U. S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
(Mark One)
(X) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended October 31, 1997
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 0-1394
SEVEN J STOCK FARM, INC.
------------------------
(Name of small business issuer as specified in its charter)
Texas 74-1110910
----- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
808 Travis Street, Suite 1453, Houston, TX 77002
- ------------------------------------------ -----
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (713) 228-8900
Securities registered under Section 12(b) of the Exchange Act:
None
----
(Title of Class)
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $1.00 a share
-------------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes (X) No ( )
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. (X)
Issuer's revenues for the fiscal year ended October 31, 1997 were $747,000.
The aggregate market value of common stock held by non-affiliates on
January 9, 1998 was $1,546,808.
As of January 9, 1998 there were outstanding 1,451,000 shares of Seven J Stock
Farm, Inc. common stock $1.00 par value.
DOCUMENTS INCORPORATED BY REFERENCE - Portions of the annual information
statement for the fiscal year ended October 31, 1997 are incorporated by
reference into Part III.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
- ------------
Seven J Stock Farm, Inc. was incorporated in Texas in 1948. The
principal operations of Seven J Stock Farm, Inc. and Subsidiary (the
"Company") consist of producing and selling field crops, leasing pastures,
and gathering of natural gas through pipelines. In addition, the Company
receives oil and gas royalties for minerals underlying the land owned in fee.
As disclosed in the following discussion, the Company receives a material
amount of its income from transactions with major customers, including related
parties.
Agricultural and Ranch Leases
- -----------------------------
The Company's leased land is as follows:
PERCENT OF
TOTAL COMPANY
LAND LEASED TO AREA LEASED LAND
----------------------- ------------- -------------
Unrelated parties:
Agricultural leases 2,612 acres 23.4 %
Ranch lease 1,200 acres 10.8
Related parties:
Ranch lease - Trust created under will
of J. R. Parten (Estate of J.R. Parten -
shareholder of the
Company) 6,972 acres 62.6 %
Land Lease
John R. Parten, Officer,
Director and Shareholder
of the Company 6 acres 0.1 %
In accordance with the terms of the agricultural leases, the Company is
entitled to 25% of the cotton production and 30% of the milo, wheat, or corn
production from the leased lands. The Company is also liable for its
respective share of certain costs of crop production.
In accordance with the ranch leases encompassing 8,172 acres or 73% of
Company land, the annual rent, payable monthly, is $16 per net acre (7,442
aggregate net acres). The Company is liable for payment of property taxes,
repairs to water wells, and a portion of maintenance expense of the levee
system. The ranch lease with an unrelated party is for a term of five years
ending July 31, 1998 with an option to renew for an additional five year term.
The ranch lease with the Estate of J. R. Parten and Trust created under the
will of J.R. Parten, related parties, was renewed on October 31, 1994 for an
additional five years, subject to earlier termination by either party by
giving three calendar months notice to the other party.
Under a lease agreement for fifty years beginning September 1, 1997, the
Company is leasing approximately six acres of land to John R. Parten, an
officer, director and shareholder of the Company. Under the terms of the
lease agreement, the Company is entitled to an annual rent of $200, subject
to escalation after ten years. The lessee is responsible for property
taxes, utilities, insurance and the cost of construction of any buildings or
improvements. Upon lease termination, any buildings or improvements
constructed on the leased land becomes the Company's property.
For the two fiscal years ended October 31, 1997 and 1996, revenue
generated from the leasing activities including share of crops represented 40%
and 52%, respectively, of the Company's total revenue.
Pipeline Operations
- -------------------
In 1977, Madison Pipe Line Co., a wholly-owned subsidiary which owns a
gas gathering system, commenced operating its natural gas pipelines. For
fiscal years ended October 31, 1997 and 1996, pipeline income represented 27%
and 30%, respectively, of the Company's total revenue. The principal service
rendered by the subsidiary is to maintain and operate gas gathering systems
which deliver natural gas to various pipelines.
Effective December 1, 1996, the subsidiary entered into a joint operating
agreement with another pipeline company ("operator") owned by Mr. John R.
Parten, an officer, director and shareholder of the Company. Under the
agreement, the subsidiary and operator share the cost of constructing a central
compression and dehydration facility on an equal basis. In addition, the
subsidiary and operator share on an equal basis the revenues, costs and expenses
of operating the combined gathering systems and central compression and
dehydration facility. The term of the agreement is for one year and for month-
to-month thereafter until cancelled. The combined gathering systems are
currently servicing fourteen producing gas wells. Thirteen wells are operated
by Parten Operating Inc.,which is owned by John R. Parten.
Oil and Gas Royalties
- ---------------------
The Company receives oil and gas royalties attributable to seventeen
producing oil and gas wells. The royalties are received from various oil and
gas companies, including related parties. The income is of a passive nature
as the Company does not explore for oil and gas and does not participate in
the drilling of oil and gas wells. For the fiscal years ended October 31,
1997 and 1996, net royalty income represented 34% and 19%, respectively, of
the Company's total revenue. Substantially all Company property is leased for
oil and gas exploration. Lessees are related parties.
Major Customers
- ---------------
Customers comprising 10% or greater of the Company's revenues for the
fiscal years ended October 31, 1997 and 1996 are summarized as follows:
FISCAL YEAR ENDED
OCTOBER 31,
-----------------------
1997 1996
---------- ----------
(in thousands)
Ranch lease - Estate of J. R. Parten and
trust created under will of J.R. Parten-
related parties $ 100 $ 100
Agricultural leases - Caney Valley Cotton Co. 138 -
Pipeline operations - Gathering income
attributable to gas wells partially
owned by related parties 138 122
--------- ---------
Total revenues - major customers $ 376 $ 222
========= =========
Percentage to total revenues - all
customers 50% 41%
========= =========
Employees
- ---------
The Company presently employs one full time ranch employee and seven
part-time individuals through a labor sharing arrangement with related
parties. None of these individuals are represented by a union and management
considers its relations with the individuals to be satisfactory. The
Company has not experienced serious difficulty in hiring qualified employees.
General
- -------
The Company does not own any patents, trademarks, licenses, franchises
or concessions which might be deemed important to the Company or to any of
its segments. The Company does not have backlog orders or contractual
commitments. The Company has not expended any funds in research activities.
The Company anticipates no material effects on its business concerning
compliance with federal, state and local provisions which have been enacted
or adopted concerning environmental matters.
The Company operates in the United States and does not have foreign
operations or export sales.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company owns in fee approximately 11,140 acres of land in Houston
County, Texas, adjoining the Trinity River located about 100 miles north
of Houston, Texas. Of this land, approximately 35% is planted as native
pasture, approximately 36% is improved pasture consisting of coastal bermuda
and bahia grasses, approximately 23% is cropland cultivated in cotton, wheat,
milo, and corn, and approximately 6% is wooded pasture or wasteland.
Improvements include approximately twenty miles of roads, approximately
eighty four miles of perimeter and cross fencing, nine water wells, a levee
approximately ten miles long with pumping units, five single family
residences, three buildings, seven barns or warehouses, two sheds, four
corrals, and one stable/tack room. Oil and gas royalties are received from
oil and gas companies. Seventeen oil and gas wells are producing on the
Company's land and six wells are shut-in. The lessees of the minerals
underlying Company land are related parties.
Madison Pipe Line Co. property consists of three pipelines currently
servicing six gas wells located adjacent to Seven J Stock Farm, Inc.
properties, and a 50% undivided interest in a compression and dehydration
facility.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's common stock, not listed in any established public trading
market, is traded over-the-counter. The quoted bid prices of the common
shares for the fiscal years ended October 31, 1997 and 1996 are as follows:
QUOTED BID
PRICE
-------------------------
QUARTER 1997 1996
------- -------- --------
First $ 3.50 $ 3.50
Second 3.50 3.50
Third 3.50 3.50
Fourth 3.50 3.50
The above quoted bid prices were compiled from sporadic market quotations
which may not necessarily represent actual transactions.
As of January 7, 1998, the Company had approximately 793 shareholders.
For the second consecutive year, the Company has paid a dividend to
its shareholders.
On May 15, 1997, the Company paid a $.04 per share cash dividend to
shareholders of record as of March 20, 1997.
Although no restrictions exist for the payment of dividends, any future
payment of cash dividends will depend upon the Company's earnings, financial
condition, capital requirements, and other factors deemed relevant by the
Board of Directors.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
The following table summarizes for the period indicated the percentage
increase (decrease) of revenues and costs and expenses as compared to the
prior period:
PERIOD-TO-PERIOD INCREASE
(DECREASE) FOR FISCAL YEARS
---------------------------
1997 1996
COMPARED COMPARED
TO 1996 TO 1995
---------- ----------
REVENUES:
Pipeline operations 23.8% (18.8)%
Net oil and gas royalties 146.1 (4.7)
Farm produce sales 11.9 (39.2)
Ranch lease rentals - -
Total revenues 38.1 (21.1)
COSTS AND EXPENSES:
Operating expenses 68.9 (35.3)
General and administrative expenses .1 26.1
Depreciation and amortization 24.7 10.6
Other (income) expense - net 60.0 (16.7)
Taxes - other than income taxes ( 2.3) (15.4)
Total costs and expenses 22.7 (5.9)
INCOME BEFORE PROVISION FOR INCOME TAXES 99.1 (52.0)
Provision for income taxes 50.0% (50.8)%
The following is a discussion of material changes in the results of
operations of the Company.
COMPARISON OF FISCAL YEARS 1997 AND 1996
----------------------------------------
REVENUES
- --------
Pipeline Operations - Pipeline gathering revenue for fiscal year 1997
increased 23.8% as compared to fiscal year 1996. The Company entered into
a joint operating agreement effective December 1, 1996 to jointly operate its
gas gathering system with a gathering system owned by a pipeline company
("operator") owned by John R. Parten. Under the terms of the agreement, the
Company was charged for its 50% share of the cost of equipment and labor to
construct, as part of the system, a central compression and dehydration
facility required to remove excess water content from the gas before delivery
to a gas plant owned by an unrelated party. The Company and the operator share
equally the income, costs and expenses of operating the gathering system,
including the dehydration facility (Ft. Trinidad Pipeline system).
Net Oil and Gas Royalties - Net oil and gas royalties for fiscal year
1997 increased 146.1% as compared to fiscal year 1996. The increase is
primarily due to oil and gas royalties received on a new well drilled on
Company land. Gas royalties increased 45.9% because of an increase of 16% in
natural gas production including the new well(thousand cubic feet "MCF") (1997
12,866 MCF; 1996 - 11,095 MCF), and an increase of 25.1% in natural gas prices
(average price per MCF: 1997 - $2.89; 1996 - $2.31). Oil and condensate
royalties increased 176.6% because of an increase of 175.6% in oil and
condensate production (barrel "bbl") (1997 - 11,144 bbls.; 1996 - 4,044 bbls),
and an increase of 2.6% in oil and condensate prices (average price per barrel:
1997 - $20.72; 1996 - $20.20). The Company's undiscounted future revenues in
proven developed oil and gas reserves are estimated to be approximately
$1,300,000.
Farm Produce Sales - Farm produce sales for fiscal year 1997 increased
11.9% as compared to fiscal year 1996. Cotton production yield increased
292.9% (1997 - 220,000 lbs.; 1996 - 56,000 lbs.) The 1996 cotton crop was
severally damaged by adverse weather conditions.
During fiscal year 1994, the Company planted 2,500 pecan trees. The
Company anticipates that it will take an additional four years before the pecan
grove is commercially productive. Estimated future annual target yield of the
pecan grove is approximately 300,000 lbs.
Costs and Expenses
- ------------------
Operating Expenses - Operating expenses increased 68.9% for fiscal year
1997 as compared to fiscal year 1996. The increase is primarily attributable
to an increase of the operating expenses of the Ft. Trinidad Pipeline system.
The increase in pipeline revenue was not adequate to offset the increase
in pipeline operating expenses. Management anticipates that pipeline
operations will improve during fiscal year 1998 because the Company and the
operator of the Ft. Trinidad Pipeline system will sell the raw gas rather than
have it processed through a gas plant. Pipeline revenues are reduced by gas
plant processing fees and by any shrinkage of natural gas during processing.
Depreciation and Amortization - Depreciation and amortization for fiscal
year 1997 increased 24.7% as compared to fiscal year 1996. The increase is
attributable to ranch properties and to the addition of the Ft. Trinidad
Pipeline compression and dehydration facility.
Other (Income) Expense - Net - Other (income) expense - net for the
fiscal year 1997 increased 60% as compared to fiscal year 1996. The
increase is attributable to income earned for services charged others for
ranch labor.
Taxes - Other Than Income Taxes - Taxes - other than income taxes for
fiscal year 1997 decreased 2.3% as compared to fiscal year 1996.
Provision for Income Taxes - Provision for income taxes for fiscal year
1997 increased 50% as compared to fiscal year 1996. The increase is
attributable to an increase in pre-tax accounting income.
COMPARISON OF FISCAL YEARS 1996 AND 1995
Revenues
- --------
Pipeline Operations - Pipeline gathering revenue for fiscal year 1996
decreased 18.8% as compared to fiscal year 1995. Gathering fees which include
sale of liquefied natural gas products are adjusted for differences between
quantities of natural gas gathered and quantities of natural gas sold. For
fiscal year 1996, the gathering fees decreased by $28,700 for these differences
as compared to fiscal year 1995. Part of the decrease in gathering fees for
fiscal year 1996 is also attributable to a 4.9% decrease in quantities (million
british thermal units - mmbtu) of natural gas volumes gathered and transmitted
(1996 - 762,000 mmbtu; 1995 - 801,000 mmbtu).
Net Oil and Gas Royalties - Net oil and gas royalties for fiscal year
1996 decreased 4.7% as compared to fiscal year 1995. A decrease of 29.2% in
natural gas production (thousand cubic feet "MCF") (1996 - 11,095 MCF; 1995 -
15,679 MCF) was partially offset by a 32% increase in natural gas prices
(average price per MCF; 1996 - $2.31; 1995 - $1.75). A decrease of 19.2% in
oil and condensate production (barrel "bbl") (1996 - 4,044 bbl; 1995 - 5,007
bbl) was partially offset by a 20.2% increase in oil and condensate prices
(average price per barrel: 1996 - $20.20; 1995 - $16.81). The Company's
undiscounted future revenues in proved developed oil and gas reserves is
estimated to be approximately $405,000 at October 31, 1996.
Farm Produce Sales - Farm produce sales for fiscal year 1996 decreased
39.2% as compared to fiscal year 1995. As a result of drought followed by
heavy rains during September, the cotton production yield decreased 84.4%
(1996 - 56,000 lbs.; 1995 - 360,000 lbs.). The losses in production due to
destroyed cotton crops for fiscal year 1996 were partially offset by insurance
proceeds received under multi-peril crop insurance policies.
During fiscal year 1994, the Company planted 2,500 pecan trees. The
Company anticipates that it will take six years before the pecan grove is
commercially productive. Estimated future annual target yield of the pecan
grove is approximately 300,000 lbs. In accordance with an agreement with a
pecan picking company, the Company receives 40% of harvested pecans from
approximately 100 previously existing pecan trees located on Company land.
As the result of adverse weather conditions, the 1996 pecan crop was
substantially decreased.
Costs and Expenses
- ------------------
Operating Expenses - Operating expenses decreased 35.3% for fiscal year
1996 as compared to fiscal year 1995. The decrease in operating expenses are
attributable to reduction of costs of agricultural leases and ranch operating
expenses. Operating expenses of the agricultural leases were substantially
lower due to the low cotton production yields caused by adverse weather
conditions. Ranch operating expenses decreased due to a decrease in outside
services expense for painting and maintaining ranch fences and buildings.
This decrease in payments to contract labor was partially offset by an increase
in ranch salaries. Operating expenses of the gathering system for fiscal year
1996 were about the same as compared to fiscal year 1995.
General and Administrative Expenses - General and administrative expenses
for the fiscal year 1996 increased 26.1% as compared to fiscal year 1995. The
increase in expense is attributable to increases in insurance, legal, salaries,
and office expense. Insurance expense for fiscal year 1996 increased due to
increased insurance premiums and retroactive policy premium adjustments. Legal
fees were incurred in connection with the payment of dividends to shareholders
and other matters. Salaries and office expense increased due to increase in
allocated salaries and office expense from related parties.
Depreciation and Amortization - Depreciation and amortization for fiscal
year 1996 increased 10.6% as compared to fiscal year 1995. The increase is
attributable to additions to ranch properties.
Other (Income) Expense - Net - Other (income) expense - net for the fiscal
year 1996 decreased 16.7% as compared to fiscal year 1995. The decrease is
attributable to a reduction in other income derived from charging related
parties for time of ranch personnel.
Taxes - Other Than Income Taxes - Taxes-other than income taxes for
fiscal year 1996 decreased 15.4% as compared to fiscal year 1995 due to a
reduction in franchise taxes.
Provision for Income Taxes - Provision for income taxes for fiscal year
1996 decreased 51% as compared to fiscal year 1995. The decrease is
attributable to a similar decrease in pre-tax accounting income.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
As indicated by the Company's consolidated statement of cash flows, cash
and cash equivalents at the end of fiscal year 1997 increased $35,000 as
compared to the end of fiscal year 1996. Net cash provided by operating
activities of $369,000 was utilized to pay $58,000 in dividends to shareholders
and to pay $229,000 for capital expenditures. The Company expended $33,000 for
an extension to the irrigation system, or construction of gas lines, $46,000
in building improvements, $97,000 in the gathering system central compression
and dehydration facility, and $53,000 in other ranch equipment or property. In
addition, the Company' loaned $47,000 to a lessee of one of its agricultural
leases in order for the lessee to purchase an irrigation system for use on the
lease.
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITOR'S REPORT
----------------------------
To the Shareholders and Board of Directors
of Seven J Stock Farm, Inc.
We have audited the accompanying consolidated balance sheets of Seven J
Stock Farm, Inc. and Subsidiary as of October 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash
flows for the fiscal years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Seven J
Stock Farm, Inc. and Subsidiary as of October 31, 1997 and 1996 and the
results of its operations and its cash flows for the fiscal years then
ended in conformity with generally accepted accounting principles.
MATTISON AND RIQUELMY
January 12, 1998
Houston, Texas
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
(in thousands except for share and per share data)
=============================================================================
OCTOBER 31,
-------------------
1997 1996
-------- --------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 132 $ 97
Accounts receivable 65 126
Accounts receivable - related parties 33 99
Accounts and note receivable - other 11 1
Inventories 138 35
Refundable income taxes 52 66
Other current assets 10 13
------- -------
Total current assets $ 441 $ 437
PROPERTY AND EQUIPMENT - at cost, less accumulated
depreciation of $1,854 in 1997 and $1,766 in 1996 1,492 1,353
OTHER ASSETS 45 8
------- -------
TOTAL $ 1,978 $ 1,798
======= =======
(CONTINUED)
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
--------------------------------------
CONSOLIDATED BALANCE SHEETS
OCTOBER 31, 1997 AND 1996
(in thousands except for share and per share data)
=============================================================================
(CONTINUED) OCTOBER 31,
-------------------
1997 1996
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 82 $ 58
Accounts payable - related parties 38 25
Accrued taxes - other than income taxes 28 -
Accrued expenses - other 20 34
Accrued income taxes payable 1 1
Deferred income taxes 39 41
------- -------
Total current liabilities $ 208 $ 159
------- -------
OTHER LIABILITIES AND CREDITS:
Deferred income taxes $ 90 $ 70
Unearned lease income 9 9
------- -------
Total other liabilities and credits $ 99 $ 79
------- -------
SHAREHOLDERS' EQUITY:
Common stock, par value - $1 per share; authorized
1,500,000 shares; issued and outstanding 1,451,000
shares $ 1,451 $ 1,451
Retained earnings 220 109
------- -------
Total shareholders' equity $ 1,671 $ 1,560
------- -------
TOTAL $ 1,978 $ 1,798
======= =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE FISCAL YEARS ENDED OCTOBER 31, 1997 AND 1996
(in thousands except for share and per share data)
=============================================================================
FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
-------- --------
REVENUES:
Pipeline operations $ 60 $ 24
Pipeline operations - related parties 138 136
Net oil and gas royalties 251 102
Farm produce sales 179 160
Ranch lease rentals 19 19
Ranch lease rentals - related party 100 100
------- -------
Total revenues $ 747 $ 541
------- -------
COSTS AND EXPENSES:
Operating expenses $ 102 $ 122
Operating expenses - related parties 121 10
General and administrative expenses 112 123
General and administrative expenses - related parties 93 80
Depreciation and amortization 91 73
Other (income) expense - net (15) (7)
Other (income) expense - net - related parties (17) (13)
Taxes - other than income taxes 38 39
Taxes - other than income taxes - related parties 5 5
------- -------
Total costs and expenses $ 530 $ 432
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES $ 217 $ 109
Provision for income taxes 48 32
------- -------
NET INCOME $ 169 $ 77
======= =======
NET INCOME PER SHARE (1,451,000 weighted -
average shares outstanding) $ .12 $ .05
======= =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED OCTOBER 31, 1997 AND 1996
(in thousands except for per share data)
=============================================================================
COMMON STOCK TOTAL
--------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- --------- --------- -------------
Balance at
October 31, 1995 1,451 $ 1,451 $ 90 $ 1,541
Net income - - 77 77
Dividend paid - $.04
per share (58) (58)
-------- -------- ------- --------
Balance at
October 31, 1996 1,451 $ 1,451 $ 109 $ 1,560
Net income - - 169 169
Dividend paid - $.04
per share - - (58) (58)
-------- -------- -------- ------------
Balance at
October 31, 1997 1,451 $ 1,451 $ 220 $ 1,671
======== ======== ======== ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED OCTOBER 31, 1997 AND 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
=============================================================================
FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 169 $ 77
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 91 73
Deferred income taxes 18 49
Changes in assets and liabilities:
(Increase) decrease in assets:
Inventories (103) (30)
Accounts receivable 127 (115)
Refundable income taxes 14 (66)
Other assets 3 (4)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 50 (45)
Accrued income taxes payable - (13)
------- -------
Net cash provided by (used in) operating
activities $ 369 $ (74)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures $ (229) $ (258)
Loan to agricultural lessee (47) -
------- -------
Net cash provided by (used in) investing
activities $ (276) $ (258)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES - Dividends paid $ (58) $ (58)
------- ------
(CONTINUED)
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED OCTOBER 31, 1997 AND 1996
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(in thousands)
=============================================================================
(CONTINUED) FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 35 $ (390)
CASH AND CASH EQUIVALENTS - beginning of year 97 487
------- -------
CASH AND CASH EQUIVALENTS - end of year $ 132 $ 97
======= =======
SUPPLEMENTAL CASH FLOW DATA:
Income taxes paid $ 16 $ 63
======= =======
The accompanying notes to consolidated financial statements
are an integral part of these statements.
SEVEN J STOCK FARM, INC. AND SUBSIDIARY
---------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Seven J Stock Farm, Inc. was incorporated in Texas in 1948. The
principal operations of Seven J Stock Farm, Inc., and Subsidiary (the
"Company") which are conducted on 11,140 acres of land consist of producing
and selling field crops, leasing pastures, and gathering natural gas through
pipelines. In addition, the Company receives oil and gas royalties for
minerals underling the land owned in fee. All operations are located and
conducted in the State of Texas.
Preparation of Financial Statements - The financial statements reflect,
on a consolidated basis, the accounts of Seven J Stock Farm, Inc. and
Subsidiary. The wholly-owned subsidiary is Madison Pipe Line Co. All
significant intercompany accounts and transactions have been eliminated.
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
reporting period. Actual results could differ from those estimates.
Revenue and Expense Recognition - Revenues are reflected in operations
when earned and expenses when incurred utilizing the accrual method of
accounting.
Revenue from pipeline operations is recognized based on dates natural
gas is gathered.
Revenue from net oil and gas royalties is recognized based on dates of
production.
Revenue from farm produce sales is recognized when field crops are
harvested.
Revenue from ranch lease rentals is recognized based on lease periods.
Inventories - Inventories of harvested cotton, corn, wheat, milo, and
pecans are stated at current sales price less cost of disposal. Growing
crops are stated at the lower of cost or net realizable value.
Property and Equipment - Property and equipment is recorded at cost.
The straight-line method of computing depreciation is used for financial
reporting purposes. Maintenance and repairs are included in expenses when
incurred. Renewals and betterments which extend the useful life of the
equipment are capitalized. At the time properties are retired or otherwise
disposed of, the cost of the property and accumulated depreciation are
removed from the accounts. The difference between the net book value and the
amount received by sale or salvage is included in income.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
(CONTINUED)
The cost of planting the pecan grove and yearly maintenance and
development costs are capitalized until the grove is ready for commercial
production. Net proceeds from sale of pecans before commercial production
are recorded as a reduction of capitalized costs. Normal losses of trees to
disease and other conditions during the development stage are not treated as
a reduction to the capitalized cost; however, abnormal losses are charged to
current operations. The capitalized cost is depreciated over its estimated
economic life, beginning in the first year of commercial production.
Cash and Cash Equivalents - All highly liquid investment purchases with
a original maturity of three months or less are cash equivalents.
Deferred Income Taxes - In accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes", the Company
utilizes the asset and liability approach in computing deferred income taxes.
Under the asset and liability approach to accounting for income taxes, a
deferred income tax liability, calculated using projected tax rates, is
recognized on temporary differences which will result in projected future net
taxable amounts. In addition, a deferred income tax asset, calculated using
projected tax rates, is recognized on temporary differences which will result
in projected future net deductible amounts. The deferred income tax asset is
reduced by a valuation allowance based on management's estimate of the amount
that will ultimately be realized or deducted in future years.
Reclassifications - Certain items and amounts have been reclassified.
The reclassifications have no effect on net income.
2. PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION
Property and equipment consists of:
FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
-------- --------
(in thousands)
Buildings and building improvements $ 602 $ 538
Levee, drainage, irrigation, roads, and
flood control facilities 595 584
Farm implements, trucks, and tractors 50 50
Fences, corrals, and other equipment 683 637
Gathering system and dehydration facility 797 700
Pecan grove and irrigation system
(not commercially productive) 322 310
------- -------
$ 3,049 $ 2,819
Less accumulated depreciation 1,854 1,766
------- -------
$ 1,195 $ 1,053
Land 297 300
------- -------
Property and equipment - net $ 1,492 $ 1,353
======= =======
2. PROPERTY AND EQUIPMENT AND ACCUMULATED DEPRECIATION (CONTINUED)
Depreciation of property and equipment is based on the estimated useful
lives. Annual lives for depreciation are as follows:
YEARS
--------
Buildings and building improvements 5 - 40
Levee, drainage, irrigation, roads, and
flood control facilities 7 - 50
Farm implements, trucks, and tractors 5 - 10
Fences, corrals, and other equipment 5 - 20
Gathering system and dehydration facility 10 - 20
Pecan grove and irrigation system 20
3. RANCH AND LAND LEASES
Company property is subject to two separate ranch leases at an annual
rental of $16 per net acre. One lease agreement, expiring July 31, 1998,
with an unrelated party, covers 1,182 net acres. The lessee has an option
to renew the lease for an additional five years subject to possible
escalation. The other lease for 6,260 net acres with the Estate of J. R.
Parten and trust created under the will of J.R. Parten, related parties,
expires on October 31, 1998. The lease is subject to earlier termination by
either party giving three months notice.
Unearned lease income of $9,000 at October 31, 1997 and 1996 represents
prepaid rent attributable to the unrelated party lease.
Under a fifty year lease agreement beginning September 1, 1997, the
Company is leasing approximately six acres of land to John R. Parten, an
officer, director and shareholder of the Company. Under the terms of the
lease agreement, the Company is entitled to an annual rent of $200, subject to
escalation after ten years, and the lessee is responsible for property taxes,
utilities, insurance and the cost of construction of any buildings or
improvements. Upon lease termination, any buildings or improvements
constructed on the leased land becomes the Company's property.
4. AGRICULTURAL LEASES
Approximately 2,612 acres or 23% of the Company land is leased to
unrelated parties under two lease agreements. The Company is entitled to 25%
of the cotton production and 30% of the milo, wheat, and corn production from
the leased lands. The Company pays for its respective share of certain costs
of crop production.
The lessee of one lease agreement covering 1,621 acres exercised his
option to renew the lease for an additional two-year period expiring on the
harvest date of the 1999 crop. The other lease agreement, which covers 991
acres, expires on the harvest date of the 2000 crop.
5. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited selected quarterly financial data for the fiscal years ended
October 31, 1997 and 1996 are as follows:
1997 QUARTER ENDED
-------------------------------------
JANUARY APRIL JULY OCTOBER
31 30 31 31
------- ------- ------- -------
(in thousands except per share amounts)
Revenues $ 122 $ 146 $ 162 $ 317
====== ====== ====== ======
Net income $ 19 $ 27 $ 39 $ 84
====== ====== ====== ======
Net income per share $ .01 $ .02 $ .03 $ .06
====== ====== ====== ======
1996 QUARTER ENDED
-------------------------------------
JANUARY APRIL JULY OCTOBER
31 30 31 31
------- ------- ------- -------
(in thousands except per share amount)
Revenues $ 93 $ 96 $ 98 $ 254
====== ====== ====== ======
Net income $ 8 $ 11 $ 9 $ 49
====== ====== ====== ======
Net income per share $ - $ .01 $ .01 $ .03
====== ====== ====== ======
The 1997 and 1996 fourth quarter revenues include seasonal sales of
harvested cotton.
6. BUSINESS SEGMENTS
The Company operates in two principal industries, agriculture and oil and
gas. The Company's agricultural industry segments consist of the producing
and selling of field crops and the leasing of ranch land not used in farming
operations. The Company's oil and gas industry segments consist of oil and
gas royalty interests in minerals underlying the land owned in fee and
gathering and transportation of natural gas through pipelines.
Financial information concerning the Company's business segments for the
fiscal years ended October 31, 1997 and 1996 is as follows. There were no
material intersegment sales or transfers. Income before provision for income
taxes represents revenues less operating expenses for each segment and
excludes general corporate expenses and other income and expenses of a general
corporate nature. Identifiable assets, by segment, are those assets that are
used in the Company's operations within that industry. Corporate assets are
those assets maintained for general purposes, principally cash and cash
equivalents.
6. BUSINESS SEGMENTS (CONTINUED)
FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
-------- --------
(in thousands)
REVENUES:
Agriculture:
Farm produce $ 179 $ 160
Ranch leases 119 119
------- -------
$ 298 $ 279
------- -------
Oil and gas:
Net oil and gas royalties $ 251 $ 102
Pipeline operations 198 160
------- -------
$ 449 $ 262
------- -------
Total revenues $ 747 $ 541
======= =======
OPERATING PROFIT:
Agriculture:
Farm produce $ 113 $ 108
Ranch leases (1) (7)
------- -------
$ 112 $ 101
------- -------
Oil and gas:
Net oil and gas royalties $ 245 $ 97
Pipeline operations 38 101
------- -------
$ 283 $ 198
------- -------
Total operating profit $ 395 $ 299
Other income (expense) - net 32 20
General corporate expenses (210) (210)
------- -------
Income before provision for income taxes $ 217 $ 109
======= =======
IDENTIFIABLE ASSETS:
Agriculture $ 1,511 $ 1,307
Oil and gas 327 381
Corporate assets 140 110
------- -------
Total assets $ 1,978 $ 1,798
======= =======
6. BUSINESS SEGMENTS (CONTINUED)
TOTAL CAPITAL EXPENDITURES:
Agriculture $ 132 $ 258
Oil and gas 97 -
------- -------
Total capital expenditures $ 229 $ 258
======= =======
DEPRECIATION AND AMORTIZATION:
Agriculture $ 53 $ 38
Oil and gas 38 35
------- -------
Total depreciation and amortization $ 91 $ 73
======= =======
MAJOR CUSTOMERS:
Customers comprising 10% or greater of the
Company's net revenues are summarized as
follows by business segments:
Ranch lease - Estate of J. R. Parten - and trust
created under will of J.R. Parten related parties $ 100 $ 100
Agricultural leases - Caney Valley Cotton Co.
(1996 less than 10%) 138 -
Pipeline operations - Gathering income
attributable to gas wells partially
owned by related parties 138 122
------- -------
Total revenues - major customers $ 376 $ 222
======= =======
Percentage to total revenues - all customers 50% 41%
======= =======
7. RELATED PARTY TRANSACTIONS
The relationship of the Estate of J. R. Parten to the Company is that of
a shareholder. Mr. John R. Parten and Mr. Robert F. Pratka, officers,
directors and shareholders of the Company, are Co-Executors of the Estate of
J. R. Parten and Co-Trustees of a trust created under the will of J.R. Parten.
Information concerning ranch and land leases to related parties are also
disclosed in Note 3 of the notes to consolidated financial statements.
7. RELATED PARTY TRANSACTIONS (CONTINUED)
The following is a description of significant related party transactions
for the fiscal years ended October 31, 1997 and 1996:
FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
-------- --------
(in thousands)
DESCRIPTION OF RELATED PARTY TRANSACTIONS:
Gathering income attributable to production
from gas wells owned by related
parties $ 138 $ 136
50% share of operating expenses of gathering systems
operated by pipeline company owned by John R. Parten 111 -
Ranch lease rentals received from the Estate
of J. R. Parten and trust created under will 100 100
of J.R. Parten
Allocated salaries, payroll taxes and other
expenses of two part-time employees by a
company owned by John. R. Parten 45 35
Allocated office salaries, payroll taxes, office
rent and other office expenses by the Estate of
J. R. Parten and trust under the will of J.R. Parten 63 60
Ranch labor income received from a company owned
by John R. Parten 2 -
Rental income received from:
Pipeline company owned by John R. Parten, 2 2
Company owned by John R. Parten, 10 10
other related parties. 3 -
Capital expenditures - equipment and labor
charges for construction of irrigation system
and central compression and dehydration facility
purchases from pipeline company owned by
John R. Parten 105 16
8. FEDERAL INCOME TAXES
The components of the provision for Federal income taxes for the fiscal
years ended October 31, 1997 and 1996 are as follows:
FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
-------- --------
(in thousands)
Current income tax expense (benefit) $ 30 $ (17)
Deferred income taxes 18 49
------- -------
$ 48 $ 32
======= =======
Federal taxable income is reported by Seven J Stock Farm, Inc. on the
cash basis and by its subsidiary on the accrual basis.
At October 31, 1997, the Company has a credit for prior year alternative
minimum tax carryover for income tax purposes of $7,000.
The total deferred income tax liabilities and deferred income tax benefits
with related valuation allowances as of October 31, 1997 and 1996 are as
follows:
FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
-------- --------
(in thousands)
Deferred income tax liabilities:
Excess tax depreciation $ 101 $ 101
Use of cash basis method of accounting 35 38
------- -------
$ 136 $ 139
------- -------
Deferred income tax benefits - net of related
valuation allowances:
Credit for prior years alternative minimum
tax carryover $ 7 $ 28
------- -------
Net deferred income tax liability $ 129 $ 111
======= =======
A reconciliation of the Company's income tax provision and the amount
computed by applying the statutory Federal income tax rates to earnings before
income taxes for the fiscal years ended October 31, 1997 and 1996 is as
follows:
FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
-------- --------
(in thousands)
Computed Federal income tax at statutory rate of 34% $ 74 $ 37
Tax benefit of graduated Federal income tax rates (8) (4)
Tax benefit of credit for prior year alternative
minimum tax (1) -
Percentage depletion attributable to oil and gas
royalties (17) -
State income tax differential - (1)
------- --------
Provision for income taxes $ 48 $ 32
======= =======
Effective Federal income tax rate 22.1% 29.4%
======= =======
9. NET OIL AND GAS ROYALTIES
The Company receives oil and gas royalties based on oil and gas well
production from various oil and gas companies. Lessees are related parties
underlying the lands owned in fee.
Oil and gas royalties net of production taxes for the fiscal years ended
October 31, 1997 and 1996 are as follows:
FISCAL YEAR ENDED
OCTOBER 31,
-------------------
1997 1996
-------- --------
(in thousands)
Gross oil and gas royalties $ 268 $ 107
Production taxes (17) (5)
------- -------
Net oil and gas royalties $ 251 $ 102
======= =======
10. CONCENTRATION OF CREDIT RISK
The Company maintains cash deposits with banks which from time to time
may exceed federally insured limits. Management periodically assesses the
financial condition of the institutions and believes that any possible loss
is minimal.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS,
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Incorporated herein by reference to portions of the Company's information
statement filed pursuant to regulations 14A with the Securities and Exchange
Commission not later than 120 days after the end of the Company's fiscal year.
ITEM 9A. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company are as follows:
NAME AGE POSITION
- ----------------------- ----- --------------------------------------
John R. Parten 48 Chairman of the Board and President
R. F. Pratka 75 Vice-President and Treasurer
Valerie Coulter 55 Secretary
On November 18, 1992, John R. Parten was elected President of the
Company. He served the Company as Vice-President from 1987 to November 18,
1992.
R. F. Pratka has served the Company as Vice-President and Treasurer since
1970.
Valerie Coulter was elected Secretary on March 15, 1994.
ITEM 10. EXECUTIVE COMPENSATION, and
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, and
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Part III (Items 10, 11, and 12) is
incorporated by reference from the Company's information statement filed
pursuant to regulations 14A with the Securities and Exchange Commission not
later than 120 days after the end of the Company's fiscal year.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
EXHIBIT INDEX
No. Description
- --- ------------
(2) Articles of Incorporation and Bylaws (1)
(10) Material Contract - Ranch Lease - Estate of J. R.
Parten dated March 4, 1993 (2)
(22) Subsidiary of the Registrant
(27) Financial data schedule
- -------------------------------------------------------------------------------
(1) EXHIBIT D to Registration Statement, Form 10, filed with the Securities
and Exchange Commission on June 3, 1965, is incorporated by reference.
(2) Incorporated by reference, Form 10-KSB for the fiscal year ended
October 31, 1994 filed with the Securities and Exchange Commission
on January 30, 1995.
REPORTS ON FORM 8-K
No reports on Form 8-K have been filed for the quarter ended October 31, 1997.
EXHIBIT 22
SUBSIDIARY OF REGISTRANT
At October 31, 1997, the Company has one wholly-owned subsidiary, Madison
Pipe Line Co. The subsidiary was organized under the laws of the State of
Texas and the financial statements of this subsidiary are included in the
Company's consolidated financial statements.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SEVEN J STOCK FARM, INC.
January 27, 1998 By s/ R. F. Pratka
------------------------------------
R. F. Pratka, Vice-President and
Treasurer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
January 27, 1998 s/ John R. Parten
------------------------------------
John R. Parten, President and
Director (Chief Executive Officer)
January 27, 1998 s/ R. F. Pratka
------------------------------------
R. F. Pratka, Vice-President,
Treasurer and Director (Chief
Financial and Accounting Officer)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEVEN J
STOCK FARM, INC. CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 1997 AND
CONSOLIDATED STATEMENT OF INCOME FOR THE FISCAL YEAR ENDED OCTOBER 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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