10QSB 1 g0119a.txt QUARTERLY REPORT FOR THE QTR ENDED 6/30/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-QSB Quarterly Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934 CENTRAL UTILITIES PRODUCTION CORPORATION (Name of Small Business Issuer) For the Quarter Ended June 30, 2002 Commission File Number 0-27187 Nevada 88-0361127 (State of Incorporation) (I.R.S. Employer Identification Number) 1039 North I-35 #301 Carrollton, Texas 75006. (Address of Principal Executive Offices Including Zip Code) (972) 446 3775 (Issuers Telephone Number) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. [X] YES [ ] NO Number of shares outstanding of each of the issuer's classes of common equity, as of August 27, 2002: 248,778,497 Transitional Small Business Disclosure Format: [ ] Yes [X] No Central Utilities Production Corporation INDEX Page ---- PART I - FINANCIAL INFORMATION Item 1. - Financial Statements Consolidated Balance Sheet at June 30, 2002 2 Consolidated Statement of Operations for the three month and six month periods ended June 30, 2002 3 Consolidated Statement of Cash Flows for the six months ended June 30, 2002 5 Notes to Consolidated Financial Statements 6 Item 2. - Management's Discussion and Analysis 12 PART II - OTHER INFORMATION Item 1. Legal Proceedings 17 Item 2. Changes in Securities and Use of Proceeds 17 Item 3. Default Upon Senior Securities 17 Item 4. Submission of Matters to a Vote of Security Holders 17 Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 18 1 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CENTRAL UTILITIES PRODUCTION CORP. CONSOLIDATED BALANCE SHEET JUNE 30, 2002 -------------------------------------------------------------------------------- ASSETS Unaudited CURRENT ASSETS Cash $ 21,874 Accounts receivable 26,619 Inventories 7,632 ------------ Total current assets 56,125 ------------ OIL AND GAS PROPERTIES, at cost (full cost method): Proved properties 26,237,688 Unproved properties 55,729 Less accumulated amortization (75,405) ------------ Net oil and gas properties 26,218,012 OTHER OPERATING PROPERTY AND EQUIPMENT 489,140 OTHER ASSETS 35,050 ------------ TOTAL ASSETS $ 26,798,327 ============ LIABILITIES AND STOCKHOLDERS' EQUITY: CURRENT LIABILITIES: Accounts payable $ 81,650 Accrued liabilities 229,878 Current maturities of long-term debt 316,548 Current maturities of convertible debentures 1,000,000 ------------ Total current liabilites 1,628,076 ------------ LONG-TERM DEBT NET OF CURRENT MATURITIES 526,577 CONVERTIBLE DEBENTURES, NET OF CURRENT MATURITIES 340,000 ------------ Total liabilities 2,494,653 ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock, $.0001 par value, 3,000,000 shares authorized, none issued -- Common stock, $.0001 par value, 500,000,000 share authorized, 248,778,497 issued and outstanding 24,878 Paid in capital 25,725,823 Accumulated deficit (1,447,027) ------------ Total stockholders' equity (deficit) 24,303,674 ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 26,798,327 ============ The accompanying notes are an integral part of this consolidated financial statement. 2 CENTRAL UTILITIES PRODUCTION CORP. CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE AND-SIX MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 --------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30, ---------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) SALES $ 86,277 $ 12,318 $ 153,877 $ 12,318 --------- --------- --------- --------- COSTS AND EXPENSES: Lease operating expense 59,428 7,433 152,180 7,433 General and administrative expense 66,032 138,214 163,812 139,291 Depreciation, depletion and amortization 60,000 -- 123,250 -- --------- --------- --------- --------- Total costs and expenses 185,460 145,647 439,242 146,724 OPERATING LOSS (99,183) (133,329) (285,365) (134,406) --------- --------- --------- --------- OTHER (INCOME) AND EXPENSES Interest expense 52,400 355,256 105,924 370,256 Settlement expense -- -- -- -- Other income (13) -- (404) -- --------- --------- --------- --------- Total other expense (income) 52,387 355,256 105,520 370,256 --------- --------- --------- --------- LOSS BEFORE INCOME TAXES AND (151,570) (488,585) (390,885) (504,662) DISCOUNTED OPERATIONS DISCONTINUED OPERATIONS -- -- -- 3,371 INCOME TAX (PROVISION) BENEFIT -- -- -- -- --------- --------- --------- --------- NET LOSS $(151,570) $(488,585) $(390,885) $(501,291) ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 3 CENTRAL UTILITIES PRODUCTION CORP. CONSOLIDATED STATEMENT OF OPERATIONS - CONTINUED FOR THE THREE AND SIX-MONTH PERIODS ENDED JUNE 30, 2002 AND 2001 --------------------------------------------------------------------------------
Three months ended June 30, Six months ended June 30, ---------------------------- --------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) NET INCOME (LOSS) PER COMMON SHARE Basic $ * $ * $ * $ * ============ ============ ============ ============ Diluted $ * $ * $ * $ * ============ ============ ============ ============ WEIGHTED AVERAGE COMMON SHARES OUTSTANDING Basic 248,778,497 237,816,009 248,778,497 232,935,121 ============ ============ ============ ============ Diluted 248,778,497 237,816,009 248,778,497 232,935,121 ============ ============ ============ ============
* Less than $0.01 per share. The accompanying notes are an integral part of these consolidated financial statements. 4 CENTRAL UTILITIES PRODUCTION CORP. CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 --------------------------------------------------------------------------------
Six months ended June 30, -------------------------------- 2002 2001 ----------- ----------- (Unaudited) (Unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (390,885) $ (501,291) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and depletion 86,250 -- Amortization of debt discount -- 333,333 Amortization of deferred financing costs 37,000 -- Changes in assets and liabilities, net of business acquired: Accounts receivable (11,046) (12,318) Inventories 9,061 -- Other assets -- (5,000) Accounts payable 8,689 (24,928) Accrued liabilities 93,400 41,808 ------------ ------------ Net cash used in operating activities (167,531) (168,396) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of oil and gas properties (82,716) (237,000) Purchase of property and equipment (16,776) (13,378) ------------ ------------ Net cash used in investing activities (99,492) (250,378) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of convertible debentures -- 500,000 Principal payments on long-term debt (41,293) -- ------------ ------------ Net cash used in financing activities (41,293) 500,000 ------------ ------------ DECREASE IN CASH (308,316) 81,226 CASH, BEGINNING OF PERIOD 330,190 28,116 ------------ ------------ CASH, END OF PERIOD $ 21,874 $ 109,342 ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 12,524 $ -- ============ ============ Book value of net assets transferred in connection with reverse merger consummated by issuance of common stock $ -- $ 26,112,698 ============ ============
The accompanying notes are an integral part of these consolidated financial statements. 5 CENTRAL UTILITIES PRODUCTION CORP. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) STATEMENT OF INFORMATION FURNISHED The accompanying financial statements have been prepared in accordance with Form 10-QSB instructions and in the opinion of management contain all adjustments (consisting of only normal and recurring accruals) necessary to present fairly the financial position as of June 30, 2002, and the results of operations for the three and six month periods ended June 30, 2002 and cash flows for the six month period ended June 30, 2002. These results have been determined on the basis of generally accepted accounting principles and practices applied consistently with those used in the preparation of the Company's 2001 financial statements included in Form 10-KSB. Certain information and footnote disclosure normally included in financial statements presented in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that the accompanying financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-KSB. (1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION Central Utilities Production Corporation (the "Company"), is an independent energy company engaged in the development and operation of oil and gas producing properties. The Company's current operations are focused in Texas and Kentucky. During the year ended December 31, 2001, the Company acquired oil and gas properties in Kentucky and Texas. The Company began production of these properties in the year ended December 31, 2001. The Company was formed as Enpetro Mineral Pool, Inc. ("Enpetro") in October 2000. Enpetro acquired certain oil and gas properties for the issuance of its common shares. Enpetro valued its acquisition of the oil and gas properties on the basis of the estimated fair value of those oil and gas properties, primarily interests in oil and gas leases. The valuation was assessed by an outside party certified to be a specialist in determining oil and gas reserves and valuation of the related properties. The value was determined to be $26,112,698. Enpetro had no other significant assets or operations. Enpetro entered into an Agreement and Plan of Reorganization in which it was acquired by Accord Advanced Technologies, Inc. ("Accord"). Accord had previously been a reconditioner and modifier of multi-chamber semiconductor equipment. Accord is a publicly traded company. Accord's only operating subsidiary filed to liquidate under Chapter 7 of the United States Bankruptcy Code in 2000 and had no operations at the time of the merger. The Agreement and Plan of Reorganization stipulated that Accord acquire all of the outstanding voting shares of Enpetro for 228,000,000 post reverse split common shares of the Accord. The shareholders of Enpetro held an interest of approximately 92% in Accord effective with the acquisition. A name change occurred at the time of the acquisition from Accord Advanced Technologies, Inc. to Central Utilities Production Corp. 6 For financial accounting purposes, the acquisition was a reverse acquisition of the Company by Enpetro, under the purchase method of accounting, and was treated as a recapitalization with Enpetro as the acquirer. Accordingly, the historical financial statements have been restated after giving effect to the acquisition of the Company. The financial statements have been prepared to give retroactive effect to January 1, 2001, of the reverse acquisition, and represent the operations of Enpetro. Consistent with reverse acquisition accounting: (i) all of Enpetro's assets, liabilities, and accumulated deficit, are reflected at their combined historical cost (as the accounting acquirer) and (ii) the preexisting outstanding shares of the Company (the accounting acquiree) are reflected at their net asset value as if issued on the date of acquisition. The Company had no operations prior to May 2001. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH - Cash includes all short-term highly liquid investments that are readily convertible to known amounts of cash and have original maturities of three months or less. OIL AND GAS PROPERTIES - The Company follows the full cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration, and development of oil and gas reserves, including directly related overhead costs, are capitalized. All capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is added to the capitalized costs to be amortized. There were no such impairments identified during the interim periods ended June 30, 2002 and 2001. In addition, the capitalized costs are subject to a "ceiling test", which basically limits such costs to the aggregate of the "estimated present value," discounted at a 10-percent interest rate of future net revenues from proved reserves, based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties. 7 Sales of proved and unproved properties are accounted for as adjustments of capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and gas, in which case the gain or loss is recognized in income. Abandonments of properties are accounted for as adjustments of capitalized costs with no loss recognized. There were no sales or abandonments during the interim periods ended June 30, 2002 and 2001. LONG -LIVED ASSETS -Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the related carrying amount may not be recoverable. When required, impairment losses on assets to be held and used are recognized based on the fair value of the asset and long -lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. DEFERRED FINANCING COSTS -Deferred financing costs included in other assets of $26,000, net of $74,000 of accumulated amortization, are being amortized using the effective interest method over the term of the associated debt. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Enpetro Mineral Pool, Inc. and Accord SEG. Accord SEG is being liquidated under Chapter 7 of the United States Bankruptcy Code. All significant intercompany accounts and transactions are eliminated. INCOME TAXES - The Company provides for income taxes based on the provisions of Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES, which among other things, requires that recognition of deferred income taxes be measured by the provisions of enacted tax laws in effect at the date of financial statements. REVENUE RECOGNITION - The Company recognizes revenue from sales of oil and gas at the point of passage of title, which is generally at the time of shipment. Revenue is recognized in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Other significant estimates include depletion of proved oil and gas properties. Oil and gas reserve estimates, which are the basis for unit-of-production depletion and the ceiling test, are inherently imprecise and are expected to change as future information becomes available. 8 NET INCOME PER SHARE - Net income per share amounts are presented in accordance with SFAS 128, "Earnings per Share," which requires the presentation of basic net income per share and diluted net income per share. Basic net income per share was computed by dividing net income by the weighted average number of common shares outstanding for each respective period. Because the Company had a net loss for the year, the impact of any potentially dilutive common shares would have had an anti-dilutive effect. RECENTLY ISSUED ACCOUNTING STANDARDS - On June 29, 2001, SFAS No. 141, BUSINESS COMBINATIONS, and SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS, were issued by the FASB. SFAS No. 141 states that all business combinations initiated after June 30, 2001 must be accounted for under the purchase method of accounting; use of the pooling-of-interests method is prohibited. SFAS 142 supersedes Accounting Principal Board Opinion 17, "Intangible Assets" and was effective for fiscal years beginning after December 15, 2001. SFAS 142 requires companies to cease amortization of goodwill, replacing amortization with an annual impairment test. The Company does not have any goodwill as of June 30, 2002 and does not believe that adoption of this standard will have any impact. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". Statement 144 addresses the accounting and reporting for the impairment or disposal of long-lived assets. The statement provides a single accounting model for long-lived assets to be disposed of. New criteria must be met to classify the asset as an asset held-for-sale. This statement also focuses on reporting the effects of a disposal of a segment of a business. This statement was effective for fiscal years beginning after December 15, 2001. The Company does not expect the adoption to have a material impact to the Company's financial position or results of operations. (3) CONVERTIBLE DEBENTURES AND NOTES PAYABLE In connection with the reverse merger, the Company entered into an agreement to sell $500,000 of convertible debentures. The debentures are due May 31, 2002 and bear interest at 12% per annum. The debentures are convertible at the lower of $0.23 per share or 60% of the average of the lowest three inter-day trading prices of the previous twenty trading days. The debenture holders received warrants to purchase 250,000 shares of the Company's common stock at $0.253 per share. The warrants were not assigned any value as the exercise price greatly exceeded the market value of the stock. The debentures contain a beneficial conversion feature and under generally accepted accounting principles, the intrinsic value of the beneficial conversion feature was recorded as a discount to the related debentures. The discount was determined to be $333,333 and was amortized as interest expense as of the date of issuance due to the immediate conversion option of the purchaser. 9 On June 22, 2000, the Company executed a Secured Convertible Debenture Purchase Agreement in the amount of $1,000,000. Of the total commitment amount, $500,000 was funded by the purchasers. The debentures are due June 30, 2001 and bear interest at 12% per annum. The debenture agreement also provides the purchaser warrants to purchase 500,000 shares of the Company's common stock at $0.253 per share. The warrants were not assigned any value as the exercise price greatly exceeded the market value of the stock. The debentures are convertible into the Company's common stock at the lower of $0.23 per share or 60% of the lowest three inter-day trading prices of the previous twenty trading days. The Company recorded a discount on the debentures of $500,000 representing the maximum discount for the beneficial conversion feature contained in the debentures. The discount was amortized as interest expense as of the date of issuance due to the immediate conversion option of the purchaser. The Company paid fees of $60,000 related to securing the financing. The financing costs were capitalized and are being amortized over the one year term of the note. The Company assumed a judgment of $281,000 from Accord. The Company and the third party agreed to convert the judgment into a convertible debenture that matures in May 18, 2006 and bears interest at 2% per annum. The debentures are convertible at the lower of $.35 per share or 65% of the average of the lowest three inter-day trading prices of the previous 20 trading days. The debentures contained a beneficial conversion feature and under generally accepted accounting principles, the intrinsic value of the beneficial conversion feature was recorded as a discount to the related debentures. The discount was determined to be $183,077 and was amortized as interest expense at inception as the debentures were convertible upon issuance. In September 2001, the Company entered into an agreement whereby a lender has committed to loan the Company up to $750,000 under a promissory note. The borrowings were funded through December 15, 2001. The note bears interest at 10% per annum and requires repayment of 33 installments of $26,307 beginning December 31, 2001. The Company paid fees of $40,000 related to securing the financing. The financing costs were capitalized and are being amortized over the 33 month term of the note. The Company acquired additional oil and gas properties through the issuance of a promissory note of $125,000. The Note bears interest at 9% per annum and is payable in nine monthly installments of $15,139 beginning September 30, 2001. The Company acquired a vehicle through an auto loan of $20,000. The loan bears interest at 7.5% and is payable in 60 monthly installments of $401. The Company is currently negotiating with the debenture holders and expects to extend the maturity dates of the convertible debentures that were due May 31, 2002. However, the debentures are in default and have been classified as current liabilities in the accompanying balance sheet. 10 (4) COMMMITMENTS AND CONTINGENCIES During 2001, the Company entered into an agreement with a third party operator of oil and gas properties whereby the third party will provide equipment and services to the Company to assist the Company in the operation and production of its properties. The agreement requires the Company to pay $400,000 for these services to be performed over a one-year period beginning August 11, 2001. Through June 30, 2002, the Company had paid $50,000 under this agreement. The Company is subject to routine litigation during the normal course of business. The Company believes that the outcome of pending litigation will not have a material adverse effect on its financial position or results of operations. (7) INCOME TAXES The Company recorded a deferred tax benefit of approximately $156,000 for the six-month period ended June 30, 2002. A valuation allowance has been provided for the full amount of this benefit. (8) NET LOSS PER SHARE Net loss per share is calculated using the weighted average number of shares of common stock outstanding during the year. Debentures convertible to 27,372,000 common shares and warrants exercisable for 750,000 common shares were not considered in the calculation for diluted earnings per share for the six months ended June 30, 2002 because the effect of their inclusion would be anti-dilutive. The following presents the computation of basic and diluted earnings per share from continuing operations:
Income/(Loss) Income/(Loss) Six months Three months June 30, Per June 30, Per 2002 Shares Share 2002 Shares Share ---- ------ ----- ---- ------ ----- Net Income (Loss) $ (390,855) $ (151,570) Discontinued operations -- -- Extraordinary income -- -- ---------- ---------- Income from continuing operations (390,855) (151,570) BASIC EARNINGS (LOSS) PER SHARE: Loss available to Common Shareholders $ (390,855) 248,778,497 $ * $ (151,570) 248,778,497 $ * ========== ====== ========== ====== EFFECT OF DILUTIVE SECURITIES: N/A -- N/A -- DILUTED EARNINGS (LOSS) PER SHARE $ (390,855) 248,778,497 $ * $ (151,570) 248,778,497 $ * ========== ====== ========== ======
* less than $0.01 per share 11 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-QSB contains certain statements that are not related to historical results, including, without limitations, statements regarding the company's business strategy and objectives and future financial position, are forward looking statements within the meaning of section 27A of the securities act and section 21E of the Exchange Act and involve risks and uncertainties. Although the company believes that the assumptions on which these forward looking statements are based are reasonable, there can be no assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward looking statements. Factors that could cause or contribute to such differences include but are not limited to, those set forth in the preceding paragraph, as well as those discussed elsewhere in this report. All forward-looking statements contained in this report are qualified in their entirety by this cautionary statement. Central Utilities Production Corporation (the "Company") is an independent energy company engaged in the development and operation of oil and gas producing properties. The company's current operations are focused in Texas and Kentucky. During the year ended December 31, 2001, the Company acquired oil and gas properties in Kentucky and Texas. The Company began production of these properties in the year ended December 31, 2001. The Company was formed as Enpetro Mineral Pool, Inc. ("Enpetro") in October 2000. Enpetro acquired certain oil and gas properties for the issuance of its common shares. Enpetro valued its acquisition of the oil and gas properties on the basis of the estimated fair value of those oil and gas properties, primarily interests in oil and gas leases. The valuation was assessed by an outside party certified to be a specialist in determining oil and gas reserves and valuation of the related properties. The value was determined to be $26,112,698. Enpetro had no other significant assets or operations. On May 18, 2001, Enpetro entered into an Agreement and Plan of Reorganization in which, it was acquired by Accord Advanced Technologies, Inc. ("Accord"). Accord had previously been a reconditioner and modifier of multi-chamber semiconductor equipment. Accord is a publicly traded company. Accord's only operating subsidiary filed to liquidate under Chapter 7 of the United States Bankruptcy Code in 2000 and had no operations at the time of the merger. The Agreement and Plan of Reorganization stipulated that Accord acquire all of the outstanding voting shares of Enpetro for 228,000,000 post reverse split common shares of the Accord. The shareholders of Enpetro held an interest of approximately 92% in Accord effective with the acquisition. A name change occurred at the time of the acquisition from Accord Advanced Technologies, Inc. to Central Utilities Production Corp. . In order to facilitate the agreement it was also required to increase the number of authorized shares to 500,000,000. The agreement also called for the resignation of the registrant's President and CEO, a reverse stock split of two shares of the old company for 1 share of the new company. 12 On May 18th 2001, GEM Management, Ltd. and Successway Holdings Ltd. entered into a settlement agreement with the registrant as set out in Item 3 "Legal Proceedings". Upon the settlement with GEM and Successways and the merger with Enpetro, two existing debenture holders of the registrant, AJW Partners, LLC. and New Millennium Capital Partners II, LLC. purchased a total of $500,000 in new 12% convertible debentures due May 31, 2002. As of August 28, 2002 the debentures have not been converted nor has there been a claim of default. The holders were also granted a total of 250,000 warrants at $.253 per share. The registrant and the debenture holders executed a second amendment to the original Secured Convertible Purchase Debenture Agreement. The core of the existing business is the large quantity of proven natural gas reserves accessible to and owned by the registrant. Expanding from this base the company intends to develop an integrated network of natural gas transmission and distribution systems to sell this gas directly to industrial, commercial and residential customers. This network will be developed through a combination of acquisition of existing utility companies, pipelines, and distribution systems as well as the construction of new pipelines and distribution systems where economics dictate. As the network develops additional gas reserves will be acquired to ensure a long-term supply. The company will register the shares underlying the above Convertible Debentures. On May 23, 2001 the company was deleted from trading on the OTC BB and is now quoted on the Pink Sheets. The quote may be found on www.pinksheets.com. RESULTS OF OPERATIONS The company had an operating loss for the three months ended June 30, 2002 of $(127,947) and $(314,129) for six months ended June 30, 2002. The company's net loss was $(151,570) for the three months ended June 30, 2002 and $(390,885) for six months ended June 30, 2002. The Company continues to develop its oil and gas reserves. The operating wells are producing small volumes and the Company will continue to attempt to increase production from its existing properties. Volumes were relatively consistent in the first and second quarters of 2002. There was some increase in production as the Texas properties came online. However, the net price for product was slightly lower in the second quarter. Revenue in the three and six months ended June 30, 2001 is not comparable because production did not begin until late June 2001. General and administrative expenses were $66,032 and $163,812 for the three and six months ended June 30, 2002, compared to $138,214 and $139,291 for the three and six months ended June 30, 2001. These expenses were higher in the second quarter of 2001 due to expenses associated with the merger with Enpetro. 13 Interest expense was $52,400 and $105,924 for the three and six months ended June 30, 2002, compared to $355,256 and $370,256 for the three and six months ended June 30, 2001. These expenses were higher in the second quarter of 2001 due to the amortization of the beneficial conversion feature on the convertible debt. Lease operating expenses includes personnel costs, costs of third party operator and other maintenance and operating costs. General and administrative expenses primarily includes professional fees and travel expenses. The Company's loss per share, on a fully diluted basis, for the three and six months ending June 30, 2002 was less than $0.01 per share. The Company expects to face many operating and industry challenges and will be doing business in a highly competitive industry. The Company has significant fixed costs that were not covered at the current production and sales volumes. The Company must substantially increase its volumes in order to attain profitability. The Company did not begin production of the Kentucky properties until the third quarter of 2001 and the Texas properties in the fourth quarter. Management believes that with present commodity prices and its cost structure for production that profitability is attainable. LIQUIDITY AND CAPITAL RESOURCES The Company has a working capital deficit of $1,571,951 as of June 30, 2002. The Company is in default of the convertible debenture agreements and is attempting to restructure and extend the $1,000,000 in default the. Supplementally, management believes that the debentures will ultimately be converted to common stock. However, there can be no assurances that the debt will be restructured or converted. Management has communicated with the holders of the convertible debentures and continues to do so to keep the creditors informed on the Company's intentions as they relate to the debt. The Company used $167,531 of cash in its operations for the six months ended June 30, 2002. As the Company increases its volume of business, liquidity will be affected by requirements to carry larger accounts receivable and inventory balances. Generally, inventories are not significant relative to sales volume. The Company has experienced a quick turnover of its accounts receivable. The Company used $99,492 of cash in investing activities for the six months ended June 30, 2002, primarily for the purchase of oil and gas properties and related equipment. The Company will continue to require capital to acquire equipment in order to increase its production volumes. Management believes that the Company has good relationships with its suppliers and vendors. 14 The Company will seek additional financing. There can be no assurance that additional public or private financing, including debt or equity financing, will be available as needed, or, if available, on terms favorable to the Company. Any additional equity financing may be dilutive to shareholders and such additional equity securities may have rights, preferences or privileges that are senior to those of the Company's existing common stock. Furthermore, debt financing, if available, will require payment of interest and may involve restrictive covenants that could impose limitations on the operating flexibility of the company. The failure of the company to successfully obtain additional future funding may jeopardize the company's ability to continue its business and operations. The Company plans to develop its existing oil and gas properties to increase production and to acquire new oil and gas properties to increase the asset base and revenues of the Company. The Company may elect to sell certain properties that exceeds the cost of operations budget established by the Company. SEASONALITY Weather conditions affect the demand for and prices of natural gas and can also delay drilling activities, disrupting our overall business plans. Demand for natural gas is typically higher in the fourth and first quarters resulting in higher natural gas prices. Due to these seasonal fluctuations, results of operations for individual quarterly periods may not be indicative of results which may be realized on an annual basis. MARKETS AND CUSTOMERS Our oil and gas production is sold at the well site on an as-produced basis at market-related prices in the areas where the producing properties are located. We do not refine or process any of the oil or natural gas we produce. All of our production is sold to unaffiliated purchasers on a month-to-month basis. We do not believe the loss of any one of our purchasers would materially affect our ability to sell the oil and gas we produce. Other purchasers are available in our areas of operations. The marketability of our current oil and gas reserves or of reserves, which we may acquire or discover, may be affected by numerous factors beyond our control. These factors include fluctuations in product markets and prices, the proximity and capacity of pipelines to our oil and gas reserves, our ability to finance exploration and development costs and the availability of processing equipment. Additional factors are engineering and construction delays, difficulties and hazards resulting from unusual or unexpected geological or environmental conditions, or to the conditions involved in drilling and operating wells. 15 We are not obligated to provide a fixed and determinable quantity of oil or natural gas under any existing arrangements or contracts. Our business does not require us to maintain a backlog of products, customer orders or inventory. REGULATIONS Domestic exploration for, and production and sale of, oil and gas are extensively regulated at both the federal and state levels. Legislation affecting the oil and gas industry is under constant review for amendment or expansion, frequently increasing the regulatory burden. Also, numerous departments and agencies, both federal and state, are authorized by statute to issue, and have issued, rules and regulations binding on the oil and gas industry that often are costly to comply with and that carry substantial penalties for failure to comply. In addition, production operations are affected by changing tax and other laws relating to the petroleum industry, by constantly changing administrative regulations and possible interruptions or termination by government authorities. State regulatory authorities have established rules and regulations requiring permits for drilling operations, drilling bonds and reports concerning operations. The states in which we operate also have statutes and regulations governing a number of environmental and conservation matters, including the unitization or pooling of oil and gas properties and establishment of maximum rates of production from oil and gas wells. Many states also restrict production to the market demand for oil and gas. Such statutes and regulations may limit the rate at which oil and gas could otherwise be produced from our properties. We are subject to extensive and evolving environmental laws and regulations. These regulations are administered by the United States Environmental Protection Agency ("EPA") and various other federal, state, and local environmental, zoning, health and safety agencies, many of which periodically examine our operations to monitor compliance with such laws and regulations. These regulations govern the release of waste materials into the environment, or otherwise relating to the protection of the environment, human, animal and plant health, and affect our operations and costs. In recent years, environmental regulations have taken a "beginning-to-end" approach to waste management, regulating and creating liabilities for the waste at its inception to final disposition. Our oil and gas exploration, development and production operations are subject to numerous environmental programs, some of which include solid and hazardous waste management, water protection, air emission controls, and situs controls affecting wetlands, coastal operations, and antiquities. Environmental programs typically regulate the permitting, construction and operations of a facility. Many factors, including public perception, can materially impact the ability to secure an environmental construction or operation permit. Once operational, enforcement measures can include significant civil penalties for regulatory violations regardless of intent. Under appropriate circumstances, an administrative agency can request a "cease and desist" order to terminate operations. 16 New programs and changes in existing programs are anticipated, some of which include Natural Occurring Radioactive Materials ("NORM"), oil and gas exploration and production waste management, and underground injection of waste materials. Each state in which we operate has laws and regulations governing solid waste disposal, water and air pollution. Many states also have regulations governing oil and gas exploration, development and production operations. We are also subject to Federal and State Hazard Communications ("OSHA") and Community Right to Know ("SARA Title III") statutes and regulations. These regulations govern record keeping and reporting of the use and release of hazardous substances. We believe we are in compliance with these requirements in all material respects. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The registrant, on May 18, 2001, settled a pending legal matter with GEM Management, Ltd. and Successway Holdings Ltd by entering into a Convertible Debenture Purchase Agreement and a 2% Convertible Debenture for $340,000. The consent judgment has been placed in escrow and upon the conversion of the underlying shares or payment the judgment will be set aside and the case will be dismissed. The Company is subject to routine litigation during the normal course of business. The Company knows of no pending litigation that would have a material adverse effect on its financial position or results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULT UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None during this reporting period ITEM 5. OTHER INFORMATION None 17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 99.1 Certification by the Chief Executive Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification by the Acting Chief Financial Officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K The Company filed a Form 8-K/A on June 26, 2002 amending the pro forma filed on June 27, 2001. SIGNATURES In accordance with Section 12 of the Securities Exchange Act of 1934, the Registrant caused this registration statement to be signed on its behalf by the undersigned thereunto duly authorized. Central Utilities Production, Corporation August 28, 2002 By /s/ Stan Dedmon ---------------------------------------- Stan Dedmon Director and President 18