 2.3 was filed as Exhibit 2.1 with the Company's Form 8-K filed
with the Securities and Exchange Commission on December 26, 2002. Exhibit 3.3
was filed with the Company's Registration Statement on Form S-1 on June 12,
1989. Exhibit 10.1 was filed as Exhibit 10.14 to the Company's Form 10-KSB for
the year ended December 31, 2000, which was filed with the Securities and
Exchange Commission on April 2, 2001. Exhibit 10.2 was filed with the Company's
Form 10-QSB filed with the Securities and Exchange Commission on November 14,
2002. Exhibit 10.3 was filed as Exhibit 10.19 to the Company's Form 10-KSB for
the year ended December 31, 2002, which was filed with the Securities and
Exchange Commission on March 31, 2003. Exhibit 10.4 was filed as Exhibit 10.20
with the Company's Definitive Proxy Statement (Schedule 14A) for its annual
meeting of shareholders held on July 8, 1998, which was filed with the
Securities and Exchange Commission on April 28, 1998. Exhibit 10.5 was filed as
Exhibit 99.2 with the Company's Form 8-K filed with the Securities and Exchange
Commission on November 15, 2004.
Number Description
- ------ -----------
2.1 Stock Purchase Agreement, dated March 22, 2001 by and among SA Oil,
the shareholders of SA Oil, and the Company
2.2 Purchase and Sale Agreement, dated June 5, 2002 by and between Crown
Energy Drilling Production Fund 2001-1 Limited Partnership and
Stratford American Energy Corporation
2.3 Purchase and Sale Agreement, dated July 17, 2002, by and between Opus
West Corporation, a Minnesota corporation, and Stratford American
Corporation
3.1 Articles of Incorporation
3.2 By-laws
3.3 Articles of Amendment to Articles of Incorporation
4.1 Form of Common Stock Certificate
4.2 Form of Series "A" Preferred Stock Certificate
4.3 Article IV of the Articles of Incorporation
4.4 Article III of the Bylaws
10.1 Operating Agreement between DVI Raintree, LLC, Stratford American
Corporation and Colonial Raintree, LLC, dated October 26, 2000
22
10.2 Letter Agreement between Stratford American Corporation, JDMD
Investments, L.L.C., Diamond Ventures, Inc., Golden Gate Apartments,
Ltd., L.P., Auriga Properties, Inc., DRD-97 Trust and David Goldstein,
dated September 27, 2002
10.3 Operating Agreement of Scottsdale Thompson Peak, LLC
10.4 Stratford American Corporation 1998 Stock Incentive Plan
10.5 Purchase and Sale Agreement, dated August 30, 2004, by and between
Holualoa Arizona, Inc. and Scottsdale Thompson Peak, LLC
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.3 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32 Officer Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
23