10-Q 1 j10q-63002.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, 2002 Commission File No. 0-1392 Central Natural Resources, Inc. and Subsidiaries Incorporated in State of Delaware IRS Number: 44-0195290 127 West 10th Street, Suite 666 Kansas City, Missouri 64105 Phone: 816-842-2430 Common stock outstanding as of June 30, 2002 $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, 2002 and December 31, 2001 Consolidated Statements of Earnings and Retained Earnings - Six months ended June 30, 2002 and 2001 and three months ended June 30, 2002 and 2001 Consolidated Statements of Comprehensive Income -Six months ended June 30, 2002 and 2001 and three months ended June 30, 2002 and 2001 Consolidated Statements of Cash Flows - Six months ended June 30, 2002 and 2001 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, 2002 and December 31, 2001 (amounts in unit dollars)

See accompanying notes to consolidated financial statements.

CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES KANSAS CITY, MISSOURI Consolidated Statements of Earnings and Retained Earnings Six months ended June 30, 2002 and 2001 and three months ended June 30, 2002 and 2001 (Unaudited) (amounts in unit dollars)

CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES KANSAS CITY, MISSOURI Consolidated Statements of Comprehensive Income Six months ended June 30, 2002 and 2001 and three months ended June 30, 2002 and 2001 (Unaudited) (amounts in unit dollars)

CENTRAL NATURAL RESOURCES, INC. AND SUBSIDIARIES KANSAS CITY, MISSOURI Consolidated Statements of Cash Flows Six months ended June 30, 2002 and 2001 (Unaudited) (amounts in unit dollars)

CENTRAL NATURAL RESOURCES INC. AND SUBSIDIARIES KANSAS CITY, MISSOURI Notes to Consolidated Financial Statements June 30, 2002 (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, 2002 and the results of operations and cash flows for the periods ended June 30, 2002 and 2001. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and, consequently, do not include all the disclosures required by accounting principles generally accepted in the United States of America. For further information, refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Results of operations for interim periods are not necessarily indicative of results to be expected for a full year. 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, 2002 and December 31, 2001 are as follows:

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

Investments in debt securities are classifiedas held-to-maturity securities, which are carried at amoritizedCost. Investments in marketable equity securitites are classified as 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 based 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 six and three months ended June 30, 2002, the Company recognized an impairment charge for declines in market values of equity securities considered to be other than temporary of $535,133 and $323,006, respectively. During the six and three months ended June 30, 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) Subsequent Event During the quarter ended June 30, 2002, the Company's Board of Directors authorized to spend up to $250,000 to participate in oil and gas exploration on certain property located in Texas. The Company has incurred $137,466 in relation to this project subsequent to June 30, 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Total operating revenue was down substantially in the first six months of 2002 from the first six months of 2001, and also down somewhat in the second quarter of 2002 from the second quarter of 2001. The decreases were due primarily to decreased revenues from oil and gas royalties which, in turn, were due to decreases in the prices for oil and gas during the current periods under comparison, coupled with somewhat decreased production. As mentioned in prior reports, a lessee has completed drilling operations and commenced production of coal bed methane gas from certain of the Company's coal properties located in Sebastian County, Arkansas. Some revenue from royalties from this operation have been received during the current periods under comparison. However, commercial production has only begun during the current fiscal year, and the level of commercial production on an ongoing basis is uncertain at this time. Should production increase, and royalty revenue from this source increase, it still may very well be in the intermediate term before the Company realizes materially increased royalty income from this source. Further, the amount of revenue ultimately received from this source will be subject to the uncertainties of price fluctuations in the market price of natural gas. The decreases in revenues from oil and gas royalties in the current periods were somewhat offset by increases in revenue from oil and other mineral lease rentals and bonuses in the first six months of 2002 over the first six months of 2001, and also in the second quarter of 2002 over the second quarter of 2001. These increases resulted from more leases being in effect in the current periods with income recognizable in those periods. Nonoperating income was down substantially both in the first six-month period of 2002 compared to the first six months of 2001, and also in the second quarter of 2002 from the second quarter of 2001. These decreases resulted from somewhat lower rates of return on temporary fixed income investments, and the reduced size of the portfolio of fixed income investments during the current periods. Also, contributing to the decreases were reduced gains realized on sales of equity securities. Additionally, the Company recognized impairment charges during both the first and second quarter of 2002 reflecting write-downs in the carrying value of certain equity securities because decreases in current market values of those securities have been deemed by Management to be other than temporary. This is explained in more detail in Note 2 to the accompanying Consolidated Financial Statements. There was such a write-down in the second quarter of 2001, but none in the first quarter of 2001. Income taxes were lower for the first six months of 2002 from the first six months of 2001, principally as a result of reduced earnings before income taxes, and receipt of a sizeable refund of state income taxes for prior years in 2002 amounting to $70,093. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued Financial Condition - Liquidity and Capital Resources The financial condition of the Company continued to be strong through the end of the second quarter of 2002 as it was at the end of fiscal year 2001. 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 continues to be represented by liquid assets. The Company continues to have no bank debt or other lender liability outstanding and no significant other liabilities. There are no off balance sheet arrangements. In addition, since the Company carries no inventory and has no significant amount of accounts receivable or accounts payable, its working capital needs are minimal, and since it has significant liquid assets, and there are no current known demands, commitments, or contractual obligations, Management believes that liquidity should continue to be favorable and the financial condition of the Company strong. The only continuing commercial commitment is the operating lease for general office space of the Company. Regarding future capital expenditures, as reported last quarter, the Board of Directors authorized the Company to participate in an oil and gas exploration venture in the Willow Creek area in Liberty and Hardin Counties, Texas. The Board has authorized a capital expenditure of up to $250,000 for this project, approximately $137,466 of which was paid after the close of the second quarter of 2002. Other than this project, 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, and in pursuit of that objective has focused on possible acquisition of additional mineral properties or working interests in selected oil and gas operations. In addition, Management continues to aggressively pursue development of its currently owned oil and gas and coal properties and to attempt to lease more of its mineral properties in order to generate additional rental, bonus and royalty income. Although as discussed above, the liquidity of the Company continues to be favorable, it is affected by cash flows. The consolidated statement of cash flows in the accompanying Consolidated Financial Statements illustrate that there were net decreases in cash and cash equivalents both in the first six months of 2002 and the first six months of 2001, however, the decrease was greater in the first six months of 2001. 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 mature/called investment debt securities which were reinvested, and the purchase of a greater amount of other investments in the first six months of 2001. The net loss in the first six months of 2002 included certain impairment charges on equity securities described above which reduced earnings but did not reduce cash, while the amount of such impairment charges in the first six months of 2001 was substantially less. The decrease in cash flows from operating activities was also affected by the timing of income tax payments. Cash used in the payment of dividends was significantly less in the first six months of 2002 than in the first six months of 2001 due to a reduction in the amount of quarterly dividend as explained hereafter. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued Accounting Policies, Recent Accounting Pronouncements and Other Matters A summary of significant accounting policies was contained in Note 1 to the consolidated financial statements of the Company filed with Form 10-K for the year ended December 31, 2001. One example of a judgment made in applying a critical accounting policy is the impairment charge made relative to the decline in market value of certain securities that is deemed to be other than temporary as is referred to above. Other than temporary impairment is analyzed quarterly on an individual security basis based on length of time (generally six to nine months), and the extent to which market value has been less than cost; the financial condition and any specific events which affect the issues; and the Company's intent and ability to hold the security. There would be materially different reported results if different assumptions or conditions were to prevail. In the judgment of Management and the Board of Directors, the indicated charges were appropriate, however, they have taken note of the fact that for the last two complete fiscal years (2000 and 2001) and the first two quarters of 2002 in the aggregate, total return on the equity portfolio (including realized gains on the sale of equity securities, dividends and other income items) net of all such impairment charges was still positive by over $44,000. Another example of a judgment made in applying a critical accounting policy is the periodic review of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This accounting policy was also explained in Note 1 referred to above, and has been applied in the past, for example, in downward adjustments to the carrying value of the Company's coal properties. However, this accounting policy does not permit an upward adjustment in such carrying values when Management believes the current fair market value of an asset is greater than the carrying value on the balance sheet and in fact Management believes that this may be the case with respect to the carrying value of certain assets on the balance sheet carried at their historical cost. A one share for one share stock dividend was distributed to Stockholders in the first quarter of 2001. All per share and share data in the consolidated financial statements accompanying this report, and related notes, retroactively reflect the stock dividend for the periods presented. Cash dividends of $0.25 per share were paid in the first quarter and second quarter of 2001, while cash dividends of $0.10 per share were paid in the first quarter and second quarter of 2002. While the Board of Directors had expressed the intention early in 2001 to continue paying a $0.25 per share quarterly dividend if the operating results and financial condition of the Company continued to justify it, the Board subsequently expressed a consensus that in subsequent quarters the Board might reevaluate the quarterly dividend policy in light of possible needs to retain liquidity for potential acquisitions or other projects under consideration and for other possible areas of internal growth. In the fourth quarter of 2001, the Board declared a dividend for that quarter of $0.125 per share and explained that since total year to date earnings for that year were somewhat below total net earnings for the same period of the previous year, due in substantial part to a recent decrease in energy prices, and in furtherance of the objective to retain liquidity for potential acquisitions under consideration and for other possible areas of internal growth, it would be advisable to reduce the quarterly dividend payment accordingly. In the first quarter of 2002, the Board reduced the dividend to $0.10 per share because earnings were again down due in part to a continuation of lower energy prices and reduced production, and in light of the decision to acquire a working interest in oil and gas properties in Texas as described above, and the reduced dividend of $0.10 per share was also paid in the second quarter of 2002. The Company was required to adopt SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002. The Company currently has no goodwill or significant other intangible assets, and accordingly the adoption of SFAS had no impact on the Company's financial statements. On October 3, 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While this statement supersedes, SFAS No.121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of , it retains many of the fundamental provisions of that statement. This statement also supersedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. The Company was required to adopt SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 had no impact on the Company's financial statements. Forward-Looking Statements This report contains forward-looking statements that are based on current expectations, estimates, forecasts, and projections about the business segment 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 assumptions and certain risks and uncertainties that are difficult to predict, such as future changes in energy prices, including fluctuations in prevailing prices for oil and gas, 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), results of drilling and other exploration and development activities, uncertainties regarding future political, economic, regulatory, fiscal, and tax policies and practices as well as assumptions concerning a relatively stable national economy, and the absence of a major disruption such as a domestic act of terrorism. 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 2002, the quarter to which this report pertains. (a) The Annual Meeting of Stockholders was held April 18, 2002. (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 401,552 Ray A. Infantino 401,552 Patrick J. Moran 401,552 James R. Ukropina 401,552 Phelps C. Wood 401,502 Phelps M. Wood 401,552 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, 2002 and to perform other appropriate accounting services. The holders of 407,552 shares cast their votes in favor of that appointment, the votes of 242 shares were cast against it, and the holders of 200 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 13, 2002 ____________________________ By: /s/ Leonard L. Noah ____________________________ Leonard L. Noah, Chief Financial Officer Date: August 13, 2002 ____________________________ By: /s/ Phelps C. Wood ____________________________ Phelps C. Wood President CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 With respect to the Quarterly Report of Central Natural Resources, Inc., a Delaware corporation (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Leonard Noah, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: August 13, 2002 ____________________________ By: /s/ Leonard L. Noah ____________________________ Leonard L. Noah, Chief Financial Officer The foregoing certification is being furnished solely pursuant to 18 U.S.C. section 1350 and is not being filed as a part of the Report or as a separate disclosure document. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 With respect to the Quarterly Report of Central Natural Resources, Inc., a Delaware corporation (the "Company") on Form 10-Q for the period ending June 30, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Phelps C. Wood, President of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Date: August 13, 2002 ____________________________ By: /s/ Phelps C. Wood ____________________________ Phelps C. Wood, President The foregoing certification is being furnished solely pursuant to 18 U.S.C. section 1350 and is not being filed as a part of the Report or as a separate disclosure document.

CENTRAL NATURAL RESOURCES INC 10-Q