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FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the period ended September 30, 2001March 31, 2002
or -------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number: 100 ------------ ------------
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CROFF ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Utah 87-0233535
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
621 17th St., Suite 830, Denver, Colorado 80293
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(Address of principal executive offices) (Zip Code)
(303) 383-1555
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant has required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X Yes No
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APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date: 526,060566,060 shares, one class only
as of October 31, 2001.May 10, 2002.
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INDEX
INDEX TO INFORMATION INCLUDED IN THE QUARTERLY REPORT (FORM 10-Q) TO THE
SECURITIES AND EXCHANGE COMMISSION FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 2001(UNAUDITED)MARCH 31, 2002 (UNAUDITED).
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Page Number
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PART I. UNAUDITED FINANCIAL INFORMATION
Balance Sheets as of December 31, 20002001 and
September 30, 2001 3,4March 31, 2002 3
Statements of Operations for the three and
nine months
ended September 30, 2000March 31, 2001 and 2001 52002 4
Statements of Stockholders' Equity for the year
ended December 31, 20002001 and the ninethree months
ended September 30, 2001 6March 31, 2002 5
Statements of Cash Flows for ninethree months ended
September 30, 2000March 31, 2001 and 2001 72002 6
Notes to Unaudited Condensed Financial Statements 87
Management's Discussion and Analysis of
Financial Condition and Results of Operations 87
PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION 9
ITEM 6(B) REPORTS ON FORM 8-K 109
Signatures 109
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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, 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.
PART I. UNAUDITED FINANCIAL INFORMATION
CROFF ENTERPRISES, INC.
BALANCE SHEETS
(Unaudited)
December 31, September 30,
2000March 31,
2001 -------------- --------------
ASSETS2002
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 191,634338,870 $ 269,246378,361
Marketable equity securities, 6,125 62,892available for sale 4,600 4,000
Accounts receivable 91,742 53,724
Note49,226 35,704
Notes receivable, related party - 15,446parties 16,159 16,893
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289,501 401,308408,855 434,958
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Oil and gas properties, at cost, successful efforts method:
Proved properties 611,960 633,665578,091 578,091
Unproved properties 97,102 97,102
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709,062 730,767675,193 675,193
Accumulated depletion and depreciation and depletion (370,391) (400,391)(388,924) (396,924)
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338,671 330,376286,269 278,269
---------- ----------
Total assets $ 628,172695,124 $ 731,684713,227
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,568 $ 17,082
Accrued liabilities 5,471 2,439
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23,039 19,521
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Stockholders' equity:
Class A Preferred stock, no par value
5,000,000 shares authorized, none issued - -
Class B Preferred stock, no par value; 1,000,000
shares authorized, 540,659 shares issued and
outstanding 397,085 396,428
Common stock, $.10 par value; 20,000,000 shares
authorized, 629,143 shares issued and outstanding 62,914 62,914
Capital in excess of par value 530,071 530,728
Treasury stock, at cost, 63,083 shares issued and
outstanding (83,151) (83,151)
Accumulated other comprehensive loss (1,150) (1,750)
Accumulated deficit (193,618) (170,800)
Notes receivable from directors (40,066) (40,663)
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672,085 693,706
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Total liabilities and stockholders' equity $ 695,124 $ 713,227
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See accompanying notes to unaudited condensed financial statements.
3
CROFF ENTERPRISES, INC.
BALANCE SHEETSSTATEMENTS OF OPERATIONS
For the three months ended March 31, 2001 and 2002
(Unaudited)
(Continued)
December 31, September 30,
2000 2001 -------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY2002
---------- ----------
Current liabilities:
Accounts payableRevenues
Oil and gas sales $ 10,838122,361 $ 14,419
Accrued liabilities 5,368 17,84849,321
Gain on sale of marketable equity
securities - 23,026
Other income 3,026 1,891
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16,206 32,267125,387 74,238
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Stockholders' equity:
Class A Preferred stock, no par value;
5,000,000 shares authorized,
none issued or outstanding - -
Class B Preferred stock, no par value;
1,000,000 shares authorized,
500,659 shares issuedExpenses
Lease operating expense including
production taxes 46,752 14,014
General and outstanding 475,359 475,359
Common stock, $.10 par value
20,000,000 shares authorized,
589,143 shares issuedadministrative 23,341 23,406
Overhead expense, related party 6,000 6,000
Depletion and outstanding 58,914 58,914
Capital in excess of par value 415,797 415,797
Treasury stock, at cost 62,883
and 63,083 shares, respectively (82,951) (83,151)
Accumulated other comprehensive income - 3,700
Accumulated deficit (255,153) (171,202)depreciation 10,000 8,000
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611,966 699,41786,093 51,420
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Total liabilitiesNet income 39,294 22,818
Net income (loss) applicable to
preferred B shareholders 37,883 (657)
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Net income applicable to
common shareholders $ 1,411 $ 23,475
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Basic and stockholders' equitydiluted net income
per common share $ 628,172.01 $ 731,684.04
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Weighted average common shares outstanding 526,060 566,060
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See accompanying notes to unaudited condensed financial statements.
4
CROFF ENTERPRISES, INC.
STATEMENTS OF OPERATIONSSTOCKHOLDERS' EQUITY
For the year ended December 31, 2001 and
the three month period ened March 31, 2002
(Unaudited)
Three months ended Nine months ended
September 30, September 30,Accumulated
Preferred B stock Common stock Capital in other
------------------ ------------------ 2000 2001 2000 2001excess of Treasury comprehensive Accumulated
Shares Amount Shares Amount par value stock loss deficit
-------- -------- -------- -------- ---------- -------- ------------- -----------
Revenues
Oil and gas sales
Balance at December 31, 2000 500,659 $475,359 589,143 $ 91,58658,914 $ 71,073 $237,456 $286,577
Other415,797 $(82,951) $ - $ (255,153)
Stock warrants exercised 40,000 28,000 40,000 4,000 8,000 - - -
Purchase of 200 shares of
treasury stock - - - - - (200) - -
Net unrealized loss on marketable
equity securities - - - - - - (1,150) -
Net income 2,399 2,022 4,821 7,816for the year ended
December 31, 2001 - - - - - - - 61,535
Stock reallocation - (136,274) - - 136,274 - - -
Preferred stock reallocation - 30,000 - - (30,000) - - -
-------- -------- -------- -------- 93,985 73,095 242,277 294,393---------- -------- ------------- -----------
Balance at December 31, 2001 540,659 $397,085 629,143 $ 62,914 $ 530,071 $(83,151) $ (1,150) $ (193,618)
-------- -------- -------- -------- Expenses
Lease operating expense 23,472 23,827 69,101 98,134
Depreciation and depletion 10,500 10,000 31,500 30,000
General and administrative 20,323 23,050 70,141 71,508
Rent expense---------- -------- ------------- -----------
Net unrealized loss on marketable
equity securities - related party 2,940 3,600 8,820 10,800- - - - - (600) -
Net income for the three months
ended March 31, 2002 - - - - - - - 22,818
Preferred stock reallocation - (657) - - 657 - - -
-------- -------- -------- -------- 57,235 60,477 179,562 210,442---------- -------- -------- -------- --------
Net income------------- -----------
Balance at March 31, 2002 540,659 $396,428 629,143 $ 36,75062,914 $ 12,618530,728 $(83,151) $ 62,715(1,750) $ 83,951(170,800)
======== ======== ======== ======== Net income applicable to
Class B Preferred stockholders' $ 35,794 $ 11,243 $ 57,894 $ 79,003========== ======== ======== ======== ========
Net income applicable to
Common stockholders' $ 956 $ 1,375 $ 4,821 $ 4,948
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Basic and diluted net income
per common share * *$ .01 $ .01
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*-Less than $.01 per share
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See accompanying notes to unaudited condensed financial statements.
5
CROFF ENTERPRISES, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYCASH FLOWS
For the three months ended March 31, 2001 and 2002
(Unaudited)
Accumulated
Preferred Stock Common Stock Capital in other
------------------ ------------------ excess of Treasury comprehensive Accumulated
Shares Amount Shares Amount par Value stock income deficit Total
------- -------- ------- --------2001 2002
---------- -------- ------------- ----------- --------
Balance,
December 31, 1999 500,659 $350,359 589,143 $ 58,914 $540,797 $(82,286) $ - $(386,821) $480,353
Purchase of 55 shares
of treasury stock - - - - - (55) - - (55)
Net income for the year
ended December 31, 2000 - - - - - - - 131,668 131,668
Preferred stock
reallocation - 125,000 - - (125,000) - - - -
------- -------- ------- -------- ---------- -------- ---------- ----------- --------
Balance,
December 31, 2000 500,659 475,359 589,143 58,914 415,797 (82,951) - (255,153) 611,966
Purchase of 200 shares
of treasury stock - - - - - (200) - - (200)
Unrealized gain on
marketable equity
securities - - - - - - 3,700 - 3,700
Net income for the nine
months ended
September 30, 2001 - - - - - - - 83,951 83,951
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Balance,
September 30, 2001 500,659 $475,359 589,143 $ 58,914 $415,797 $(83,151) $ 3,700 $(171,202) $699,417
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See accompanying notes to unaudited condensed financial statements.
6
CROFF ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
For the nine months ending
September 30,
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2000 2001
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Cash flows from operating activities:
Net income $ 62,71539,294 $ 83,95122,818
Adjustments to reconcile net income
to net cash provided by operating
activities:
DepreciationDepletion and depletion 31,500 30,000depreciation 10,000 8,000
Realized (gain) loss on marketable
equity securities 375 (23,026)
Changes in operating assets and
liabilities:
(Increase) decrease in marketable securities (1,875)Accounts receivable (1,817) 13,522
Accrued interest on notes receivable - (Increase) decrease in accounts receivable (9,394) 38,018
(Increase) decrease in other(1,331)
Other assets (1,797) (446)
Increase (decrease) in accounts(5,205) -
Accounts payable 982 3,581
Increase (decrease) in accrued6,120 (486)
Accrued liabilities 454 12,480(1,476) (3,032)
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Net cash provided by operating
activities 82,585 167,58447,291 16,465
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Cash flows from investing activities:
Purchased working interest in proved properties - (21,705)
Purchase of marketable equity securities - (53,067)
Issuance(165,502)
Proceeds from sale of short-term note receivablemarketable equity
securities - (15,000)188,528
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Net cash used inprovided by investing activities - (89,772)23,026
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Cash flows from financing activities:
Purchase of treasury stock (55) (200) -
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Net cashCash used in financing activities (55) (200) -
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IncreaseNet increase in cash and
cash equivalents 82,530 77,61247,091 39,491
Cash and cash equivalents
at beginning of period 57,716 191,634 338,870
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Cash and cash equivalents
at end of period $ 140,246238,725 $ 269,246
---------- ----------378,361
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Supplemental disclosure of non-cash investing and financing activities:
During the three month period ended March 31, 2002, the Company had
unrealized losses on available for sale securities in the amount of $600.
See accompanying notes to unaudited condensed financial statements
7statements.
6
CROFF ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Basis of preparation
The condensed financial statements for the three and nine month periods ended
September 30,March 31, 2002 and 2001 and 2000 in this report have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect, in the opinion of the management, all
adjustments necessary to present fairly the results of the operations of
the nteriminterim periods presented herein. Certain reclassifications have been made to
the prior year's condensed financial statements to conform to the 2001
presentation. Certain information in footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted accounting principlesin the United
States of America have been omitted pursuant to such rules and
regulations, although the Company believes the disclosures presented
herein are adequate to make the information presented not misleading.
It is suggested that these condensed financial statements be read in
conjunction with the financial statements and notes thereto included in
the Company's Annual Report on Form 10-K for the year ended December 31,
2000,2001, which report has been filed with the Securities and Exchange
Commission, and is available from the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operation are based upon financial statements, which have been
prepared in accordance with accounting principles generally adopted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the year. The Company analyzes its estimates, including
those related to oil and gas revenues, oil and gas properties, marketable
securities, income taxes and contingencies. The Company bases its estimates
on historical experience and various other assumptions that are believed to
be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes
the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its financial statements
and the uncertainties that it could impact our results of operations,
financial condition and cash flows. The Company accounted for its oil and
gas properties under the successful efforts method of accounting. The
Company periodically evaluates its oil and gas properties for possible
impairment. Impairments are recorded when management believes that a
property's net book value is not recoverable based on current estimates of
expected future cash flows. The Company provides for depreciation and
depletion of its investment in producing oil and gas properties on the unit-
of-production method, based upon estimates of recoverable oil and gas reserves
from the property.
7
Results of Operations
Three months ended September 30, 2001March 31, 2002 compared to three months ended September 30, 2000.March 31, 2001.
Revenues for the thirdfirst quarter of 20012002 totaled $73,095,$74,238, a 22%41% decrease from
the prior year period. Net income for the thirdfirst quarter of 20012002 totaled $12,618,$22,818,
a decrease of 66%42% compared to the thirdfirst quarter of 2000.2001. Oil and gas sales for
the thirdfirst quarter totaled $71,073,$49,321, a 22%60% decrease from the prior year period.
ThisThe major factor in this decrease in revenue was attributablethe combination of price and
production for oil and natural gas. The average sale price of oil in 2002 for
the Company was approximately $17 compared to declines$25 in 2001. The average sale
price of natural gas in 2002 for the Company was $1.80 per Mcf, compared to
$5.80 per Mcf in 2001. Production of both oil and natural gas prices as well as lower demand for natural gas. The Company's oil and gas
revenues are generally divided approximately equally between royalties and
working interest. Other income fordecreased during the
thirdfirst quarter of 2002 compared to the first quarter of 2001 totaled $2,022,as the operators of
the Company's wells slowed production due to low prices and reduced demand.
During 2002, the Company realized a 16% decrease from the prior year period. This decrease is primarily a result
of lower rates of return earnedgain on the Company's money market investments.sale of marketable equity
securities totaling $23,026.
Lease operation expense, which includes all production related taxes for
the thirdfirst quarter of 2002, totaled $14,014 compared to the first quarter of
2001, totaled $23,827, approximately equal with the third
quarter of 2000, which totaled $23,472.$46,752. This decrease was attributable to the decrease
in oil and gas production and lower taxes for 2002.
Depreciation and depletion expense for the thirdfirst quarter of 20012002 totaled
$10,000,$8,000, a 5%20% decrease from the prior year period, which totaled $10,500.$10,000.
General and administrative expense, including rent for the thirdfirst quarter
of 20012002 totaled $26,650, a 15% increase from the prior year period. This
increase$29,406, which is attributable to the fact that costs associated with the Company's
annual report were incurred in the third quarter this year verses the second
quarter last year.
8
Nine months ended September 30, 2001 compared to nine months ended\
September 30, 2000.
Revenues for the nine months ended September 30, 2001 totaled $294,393, a
22% increase from the prior year period. Net income for the nine months ended
September 30, 2001 totaled $83,951, an increase of 34% comparedcomparable to the prior year period. Oil and natural gas sales for the nine months ended September 30,
2001 totaled $286,577, an 21% increase from the prior year period. This
increase was primarily attributable to higher oil and natural gas prices.
The Company's oil and gas revenues are divided approximately equally between
royalties and working interest. Other income for the nine months ended
September 30, 2001, total $7,816, a 62% increase from the prior year period.
The Company earned higher interest and dividend income due to an increase in
the value of the Company's cash and cash equivalents.
Lease operating expense, which includes all production related taxes for
the nine months ended September 30, 2001, totaled $98,134, an increase of 42%
compared to the prior year period. The primary reason for this increase was
the expenditure of $22,000 incurred in a five percent participation in an
unsuccessful new well in Oklahoma. The well was completed but has produced a
minimal amount. The remaining increase was due to higher production taxes due
to higher prices and inflation in oil field costs.
Depreciation and depletion expense for the nine months ended September 30,
2001 totaled $30,000, a 5% decrease from the prior year period.
General and administrative expense, including rent for the nine months
ended September 30, 2001 totaled $82,308, compared to $78,961 from the prior
year period. The Company expects general and administrative costs to remain
stable this year.
Financial condition and capital resources
At September 30, 2001,March 31, 2002, the Company had $731,684$713,227 of assets and $699,417$693,706 of
stockholders' equity. In the first ninethree months of 2001,2002, net cash provided by
operations totaled $167,584$16,465 as compared to $82,585$47,291 for the prior year period.
Working capital at September 30, 2001March 31, 2002 totaled $369,041,$415,437, an increase of 100%8% compared
to $184,857$385,816 at September 30, 2000.December 31, 2001. The Company'sCompany had a favorable current ratio
at September 30, 2001 isMarch 31, 2002 of approximately 12:22:1. At September 30, 2001, there were
no significant commitments for capital expenditures. The Company is currently
accumulating cash and liquid assets to prepare for a possible reverse mergerFor the remainder of 2002, the Company. The
Company expects to continue to operate at a positive cash flow for the remainder of this year and intends to
resume buying producingpurchasing oil and natural gas properties.
Inleases. The Company has no short-term
or long-term debt at this time.
Because the first nine months 2001,Company's revenues are based primarily on the commodity
price of oil and natural gas, and, because the Company repurchased 200 shares of its
common stock for $200.does not have
significant operating expenses, inflation, generally, is favorable to the
Company.
8
PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION
On June 15, 2001, the Company loaned $15,000 to Reef Energy Corporation, a
related party
corporation, thecompany in which Croff's President of which is also the President of the Company.owns approximately a one-fourth interest.
This short-term secured note bears interest at 10% per annum. 9
PART II. OTHER INFORMATIONIn December 2001,
the Company loaned three of its Directors a total of $40,000 associated with the
exercise of their stock warrants. The fully recourse notes due December 31, 2002
bear interest at 6% per annum.
ITEM 6(B) REPORTS ON FORM 8-K
The registrant has filed no reports on Form 8-K for the quarter ended
June 30, 2001.March 31, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
REGISTRANT: CROFF ENTERPRISES, INC.
By: /s/ Gerald L. Jensen
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Gerald L. Jensen
Chief Executive Officer
and Chief Financial Officer
By: /s/ Stuart D. Kroonenberg
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Stuart D. Kroonenberg
Chief AccountingFinancial Officer
Dated: NovemberMay 14, 20012002
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