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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from _______ to _________
Commission file number 1-100
CROFF ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0233535
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
621 17th Street 80293
Denver, Colorado (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (303) 383-1515
Securities registered pursuant to Section 12(b) of the Act
Title of each class Name of each exchange on which registered
---------------------------- -----------------------------------------
Common Stock, $.10 par value None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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.
[X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this
Form 10-K. [X]
As of March 18, 2002, the aggregate market value of the common voting stock
held by non-affiliates of the Registrant, computed by reference to the average
of the bid and ask price on such date was: $352,266.
As of March 18, 2002, the Registrant had outstanding 566,060 shares of
common stock ($0.10 par value)
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1
CROFF ENTERPRISES, INC.
Annual Report on Form 10-K
December 31, 2001
TABLE OF CONTENTS
PART I
Page
ITEM 1 BUSINESS..............................................................3
ITEM 2 PROPERTIES............................................................7
ITEM 3 LEGAL PROCEEDINGS....................................................13
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................13
PART II
ITEM 5 MARKET FOR REGISTRANT'S SECURITIES AND RELATED
STOCKHOLDER MATTERS..................................................13
ITEM 6 SELECTED FINANCIAL DATA..............................................15
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................16
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA...........................19
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES..............................19
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...................19
ITEM 11 EXECUTIVE COMPENSATION...............................................20
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.......................................................21
ITEM 13 CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS........................22
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND
REPORTS ON FORM 8-K..................................................23
SIGNATURES...........................................................24
FINANCIAL STATEMENTS............................................25(F-1)
ITEM 1. BUSINESS
Certain information included in this report, other materials filed or to be
filed by the Company with the Securities and Exchange Commission ("SEC"), as
well as information included in oral statements or other written statements made
or to be made by the Company contain or incorporate by reference certain
statements (other than statements of historical fact) that constitute forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Statements that
are not historical facts contained in this report are forward-looking statements
that involve risks and uncertainties that could cause actual results to differ
from projected results. Such statements address activities, events or
developments that the Company expects, believes, projects, intends or
anticipates will or may occur, including such matters as future capital,
development and exploration expenditures (including the amount and nature
thereof), drilling, deepening or refracing of wells, reserve estimates
(including estimates of future net revenues associated with such reserves and
the present value of such future net revenues), future production of oil and
natural gas, business strategies, expansion and growth of the Company's
operations, cash flow and anticipated liquidity, prospects and development and
property acquisition, obtaining financial or industry partners for prospect or
program development, or marketing of oil and natural gas. Factors that could
cause actual results to differ materially ("Cautionary Disclosures") are
described, among other places, in the Gathering, Processing and Marketing,
Competition, and Regulation sections in this Form 10-K and under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Without limiting the Cautionary Disclosures so described,
Cautionary Disclosures include, among others: general economic conditions, the
market price of oil and natural gas, the risks associated with exploration,
the Company's ability to find, acquire, market, develop and produce new
properties, operating hazards attendant to the oil and gas business,
uncertainties in the estimation of proved reserves and in the projection of
future rates of production and timing of development expenditures, the strength
and financial resources of the Company's competitors, the Company's ability to
find and retain skilled personnel, climatic conditions, labor relations,
availability and cost of material and equipment, environmental risks, the
results of financing efforts, and regulatory developments. All written and oral
forward-looking statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by the Cautionary Disclosures.
The Company disclaims any obligation to update or revise any forward-looking
statement to reflect events or circumstances occurring hereafter or to reflect
the occurrence of anticipated or unanticipated events.
With the previous paragraph in mind, you should consider the following
important factors that could cause actual results to differ materially from
those expressed in any forward-looking statement made by the Company or on its
behalf.
Description of Business
Croff Enterprises, Inc. (formerly Croff Oil Company and hereafter "Croff"
or "the Company"), was incorporated in Utah in 1907 as Croff Mining Company.
The Company changed its name to Croff Oil Company in 1952, and in 1996 changed
its name to Croff Enterprises, Inc. The Company, however, continues to operate
its oil and gas properties as Croff Oil Company. The principal office of the
Company is located at 621 17th Street, Suite 830, Denver, Colorado 80293. The
telephone number is (303) 383-1555.
Croff is engaged in the business of oil and gas exploration and production,
primarily through ownership of perpetual mineral interests and acquisition of
producing oil and gas leases. The Company's principal activity is oil and gas
production from non-operated properties. The Company also acquires, owns, and
sells, producing and non-producing leases and perpetual mineral interests in
Alabama, Colorado, Michigan, Montana, New Mexico, North Dakota, Oklahoma, Texas,
Utah and Wyoming. Over the past ten years, the Company's primary source of
revenue has been oil and gas production from leases and producing mineral
interests. Croff participates as a working interest owner in approximately 42
wells. Croff holds small royalty interests in over 200 wells.
Croff primarily accumulated cash in the year 2001, but did invest about
$28,000 for a 5% working interest in a test well in Leflore County, Oklahoma, in
January 2001. Croff did not buy any new production in 1999 as it had made
significant purchases in 1998 and was repaying debt incurred to pay for those
purchases. In 1998, Croff purchased working interests in six natural gas wells
in the State of Oklahoma. These wells now provide the largest source of revenue
to Croff from any single operating company. In 1997, Croff purchased working
interests in three gas wells in Michigan, a gas well in Colorado, and an oil
well in Texas. Other companies operate all of the wells from which Croff
receives revenues and Croff has no control over the factors, which determine
royalty or working interest revenues such as markets, prices and rates of
production.
In 1997, the Company leased several tracts of its perpetual mineral
interests in Northeast Utah as drilling activity increased. Drilling and
leasing activity nearly ceased on the Company's properties in 1998 and 1999, as
oil and natural gas prices dropped. In late 2000, the Company again leased a
tract of its' perpetual mineral interests.
Please see Item 2, Properties, for charts showing the Company's sales,
production and cost of production of oil and natural gas.
Croff has one part-time employee, the President, and two part-time
contract workers, who work for the Company as part of its contracted office
space arrangement described in Item 13.
Current Activities
During 2001, Croff's primary goal was to increase the cash available for
the benefit of common stockholders to make itself a more attractive merger
partner. The Board determined that the cash of the Company, which had been
building during a period of high oil prices, should be formally allocated
between the common stock and the preferred B stock. This allocation was
accomplished in the year 2001 with $250,000 being allocated to the common stock
and the balance of cash remaining with the preferred B stock. The Board then
determined that all future oil and gas cash flow would be allocated solely to
the preferred B for use in acquiring additional oil and gas assets. The cash
attributable to the common stock would be invested until such time as a merger
may take place. Under this separate allocation, the preferred B and common
stock cash investment accounts were separated. The Company ended the year with
a balance of approximately $275,000 allocated to the common stockholders.
The oil and gas activities suffered from the rapid drop in oil and natural
gas prices throughout 2001. Nevertheless, the cash flow of the Company,
especially during the first half of the year, was sufficient to allow the
balance to the common share account as described above. The preferred B account
available for purchasing producing oil and gas leases, ended the year with a
balance of approximately $60,000. While the Company looked at several potential
purchases, it did not complete any oil and gas purchases during 2001. The
Company expects to invest this and other future cash flows in oil and gas
producing leases in 2002.
During 2001, the Company considered acquiring a company with oil and gas
development prospects in the Illinois Basin, a former prolific oil production
area. The Company evaluated preliminary reports from a development project
with this company during the second and third quarters of the year. After
considerable due diligence, the Board of Directors determined that Croff was
not interested in a merger with this prospect and terminated the negotiations.
Croff also met and negotiated on a possible merger with a manufacturer of
petroleum equipment in China. These negotiations did not result in an
agreement and these negotiations have now ceased. The Company intends to
explore other potential mergers in the coming year.
During the year 2001, the Company concentrated on the accumulation of cash
from its existing producing wells as well as through returns on its existing
cash and cash equivalents. The Company continued to actively search for
acquisitions or a possible merger. The Company postponed purchasing new oil or
natural properties until the year 2002.
In the year 2000, the Company's policy was to accumulate cash from its
existing producing wells in order to repay monies that had been borrowed from
the common stock cash position and used for the benefit of preferred B
shareholders to purchase certain gas wells in 1998. Therefore, the Company did
not actively pursue purchasing new properties in the year 2000. The Company did
participate in the workover of several wells, and in December, 2000, after the
cash reserves had been restored, the Company participated as a 5% working
interest owner in a new well drilled by Chesapeake Energy in Leflore County,
Oklahoma. This well was completed, but has not established commercial
production. In 2000, the Company continued to actively search for acquisitions
or a possible merger partner.
In 1999 the Company did not purchase any new properties as it paid off
debt and replenished its cash reserves. In 1998, the Company purchased six gas
wells located in Oklahoma. The Company spent $208,000, primarily from its cash
reserves, to buy these working interests. While the wells occasionally produce
oil or condensate, these wells are primarily natural gas wells. Because of the
low prices of oil and natural gas through mid-1999, the effect of this greater
production to the Company was offset by low prices.
The shareholders voted in 1996 to adopt changes in the capital structure of
the Company in order to provide more liquidity to the shareholders. The purpose
of this recapitalization was to allow the Company to pursue ventures outside of
the oil and gas business while retaining the Company's core oil and natural gas
assets. In order to do this, the Company created a class of preferred B stock
to which the entire perpetual mineral interests and other oil and gas assets
were pledged. Thus the preferred B stock represents the oil and gas assets of
the Company and all other assets are represented by the common stock. Each
common shareholder received an equal number of preferred B shares, one for one,
at the time of this restructuring of the capital of the Company.
The preferred B shares are not publicly traded, but are bought and sold by
shareholders privately. The Company has provided, each year, a Clearinghouse to
assist shareholders wishing to trade preferred B shares. Any shareholder or any
outsider is able to bid and ask for the Preferred B shares of the Company. This
system provides some liquidity to the preferred B shareholders. The Company
operates the Clearinghouse without charge or commission.
The Board intends to continue to search for a potential acquisition or
possible merger partner.
Major Customers
Customers, which accounted for over 10% of oil and natural gas revenues,
were as follows for the years ended December 31, 1999, 2000 and 2001:
1999 2000 2001
------ ------ ------
Burlington Resources Oil and Gas Company 13.2% 13.2% 13.2%
El Paso Production 10.0% 11.0% 10.6%
Jenex Petroleum Corp. 26.9% 28.9% 24.3%
Financial Information About Industry Segments
The Company's operations presently consist of oil and gas production.
During previous years the Company has generated revenues through the purchase
and resale of oil and gas leasehold interests; however, no significant revenues
were generated from this source for the last five years. Further information
concerning the results of the Company's operations in this one industry segment
can be found in the Financial Statements. The following chart shows the
Company's production of oil and natural gas by State:
STATE GEOGRAPHIC DISTRIBUTION OF PRODUCTION
Oil Natural Gas
State Bbls Produced Mcf Produced
----------------- --------------- --------------
Alabama - 378
Colorado 101 4,327
Michigan 2 6,684
Montana 264 -
New Mexico - 13,648
North Dakota 729 179
Oklahoma 610 22,863
Texas 5 2,044
Utah 2,379 4,354
Wyoming 670 3,327
Environmental and Employee Matters
The Company's interests in oil and gas operations are indirectly subject to
various laws and governmental regulations concerning environmental matters, as
well as employee safety and health within the United States. The Company does
not believe that it has any direct responsibility for or control over these
matters, as it does not act as operator of any oil or gas wells.
Oil and gas operations are subject to particular and extensive
environmental concerns, hazards, and regulations. Among these regulations
would be included the Toxic Substance Control Act; Resources Conservation and
Recovery Act; The Clean Air Act; The Clean Water Act; The Safe Drinking Water
Act; and The Comprehensive Environmental Response, Compensation and Liability
Act (also known as Superfund). Oil and gas operations are also subject to
Occupational Safety and Health Administration (OSHA) regulations concerning
employee safety and health matters. The United States Environmental Protection
Agency (EPA), OSHA, and other federal agencies have the authority to promulgate
regulations that have an impact on all oil and gas operations.
In addition, various state and local authorities and agencies, such as The
Railroad Commission of Texas, also impose and regulate environmental and
employee concerns pertaining to oil and gas production. Often, though not
exclusively, compliance with state environmental and employee regulations
constitutes an exemption or compliance with federal mandates and regulations.
As indicated above, the Company does not have any direct control over or
responsibility for insuring compliance with such environmental or employee
regulations as they primarily pertain to the operator of oil and gas wells and
leases. In no instances does the Company act as the operator of the oil and
gas wells from which it receives revenues. The effect of a violation by an
Operator of a well in which the Company had a working interest would be that
the Company might incur its pro-rata share of the cost of the violation.
The Company is not aware of any instance in which it was found to be in
violation of any environmental or employee regulations or laws, and the Company
is not subject to any present litigation or claims concerning such matters. In
some instances the Company could in the future incur liability even as a
non-operator for potential environmental waste or damages or employee claims
occurring on oil and gas properties or leases in which the Company has an
ownership interest.
ITEM 2. PROPERTIES
Oil and Gas Mineral Interests and Royalties
The Company owns perpetual mineral interests which total approximately
4,600 net mineral acres, of which approximately 1,100 net acres are producing.
The mineral interests are located in 110,000 gross acres in Duchesne, Utah,
Wasatch and Carbon Counties in Utah, and approximately 40 net mineral acres in
La Plata County, Colorado, and San Juan County, New Mexico.
In 2001, the Company executed a few new leases or renewals on its perpetual
mineral interests. Overall, however, the amount of new leasing was slight. In
December 2000, the Company leased approximately 50 acres of its gross mineral
interests in Duchesne County, Utah. There was also increased production from
the Company's perpetual mineral interests in San Juan County, New Mexico, due to
the fact that field drilling continued on the coal bed methane gas. The Company
also received revenues, which had been suspensed, from the Company's holdings in
La Plata County, Colorado. These leases were part of a group of patented
mineral rights being challenged by the Colorado Ute Indian Tribe as being
invalid because they were on an Indian reservation. This lawsuit eventually
reached the US Supreme Court where the Court ruled in favor of the holders of
the mineral interests. Upon this decision, Amoco released suspensed royalties
to numerous companies, among them Croff Oil Company.
In 1998-1999, there was a virtual halt to leasing on the Company's acreage
due to declining petroleum prices. While the leasing had increased in 1996 and
1997, leasing activity came to a halt shortly after the first of 1998. Croff
participated in royalties on two wells, which were drilled in Duchesne County,
Utah, and one well in Wyoming. In addition, three small leases of 15.66 net
acres, 6.8 net acres, and 50.69 net acres were drilled late in 1997, and the
early part of 1998. These leases were for mineral interests in Duchesne County,
Utah.
After a period of approximately four years in which there was minimal
leasing, the Company entered into four leases on acreage in Duchesne County,
Utah, in 1997. This generated several thousand dollars in lease bonus revenue
and new production on some of the acreage.
The Company's revenues from oil and natural gas royalties decreased in the
year 2001 compared to the year 2000. This decrease was due to the substantial
decrease in the price of oil and natural gas during the second half of the year.
Oil and gas revenues were approximately $333,000 in 2001, compared to $368,000
in the year 2000 and $214,000 in 1999.
As of December 31, 2001, the Company was receiving royalties from
approximately 200 producing wells, primarily in the Bluebell-Altamont field in
Duchesne and Uintah Counties, Utah. Royalties also were received from scattered
interests in Alabama, Colorado, New Mexico, Texas, and Wyoming. Natural gas
royalty income increased from 1997 to 1999 with increased gas sales from
royalties on coal bed methane gas in San Juan County, New Mexico, and La Plata
County, Colorado. Royalty income is contingent upon market demand, prices,
producing capacity, rate of production, and taxes, none of which are in the
control of the Company.
The most important factor to the Company's revenue and profit is the price
of oil and natural gas. Posted prices of oil dropped drastically during the
period from late 1997 through mid-1999. Prices increased dramatically in 2000
from both oil and natural gas but began falling again during the third and
fourth quarters of 2001. Natural Gas prices were only about two-thirds of the
1997 price during 1998 and 1999. Most onshore U.S. production is uneconomic at
those prices, so oil exploration in the continental U.S. was greatly reduced.
Currently Croff's prices are approximately $20 a barrel for oil and
approximately $2.20 an Mcf for natural gas. Because much of Croff's natural
gas is in the Rocky Mountains and Oklahoma, Croff's average price for natural
gas is not as high as gas producers in Texas and the Gulf area receive.
Oil and Gas Working Interests
The Company has sought to increase its production of oil and natural gas
through the purchase of producing leases. The Company has found, in general,
that it is able to purchase working interests at a more reasonable price than
royalty interests. A working interest requires the owner to pay its
proportionate share of the costs of producing the well, while a royalty is paid
out of the revenues without a deduction for the operating costs of the well.
When oil or natural gas prices drop, the proportion of the revenues going to
pay the expense of operating the well increases, and when oil and natural gas
prices are rising, expenses decrease as a percentage of total revenues. The
Company did not purchase any material working interest in the year 2001.
In late 2000, the Company participated as a five percent owner in a well in
Leflore County, Oklahoma. This well was completed, but has not established
commercial production. The Company intends to purchase working interests in oil
and natural gas wells in the year 2002. The Company's purchase of working
interests are intended to offset the normal decline of the Company's current oil
and natural gas wells and, hopefully, increase its production over time.
In 1999, the Company realized its largest natural gas revenues from the
working interests in six Oklahoma natural gas wells it purchased in 1998.
These wells are primarily natural gas, but occasionally produce oil. The
Company paid the sum of $208,000 for minority working interests in the
following leases: a 13% working interest in the Harper #1(Woodward County,
Oklahoma), a 16% working interest in the Miller well (Woodward county,
Oklahoma), a 22% working interest in the Fannie Brown well (Caddo county,
Oklahoma), a 30% working interest in the Dickerson (Kingfisher County,
Oklahoma), a 43% working interest in the Mueggenborg (Kingfisher County,
Oklahoma), and a 32% interest in the Duncan well (LeFlore County, Oklahoma).
These wells were purchased from St. James Oil Company, which is owned by
the brother of the President of Croff. Jenex Operating Company, which was owned
one half by St. James Oil Ltd., was sold to Jenco Petroleum, which is owned by
Gerald Jensen, the President of Croff, in a separate transaction. Jenex
Operating Company is the operator of the wells, and agreed to provide a credit
of $150 per month per well against the operating expenses of these wells as a
condition of purchase, as long as Croff owned the wells. The Dickerson, Fannie
Brown and Mueggenborg sell natural gas through Duke Energy, and the Harper and
Miller sell gas through Oneok, Inc. The Duncan sells gas through Webb Energy.
In 1997, the Company purchased an interest in seven wells. The Company
increased its interest in the Rentuer oil and gas well in Wyoming, by purchasing
a portion of Exxon's interest. The Company purchased an interest in a helium
and gas well in Southeast Colorado. The Company also purchased a working
interest in an oil well in North Dakota. In November of 1997, the Company
purchased an interest in three gas wells in Michigan for approximately $50,000.
Except for purchasing a small interest in the drilling of one well in 1991,
one well in 1995, one well in 1997, and one well in 2000, the Company has not
engaged in drilling activity. The Company participated in the last six years,
in the reworking of five existing wells, three in Utah, one in Oklahoma and one
in North Dakota. The Company historically preferred to participate in new wells
drilled by other operators as a royalty owner. A royalty owner generally
receives a smaller interest, but does not share in the expense of drilling or
operating the wells.
ESTIMATED PROVED RESERVES,
FUTURE NET REVENUES AND PRESENT VALUES
Management for the fiscal years ending December 31, 2001, 2000, and 1999
has evaluated the Company's interests in proved developed and undeveloped oil
and gas properties. All of the Company's reserves are located within the
continental United States. The following table summarizes the Company's
estimate of proved oil and gas reserves at December 31, 2001, 2000, and 1999.
Reserve Category
Proved Developed Proved Undeveloped Total
As of --------------------- --------------------- ---------------------
12/31 Oil (Bbls) Gas (Mcf) Oil (Bbls) Gas (Mcf) Oil (Bbls) Gas (Mcf)
- ----- ---------- --------- ---------- --------- ---------- ---------
2001 26,223 387,974 8,920 9,492 35,143 397,466
2000 31,099 460,124 9,045 9,625 40,144 469,749
1999 30,944 473,728 10,640 11,323 41,584 485,051
The estimated future net reserves (using adjusted December 31 prices and
costs for each respective year), and the present value of future revenues
(discounted at 10%) for the Company's proved developed and proved undeveloped
oil and gas reserves, for the years ended December 31, 2001, 2000, and 1999 are
summarized as follows:
Proved Developed Proved Undeveloped Total
------------------------- ------------------------- -------------------------
Future Net of Future Net Future Net of Future Net Future Net of Future Net
12/31 Revenue Revenue Revenue Revenue Revenue Revenue
- ----- ---------- ------------- ---------- ------------- ---------- -------------
2001 $1,102,845 $737,171 $160,679 $108,180 $1,263,524 $845,351
2000 $1,867,091 $1,113,293 $205,698 $127,986 $2,072,789 $1,241,279
1999 $1,170,625 $759,735 $178,508 $115,852 $1,349,133 $875,587
"Proved developed" oil and gas reserves are reserves expected to be
recovered from existing wells with existing equipment and operating methods.
"Proved undeveloped" oil and gas reserves are reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where a
relative major expenditure is required for recompletion.
For additional information concerning oil and gas reserves, see
Supplemental Information - Disclosures about Oil and Gas Producing Activities
- - Unaudited, included with the Financial Statements filed as a part of this
report.
Since December 31, 2001, the Company has not filed any estimates of its oil
and gas reserves with, nor were any such estimates included in any reports to,
any state or federal authority or agency, other than the Securities and Exchange
Commission.
Oil and Gas Acreage
During the last five fiscal years, the Company decreased its holdings in
undeveloped oil and gas leases and generally increased its holdings in developed
oil and gas leases. The Company increased its acreage position in 1998, but its
holdings have remained relatively static during the fiscal years ending
December 31, 2001 and 2000.
"Developed acreage" consists of lease acreage spaced or assignable to
production on wells having been drilled or completed to a point that would
permit production of commercial quantities of oil or gas. "Gross acreage" is
defined as total acres in which the Company has any interest; "Net acreage" is
the actual number of mineral acres in which the mineral interest is owned
entirely by the Company. All developed acreage is held by production.
The acreage is concentrated in Alabama, Michigan, Oklahoma, Texas, and Utah
and is widely dispersed in Colorado, Montana, New Mexico, North Dakota, and
Wyoming.
COMPANY'S INTEREST IN PRODUCTIVE WELLS
(Gross and Net)
The following table shows the Company's interest in productive wells as of
December 31, 2001.
Oil Wells (1) Gas Wells (2)
------------- -------------
Gross Net Gross Net
----- ----- ----- -----
206 1.81 42 2.1
(1) Primarily located in the Bluebell-Altamont field in Northeastern Utah.
These wells include some natural gas production, but are primarily oil
wells.
(2) Primarily located in Rio Blanco and LaPlata Counties, Colorado; Beaver,
Woodward and Kingfisher Counties, Oklahoma; San Juan County, New Mexico;
Otsego County, Michigan; Campbell County, Wyoming; and Duchesne County,
Utah.
HISTORICAL PRODUCTION TO COMPANY
The following table shows approximate net production to the Company of
crude oil and natural gas for the years ended December 31, 2001, 2000 and 1999:
Crude Oil Natural Gas
(Barrels) (Thousands of Cubic Feet)
--------- -------------------------
Year Ended December 31, 2001: 4,760 57,804
Year Ended December 31, 2000: 4,909 71,487
Year Ended December 31, 1999: 4,610 74,300
Croff has no delivery commitments with respect to the above production of
oil and natural gas, since Croff is not the operator, but allows the operator to
contract for delivery. The Company is unaware of the circumstances of any
delivery commitments on royalty well.
AVERAGE SALES PRICE AND COSTS
The following table shows the approximate average sales price per barrel
(oil) and Mcf (1000 cubic feet of natural gas), together with production costs
for units of production for the Company's production revenues for 1999, 2000,
and 2001.
1999 2000 2001
------ ------ ------
Average sales price per Bbl of oil $16.65 $27.73 $22.42
Average production cost per Bbl $ 5.82 $ 6.59 $ 7.82
Average sales price per Mcf of natural gas $ 1.95 $ 3.27 $ 3.50
Average production cost per Mcf of natural gas $ .53 $ .83 $ .95
The average production cost for oil increased in 2001 due to higher taxes
on oil wells when compared to 2000, because of higher oil prices.
The average production cost for oil was higher in 1999, when compared to
1998; $5.82 per barrel in 1999 and $5.57 per barrel in 1998. Production costs
per barrel of oil increased due to an increase in the price of oil, which
increased the amount of production taxes, and higher prices for goods and
services in the oilfield.
The average cost for natural gas increased in 2001 due to higher workover
expenses on the wells, as well as higher production taxes because of much higher
natural gas prices. To a lesser extent, the costs of goods and services in the
oilfield also increased.
The average cost for natural gas increased in 2000 due to higher production
taxes because of much higher natural gas prices. To a lesser extent, the costs
of goods and services in the oilfield also increased.
The Company conducts its oil and gas operations from Denver, Colorado.
Corporate Offices and Employees
The corporate offices are located at 621 17th Street, Suite 830, Denver,
Colorado 80293. The Company is not a party to any lease, but during 2001 paid
$2,000 per month to Jenex Petroleum Corporation, which is owned by the
Company's President, for office space and all office services, including rent,
phone, office supplies, secretarial, land, and accounting. Jenex Petroleum
Corporation also provides assistance from a geologist. The Company's expenses
for these services were approximately $20,000 per year for the previous five
years.
The Company currently has five (5) directors. The Company has one
part-time employee, the President, and two part-time contract workers. The
part-time contract workers are provided to the Company as part of its office
lease and overhead agreement. The President and the contract workers work from
the Company's corporate offices. None of the officers or employees are
represented by a union.
Foreign Operations and Subsidiaries
The Company has no foreign operations, exports, or subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
There are no legal actions of a material nature in which the Company is
engaged.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 9, 2001, the annual meeting of shareholders was held. The
shareholders elected the five board members listed under Item 10, and ratified
Causey Demgen & Moore, Inc. as independent auditors of the Company.
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS
On February 28, 1996, the shareholders approved the issuance of the
preferred B stock to be issued to each common shareholder on the basis of one
share preferred B for each share of common stock. The Company in the fourth
quarter of 1996 issued all of the preferred shares and delivered the preferred B
shares to each of the shareholders for which it had a current address. The
preferred B shares have an extremely limited market, but are traded from time
to time through a Clearinghouse held by the Company. The Company established a
bid and ask format, whereby any shareholder may submit a bid or ask price for
each preferred B share. During the first bid and ask period in 1997, bids of
$.75 were received and asked prices of $.75 and $.90 were received, and 13,365
preferred B shares were traded at $.75 or $.90. In 1998, the bid prices
received were $.90-$1.00 and approximately 31,110 shares were traded at this
price. In 1999, only 550 shares were traded. In 2000, the Company traded
7,370 shares at a price of $1.05 per share. The Company is acting as its own
transfer agent; with respect to these preferred B shares only. The Company
plans to launch, during the second quarter of 2002, an Internet based
Clearinghouse at www.croff.com that will operate 365 days a year.
In November 1991, the common stock was reversed split, 1:10, and a trading
range of approximately $1.00 to $1.10 per bid was established and prevailed for
approximately four years. A few transactions were conducted in the pink sheets,
but the stock was not listed on any exchange and did not qualify to be listed on
the NASDAQ small cap exchange. Therefore, there has been almost no trading in
the Company's securities during the last five years. The Company has purchased
common stock on an unsolicited basis during this period at a price of $.80 to
$1.00 per common share and certain limited transactions known to the Company
were traded within this same range. The chart below shows the limited trading
of which the Company is aware during the last three years.
The trading range for 2001 is shown for preferred shares and common shares
as a guide to the shareholders as to what transactions have either taken place
or of which the Company is aware of the bid or ask price. One of the principal
reasons for issuance of the Preferred B shares was to attempt to use the common
shares of the Company to grow the Company to a size whereby an active trading
market will develop. The Company qualified the stock for over the counter
trading in 2000, and obtained a symbol "CRFF" from NASDAQ.
COMMON SHARES - 566,060 SHARES OUTSTANDING FOR 2001
(The following data is generated solely from private
transactions or internal purchases by the Company)
BID RANGE
Calendar Quarter Bid Asked
---------------- ------ ------
1999: First Quarter $ .75 $ .85
Second Quarter $ .95 $1.00
Third Quarter $ .75 $ .90
Fourth Quarter $ .65 $ .80
2000: First Quarter $ .90 $1.00
Second Quarter $ .90 $1.00
Third Quarter $ .90 $1.00
Fourth Quarter $ .90 $1.00
2001: First Quarter $ .90 $1.00
Second Quarter $ .90 $1.00
Third Quarter $ .90 $1.00
Fourth Quarter $ .90 $1.00
Only a few transactions resulting in the transfer of stock took place in
1999, 2000 or 2001. In 2001, the Company repurchased less than 1,000 shares at
the request of estates or widows at a price of $1.00.
As of December 31, 2001, there were approximately 1,100 holders of record
of the Company's common stock. The Company has never paid a dividend and has
no present plan to pay any dividend.
PREFERRED "B" SHARES- 540,659 SHARES OUTSTANDING
(The following data is generated solely from private
transactions or internal purchases by the Company)
BID RANGE
Calendar Quarter Bid Asked
---------------- ------ ------
1999: First Quarter $ .85 $ .90
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter No Trading No Trading
2000: First Quarter No Trading No Trading
Second Quarter $1.05 $1.05
Third Quarter $1.05 $1.05
Fourth Quarter $1.05 $1.05
2001: First Quarter No Trading No Trading
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter No Trading No Trading
$(12,738) $(15,582) $ 12,430 $131,668 $ 61,535
Per Common Share $ (.12) $ (.01) $ * $ .01 $ .06
Working capital $205,339 $ 1,866 $ 90,697 $273,295 $385,816
Dividends per share NONE NONE NONE NONE NONE
* - Less than .01 per share
BALANCE SHEET DATA
Total assets $504,875 $508,847 $498,162 $628,172 $695,124
Long-term debt* NONE NONE NONE NONE NONE
Stockholders' equity $497,892 $458,123 $480,353 $611,966 $672,085
** - There were no long-term obligations from 1997-2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
OF OPERATIONS
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results
of operation are based upon financial statements, which have been prepared in
accordance with accounting principles generally adopted in the United States.
The preparation of these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the year. The Company analyzes its estimates, including those
related to oil and gas revenues, oil and gas properties, marketable
securities, income taxes and contingencies. The Company bases its estimates
on historical experience and various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes the
following critical accounting policies affect its more significant judgments and
estimates used in the preparation of its financial statements and the
uncertainties that could impact our results of operations, financial condition
and cash flows. The Company accounted for its Oil and gas properties under the
successful efforts method of accounting. The Company periodically evaluates its
Oil and gas properties for possible impairment. Impairments are recorded when
management believes that a property's net book value is not recoverable based on
current estimates of expected future cash flows. The Company provides for
depreciation and depletion of its investment in producing oil and gas properties
on the unit-of-production method, based upon estimates of recoverable oil and
gas reserves from the property.
FACTORS AFFECTING FINANCIAL CONDITION AND LIQUIDITY
Results of Operations
Oil and natural gas sales in 2001 were $332,573 compared to $368,022 in
2000. The major factors in this decrease in revenue was the combination of
price and production for oil and natural gas. The average sale price of oil in
2001 for the Company was $22.42 compared to $27.73 in 2000. The average sale
price of natural gas in 2001 for the Company was $3.50 per Mcf, compared to
$3.27 per Mcf in 2000. Production of oil decreased approximately 3% in 2001,
while production of natural gas decreased approximately 19%. Natural gas
production decreased primarily for two reasons. The Company's Fannie Brown well
located in Oklahoma was shut down during a workover during the last two quarters
of the year 2001. In addition, natural gas production was decreased as the
operators of the Company's wells slowed production due to low demand during the
fourth quarter of 2001. During 2001, the Company realized a gain on the sale of
marketable equity securities totaling $22,193. Interest and dividend income
increased approximately 50% during 2001 to $10,459 from $6,970 in 2000. The
Company earned higher interest and dividend income due to an increase in the
value of the Company's cash and cash equivalents.
Oil and natural gas sales in 2000 were $368,022 compared to $214,190 in
1999. The major factor in this increase in revenue was the higher prices for
oil and natural gas. The average sale price of oil in 2000 for the Company was
$27.73 compared to $16.65 in 1999. The average sale price of natural gas in
2000 for the Company was $3.27 per Mcf, compared to $1.95 per Mcf in 1999. This
material increase in price resulted in the higher revenues and the higher
profits for the Company. Actual production of oil in 2000 was approximately
equal to that of 1999 while actual production of natural gas showed a slight
decrease. Other income increased in 2000 to $6,970 from $1,552 in 1999. This
was due to additional interest earned from the Company's larger accumulated cash
position.
Lease operating expense, which includes all production related taxes
increased by approximately $28,000 in 2001, to $116,190 compared to $87,921 in
2000. The primary reason for this increase was the expenditure of $22,000
incurred in a five percent participation in an unsuccessful new well in
Oklahoma. In addition to the lease operating expenses, there was an impairment
loss during 2001 in the amount of $34,107 due to the significant decrease in
production of the Fannie Brown well in Oklahoma.
Lease operating expenses, which includes all production related taxes,
increased significantly in 2000 to $87,921 compared to $66,532 in 1999. Most
of this increase was due to the increase in production taxes, which are based
upon a percentage of total revenues. Theses taxes, generally known as severance
taxes, increased proportionally with the revenues. In addition, after the
period of lower oil prices in 1998 and 1999, there were more workovers and
reworks on existing wells in the year 2000 than during the previous two years.
General and administrative expense increased approximately $7,400 to
$113,393 in 2001 from $105,945 in 2000. This increase was due in part to an
increase of $400 per month in overhead paid to Jenex Petroleum Corporation,
which is owned by the Company's President, for office space and all office
services, including rent, phone, office supplies, secretarial, land, and
accounting, and additional expenses for boards meetings and shareholder
meetings.
General and administrative expenses, including certain overhead expenses
paid to a related party, increased to $105,945 in 2000 from $87,464 in 1999.
This increase was primarily due to expenses associated with the annual meeting
in 2000, which it did not do in 1999. In addition the Company expended
additional monies for legal work in order to qualify the Company to go on the
NASDQ bulletin board market. In 2000 the Company also paid the Company's
contribution to the President's retirement account, which had been deferred in
1999 due to low prices.
Capital Resources and Liquidity
At December 31, 2001, the Company's current assets totaled $408,855
compared to current liabilities of $23,039. At December 31, 2000, the Company's
current assets totaled $289,501 compared to current liabilities of $16,206.
Working capital at December 31, 2001 totaled $385,816, an increase of 41%
compared to $273,295 at December 31, 2000. The Company had a favorable current
ratio at December 31, 2001 of approximately 18:1. On June 15, 2001, the Company
loaned $15,000 to Reef Energy Corporation, a company in which Croff's President
owns approximately one-fourth interest. This short-term secured note bears
interest at 10% per annum. In December 2001, the Company loaned three of its
Directors a total of $40,000 associated with the exercise of their stock
warrants. The fully recourse notes due December 31, 2002 bear interest at 6% per
annum. For 2002, the Company expects to continue to operate at a positive cash
flow and intends to resume purchasing oil and natural gas leases. The Company
has no short-term or long-term debt at this time.
At December 31, 2000, the Company's current assets totaled $289,501
compared to current liabilities of $16,206. At December 31,1999, the Company's
current assets totaled $108,506 compared to current liabilities of $17,809.
This resulted in the Company having a current asset to current liabilities ratio
of approximately 18:1, in 2000.
Because the Company's revenues are based primarily on the commodity price
of oil and natural gas, and, because the Company does not have significant
operating expenses, inflation, generally, is favorable to the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to financial statements, financial statement schedules, and
supplemental information, beginning with Page 22 (F-1) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors, Officer and Significant Employees.
The Croff Board consists of Gerald L. Jensen, Dilworth A. Nebeker, Richard
H. Mandel, Edwin W. Peiker, and Julian D. Jensen. Each director will serve
until the next annual meeting of shareholders, or until his successor is duly
elected and qualified. The following is provided with respect to each officer
and director of the Company as of March 22, 2002.
GERALD L. JENSEN, 62, PRESIDENT AND DIRECTOR
President of Croff Oil Company since October 1985. Mr. Jensen has been an
officer and director of Jenex Petroleum Corporation, a private oil and gas
company, for over ten years, and an officer and director of other Jenex
companies. In 2000, Mr. Jensen became Chairman of Provisor Capital Inc., a
private finance company. Mr. Jensen was a director of Pyro Energy Corp., a
public company (N.Y.S.E.) engaged in coal production and oil and gas, from 1978
until it was sold in 1989. Mr. Jensen is also an owner of private real estate,
finance, and oil and gas companies.
STUART D. KROONENBERG, 33, CHIEF FINANCIAL OFFICER
Mr. Kroonenberg has been the Company's Chief Financial Officer since
May 2001. Mr. Kroonenberg has over ten years experience as a CPA, including
two years as an Assurance Services Manager, for a large international CPA firm.
Mr. Kroonenberg has extensive experience working with small and mid-size public
and privately held companies. Mr. Kroonenberg is a contract employee of the
company described in Item 13.
RICHARD H. MANDEL, JR., 72, DIRECTOR
Mr. Mandel has been a director of Croff Enterprises, Inc. since 1986.
Since 1982, Mr. Mandel has been President and a Board Member of American Western
Group, Inc., an oil and gas producing company in Denver, Colorado. From 1977 to
1984, he was President of Universal Drilling Co., Denver, Colorado.
DILWORTH A. NEBEKER, 61, DIRECTOR
Mr. Nebeker served as President of Croff from September 2, 1983 to June 24,
1985, and has been a director of Croff since December 1981. He has been a
lawyer in private practice for more than ten years. Prior thereto, he was a
lawyer employed by Tosco Corporation, a public corporation, from 1973 to 1978.
He was a lawyer with the Securities and Exchange Commission from 1967 to 1973.
EDWIN W. PEIKER, JR., 70, DIRECTOR AND SECRETARY
Mr. Peiker currently serves as director and secretary of Croff. He was
President of Royal Gold, Inc., from 1988 through 1991, and continues to be a
director. Since 1986, Mr. Peiker has been a Vice President and Director of
Royal Gold, Inc., a public company engaged in gold exploration and mining
activities. Prior thereto he was involved in private investments in oil and gas
exploration and production. Mr. Peiker was employed in responsible positions
with AMAX, Inc., a public corporation, from 1963 to 1983.
JULIAN D. JENSEN, 54, DIRECTOR
Mr. Jensen is the brother of the Company's president and has served as
legal counsel to the Company for the past eight years. Mr. Jensen has practiced
primarily in the areas of corporate and securities law, in Salt Lake City, Utah,
since 1975. Mr. Jensen is currently associated with the firm of Jensen, Duffin,
Carman, Dibb & Jackson, which acts as legal counsel for the Company.
The Company has no knowledge of any arrangements or understandings between
directors or any other person pursuant to which any person was or is to be
nominated or elected to the office of director of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Remuneration
During the fiscal year ended December 31, 2001, there were no officers,
employees or directors whose total cash or other remuneration exceeded $80,000.
Summary Compensation Table
2001 Compensation Gerald L. Jensen, President. (No other executive salaries)
Annual Compensation Awards Long Term Compensation Payouts
---------------------- ---------- ------------------------------
Number Long
Shares Term
Other Restricted Covered Incen.
Name and Annual Stock by Option Plan All Other
position Year Salary Bonus Comp. Awards Grant Payout Comp.
- ---------------------- ---- ------ ----- ------ ---------- ---------- ------ ---------
Gerald L. Jensen
President and Chairman 2001 $54,000 $0 $0 $0 20,000 $0 $1,620(1)
2000 $54,000 $0 $0 $21,000(2) 20,000 $0 $1,620(1)
Pfd. B(2)
1999 $51,000 $0 $0 $0 20,000 $0 $0
(1) Company IRA Contribution
(2) The preferred B warrants were added to existing common warrants in 1996.
Gerald L. Jensen is employed part time as the President and Chairman of
Croff Enterprises, Inc. Directors, excluding the President, are not paid a set
salary by the Company, but are paid $350 for each half-day board meeting and
$500 for each full-day board meeting.
Proposed Remuneration:
During 2002, the Company intends to compensate outside directors at the
rate of $350 for a half day meeting and $500 for a full day meeting. Based on
the proposed remuneration, for the fiscal year ending December 31, 2002, no
officer or director shall receive total cash remuneration in excess of $80,000.
Options, Warrants or Rights
The Company has no outstanding stock options, warrants or rights as of
December 31, 2001. During 2001, 40,000 warrants were exercised and 10,000
warrants expired. In December 2001, the Company loaned three of its directors a
total of $40,000 associated with the exercise of their stock warrants. The fully
recourse notes due December 31, 2002 bear interest at 6% per annum.
Directors were authorized and issued stock warrants in 1991, that
essentially provide each director a warrant to purchase 10,000 shares of the
Company's stock at $1.00 per share through 1995. The President's warrant is for
20,000 shares. The warrants to purchase stock were extended for four more years
at the Board of Directors meeting on November 1, 1995. In 1996, the warrants
were modified to include an equal number of preferred B shares for each common
share grantor. During 1999, warrants to purchase 10,000 shares, of both common
and preferred B stock, were exercised, respectively. Also in 1999, the Board
extended the expiration date for the warrants to purchase common stock and
preferred B stock to December 31, 2001. Currently, the Company has no
outstanding options or warrants. In 2001, 40,000 warrants were exercised and
10,000 warrants expired.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(b) Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of Common stock and
preferred B stock of the Company as of December 31, 2001, by (a) each person who
owned of record, or beneficially, more than five percent (5%) of the Company's
$.10 par value common stock, its common voting securities, and (b) each director
and nominee and all directors and officers as a group.
Richard H. Mandel, Jr. 10,100 1.8% 16,202 3.0%
3333 E. Florida #94
Denver, Colorado 80210
Julian D. Jensen 46,532 (2) 8.2% 46,532 8.6%
311 South State Street, Suite 380
Salt Lake City, Utah 84111
Directors as a Group 276,877 48.9% 302,656 56.0%
(1) Includes 132,130 shares of Common and 132,130 shares preferred B held by
Jensen Development Company which is primarily owned by Gerald L. Jensen.
(2) Includes shares held in Jensen Family Trust (31,532) in which Julian D.
Jensen is the Trustee and approximate 43% beneficial owner. Mr. Gerald
L. Jensen holds an approximate 38% beneficial interest in these Trusts.
Rule 405 Disclosures
The registrant, in accordance with the requirements of the SEC Rule 405 of
Regulation S-K, discloses that it has become aware that certain 5% or greater
shareholders of its outstanding stock did not timely file reports on Forms 4 and
5 for the calendar year ending December 31, 2001. Set out below is the shares,
which should have been subject to the Form 4 and 5 filings by the respective
shareholders. The Company is contemporaneously filing these forms with this
report and has implemented procedures to attempt to prevent any delinquency in
these types of reports in the future. The Company wishes to also note that a
full and accurate description of all shares held by principal officers and
each of the following parties has been contained in the description of security
ownership by all persons owning 5% or more of the shares of the Company in the
above tables under this section. Based upon the foregoing, the Company now
represent as follows:
(1) Mr. Gerald L. Jensen, President of the Company, exercised a warrant in
December 2001 to acquire 20,000 shares of the Company's preferred B stock
and 20,000 shares of the Company's common stock, which increased his
beneficial ownership in the Company's preferred B stock from 42.5% to
43.1% and increased his beneficial ownership in the Company's common stock
from 36.8% to 37.7%; as reported above.
(2) Mr. Julian D. Jensen, a Director, exercised a warrant in December 2001 to
acquire 10,000 shares of the Company's preferred B stock and 10,000 shares
of the Company's common stock, which increased his beneficial ownership in
the Company's preferred B stock from 7.3% to 8.6% and increased his
beneficial ownership in the Company's common stock from 6.9% to 8.2%; as
reported above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company currently is in an office sharing arrangement with Jenex
Petroleum Corporation, hereafter "Jenex", which is owned by the Company's
President. The Company is not a party to any lease, but during 2001 paid $2,000
per month to Jenex, which is owned by the Company's president, for office space
and all office services, including rent, phone, office supplies, secretarial,
land, and accounting. Mr. Stuart Kroonenberg, the Chief Financial Officer of
the Company, is paid by Jenex pursuant to this arrangement, but serves as an
officer of Croff. These arrangements were entered into in order to reduce the
Company's overhead. The Company is currently continuing this arrangement on a
month-to-month basis. During 2001, Jenex provided similar services to another
two companies in which the Company's President has a direct ownership interest.
In the opinion of management, the amounts paid by Croff to Jenex for the
personnel, office, equipment use, and other services are below the cost for
such items if independently obtained.
On June 15, 2001, the Company loaned $15,000 to a related party
corporation, who's President is also the President of the Company. This short-
term secured note bears interest at 10% per annum.
In December 2001, the Company loaned Messrs.Gerald Jensen, Julian Jensen
and Richard Mandel, three of its Directors, a total of $40,000 associated with
the exercise of their stock warrants. The fully recourse notes due December 31,
2002 bear interest at 6% per annum.
The Company retains the legal services of Jensen, Duffin, Carman, Dibb &
Jackson. Julian Jensen, a Director of the Company, is part of this professional
corporation. Legal fees paid to this law firm for the years ending 2001, 2000,
and 1999 are $1,800, $2,375 and $329, respectively.
In 2001 the Company considered acquiring in Reef Energy Corporation, a
private oil and gas firm, in which the Company's President had purchased
approximately one-fourth interest. The Company loaned Reef Energy, as part of a
larger loan, $15,000 secured by assets of Reef Energy. Reef Energy is currently
attempting to sell assets to repay this loan.
Effective April 1, 1998, the Company purchased six working interests in
Oklahoma natural gas wells from St. James Oil Ltd. a company owned by a brother
of the Company's President. The price of $208,000 was slightly less than an
unaffiliated parties offer, to St. James Oil Ltd., which offer, however,
included the third party taking over operations from Jenex. As part of this
transaction, Gerald Jensen, the Company's President, purchased the one half
ownership of Jenex which he did not already own, and Jenex then retained
operations of these wells, but agreed to rebate to Croff $150 of the operating
fees per well, each month, or a total of $900 per month as long as Jenex
operated the wells and Croff retained its interest. Croff then agreed to
purchase the wells for $208,000. The Board of Directors approved this
acquisition in March 1998, with the President abstaining from the vote.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements. See index to financial statements, financial
statement schedules, and supplemental information as referenced in Part II, Item
8, and the financial index on Page F-1 hereof. These reports are attached as
Exhibits and are incorporated herein.
Reports on Form 8-K: None
Exhibit Index
Index & Financial statements, schedules, and supplemented information.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
CROFF ENTERPRISES, INC.
Date: March 22, 2002 By: /S/Gerald L. Jensen
---------------- ------------------------------
Gerald L. Jensen, President,
Chief Executive Officer
Date: March 22, 2002 By: /s/Stuart D. Kroonenberg
---------------- ------------------------------
Stuart D. Kroonenberg,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
date indicated have signed this report below.
Date: March 22, 2002 By: /S/Gerald L. Jensen
---------------- ------------------------------
Gerald L. Jensen, President
Date: March 22, 2002 By: /S/Richard H. Mandel, Jr.
---------------- ------------------------------
Richard H. Mandel, Jr., Director
Date: March 22, 2002 By: /S/Edwin Peiker, Jr.
---------------- ------------------------------
Edwin Peiker, Jr., Director
Date: March 22, 2002 By: /S/Dilworth A. Nebeker
---------------- ------------------------------
Dilworth A. Nebeker, Director
Date: March 22, 2002 By: /S/Julian D. Jensen
---------------- ------------------------------
Julian D. Jensen, Director
CROFF ENTERPRISES, INC.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES
AND SUPPLEMENTAL INFORMATION
Page Number
-----------
I. Financial Statements
Report of Independent Certified Public Accountants.................F-2
Balance Sheets as of December 31, 2000 and 2001....................F-3
Statements of Operations for the years ended December 31,
1999, 2000 and 2001................................................F-4
Statements of Stockholders' Equity for the years ended
December 31, 1999, 2000 and 2001...................................F-5
Statements of Cash Flows for the years ended December 31,
1999, 2000 and 2001...........................................F-6
Notes to Financial Statements......................................F-7
II. Supplemental Information - Disclosures About Oil and
Gas Producing Activities - Unaudited..........................F-15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Croff Enterprises, Inc.
We have audited the balance sheets of Croff Enterprises, Inc. at
December 31, 2000 and 2001, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the 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 financial statements referred to above present fairly,
in all material respects, the financial position of Croff Enterprises, Inc. as
of December 31, 2000 and 2001, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2001, in
conformity with accounting principles generally accepted in the United States
of America.
Denver, Colorado
March 21, 2002 CAUSEY DEMGEN & MOORE INC.
F-2
CROFF ENTERPRISES, INC.
BALANCE SHEETS
December 31, 2000 and 2001
2000 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 191,634 $ 338,870
Marketable equity securities, available for sale 6,125 4,600
Accounts receivable 91,742 49,226
Notes receivable, related parties - 16,159
---------- ----------
289,501 408,855
---------- ----------
Oil and gas properties, at cost, successful efforts method:
Proved properties 611,960 578,091
Unproved properties 97,102 97,102
---------- ----------
709,062 675,193
Accumulated depletion and depreciation (370,391) (388,924)
---------- ----------
338,671 286,269
---------- ----------
Total assets $ 628,172 $ 695,124
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,838 $ 17,568
Accrued liabilities 5,368 5,471
---------- ----------
16,206 23,039
---------- ----------
Stockholders' equity:
Class A Preferred stock, no par value
5,000,000 shares authorized, none issued - -
Class B Preferred stock, no par value; 1,000,000
shares authorized, 500,659 and 540,659 shares
issued and outstanding 475,359 397,085
Common stock, $.10 par value; 20,000,000 shares
authorized, 589,143 and 629,143 shares issued
and outstanding 58,914 62,914
Capital in excess of par value 415,797 530,071
Treasury stock, at cost, 62,883 and 63,083
shares issued and outstanding (82,951) (83,151)
Accumulated other comprehensive loss - (1,150)
Accumulated deficit (255,153) (193,618)
Notes receivable from directors - (40,066)
---------- ----------
611,966 672,085
---------- ----------
Total liabilities and stockholders' equity $ 628,172 $ 695,124
========== ==========
See accompanying notes to the financial statements.
F-3
CROFF ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 2000 and 2001
1999 2000 2001
---------- ---------- ----------
Revenues
Oil and gas sales $ 214,190 $ 368,022 $ 332,573
Gain on disposal of oil and gas
properties 2,563 (5,623) -
Gain on sale of marketable equity
securities - - 22,193
Other income 1,552 6,970 10,459
---------- ---------- ----------
218,305 369,369 365,225
---------- ---------- ----------
Expenses
Lease operating expense including
production taxes 66,532 87,921 116,190
General and administrative 68,264 86,745 89,393
Overhead expense, related party 19,200 19,200 24,000
Impairment of oil and gas properties 2,819 - 34,107
Depletion and depreciation 48,665 43,835 40,000
Interest 395 - -
---------- ---------- ----------
205,875 237,701 303,690
---------- ---------- ----------
Net income 12,430 131,668 61,535
Net income applicable to
preferred B shareholders 14,000 125,000 30,000
---------- ---------- ----------
Net income (loss) applicable to
common shareholders $ (1,570) $ 6,668 $ 31,535
========== ========== ==========
Basic and diluted net income (loss)
per common share $ (*) $ .01 $ .06
========== ========== ==========
*less than $.01 per share
See accompanying notes to the financial statements.
F-4
CROFF ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999, 2000 and 2001
Accumulated
Preferred B stock Common stock Capital in other
------------------ ------------------ excess of Treasury comprehensive Accumulated
Shares Amount Shares Amount par value stock loss deficit
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 1998 490,859 $329,559 579,143 $ 57,914 $ 552,797 $(82,896) $ - $ (399,251)
Stock warrants exercised 10,000 7,000 10,000 1,000 2,000 - - -
Purchase and retirement of
shares of preferred B stock (200) (200) - - - - - -
Net income for the year ended
December 31, 1999 - - - - - - - 12,430
Preferred stock reallocation - 14,000 - - (14,000) - - -
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 1999 500,659 350,359 589,143 58,914 540,797 (82,896) - (386,821)
Purchase of 55 shares of
treasury stock - - - - - (55) - -
Net income for the year ended
December 31, 2000 - - - - - - - 131,668
Preferred stock reallocation - 125,000 - - (125,000) - - -
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 2000 500,659 475,359 589,143 58,914 415,797 (82,951) - (255,153)
Stock warrants exercised 40,000 28,000 40,000 4,000 8,000 - - -
Purchase of 200 shares of
treasury stock - - - - - (200) - -
Net unrealized loss on marketable
equity securities - - - - - - (1,150) -
Net income for the year ended
December 31, 2001 - - - - - - - 61,535
Stock reallocation - (136,274) - - 136,274 - - -
Preferred stock reallocation - 30,000 - - (30,000) - - -
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 2001 540,659 $397,085 629,143 $ 62,914 $ 530,071 $(83,151) $ (1,150) $ (193,618)
======== ======== ======== ======== ========== ======== ============= ===========
See accompanying notes to the financial statements.
F-5
CROFF ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 2000 and 2001
1999 2000 2001
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 12,430 $ 131,668 $ 61,535
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depletion and depreciation 48,665 43,835 40,000
Loss on disposal or impairment of
property 256 5,623 34,107
Realized gain on marketable equity
securities (1,250) (1,750) (22,193)
Other items, net - 1,527 375
Changes in operating assets and
liabilities:
Accounts receivable (11,244) (45,327) 42,516
Accrued interest on notes receivable - - (1,225)
Accounts payable 4,383 (3,613) 6,730
Accrued liabilities (4,707) 2,010 103
---------- ---------- ----------
Net cash provided by operating
activities 48,533 133,973 161,948
---------- ---------- ----------
Cash flows from investing activities:
Purchase of marketable equity securities - - (72,931)
Proceeds from sale of marketable equity
securities - - 95,124
Notes receivable issued - - (15,000)
Additions to oil and gas properties - - (21,705)
Distribution from a coal investment 8,458 - -
---------- ---------- ----------
Net cash provided by (used in)
investing activities 8,458 - (14,512)
---------- ---------- ----------
Cash flows from financing activities:
Exercise of stock warrant 10,000 - -
Purchase of preferred B stock (200) - -
Purchase of treasury stock - (55) (200)
Repayment of note payable (23,369) - -
---------- ---------- ----------
Net cash (used in) financing activities (13,569) (55) (200)
---------- ---------- ----------
Net increase in cash and
cash equivalents 43,422 133,918 147,236
Cash and cash equivalents
at beginning of year 14,294 57,716 191,634
---------- ---------- ----------
Cash and cash equivalents
at end of year $ 57,716 $ 191,634 $ 338,870
========== ========== ==========
Supplemental disclosure of non-cash investing and financing activities:
In December 2001, the Company received notes from certain Directors
associated with the exercise of $40,000 in stock warrants. During the year
ended December 31, 2001, the Company has unrealized losses on available for
sale securities in the amount of $1,150.
See accompanying notes to the financial statements.
F-6
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1999, 2000 and 2001
1. ORGANIZATIONS AND NATURE OF BUSINESS
Croff Enterprises, Inc. (the Company) is engaged in the business of oil
and gas exploration and production, primarily through ownership of perpetual
mineral interests and acquisition of producing oil and gas leases. The
Company's principal activity is oil and gas production from non-operated
properties. The Company also acquires, owns, and sells, producing and non-
producing leases and perpetual mineral interests in Alabama, Colorado, Michigan,
Montana, New Mexico, North Dakota, Oklahoma, Texas, Utah, and Wyoming. Over the
past ten years, the Company's primary source of revenue has been oil and gas
production from leases and producing mineral interests. Croff participates as a
working interest owner in approximately 42 wells. Croff holds small royalty
interests in over 200 wells.
The Company was incorporated in Utah in 1907 as Croff Mining Company.
The Company changed its name to Croff Oil Company in 1952, and in 1996 changed
its name to Croff Enterprises, Inc. The Company, however, continues to operate
its oil and gas properties as Croff Oil Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Producing activities
The Company follows the "successful efforts" method of accounting for its
oil and gas properties. Under this method, all property acquisition costs and
costs of exploratory and development wells are capitalized when incurred,
pending determination of whether the well has proven reserves. If an
exploratory well does not result in reserves, the capitalized costs of drilling
the well, net of any salvage, are charged to expense. The costs of development
wells are capitalized, whether the well is productive or nonproductive.
Maintenance and repairs are charged to expense; betterments of property
are capitalized and depreciated as described below.
Lease bonuses
The Company defers bonuses received from leasing minerals in which
unrecovered costs remain by recording the bonuses as a reduction of the
unrecovered costs. Bonuses received from leasing mineral interests previously
expensed are taken into income. For federal income tax purposes, lease bonuses
are regarded as advance royalties (ordinary income). The Company received no
lease bonuses in 1999 and 2000. In 2001, the Company received lease bonuses
totaling $2,220, which was included in other income.
F-7
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1999, 2000 and 2001
Depreciation and depletion
The Company provides for depreciation and depletion of its investment in
producing oil and gas properties on the unit-of-production method, based upon
estimates of recoverable oil and gas reserves from the property.
Impairment of assets
Producing property costs are evaluated for impairment and reduced to fair
value if the sum of expected undiscounted future cash flows is less than net
book value pursuant to Statement of Financial Accounting Standard No. 121
(SFAS 121) "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Impairment of non-producing leasehold
costs and undeveloped mineral and royalty interests are assessed periodically
on a property-by-property basis, and any impairment in value is currently
charged to expense. There was no impairment loss during 1999 and 2000.
There was an impairment loss during 2001 in the amount of $34,107 due to the
significant decrease in production from the Fannie Brown well in Oklahoma.
In August 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standards No. 144 (SFAS 144),
Accounting for the Impairment or Disposal of Long- Lived Assets. This standard
addresses financial accounting and reporting for the impairment of disposal of
long-lived assets. This standard establishes a single framework, based on
Statement of Financial Accounting Standards No. 121 (SFAS 121), Accounting for
the Impairment of Lon-Lived Assets and for Long-Lived Assets to be Disposed Of,
for long-lived assets to be disposed of the sale and resolves certain
implementation issues related to SFAS 121. SFAS 144 is effective for fiscal
years beginning after December 15, 2001. The Company does not expect SFAS 144
to have a material effect on the Company's financial position, result of
operations, or cash flows.
Revenue recognition
Oil and gas revenues are accounted for using the sales method. Under this
method, revenue is recognized based on the cash received rather than the
Company's proportionate share of the oil and gas produced. Oil and gas
imbalances and related value at December 31, 1999, 2000 and 2001 were
insignificant.
Risks and uncertainties
Historically, oil and gas prices have experienced significant fluctuations
and have been particularly volatile in recent years. Price fluctuations can
result from variations in weather, levels of regional or national production and
demand, availability of transportation capacity to other regions of the country
and various other factors. Increases or decreases in prices received could have
a significant impact on future results.
F-8
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1999, 2000 and 2001
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting comprehensive
income. In addition to net income, comprehensive income includes all changes
in equity during a period, except those resulting from investments and
distributions to the owners of the Company. The Company had no such changes
prior to 2001. The components of other comprehensive income net of the related
tax effects for the twelve months ended December 31, 2001 totaled $1,150 are
related to a net unrealized loss on the Company's marketable equity securities,
which are available for sale.
Fair value of financial instruments
The carrying amounts of financial instruments including cash and cash
equivalents, marketable equity securities, accounts receivable, notes
receivable, accounts payable and accrued liabilities approximate fair value as
of December 31, 2000 and 2001.
Concentrations of credit risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents and
accounts receivable. The Company places its cash with high quality financial
institutions. At times during the year, the balance at any one financial
institution may exceed FDIC limits.
Derivative instruments and hedging activities
The Company has not entered into commodity derivative contracts or
fixed-price physical contracts to manage its exposure to oil and gas price
volatility, the Company's principal activity is oil and gas production from
non-operated properties.
Stock warrants
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" related to its stock warrants.
Cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with maturity of three months or less
to be cash equivalents.
F-9
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1999, 2000 and 2001
Marketable equity securities
The Company has designated its marketable equity securities as "securities
available for sale" pursuant to Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities. The
net unrealized gain related to these securities before taxes were $0 and $1,150
at December 31, 2000 and 2001 and is reflected as another comprehensive loss.
During 2001, a portion of the available-for-sale securities was sold for $95,124
resulting in a net gain before taxes of $22,193 based upon historical cost.
Accounts receivable
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
un-collectible, they will be charged to operations when that determination is
made.
Income taxes
The provision for income taxes is based on earnings reported in the
financial statements. Deferred income taxes are provided using a liability
approach based upon enacted tax laws and rates applicable to the periods in
which the taxes become payable.
Net income (loss) per common share
In accordance with the provisions of SFAS No. 128, "Earnings per Share,"
basic income (loss) per common share amounts were computed by dividing net
income (loss) after deduction of the net income attributable to the preferred B
shares by the weighted average number of common shares outstanding during the
period. Diluted income (loss) per common share assumes the conversion of all
securities that are exercisable or convertible into either preferred B or common
shares that would dilute the basic earnings per common share during the period.
The increase in potential shares used to determine dilutive income (loss) per
share for the years ended December 31, 1999 and 2000 is attributable to dilutive
stock warrants. All of the Company's outstanding stock warrants were either
exercised or expired on or prior to December 31, 2001.
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.
F-10
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1999, 2000 and 2001
3. RELATED PARTY TRANSACTIONS
The Company retains the services of a law firm in which a partner of the
firm is a director of the Company. Legal fees paid to this firm for the years
ended December 31, 1999, 2000 and 2001 amounted to $329, $2,375 and $1,800,
respectively.
The Company has a month-to-month agreement with an affiliated company to
provide for office services and subleased office space for $1,600 per month
through December 31, 2000 and increasing to $2,000 per month on January 1, 2001.
Accrued liabilities at December 31, 1999, 2000 and 2001 included $1,600, $1,600
and $0 due to the affiliated company pursuant to this agreement.
On June 15, 2001, the Company loaned $15,000 to a related Corporation who's
President is also the President of the Company. The short-term secured note
bears interest at 10% per annum.
Purchase of proved oil and gas properties
On April 7, 1998, the Company purchased certain working leasehold interests
in oil and gas wells in Oklahoma, from an affiliated company, for cash in the
amount of $208,000. Another affiliated entity is the operator of these wells,
and has offered to offset the Company's lease operating expenses on these wells
in the amount of $150 per month per well (an aggregate of $900 per month) for as
long as the Company owns the wells. In October 1998, this amount was increased
to $180 per month per well (an aggregate of $1,080 per month). In January 2000,
the offset was returned to the original $900 per month aggregate ($150 per
well). During the years ending December 31,1999, 2000 and 2001, $10,720,
$10,800 and $10,800, respectively, has been offset against lease operating
expense, in this manner.
4. STOCKHOLDERS' EQUITY
During 2001, the Board determined that the cash of the Company, which had
been building during a period of high oil prices, should be formally allocated
between the common stock and the preferred B stock. The Board decided to
allocated $250,000 cash to the common stock and the balance of cash remaining
with the preferred B stock. The Board then determined that all future oil and
gas cash flow would be allocated solely to the preferred B stock. The Company
established separate investment accounts for the preferred B and common stock
investments.
F-11
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1999, 2000 and 2001
The Company has no outstanding stock options, warrants or rights as of
December 31, 2001. During 2001, warrants to purchase 40,000 common shares and
40,000 Class B Preferred shares were exercised by the Directors providing full
recourse notes receivable to the Company for $40,000 and 10,000 warrants to
purchase 10,000 common shares and 10,000 Class B Preferred shares expired.
Directors were authorized and issued stock warrants in 1991 that
essentially provide each director a warrant to purchase 10,000 shares of the
Company's stock at $1.00 per share through 1995. The President's warrant is for
20,000 shares. The warrants to purchase stock were extended for four more
years at the Board of Directors meeting on November 1, 1995. The warrants were
again extended for two years to expire December 31, 2001. In 1996, the warrants
were modified to include an equal number of Preferred B shares for each common
share grantor. During 1999, warrants to purchase 10,000 shares were exercised.
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
warrants. Had compensation costs for the Company's warrants been determined
based on the fair value at the extension date consistent with the provision of
SFAS No. 123, the Company's net earnings and earnings per share for 1999 would
have decreased by $50,000 to a loss of $37,570 or $.10 per share. The
Company's net earnings and earnings per share for 2000 and 2001 would not be
materially different. The fair value is estimated on the date the warrants were
extended in 1999 using the Black-Scholes option-pricing model, using an
expected life of 2 years, a risk-free interest rate of 6.29% and expected
volatility of 28%.
In June 2000, the Company approved the increase in the authorized Class B
Preferred stock to 1,000,000 shares.
The Class A Preferred stock was authorized for possible future
capitalization and funding purposes of the Company and has not yet been
designated as voting or non-voting. Presently, there are no plans or intentions
to issue these shares.
The Class B Preferred stock was authorized to allocate the existing
perpetual mineral interests and other oil and gas assets of the Company for the
benefit of existing stockholders while the Company pursues other business
ventures. The Class B Preferred stock has no par value and limited voting
privileges. The Class B Preferred stockholders are entitled exclusively to all
dividends, distributions, and other income, which are based directly, or
indirectly on the oil and natural gas assets of the Company. In addition, in the
event of liquidation, distribution or sale of the Company, the Class B Preferred
stockholders have an exclusive preference to the net asset value of the natural
gas and oil assets over all other classes of common and preferred stockholders.
F-12
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1999, 2000 and 2001
The Class B Preferred shares have an extremely limited market, but are
traded from time to time through a clearinghouse held by the Company. The
Company established a bid and ask format, whereby any shareholder could submit
a bid or ask price for each Class B Preferred share. In 1999, only 550 shares
were traded. In 2000, the Company traded 7,370 shares at a price of $1.05 per
share. In 2001, no shares of Class B Preferred were traded. The Company is
acting as its own transfer agent, with respect to these Class B Preferred shares
only.
5. INCOME TAXES
At December 31, 2001, the Company had net tax capital loss carry-forwards
of approximately $48,300. In addition, the Company has a depletion carryover
of approximately $400,000, which has no expiration date.
The Company did not record an income tax provision for the years ended
December 31, 1999, 2000 or 2001 due to the utilization of a tax loss carry
forward. The recognized tax benefit of the utilized carry forward was
approximately $1,000, $34,000 and $17,100 respectively, for the years ended
December 31, 1999, 2000 and 2001. The Company has a financial statement loss
carryover of approximately $159,500 remaining at December 31, 2001. The
difference in financial statement and tax return loss carryovers is principally
the difference in the timing of deducting intangible drilling costs as well as
from expired and unused tax net operating losses.
As of December 31, 2000 and 2001, total deferred tax assets; liabilities
and valuation allowance are as follows:
2000 2001
-------- --------
Deferred tax assets resulting
from loss carry forwards $ 95,000 $ 175,400
Valuation allowance (95,000) (175,400)
-------- --------
$ - $ -
======== =========
7. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share information is based on the weighted
average number of shares of common stock outstanding during each year,
approximately 518,000 shares in 1999, 526,000 shares in 2000 and 527,000 in
2001. Outstanding warrants were not dilutive in any of the periods presented.
F-13
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 1999, 2000 and 2001
8. MAJOR CUSTOMERS
Customers, which accounted for over 10% of oil and natural gas revenues,
were as follows for the years ended December 31, 1999, 2000 and 2001:
1999 2000 2001
------ ------ ------
Burlington Resources Oil and Gas Company 13.2% 13.2% 13.2%
El Paso Production 10.0% 11.0% 10.6%
Jenex Petroleum Corp. 26.9% 28.9% 24.3%
Management believes that the loss of any individual purchaser would not
have a long-term material adverse impact on the financial position or results of
operations of the Company.
F-14
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
In November, 1982, the Financial Accounting Standards Board issued and the
SEC adopted Statement of Financial Accounting Standards No. 69 (SFAS 69)
"Disclosures about Oil and Gas Producing Activities". SFAS 69 requires that
certain disclosures be made as supplementary information by oil and gas
producers whose financial statements are filed with the SEC. The Company bases
these disclosures upon estimates of proved reserves and related valuations.
Management of the Company, none of whom are licensed as either a petroleum
reservoir engineer or geologist, compiled these estimates. No attempt is made
in this presentation to measure "income" from the changes in reserves and costs.
The standardized measure of discounted future net cash flows relating to
proved reserves as computed under SFAS 69 guidelines may not necessarily
represent the fair value of the Company's oil and gas properties in the market
place. Other factors, such as changing prices and costs and the likelihood of
future recoveries differing from current estimates, may have significant effects
upon the amount of recoverable reserves and their present value.
The standardized measure does not include any "probable" and "possible"
reserves, which may exist and may become available through additional drilling
activity.
The standardized measure of discounted future net cash flows is developed
as follows:
1. Estimates are made of quantities of proved reserves and the future periods
during which they are expected to be produced based on year-end economic
conditions.
2. The estimated future production of proved reserves is priced on the basis of
year-end prices except that future prices of gas are increased for fixed and
determinable escalation provisions in contracts (if any).
3. The resulting future gross revenue streams are reduced by estimated future
costs to develop and produce the proved reserves, based on year-end cost and
timing estimates.
4. A provision is made for income taxes based upon year-end statutory rates.
Consideration is made for the tax basis of the property and permanent
differences and tax credits relating to proved reserves. The tax computation
is based upon future net cash inflow of oil and gas production and does not
contemplate a tax effect for interest income and expense or general and
administrative costs.
5. The resulting future net revenue streams are reduced to present value amounts
by applying a 10% discount factor.
F-15
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
Changes in the standardized measure of discounted future net cash flows are
calculated as follows:
1. Acquisition of proved reserves is based upon the standardized measure at the
acquisition date before giving effect to related income taxes.
2. Sales and transfers of oil and gas produced, net of production costs, are
based upon actual sales of products, less associated lifting costs during
the period.
3. Net changes in price and production costs are based upon changes in prices
at the beginning and end of the period and beginning quantities.
4. Extensions and discoveries are calculated based upon the standardized
measure before giving effect to income taxes.
5. Purchase of reserves are calculations based on increases from the Company's
acquisition activities.
6. Revisions of previous quantity estimates are based upon quantity changes and
end of period prices.
7. The accretion of discount represents the anticipated amortization of the
beginning of the period discounted future net cash flows.
8. Net change in income taxes primarily represents the tax effect related to
all other changes described above and tax rate changes during the period.
All of the Company's oil and gas producing activities are in the United
States.
OIL AND GAS PRICES
During the year ended December 31, 2001, crude oil and natural gas prices
were highly volatile. The average sale price of oil in 2001 for the Company
was $22.42, compared to $27.73 in 2000. The average sale price of natural gas
in 2001 for the Company was $3.50 per Mcf, compared to $3.27 per Mcf in 2000.
The ultimate amount and duration of oil and gas price fluctuations and their
effect on the recoverability of the carrying value of oil and gas properties
and future operations is not determinable by management at this time.
F-16
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The results of operations for oil and gas producing activities, excluding
capital expenditures, impairment charges, corporate overhead and interest
expense, are as follows for the years ended December 31, 1999, 2000 and 2001:
1999 2000 2001
------ ------ ------
Revenues $214,190 $368,022 $332,573
-------- -------- --------
Lease operating costs 42,829 61,202 83,700
Production taxes 23,703 26,719 32,490
Depletion and depreciation 48,665 43,835 40,000
-------- -------- --------
115,197 131,756 156,190
Income tax expense - - -
-------- -------- --------
Results of operations from producing
Activities (excluding capital
expenditures, impairment charges
corporate overhead, and interest
expense) $ 98,993 $236,266 $176,383
======== ======== ========
F-17
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
Year ended December 31,
-----------------------
1999 2000 2001
------ ------ ------
Future cash inflows $1,777,000 $2,507,000 $1,486,000
Future production and development costs (428,000) (434,000) (223,000)
---------- ---------- ----------
1,349,000 2,073,000 1,263,000
Future income tax expense - - (210,000)
---------- ---------- ----------
Future net cash flows 1,349,000 2,073,000 1,053,000
10% annual discount for
estimated timing of cash
flows (473,000) (832,000) (418,000)
---------- ---------- ----------
Standardized measure of
discounted future net
cash flows $ 876,000 $1,241,000 $ 635,000
========== ========== ==========
The following are the principal sources of
change in the standardized measure of
discounted future net cash flows:
Beginning balance $675,000 $876,000 1,241,000
Evaluation of proved undeveloped
reserves, net of future production
and development costs 9,000 12,000 14,000
Purchase of proved reserves - - -
Sales and transfer of oil and gas
produced, net of production costs (214,000) (280,000) (218,000)
Net increase (decrease) in prices
and costs 406,000 695,000 (663,000)
Extensions and discoveries - 20,000 -
Revisions of previous quantity estimates (10,000) 154,000 57,000
Accretion of discount 10,000 (236,000) 414,000
Net change in income taxes - - (210,000)
Other - - -
-------- ---------- --------
Ending balance $876,000 $1,241,000 $635,000
======== ========== ========
F-18
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
PROVED OIL AND GAS RESERVE QUANTITIES
(All within the United States)
Oil Gas
reserves reserves
(bbls) (mcf)
-------- --------
Balance at December 31, 1998 49,298 424,074
Revisions of previous estimates (3,104) 135,277
Production (4,610) (74,300)
-------- --------
Balance at December 31, 1999 41,584 485,051
Revisions of previous estimates 2,660 46,000
Extensions, discoveries and other additions 800 10,198
Production (4,900) (71,500)
-------- --------
Balance at December 31, 2000 40,144 469,749
Revisions of previous estimates (241) (12,479)
Extensions, discoveries and other additions - (2,000)
Production (4,760) (57,804)
-------- --------
Balance at December 31, 2001 35,143 397,466
======== ========
Proved developed reserves
December 31, 1999 30,944 473,728
December 31, 2000 31,099 460,124
December 31, 2001 26,223 387,974
Costs incurred in oil and gas producing
activities for the ended December 31,
1999, 2000, and 2001 are as follows:
1999 2000 2001
------ ------ ------
Property acquisition, exploration and
development costs capitalized $ - $ - $(21,705)
Impairment of property 2,819 - 34,107
Production costs 66,532 87,921 116,190
Depletion and depreciation 48,665 43,835 40,000
F-19