FORM 10K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
MARK ONE
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 19981999
OR
TRANSITION REPORT pursuant to section 13 or 15(d) of the
securities exchange act of 1934
FOR THE TRANSITION PERIOD FROM N/A TO N/A
COMMISSION FILE NUMBER: 1-100
CROFF ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UTAH 87-0233535
STATE OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
1675 BROADWAY621 17TH STREET
SUITE 1030830
DENVER, COLORADO 8020280293
ADDRESS OF PRINCIPAL ZIP CODE
EXECUTIVE OFFICES
Registrant's telephone number, including area code: (303) 628-
1963383-1555
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common - $0.10 Par Value None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registration (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. YES X NO
As of March 1, 1999,2000, 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: $218,316.$220,000.
As of March 1, 1999,2000, the Registrant had outstanding 516,315526,315 shares of
common stock ($0.10 par value)
TABLE OF CONTENTS
PART I
Page
ITEM 1 BUSINESS......................... 3BUSINESS----------------------------------------------3
ITEM 2 PROPERTIES........................ 7PROPERTIES--------------------------------------------6
ITEM 3 LEGAL PROCEEDINGS..................... 14PROCEEDINGS ------------------------------------12
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 1412
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY........
14EQUITY-----------------12
ITEM 6 SELECTED FINANCIAL DATA................. 16DATA-------------------------------14
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........... 16OPERATIONS . 14
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA......
20DATA------ 18
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES....... 20DISCLOSURES 18
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..
21REGISTRANT 18
ITEM 11 EXECUTIVE COMPENSATION.................. 22COMPENSATION------------- 19
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................... 22MANAGEMENT------------------------------------------- 20
ITEM 13 CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.... 24TRANSACTIONS---------21
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND
REPORTS ON FORM 8-K.................... 25
SIGNATURES........................ 268------------------------------------------ 22
SIGNATURES--------------------------------------------------23
FINANCIAL STATEMENTS.................. 27STATEMENTS----------------------------------------24
ITEM 1. BUSINESS
Forward-looking statements in this report, including without
limitation, statements relating to the Company's plans, strategies,
objectives, expectations, intentions and adequacy of resources, are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking
statements involve risks and uncertainties; including without limitation to,
the following: (i) the Company's plans, strategies, objective,objectives,
expectations and intentions are subject to change at any time at the
discretion of the Company; (ii) the Company's plans and results of
operations will be affected by the Company's ability to manage its growth
and inventory (iii) other risks and uncertainties indicated from time to
time in the Company's filings with the Securities and Exchange
Commission. Neither the Securities and Exchange Commission nor any
other regulatory body takes any position as to the accuracy of forward
looking statements.
(a) Description of Business
Croff Enterprises, Inc. (formerly Croff Oil Company) and hereafter
"Croff" or "the Company, was incorporated in Utah in 1907 as Croff
Mining Company. The Company changed its name to Croff Oil Company in
1952, and in 1996 changed its name to Croff Enterprises, Inc. The
Company, however, continues to operate its oil and gas properties as Croff
Oil Company. The principal office of the Company is located at 1675 Broadway,621 17th
Street, Suite 1030,830, Denver, Colorado 80202.80293. The telephone number is (303)
628-1963.383-1555.
Croff is engaged in the business of oil and gas exploration and
production, primarily through ownership of perpetual mineral interests and
acquisition of 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. Over the past ten years, Croff's primary
source of revenue has been oil and gas royalties from producing mineral
interests. Croff participates as a working interest owner in approximately
40 wells. Croff holds small royalty interests in over 200 wells. Croff did
not buy any new production in 1999 as it had made significant purchases in
1998 and was repaying debt. In 1998, Croff purchased working interests in
six natural gas wells in the state of Oklahoma. The Company
began receivingThese wells now provide
the largest source of revenue to Croff from these wells in the second half of
the year.any single operating company.
In 1997, Croff purchased working interests in five
additional wells, three gas wells in Michigan,
a gas well in Colorado, and an oil well in Texas. In 1996 Croff also purchased
an additional interest in the Rentuer, a gas and oil well in
Wyoming, and an oil well in Colorado. All of the wells from
which Croff receives revenues are operated by other companies and Croff
has no control over the factors which determine royalty or working
interests revenues such as markets, prices and rates of production.
In 1995, Croff purchased a two percent interest in a mortgage note
secured by an equal interest in an Indiana Coal Mine. This venture failed
when the utility canceled the coal contract and Croff had to write off mostmuch
of this investment. In
1996, the Company sold its carved-out production interestinvestment in South Texas1997, 1998 and purchased three interests in oil and gas wells in
Wyoming and Colorado.1999. In 1997, the Company leased
several tracts of its perpetual mineral interests in Northeast Utah as
drilling activity increased. Drilling and leasing activity nearly ceased on
the Company's properties in 1998 and 1999 as oil and natural gas prices
dropped.
Croff has one part-time employee, the President, and two Assistant
Secretaries, who work for the Company as part of its contracted office
space arrangement described in Item 13.
(b) Current Activities
In 1999 the Company did not purchase any new properties as it paid
off debt and replenished its cash reserves. In 1998, the Company purchased
six gas wells located in Oklahoma. The Company spent $208,000,
primarily from its cash reserves, to buy these working interests. While the
wells occasionally produce oil andor condensate, these wells are all primarily
natural gas wells. This purchase closed in April 1998, and the Company
began receiving revenue from these wells during the last half of
calendar year 1998. Because of the low prices of oil and natural gas through
mid-1999, the effect of this greater production nearlywas offset by low prices.
Currently the Company's natural gas production is the largest it ever has
been, and the Company has a decline in the revenue from the existing wells in the Company.positive cash flow.
In 1996, the shareholders voted to adopt changes in the capital
structure of the Company in order to provide more liquidity to the
shareholders. The purpose of this recapitalization was to allow the
Company to pursue ventures outside of the oil and gas business while
retaining the Company's core oil and natural gas assets. In order to do
this, the Company created a class of Preferred B stock to which all of the
perpetual mineral interests and other oil and gas assets were pledged. Thus
the Preferred B stock represents the oil and gas assets of the Company and
all other assets are represented by the common stock. Each common
shareholder received an equal number of Preferred B shares, one for one, at
the time of this restructuring of the capital of the Company.
The Preferred B shares are not publicly traded, but are bought and
sold by shareholders privately. The Company provides, each year, a
clearinghouse to assist shareholders wishing to trade Preferred B shares.
Any shareholder or any outsider is able to bid and ask for the Preferred B
shares of the Company. This process first took place in January and
February of 1997, again in 1998, and 1999. In 1997, the sale of the
Preferred B shares were closed at prices ranging from $.75 to $.90 per
share. In 1998, the average price iswas approximately $1.00 per share. In
1997, approximately 13,500 shares were traded, and in 1998 approximately
30,000 were traded. In 2000, the clearinghouse was postponed until after
the 1999 10-K was mailed to shareholders. This system provides some
liquidity to the Preferred B shareholders, and is paid for by the Company
without charge or commission to the shareholders.
In February of 1998, the Company completed its annual
clearinghouse for the Preferred B stock. At the time of this
clearinghouse, one purchaser had committed for the largest amount
of the stock and the sellers had been notified of this purchase
at a price of $0.95 per share. At the time for closing these
purchases, this purchaser was unable to close and the sellers had
no other purchaser. The Board of Directors determined that the
Company would repurchase the agreed upon shares at the amount
that had been bid by this purchaser. This allowed the sellers
who had been told their shares would be purchased to complete
their sales and at the same time allowed the Company to increase
the per share value of the Preferred B shares by retiring 25,646
shares at an average price of $0.94 per share. The Company does
not intend to purchase shares on a regular basis, and will not be
purchasing shares in the clearinghouse in 1999.
In 1997, the Company reportedwrote off a small loss, which was the
first loss reported by the Company in over five years. This loss
was due to a write downportion of the Company's investment it had
made in Carbon
Opportunities, L.L.C. The Company,1995 in March of 1995, purchased a 2% interestlimited liability company with a coal mine in Carbon Opportunities, L.L.C. Carbon
Opportunities, L.L.C. had purchased a non-performing $6,000,000
note secured byIndiana.
This write off more than offset the Buck Creek Coal Mine. The only source of
repayment of the note wascash flow from operations at the Buck Creek Coal
Mine. In December 1995, the utility which was the major
purchaser of coal from the mine, canceled the contract. Later,
the mine filed a Chapter 11 bankruptcy. By the third quarter of
1997, it was clear that the mine would not be reopened, the
lawsuit against the utility had been lost at the trial level, and
liquidation of the equipment would not yield sufficient monies to
recoup the investment. The Company determined that $62,000 of
its original $100,000 investment would have to be written off.
The Company had received $18,000 of its original investment and
had written the investment down to approximately $82,000.
Subsequently, the Company received $4,000, and there remains cash
and equipment left to be liquidated of approximately $11,000,
which is the remaining value of this asset on the Company's
books. The Company now considers this a liquidated asset and
expects to credit any monies received against its remaining value
on the Company's books.
The Company in 1996 purchased three interests in oil and gas wells, primarily an oil and gas well in Campbell County, Wyoming.
The Company was also the beneficiary of increased drilling and
higher prices in San Juan County, New Mexico, and La Plata
County, Colorado, from coal gas methane wells which produced
higher revenues. The Company also received a 1/16 royalty in an
offsetting gas well to the Company's current production,
in
Western Colorado. The Company entered into two leases for
additional drilling on its mineral interests in the Blue Bell
Altamont field in northeast Utah.
In the second quarter of 1996, the Company sold its carved-
out production interest in the Taylor Ina field in Medina County,
Texas. This carve-out production interest was sold for cash in
the approximate amount of $106,000 to the operator of the field.
Also during the second quarter, the Company sold its interestresulting in a North Dakota well for cash, which well required a significant
workover. This allowed the Company to accumulate significant
amounts of cash to attempt to secure other oil and gas interests
In 1995, the Company also purchased a small interest in the
Ash Unit, a pooled oil field in Campbell County, Wyoming. The
Company also participated in a small interest in a gas well in
Wyoming and as a royalty owner, it continued development in the
Bluebell-Altamont Field.
In 1994, the Company purchased small non-operating working
interest in three oil wells and one gas well. It purchased a
royalty interest in a gas well in Texas. In 1994, the Company
received an increase in production from coal seam gas wells in La
Plata County, Colorado, and San Juan County, New Mexico.
The Company is currently continuing to pursue its
acquisition/merger with a private group in a non oil and gas
business which would have the potential to create a public
trading marketloss for the Company's shares in an expanding line of
business. The Company has had negotiations, at this point, with
several private companies which were interested in merging with
Croff in order to become public. These negotiations occurred
throughout 1997 and are continuing. . The Company has
concentrated on meeting Companies in various high-tech areas, but
has not yet completed any agreement.year.
The Board has adopted an
acquisitions strategy,a policy of seeking a reverse merger partner
which would involve merging a larger private company with Croff. This,
however, asis a long-term strategy, andstrategy. The Board intends to continue to search
for a potential partner or acquisition, which would be of most benefit to the
common shareholders and create a public market for the common shares.
(c) Major Customers
Customers which accounted for over 10% of revenues were as follows
for the years ended December 31, 1996, 1997 and 1998:
1996 1997, 1998 and 1999:
1997 1998 1999
Oil and gas:
ANRCoastal Production Company * 23.7%23.0% * 23.0% 13.9% 10.0%
Burlington Resources Oil and Gas Company 10.5% 18.4% 10.4% 13.2%
Jenex Petroleum Corp. -------- ------------ 21% 26.9%
Pennzoil Production Company 11.1% 12.2% - ------------ -----
*Includes Coastal Production Company
(d) Financial Information About Industry Segments
The Company's operations presently consist of oil and gas
production. During previous years the Company has generated revenues
through the purchase and resale of oil and gas leasehold interests, however,
no significant revenues were generated from this source for the last five
years. Further information concerning the results of the Company's
operations in this one industry segment can be found in the Financial
Statements.
(e) Environmental and Employee Matters
The Company's interest 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.
The Company is advised that oilOil 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 also
impose and regulate environmental and employee concerns pertaining to oil
and gas production, such as The Texas Railroad Commission. Often,
though not exclusively, compliance with state environmental and employee
regulations constitutes an exemption or compliance with federal mandates
and regulations.
As indicated above, the Company does not have any direct control
over or responsibility for insuring compliance with such environmental or
employee regulations as they primarily pertain to the operator of oil and
gas wells and leases. In no instances does the Company act as the operator.
The effect of a violation by an Operator of a well in which the Company
had a working interest would be that the Company may incur its pro-rata
share of the cost of the violation.
The Company is not aware of any instance in which it was found to be
in violation of any environmental or employee regulations or laws, and the
Company is not subject to any present litigation or claims concerning such
matters. In some instances the Company could in the future incur liability
even as a non-operator for potential environmental waste or damages or
employee claims occurring on oil and gas properties or leases in which the
Company has an ownership interest.
ITEM 2. PROPERTIES
Oil and Gas Mineral Interests and Royalties
The Company owns perpetual mineral interests which total
approximately 4,600 net mineral acres, of which approximately 1,100 net
acres are producing. The mineral interests are located in 110,000 gross
acres in Duchesne County, Utah, Wasatch and Carbon Counties in Utah, and
approximately 40 net mineral acres in La Plata County, Colorado, and San
Juan County, New Mexico.
In 1998,1998-1999, there was a virtual halt to leasing on the Company's
acreage due to declining petroleum prices. While the leasing had increased
in 1996 and 1997, leasing activity came to a halt shortly after the first of
the year.1998. Croff participated in royalties on two wells which were drilled in
Duchesne County, Utah and one well in Wyoming. In addition, three small
leases of 15.66 net acres, 6.8 net acres, and 50.69 net acres were drilled
late in 1997, and the early part of 1998. These leases were for mineral
interests in Duchesne County, Utah. As prices continued to drop
throughout the year,1998, there was no further leasing or drilling activity on the
Company's acreage.
After a period of approximately four years in which there was
minimal leasing, the Company entered into four leases on acreage in
Duchesne County, Utah, in 1997. This generated several thousand dollars
in lease bonus revenue and should result in some production on this acreage
in the next three years if the drilling is successful. In addition, the
Company has received new royalty payments from development drilling on
previously leased acreage in Northeast Utah.
In 1996, the Company sold its carved-out production payment
on 110 stripper wells in Medina County, Texas, which it had
purchased in 1993. This carved-out production payment operated
similarly to a royalty, with the Company receiving 200 barrels of
oil a month, without operating expenses. The Company sold this
interest for approximately $106,000 after owning this interest
for approximately three years.
As of December 31, 1998,1999, the Company was receiving royalties from
approximately 200 producing wells in the Bluebell-Altamont field in
Duchesne and Uintah Counties, Utah. Because of the drastic drop in oil
prices, there were only three wells started in 1998. Royalties also were
received from scattered interests in Wyoming, Colorado, New Mexico,
Alabama, and Texas. Oil and gas revenues to the Company, primarily from
royalties, were approximately $214,000 in 1999, $194,000 in 1998 and
$193,000 in 1997, $216,000 in
1996, and $196,000 in 1995.. Natural gas production to the Company increased by nearly one-third during the last half of the
year, after
the purchase of the Oklahoma gas wells, but the drop in prices offset the
increase in production. Natural gas income increased in 1996 andfrom 1997, through
1998 to 1999 with increased gas sales from royalties on coal bed methane
gas in San Juan County, New Mexico, and new wells in Western Colorado and Wyoming.La Plata County, Colorado.
Royalty income is contingent upon market demand, prices, producing
capacity, rate of production, and taxes, none of which are in the control of
the Company.
The most important factor to the Company's revenue and profit, is the
price of oil and natural gas. Posted prices of oil continued to drop throughout 1998 from an already low average
price of $15 per barrel in January to around $10 per barrel by
June and ending the year with the Company's price averaging below
$10 per barrel. Oil prices had dropped drastically
during the period from late 1997 with postedthrough mid-1999. Natural Gas prices
for sweet oil in Utah dropping from around $23
per barrel in January to a low of less than $17 per barrel by the
endwere only about two-thirds of the year. The drop in prices has continued into 1999,
with the first recovery occurring in March1997 price during 1998 and 1999. The market in
oil prices, having declined from 1990 to 1993, turned around, and
average oil prices increased from 1994 to 1996. In 1997, they
started down and by 1999, they have declined to the lowest level,
adjusted for inflation, since 1917. Most
onshore U.S. production is uneconomic at these prices, so oil exploration
in the continental U.S. haswas almost shut down. NaturalOil and natural gas
prices
sustained a continuing declineproduction is expected to expand in 1998 due2000 as drilling activity returns to warmer than average
weather and cheaper fuel oil prices. Beginning the year over $2,
they fell by over $0.60 to about $1.40 by September 1998. There
was a small recoverypre-
recession levels in the winter of 1999, but currentlypetroleum industry. Currently posted prices are
only 2/3 of the 1997 level. Natural gas prices in 1997 were
stable at the higher level of $2-$3 perover $25 a barrel for oil and over $2.00 an MCF achieved by the final
two months of 1996. Natural gas prices averaged $2.03 for the
Company in 1997, the average price being higher for the first
half of the year. The average price in 1996 was $1.86 per MCF.
The warm winter of 1998 contributed to the falling natural gas
prices.gas. Because
much of Croff's natural gas is in the Rocky Mountains and Oklahoma,
Croff's average price for natural gas wasis not as high as gas producers in
Texas and the Gulf area received.receive.
Oil and Gas Working Interests
On April 7, 1998,In 1999, the Company purchased sixrealized its largest natural gas revenues from
the working
leasehold interests in oil andsix Oklahoma natural gas wells it purchased in
Oklahoma.1998. These wells are primarily natural gas but occasionally produce a
load of oil. The Company paid the sum of $208,000 for the minority working
interests in each of the following leases. There are two wells in Woodward County,
Oklahoma, a 13% working interest in the Harper #1 and a 16% working
interest in the Miller well. There is one well in Caddo County, Oklahoma,
a 22% working interest in the Fannie Brown well. In Kingfisher County,
Oklahoma there are two wells, a 30% interest in the Dickerson and a 43%
interest in the Mueggenborg. The sixth well in is LeFlore County,
Oklahoma and is a 32% interest in the Duncan well. These wells were
purchased from St. James Oil Company which is owned by the brother of
the President of Croff. Jenex Operating Company which was owned one
half by St. James Oil Ltd. was sold to Jenco Petroleum which is owned by
Gerald Jensen, the President of Croff, in a separate transaction. Jenex
Operating Company is the operator of the wells, and agreed to provide a
credit of $150 per month per well against the operating expenses of these
wells as a condition of purchase. The Dickerson and Mueggenborg sell
natural gas through Conoco, and the Harper and Miller sell gas through KN
Energy. The Fanny Brown sells its gas to Pan Energy Services, Inc., and
the Duncan to AOG. The Company used
approximately $120,000did not purchase any new working
interests in oil and gas wells in 1999, because of its ownlow prices reducing cash
flow, and borrowed the balance
of $90,000 on a one year Bank Note. Thethis large purchase was completed
effective April 1, 1998 and the Company began receiving revenues
the second half ofin 1998.
In 1997, the Company purchased an interest in seven wells. The
Company increased its interest in the Rentuer oil and gas well in Wyoming,
by purchasing a portion of Exxon's interest. The Company purchased an
interest in a helium and gas well in Southeast Colorado. The Company also
purchased a working interest in an oil well in North Dakota. In November
of 1997, the Company purchased an interest in three gas wells in Michigan
for approximately $50,000.
During 1996, the Company purchased an interest in the Rentuer well
in Campbell County, Wyoming, and in the Jones well in Colorado. Both
have been successful oil and gas producers. The Company sold its interest
in the Anderson State well in North Dakota and in the Taylor-Ina field in
Medina County, Texas. Overall, this increased the Company's cash
reserves to approximately $200,000 by the end of 1996.
In 1995, the Company purchased a working interest in the Ash Unit in
Campbell County, Wyoming. This is a pooled field which has operating
costs equal to about one-half of the net revenue. The Company invested
primarily in a note secured by a coal mine in 1995 and thus purchased less
oil and natural gas leases.
In 1994, the Company purchased small working interests in a
gas well in New Mexico; a gas well in Alabama; an oil well in
Montana, a gas well in Oklahoma; and a waterflood in Wyoming in
which the Company already had a working interest. The Company
spent an aggregate of less than $25,000 on these purchases. In
1993, the Company sold its working interest in the five wells
which it had purchased in 1992 in Frio County, Texas. It
determined these wells were not profitable and were sold for
salvage value. The company did not participate in any other
drilling in 1993, and did not purchase any further working
interests, but received a royalty interest on four new wells.
Except for purchasing a small interest in the drilling of one well in
1991, one well in 1995, and a well in 1997, the Company has not engaged
in drilling activity. The Company has participated, in the last five years,
in the reworking of four existing wells, three in Utah and one in North
Dakota. The Company generally participates 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.
In 1998 the Company participated in a tiny
working interest in a new well; but until oil and natural gas
prices improve, the Company does not anticipate participating in
any further drilling.
ESTIMATED PROVED RESERVES,
FUTURE NET REVENUES AND PRESENT VALUES
The Company's interests in proved developed and undeveloped oil
and gas properties have been evaluated by management for the fiscal years
ending December 31, 1999, 1998, 1997, and 1996.1997. All of the Company's
revenues are located within the continental United States. The following
table summarizes the Company's estimate of proved oil and gas reserves at
December 31, 1999, 1998, 1997, and 1996.1997.
Reserve Category
As of Proved Developed Proved Undeveloped Total
12/31 Oil (Bbls) Gas (Mcf) Oil (Bbls)Gas (Mcf) Oil (Bbls) Oil(Bbls)Gas
(Mcf)
1996 38,101 265,748 13,011
9,376 51,012 275,124
1997 39,339 301,343 12,612 13,423 51,951 314,766
1998 36,686 410,651 12,612 13,423 49,298 424,074
1999 30,944 473,728 10,640 11,323 41,584 485,051
The Company sold oil reserves in 1996, and purchased natural gas reserves in 1998.1998, and drilling activity
increased on the Company's coal gas methane acreage during 1996-1998.
The estimated future net reserves (using December 31 prices and
costs for each respective year), and the present value of future revenues
(discounted at 10%); for the company's proved developed and proved
undeveloped oil and gas reserves, for the years ended December 31, 1996, 1997,
1998, and 19981999 are summarized as follows:
Proved Developed Proved Undeveloped Total
Present Present Present
Future Value Future Value of Future Value of
As of Net Future Net Net FutureNetFuture Net Net Future Net
12/31 Revenue Revenue Revenue Revenue Revenue Revenue
1996 $942,653 $574,473 $238,347 $191,527 $1,181,000
$766,000
1997 $970,392 $629,784 $199,701 $129,606 $1,170,093 $759,390$ 759,390
1998 $892,795 $579,423 $147,038 $ 95,428 $1,039,832
$674,851$1,039,83 $ 674,851
1999 $1,170,625 $759,735 $178,508 $115,852 $1,349,133 $ 875,587
"Proved developed" oil and gas reserves are reserves that can be
expected to be recovered from existing wells with existing equipment and
operating methods. "Proved undeveloped" oil and gas reserves are reserves
that are expected to be recovered from new wells on undrilled acreage, or
from existing wells where a relative major expenditure is required for
recompletion.
For additional information concerning oil and gas reserves, see
Supplemental Information - Disclosures about Oil and Gas Producing
Activities - Unaudited, included with the Financial Statements filed as a
part of this report.
Since December 31, 1997,1998, the Company's has not filed any estimates
of its oil and gas reserves with, nor were any such estimates included in
any reports to, any state or federal authority or agency, other than the
Securities and Exchange Commission.
Oil and Gas Acreage
During the last five fiscal years, the Company decreased its holdings
in undeveloped oil and gas leases and generally retained its holdings in
developed oil and gas leases. The Company's acreage position was
relatively static during the fiscal years ending December 31, 1996, 1997, 1998,
and 1998.1999.
"Developed acreage" consists of lease acreage spaced or assignable to
production on wells having been drilled or completed to a point that would
permit production of commercial quantities of oil or gas. "Gross acreage"
is defined as total acres in which the Company has any interest; "Net
acreage" is the actual number of mineral acres in which the mineral interest
is owned entirely by the Company. All developed acreage is held by
production.
The acreage is concentrated in Utah, Texas, Oklahoma, Michigan, and
Alabama and is widely dispersed in Colorado, Montana, New Mexico, North
Dakota, and Wyoming.
COMPANY'S INTEREST IN PRODUCTIVE WELLS
(Gross and Net)
The following table shows the Company's interest in productive wells
as of December 31, 1998.1999.
Oil Wells (1) Gas Wells (2)
Gross Net Gross Net
208 1.81 42 2.1
(1) Primarily located in the Bluebell-Altamont field in Northeastern
Utah. These wells include some natural gas production, but are primarily
oil wells.
(2) Primarily located in Rio Blanco and LaPlata Counties, Colorado,
Beaver, Woodward and Kingfisher Counties, Oklahoma, San Juan County,
New Mexico, Otsego County, Michigan, and Duchesne and Uintah Counties,
Utah.
HISTORICAL PRODUCTION TO COMPANY
The following table shows approximate net production to the
Company of crude oil and natural gas for the years ended December 31,
1996, 1997, 1998, and 1998:1999:
Crude Oil Natural Gas
(Barrels) (Thousands of Cubic Feet)
MCF
Year Ended December 31, 1996: 5,886 44,938
Year Ended December 31, 1997: 5,295 46,222
Year Ended December 31, 1998: 5,278 65,673
Year Ended December 31, 1999: 4,610 74,300
There are no delivery commitments with respect to the above
production of oil and natural gas, since Croff is not the operator, but
allows the operator to contract for delivery. The Company is unaware of
the circumstances of any delivery commitments on royalty wells.
AVERAGE SALES PRICE AND COSTS BY GEOGRAPHIC AREA
The following table shows the approximate average sales price per
barrel (oil) and Mcf (1000 cubic feet of natural gas), together with
production costs for units of production for the Company's production
revenues for 1996, 1997, and 1998.
1996 1997, 1998, and 1999.
1997 1998 1999
Average sales price per bbl of oil $20.38
$18.55 $11.74 $16.65
Average production cost per bbl $ 5.90
$ 4.24 $ 5.57 $ 5.82
Average sales price per Mcf of natural gas $ 1.86
$ 2.03 $ 1.81 $ 1.95
Average production cost per Mcf of natural gas $ .51
$ .40 $ .61 $ .53
The average production cost for oil was higher in 1998,1999, when
compared to 1997,1998, $5.82 per barrel in 1999 and $5.57 per barrel in 1998 and $4.24 per barrel
in 1997.1998.
The Company had more workovers on its oil wells in
1998, and a greater percentage of income from working interests.interests,
resulting in the slightly higher price. In 19971999, after oil prices increased,
there were fewer workovers, but morehigher production taxes due to higher oil prices.
The average production cost for natural gas increaseddecreased in 19981999 due to
morehigher production from working interestsrates because of higher prices. This results in higherfixed
monthly costs being spread over a greater flow reducing costs per MCF.
The increase in royalty gas reduces the average cost wells in Oklahoma. These Oklahoma wells added up to a third of
natural gas production which was mostly from royalty wells in
1997.per MCF, as well.
The average production cost for natural gas dropped in 1997,1999, due in
part to a large amount ofmore royalty gas from San Juan County, New Mexico. The cost of
production for natural gas was $ .53 in 1999, $ .61 in 1998, $.40$ .40 in 1997, and $.51 in 1996.1997.
This was caused by increased sales of natural gas but withoffset somewhat by more
production coming from working interest wells, resulting in a high production cost
per MCF.wells.
The Company's oil and gas operations are conducted by the Company
through its corporate headquarters in Denver, Colorado.
Mining Interests
The Company formerly owned stock and a note in Carbon
Opportunities, L.L.C. which was secured against the assets of
Buck Creek Coal Company in Indiana. The Company thus had an
indirect interest in coal leases in Sullivan County, Indiana.
These coal leases were security for a promissory note owned by
Carbon Opportunities, L.L.C., in which the Company holds a 2%
interest. The leases were operated as the Buck Creek Coal Mine
during 1995, but have since gone into bankruptcy and are
currently in a Chapter 11 liquidation. The Company has not made
any reserve estimates of coal in place on such leases as the
value of the leases has been written off. The Company currently has no mining operations on its perpetual
mineral interests.
Corporate Offices and Employees
The corporate offices are located at 1675 Broadway,621 17th Street, Suite 1030,830,
Denver, Colorado 80202.80293. The Company is not a party to any lease but
currently pays $1,600 a month to Jenex Operating Company, 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 are approximately $20,000 per
year. The Company is continuing this arrangement on a month-to-month
basis. The Company believes this arrangement is below true market rate
for equivalent facilities and services.
The Company currently has five (5) directors. The Company has one
part time employee, the President, and two assistant secretaries on a
contract basis employed at the Company's corporate offices. None of the
officers or employees are represented by a union.
Foreign Operations and Subsidiaries
The Company has no foreign operations, exports, or subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
There are no legal actions of a material nature in which the Company
is engaged.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a shareholder's meeting in 1998,
due to a meeting being held late in the preceding year, on
November 25, 1997. The results of this meeting are in the 10-K
filed for December 31, 1997. The Company intends to hold a shareholder'sshareholders meeting in 1999, thus
there was no vote of securities holders in 1999.
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED
STOCKHOLDER MATTERS
On February 28, 1996, the shareholders approved the issuance of the
Preferred B stock to be issued to each common shareholder on the basis of
one share Preferred B for each share of common stock. The Company in the
fourth quarter of 1996 issued all of the Preferred Shares and delivered the
Preferred B shares to each of the shareholders for which it had a current
address. The Preferred B shares have an extremely limited market, but are
traded through a clearinghouse held by the Company from December
through February of each year.year, except 1999-2000, when the clearinghouse
will be held in May and June 2000. The Company established a bid and ask
format, whereby any shareholder could 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. The Company is acting as its own transfer agent, with
respect to these Preferred B shares only. In the wake of the disastrous oil
market in 1998, bids for only 550 shares were received to purchase the
Preferred B shares in 1999. The clearinghouse for 2000 was postponed
until May 1-June 30,2000.
In November 1991, the Common Stock was reversed split, 1:10, and a
trading range of approximately $1.00 bid to $1.10 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 $1.00-$1.20 per 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 1998-1999 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.
COMMON SHARES - 516,315526,315 SHARES OUTSTANDING
BID RANGE
(1), (2), (3)
Calendar Quarter Bid Asked
1996: First Quarter $1.10
$1.20
Second Quarter $1.10 $1.20
Third Quarter $1.10 $1.20
Fourth Quarter $1.10 $1.20
1997: First Quarter $.50 (4) $.75 (4)
Second Quarter $.50 (4) $.75 (4)
Third Quarter $.50 (4) $.75 (4)
Fourth Quarter $.50 (4) $.75 (4)
1998: First Quarter $.65 (4) $.75 (4)
Second Quarter $.65 (4) $.75 (4)
Third Quarter $.65 (4) $.75 (4)
Fourth Quarter $.75 (4) $.85 (4)
1999: First Quarter $.75 (4) $.85 (4)
Second Quarter $.95 (4) $1.00 (4)
Third Quarter $.75 (4) $.90 (4)
Fourth Quarter $.65 (4) $.80 (4)
Only a few transactions resulting in the transfer of stock took place in
1996, 1997, 1998 or 1998.1999.
(1) In 1991, the Company tendered for its own 1:10 reverse split
shares at $1.00 per share net to the shareholder. Approximately
29,000 shares were purchased by the Company. All prices shown
are following the implementation of the reverse split.
(2) The Company repurchased approximately 10,000 of its common
shares for its Treasury in 1995 at $1.00 and $1.05 per share from
an estate and a bankruptcy trustee.
(3) (4) The restricted Preferred B shares were first issued in 1996, and trade
in a Company sponsored clearinghouse from December-February of each
year, so the 1997 and prices subsequent reflect the common share price to
which the Preferred B price must be added to compare earlier periods.
As of December 31, 1998,1999, 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- 490,859500,659 SHARES OUTSTANDING
BID RANGE (1), (2), (3), (4)
Calendar Quarter Bid Asked
1997: First Quarter $.75-$.90 $.90
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter $.75-$.90 $1.00
1998: First Quarter $.90 $1.00
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter $.85 $.90
1999: First Quarter $.85 $.90
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter No Trading No Trading
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended December 31:
1994 1995 1996 1997 1998 1999
REVENUES
Operations
Oil and Gas $196,780 $195,834 $216,870 $193.099 $
193,971$193,971 $214,190
Other Revenues $ 6,139 $ 9,596 $ 27,181 $ 14,790 $ 7,5054,417 $ 4,115
Expenses $167,080 $173,919 $170,258 $220.627 $ 213,970 $205,857
Net Income $ 34,183 $ 31,511 $ 73,793 $(12,738) $(15,582) $ 12,430
Per Common Share $ .06 $ .06 $ .14 $ (.12) $ (.01).01) $ *
Working capital $ 74,401 $ 26,457 $226,367 $205,339 $ 1,866 $ 90,697
Long-term debt -- -- -- - -- --
Total assets $430,327 $505,018 $515,704 $504,875 $508,847 $498,162
Stockholders' equity $418,856 $440,527 $510,880 $497,892 $458,123 $480,353
Dividends per share NONE NONE NONE NONE NONE
* - Less than .01 per share
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
This Form 10-K includes "forward-looking" statements about future
financial results, future business changes and other events that haven't yet
occurred. For example, statements like we "expect," we "anticipate" or we
"believe" are forward-looking statements. Investors should be aware that
actual results may differ materially from our expressed expectations
because of risks and uncertainties about the future. We will not necessarily
update the information in this Form 10-K if any forward-looking statement
later turns out to be inaccurate. Details about risks affecting various
aspects of our business are discussed throughout this Form 10-K. Investors
should read all of these risks carefully.
Results of Operations
Oil and gas sales in 1999 were $214,190 compared to $193,971 in
1998. This increase was due to a full year of natural gas production
from the working interests purchased in Oklahoma in 1998. A second
factor resulting in this increase was the higher prices for oil and
natural gas which began in the second quarter of 1999 and increased
through the fourth quarter of 1999. The average prices in the fourth
quarter of 1999 were almost double the oil prices received in the first
quarter of 1999. The natural gas prices increase moderately by
approximately $ 0.50 per MCF during the year. The significant
increase in oil and natural gas sales occurred during the latter half of
1999.
Oil and gas sales in 1998 were aided by a slight increase in oil
production and a 50% increase in natural gas production. However, total
sales barely increased over the 1997 sales figures due to oil prices
dropping nearly in half from late 1997 levels and natural gas prices
dropping around 20%. Oil and gas sales were $193,971 in 1998, compared
to $193,099 in 1997. The increased production came from purchased
working interests with higher operating costs, so net income from oil and
gas production fell. The share of production revenues from natural gas
increased to about 65% of oil and gas revenues.
Oil and gas sales for the fiscal year ended December 31, 1997,
decreased from $216,870 in 1996 to $193,099 in 1997. This decrease was
due to the steep decline in oil prices. Natural gas sales increased primarily
from increased sales from coal seam gas in New Mexico. Oil sales
decreased due to the natural decline in the fields.
OilLease operating expenses and production taxes decreased slightly
from $68,981 in 1998 to $66,532 in 1999. Because of the low oil and gas
sales forprices there were no significant work-overs in 1999. However, during the
fiscal year ended December 31,
1996,latter half of 1999 production taxes increased from $195,834 in 1995 to $216,870 in 1996. This
was caused by several factors, natural gas production from coal
seam gas increased,significantly as the price of
oil reached a three year high,
andapproximately doubled from the first quarter of 1999 to the final
quarter of 1999. Thus, while there was some increase in the average cost
of taxes in 1999, this was more than offset by the shut-in production
from purchased oil wells was added. Oil prices in
1996 benefited from a cold winter that caused heating oil to rise
carrying crude prices upward. Then prices firmed up atduring the higher levels and increased again at the endfirst part of the year. The
shortage of oil in Western Coloradoyear and Eastern Utah resulted in
a premium price for much of this oil. Natural gas prices
benefited from the cold winter which drew down storage levels.
An actual or perceived shortage of natural gas during November,
1996, through February, 1997, resulted in a pricelower level of $3-$4
per MCF by early 1998.work-overs in
maintenance on wells due to the low prices.
Operating expenses increased significantly in 1998, when compared to
1997, due principally to two factors. The First was due to the purchase of
six new wells in Oklahoma. Due to these new wells, depletion and
depreciation almost doubled, from $21,108 in 1997, to $39,577 in 1998.
The cost of operating these wells was also high, with production taxes and
operating cost increases almost $30,000 from the six new wells, which was
then offset by the operating expense rebate on these six wells. The
remaining operating cost increases came from an increase in workover
expenses, which were higher in 1998 than in 1997.
Operating expenses, including production taxes, in the fiscal year
ending December 31, 1997, were $40,824 compared to $58,356 in 1996.
This decrease was due to less workover expenses in 1997, the sale of higher
operating cost oil wells, and the purchase of lower operating cost natural
gas wells. During 1997 production increases were being offset by lower
prices.
Operating costs increasedGeneral and administrative expenses decreased in 1999 from
$55,584$75,467 in 19951998 to $58,356$68,264 in 1996.1999. This increase in lease operating expensesdecrease was due to higher costsnot
holding an annual meeting in some1999 and saving the expenses of the
Utah fields where Coastal completed
workovers on wells acquired from Linmar Petroleum Company. The
overall strategyannual report and mailing during 1999. These expenses are expected
to increase in the year 2000 as the annual report and annual meeting
are held in the spring of the Companyyear 2000. Other income decreased in using its cash flow1999,
due to purchase interestslower interest income received in oil1999 and gas properties has resulted in
gradual increases in total oilno leasing income.
Lease bonus income was flat for both years as leasing activity
essentially ceased during 1998 and gas production. The Company
has attempted to sell or abandon its interest in wells with high
operational costs, as a percent of revenues.1999.
General and administrative expenses decreased slightly from $79,495
in 1997 to $75,467 in 1998. This small decrease was due to holding an
annual meeting late in 1997, and deferring the next shareholder's meeting
until 1999.2000. The Company also incurred interest expense in 1998 of $5,745
due to the one year borrowing for the natural gas purchase, versus no
interest expense in 1997. Other income in 1997 included interest from the
Company's cash reserves which were expended for oil and gas purchases
and Preferred B stock repurchases in 1998. The Company's other income
of $7,505 in 1998 included lease bonus income, interest and dividends
income, and gains on stock sales.
General and administration expenses increased from $73,673 in 1996
to $79,495 in 1997. The principal reason for this increase was a raise of
$6,000 per year to the President. The President's salary had not been
increased in over ten years and the Board of Directors raised it, effective
April 1, 1997. Other income increased due to interest on cash and
dividends on stock and lease bonus income.
General and administrative expenses increased in the fiscal
year ended December 31, 1996, to $73,673 from $66,698 in 1995.
This increase was due to a higher legal, accounting and
administrative expense incurred in designing, authorizing and
delivering the new capital structure of the Company including the
Preferred B shares which were issued in 1996. Other income also
increased due to higher interest being paid on the Company's
higher cash balances, and profits on sales of oil and gas
properties.
Year 2,000 Disclosure
There has been increasing concern about the effect upon the
financial results of all public companies dueThe Company experienced no problems with respect to the year
2000 problem. The year 2000 problem is based onwith its computer systems.
Capital Resources and Liquidity
At December 31, 1999, the concern that
certain computer programsCompany's current assets totaled
$108,506 compared to current liabilities of $17,809. This compared to
current assets of $52,590 at December 31,1998, and computers are not presently
configuredcurrent liabilities of
$50,724. This increase in the Company's working capital position was due
to recognize the year 2000 or succeeding years. This
defect in computer functions could have an adverse impact upon
our company and other industries in which we deal if the various
programs and applications cease to function or function
erroneously as we approach the year 2000. Programs dealing with
accounting and financial functionspaying off of the Company could cease to
function if they are not year 2000 compliant. This Company has
viewedCompany's note in 1999 and the year 2000 problem hereafter "Y2K" compliance,increased
production from the natural gas wells which were purchased in three
general categories. The first is the impact on the Company's own
information technology system consisting1998 using a
significant portion of its computers,
software, and financial records. The second is the possible
failure of other equipment which the Company uses such as
security systems, telephone systems, vehicles, and gas meters
which rely on computer components The third potential adverse
effect upon the Company would be third party service and product
suppliers for which the Company depends including payment by the
various companies which operate the wells in which the Company
has interests in, and which provide the Company's cash flow.and a Bank Note. The
Company's current ratio of 6:1 and ratio of current assets to current
liabilities is expected to increase as the Company has addressed the first ofcontinues to accumulate
cash for its systems, its own
accountingcommon stock account. This cash was utilized to purchase oil
and financial records, and its well records by
confirming the software systems are Y2K compliant. The Company
financial records are being transferredgas assets in 1998 which were pledged to the "Roughneck" system
which has been Y2K compliant for two years and amply tested.
This system is owned and operated by Jenex Petroleum Corp. which
provides it to the Company as part of its overhead services. The
Company intends to have its complete 1999 records on the
Roughneck system and fully compliant by the second quarter of
1999. The previous records of the Company are also being kept on
a Y2K compliant system, primarily on Excel, which has been
upgraded to a Y2K compliant status. The Company anticipates no
further problems with its own records in order to be fully Y2K
compliant.
With respect to other IT systems which may fail on or around
the advent of the year 2000, the Company is conferring with its
supplier of services, Jenex, and has confirmed that its
telephone, fax, and email systems are Y2K compliant. The Company
does not anticipate any major problems with these systems.
Because the Company does not operate any of its oil or natural
gas wells, it is in a position to withstand, without any material
adverse consequences, a break down of days or even weeks in these
systems.
With respect to the third possibility, the third party
suppliers from which the Company derives its cash flow being
unable to operate wells and or pay timely for the Company's
production, the Company has begun a program of reserving cash, as
a contingency in the event of a disruption in its cash flow. The
Company believes in its capacity as a low overhead company with
no operations of its own, and that this problem can be addressed
by simply having adequate cash reserves to replace at least two
months of total revenue. The Company plans to be in this
position by the end of 1999.
Under the Company's agreements, the Company's costs to
become Y2K compliant, will not increase its overhead from its
normal operations. The Company feels its efforts are adequate to
handle any Y2K problems that can be reasonably anticipated.
Capital Resources and Liquiditypreferred B stock.
At December 31, 1998, the Company's current assets totaled $52,590
and its current liabilities totaled $50,724 for a working capital position of
$1,866. This drastic decrease in the Company's working capital position in
1998 was due to the use of cash to purchase the six natural gas wells, and
the short term borrowing of $90,000. The final payment on this debt was
made in March
1999, and the Company's current liabilities should drop, to less
than half of the Company's current assets in 1999. The drop in oil and natural gas prices resulted in the
Company depleting its cash resources to a greater extent than anticipated
by management.
At December 31, 1997, the Company's current assets totaled
$212,322 and the Company's current liabilities totaled $6,983, for a
working capital position of $205,339. This liquidity decreased from
$226,367 at December 31, 1996, to the $205,339 at December 31, 1997.
This decrease was due to the Company purchasing oil and gas wells during
1997. The Company's current ratio was in excess of 30:1 during 1996 and
1997.
As the Company
purchased oil and natural gas properties, the current ration
dropped during 1998.
In 1996, the Company increased its current ratio by
decreasing its current liabilities from $64,491 to $4,824, while
increasing its current assets to $231,191. In 1996, the
Company's current ratio increased as it paid off bank debt and
paid down payables and utilized its cash flow to accumulate cash.
The Company, in March 1999, paid off the final installments
of its' bank debt. The Company intends to pay down payables and accumulate cash
during the next year.year 2000. The Company would expect that future cash positions
and liquidity will be dependent upon its success in doing a merger,
acquisition, or reverse acquisition, and the amount of oil and gas properties
it buys.
Because the Company's revenues are primarily from royalty payments
and the Company does not have significant operating expenses, inflation is
favorable to the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to financial statements, financial statement schedules, and
supplemental information, beginning with Page 2224 (F-1) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a)(b)(c)
Identification of Directors, Officer and Significant Employees.
The Croff Board consists of Gerald L. Jensen, Dilworth A. Nebeker,
Richard H. Mandel, Edwin W. Peiker, and Julian D. Jensen. Each director
will serve until the next annual meeting of shareholders, or until his
successor is duly elected and qualified. The following is provided with
respect to each officer and director of the Company as of March 1, 1999.2000.
GERALD L. JENSEN, 59,60, 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. In 1999, Mr. Jensen became Chairman of
Online Launch, Inc., a private internet incubator company. Mr. Jensen was
a director of Pyro Energy Corp., a public company (N.Y.S.E.) engaged
primarily in coal production, from 1978 until the Company was sold in
1989. Mr. Jensen is also an owner of private real estate, development, and
oil and gas companies.
RICHARD H. MANDEL, JR., 69,70, DIRECTOR
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, 58,59, DIRECTOR
Mr. Nebeker served as President of Croff from September 2, 1983 to June
24, 1985, and has been a director of Croff since December 1981. He has
been a lawyer in private practice for the past ten years. Prior thereto, he
was a lawyer employed by Tosco Corporation, a public corporation, from
1973 to 1978. He was a lawyer with the Securities and Exchange
Commission from 1967 to 1973.
EDWIN W. PEIKER, JR., 67,68, DIRECTOR AND SECRETARY
Mr. Peiker 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. AMAX is primarily engaged in mine
evaluation and resource analysis.
JULIAN D. JENSEN, 50,52, DIRECTOR
Mr. Jensen is the brother of the Company's president and has served as
legal counsel to the Company for the past seven years. Mr. Jensen has
practiced law, 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, 1998,1999, there were no
officers, employees or directors whose total cash or other remuneration
exceeded $60,000.
Summary Compensation Table
19981999 Compensation of C.E.O. (1)
Total All
Salary Bonus Other Stock Options Compensation
$53,625$51,000 0 0 No new options $53,625$51,000
per annum
Gerald L. Jensen is employed part time as the President and C.E.O. of
Croff Enterprises, Inc.
(1) Effective March 20, 1997, the President's salary was increased to
$54,000 per year. In addition, the Company will contribute 3% of his
salary to a Simple IRA Plan.
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 the current fiscal year, the Company intends to compensate
outside directors at the rate of $350 for a half day meeting and $500 for a
full day meeting.
Based on the current remuneration, for the fiscal year ending
December 31, 1998,2000, no officer or director shall receive total cash
remuneration in excess of $60,000.
Options, Warrants or Rights
Directors were authorized and issued stock warrants in 1991, that
essentially provide each director a warrant to purchase 10,000 shares of the
Company's stock at $1.00 per share through 1995. The President's warrant
is for 20,000 shares. The warrants to purchase stock were extended for
four more years at the Board of Directors meeting on November 1, 1995.
The expiration date ofwarrants were again extended for two years at the warrants isBoard Meeting on
December 31,15, 1999. No stock options were granted in the fiscal year
ending December 31, 1998.1999. During 1999, warrants to purchase 10,000
shares were exercised.
The chart below sets out the terms and value of the above warrants to
all officers and directors, none of which have been exercised.
Officers and Directors Warrants and Compensation (1998)(1999)
Warrant Terminat Exercito Termination
Buy date
Date
Exercise
Price
Current Value
(Estimated) (1)
Director
to ion se Value Compensati
Buy Date Price (Estimate onCompensation
(2)
d) (1)
Directors (Excluding President):
10,000
Shares
12/31/9901
$1.00
$ 6,5009,500
$ 1,050
President): Shares
President and Director:
20,000
Shares
12/31/9901
$1.00
$13,000$19,000
$53,625
Director: Shares
(1) Based on a current stock price of $1.00 for Preferred B shares and $.75$.95
for common shares for a total estimated value of $1.65,$1.95, over option
price of $1.00 per share. There is no market for the warrants and an
extremely limited market for stock.
(2) Director compensation based on holding three one half day meetings per
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
(b) Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of Common
stock of the Company as of December 31, 1998,1999, 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.
Shares Percentage of
Beneficially Class of
Owned Stock
Jensen Development Company 132,130 (1) 25.58%
1675 Broadway,25.10%
621 17th Street, Suite 1030830
Denver, Colorado 8020280293
Gerald L. Jensen 71,21581,215 (2) 13.27%
1675 Broadway,14.87%
621 17th Street, Suite 1030830
Denver, Colorado 8020280293
Edwin W. Peiker, Jr. 14,000 (2) 2.66%2.61%
550 Ord Drive
Boulder, Colorado 80401
Dilworth A. Nebeker 11,300 (2) 2.15%1,300 .25%
201 East Figueroa Street
Santa Barbara, California 93101
Richard H. Mandel, Jr. 10,100 (2) 1.92%1.88%
3333 E. Florida #94
Denver, Colorado 80210
Julian D. Jensen 46,532 (2)(3) 8.84%8.68%
311 South State Street, Suite 380
Salt Lake City, Utah 84111
Directors as a Group 285,277 49.48%49.5%
(1) Jensen Development Company is primarily owned by Gerald L. Jensen
(2) Includes a warrant to purchase 10,000 shares of the Company's stock
at $1.00 per share, expiring December 31, 1999.2001. Mr. Gerald L. Jensen's
warrant is for 20,000 shares. NoneOn Nov,1999, the warrant of the
warrants haveDan Nebeker,
which had been exercised.assigned to Gerald L. Jensen, was exercised..
(3) Includes shares held in Jensen Family Trust (31,532) in which Julian
D. Jensen is the Trustee and approximate 43% beneficial owner. Mr.
Gerald L. Jensen holds an approximate 38% beneficial interest in these
Trusts.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company currently is in an office sharing arrangement with Jenex
Petroleum Corporation, hereafter "Jenex", a company formerly owned 50%
by the President, Gerald L. Jensen, which during the last yearin 1998 was acquired 100% by
Mr. Jensen. Jenex provides offices, phones, office supplies, computers,
photocopier, fax, and all normal and customary office services. In
addition, the Company shares an accountant and two assistant secretaries
who are paid by Jenex. Jenex also provides assistance from a geologist.
Croff currently reimburses Jenex $1,600 per month for all of these
expenses. These arrangements were entered into in order to reduce the
Company's overhead. The Company is currently continuing this
arrangement on a month-to-
monthmonth-to-month basis. Jenex provides similar services to
Jenex Operating Company of Texas, Inc. for $6,500 per month, a Company
in which the President owns a 50% interest. In the opinion of management,
the amounts paid by Croff to Jenex for the personnel, office, equipment
use, and other services are below the cost for such items if independently
obtained.
The Company retains the legal services of Jensen, Duffin, Carman, Dibb &
Jackson. Julian Jensen, a director, as a professional corporation, is part
of this association. Legal fees paid to this law firm for the years ending
1998,1999,1998, and 1997 and
1996 are, respectively, $329, $525 $2,086, and $4,398.$2,086.
Effective April 1, 1998, the Company purchased six working interests in
Oklahoma natural gas wells from St. James Oil Ltd. a company owned by a brother
of theofthe Company's President. The price of $208,000 was slightly less than an
unaffiliated parties offer, to St. James Oil Ltd. which offer, however, included
the third party taking over operations from Jenex. As part of this transaction,
Gerald Jensen, the Company's President, purchased the one half ownership of
Jenex which he did not already own, and Jenex then retained operations of these
wells, but agreed to rebate to Croff $150 of the operating fees per well,
each month, or a total of $900 per month as long as Jenex operated the wells
and Croff retained its interest. Croff then agreed to purchase the wells for
$208,000. This acquisition was approved by the Board of Directors in March
1998, with the President abstaining from the vote.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements. See index to financial statements, financial
statement schedules, and supplemental information as referenced in Part II,.
Item 8, and the financial index on Page F-
1F-1 hereof. These reports are
attached as Exhibits and are incorporated herein.
Reports on Form 8-K
None
Exhibit Index
Report of Independent Certified Public Accountants
Note Agreement with Union Bank
Croff Purchase Agreement
Assignment of Oil, Gas, and Mineral Lease
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
CROFF ENTERPRISES, INC.
Date: March 31, 199830, 2000 By: /S/Gerald L. Jensen
Gerald L. Jensen, President,
Chief Executive Officer
Date: March 31, 199830, 2000 By: /S/ Beverly Licholat
Beverly Licholat,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
Date: March 31, 199830, 2000 By: /S/Gerald L. Jensen
Gerald L. Jensen, President
Date: March 31, 199830, 2000 By: /S/ Richard H. Mandel
Richard H. Mandel, Jr., Director
Date: March 31, 199830, 2000 By: /S/ Edwin Peiker
Edwin Peiker, Jr., Director
Date: March 31, 199830, 2000 By: /S/ Dilworth A. Nebeker
Dilworth A. Nebeker, Director
Date: March 31, 199830, 2000 By: /S/ Julian D. Jensen
Julian D. Jensen, Director
CROFF ENTERPRISES, INC.
FINANCIAL STATEMENTS
December 31, 1998 and 1999
WITH
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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 Sheet - December 31, 19971998 and 19981999 F-3
Statement of Operations - years ended December 31, 1996,
1997,
1998 and 19981999 F-5
Statement of Stockholders' Equity - years ended
December 31, 1996, 1997, 1998 and 19981999 F-6
Statement of Cash Flows - years ended December 31,
1996, 1997, 1998 and 19981999 F-7
Notes to Financial Statements F-8
II. Supplemental Information - Disclosures about Oil and
Gas Producing Activities - Unaudited F-14
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Croff Enterprises, Inc.
We have audited the balance sheet of Croff Enterprises, Inc. at December
31,
19971998 and 1998,1999, and the related statements of operations, stockholders'
equity
and cash flows for each of the three years in the period ended December
31,
1998.1999. These financial statements are the responsibility of management.
Our
responsibility is to express an opinion on themthese financial statements based
on
our audits.
We conducted our audits in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the 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, 19971998 and 1998,1999, and the results of its operations and its cash
flows
for each of the three years in the period ended December 31, 1998,1999, in
conformity
with generally accepted accounting principles.
Denver, Colorado
March 17, 19992000 CAUSEY DEMGEN & MOORE
INC.
F-2
CROFF ENTERPRISES, INC.
BALANCE SHEET
December 31, 19971998 and 1999
ASSETS
1998 ASSETS
1997
1998
------
- ------1999
---- ----
Current assets:
Cash and cash equivalents $166,883
$ 14,294 $ 57,716
Marketable equity securities 15,687
3,125 4,375
Accounts receivable:
Oil and gas purchasers 26,552
32,271 43,915
Refundable income taxes 3,200
2,900 2,500
--------
- --------
Total current assets 212,322
52,590 108,506
Oil and gas properties, at cost, successful efforts method:
Proved properties 429,903
636,595 628,560
Unproved properties 97,102 97,102
-------- - --------
527,005
733,697 725,662
Less accumulated depletion and depreciation (250,729) (288,717) (336,006)
--------
- --------
Net property and equipment 276,276
444,980 389,656
Coal investment (Note 2) 16,277
11,277
-------- -
-------- $504,875--------
$508,847 $498,162
======== ========
See accompanying notes.
F-3
CROFF ENTERPRISES, INC.
BALANCE SHEET
December 31, 19971998 and 19981999
LIABILITIES AND STOCKHOLDERS' EQUITY
1997
1998 --------
- --------1999
---- ----
Current liabilities:
Note payable - bank (Note 3) $ -23,369 $ 23,369-
Accounts payable 4,378
19,290 14,451
Accrued liabilities (Note 4) 2,605
8,065 3,358
--------
- --------
Total current liabilities 6,983
50,724 Contingencies (Note 2)17,809
Stockholders' equity (Note 5):
Class A preferred stock, no par value;
5,000,000 shares authorized, none issued - -
-
Class B preferred stock, no par value;
520,000 shares authorized, 516,505 shares (1997)
and 490,859 shares (1998)
and 500,659 shares (1999) issued and outstanding 364,328 329,559 350,359
Common stock, $.10 par value; 20,000,000 shares
authorized, 579,143 shares (1998) and 589,143
shares (1999) issued 57,914 57,91458,914
Capital in excess of par value 542,215 552,797 540,797
Accumulated deficit (383,669) (399,251) -------
- -(386,821)
-------- 580,788--------
541,019 563,249
Less treasury common stock at cost, 62,828 shares
(1997(1998 and 1998)1999) (82,896) (82,896)
-------- -------
- - --------
Total stockholders' equity 497,892 458,123 -------
- -480,353
-------- $504,875--------
$508,847 $498,162
======== ========
See accompanying notes.
F-4
CROFF ENTERPRISES, INC.
STATEMENT OF OPERATIONS
For the years ended December 31, 1996, 1997 and
1998
1996 1997, 1998 and 1999
1997 1998 1999
---- ----
- ----
Revenue:
Oil and gas sales (Note 8) $216,870
$193,099 $193,971
$214,190
Gain (loss) on disposal of oil and gas
properties 19,678- (3,088)
2,563
Other income 14,790 7,505
1,552
-------- -------- -------
- -
(3,088)
Other income 7,503
14,790 7,505
-------- ------
- -- --------
Total revenue 244,051
207,889 198,388
218,305
Costs and expenses:
Lease operating expense and production taxes 58,356
40,824 68,981
66,532
General and administrative (Note 4) 73,673
79,495 75,467
68,264
Rent expense - related party (Note 4) 16,800
17,200 19,200
19,200
Depreciation and depletion 20,759
21,108 39,577
48,665
Interest 670
- - 5,745
395
Write down of coal investment (Note 2) -
62,000 5,000
2,819
-------- -------------- -------
- -- ---------
Total costs and expenses 170,258
220,627 213,970
205,875
-------- -------------- -------
- -- ---------
Net income (loss) (Note 6) 73,793
(12,738) (15,582)
12,430
Net income (loss) applicable to preferred stock
(Note 5) -
49,262 (10,582)
14,000
-------- -------------- -------
- -- ---------
Net income (loss)loss applicable to common shareholders $ 73,793
$(62,000) $ (5,000)
(1,570)
======== ========
========
Basic and diluted net income (loss)loss per common share
(Note 7) $ .14 $
(.12) $ (.01) $
(*)
======== ======= ===============
========
* - less than $.01 per share
See accompanying notes.
F-5
CROFF ENTERPRISES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1997, 1998 and 19981999
Capital in
Preferred stock Common stock
excess of Treasury Accumulated
Shares Amount Shares Amount
par value stock deficit
------ ------ ------ ------
- ------ --------- ----------------- -------- -----------
Balance, December 31, 1995 - $ - 579,143
$ 57,914 $ 909,983 $ (82,646) $ (444,724)
Issuance of preferred stock
(Note 5) 516,505 233,744 -
- - (233,744) - -
Costs of issuance of preferred
stock - - -
- - (3,440) - -
Net income for the year ended
December 31, 1996 - - -
- - - - 73,793
-------- -------- -------
- -------- -------- -------- ----------
Balance, December 31, 1996 516,505 233,744$233,744 579,143 57,914 672,799 (82,646) (370,931)$57,914
$672,799 $(82,646) $(370,931)
Purchase of 200 shares of
treasury stock - - - -
- - (250) -
Net loss for the year ended
December 31, 1997 - - - -
- - - (12,738)
Preferred stock reallocation
(Note 5) - 130,584 - -
- (130,584) - -
------- -------- --------------- -------
- -------- -------- -------- ------------------- ---------
Balance, December 31, 1997 516,505 364,328 579,143 57,914
542,215 (82,896) (383,669)
Purchase and retirement of 25,646
shares of preferred stock (25,646) (24,187) - -
- - - -
Net loss for the year ended
December 31, 1998 - - - -
- - - (15,582)
Preferred stock reallocation
(Note 5) - (10,582) - -
- 10,582 - -
------- -------- ------- -------
- -------- -------- --------
Balance, December 31, 1998 490,859 329,559 579,143 57,914
552,797 (82,896) (399,251)
Stock warrants exercised 10,000 7,000 10,000 1,000
2,000 - -
Purchase and retirement of shares
of preferred stock (200) (200) - -
- - - -
Net income for the year ended
December 31, 1999 - - - -
- - - 12,430
Preferred stock reallocation
(Note 5) - 14,000 - -
(14,000) - -
------- --------- ------- -------
- ------- -------- -------- ---------
Balance, December 31, 1998 490,859 $329,559 579,143
$57,914 $552,7971999 500,659 $ 350,359 589,143 $ 58,914
$540,797 $(82,896) $(399,251)$(386,821)
======= ========= ======= ======== ======== =======
=======
======== ======== =========
See accompanying notes.
F-6
CROFF ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
For the years ended December 31, 1996, 1997 and
1998
1996 1997, 1998 and 1999
1997 1998 1999
---- ---- - ----
Cash flows from operating activities:
Net income (loss) $(12,738) $(15,582) $ 73,793 $
(12,738) $ (15,582)12,430
Adjustments to reconcile net income
(loss) to net cash provided by operating
activities:
Depreciation and depletion 20,759
21,108 39,577 48,665
(Gain) loss on disposal of properties (19,678)
- - 3,088 (2,563)
(Gain) loss on marketable equity
securities (3,012)
(1,377) (2,438) (1,250)
Loss on write down of investment -
62,000 5,000 2,819
Change in assets and liabilities:
Decrease (increase) in accountsAccounts receivable (3,411) 6,374 (5,419) Increase (decrease) in accounts(11,244)
Accounts payable (7,665) 1,214 14,912 Increase (decrease) in accrued4,383
Accrued liabilities (2,002) 945 5,460 (4,707)
-------- -----
- -- --------------- --------
Total adjustments (15,009)
90,264 60,180 36,103
-------- -----
- -- -------
Net cash provided by operating activities 58,784-------- --------
77,526 44,598 Cash flows from investing activities:
Note receivable 4,800
- - -
Proceeds from sale and leases of property 131,585
- - -48,533
Purchase of oil and gas interests (15,875)
(95,404) (211,369) -
Purchase of marketable equity securities (3,810) -
(3,810) -
Proceeds from sale of marketable equity
securies 8,012securities - 15,000 - 15,000
Distributions from coal investment 12,766
4,256 - 8,458
-------- ----
- --- --------------- --------
Net cash provided by (used in)
investing activities 141,288
(94,958) (196,369) Cash flows from financing activities:8,458
Exercise of stock warrant - - 10,000
Purchase of preferred stock - - - (24,187) (200)
Purchase of treasury stock (250) -
(250) -
Proceeds from note payable - 90,000 - - 90,000
Repayment of note payable (50,000)
- - (66,631) Cost of issuance of preferred stock (3,440)
- - -(23,369)
-------- -----
- -- --------------- --------
Net cash provided by (used in)used in financing activities (53,440)
(250) (818) (13,569)
-------- -----
- -- --------------- --------
Increase (decrease) in cash 146,632
(17,682) (152,589) 43,422
Cash and cash equivalents at beginning of
year 37,933
184,565 166,883 14,294
--------- --------- -------- -----
- -- -------
Cash and cash equivalents at end of year $184,565
$166,883 $14,294$ 166,883 $ 14,294 $ 57,716
========= ======== ======== =======
Supplemental disclosure of cash information:
During the years ended December 31, 1996, 1997, 1998 and 1998,1999, the Company paid
cash
for interest in the amount of $1,115, $0, $5,745 and $5,745,$395, respectively.
See accompanying notes.
F-7
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997, 1998 and 19981999
1. Summary of significant accounting policies
Croff Enterprises, Inc. (the Company) is engaged primarily in the
business
of oil and gas exploration and production, primarily through ownership
of
perpetual mineral interests in Oklahoma, Utah, Colorado and New Mexico,
and
acquisition of oil and gas leases.
A summary of the Company's significant accounting policies is as follows:
Use of estimates:
The preparation of financial statements in conformity with
generally
accepted accounting principles requires management to make estimates
and
assumptions that affect the reported amounts of assets and liabilities
and
disclosure of contingent assets and liabilities at the date of
the
financial statements and the reported amounts of revenues and
expenses
during the reporting period. Actual results could differ from
those
estimates.
Fair value of financial instruments:
The carrying amount of cash, cash equivalents and note payable - bank
is
assumed to approximate fair value because of the short maturities of
those
instruments.
Marketable equity securities:
The Company has adopted Statement of Financial Accounting Standards
No.
115, Accounting for Certain Investments in Debt and Equity
Securities,
which provides for reporting certain equity securities at fair value,
with
unrealized gains and losses included in earnings. The aggregate cost
of
marketable equity securities was $1,663 at December 31, 19971998 and
1998
was $5,958 and
$1,663,1999,
respectively.
Accounts receivable:
The Company considers accounts receivable to be fully
collectible;
accordingly, no allowance for doubtful accounts is required. If
amounts
become uncollectible, they will be charged to operations when
that
determination is made.
Oil and gas property and equipment:
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.
F-8
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997, 1998 and 19981999
1. Summary of significant accounting policies (continued)
The Company annually evaluates the net present value of future cash
flows,
by lease, and records a loss if necessary, when net book value
exceeds
projected discounted cash flow. The acquisition costs of
unproved
properties are assessed periodically to determine whether their value
has
been impaired and, if impairment is indicated, the costs are charged
to
expense.
Geological and geophysical costs and the costs of carrying and
retaining
undeveloped properties (including delay rentals) are expensed as
incurred.
Capitalized costs are amortized on a units-of-production method based
on
estimates of proved developed reserves.
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.
Coal investment:
The investment was initially recorded at cost. Revenues and
distributions
are recorded using the cost recovery method (see Note 2).
Cash equivalents:
For purposes of the statement of cash flows, the Company considers
all
highly liquid debt instruments purchased with a maturity of three months
or
less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company
to
concentrations of credit risk consist principally of cash, cash
equivalents
and trade receivables. 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.
2. Coal investment
In March 1995, the Company purchased a 2% interest in a limited
liability
company (LLC) in exchange for $100,000, $50,000 of which was borrowed
by
the Company pursuant to a one year 10.5% bank loan, guaranteed by
the
Company' president. The loan was repaid during 1996. The LLC acquired
a
mortgage note on a coal mine in Indiana, and the Company had an option
to
acquire a 2% interest in the mine for a nominal payment.
F-9
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997, 1998 and 19981999
2. Coal investment (continued)
In December 1995, the major purchaser of coal from the mine, a
utility,
canceled the contract. In January 1996, creditors of the coal mine filed
an
involuntary petition under Chapter 7 of the Bankruptcy Code which,
upon
motion of the mining company was converted to a case under Chapter 11
of
the Bankruptcy Code. The operations at the mine have subsequently been
shut
down and the assets were being liquidated while the LLC sued the
utility.
In July 1997, the trial court ruled against the LLC. As a result,
the
Company recorded a write down of $62,000 in 1997, and an additional
$5,000
in 1998, to adjust its carrying value of the investment to the
estimated
liquidation value of cash, land and equipment remaining. During 1999,
the
Company received a final payment of $8,458, and wrote-off the
remaining
balance of $2,819.
3. Note payable - bank
In connection with the purchase of certain producing oil and gas
interests
(see Note 4), the Company obtained a loan from a bank as evidenced by
a
promissory note dated March 23, 1998, in the principal amount of
$90,000,
with interest at 2.0 percentage points above the Norwest Bank
Colorado,
N.A. prime rate (9.75% at December 31, 1998).rate. The loan iswas unsecured, guaranteed by an officer
and
shareholder of the Company as a co-borrower, and iswas due in twelve
monthly
installments of principal plus interest, with final payment due March
23,
1999. At December 31, 1998,
$23,369 remains
outstanding under this obligation.The loan was paid in full in 1999.
4. 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, 1996, 1997, 1998 and 19981999 amounted to $4,398, $2,086, $525
and
$525,$329, respectively.
The Company has a month-to-month agreement with an affiliated company
to
provide for office services and sublease office space for $1,600 per
month.
Accrued liabilities at December 31, 19981999 include $4,800$1,600 due to
the
affiliated company pursuant to this agreement.
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 affilatedaffiliated entity is the operator of
these
wells, and has offered to offset the Company's lease operating expenses
on
these wells in the amount of $150 per month per well (an aggregate of
$900
per month) for as long as the Company owns the wells. In October of
1998,
this amount was increased to $180 per month per well (an aggregate
of
$1,080 per month). AtDuring the years ending December 31, 1998 and
1999,
$4,860 and $10,720, respectively, has been offset against lease
operating
expense, in this manner.
F-10
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997, 1998 and 19981999
5. Stockholders' equity
On November 1, 1991, the Company's shareholders approved the issuance
of
warrants to purchase 60,000 shares of the Company's common stock at
$1.00
per share to members of the Company's Board of Directors. In
conjunction
with the issuance of Class B preferred stock in 1996, the warrants
were
modified to provide one share of common and one share of Class B
preferred
at $1.00. During 1995,1999, the warrants were extended and are exercisable
at
any time through December 31, 1999.2001. The warrants must be exercised for
not
less than 5,000 shares at any time of exercise. As of December 31,
1998, no1999,
warrants to purchase 10,000 common shares and 10,000 preferred shares
have
been exercised.
The Company has adopted the disclosure-only provisions of Statement
of
Financial Accounting Standards No. 123 "Accounting for Stock-BasedStock-
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 would not be materially different from the amounts recorded on
the
accompanying statement of operations for the years ended December 31,
1996,
1997
or 19981998; however, for 1999, the Company's net earnings would decrease
by
$50,000 to a loss of $(37,570) or $(.10) per share. 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%.
On February 28, 1996, the shareholders of the Company approved the
creation
of 5,000,000 authorized Class A Preferred shares and 520,000
authorized
Special Class B Preferred shares.
The Class A preferred stock was authorized for possible
future
capitalization and funding purposes of the Company and has not yet
been
designated as voting or non-voting. Presently, there are no plans
or
intentions to issue these shares.
The Class B preferred stock was authorized to protect 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. In October 1996, the Company issued to its
common
shareholders one share of Class B preferred stock for every share of
common
stock held which totaled 516,505 shares. 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 value of the Class B preferred shares was originally based on the
book
value of the oil and gas assets at December 31, 1996. Effective
December
31, 1997, the Company's board of directors approved an allocation of
oil
and gas assets to the preferred shares totaling $364,328. Subsequent
to
December 31, 1997, net oil and gas income after operating expenses
and
applicable general and administrative expense is allocated to the Class
B
preferred shares.
F-11
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997, 1998 and 19981999
5. Stockholders' equity (continued)
During 1997, 1998 and 1998,1999, the Company conducted a clearing house where
it
broughbrought together certain buyers and sellers of its Class B preferred
stock,
which is not otherwise traded. At the conclusion of the trading period
in
1998, one large purchaser was unable to complete its intended
purchases,
due to lack of financing. The Board of Directors determined to purchase
and
retire 25,646 shares. In April 1998, the Company completed the purchase of
25,646
shares of the Class B preferred stock for the cash in the amount
of
$24,187, which reduced the issued and outstanding Class B preferred
shares.
In 1999, the Company acquired 200 shares leavingof the Class B preferred stock
for
cash of $200, and issued 10,000 shares upon exercise of stock
warrants,
resulting in a remaining balance of 490,859 shares.500,659 shares at December 31, 1999.
6. Income taxes
At December 31, 1998,1999, the Company had net operating loss carry-forwards
of
approximately $501,000,$538,000, which, if not used, will expire as follows:
Year of expiration Amount
------------------ --------------
2000 $471,000$469,000
2001 23,000
2018 7,00046,000
--------
$501,000$538,000
========
In addition, the Company has a depletion carryover of
approximately
$512,000 which has no expiration date.
The Company did not record an income tax provision for the year
ended
December 31, 19961999 due to the utilization of a tax loss carryforward for
the
year. The recognized tax benefit of the utilized carryforward
was
$15,600approximately $1,000 for the year ended December 31, 1996.1999. The Company
has
a financial statement loss carryover of approximately $399,000$387,000 remaining
at
December 31, 1998.1999. The difference in financial statement and tax
return
loss carryovers is principally the difference in the timing of
deducting
intangible drilling costs. Income tax credit carryovers for financial
and
tax purposes approximate $2,700 from pre-1986 transactions.
F-12
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997, 1998 and 19981999
6. Income taxes (continued)
As of December 31, 19971998 and 1998,1999, total deferred tax assets,
liabilities
and valuation allowance are as follows:
1997
1998 1999
----
- ----
Deferred tax assets resulting from loss
carryforward $168,000
$ 187,000$187,000 $201,000
Deferred tax liabilities
(21,000)liabiles (39,000) (56,000)
Valuation allowance (147,000) (148,000) (145,000)
--------
- --------
$ - $ -
======== ========
7. Basic and diluted income (loss) per common share
Basic income (loss) per common share information is based on the
weighted
average number of shares of common stock outstanding during each
year,
approximately 517,000 shares in 1996, 1997 and 1998.1998, and 518,000 shares in
1999.
Outstanding warrants are not dilutive in any of the periods presented.
8. Major customers
Customers which accounted for over 10% of revenues were as follows for
the
years ended December 31, 1996, 1997 and 1998:
1996 1997, 1998 and 1999:
1997 1998 1999
---- ----
- ----
Oil and gas:
Customer A 23.7% 23.0% 13.9% 10.0%
Customer B 11.1% 12.2% 10.4%* *
Customer C *(related party) * 21.0% 26.9%
Customer D 10.5% 18.4% *10.4% 13.2%
* - less than 10%
F-13
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.
These
disclosures are based upon estimates of proved reserves and
related
valuations by the Company. 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 Croff'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-14
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
(continued)
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 prices
During the year ended December 31, 1998,1999, both crude oil prices
decreased and natural
gas
prices were stable.increased. 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-15
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, corporate overhead and interest costs, are as
follows
for the years ended December 31, 1996, 1997 and 1998:
1996 1997, 1998 and 1999:
1997 1998 1999
---- ---- - ----
Revenues $216,870 $193,099 $193,971 $214,190
-------- --------
- --------
Lease operating costs 47,759 26,966 52,679 42,829
Production taxes 10,597 13,858 16,302 23,703
Depletion and depreciation 20,759 21,108 39,577 ------- -------
- ------
79,11548,665
-------- -------- --------
61,932 108,558 115,197
Income tax expense - - -
-
------- -------
- -------------- -------- --------
Results of operations from producing
activities (excluding corporate
overhead and interest expense) $137,755 $131,167 $ 85,413 $ 98,993
======== ======== ========
F-16
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
---------------
- --------
1996 1997 1998 1999
---- ----
- ----
Future cash inflows $1,540,000
$1,487,000 $1,346,000 $1,777,000
Future production and development costs (359,000)
(317,000) (306,000)
1,181,000(428,000)
---------- ---------- ----------
1,170,000 1,040,000 1,349,000
Future income tax expense - - -
-
-- -
- - ----------- ---------- ----------
Future net cash flows 1,181,000
1,170,000 1,040,000 1,349,000
10% annual discount for estimated timing of
cash flows (415,000)
(411,000) (365,000)
--------- -------
- -- ---------(473,000)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows $ 766,000 $
759,000 $ 675,000 $ 876,000
========== ========== ===================
The following are the principal sources of change in the standardized measure
of
discounted future net cash flows:
Beginning balance $ 736,000 $
766,000 $ 759,000 $ 675,000
Evaluation of proved undeveloped reserves,
net of future production and development
costs (5,000)
(22,000) (8,000) 9,000
Purchase of proved reserves 16,000
95,000 211,000 -
Sales and transfer of oil and gas produced,
net of production costs (264,000)
(152,000) (166,000)
(214,000)
Net increase (decrease) in prices and costs 204,000
(20,000) (151,000) 406,000
Extensions and discoveries 74,000
53,000 12,000 -
Revisions of previous quantity estimates (7,000)
28,000 8,000
(10,000)
Accretion of discount 12,000
11,000 10,000 10,000
Net change in income taxes - - -
-
Other - - -
-
--------- --------
- ---------- ---------
Ending balance $ 766,000 $
759,000 $ 675,000 ==========
==========$ 876,000
========= ========= =========
F-17
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 reservesGasreserves Gas reserves
(bbls.) (Mcf.)
Balance, December 31, 1995 70,555
217,976
Revisions of previous estimates (2,493)
23,148
Purchase of reserves 700
26,000
Extensions, discoveries and other additions 550
54,000
Sale of reserves (12,414)
- -
Production (5,886)
(46,000)
------- ------
- --
Balance, December 31, 1996 51,012 275,124
Revisions of previous estimates - 7,000
Purchase of reserves 3,200 68,864
Extensions, discoveries and other
additions 3,034 10,000
Sale of reserves - -
-
Production (5,295) (46,222)
------- ------ - ---------
Balance, December 31, 1997 51,951 314,766
Revisions of previous estimates - 3,000
Purchase of reserves 1,522 171,981
Extensions, discoveries and other
additions 1,103 -
-
Production (5,278) (65,673)
------- ------ - ---------
Balance, December 31, 1998 49,298 424,074
=======Revisions of previous estimates (3,104) 135,277
Purchase of reserves - -
Extensions, discoveries and other
additions - -
Sale of reserves - -
Production (4,610) (74,300)
------ -------
Balance, December 31, 1999 41,584 485,051
====== =======
Proved developed reserves
December 31, 1996 38,101
265,748
December 31, 1997 39,339 301,343
December 31, 1998 36,686 410,651
December 31, 1999 30,944 473,728
Costs incurred in oil and gas producing activities for the years ended
December
31, 1996, 1997, 1998, 1999 are as follows:
1996 1997 1998 1999
---- ----
- ----
Property acquisition, exploration and
development costs capitalized $ 15,875 $
95,404 $ 211,369 $ -
Production costs 58,356
40,824 68,981 66,532
Depletion and depreciation 20,759
21,108 39,577 48,665
F-18
CROFF ENTERPRISES, INC.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES
AND SUPPLEMENTAL INFORMATION
Page No.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
BALANCE SHEET-DECEMBER 31, 1997 AND 1998 F-3
INCOME STATEMENT-YEARS ENDED DECEMBER 31, 1996,
1997 AND 1998 F-5
STATEMENT OF STOCKHOLDERS' EQUITY-YEARS ENDED
DECEMBER 31, 1996, 1997, AND 1998 F-6
STATEMENT OF CASH FLOWS-YEARS ENDED DECEMBER 31,
1996, 1997, AND 1998 F-7
NOTES TO FINANCIAL STATEMENTS F-8
SUPPLEMENTAL INFORMATION-DISCLOSURES ABOUT OIL
AND GAS PRODUCING ACTIVITIES-UNAUDITED F-14
23
45