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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, 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
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
621 17th St., Suite 830, Denver, Colorado 80293
----------------------------------------- ----------
(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: 566,060 shares, one class only
as of November 12, 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, 2002 (UNAUDITED).
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Page Number
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PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Unaudited financial statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Item 4. Controls and Procedures 9
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section
1350; as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 10
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section
1350; as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 10
PART II. OTHER INFORMATION 10
Item 5 Other Information 10
Item 6 Exhibits and reports on Form 8-K 10
Signatures 10
Certifications Pursuant to Securities Exchange Act of 1934:
Rules 13a-14, 13a-15, 15d-14 and 15d-15 Section 302 of
The Sarbanes-Oxley Act of 2002 11
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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
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
CROFF ENTERPRISES, INC.
BALANCE SHEETS
(Unaudited)
December 31, September 30,
2001 2002
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 338,870 $ 267,074
Marketable equity securities, available for sale 4,600 59,210
Accounts receivable 49,226 46,851
Notes receivable, related parties 16,159 17,070
---------- ----------
408,855 390,205
---------- ----------
Oil and gas properties, at cost, successful efforts method:
Proved properties 578,091 627,676
Unproved properties 97,102 97,102
---------- ----------
675,193 724,778
Accumulated depletion and depreciation (388,924) (412,924)
---------- ----------
286,269 311,854
---------- ----------
Total assets $ 695,124 $ 702,059
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,568 $ 15,881
Accrued liabilities 5,471 2,437
---------- ----------
23,039 18,318
---------- ----------
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 397,085 435,255
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 530,071 491,901
Treasury stock, at cost, 63,083 shares (83,151) (83,151)
Accumulated other comprehensive loss (1,150) (50,512)
Accumulated deficit (193,618) (130,761)
Notes receivable from directors (40,066) (41,905)
---------- ----------
672,085 683,741
---------- ----------
Total liabilities and stockholders' equity $ 695,124 $ 702,059
========== ==========
See accompanying notes to unaudited condensed financial statements.
3
CROFF ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2001 2002 2001 2002
-------- -------- -------- --------
Revenues
Oil and gas sales $ 71,073 $ 74,662 $286,577 $189,520
Gain on sale of marketable
equity securities - - - 23,026
Other income 2,022 6,679 7,816 10,035
-------- -------- -------- --------
73,095 81,341 294,393 222,581
-------- -------- -------- --------
Expenses
Lease operating expense including
production taxes 23,827 20,997 98,134 49,582
General and administrative 20,650 22,928 64,308 68,142
Overhead expense, related party 6,000 6,000 18,000 18,000
Depreciation and depletion 10,000 8,000 30,000 24,000
-------- -------- -------- --------
60,477 57,925 210,442 159,724
-------- -------- -------- --------
Net income $ 12,618 $ 23,416 $ 83,951 $ 62,857
======== ======== ======== ========
Net income applicable to
Class B Preferred stockholders' $ 11,243 $ 22,841 $ 79,003 $ 38,170
======== ======== ======== ========
Net income applicable to
Common stockholders' $ 1,375 $ 575 $ 4,948 $ 24,687
======== ======== ======== ========
Basic and diluted net income
per common share *<F1> *<F1>$ .01 $ .04
======== ======== ======== ========
<F1>
*-Less than $.01 per share
</FN>
See accompanying notes to unaudited condensed financial statements.
4
CROFF ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the year ended December 31, 2001 and
the nine month period ened September 30, 2002
(Unaudited)
Accumulated
Preferred B stock Common stock Capital in other
------------------ ------------------ excess of Treasury comprehensive Accumulated
Shares Amount Shares Amount par value stock loss deficit
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 2000 500,659 $475,359 589,143 $ 58,914 $ 415,797 $(82,951) $ - $ (255,153)
Stock warrants exercised 40,000 28,000 40,000 4,000 8,000 - - -
Purchase of 200 shares of
treasury stock - - - - - (200) - -
Net unrealized loss on marketable
equity securities - - - - - - (1,150) -
Net income for the year ended
December 31, 2001 - - - - - - - 61,535
Stock reallocation - (136,274) - - 136,274 - - -
Preferred stock reallocation - 30,000 - - (30,000) - - -
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 2001 540,659 $397,085 629,143 $ 62,914 $ 530,071 $(83,151) $ (1,150) $ (193,618)
-------- -------- -------- -------- ---------- -------- ------------- -----------
Net unrealized loss on marketable
equity securities - - - - - - (49,362) -
Net income for the nine months
ended September 30, 2002 - - - - - - - 62,857
Preferred stock reallocation - 38,170 - - (38,170) - - -
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at September 30, 2002 540,659 $435,255 629,143 $ 62,914 $ 491,901 $(83,151) $ (50,512) $ (130,761)
======== ======== ======== ======== ========== ======== ============= ===========
See accompanying notes to unaudited condensed financial statements.
5
CROFF ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2001 and 2002
(Unaudited)
2001 2002
---------- ----------
Cash flows from operating activities:
Net income $ 83,951 $ 62,857
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depletion and depreciation 30,000 24,000
Realized (gain) loss on marketable
equity securities - (23,026)
Changes in operating assets and
liabilities:
Accounts receivable 38,018 2,375
Accrued interest on notes receivable - (2,750)
Other assets (446) -
Accounts payable 3,581 (1,687)
Accrued liabilities 12,480 (3,033)
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Net cash provided by operating
activities 167,584 58,736
---------- ----------
Cash flows from investing activities:
Purchase of marketable equity securities (53,067) (269,475)
Proceeds from sale of marketable equity
securities - 188,528
Purchased working interest in proved properties (21,705) (49,585)
Issuance of short-term note receivable (15,000) -
---------- ----------
Net cash used in investing activities (89,772) (130,532)
---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (200) -
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Net Cash used in financing activities (200) -
---------- ----------
Net increase (decrease) in cash and
cash equivalents 77,612 (71,796)
Cash and cash equivalents
at beginning of period 191,634 338,870
---------- ----------
Cash and cash equivalents
at end of period $ 269,246 $ 267,074
========== ==========
Supplemental disclosure of non-cash investing and financing activities:
During the nine month period ended September 30, 2002, the Company had
unrealized losses on available for sale securities in the amount of $49,362.
See accompanying notes to unaudited condensed financial statements.
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, 2002 and 2001 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 interim periods presented herein. Certain reclassifications have been
made to the prior year's condensed financial statements to conform to the
2002 presentation. Certain information in footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in 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, 2001, which report has been
filed with the Securities and Exchange Commission, and is available from
the Company.
ITEM 2. 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 accepted 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, 2002 compared to three months ended
September 30, 2001.
Revenues for the third quarter of 2002 totaled $81,341, an 11% increase
from the prior year period. Net income for the third quarter of 2002 totaled
$23,416, an increase of 86% compared to the third quarter of 2001. Oil and
gas sales for the third quarter totaled $74,662, a 5% increase from the prior
year period, which totaled $71,073. The Company's oil and gas revenues are
approximately divided equally between royalties and working interest. Other
income for the third quarter of 2002 totaled $6,679 compared to $2,022 from
the prior year period; this increase is primarily from additional interest
income.
Lease operation expense, which includes all production related taxes for
the third quarter of 2002, totaled $20,997, a decrease of 12% compared to the
third quarter of 2001, which totaled $23,827.
Depreciation and depletion expense for the third quarter of 2002 totaled
$8,000, a 20% decrease from the prior year period, which totaled $10,000.
General and administrative expense, including overhead to a related party
for the third quarter of 2002, totaled $28,928, which is comparable to the prior
year period.
Nine months ended September 30, 2002 compared to nine months ended
September 30, 2001.
Revenues for the nine months ended September 30, 2002 totaled $222,581, a
24% decrease from the prior year period. Net income for the nine months ended
September 30, 2002 totaled $62,857, a decrease of 25% compared to the same
period in 2001. Oil and gas sales for the nine months ended September 30, 2002
totaled $189,520, a 34% decrease from the same period in 2001. The major factor
in this decrease in oil and gas sales is attributable to decreased prices for
both oil and natural gas during the first six months of 2002 as compared to the
prices of oil and natural gas during the first six months of 2001. The
Company's oil and gas revenues are approximately divided equally between
royalties and working interest. During 2002, the Company realized a gain on
the sale of marketable equity securities totaling $23,026. Other income for the
nine months ended September 30, 2002, total $10,035, a 28% increase from the
prior year period. The increase in other income is attributable to additional
interest income.
Lease operating expense, which includes all production related taxes for
the nine months ended September 30, 2002, totaled $49,582, a decrease of 49%
compared to the $98,134 spent in the same period in 2001. In 2001, the Company
spent approximately $22,000 on an unsuccessful well, and production taxes were
also higher in 2001. The remaining decrease was due to lower production taxes
due to lower prices and less production.
Depreciation and depletion expense for the nine months ended September 30,
2002 totaled $24,000, a 20% decrease from the same period in 2001.
General and administrative expense, including overhead to a related party
for the nine months ended September 30, 2002 totaled $86,142, compared to
$82,308 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, 2002, the Company had $702,059 of assets and $683,741 of
stockholders' equity. In the first nine months of 2002, net cash provided by
operations totaled $58,736 as compared to $167,584 for the prior year period.
Working capital at September 30, 2002 totaled $371,887, and is comparable to the
December 31, 2001 working capital, which totaled $385,816. The Company's
current ratio at September 30, 2002 is approximately 21:1. At September 30,
2002, there were no significant commitments for capital expenditures. In June
2002, the Company purchased working interests in producing leases in Michigan
and Texas, investing a total of $49,585. The Company is currently accumulating
cash and liquid assets to prepare for a possible reverse merger of the Company.
The Company expects to continue to operate at a positive cash flow for the
remainder of this year and continue buying producing oil and natural gas
properties. The Company has no short-term or long-term debt at this time.
However, on June 11, 2002, the Company entered into a one-year variable rate
revolving line of credit agreement whereby the Company could borrow up to
$100,000 to fund investments in oil and gas properties. The variable rate is
based on Prime plus 1.5%, subject to a floor of 7% and a ceiling of 12%.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities Exchange Act of 1034 is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission. Based upon their evaluation of those
controls and procedures performed within 90 days of the filing date of this
report, the President/Chief Executive Officer and the Chief Financial Officer of
the Company concluded that the Company's disclosure controls and procedures were
adequate.
9
The Company made no significant changes in its internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the evaluation of those controls by the President/Chief Executive
Officer and the Chief Financial Officer of the Company.
EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350; AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350; AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On June 15, 2001, the Company loaned $15,000 to Reef Energy Corporation, a
company in which Croff's President owns approximately a one-fourth interest.
This short-term secured note bears interest at 10% per annum. In December 2001,
the Company loaned three of its Directors a total of $40,000 associated with the
exercise of their stock warrants. The fully recourse notes due December 31, 2002
bear interest at 6% per annum.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
The registrant has filed no exhibits or reports on Form 8-K for the quarter
ended September 30, 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.
Date: November 13, 2002 By: /s/ Gerald L. Jensen
-------------------- -------------------------------
Gerald L. Jensen
Chief Executive Officer
Date: November 13, 2002 By: /s/ Stuart D. Kroonenberg
-------------------- -------------------------------
Stuart D. Kroonenberg
Chief Financial Officer
10
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934: RULES 13a-14, 13a-15, 15d-14, and 15d-15
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gerald L. Jensen, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Croff Enterprises, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the effectiveness
of the disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of my most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Gerald L. Jensen
- ------------------------------
Gerald L. Jensen, President,
Chief Executive Officer
November 13, 2002
11
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934: RULES 13a-14, 13a-15, 15d-14, and 15d-15
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stuart D. Kroonenberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Croff Enterprises, Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report my conclusions about the effectiveness
of the disclosure controls and procedures based on my evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of my most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
/s/ Stuart D. Kroonenberg
- ------------------------------
Stuart D. Kroonenberg,
Chief Financial Officer
November 13, 2002
12