UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
Quarterly Report
Under Section 13 or 15(d) of The Securities Exchange Act of 1934
For the Quarter Ended March 31, 2002 Commission File Number 0-27187
CENTRAL UTILITIES PRODUCTION CORPORATION
(Name of Small Business Issuer)
Nevada 88-0361127
(State of Incorporation) (I.R.S. Employer Identification Number)
1039 North I-35 #301 Carrollton, Texas 75006
(Address of Principal Executive Offices Including Zip Code)
(972) 446-3775
(Issuers 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 such shorter
period that the registrant was required to file such reports), and (2) has been
subject to filing requirements for the past 90 days. [X] YES [ ] NO
Number of shares outstanding of each of the issuer's classes of common equity,
as of June 4, 2002: 248,778,497
Transitional Small Business Disclosure Format: [ ] Yes [X] No
Central Utilities Production Corporation
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet at March 31, 2002 1
Consolidated Statement of Operations for the three months
ended March 31, 2002 2
Consolidated Statement of Cash Flows for the three months
ended March 31, 2002 4
Notes to Financial Statements 5
Item 2 - Management's Discussion and Analysis 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Default Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
i
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CENTRAL UTILITIES PRODUCTION CORP.
CONSOLIDATED BALANCE SHEET
MARCH 31, 2002
- --------------------------------------------------------------------------------
ASSETS Unaudited
CURRENT ASSETS
Cash $ 49,749
Accounts receivable 29,457
Inventories 21,602
------------
Total current assets 100,808
------------
OIL AND GAS PROPERTIES, at cost (full cost method):
Proved properties 26,234,688
Unproved properties 55,729
Less accumulated amortization (54,405)
------------
Net oil and gas properties 26,236,012
OTHER OPERATING PROPERTY AND EQUIPMENT 506,290
OTHER ASSETS 51,050
------------
TOTAL ASSETS $ 26,894,160
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 78,315
Accrued liabilities 177,477
Current maturities of long-term debt 316,548
Current maturities of convertible debentures 1,000,000
------------
Total current liabilites 1,572,340
------------
LONG-TERM DEBT NET OF CURRENT MATURITIES 526,577
CONVERTIBLE DEBENTURES, NET OF CURRENT MATURITIES 340,000
------------
Total liabilities 2,438,917
------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.0001 par value, 3,000,000 shares
authorized, none issued --
Common stock, $.0001 par value, 500,000,000 shares
authorized, 248,778,497 issued and outstanding 24,878
Paid in capital 25,725,823
Accumulated deficit (1,295,458)
------------
Total stockholders' equity (deficit) 24,455,243
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,894,160
============
The accompanying notes are an integral part of
these consolidated financial statements
1
CENTRAL UTILITIES PRODUCTION CORP.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
- --------------------------------------------------------------------------------
Unaudited
SALES $ 67,600
---------
COSTS AND EXPENSES:
Lease operating expense 92,752
General and administrative expense 97,780
Depreciation, depletion and amortization 63,250
---------
Total costs and expenses 253,782
OPERATING LOSS (186,182)
---------
OTHER (INCOME) AND EXPENSES
Interest expense 53,524
Settlement expense --
Other income (390)
---------
Total other expense (income) 53,134
---------
LOSS BEFORE INCOME TAXES (239,316)
INCOME TAX (PROVISION) BENEFIT --
---------
NET LOSS $(239,316)
=========
The accompanying notes are an integral part of
these consolidated financial statements
2
CENTRAL UTILITIES PRODUCTION CORP.
CONSOLIDATED STATEMENT OF OPERATIONS - CONTINUED
FOR THE THREE MONTHS ENDED MARCH 31, 2002
- --------------------------------------------------------------------------------
NET INCOME (LOSS) PER COMMON SHARE
Basic $ *
============
Diluted $ *
============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
Basic 248,778,497
============
Diluted 248,778,497
============
* Less than $0.01 per share.
The accompanying notes are an integral part of
these consolidated financial statements
3
CENTRAL UTILITIES PRODUCTION CORP.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002
- --------------------------------------------------------------------------------
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(239,316)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and depletion 42,250
Amortization of deferred financing costs 21,000
Changes in assets and liabilities, net of business acquired:
Accounts receivable (13,884)
Inventories (4,909)
Other assets --
Accounts payable 5,354
Accrued liabilities 41,000
---------
Net cash used in operating activities (148,505)
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of oil and gas properties (79,716)
Purchase of property and equipment (10,927)
---------
Net cash used in investing activities (90,643)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (41,293)
---------
Net cash used in financing activities (41,293)
---------
DECREASE IN CASH (280,441)
CASH, BEGINNING OF PERIOD 330,190
---------
CASH, END OF PERIOD $ 49,749
=========
SUPPLLEMENTAL CASH FLOW INFORMATION:
Income taxes paid $ --
=========
Interest paid $ 12,524
=========
The accompanying notes are an integral part of
these consolidated financial statemens
4
CENTRAL UTILITIES PRODUCTION CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 (UNAUDITED)
STATEMENT OF INFORMATION FURNISHED
The accompanying financial statements have been prepared in accordance with Form
10-QSB instructions and in the opinion of management contain all adjustments
(consisting of only normal and recurring accruals) necessary to present fairly
the financial position as of March 31, 2002, and the results of operations for
the three ended March 31, 2002 and cash flows for the three months ended March
31, 2002. These results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with those used in the
preparation of the Company's 2001 financial statements included in Form 10-KSB.
Certain information and footnote disclosure normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that the accompanying financial
statements be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-KSB.
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Central Utilities Production Corporation (the "Company"), is an independent
energy company engaged in the development and operation of oil and gas producing
properties. The Company's current operations are focused in Texas and Kentucky.
During the year ended December 31, 2001, the Company acquired oil and gas
properties in Kentucky and Texas. The Company began production of these
properties in the year ended December 31, 2001.
The Company was formed as Enpetro Mineral Pool, Inc. ("Enpetro") in October
2000. Enpetro acquired certain oil and gas properties for the issuance of its
common shares. Enpetro valued its acquisition of the oil and gas properties on
the basis of the estimated fair value of those oil and gas properties, primarily
interests in oil and gas leases. The valuation was assessed by an outside party
certified to be a specialist in determining oil and gas reserves and valuation
of the related properties. The value was determined to be $26,112,698. Enpetro
had no other significant assets or operations.
Enpetro entered into an Agreement and Plan of Reorganization in which it was
acquired by Accord Advanced Technologies, Inc. ("Accord"). Accord had previously
been a reconditioner and modifier of multi-chamber semiconductor equipment.
Accord is a publicly traded company. Accord's only operating subsidiary filed to
liquidate under Chapter 7 of the United States Bankruptcy Code in 2000 and had
5
no operations at the time of the merger. The Agreement and Plan of
Reorganization stipulated that Accord acquire all of the outstanding voting
shares of Enpetro for 228,000,000 post reverse split common shares of the
Accord. The shareholders of Enpetro held an interest of approximately 92% in
Accord effective with the acquisition. A name change occurred at the time of the
acquisition from Accord Advanced Technologies, Inc. to Central Utilities
Production Corp.
For financial accounting purposes, the acquisition was a reverse acquisition of
the Company by Enpetro, under the purchase method of accounting, and was treated
as a recapitalization with Enpetro as the acquirer. Accordingly, the historical
financial statements have been restated after giving effect to the acquisition
of the Company. The financial statements have been prepared to give retroactive
effect to January 1, 2001, of the reverse acquisition, and represent the
operations of Enpetro. Consistent with reverse acquisition accounting: (i) all
of Enpetro's assets, liabilities, and accumulated deficit, are reflected at
their combined historical cost (as the accounting acquirer) and (ii) the
preexisting outstanding shares of the Company (the accounting acquiree) are
reflected at their net asset value as if issued on the date of acquisition.
The company had no operations prior to May 2001, thus the accompanying financial
statements do not include comparative amounts for the three month period ended
March 31, 2001.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH - Cash includes all short-term highly liquid investments that are readily
convertible to known amounts of cash and have original maturities of three
months or less.
OIL AND GAS PROPERTIES - The Company follows the full cost method of accounting
for oil and gas properties. Accordingly, all costs associated with acquisition,
exploration, and development of oil and gas reserves, including directly related
overhead costs, are capitalized.
All capitalized costs of oil and gas properties, including the estimated future
costs to develop proved reserves, are amortized on the unit-of-production method
using estimates of proved reserves. Investments in unproved properties and major
development projects are not amortized until proved reserves associated with the
projects can be determined or until impairment occurs. If the results of an
assessment indicate that the properties are impaired, the amount of the
impairment is added to the capitalized costs to be amortized. There were no such
impairments identified during the quarter ended March 31, 2002.
6
In addition, the capitalized costs are subject to a "ceiling test", which
basically limits such costs to the aggregate of the "estimated present value,"
discounted at a 10-percent interest rate of future net revenues from proved
reserves, based on current economic and operating conditions, plus the lower of
cost or fair market value of unproved properties.
Sales of proved and unproved properties are accounted for as adjustments of
capitalized costs with no gain or loss recognized, unless such adjustments would
significantly alter the relationship between capitalized costs and proved
reserves of oil and gas, in which case the gain or loss is recognized in income.
Abandonments of properties are accounted for as adjustments of capitalized costs
with no loss recognized. There were no sales or abandonments during the quarter
ended March 31, 2002 .
LONG -LIVED ASSETS -Long-lived assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. When required, impairment losses on
assets to be held and used are recognized based on the fair value of the asset
and long -lived assets to be disposed of are reported at the lower of carrying
amount or fair value less cost to sell.
DEFERRED FINANCING COSTS -Deferred financing costs included in other assets of
$40,000, net of $60,000 of accumulated amortization, are being amortized using
the effective interest method over the term of the associated debt.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the
accounts of the Company and its wholly owned subsidiaries, Enpetro Mineral Pool,
Inc. and Accord SEG. Accord SEG is being liquidated under Chapter 7 of the
United States Bankruptcy Code. All significant intercompany accounts and
transactions are eliminated.
INCOME TAXES - The Company provides for income taxes based on the provisions of
Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME
TAXES, which among other things, requires that recognition of deferred income
taxes be measured by the provisions of enacted tax laws in effect at the date of
financial statements.
REVENUE RECOGNITION - The Company recognizes revenue from sales of oil and gas
at the point of passage of title, which is generally at the time of shipment.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles 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
7
reporting period. Actual results could differ from those estimates. Other
significant estimates include depletion of proved oil and gas properties. Oil
and gas reserve estimates, which are the basis for unit-of-production depletion
and the ceiling test, are inherently imprecise and are expected to change as
future information becomes available.
NET INCOME PER SHARE - Net income per share amounts are presented in accordance
with SFAS 128, "Earnings per Share," which requires the presentation of basic
net income per share and diluted net income per share. Basic net income per
share was computed by dividing net income by the weighted average number of
common shares outstanding for each respective period. Because the Company had a
net loss for the year, the impact of any potentially dilutive common shares
would have had an anti-dilutive effect.
RECENTLY ISSUED ACCOUNTING STANDARDS -
On June 29, 2001, SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142,
GOODWILL AND OTHER INTANGIBLE ASSETS, were issued by the FASB. SFAS No. 141
states that all business combinations initiated after June 30, 2001 must be
accounted for under the purchase method of accounting; use of the
pooling-of-interests method is prohibited. SFAS 142 supersedes Accounting
Principal Board Opinion 17, "Intangible Assets" and is effective for fiscal
years beginning after December 15, 2001. SFAS 142 requires companies to cease
amortization of goodwill, replacing amortization with an annual impairment test.
The Company does not have any goodwill as of December 31, 2001 and does not
believe that adoption of this standard will have any impact.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". Statement 144 addresses the accounting and
reporting for the impairment or disposal of long-lived assets. The statement
provides a single accounting model for long-lived assets to be disposed of. New
criteria must be met to classify the asset as an asset held-for-sale. This
statement also focuses on reporting the effects of a disposal of a segment of a
business. This statement is effective for fiscal years beginning after December
15, 2001. The Company does not expect the adoption to have a material impact to
the Company's financial position or results of operations.
(3) CONVERTIBLE DEBENTURES AND NOTES PAYABLE
In connection with the reverse merger, the Company entered into an agreement to
sell $500,000 of convertible debentures. The debentures are due May 31, 2002 and
bear interest at 12% per annum. The debentures are convertible at the lower of
$0.23 per share or 60% of the average of the lowest three inter-day trading
prices of the previous twenty trading days. The debenture holders received
warrants to purchase 250,000 shares of the Company's common stock at $0.253 per
share. The warrants were not assigned any value as the exercise price greatly
exceeded the market value of the stock. The debentures contain a beneficial
conversion feature and under generally accepted accounting principles, the
intrinsic value of the beneficial conversion feature was recorded as a discount
to the related debentures. The discount was determined to be $333,333 and was
amortized as interest expense as of the date of issuance due to the immediate
conversion option of the purchaser.
8
On June 22, 2000, the Company executed a Secured Convertible Debenture Purchase
Agreement in the amount of $1,000,000. Of the total commitment amount, $500,000
was funded by the purchasers. The debentures are due June 30, 2001 and bear
interest at 12% per annum. The debenture agreement also provides the purchaser
warrants to purchase 500,000 shares of the Company's common stock at $0.253 per
share. The warrants were not assigned any value as the exercise price greatly
exceeded the market value of the stock. The debentures are convertible into the
Company's common stock at the lower of $0.23 per share or 60% of the lowest
three inter-day trading prices of the previous twenty trading days. The Company
recorded a discount on the debentures of $500,000 representing the maximum
discount for the beneficial conversion feature contained in the debentures. The
discount was amortized as interest expense as of the date of issuance due to the
immediate conversion option of the purchaser. The Company paid fees of $60,000
related to securing the financing. The financing costs were capitalized and are
being amortized over the one year term of the note.
The Company assumed a judgment of $281,000 from Accord. The Company and the
third party agreed to convert the judgment into a convertible debenture that
matures in May 18, 2006 and bears interest at 2% per annum. The debentures are
convertible at the lower of $.35 per share or 65% of the average of the lowest
three inter-day trading prices of the previous 20 trading days. The debentures
contained a beneficial conversion feature and under generally accepted
accounting principles, the intrinsic value of the beneficial conversion feature
was recorded as a discount to the related debentures. The discount was
determined to be $183,077 and was amortized as interest expense at inception as
the debentures were convertible upon issuance.
In September 2001, the Company entered into an agreement whereby a lender has
committed to loan the Company up to $750,000 under a promissory note. The
borrowings were funded through December 15, 2001. The note bears interest at 10%
per annum and requires repayment of 33 installments of $26,307 beginning
December 31, 2001. The Company paid fees of $40,000 related to securing the
financing. The financing costs were capitalized and are being amortized over the
33 month term of the note.
The Company acquired additional oil and gas properties through the issuance of a
promissory note of $125,000. The Note bears interest at 9% per annum and is
payable in nine monthly installments of $15,139 beginning September 30, 2001.
The Company acquired a vehicle through an auto loan of $20,000. The loan bears
interest at 7.5% and is payable in 60 monthly installments of $401.
The Company is negotiating with the debenture holders and intends to extend the
maturity dates of the convertible debentures that are due May 31, 2002.
9
(4) COMMMITMENTS AND CONTINGENCIES
During 2001, the Company entered into an agreement with a third party operator
of oil and gas properties whereby the third party will provide equipment and
services to the Company to assist the Company in the operation and production of
its properties. The agreement requires the Company to pay $400,000 for these
services to be performed over a one-year period beginning August 11, 2001.
Through March 31, 2002, the Company had paid $50,000 under this agreement.
The Company is subject to routine litigation during the normal course of
business. The Company believes that the outcome of pending litigation will not
have a material adverse effect on its financial position or results of
operations.
(5) INCOME TAXES
The Company recorded a deferred tax benefit of approximately $95,700 for the
three-month period ended March 31, 2002. A valuation allowance has been provided
for the full amount of this benefit.
(6) NET LOSS PER SHARE
Net (loss) per share is calculated using the weighted average number of shares
of common stock outstanding during the year. Debentures convertible to
27,372,000 common shares and warrants exercisable for 750,000 common shares were
not considered in the calculation for diluted earnings per share for the three
months ended March 31, 2002 because the effect of their inclusion would be
anti-dilutive. The following presents the computation of basic and diluted
earnings per share from continuing operations:
Per
Income/(Loss) Shares Share
------------- ------ -----
Net Income (Loss) $ (239,316)
Discontinued operations --
Extraordinary income --
-----------
Income from continuing operations (239,316)
BASIC EARNINGS (LOSS) PER SHARE:
Loss available to Common Shareholders $ (239,316) 248,778,497 $ 0
EFFECT OF DILUTIVE SECURITIES: N/A
DILUTED EARNINGS (LOSS) PER SHARE $ (239,316) 248,778,497 $ 0
* less than $0.01 per share
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-QSB contains certain statements that are not related to historical
results, including, without limitations, statements regarding the company's
business strategy and objectives and future financial position, are forward
looking statements within the meaning of section 27A of the securities act and
section 21E of the Exchange Act and involve risks and uncertainties. Although
the company believes that the assumptions on which these forward looking
statements are based are reasonable, there can be no assurance that such
assumptions will prove to be accurate and actual results could differ materially
from those discussed in the forward looking statements. Factors that could cause
or contribute to such differences include but are not limited to, those set
forth in the preceding paragraph, as well as those discussed elsewhere in this
report. All forward-looking statements contained in this report are qualified in
their entirety by this cautionary statement.
Central Utilities Production Corporation (the "Company") is an independent
energy company engaged in the development and operation of oil and gas producing
properties. The company's current operations are focused in Texas and Kentucky.
During the year ended December 31, 2001, the Company acquired oil and gas
properties in Kentucky and Texas. The Company began production of these
properties in the year ended December 31, 2001.
The Company was formed as Enpetro Mineral Pool, Inc. ("Enpetro") in October
2000. Enpetro acquired certain oil and gas properties for the issuance of its
common shares. Enpetro valued its acquisition of the oil and gas properties on
the basis of the estimated fair value of those oil and gas properties, primarily
interests in oil and gas leases. The valuation was assessed by an outside party
certified to be a specialist in determining oil and gas reserves and valuation
of the related properties. The value was determined to be $26,112,698. Enpetro
had no other significant assets or operations.
On May 18, 2001, Enpetro entered into an Agreement and Plan of Reorganization in
which, it was acquired by Accord Advanced Technologies, Inc. ("Accord"). Accord
had previously been a reconditioner and modifier of multi-chamber semiconductor
equipment. Accord is a publicly traded company. Accord's only operating
subsidiary filed to liquidate under Chapter 7 of the United States Bankruptcy
Code in 2000 and had no operations at the time of the merger. The Agreement and
Plan of Reorganization stipulated that Accord acquire all of the outstanding
voting shares of Enpetro for 228,000,000 post reverse split common shares of the
Accord. The shareholders of Enpetro held an interest of approximately 92% in
Accord effective with the acquisition. A name change occurred at the time of the
acquisition from Accord Advanced Technologies, Inc. to Central Utilities
Production Corp. . In order to facilitate the agreement it was also required to
increase the number of authorized shares to 500,000,000. The agreement also
called for the resignation of the registrant's President and CEO, a reverse
stock split of two shares of the old company for 1 share of the new company.
On May 18th 2001, GEM Management, Ltd. and Successway Holdings Ltd. entered into
a settlement agreement with the registrant as set out in Item 3 "Legal
Proceedings".
11
Upon the settlement with GEM and Successways and the merger with Enpetro, two
existing debenture holders of the registrant, AJW Partners, LLC. and New
Millennium Capital Partners II, LLC. purchased a total of $500,000 in new 12%
convertible debentures due May 31, 2002. The holders were also granted a total
of 250,000 warrants at $.253 per share. The registrant and the debenture holders
executed a second amendment to the original Secured Convertible Purchase
Debenture Agreement.
The core of the existing business is the large quantity of proven natural gas
reserves accessible to and owned by the registrant. Expanding from this base the
company intends to develop an integrated network of natural gas transmission and
distribution systems to sell this gas directly to industrial, commercial and
residential customers. This network will be developed through a combination of
acquisition of existing utility companies, pipelines, and distribution systems
as well as the construction of new pipelines and distribution systems where
economics dictate. As the network develops additional gas reserves will be
acquired to ensure a long-term supply.
The company will register the shares underlying the above Convertible Debentures
On May 23, 2001 the company was deleted from trading on the OTC BB and is now
quoted on the Pink Sheets. The quote may be found on www.pinksheets.com.
RESULTS OF OPERATIONS
The company had an operating loss for the three months ended March 31, 2002 of
$(186,182). The company's net loss was $(239.316) for the three months ended
March 31, 2002.
The company's earnings per share, on a fully diluted basis, for the three months
ending March 31, 2002 is less than $0.01 per share.
The Company expects to face many operating and industry challenges and will be
doing business in a highly competitive industry.
The Company has significant fixed costs that were not covered at the current
production and sales volumes. The Company must substantially increase its
volumes in order to attain profitability. The Company did not begin production
of the Kentucky properties until the third quarter of 2001 and the Texas
properties in the fourth quarter. Management believes that with present
commodity prices and its cost structure for production that profitability is
attainable.
12
Lease operating expenses includes personnel costs, costs of third party operator
and other maintenance and operating costs. General and administrative expenses
primarily includes professional fees and travel expenses.
Capital reserves at March 31, 2002 were positive and the company has adequate
working capital to continue its operations at its present level. The Company
plans to increase working capital through the sale of stock as well as strategic
mergers or acquisitions in the industry to increase revenue and cash flow.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a working capital deficit of $1,471,532 as of March 31, 2002.
The Company is attempting to restructure and extend $1,000,000.00 of convertible
debentures. Supplementally, management believes that the debentures will
ultimately be converted to common stock. However, there can be no assurances
that the debt will be restructured or converted.
The Company used $148,505 of cash in its operations for the three months ended
March 31, 2002. As the Company increases its volume of business, liquidity will
be affected by requirements to carry larger accounts receivable and inventory
balances. Generally, inventories are not significant relative to sales volume.
The Company has experienced a quick turnover of its accounts receivable.
The Company used $90,643 of cash in investing activities for the three months
ended March 31, 2002, primarily for the purchase of oil and gas properties and
related equipment. The Company will continue to require capital to acquire
equipment in order to increase its production volumes.
Management believes that the Company has good relationships with its suppliers
and vendors.
The Company will seek additional financing. There can be no assurance that
additional public or private financing, including debt or equity financing, will
be available as needed, or, if available, on terms favorable to the Company. Any
additional equity financing may be dilutive to shareholders and such additional
equity securities may have rights, preferences or privileges that are senior to
those of the Company's existing common stock. Furthermore, debt financing, if
available, will require payment of interest and may involve restrictive
covenants that could impose limitations on the operating flexibility of the
company. The failure of the company to successfully obtain additional future
funding may jeopardize the company's ability to continue its business and
operations.
The Company plans to develop its existing oil and gas properties to increase
production and to acquire new oil and gas properties to increase the asset base
and revenues of the Company. The Company may elect to sell certain properties
that exceeds the cost of operations budget established by the Company.
SEASONALITY
Weather conditions affect the demand for and prices of natural gas and can also
delay drilling activities, disrupting our overall business plans. Demand for
natural gas is typically higher in the fourth and first quarters resulting in
higher natural gas prices. Due to these seasonal fluctuations, results of
operations for individual quarterly periods may not be indicative of results
which may be realized on an annual basis.
13
MARKETS AND CUSTOMERS
Our oil and gas production is sold at the well site on an as-produced basis at
market-related prices in the areas where the producing properties are located.
We do not refine or process any of the oil or natural gas we produce. All of our
production is sold to unaffiliated purchasers on a month-to-month basis.
We do not believe the loss of any one of our purchasers would materially affect
our ability to sell the oil and gas we produce. Other purchasers are available
in our areas of operations.
The marketability of our current oil and gas reserves or of reserves which we
may acquire or discover may be affected by numerous factors beyond our control.
These factors include fluctuations in product markets and prices, the proximity
and capacity of pipelines to our oil and gas reserves, our ability to finance
exploration and development costs and the availability of processing equipment.
Additional factors are engineering and construction delays, difficulties and
hazards resulting from unusual or unexpected geological or environmental
conditions, or to the conditions involved in drilling and operating wells.
We are not obligated to provide a fixed and determinable quantity of oil or
natural gas under any existing arrangements or contracts.
Our business does not require us to maintain a backlog of products, customer
orders or inventory.
REGULATIONS
Domestic exploration for, and production and sale of, oil and gas are
extensively regulated at both the federal and state levels. Legislation
affecting the oil and gas industry is under constant review for amendment or
expansion, frequently increasing the regulatory burden. Also, numerous
departments and agencies, both federal and state, are authorized by statute to
issue, and have issued, rules and regulations binding on the oil and gas
industry that often are costly to comply with and that carry substantial
penalties for failure to comply. In addition, production operations are affected
by changing tax and other laws relating to the petroleum industry, by constantly
changing administrative regulations and possible interruptions or termination by
government authorities.
State regulatory authorities have established rules and regulations requiring
permits for drilling operations, drilling bonds and reports concerning
operations. The states in which we operate also have statutes and regulations
governing a number of environmental and conservation matters, including the
unitization or pooling of oil and gas properties and establishment of maximum
rates of production from oil and gas wells. Many states also restrict production
to the market demand for oil and gas. Such statutes and regulations may limit
the rate at which oil and gas could otherwise be produced from our properties.
We are subject to extensive and evolving environmental laws and regulations.
These regulations are administered by the United States Environmental Protection
Agency ("EPA") and various other federal, state, and local environmental,
zoning, health and safety agencies, many of which periodically examine our
operations to monitor compliance with such laws and regulations. These
regulations govern the release of waste materials into the environment, or
otherwise relating to the protection of the environment, human, animal and plant
health, and affect our operations and costs. In recent years, environmental
regulations have taken a "beginning-to-end" approach to waste management,
regulating and creating liabilities for the waste at its inception to final
disposition. Our oil and gas exploration, development and production operations
are subject to numerous environmental programs, some of which include solid and
hazardous waste management, water protection, air emission controls, and situs
controls affecting wetlands, coastal operations, and antiquities.
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Environmental programs typically regulate the permitting, construction and
operations of a facility. Many factors, including public perception, can
materially impact the ability to secure an environmental construction or
operation permit. Once operational, enforcement measures can include significant
civil penalties for regulatory violations regardless of intent. Under
appropriate circumstances, an administrative agency can request a "cease and
desist" order to terminate operations.
New programs and changes in existing programs are anticipated, some of which
include Natural Occurring Radioactive Materials ("NORM"), oil and gas
exploration and production waste management, and underground injection of waste
materials.
Each state in which we operate has laws and regulations governing solid waste
disposal, water and air pollution. Many states also have regulations governing
oil and gas exploration, development and production operations.
We are also subject to Federal and State Hazard Communications ("OSHA") and
Community Right to Know ("SARA Title III") statutes and regulations. These
regulations govern record keeping and reporting of the use and release of
hazardous substances. We believe we are in compliance with these requirements in
all material respects.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The registrant, on May 18, 2001, settled a pending legal matter with GEM
Management, Ltd. and Successway Holdings Ltd by entering into a Convertible
Debenture Purchase Agreement and a 2% Convertible Debenture for $340,000. The
consent judgment has been placed in escrow and upon the conversion of the
underlying shares or payment the judgment will be set aside and the case will be
dismissed.
The Company is subject to routine litigation during the normal course of
business. The Company knows of no pending litigation that would have a material
adverse effect on its financial position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULT UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during this reporting period
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during this reporting period.
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SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
Registrant caused this registration statement to be signed on its behalf by the
undersigned thereunto duly authorized.
Central Utilities Production, Corporation
June 6, 2002 By /s/ Stan Dedmon
------------------------------------
Stan Dedmon
Director and President
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