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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, 2002
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 26, 2003, 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: $274,724.
As of March 26, 2003, the Registrant had outstanding 566,060 shares of
common stock ($0.10 par value)
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1
TABLE OF CONTENTS
PART I
Page
ITEM 1 BUSINESS..............................................................3
ITEM 2 PROPERTIES............................................................8
ITEM 3 LEGAL PROCEEDINGS....................................................14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................14
PART II
ITEM 5 MARKET FOR REGISTRANT'S SECURITIES AND RELATED
STOCKHOLDER MATTERS..................................................14
ITEM 6 SELECTED FINANCIAL DATA..............................................16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................17
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA...........................20
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES..............................20
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................20
ITEM 11 EXECUTIVE COMPENSATION..............................................22
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................................23
ITEM 13 CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.......................24
ITEM 14 CONTROLS AND PROCEDURES ............................................24
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND
REPORTS ON FORM 8-K.................................................25
SIGNATURES..........................................................25
CERTIFICATIONS PURSUANT TO THE SARBANES-OXLEY ACT OF 2002...........27
2
CROFF ENTERPRISES, INC.
Annual Report on Form 10-K
December 31, 2002
PART I
ITEM 1. BUSINESS
General
Croff Enterprises, Inc. ("Croff" or the "Company") is a independent energy
company 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 acquires, owns, and
sells, or leases, 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. 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. Croff participates as a working interest owner in
approximately 50 wells. Croff holds small royalty interests in approximately
210 wells.
Summary of Current Events
At December 31, 2002, the Company had 837,506 thousand cubic feet
equivalent (Mcfe) of proved reserves having a pretax present value (PV10%) of
$1,197,000 based on non-escalated prices and costs. The SEC valuation
reflected average wellhead prices of $3.45 per Mcf and $28.06 per barrel at
year-end. During 2002, the value of the Company's reserves increased 60%.
The growth was attributable to acquisitions which increased reserves by 19,989
barrels and 119,932 Mcf and increased the pretax present value (PV10%) by
approximately $200,000. In addition, the value of the Company's proved
reserves increased as a result of higher prices at December 31, 2002 as
compared to December 31, 2001. At December 31, 2002, approximately 55% of the
Company reserves were natural gas. Oil and natural gas equivalents are based
on 6 Mcf of gas being the equivalent to one barrel of oil. Based on year-end
reserves and the Company's production level the Company had a reserve life of
approximately 9 years.
Revenues and net income for 2002 totaled $286,602 and $98,912,
respectively. Cash provided from operations in 2002 totaled $100,077. This
cash flow from operations funded $62,664 in capital expenditures in 2002.
These capital expenditures were employed to acquire working interest in eleven
wells located in Michigan, Montana, Oklahoma and Texas.
Our business strategy is focused on providing long-term growth in the net
asset value of our business. In order to achieve this goal, we will focus on
the expansion of our leasehold positions while maintaining our highly
efficient operations. Currently, the Company is in the initial stages of
exploring a more aggressive oil and gas property acquisition strategy. The
size and timing of any future acquisitions will depend on market conditions.
In 2002, the Board of Directors adopted an independent Audit Committee of
two members together with an Audit Charter for the Company. The adoption of
an Audit Committee was primarily in response to the requirements under the
Sarbanes-Oxley Act of 2002 and NASD requirements for an independent Audit
Committee. The NASD prescribes the standards of such committees as part of
ongoing listing requirements on the newly proposed BBX or other similar over-
the-counter markets. Since the Company wishes to remain in a position to
potentially seek a BBX listing or other type of similar exchange listing in the
future, it decided to implement now the requirements for an independent Audit
Committee. The Audit Committee requires the placement of at least one
independent director or other person on the committee. The committee has
substantial independent powers to review the audits of the Company and related
audit issues directly with the independent auditors and with counsel for the
Company.
Also, in compliance with the mandates of the Sarbanes-Oxley Act, the
Company determined in 2002 that it will not engage in any future loans by the
Company to its officers, directors, or other affiliated persons or entities.
In this regard, the Company has one outstanding loan from a director of the
Company which totals $10,600 as of December 31, 2002, of which $5,600 has
since been paid, and one outstanding loan from an affiliated company which
totals $9,318 as of December 31, 2002.
History
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 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 re-capitalization 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 perpetual mineral interests and other oil and
gas assets were pledged. Thus, the preferred B stock represents the current
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.
Over the past five years the Company has strived to maximize its cash
flows from operations in order to build up its cash reserves and to acquire
oil and gas properties.
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. This allocation was
accomplished 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
future oil and gas cash flow from preferred B assets would be allocated solely
to the preferred B stock. The cash attributable to the common stock would be
invested until such time as another plan would be adopted by the Board of
Directors. Under this allocation, the preferred B and common stock cash
investment accounts were separated.
During 2002, the Company continued its acquisition program by purchasing
working interests in ten new wells, two in Michigan, seven in Texas, and one
in Montana. In addition, the Company acquired an additional 44% working
interest in one natural gas well located in Le Flore County, Oklahoma, in
which the Company previously held a 5% working interest. These 2002
acquisitions total approximately $63,000.
Material Subsequent Events
The Company undertakes to report what it deems to be material subsequent
events as occurring since the close of its current fiscal year on December 31,
2002 and up to the date of this report. As to matters that are not completed,
the following constitutes only a preliminary outline and such matters will be
more fully reported when, and if, consummated in the appropriate format by the
Company.
The Company is exploring the concept of creating a type of drilling fund
that could be sold, along with the Company's common stock to raise money for
exploratory or development drilling. The Board of Directors has authorized
management to draft a preliminary plan, discuss financing, and investigate
joint venture partners and identify prospective properties. No financing
commitments have been obtained at this time and there is no assurance of any
such financing being obtained.
The Board of Directors authorized the President to hedge prices on crude
oil and natural gas using only fixed liability instruments such as "puts" and
"calls". On March 21, 2003, the Company purchased a single put contract for
10,000 MMBTU's per month of natural gas beginning in June 2003 and ending May
2004 at the strike price of $4.75. The Company paid $58,044 for these twelve
contracts.
Available Information
Our Internet address is www.croff.com. We make available through our
website our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the Securities and Exchange Commission.
Major Customers
Customers, which accounted for over 10% of oil and natural gas revenues,
were as follows for the years ended December 31, 2000, 2001 and 2002:
2000 2001 2002
------ ------ ------
Burlington Resources Oil and Gas Company 13.2% 13.2% 10.0%
El Paso Production 11.0% 10.6% 14.6%
Energetics, LTD. - - 10.0%
Jenex Petroleum Corp., a related party 28.9% 24.3% 17.2%
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 sale or
leasing 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.
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. Currently, the Company does not 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.
Forward-Looking Statements
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 or present 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. All statements, other than statements of historical or present facts,
that address activities, events, outcomes or developments that the Company
plans, expects, believes, assumes, budgets, predicts, forecasts, estimates,
projects, intends or anticipates (and other similar expressions) will or may
occur in the future are forward-looking statements. These forward-looking
statements are based on management's current belief, based on currently
available information, as to the outcome and timing of future events. When
considering forward-looking statements, you should keep in mind the risk
factors and other cautionary statements in this Form 10-K. Such
forward-looking statements appear in a number of places and include statements
with respect to, among other things, such matters as: future capital,
development and exploration expenditures (including the amount and nature
thereof), drilling, deepening or refracing of wells, oil and gas reserve
estimates (including estimates of future net revenues associated with such
reserves and the present value of such future net revenues), estimates of
future production of oil and natural gas, expected results or benefits
associated with recent acquisitions, business strategies, expansion and growth
of the Company's operations, cash flow and anticipated liquidity, grassroots
prospects and development and property acquisition, obtaining financial or
industry partners for prospect or program development, or marketing of oil
and natural gas. We caution you that these forward-looking statements are
subject to all of the risks and uncertainties, many of which are beyond our
control, incident to the exploration for and development, production and sale
of oil and gas. These risks include but are not limited to: 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, regulatory
developments and the other risks described in this Form 10-K.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact way.
The accuracy of any reserve estimate depends on the quality of available data
and the interpretation of that data by geological engineers. In addition, the
results of drilling, testing and production activities may justify revisions
of estimates that were made previously. If significant, these revisions could
change the schedule of any further production and/or development drilling.
Accordingly, reserve estimates are generally different from the quantities of
oil and natural gas that are ultimately recovered.
Should one or more of the risks or uncertainties described above or
elsewhere in this Form 10-K occur, or should underlying assumptions prove
incorrect, our actual results and plans could differ materially from those
expressed in any forward-looking statements. We specifically disclaim all
responsibility to publicly update any information contained in a
forward-looking statement or any forward-looking statement in its entirety and
therefore disclaim any resulting liability for potentially related damages.
All forward-looking statements attributable to us are expressly qualified
in their entirety by this cautionary statement
Fluctuations in Profitability of the Oil and Gas Industry
The oil and gas industry is highly cyclical and historically has
experienced severe downturns characterized by oversupply and weak demand. Many
factors affect our industry, including general economic conditions, consumer
preferences, personal discretionary spending levels, interest rates and the
availability of credit and capital to pursue new production opportunities. We
cannot guarantee that our industry will not experience sustained periods of
decline in the future. Any such decline could have a material adverse affect
on our business.
Competition for the Acquisition of New Properties
The oil and gas industry is very competitive. Other exploration and
production companies compete with us for the acquisition of new properties.
Among them are some of the largest oil companies in the United States and
other substantial independent oil and gas companies. Almost all of these
companies have greater financial and other resources than we do. Our ability
to increase our reserves in the future will depend upon our ability to select
and acquire suitable oil and gas properties in this competitive environment.
Estimates of Oil and Gas Reserves, Production Replacement
The information on proved oil and gas reserves included in this document
are simply estimates. The accuracy of any reserve estimate is a function of
the quality of available data, engineering and geological interpretation and
judgment, assumptions used regarding quantities of oil and gas in place,
recovery rates and future prices for oil and gas. Actual prices, production,
development expenditures, operating expenses and quantities of recoverable oil
and gas reserves will vary from those assumed in our estimates, and such
variances may be significant. If the assumptions used to estimate reserves
later prove incorrect, the actual quantity of reserves and future net cash
flow could be materially different from the estimates used herein.
In addition, results of drilling, testing and production along with changes in
oil and gas prices may result in substantial upward or downward revisions.
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 2002 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. The Company's
expenses for these services were approximately $20,000 per year for each of
the previous five years. Although these kinds of trandsactions were not a
result of "arms length" negotations, the Company's Board of Directors believes
the lease terms are as favorable as could be anticipated through third party
negotations.
The Company currently has five (5) directors. The Company has one
employee, the President, and two part-time contract workers. The 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 2. PROPERTIES
General
During the last five fiscal years, the Company has decreased its holdings
in undeveloped oil and gas leases and generally increased its holdings in
developed oil and gas leases. "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
lease or mineral interest is owned by the Company. All developed acreage is
held by production. The acreage is concentrated in Alabama, Michigan, New
Mexico, Oklahoma, Texas, and Utah and is widely dispersed in Colorado,
Montana, North Dakota, and Wyoming.
During 2002, the Company's production averaged 158 Mcf of natural gas and
17 Bbl of oil per day. "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.
The quantities and values in the tables that follow are based on average
prices for the year 2002 which averaged $22.62 per barrel of oil and $2.56 per
Mcf of gas or in some cases constant prices in effect at December 31, 2002.
Price declines decrease reserve values by lowering the future net revenues
attributable to the reserves and reducing the quantities of reserves that are
recoverable on an economic basis. Price increases have the opposite effect.
A significant decline in the prices of oil or natural gas could have a
material adverse effect on the Company's financial condition and results of
operations.
Proved developed reserves are proved reserves that are expected to be
recovered from existing wells with existing equipment and operating methods
under current economic conditions. Proved undeveloped reserves are proved
reserves that are expected to be recovered from new wells drilled to known
reservoirs on undrilled acreage for which the existence and recoverability of
such reserves can be estimated with reasonable certainty, or from existing
wells where a relatively major expenditure is required to establish
production.
Future prices received from production and future production costs may
vary, perhaps significantly, from the prices and costs assumed for purposes of
these estimates. There can be no assurance that the proved reserves will be
developed within the periods indicated or that prices and costs will remain
constant. There can be no assurance that actual production will equal the
estimated amounts used in the preparation of reserve projections.
The present values shown should not be construed as the current market
value of the reserves. The quantities and values shown in the tables that
follow are based on oil and natural gas prices in effect on December 31, 2002.
The value of the Company's assets is in part dependent on the prices the
Company receives for oil and natural gas, and a significant decline in the
price of oil or gas could have a material adverse effect on the Company's
financial condition and results of operations. The 10% discount factor used
to calculate present value, which is specified by the Securities and Exchange
Commission (the "SEC"), is not necessarily the most appropriate discount rate,
and present value, no matter what discount rate is used, is materially
affected by assumptions as to timing of future production, which may prove to
be inaccurate. The calculation of estimated future net revenues does not take
into account the effect of various cash outlays, including, among other things
general and administrative costs.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. The data in the tables that follow represent
estimates only. Oil and gas reserve engineering must be recognized as a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way. The accuracy of any reserve estimate is a
function of the quality of available data and engineering and geological
interpretation and judgment. Results of drilling, testing and production
after the date of the estimate may justify revisions. Accordingly, reserve
estimates are often materially different from the quantities of oil and
natural gas that are ultimately recovered.
An indepedent petroleum engineering firm compiled the proved oil and gas
reserves and future revenues as of December 31, 2002 for the Company's most
significant wells. Management completed the 2002 reserve report from this
base study. Since December 31, 2002, 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. For 2000 and 2001, management of the
Company, none of whom are licensed as either petroleum reservoir engineers or
geologists, compiled these estimates.
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.
The following table sets forth summary information with respect to
estimated proved reserves at December 31, 2002.
ESTIMATED PROVED RESERVES
As of December 31, 2002
Net Oil Net Gas Pre-Tax Present
Area (Bbls) (Mcf) Value 10%
------------------- ----------- ----------- -------------------
Alabama - 1,596 $ 3,750
Colorado 2,965 44,877 113,721
Michigan 17,576 71,617 347,371
Montana 3,991 - 18,798
New Mexico 180 96,869 184,084
North Dakota 5,518 3,672 41,077
Oklahoma 3,700 128,445 175,665
Texas 1,308 8,190 25,387
Utah 14,310 73,994 220,204
Wyoming 4,863 18,768 66,943
------ ------- ----------
Total 54,411 448,028 $1,197,000
For the year ended December 31, 2002, the Company had no delivery
commitments with respect to the production of oil and natural gas.
The Company is unaware of the circumstances of any delivery commitments on
royalty wells. The following table sets forth summary information with
respect to oil and natural gas production for the year ended December 31,
2002.
STATE GEOGRAPHIC DISTRIBUTION OF NET PRODUCTION
Net Oil Net Gas
State (Bbls) (Mcf)
-------------------- ----------- -----------
Alabama - 228
Colorado 112 6,411
Michigan 1,143 4,775
Montana 366 -
New Mexico 30 11,765
North Dakota 875 253
Oklahoma 327 19,145
Texas 218 1,170
Utah 2,385 10,295
Wyoming 687 3,484
----- ------
Total 6,143 57,526
The following table sets forth summary information with respect to the
Company's estimated number of productive wells as of December 31, 2002.
PRODUCTIVE WELLS AND ACREAGE (1)
As of December 31, 2002
Net
Acreage
Gross Oil Gross Gas Net Oil Net Gass with
Area Wells(2) Wells(2) Wells Wells Production
- --------------- ---------- ---------- ---------- ---------- ------------
Alabama - 2 - .01 10
Colorado 1 1 .06 .03 40
Michigan 2 4 1.25 .03 148
Montana 1 - .01 - 22
New Mexico 1 5 .01 .03 55
North Dakota 2 4 .19 .19 38
Oklahoma 8 8 2.21 2.21 173
Texas 5 6 .02 .02 29
Utah 238 28 .20 .13 650
Wyoming 3 3 .22 .22 120
--- -- ---- ---- -----
Total 261 61 4.17 2.87 1,285
(1) This chart contains estimates associated with small mineral interests
and small leases.
(2) Wells included twice if it produces both oil and gas.
The following table sets forth summary information with respect to the
Company's undeveloped acreage as of December 31, 2002.
UNDEVELOPED ACREAGE
As of December 31, 2002
Total Undeveloped Acreage
----------------------------------------------------
Area Proven Unproven
------------------- ------------------------ ------------------------
Gross Acres Net Acres Gross Acres Net Acres
----------- ----------- ----------- -----------
Colorado 80 7 600 40
Montana - - 3,800 250
Utah 8,000 140 102,000 3,300
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 primarily in
Duchesne, Uintah and Wasatch Counties in Utah, and approximately 40 net
mineral acres in La Plata County, Colorado, and San Juan County, New Mexico.
During the past two years, the Company has executed a few new leases or
renewals on its perpetual mineral interests. Overall, however, the amount of
new leasing was not significant. In 2002, the Company leased approximately
136 acres of its gross mineral interests in Duchesne County, Utah to Armstrong
Oil and Gas and Petroglyph Corp. There was increased production from the
Company's perpetual mineral interests in San Juan County, New Mexico, due to
the fact that field drilling continued for coal bed methane gas. In 2001, the
Company 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. After this decision, Amoco released
suspensed royalties payments.
As of December 31, 2002, 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.
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's purchases 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. The Company has previously
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. The Company now
participates as a working interest owner in drilled wells.
AVERAGE SALES PRICE AND COSTS
The following table sets forth summary information with respect to the
Company's 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 by geographic area for the last three years.
PRODUCTION
Past Three Years by Geographic Area
Average Sales Price* Average Production Cost*
--------------------------------------------- --------------------------------------------
2002 2001 2000 2002(1) 2001(2) 2000(2)
------------- ------------- ------------- ------------- ------------- ------------
Geographic Area Oil Gas Oil Gas Oil Gas Oil Gas Oil Gas Oil Gas
- --------------- | ------ ------ | ------ ------ | ------ ------ | ------ ------ | ------ ------ | ------ ------ |
| | | | | | |
| | | | | | |
Alabama | $ - $ 2.96 | $ - $ 2.22 | $ - $ - | $ n/a $ 0.79 | $ - $ - | $ - $ - |
Colorado | $21.28 $ 1.75 | $24.64 $ 4.33 | $30.03 $ 3.00 | $ 8.49 $ 0.03 | $ - $ - | $ - $ - |
Michigan | $25.96 $ 3.15 | $16.52 $ 3.13 | $ - $ 3.61 | $ 5.27 $ 0.84 | $ - $ - | $ - $ - |
Montana | $20.58 $ - | $20.80 $ - | $25.79 $ - | $10.53 $ n/a | $ - $ - | $ - $ - |
New Mexico | $27.14 $ 3.10 | $24.33 $ 4.35 | $30.57 $ 3.46 | $ 2.34 $ 0.19 | $ - $ - | $ - $ - |
North Dakota | $23.49 $ 1.64 | $24.40 $ 1.51 | $27.81 $ 1.60 | $ 6.96 $ 1.01 | $ - $ - | $ - $ - |
Oklahoma | $22.88 $ 2.18 | $22.97 $ 4.07 | $28.10 $ 3.75 | $12.25 $ 1.40 | $ - $ - | $ - $ - |
Texas | $25.43 $ 2.89 | $19.41 $ 4.28 | $27.70 $ 4.00 | $10.45 $ 1.54 | $ - $ - | $ - $ - |
Utah | $22.55 $ 1.49 | $24.66 $ 2.85 | $28.52 $ 3.20 | $ 3.03 $ 0.02 | $ - $ - | $ - $ - |
Wyoming | $16.38 $ 2.36 | $19.30 $ 2.93 | $26.14 $ 3.38 | $ 5.99 $ 0.61 | $ - $ - | $ - $ - |
* Oil is per Bbl and Gas is per Mcf.
(1) States with higher production from royalty interests such as Utah, reflect a lower cost per barrel or Mcf
(2) The Company did not account for production cost by state prior to 2002. Average production cost for the
Company was $7.82 per barrel and $0.95 per Mcf for the year 2001 and $6.59 per barrel and $0.83 per Mcf
for the year 2000.
The average production cost for oil decreased in 2002 from 2001 due to
higher prices and lower taxes on oil wells. The other costs were somewhat
lower due to less workover related costs. The average production cost for oil
increased in 2001 due to higher taxes on oil wells when compared to 2000.
The average production cost for natural gas decreased in 2002 due to
lower production taxes and less workover expenses. 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.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any legal actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 17, 2002, 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.
PART II
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 had an extremely limited market, but were 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 launched, during the second quarter of 2002, an Internet based
Clearinghouse at www.croff.com. Bids and offers can be posted for both
preferred B shares and common shares on this website. Trading of the
Company's securities is also available on the over the counter market bulletin
board at www.otcbb.com. In addition the Company posts its recent SEC quarterly
and annual reports on the website.
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 2002 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 "COFF" from NASDAQ. The
Company currently plans to apply for listing on the proposed BBX by NASDAQ, if
and when it is established in the next year.
COMMON SHARES - 566,060 SHARES OUTSTANDING FOR 2002 - (The following data is
generated solely from private transactions or internal
purchases by the Company)
BID RANGE
Calendar Quarter Bid Asked
---------------- ------ ------
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
2002: First Quarter $ .90 $1.00
Second Quarter $ .90 $1.00
Third Quarter $ .90 $1.00
Fourth Quarter $ .90 $1.00*
* In early 2003, common shares were traded at $0.90 per share in a
private transaction.
Only a few transactions resulting in the transfer of stock took place
in 2000, 2001 or 2002. In 2001, the Company repurchased less than 1,000 shares
at the request of certain shareholders at a price of $1.00.
As of December 31, 2002, 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
---------------- ------ ------
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
2002: First Quarter No Trading No Trading
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter No Trading No Trading
$(15,582) $ 12,430 $131,668 $ 61,535 $ 98,912
Per Common Share $ (.01) $ * $ .01 $ .06 $ .04
Working capital $ 1,866 $ 90,697 $273,295 $385,816 $419,475
Dividends per share NONE NONE NONE NONE NONE
* - Less than .01 per share
BALANCE SHEET DATA
Total assets $508,847 $498,162 $628,172 $695,124 $753,212
Long-term debt** NONE NONE NONE NONE NONE
Stockholders' equity $458,123 $480,353 $611,966 $672,085 $736,408
** There were no long-term obligations from 1998-2002.
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 accepted in the
United States of America. 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 it 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. The Company has designated its marketable equity
securities as "securities available for sale".
Liquidity and Capital Resources
At December 31, 2002, the Company had assets of $753,212 of assets. At
December 31, 2002, the Company's current assets totaled $436,279 compared to
current liabilities of $16,804. Working capital at December 31, 2002 totaled
$419,475, an increase of 9% compared to $385,816 at December 31, 2001. The
Company had a very favorable current ratio at December 31, 2002 of
approximately 26:1. The market value of the Company's marketable equity
securities were $65,205 below cost at December 31, 2002. During 2002, net
cash provided by operations totaled $100,077, as compared to $161,948 in 2001.
The Company's cash flow from operations is highly dependent on oil and gas
prices. The Company has no short-term or long-term debt outstanding at this
time. On June 11, 2002, the Company entered into a one-year variable rate
revolving line of credit agreement whereby the Company can borrow up to
$100,000 to fund investments in oil and gas properties. The variable rate is
based on Prime plus 1.5%, subject to a floor of 7% and a ceiling of 12%.
At December 31, 2002, there were no significant commitments for capital
expenditures. The Company during 2002, made $62,664 in capital expenditures.
These capital expenditures were to acquire working interests in eleven wells
located in Michigan, Montana, Oklahoma and Texas. The Company is uncertain at
this time as to the size and extent of its 2003 capital budget. The Company
plans to finance its ongoing development, acquisition and exploration
expenditures and possible equity repurchases using internal cash flow. In
addition, proceeds from asset sales and bank borrowings may be utilized as
well as possible joint ventures or future public and private offerings of debt
or equity securities. However, future cash flows are subject to a number of
variables, including the level of production and oil and gas prices, and there
can be no assurance that operations and other capital resources will provide
cash in sufficient amounts to maintain planned levels of capital expenditures
or that increased capital expenditures will not be undertaken.
The Company believes that borrowings available under its line of credit,
projected operating cash flows and the cash on hand will be sufficient to
cover its working capital, capital expenditures, planned development
activities and debt service requirements for the next 12 months. In
connection with consummating any significant acquisition, additional debt or
equity financing will be required, which may or may not be available on terms
that are acceptable to the Company.
While certain costs are affected by the general level of inflation,
factors unique to the oil and gas industry result in independent price
fluctuations. Over the past five years, significant fluctuations have occurred
in oil and gas prices. Although it is particularly difficult to estimate
future prices of oil and gas, price fluctuations have had, and will continue
to have, a material effect on the Company. Overall, it is management's belief
that inflation is generally favorable to the Company since it does not have
significant operating expenses.
Results of Operations
Revenues for 2002 totaled $315,328, a decrease of 14% from 2001. Net
income for 2002 totaled $98,912 compared to $61,535 in 2001. The decrease in
revenue was due primarily to decreases in oil and gas prices, which more than
offset increases in oil and gas production. The average sale price of oil in
2002 for the Company was $22.62 compared to $22.42 in 2001. The average sale
price of natural gas in 2002 for the Company was $2.56 per Mcf, compared to
$3.50 per Mcf in 2001. Production of oil increased approximately 29% in 2002,
while production of natural gas remained constant. Oil production increased
primarily due to the acquisition of new wells in Michigan. The Company
realized a gain on the sale of marketable equity securities totaling $23,026
and $22,193 for the years ended December 31, 2002 and 2001, respectively.
Other income, which is composed primarily of interest and dividend income,
decreased approximately 46% during 2002 to $5,700 from $10,459 in 2001. The
Company maintained a larger balance of its working capital in marketable
equity securities than in interest and dividend bearing money market accounts
for 2002 compared to 2001.
Oil and natural gas sales in 2001 were $332,573 compared to $368,022 in
2000. The major factor 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.
Lease operating expense, which includes all production related taxes
decreased by approximately $39,000 in 2002, to $77,065 compared to $116,190 in
2001. The primary reason for this decrease was the fact that the Company did
not need to participate in any well workovers or reworks during 2002, nor did
the Company incur any impairment losses during 2002. In 2001, the Company had
an impairment loss of approximately $34,000.
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.
General and administrative expense decreased approximately $6,000 to
$107,351 in 2002 from $113,393 in 2001. This decrease was primarily
attributable lower annual meeting costs and lower website development costs
during 2002.
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.
Recent Accounting Pronouncements
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset. The asset retirement liability will be allocated to
operating expense by using a systematic and rational method. The statement is
effective for the Company on January 1, 2003. The Company does not expect the
adoption of SFAS No. 143 to have a material effect on the Company's financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which provides a single
accounting model for long-lived assets to be disposed of and changes the
criteria that would have to be met to classify an asset as held-for-sale. The
statement also requires expected future operating losses from discontinued
operations to be recognized in the periods in which the losses are incurred,
which is a change from the current requirement of recognizing such operating
losses as of the measurement date. The statement is effective for fiscal
years beginning after December 15, 2001. The adoption of SFAS No. 144 did not
have a material impact on the Company's financial position or results of
operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities," which provides guidance for
financial accounting and reporting of costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement
requires the recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the
entity commits to an exit plan under EITF No. 94-3. The statement is
effective for the Company in 2003. The adoption of SFAS No. 146 is not
expected to have a material effect on the Company's financial position or
results of operations as the Company currently is not the operator of its
wells.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation - Transition and Disclosure - an amendment of SFAS No.
123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require disclosures in both annual
and interim financial statements about the method of accounting for stock-
based employee compensation and the effect of the method used on the reported
results. SFAS No. 148 is effective for the Company's year ended December 31,
2002 and for interim financial statements commencing in 2003. The Company's
adoption of this pronouncement did not have an impact on financial condition
or results of operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements on page F-1 for
a listing of the Company's financial statements and notes thereto and for the
financial statement schedules contained herein.
Management Responsibility for Financial Statements
The financial statements have been prepared by management in conformity
with accounting principles generally accepted in the United States of America.
Management is responsible for the fairness and reliability of the financial
statements and other financial data included in this report. In the
preparation of the financial statements, it is necessary to make informed
estimates and judgments based on currently available information on the
effects of certain events and transactions.
The Company maintains accounting and other controls which management
believes provide reasonable assurance that financial records are reliable,
assets are safeguarded and transactions are properly recorded. However,
limitations exist in any system of internal control based upon the recognition
that the cost of the system should not exceed benefits derived.
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, Officers 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 26, 2003.
GERALD L. JENSEN, 63, 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, 34, CHIEF FINANCIAL OFFICER AND SECRETARY
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., 73, 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, 62, 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 is
presently a consultant. Mr. Nebeker was a lawyer in private practice from
1986 to 2001. 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., 71, DIRECTOR
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, 55, 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, 2002, there were no officers,
employees or directors whose total cash or other remuneration exceeded
$80,000.
Summary Compensation Table
2002 Compensation Gerald L. Jensen, President. (No other executive salaries)
Name and position:
Gerald L. Jensen, President and Chairman
2002 2001 2000
- ---------------------------------------- --------- --------- ---------
Annual Compensation
- -------------------
Salary $54,000 $54,000 $54,000
Bonus $ - $ - $ -
Other Annual Compensation $ - $ - $ -
Long Term Compensation
- ----------------------
Awards
Restricted Stock Awards $ - $ - $21,000(2)
Payouts
No. Shares Covered by Option Grant - 20,000 20,000 Pfd. B(2)
Long Term Incentive Plan Payout $ - $ - $ -
All Other Compensation $ 1,620(1) $ 1,620(1) $ 1,620(1)
(1) Company IRA Contribution
(2) The preferred B warrants were added to existing common warrants in 1996.
Gerald L. Jensen is employed as the President and Chairman of Croff
Enterprises, Inc. Mr. Jensen commits a substantial amount of his time, but
not all, to his duties with the Company. 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 2003, the Company intends to compensate outside directors at the
rate of $350 for a half day meeting and $500 for a full day meeting and an
equal amount for audit committee work. Based on the proposed remuneration,
for the fiscal year ending December 31, 2003, 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 or 2002. 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 on December 31, 2002 bore interest at
6% per annum. All notes held by officers, except one, were repaid in 2002.
At December 31, 2002, one note remained unpaid, which totaled $10,600
including accrued interest. Subsequent to year end the Company has received
a payment of $5,600 on this note.
Directors were authorized and issued stock warrants in 1991 that
essentially provided 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 was
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
The following table sets forth the beneficial ownership of Common stock and
preferred B stock of the Company as of December 31, 2002, 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.
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934: RULES 13a-14, 13a-15, 15d-14, and 15d-15
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gerald L. Jensen, certify that:
1. I have reviewed this annual report on Form 10-K of Croff Enterprises, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003 By: /S/Gerald L. Jensen
---------------- ------------------------------
Gerald L. Jensen, President,
Chief Executive Officer
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934: RULES 13a-14, 13a-15, 15d-14, and 15d-15
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stuart D. Kroonenberg, certify that:
1. I have reviewed this annual report on Form 10-K of Croff Enterprises, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant is made known to us,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 27, 2003 By: /S/Stuart D. Kroonenberg
---------------- ------------------------------
Stuart D. Kroonenberg
Chief Financial Officer
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Croff Enterprises, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald
L. Jensen, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
Date: March 27, 2003 By: /S/Gerald L. Jensen
---------------- ------------------------------
Gerald L. Jensen, President,
Chief Executive Officer
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Croff Enterprises, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Stuart
D. Krooneberg, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
Date: March 27, 2003 By: /S/Stuart D. Kroonenberg
---------------- ------------------------------
Stuart D. Kroonenberg
Chief Financial Officer
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, 2001 and 2002....................F-3
Statements of Operations for the years ended December 31,
2000, 2001 and 2002................................................F-4
Statements of Stockholders' Equity for the years ended
December 31, 2000, 2001 and 2002...................................F-5
Statements of Cash Flows for the years ended December 31,
2000, 2001 and 2002................................................F-6
Notes to Financial Statements......................................F-7
II. Supplemental Information - Disclosures About Oil and
Gas Producing Activities - Unaudited..........................F-15
F-1
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, 2001 and 2002, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2002. 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, 2001 and 2002, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States
of America.
Denver, Colorado
February 26, 2003 CAUSEY DEMGEN & MOORE INC.
F-2
CROFF ENTERPRISES, INC.
BALANCE SHEETS
December 31, 2001 and 2002
2001 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 338,870 $ 316,473
Marketable equity securities, available for sale 4,600 61,540
Accounts receivable 49,226 48,948
Notes receivable, related parties 16,159 9,318
---------- ----------
408,855 436,279
---------- ----------
Oil and gas properties, at cost, successful efforts method:
Proved properties 578,091 640,755
Unproved properties 97,102 97,102
---------- ----------
675,193 737,857
Accumulated depletion and depreciation (388,924) (420,924)
---------- ----------
286,269 316,933
---------- ----------
Total assets $ 695,124 $ 753,212
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,568 $ 15,481
Accrued liabilities 5,471 1,323
---------- ----------
23,039 16,804
---------- ----------
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, 540,659 shares
issued and outstanding 397,085 470,910
Common stock, $.10 par value; 20,000,000 shares
authorized, 629,143 shares issued
and outstanding 62,914 62,914
Capital in excess of par value 530,071 456,246
Treasury stock, at cost, 63,083 shares
issued and outstanding (83,151) (83,151)
Accumulated other comprehensive loss (1,150) (65,205)
Accumulated deficit (193,618) (94,706)
Notes receivable from directors (40,066) (10,600)
---------- ----------
672,085 736,408
---------- ----------
Total liabilities and stockholders' equity $ 695,124 $ 753,212
========== ==========
See accompanying notes to the financial statements.
F-3
CROFF ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2000, 2001 and 2002
2000 2001 2002
---------- ---------- ----------
Revenues
Oil and gas sales $ 368,022 $ 332,573 $ 286,602
Loss on disposal of oil and gas
properties (5,623) - -
Gain on sale of marketable equity
securities - 22,193 23,026
Other income 6,970 10,459 5,700
---------- ---------- ----------
369,369 365,225 315,328
---------- ---------- ----------
Expenses
Lease operating expense including
production taxes 87,921 116,190 77,065
General and administrative 86,745 89,393 83,351
Overhead expense, related party 19,200 24,000 24,000
Impairment of oil and gas properties - 34,107 -
Depletion and depreciation 43,835 40,000 32,000
---------- ---------- ----------
237,701 303,690 216,416
---------- ---------- ----------
Net income 31,668 61,535 98,912
Net income applicable to
preferred B shareholders 125,000 30,000 73,825
---------- ---------- ----------
Net income applicable to
common shareholders $ 6,668 $ 31,535 $ 25,087
========== ========== ==========
Basic and diluted net income
per common share $ .01 $ .06 $ .04
========== ========== ==========
See accompanying notes to the financial statements.
F-4
CROFF ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2000, 2001 and 2002
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, 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)
Net unrealized loss on marketable
equity securities - - - - - - (64,055) -
Net income for the year ended
December 31, 2001 - - - - - - - 98,912
Preferred stock reallocation - 73,825 - - (73,825) - - -
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 2001 540,659 $470,910 629,143 $ 62,914 $ 456,246 $(83,151) $ (65,205) $ (94,706)
======== ======== ======== ======== ========== ======== ============= ===========
See accompanying notes to the financial statements.
F-5
CROFF ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 2001 and 2002
2000 2001 2002
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 131,668 $ 61,535 $ 98,912
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depletion and depreciation 43,835 40,000 32,000
Loss on disposal or impairment of
property 5,623 34,107 -
Realized gain on marketable equity
securities (1,750) (22,193) (23,026)
Other items, net 1,527 375 -
Changes in operating assets and
liabilities:
Accounts receivable (45,327) 42,516 278
Accrued interest on notes receivable - (1,225) (1,852)
Accounts payable (3,613) 6,730 (2,087)
Accrued liabilities 2,010 103 (4,148)
---------- ---------- ----------
Net cash provided by operating
activities 133,973 161,948 100,077
---------- ---------- ----------
Cash flows from investing activities:
Purchase of marketable equity securities - (72,931) (286,669)
Proceeds from sale of marketable equity
securities - 95,124 188,700
Notes receivable issued - (15,000) -
Payments from notes receivable - - 8,159
Additions to oil and gas properties - (21,705) (62,664)
---------- ---------- ----------
Net cash used in investing activities - (14,512) (152,474)
---------- ---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (55) (200) -
Payments on notes receivable
from directors - - 30,000
---------- ---------- ----------
Net cash provided by (used in)
financing activities (55) (200) 30,000
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 133,918 147,236 (22,397)
Cash and cash equivalents
at beginning of year 57,716 191,634 338,870
---------- ---------- ----------
Cash and cash equivalents
at end of year $ 91,634 $ 338,870 $ 316,473
========== ========== ==========
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 and 2002, the Company has unrealized losses on available for
sale securities in the amount of $1,150 and $64,055, respectively.
See accompanying notes to the financial statements.
F-6
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2000, 2001 and 2002
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 50 wells. Croff
holds small royalty interests in approximately 210 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 2000. In 2001 and 2002, the Company received lease bonuses
totaling $2,220 and $150, respectively, which was included in other income.
F-7
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2000, 2001 and 2002
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 2000. There was an impairment loss
during 2001 in the amount of $34,107 due to the plugging and abandoning of 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 Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, for long-lived assets to be disposed of or held for sale and resolves
certain implementation issues related to SFAS 121. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. The issuance of SFAS 144 did
not have a material effect on the Company's 2002 financial position, result
of operations, or cash flows, as the Company did not have an impairment loss
during 2002.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities," which provides guidance for
financial accounting and reporting of costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement
requires the recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the entity
commits to an exit plan under EITF No. 94-3. The statement is effective for the
Company in 2003. The adoption of SFAS No. 146 is not expected to have a
material effect on the Company's financial position or results of operations as
the Company currently is not the operator of its wells.
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, 2000, 2001 and 2002 were
insignificant.
F-8
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2000, 2001 and 2002
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.
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 and 2002 totaled
$1,150 and $64,055, respectively, and 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, 2001 and 2002.
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
During the years ended December 31, 2000, 2001 and 2002, the Company did
not enter into commodity derivative contracts or fixed-price physical contracts
to manage its exposure to oil and gas price volatility.
F-9
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2000, 2001 and 2002
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.
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 loss related to these securities before taxes for December 31,
2000, 2001, and 2002 was $0, $1,150 and $65,205, respectively and is reflected
as another comprehensive loss. During 2001 and 2002, a portion of the available
- -for-sale securities were sold for $95,124 and $188,700, respectively, resulting
in a net gain before taxes of $22,193 and $23,026, respectively, 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 per common share
In accordance with the provisions of SFAS No. 128, "Earnings per Share,"
basic income per common share amounts were computed by dividing net income
after deduction of the net income attributable to the preferred B shares by the
weighted average number of common shares outstanding
F-10
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2000, 2001 and 2002
during the period. Diluted income 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 per
share for the year ended December 31, 2000 was 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 accounting
principles generally accepted in the United States of America 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.
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, 2000, 2001 and 2002 amounted to $2,375, $1,800 and $3,109,
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, 2000, 2001 and 2002 included $1,600, $0 and
$0 due to the affiliated company pursuant to this agreement.
On June 15, 2001, the Company loaned $15,000 to a related corporation whose
President is also the President of the Company. The Company is owed $9,318
including unpaid interest on this note as of December 31, 2002. The short-term
secured note bears interest at 10% per annum. This note is currently past due
and this related corporation is in the process of selling certain assets in
order to pay off the note.
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 agreed 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 August 2002, this amount was lowered to
$750 per month aggregate at the same rate of $150 per well. During the years
ending December 31, 2000, 2001 and 2002, $10,800, $10,800 and $10,050,
respectively, has been offset against lease operating expense, in this manner.
F-11
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2000, 2001 and 2002
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.
The Company has no outstanding stock options, warrants or rights as of
December 31, 2001 and 2002. 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 provided 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 was
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 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.
F-12
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2000, 2001 and 2002
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.
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 2000, the Company
traded 7,370 shares at a price of $1.05 per share. In 2001 and 2002, 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, 2002, the Company had net tax capital loss carry-forwards
of approximately $28,800. In addition, the Company has a depletion carryover
of approximately $334,000, which has no expiration date.
The Company did not record an income tax provision for the years ended
December 31, 2000, 2001 or 2002 due to the utilization of various tax loss
carry forwards and general business credits. The recognized tax benefit of the
utilized carry forward was approximately $34,000, $17,100 and $40,000
respectively, for the years ended December 31, 2000, 2001 and 2002. The Company
has a financial statement loss carryover of approximately $20,600 remaining at
December 31, 2002. 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, 2001 and 2002, total deferred tax assets; liabilities
and valuation allowance are as follows:
2001 2002
-------- --------
Deferred tax assets resulting
from loss carry forwards $ 175,400 $ 156,900
Valuation allowance (175,400) (156,900)
--------- ---------
$ - $ -
========= =========
F-13
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2000, 2001 and 2002
6. 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 526,000 shares in 2000 and 527,000 in 2001 and approximately
629,000 shares in 2002. Outstanding warrants were not dilutive in any of the
periods presented.
7. MAJOR CUSTOMERS
Customers, which accounted for over 10% of oil and natural gas revenues,
were as follows for the years ended December 31, 2000, 2001 and 2002:
2000 2001 2002
------ ------ ------
Burlington Resources Oil and Gas Company 13.2% 13.2% 10.0%
El Paso Production 11.0% 10.6% 14.6%
Energetics, LTD. - - 10.0%
Jenex Petroleum Corp., a related party 28.9% 24.3% 17.2%
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.
8. LINE OF CREDIT
On June 11, 2002, the Company entered into a one-year variable rate
revolving line of credit agreement whereby the Company can borrow up to $100,000
to fund investments in oil and gas properties. The variable rate is based on
Prime plus 1.5%, subject to a floor of 7% and a ceiling of 12%. The Company has
not accessed this line of credit and accordingly does not have any outstanding
balance as of December 31, 2002.
9. MATERIAL SUBSEQUENT EVENTS
The Company is exploring the concept of creating a type of drilling fund
that could be sold, along with the Company's common stock to raise money for
exploratory or development drilling. The Board of Directors has authorized
management to draft a preliminary plan, discuss financing, and investigate joint
venture partners and identify prospective properties. No financing commitments
have been obtained at this time and there is no assurance of any such financing
being obtained
F-14
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2000, 2001 and 2002
The Board of Directors authorized the President to hedge prices on crude
oil and natural gas using only fixed liability instruments such as "puts" and
"calls". On March 21, 2003, the Company purchased a single put contract for
10,000 MMBTU's per month of natural gas beginning in June 2003 and ending May
2004 at the strike price of $4.75. The Company paid $58,044 for these twelve
contracts.
F-15
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.
An independent petroleum engineering firm compiled provided oil and gas reserve
and future revenues as of December 31, 2002 for the Company's most significant
wells. Management completed the 2002 reserve report from this study. For 2000
and 2001, 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-16
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, 2002, crude oil and natural gas prices
were highly volatile. The average sale price of oil in 2002 for the Company was
$22.62, compared to $22.42 in 2001. The average sale price of natural gas in
2002 for the Company was $2.56 per Mcf, compared to $3.50 per Mcf in 2001. 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-17
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, 2000, 2001 and 2002:
1999 2000 2001
-------- -------- --------
Revenues $368,022 $332,573 $286,602
-------- -------- --------
Lease operating costs 61,202 83,700 61,238
Production taxes 26,719 32,490 15,827
Depletion and depreciation 43,835 40,000 32,000
-------- -------- --------
131,756 156,190 109,065
Income tax expense - - -
-------- -------- --------
Results of operations from producing
Activities (excluding capital
expenditures, impairment charges
corporate overhead, and interest
expense) $236,266 $176,383 $177,537
======== ======== ========
F-18
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,
-----------------------
2000 2001 2002
---------- ---------- ----------
Future cash inflows $2,507,000 $1,486,000 $3,019,000
Future production and development costs (434,000) (223,000) (1,075,000)
---------- ---------- ----------
2,073,000 1,263,000 1,944,000
Future income tax expense - (210,000) (274,000)
---------- ---------- ----------
Future net cash flows 2,073,000 1,053,000 1,670,000
10% annual discount for
estimated timing of cash
flows 832,000) (418,000) (651,000)
---------- ---------- ----------
Standardized measure of
discounted future net
cash flows $1,241,000 $ 635,000 $1,019,000
========== ========== ==========
The following are the principal sources of
change in the standardized measure of
discounted future net cash flows:
Beginning balance $876,000 $1,241,000 $ 635,000
Evaluation of proved undeveloped
reserves, net of future production
and development costs 12,000 14,000 8,000
Purchase of proved reserves - - -
Sales and transfer of oil and gas
produced, net of production costs (280,000) (218,000) (210,000)
Net increase (decrease) in prices
and costs 695,000 (663,000) 871,000
Extensions and discoveries 20,000 - 12,000
Revisions of previous quantity estimates 154,000 57,000 268,000
Accretion of discount 236,000) 414,000 (701,000)
Net change in income taxes - (210,000) (64,000)
Other - - -
---------- ---------- ----------
Ending balance $1,241,000 $ 635,000 $1,019,000
========== ========== ==========
F-19
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, 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
Revisions of previous estimates 14,342 (2,352)
Extensions, discoveries and other additions 19,989 119,932
Production (6,143) (57,526)
-------- --------
Balance at December 31, 2002 63,331 457,520
======== ========
Proved developed reserves
December 31, 2000 31,099 460,124
December 31, 2001 26,223 387,974
December 31, 2002 54,411 448,028
Costs incurred in oil and gas producing
activities for the ended December 31,
2000, 2001, and 2002 are as follows:
2000 2001 2002
------ ------ ------
Property acquisition, exploration and
development costs capitalized $ - $ 21,705 $62,664
Impairment of property - 34,107 -
Production costs 87,921 116,190 77,065
Depletion and depreciation 43,835 40,000 32,000
F-20