10-Q 1 j10q-63001.txt Form 1O-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarter Ended June 30, 2001 Commission File No. 0-1392 Central Natural Resources, Inc. and Subsidiaries Incorporated in State of Delaware IRS Number: 44-0195290 127 West 10th Street, Room 666 Kansas City, Missouri 64105 Phone: 816-842-2430 Common stock outstanding as of June 30, 2001 $1 par value; 503,924 shares The Registrant (l) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months, and (2) has been subject to such filing requirements for the past ninety days. Yes [X] No [ ] CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES KANSAS CITY, MISSOURI TABLE OF CONTENTS PART I - FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 Consolidated Statements of Earnings and Retained Earnings - Six months ended June 30, 2001 and 2000 three months ended June 30, 2001 and 2000 Consolidated Statements of Comprehensive Income -Six months ended June 30, 2001 and 2000 and three months ended June 30, 2001 and 2000 Consolidated Statements of Cash Flows - Six months ended June 30, 2001 and 2000 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk PART II - OTHER INFORMATION Item 1. Legal Proceedings Item 2. Changes in Securities Item 3. Defaults Upon Senior Securities Item 4. Submission of Matters to a Vote of Security Holders Item 5. Other Information Item 6. Exhibits and Reports on Form 8-K SIGNATURES PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES KANSAS CITY, MISSOURI Consolidated Balance Sheets June 30, 2001 and December 31, 2000 (amounts in unit dollars)

CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES KANSAS CITY, MISSOURI Consolidated Statements of Earnings and Retained Earnings Six months ended June 30, 2001 and 2000 and three months ended June 30, 2001 and 2000 (Unaudited) (amounts in unit dollars)

CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES KANSAS CITY, MISSOURI Consolidated Statements of Comprehensive Income Six months ended June 30, 2001 and 2000 three months ended June 30, 2001 and 2000 (Unaudited) (amounts in unit dollars)

CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES KANSAS CITY, MISSOURI Consolidated Statements of Cash Flows Six months ended June 30, 2001 and 2000 (Unaudited) (amounts in unit dollars)

CENTRAL NATURAL RESOURCES INC. AND SUBSIDIARIES KANSAS CITY, MISSOURI Notes to Consolidated Financial Statements June 30, 2001 (1) Basis of Presentation: In the opinion of Central Natural Resources Inc. (the Company), the accompanying unaudited consolidated financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of June 30, 2001 and the results of operations and cash flows for the periods ended June 30, 2001 and 2000. Oil Lease Bonuses Oil lease bonuses which relate to future periods are deferred and Recognized as income over the related future periods (generally One year). (2) Investment Securities: The amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value for held-to-maturity and available-for-sale securities by major security type at June 30, 2001 and December 31, 2000 are as follows:

Investment income consists of the following for each of the periods ended June 30, 2001:

Investments in debt and certain equity securities are classified As either held-to-maturity securities, which are carried at amoritized Cost, or available-for-sale securities, which are carried at fair Value, with unrealized gains and losses excluded from earnings And reported in other comprehensive income. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed to be other than temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. Other than temporary impairment is analyzed quarterly on an individual security basis on the length of time and the extent to which market value has been less than cost; the financial condition and any specific events which effect the issuer; and the Company's intent and ability to hold the security. During the second quarter of 2001, the Company recognized an impairment charge for declines in market values of equity securities considered to be other than temporary of $46,088. (3) Dividends Paid During the quarter ended June 30, 2001, the Company's Board of Directors declared a $.25 dividend per share which was paid on May 18, 2001. (4) Stock Dividends On January 19, 2001, the Board of Directors declared a stock dividend of one share of common Stock for each issued and outstanding share of common stock held by stockholders of record as of January 29, 2001. The stock dividend was distributed on February 13, 2001 to stockholders of record as of January 29, 2001. As of January 19, 2001, there were 25l,962 shares issued and outstanding so that after the distribution of the stock dividend, there were 503,924 shares of common stock issued and outstanding. All per share and share data in the financial statements and related notes have been restated to reflect the stock dividend for all periods presented. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The financial condition of the Company continued very strong through the end of the first six months of 2001, as it was at the end of fiscal year 2000. The liquidity of the Company continues to be high, as is evidenced by a favorable ratio of current assets to current liabilities, and the fact that a significant portion of the Company's net worth is represented by liquid assets. Total operating revenue was up approximately 45% in the first six months of 2001 over the first six months of 2000, and up approximately 55% in the second quarter of 2001 over the second quarter of 2000. This was due primarily to increased revenues from oil and gas royalties. The increases in the current periods under comparison were due to significant increases in the prices of oil and gas during the current periods over the prior periods under comparison, coupled with increased production in the current periods. During the first six months of 2001, a lessee has commenced drilling operations exploring for coal bed methane gas in certain of the Company's coal properties located in Sebastian County, Arkansas. Although commercial production has not commenced, the initial results of the test drilling appear promising. However, should positive results be achieved in the commercial production of the coal bed methane gas under this lease, it may very well be some time in the future, perhaps even a number of years, before the Company realizes material royalty revenue from this production. Non-operating income was down significantly in the first six months of 2001 from the first six months of 2000, and also down in the second quarter of 2001 from the second quarter of 2000. These decreases resulted from lower capital gain income being realized on the sale of equity securities during the current periods under comparison, somewhat lower rates of return on temporary fixed income investments during the current periods, and the reduced size of the portfolio of fixed income investments during the current periods under comparison. Additionally, as described in Note (2) to the accompanying consolidated financial statements, the Company recognized an impairment charge in the second quarter of 2001 reflecting a write-down in the carrying value of certain securities because current market values have been consistently below the Company's cost of those securities for a significant period of time. There is a deferred tax benefit relative to such write-down which will be realized for income tax purposes upon future sale or disposition of the securities. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued General and administrative expenses were down materially in the second quarter of 2001 from the second quarter of 2000, but up slightly in the first six months of 2001 over the first six months of 2000. The fluctuations reflect changes in the fees paid to outside service providers during the periods under comparison and increased compensation paid to officers and directors. Income taxes were lower for the first six months of 2001 than for the first six months of 2000 as a result of reduced earnings before income taxes. Income taxes for the second quarter of 2001 were somewhat higher than for the same quarter in the preceding year due to increased earnings for the quarter. There was a net decrease in cash and cash equivalents in both the six months ended June 30, 2001 and the six months ended June 30, 2000, but the decrease was greater in the current period. The most significant component of the changes between the periods under comparison was the difference in cash provided by or used in investment activities, specifically differences in the amount of proceeds from the sale of equity securities and purchases of equity securities during each such period, differences in the amount of proceeds from matured/called investment debt securities which were reinvested, and the purchase of a greater amount of other investments during the current period. Also contributing to this change was the impairment charge on equity securities described above which reduced earnings but did not reduce cash. Also contributing to the differences was reduced net earnings in the first six months of 2001 compared to the first six months of 2000, partially offset by reduced income tax expense in the current period, and greater cash dividends paid to stockholders during the first six months of 2001 than in the first six months of 2000. There was also a sizeable cash expenditure in the first six months of 2000 with respect to a substantial treasury stock purchase. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued The Board of Directors of the Company on January 19, 2001 declared a one share for one share stock dividend which was distributed on February 13, 2001 to stockholders of record on January 29, 2001. All per share and share data in the consolidated financial statements accompanying this report for periods prior to the current fiscal year have been restated to reflect the stock dividend for the periods presented. A cash dividend of $0.25 per share was paid in the first quarter of 2001, and a cash dividend of the same amount paid in the second quarter of 2001. The Board of Directors had previously expressed the intention to continue paying the $0.25 per share quarterly dividend if the operating results and financial condition of the Company continued to justify it. At a Board meeting held July 20, 2001, the Board declared the quarterly cash dividend in the amount of $0.25 per share to be paid August 31, 2001 to stockholders of record as of August 15, 2001. However, it was the consensus of the Board expressed at that meeting that next quarter the Board may re-evaluate the quarterly dividend policy in light of possible needs to retain liquidity for potential acquisitions under consideration and for other possible areas of internal growth. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, was issued by the Financial Accounting Standards Board in June, 1998. SFAS No. 133 standardizes the accounting for derivative instruments. Under that Statement, entities are required to carry all derivative instruments in the statement of financial condition at fair value. The Company was required to adopt SFAS No. 133 as amended on January 1, 2001. The adoption of SFAS No. 133 did not impact the financial position or results of operation of the Company. In July 2001, the FASB issued No. 141 Business combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that the purchase Method of accounting be used for all business combinations initiated after June 30, 2001, as well as all purchase method business combinations Completed after June 30, 2001. SFAS No. 141 also specifies criteria Intangible assets acquired in a purchase method business combination must Meet to be recognized and reported apart from goodwill, noting that any Purchase price allocable to an assembled work force may not be accounted for Separately. SFAS No. 142 will require that goodwill and intangible assets With indefinite useful lives no longer be amortized, but instead tested for Impairment at least annually in accordance with the provisions of SFAS No. 142 SFAS No. 142 will also require that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment. The Company is required to adopt SFAS No. 142 effective January 1, 2002. The Company currently has no goodwill or significant other intangible assets. The Company has no specific commitment for material capital expenditures at the present time. Management does, however, continue to actively pursue other business opportunities which may result in a more productive deployment of its assets and ultimately increase earnings. The Board also continues to review numerous possible acquisition opportunities of operating businesses, in depth. Two potential acquisitions were reviewed and declined in the past year as not suitable at the present time, and two other opportunities continue to be investigated, but no firm decision on these acquisition prospects have as yet been made. Management also continues to aggressively pursue development of its oil and gas properties and to attempt to lease more of its mineral properties in order to generate more rental, bonus and royalty income, and may consider acquiring working interests in selected oil and gas operations. This Management's Discussion and Analysis of Financial Condition and Results of Operations, and other sections of this report contain forward looking statements that are based on current expectations, estimates, forecasts and projections about the business segments in which the Company operates, management's beliefs, and assumptions made by management. These and other written or oral statements that constitute forward-looking statements may be made by or on behalf of the Company. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions that are difficult to predict, including by way of example, assumptions concerning energy prices, the Company's ability to participate in or co-venture successful exploration or production of natural resources (such as oil,gas, coal and other minerals) and assumptions concerning the national economy. Therefore, actual outcomes and results may differ materially from what is expressed, implied, or forecast in such forward-looking statements. The Company does not, by including this statement, assume any obligation to review or revise any particular forward-looking statement referenced herein in light of future events. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The primary market risk exposures of the Company relate to changes in interest rates, changes in equity security prices, and changes in certain commodity prices. The Company's exposure to market risk for changes in interest rates relates solely to its fixed income portfolio which consists of U. S. government agency securities. All such securities are held-to-maturity and have original maturities of less than one year. The Company does not use derivative financial instruments to hedge interest rates on its fixed income investment securities. The Company's exposure to market risk for changes in equity security prices relates solely to its marketable equity investment portfolio which consists primarily of common stocks of domestic, publicly held enterprises. The Company's exposure to market risk for changes in commodity prices relates to changes in the prices of coal, oil, and natural gas, and the effect thereof on its royalties and rentals relating to coal deposits and mineral rights, as is discussed in more detail in Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in Part 1, Item 2 of this report. The Company does not use derivative commodity instruments to hedge its commodity risk exposures. PART II - OTHER INFORMATION Item 1. Legal Proceedings - None Item 2. Changes in Securities - None Item 3. Defaults Upon Senior Securities - None Item 4. Submission of Matters to a Vote of Security Holders - Attached Item 5. Other Information - None Item 6. Exhibits and Reports on Form 8-K - None PART II, ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The following meeting of Stockholders was held during the second quarter of 2001, to which this report pertains. (a) The Annual Meeting of Stockholders was held April 19, 2001. (b) The meeting involved the election of Directors, and the following are the Directors elected at that meeting: Bruce L. Franke Ray A. Infantino Patrick J. Moran James R. Ukropina Phelps C. Wood Phelps M. Wood There were no other Directors whose term of office as a Director continued after the meeting. (c)(i) For the election of Directors, the votes received by all nominees were as follows: Bruce L. Franke 440,926 Ray A. Infantino 440,926 Patrick J. Moran 440,926 James R. Ukropina 440,926 Phelps C. Wood 440,926 Phelps M. Wood 440,926 Cumulative voting is not permitted. (ii) At the same meeting, the Stockholders approved the appointment of the accounting firm KPMG LLP as independent public accountants to examine the financial statements of the Company for the year ending December 31, 2001 and to perform other appropriate accounting services. The holders of 441,066 shares cast their votes in favor of that appointment, the votes of 442 shares were cast against it, and the holders of 316 shares abstained. (iii) At the same meeting, the Stockholders approved the "Central Natural Resources, Inc. 2001 Stock Incentive Plan" in the form previously approved by the Board of Directors and described in the Proxy Statement distributed to Stockholders on March 20, 2001, and filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934. The holders of 411,630 shares cast their votes in favor of the approval of that plan, the votes of 27,660 shares were cast against it, and the holders of 2,534 shares abstained. (d) There were no settlements between the Company and any other participants terminating any solicitation subject to Rule 14a-11. 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. CENTRAL NATURAL RESOURCES INC. (Registrant) Date: August 15, 2001 ____________________________ By: /s/ Gary J. Pennington ____________________________ Gary J. Pennington, Assistant Treasurer- General Manager, Principal Financial and Accounting Officer Date: August 15, 2001 ____________________________ By: /s/ Phelps M. Wood ____________________________ Phelps M. Wood President

CENTRAL NATURAL RESOURCES INC 10-Q