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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transaction period from _______ to _________
Commission file number 1-100
CROFF ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
Utah 87-0233535
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
621 17th Street 80293
Denver, Colorado (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (303) 383-1515
Securities registered pursuant to Section 12(b) of the Act
Title of each class Name of each exchange on which registered
---------------------------- -----------------------------------------
Common Stock, $.10 par value None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [_] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 16, 2004, 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: $280,000.
As of March 16, 2004, the Registrant had outstanding 566,900 shares of
common stock ($0.10 par value)(excludes 53,243 common shares held as treasury
stock).
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1
TABLE OF CONTENTS
PART I
Page
ITEM 1 BUSINESS..............................................................3
ITEM 2 PROPERTIES............................................................8
ITEM 3 LEGAL PROCEEDINGS....................................................14
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..................14
PART II
ITEM 5 MARKET FOR REGISTRANT'S SECURITIES AND RELATED
STOCKHOLDER MATTERS..................................................15
ITEM 6 SELECTED FINANCIAL DATA..............................................16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..................................17
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA...........................21
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES..............................21
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..................22
ITEM 11 EXECUTIVE COMPENSATION..............................................23
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT......................................................24
ITEM 13 CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.......................25
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................26
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND
REPORTS ON FORM 8-K.................................................26
SIGNATURES..........................................................27
CERTIFICATIONS PURSUANT TO THE SARBANES-OXLEY ACT OF 2002...........28
2
CROFF ENTERPRISES, INC.
Annual Report on Form 10-K
December 31, 2003
PART I
ITEM 1. BUSINESS
General
Croff Enterprises, Inc. ("Croff" or the "Company") is an independent energy
company engaged in the business of oil and natural gas production, primarily
through ownership of perpetual mineral interests and acquisition of producing
oil and natural gas leases. The Company's principal activity is oil and natural
gas production from non-operated properties. The Company acquires, owns, and
produces, producing and non-producing leases and perpetual mineral interests in
Alabama, Colorado, Michigan, Montana, New Mexico, North Dakota, Oklahoma, Texas,
Utah and Wyoming. Over the past ten years, the Company's primary source of
revenue has been oil and natural gas production from leases and producing
mineral interests. Other companies operate almost all of the wells from which
Croff receives revenues and Croff has no control over the factors which
determine royalty or working interest revenues, such as markets, prices and
rates of production. Croff participates as a working interest owner in
approximately 50 wells or units of several wells. Croff holds small royalty
interests in approximately 200 wells.
Croff's business strategy is focused on targeting opportunities that are of
lower risk with the potential for stable cash flow and long asset life while
seeking to keep operating costs low. The Company over the last four years
acquired three wells in Michigan, one well in Montana, six wells in Oklahoma and
eight wells in Texas. The Company continues to actively explore oil and natural
gas properties that may fit into our overall business strategy. The Company's
plans for ongoing development, acquisition and exploration expenditures, and
possible equity repurchases over and beyond the Company's operating cash flows
will depend entirely on the Company's ability to secure acceptable financing.
Summary of Current Events
During 2003, the Company began preparing a drilling fund that could
potentially be sold, along with the Company's common stock, to raise money for
exploratory or development drilling. Last year, the Board of Directors
authorized management to draft a preliminary plan, discuss financing, and
investigate joint venture partners and identify prospective properties. No
financing commitments have been obtained at this time and there is no assurance
of any such financing being obtained. To date, Croff has executed a joint
venture agreement with Cavalier Oil & Natural Gas Inc. of Austin, Texas, to
acquire leases for a natural gas development in the Edwards and Wilcox
formations in South Texas. During 2003, the Company acquired non-producing
mineral leases with re-entry wells in DeWitt County, Texas for $119,190 and
spent $28,518 for land work, pipe and other tangible costs related to this 2004
Edwards-Wilcox Natural Gas Development Program. This Program contains up to 12
re-entry wells with three Edwards and Wilcox prospects and nine Wilcox
re-entries in Dewitt County, Texas. Management believes these zones were not
depleted during earlier production due to lack of pipelines, markets and low
natural gas prices. Management acquired these leases after reviewing the
existing logs as to the potential size and productivity of the Edwards limestone
and Wilcox natural gas producing sands. Existing logs show both permeability
and porosity, and can be further evaluated from offsetting Wilcox natural gas-
producing wells. Additional production may be possible from new offset drilling
after the re-entry wells are in production.
At December 31, 2003, the Company had 1,036,039 thousand cubic feet
equivalent (Mcfe) of proved reserves having a pretax present value (PV10%) of
$1,464,000 based on non-escalated prices and costs. The valuation reflected
average wellhead prices of $4.03 per Mcf and $30.14 per barrel at year-end.
During 2003, the quantity of the Company's reserves increased 19%. The growth
was attributable to acquisitions which increased reserves by 34,036 barrels of
oil and 91,496 Mcf of natural gas and increased the pretax present value (PV10%)
by approximately $450,000. In addition, the value of the Company's proved
reserves increased as a result of higher prices at December 31, 2003 as compared
to December 31, 2002. At December 31, 2003, approximately 51% of the Company
reserves were natural gas. Oil and natural gas equivalents are based on 6 Mcf
of natural gas being equivalent to one barrel of oil.
Revenues and net income for 2003 totaled $415,926 and $94,109,
respectively. Cash provided from operations in 2003 totaled $140,003. Capital
expenditures for 2003 totaled $247,708. The Company acquired non-producing
mineral leases with re-entry wells in DeWitt County, Texas for $119,190 and
spent $28,518 for land work, pipe and other tangible costs related to this
South Texas development program. In 2003, the Company acquired a 10% working
interest in one well in Hardin County, Texas for $30,000 and a 20% working
interest in one well in Cheboygan County, Michigan for $70,000.
History
The Company was incorporated in Utah in 1907 as Croff Mining Company. The
Company changed its name to Croff Oil Company in 1952, and in 1996 changed its
name to Croff Enterprises, Inc. The Company, however, continues to operate its
oil and natural gas properties as Croff Oil Company.
In 1996, the Company created a class of preferred B stock to which the
perpetual mineral interests and other oil and natural gas assets were pledged.
Thus, the preferred B stock represents the current oil and natural gas assets
of the Company, exclusive of the 2004 Edwards-Wilcox Natural Gas Development
Program, and all other assets are represented by the common stock. Each common
shareholder, as of the February 28, 1996 record date, received an equal number
of preferred B shares, one for one, at the time of this restructuring of the
capital of the Company.
Material Subsequent Events
The Company undertakes to report what it deems to be material subsequent
events as occurring since the close of its current fiscal year on December 31,
2003 and up to the date of this report.
Available Information
Our Internet address is www.croff.com. We make available through our
website our annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable
after we electronically file such material with, or furnish it to, the
Securities and Exchange Commission.
Major Customers
Customers which accounted for over 10% of oil and natural gas revenues
were as follows for the years ended December 31, 2001, 2002 and 2003:
2001 2002 2003
------ ------ ------
Burlington Resources Oil and Gas Company 13.2% 10.0% *
El Paso Production 10.6% 14.6% *
Energetics, LTD. * 10.0% *
Jenex Petroleum Corp., a related party 24.3% 17.2% 23.0%
* less than 10%
Management believes that the loss of any individual purchaser would not
have a long-term material adverse impact on the financial position or results of
operations of the Company.
Financial Information About Industry Segments
The Company's operations presently consist of oil and natural gas
production. During previous years the Company has generated revenues through
the sale or leasing of oil and natural gas leasehold interests; however, no
significant revenues were generated from this source for the last five years.
Government Regulation
The Company's operations are indirectly affected by political
developments and by federal, state and local laws and regulations.
Legislation and administrative regulations relating to the oil and natural
gas industry are periodically changed for a variety of political, economic
and other reasons. Numerous federal, state and local departments and agencies
issue rules and regulations binding on the oil and natural gas industry, some of
which carry substantial penalties and sanctions for failure to comply. The
regulatory burden on the industry increases the cost of doing business,
decreases flexibility in the timing of operations and may adversely affect the
economics of capital projects. 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 natural gas wells.
In the past, the federal government has regulated the prices at which oil
and natural gas could be sold. Prices of oil and natural gas sold by the Company
are not currently regulated, but there is no assurance that such regulatory
treatment will continue indefinitely into the future. Congress, or in the case
of certain sales of natural gas by pipeline affiliates over which it retains
jurisdiction, the Federal Energy Regulatory Commission ("FERC") could re-enact
price controls or other regulations in the future.
In recent years, FERC has taken significant steps to increase competition
in the sale, purchase, storage and transportation of natural gas. FERC's
regulatory programs allow more accurate and timely price signals from the
consumer to the producer and, on the whole, have helped natural gas become more
responsive to changing market conditions. To date, the Company believes it has
not experienced any material adverse effect as the result of these initiatives.
Nonetheless, increased competition in natural gas markets can and does add to
price volatility and inter-fuel competition, which increases the pressure on
the Company to manage its exposure to changing conditions and position itself
to take advantage of changing markets. Additional proposals are pending before
Congress and FERC that might affect the oil and natural gas industry. The oil
and natural gas industry has historically been heavily regulated at the federal
level; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by FERC and Congress will continue.
State statutes govern exploration and production operations, conservation
of oil and natural gas resources, protection of the correlative rights of oil
and natural gas owners and environmental standards. State Commissions implement
their authority by establishing rules and regulations requiring permits for
drilling, reclamation of production sites, plugging bonds, reports and other
matters. There can be no assurance that, in the aggregate, these and other
regulatory developments will not increase the cost of operations in the future.
Environmental Matters
The Company's operations are indirectly subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection.
The Company's operations are indirectly subject to stringent federal,
state and local laws governing the discharge of materials into the environment
or otherwise relating to environmental protection. Numerous governmental
departments such as the Environmental Protection Agency ("EPA")
issue regulations to implement and enforce such laws, which are often difficult
and costly to comply with and which carry substantial civil and criminal
penalties and sanctions for failure to comply. These laws and regulations
may require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentrations of various substances that can be released
into the environment in connection with drilling, production and transporting
through pipelines, limit or prohibit drilling activities on certain lands lying
within wilderness, wetlands, frontier and other protected areas, require some
form of remedial action to prevent pollution from former operations such as
plugging abandoned wells, and impose substantial liabilities for pollution
resulting from operations. In addition, these laws, rules and regulations may
restrict the rate of production. The regulatory burden on the oil and natural
gas industry increases the cost of doing business and affects profitability.
Changes in environmental laws and regulations occur frequently, and changes
that result in more stringent and costly waste handling, disposal or clean-up
requirements could adversely affect the Company's operations and financial
position, as well as the industry in general.
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 natural gas
wells and leases. Currently, the Company does not act as the operator of the
oil and natural gas wells from which it receives revenues. The effect of a
violation by an Operator of a well in which the Company had a working interest
would be that the Company might incur its pro-rata share of the cost of the
violation.
The Company is not aware of any instance in which it was found to be in
violation of any environmental or employee regulations or laws, and the Company
is not subject to any present litigation or claims concerning such matters.
In some instances the Company could in the future incur liability, even as a
non-operator, for potential environmental waste or damages or employee claims
occurring on oil and natural gas properties or leases in which the Company has
an ownership interest.
Forward-Looking Statements
Certain information included in this report, other materials filed or to be
filed by the Company with the Securities and Exchange Commission ("SEC"), as
well as information included in oral statements or other written statements made
or to be made by the Company contain or incorporate by reference certain
statements (other than statements of historical or present fact) that constitute
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All
statements, other than statements of historical or present facts, that address
activities, events, outcomes or developments that the Company plans, expects,
believes, assumes, budgets, predicts, forecasts, estimates, projects, intends or
anticipates (and other similar expressions) will or may occur in the future are
forward-looking statements. These forward-looking statements are based on
management's current belief, based on currently available information, as to the
outcome and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this Form 10-K. Such forward-looking statements appear in a number
of places and include statements with respect to, among other things, such
matters as: future capital, development and exploration expenditures (including
the amount and nature thereof), drilling, deepening or refracing of wells, oil
and natural gas reserve estimates (including estimates of future net revenues
associated with such reserves and the present value of such future net
revenues), estimates of future production of oil and natural gas, expected
results or benefits associated with recent acquisitions, business strategies,
expansion and growth of the Company's operations, cash flow and anticipated
liquidity, grassroots prospects and development and property acquisition,
obtaining financial or industry partners for prospect or program development, or
marketing of oil and natural gas. We caution you that these forward-looking
statements are subject to all of the risks and uncertainties, many of which are
beyond our control, incident to the exploration for and development, production
and sale of oil and natural gas. These risks include but are not limited to:
general economic conditions, the market price of oil and natural gas, the risks
associated with exploration, the Company's ability to find, acquire, market,
develop and produce new properties, operating hazards attendant to the oil and
natural gas business, uncertainties in the estimation of proved reserves and in
the projection of future rates of production and timing of development
expenditures, the strength and financial resources of the Company's competitors,
the Company's ability to find and retain skilled personnel, climatic conditions,
labor relations, availability and cost of material and equipment, environmental
risks, the results of financing efforts, regulatory developments and the other
risks described in this Form 10-K.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact way.
The accuracy of any reserve estimate depends on the quality of available data
and the interpretation of that data by geological engineers. In addition, the
results of drilling, testing and production activities may justify revisions of
estimates that were made previously. If significant, these revisions could
change the schedule of any further production and/or development drilling.
Accordingly, reserve estimates are generally different from the quantities of
oil and natural gas that are ultimately recovered.
Should one or more of the risks or uncertainties described above or
elsewhere in this Form 10-K occur, or should underlying assumptions prove
incorrect, our actual results and plans could differ materially from those
expressed in any forward-looking statements. We specifically disclaim all
responsibility to publicly update any information contained in a forward-
looking statement or any forward-looking statement in its entirety and
therefore disclaim any resulting liability for potentially related damages.
All forward-looking statements attributable to Croff or its management
are expressly qualified in their entirety by this cautionary statement.
Fluctuations in Profitability of the Oil and Natural Gas Industry
The oil and natural gas industry is highly cyclical and historically
has experienced severe downturns characterized by oversupply and weak demand.
Many factors affect our industry, including general economic conditions,
consumer preferences, personal discretionary spending levels, interest rates
and the availability of credit and capital to pursue new production
opportunities. It is possible that the oil and natural gas industry will
experience sustained periods of decline in the future. Any such decline
could have a material adverse affect on our business.
Competition
The oil and natural gas industry is highly competitive. The Company
encounters competition in all of its operations, including the acquisition of
exploration and development prospects and producing properties. The Company
competes for acquisitions of oil and natural gas properties with numerous
entities, including major oil companies, other independents, and individual
producers and operators. Almost all of these competitors have financial and
other resources substantially greater than those of the Company. The ability
of the Company to increase reserves in the future will be dependent on its
ability to select and successfully acquire suitable producing properties and
prospects for future development and exploration.
Estimates of Oil and Natural Gas Reserves, Production and Replacement
The information on proved oil and natural gas reserves included in this
document are simply estimates. The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological
interpretation and judgment, assumptions used regarding quantities of oil and
natural gas in place, recovery rates and future prices for oil and natural gas.
Actual prices, production, development expenditures, operating expenses and
quantities of recoverable oil and natural gas reserves will vary from those
assumed in our estimates, and such variances may be significant. If the
assumptions used to estimate reserves later prove incorrect, the actual
quantity of reserves and future net cash flow could be materially different
from the estimates used herein. In addition, results of drilling, testing and
production along with changes in oil and natural gas prices may result in
substantial upward or downward revisions.
Corporate Offices and Employees
The corporate offices are located at 621 17th Street, Suite 830, Denver,
Colorado 80293. The Company is not a party to any lease, but during 2003 paid
Jenex Petroleum Corporation, which is owned by the Company's President, for
office space and all office services, including rent, phone, office supplies,
secretarial, land, and accounting. The Company's expenses for these services
were $24,000, $24,000 and $30,000 for the years ended 2001, 2002 and 2003,
respectively. Although these transactions were not a result of "arms length"
negotiations, the Company's Board of Directors believes the transactions are
reasonable.
The Company currently has five (5) directors. The Company has one
employee, the President, and two contract workers. The contract workers are
provided to the Company as part of its office lease and overhead agreement.
The President and the contract workers work from the Company's corporate
offices. None of the Croff staff is represented by a union.
Foreign Operations and Subsidiaries
The Company has no foreign operations, exports, or subsidiaries.
ITEM 2. PROPERTIES
General
The Company remains focused on finding low risk oil and natural gas
opportunities. In 2002, the Company purchased working interests in ten new
wells, two in Michigan, seven in Texas, and one in Montana. In addition, the
Company acquired an additional 44% working interest in one natural gas well
located in Le Flore County, Oklahoma, in which the Company previously held a
5% working interest. During 2003, the Company prepared for a drilling program
to develop an oil and natural gas producing trend in the Wilcox sand and
Edwards limestone in South Texas. In 2003, the Company also continued its
acquisition program by purchasing working interests in two producing wells,
one in Michigan and one in Texas.
The Company's "Developed acreage" consists of leased 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 natural gas.
The Company's "Gross acreage" is defined as total acres in which the Company
has an interest; "Net acreage" is the actual number of mineral acres owned by
the Company. Most developed acreage is held by production. The remaining
acreage leases expire in 1 to 3 years. The acreage is concentrated in
Alabama, Michigan, New Mexico, Oklahoma, Texas, and Utah and is widely
dispersed in Colorado, Montana, North Dakota, and Wyoming.
During 2003, the Company's production averaged 145 Mcf of natural gas and
21 Bbl of oil per day. "Proved developed" oil and natural gas reserves are
reserves expected to be recovered from existing wells with existing equipment
and operating methods. "Proved undeveloped" oil and natural 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 re-completion.
The quantities and values in the tables that follow are based on average
prices for the year 2003 which averaged $28.32 per barrel of oil and $4.09 per
Mcf of natural gas or in some cases constant prices in effect at December 31,
2003. Higher prices increase reserve values by raising the future net revenues
attributable to the reserves and increasing the quantities of reserves that
are recoverable on an economic basis. Price decreases have the opposite
effect. A decline in the prices of oil or natural gas could have a material
adverse effect on the Company's financial condition and results of operations.
Proved developed reserves are proved reserves that are expected to be
recovered from existing wells with existing equipment and operating methods
under current economic conditions. Proved undeveloped reserves are proved
reserves that are expected to be recovered from new wells drilled to known
reservoirs on undrilled acreage for which the existence and recoverability
of such reserves can be estimated with reasonable certainty, or from
existing wells where a relatively major expenditure is required to establish
production.
Future prices received from production and future production costs may
vary, perhaps significantly, from the prices and costs assumed for purposes
of these estimates. There can be no assurance that the proved reserves will
be developed within the periods indicated or that the prices and costs will
remain constant. There can be no assurance that actual production will
equal the estimated amounts used in the preparation of reserve projections.
The present values shown should not be construed as the current market
value of the reserves. The quantities and values shown in the tables that
follow are based on oil and natural gas prices in effect on December 31,
2003. The value of the Company's assets is in part dependent on the prices
the Company receives for oil and natural gas, and a decline in the price of
oil or natural gas could have a material adverse effect on the Company's
financial condition and results of operations. The 10% discount factor used to
calculate present value, which is specified by the Securities and Exchange
Commission (the "SEC"), is not necessarily the most appropriate discount rate,
and present value, no matter what discount rate is used, is materially affected
by assumptions as to timing of future production, which may prove to be
inaccurate. The calculation of estimated future net revenues does not take into
account the effect of various cash outlays, including, among other things,
general and administrative costs.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures. The data in the tables that follow represent
estimates only. Oil and natural gas reserve engineering must be recognized
as a subjective process of estimating underground accumulations of oil and
natural gas that cannot be measured in an exact way. The accuracy of any
reserve estimate is a function of the quality of available data and
engineering and geological interpretation and judgment. Results of drilling,
testing and production after the date of the estimate may justify revisions.
Accordingly, reserve estimates are often materially different from the
quantities of oil and natural gas that are ultimately recovered.
An independent petroleum engineering firm compiled the proved oil and
natural gas reserves and future revenues as of December 31, 2002 and
December 31, 2003 for the Company's most significant wells. Management
completed the 2002 and 2003 reserve reports from these base studies. Since
December 31, 2003, the Company has not filed any estimates of its oil and
natural gas reserves with, nor was any such estimates included in any
reports to, any state or federal authority or agency, other than the
Securities and Exchange Commission. Management of the Company, none of
whom are licensed as either petroleum reservoir engineers or geologists,
compiled the entire 2001 reserve estimates.
For additional information concerning oil and natural gas reserves, see
Supplemental Information - Disclosures about Oil and Natural Gas Producing
Activities - Unaudited, included with the Financial Statements filed as a
part of this report.
The following table sets forth summary information with respect to
estimated proved reserves at December 31, 2003.
ESTIMATED PROVED RESERVES
As of December 31, 2003
Net Oil Net Gas Pre-Tax Present
Area (Bbls) (Mcf) Value 10%
------------------- ----------- ----------- -------------------
Alabama - 1,357 $ 3,188
Colorado 2,520 38,145 106,663
Michigan 47,346 86,906 506,130
New Mexico 49 89,820 168,870
North Dakota 6,235 2,384 40,454
Oklahoma 4,446 135,902 174,893
Texas 1,835 22,160 49,931
Utah 9,575 75,907 136,865
Wyoming 2 24,686 70,006
------ ------- ----------
Total 75,904 477,267 $1,257,000
For the year ended December 31, 2003, the Company had no delivery
commitments with respect to the production of oil and natural gas. The
Company is unaware of the circumstances pertaining to any delivery
commitments on royalty wells. The following table sets forth summary
information with respect to oil and natural gas production for the year
ended December 31, 2003.
STATE GEOGRAPHIC DISTRIBUTION OF NET PRODUCTION
Net Oil Net Gas
State (Bbls) (Mcf)
-------------------- ----------- -----------
Alabama - 304
Colorado 148 9,029
Michigan 3,091 6,541
Montana 164 -
New Mexico - 8,728
North Dakota 757 561
Oklahoma 499 21,339
Texas 355 2,376
Utah 2,167 1,532
Wyoming 475 2,591
----- ------
Total 7,656 52,998
The following table sets forth summary information with respect to the
Company's estimated number of productive wells as of December 31, 2003.
PRODUCTIVE WELLS AND ACREAGE (1)
As of December 31, 2003
Net
Gross Oil Gross Gas Net Oil Net Gass with
Area Wells(2) Wells(2) Wells Wells Production
- --------------- ---------- ---------- ---------- ---------- ------------
Alabama - 2 - .01 10
Colorado 1 9 .04 .02 40
Michigan 3 33 .98 .19 188
New Mexico 178 205 .01 .03 55
North Dakota 2 2 .12 .12 38
Oklahoma 1 5 .25 1.28 173
Texas 6 7 .08 .08 349
Utah 238 28 .20 .13 650
Wyoming 2 1 .14 .12 120
--- --- ---- ---- -----
Total 431 292 1.82 1.92 1,645
The Company's "Gross Wells" is defined as total number of wells in which the
Company has any interest in; "Net Wells" is defined as the Company's total
percentage of ownership interest; "Net acreage" is the actual number of mineral
acres owned by the Company.
(1) This chart contains estimates associated with small mineral interests
and small leases.
(2) Wells included twice if it produces both oil and gas.
The following table sets forth summary information with respect to the
Company's undeveloped acreage as of December 31, 2003.
UNDEVELOPED ACREAGE
As of December 31, 2003
Total Undeveloped Acreage
----------------------------------------------------
Area Proven Unproven
------------------- ------------------------ ------------------------
Gross Acres Net Acres Gross Acres Net Acres
----------- ----------- ----------- -----------
Colorado 80 7 600 40
Montana - - 3,800 250
Texas 1,100 900 - -
Utah 8,000 140 102,000 3,300
Oil and Natural Gas Mineral Interests and Royalties
The Company owns perpetual mineral interests which total approximately
4,600 net mineral acres, of which approximately 1,100 net acres are producing.
The mineral interests are located in 110,000 gross acres primarily in Duchesne,
Uintah and Wasatch Counties in Utah, and approximately 40 net mineral acres in
La Plata County, Colorado, and San Juan County, New Mexico.
During the past three years, the Company has executed a few new leases or
renewals on its perpetual mineral interests. Overall, however, the amount of
new leasing was not significant. In 2003, the Company leased 22 acres of gross
mineral interest in Duchesne County, Utah to Berry Corp. In 2002, the Company
leased approximately 136 acres of its gross mineral interests in Duchesne
County, Utah to Armstrong Oil and Gas and Petroglyph Corp. There was
increased production from the Company's perpetual mineral interests in San Juan
County, New Mexico, due to the fact that field drilling continued for coal bed
methane natural gas. In 2001, the Company received revenues, which had been
suspensed, from the Company's holdings in La Plata County, Colorado. These
leases were part of a group of patented mineral rights being challenged by the
Colorado Ute Indian Tribe as being invalid because they were on an Indian
reservation. This lawsuit eventually reached the US Supreme Court where the
Court ruled in favor of the holders of the mineral interests. After this
decision, Amoco released suspensed royalty payments.
As of December 31, 2003, the Company was receiving royalties from
approximately 200 producing wells, primarily in the Bluebell-Altamont field in
Duchesne and Uintah Counties, Utah. Royalties also were received from scattered
interests in Alabama, Colorado, New Mexico, Texas, and Wyoming.
Oil and Natural Gas Working Interests
The Company has sought to increase its production of oil and natural gas
through the purchase of producing leases. The Company believes, in general,
that it is able to purchase working interests at a more reasonable price than
royalty interests. A working interest requires the owner to pay its
proportionate share of the costs of producing the well, while a royalty is
paid out of the revenues without a deduction for the operating costs of the
well. When oil or natural gas prices drop, the proportion of the revenues
going to pay the expense of operating the well increases, and when oil and
natural gas prices are rising, expenses decrease as a percentage of total
revenues.
The Company's purchases of working interests are intended increase oil
and natural gas production over time. Earlier than 1985 the Company
participated in new wells drilled 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. Since 1985, the Company primarily
participates as a working interest owner in drilled wells.
AVERAGE SALES PRICES AND PRODUCTION COST
The following table sets forth summary information with respect to the
Company's average sales price per barrel (oil) and Mcf (1000 cubic feet of
natural gas), together with production costs for units of production for the
Company's production revenues by geographic area for the last three years.
AVERAGE SALES PRICES AND PRODUCTION COST
Past Three Years by Geographic Area
Average Sales Price* Average Production Cost*
--------------------------------------------- --------------------------------------------
2003 2002 2001 2003(1) 2002(1) 2001(2)
------------- ------------- ------------- ------------- ------------- ------------
Geographic Area Oil Gas Oil Gas Oil Gas Oil Gas Oil Gas Oil Gas
- --------------- | ------ ------ | ------ ------ | ------ ------ | ------ ------ | ------ ------ | ------ ------ |
| | | | | | |
| | | | | | |
Alabama | $ - $ 4.18 | $ - $ 2.96 | $ - $ 2.22 | $ n/a $ 1.12 | $ n/a $ 0.79 | $ - $ - |
Colorado | $31.54 $ 3.85 | $21.28 $ 1.75 | $24.64 $ 4.33 | $12.58 $ 0.07 | $ 8.49 $ 0.03 | $ - $ - |
Michigan | $28.50 $ 4.39 | $25.96 $ 3.15 | $16.52 $ 3.13 | $ 5.78 $ 1.17 | $ 5.27 $ 0.84 | $ - $ - |
Montana | $27.97 $ - | $20.58 $ - | $20.80 $ - | $14.31 $ n/a | $10.53 $ n/a | $ - $ - |
New Mexico | - $ 4.42 | $27.14 $ 3.10 | $24.33 $ 4.35 | $ n/a $ 0.27 | $ 2.34 $ 0.19 | $ - $ - |
North Dakota | $28.43 $ 1.93 | $23.49 $ 1.64 | $24.40 $ 1.51 | $ 8.42 $ 1.19 | $ 6.96 $ 1.01 | $ - $ - |
Oklahoma | $26.42 $ 4.28 | $22.88 $ 2.18 | $22.97 $ 4.07 | $14.14 $ 2.75 | $12.25 $ 1.40 | $ - $ - |
Texas | $28.01 $ 4.18 | $25.43 $ 2.89 | $19.41 $ 4.28 | $11.51 $ 2.23 | $10.45 $ 1.54 | $ - $ - |
Utah | $29.15 $ 2.99 | $22.55 $ 1.49 | $24.66 $ 2.85 | $ 3.92 $ 0.04 | $ 3.03 $ 0.02 | $ - $ - |
Wyoming | $24.50 $ 4.05 | $16.38 $ 2.36 | $19.30 $ 2.93 | $ 8.96 $ 1.05 | $ 5.99 $ 0.61 | $ - $ - |
* Oil is per Bbl and Gas is per Mcf.
(1) States with higher production from royalty interests such as Utah, reflect a lower cost per barrel or Mcf
(2) The Company did not account for production cost by state prior to 2002. Average production cost for the
Company was $7.82 per barrel and $0.95 per Mcf for the year 2001.
The average production cost for oil increased in 2003 compared to 2002.
This increase was generally attributable to higher production taxes as a result
of higher sales prices received during 2003 compare to 2002. The average
production cost for oil decreased in 2002 from 2001 due to higher prices and
lower taxes on oil wells. The other costs were somewhat lower due to less
workover related costs.
The average production cost for natural gas increased in 2003 compared to
2002. This increase was generally attributable to higher production taxes as a
result of higher sales prices received during 2003 compare to 2002. The average
production cost for natural gas decreased in 2002 due to lower production taxes
and less workover expenses compared to 2001.
Present Activities - 2004 Edwards-Wilcox Natural Gas Development Program
During 2003, the Company began preparing a drilling program to develop an
oil and natural gas producing trend in the Wilcox sand and Edwards limestone in
South Texas. The Company acquired non-producing mineral leases with re-entry
wells in DeWitt County, Texas for $119,190 and spent $28,518 for land work, pipe
and other tangible costs related to this 2004 Edwards-Wilcox Natural Gas
Development Program. The Wilcox exists at a depth of about 9,000 feet and the
Edwards at about 14,000 feet in Croff's leases in DeWitt County, Texas. The
Wilcox formation is a natural gas formation stretching from the Rio Grande
northeast across South Texas. At this time, some independents are drilling in
the Wilcox trend. The Company's management is in the process of seeking
financing and at this time no financing commitments have been obtained. There
is no assurance of any such financing being obtained at acceptable terms.
The 2004 Edwards-Wilcox Natural Gas Development Program contains up to 12
re-entry wells with three Edwards and Wilcox prospects and nine Wilcox
re-entries. Management believes these zones were not depleted during earlier
production due to lack of pipelines, markets and low natural gas prices.
Existing logs of these wells permit reasonable prediction of the size and
potential productivity of the Edwards limestone and Wilcox natural gas
producing sands. They can be further evaluated from offsetting Wilcox natural
gas-producing wells. Additional production may be possible from new offset
drilling after the re-entry wells are in production.
The size, timing and extent of this proposed drilling program will depend
on the Company's ability to secure acceptable financing or identify viable
joint interest partners. The Company has planned a drilling program utilizing
drilling with 3-1/2 inch tubing which would then be cemented in place after
reaching the Wilcox. In addition, a small frac is usually necessary for
completion. The re-completion into existing well bores is budgeted at less
than $500,000 per average well. The Company has contracted with an experienced
team of professionals, who will oversee the field operations. The area has
several pipelines available.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any significant legal actions.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 19, 2003, the annual meeting of shareholders was held. The
shareholders elected the five board members listed under Item 10, and
ratified Causey Demgen & Moore, Inc. as independent auditors of the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed and occassionally traded on the Over
The Counter Bulletin Board (www.otcbb.com) under symbol "COFF". The Company has
authorized 20,000,000 shares of common stock, of which only 566,900 shares are
outstanding to 1,178 shareholders. The preferred B shares also have an
extremely limited market, but are traded from time to time through a
Clearinghouse held by the Company. The Company acts as its own transfer agent
with respect to these preferred B shares. In 2002, the Company launched an
Internet based site for trading its shares at www.croff.com. Bids and offers
can be posted for both preferred B shares and common shares on this website.
In addition the Company posts its recent SEC filings on the website.
The trading range for 2001 through 2003 is shown for common shares and
preferred shares as a guide to as to what transactions have either taken place
or of which the Company is aware of the bid or ask price
COMMON SHARES - 566,900 SHARES OUTSTANDING FOR 2003 - (The following data is
generated from limited trades from the Company's website, the
over-the-counter bulletin board or internal purchases by the
Company or its management.)
BID RANGE
Calendar Quarter Bid Asked
---------------- ------ ------
2001: First Quarter $ .90 $1.00
Second Quarter $ .90 $1.00
Third Quarter $ .90 $1.00
Fourth Quarter $ .90 $1.00
2002: First Quarter $ .90 $1.00
Second Quarter $ .90 $1.00
Third Quarter $ .90 $1.00
Fourth Quarter $ .90 $1.00
2003: First Quarter $ .90 $1.00
Second Quarter $ .90 $1.00
Third Quarter $ .90 $1.00
Fourth Quarter $ .90 $1.25
As of December 31, 2003, there were 1,178 holders of record of the
Company's common stock. The Company has never paid a dividend and has no
present plan to pay any dividend.
PREFERRED "B" SHARES - 540,659 SHARES OUTSTANDING - (The following data is
generated solely from private transactions or internal
purchases by the Company)
BID RANGE
Calendar Quarter Bid Asked
---------------- ------ ------
2001: First Quarter No Trading No Trading
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter No Trading No Trading
2002: First Quarter No Trading No Trading
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter No Trading No Trading
2003: First Quarter No Trading No Trading
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter No Trading No Trading*
* In early 2004, 250 shares preferred stock were traded at
$1.05 per share in two separate private transactions.
Historical Events of Interest
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 issued all of
the preferred shares and delivered the preferred B shares to each of the
shareholders for which it had a current address.
In November 1991, Croff reverse-split the common stock on a ratio of 1
share of common stock for every 10 shares previously held. A trading range
of approximately $1.00 to $1.10 per bid was established and prevailed for
approximately four years.
In June 2000, the Company approved the increase in the authorized Class B
Preferred stock to 1,000,000 shares.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected historical financial data of the
Company for the five-year period ended December 31, 2003. Future results may
differ substantially from historical results because of changes in oil and
natural gas prices, production increases or declines and other factors. This
information should be read in conjunction with the Financial Statements, and
notes thereto, and Management's Discussion and Analysis of Financial Condition
and Results of Operations, presented elsewhere herein
STATEMENT OF OPERATIONS DATA
Fiscal Year Ended December 31:
1999 2000 2001 2002 2003
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
Operations
Oil and Gas $214,190 $368,022 $332,573 $286,602 $392,564
Other Revenues $ 4,115 $ 1,347 $ 32,652 $ 28,726 $ 23,362
Expenses $205,875 $237,701 $303,690 $216,416 $321,817
Net Income<loss> $ 12,430 $131,668 $ 61,535 $ 98,912 $ 94,109
Per Common Share $ * $ .01 $ .06 $ .04
Working capital $ 90,697 $273,295 $385,816 $419,475
Dividends per share NONE NONE NONE NONE NONE
* - Less than .01 per share
BALANCE SHEET DATA
Total assets $498,162 $628,172 $695,124 $753,212 $898,221
Long-term debt** NONE NONE NONE NONE NONE
Stockholders' equity $480,353 $611,966 $672,085 $736,408 $866,112
** There were no long-term obligations from 1999-2003.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operation are based upon financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements
requires the Company to make estimates and judgments that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the year. The Company analyzes its estimates,
including those related to oil and natural gas revenues, oil and natural 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 natural gas properties under the successful efforts method of
accounting.
The Company periodically evaluates its oil and natural 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 natural gas properties on the unit-of-
production method, based upon estimates of recoverable oil and natural gas
reserves from the property. The Company has designated its marketable equity
securities as "securities available for sale".
Liquidity and Capital Resources
At December 31, 2003, the Company had assets of $898,221. At December 31,
2003, the Company's current assets totaled $368,580 compared to current
liabilities of $32,109. Working capital at December 31, 2003 totaled $336,471,
a decrease of 20% compared to $419,475 at December 31, 2002. The Company had a
current ratio at December 31, 2003 of approximately 11:1. The market value of
the Company's marketable equity securities were $41,210 below cost at
December 31, 2003. During 2003, net cash provided by operations totaled
$140,003, as compared to $100,077 in 2002. The Company's cash flow from
operations is highly dependent on oil and natural gas prices. The Company had
no short-term or long-term debt outstanding at December 31, 2003.
At December 31, 2003, there were no significant commitments for capital
expenditures. Capital expenditures for 2003, totaled $247,708. The Company
acquired non-producing mineral leases with re-entry wells in DeWitt County,
Texas for $119,190 and spent $28,518 for land work, pipe and other tangible
costs related to this South Texas development program. The successful
development of these assets will require the Company to raise several million
dollars. The Company was no financing commitments at this time. During 2003,
the Company acquired a 10% working interest in one well in Hardin County, Texas
for $30,000 and a 20% working interest in one well in Cheboygan County, Michigan
for $70,000. The Company is uncertain at this time as to the size and extent of
its 2004 capital budget.
In 2003, the Company prepared a drilling fund that could be sold, along
with the Company's common stock to raise money for exploratory or development
drilling. The Board of Directors authorized management to draft a preliminary
plan, discuss financing, and investigate joint venture partners and identify
prospective properties. No financing commitments have been obtained at this
time and there is no assurance of any such financing being obtained.
The Company's plans for ongoing development, acquisition and exploration
expenditures, and possible equity repurchases over and beyond the Company's
operating cash flows will depend entirely on the Company's ability to secure
acceptable financing. Bank borrowings may be utilized to finance the
Company's 2004 capital budget as well as possible joint ventures or future
public or private offerings of debt or the Company's equity securities. In
addition, the Company will utilize its internal operating cash flows,
however, future cash flows are subject to a number of variables, including the
level of production and oil and natural gas prices, and there can be no
assurance that operations and other capital resources will provide cash in
sufficient amounts to maintain planned levels of capital expenditures or that
increased capital expenditures will not be undertaken.
The Company believes that borrowings from financial institutions,
projected operating cash flows and the cash on hand will be sufficient to
cover its working capital requirements for the next 12 months. In connection
with consummating any significant acquisition or funding an exploratory or
development drilling program, additional debt or equity financing will be
required, which may or may not be available on terms that are acceptable to
the Company.
While certain costs are affected by the general level of inflation,
factors unique to the oil and natural gas industry result in independent
price fluctuations. Over the past five years, significant fluctuations have
occurred in oil and natural gas prices. Although it is particularly difficult
to estimate future prices of oil and natural gas, price fluctuations have had,
and will continue to have, a material effect on the Company. Overall, it is
management's belief that inflation is generally favorable to the Company since
it does not have significant operating expenses.
Results of Operations
Revenues for 2003 totaled $415,926, an increase of 32% from 2002. Net
income for 2003 totaled $94,109 compared to $98,912 in 2002. The increase in
revenue was due primarily to increases in oil and natural gas prices as well
as a 25% increase in oil production, which more than offset an 8% decrease in
natural gas production. The average sale price of oil in 2003 for the Company
was $28.32 compared to $22.62 in 2002. The average sale price of natural gas
in 2003 for the Company was $4.09 per Mcf, compared to $2.56 per Mcf in 2002.
Production of oil increased approximately 25% in 2003, while production of
natural gas decreased 8% compared to 2002 production levels. Oil production
increased primarily due to the acquisition of certain oil producing properties
in 2002. The Company realized a loss during 2003 of $45,022 related to its
purchase of natural gas "put" contracts which had a strike price of $4.75 per
Mcf. The Company realized a gain on the sale of marketable equity securities
totaling $19,450 and $23,026 for the years ended December 31, 2003 and 2002,
respectively. Other income, which is composed primarily of interest and
dividend income, decreased approximately 31% during 2003 to $3,912 from $5,700
in 2002. Net income for 2003 decreased slightly from 2002 primarily as a result
of a realized a loss incurred of $45,022 during 2003, related to the purchase of
natural gas "put" contracts which had a strike price of $4.75 per Mcf.
Revenues for 2002 totaled $315,328, a decrease of 14% from 2001. Net
income for 2002 totaled $98,912 compared to $61,535 in 2001. The decrease in
revenue was due primarily to decreases in oil and natural gas prices, which
more than offset increases in oil and natural gas production. The average
sale price of oil in 2002 for the Company was $22.62 compared to $22.42 in
2001. The average sale price of natural gas in 2002 for the Company was
$2.56 per Mcf, compared to $3.50 per Mcf in 2001. Production of oil
increased approximately 29% in 2002, while production of natural gas remained
constant. Oil production increased primarily due to the acquisition of new
wells in Michigan. The Company realized a gain on the sale of marketable
equity securities totaling $23,026 and $22,193 for the years ended
December 31, 2002 and 2001, respectively. Other income, which is composed
primarily of interest and dividend income, decreased approximately 46% during
2002 to $5,700 from $10,459 in 2001. The Company maintained a larger balance
of its working capital in marketable equity securities than in interest and
dividend bearing money market accounts for 2002 compared to 2001.
Lease operating expense, which includes all production related taxes,
increased by approximately $54,000 in 2003 to $130,793 compared to $77,065 in
2002. Lease operating expenses increased primarily due to the acquisition of
certain working interests in 2002, as well as increases associated with higher
production related taxes associated with the increases in oil and natural gas
prices.
Lease operating expense, which includes all production related taxes,
decreased by approximately $39,000 in 2002 to $77,065 compared to $116,190 in
2001. The primary reason for this decrease was the facts that the Company did
not participate in any well workovers or reworks during 2002, nor did the
Company incur any impairment losses during 2002. In 2001, the Company had an
impairment loss of approximately $34,000.
The Company incurred $13,780 in costs related to its proposed 2004
Edwards-Wilcox Natural Gas Development Program. During 2003, the Company
began preparing a drilling fund that could be sold, along with the
Company's common stock to raise money for exploratory or development
drilling. The Board of Directors authorized management to draft a preliminary
plan, discuss financing, and investigate joint venture partners and identify
prospective properties. No financing commitments have been obtained at this
time and there is no assurance of any such financing being obtained.
General and administrative expense, including rent for 2003, totaled
$132,244 which is $24,893 higher than 2002 which totaled $107,351. This
increase was primarily attributable to approximately $15,000 in additional
costs incurred related to the preparation of the Company's Annual Report and
compliance with the Sarbanes-Oxley Act of 2002. In addition, the Company
incurred approximately $10,000 in additional general and administrative
expenses associated with the development of its proposed drilling fund.
General and administrative expense decreased approximately $6,000 to
$107,351 in 2002 from $113,393 in 2001. This decrease was primarily
attributable to lower annual meeting costs and lower website development
costs during 2002.
Recent Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, "Accounting fo
Stock-Based Compensation - Transition and Disclosure - an amendment of SFAS
No. 123." SFAS No. 148 amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require disclosures in both annual
and interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on the reported
results. SFAS No. 148 was effective for the Company's year ended December 31,
2002 and for interim financial statements commencing in 2003. The adoption of
this pronouncement did not have an impact on the Company's financial condition
or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities." SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under FASB Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 149 is generally effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of this
pronouncement did not have an impact on the Company's financial condition or
results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 establishes standards for how an issuer measures certain
financial instruments with characteristics of both liabilities and equity
and requires that an issuer classify a financial instrument within its scope
as a liability (or asset in some circumstances). SFAS No. 150 was effective
for financial instruments entered into or modified after May 31, 2003 and
otherwise was effective and adopted by the Company on July 1, 2003. As the
Company has no such instruments, the adoption of this statement did not have
an impact on the Company's financial condition or results of operations.
The FASB is currently evaluating the application of certain provisions of
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets," to companies in the extractive industries, including oil
and natural gas companies. The FASB is considering whether the provisions of
SFAS No. 141 and SFAS No.142 require registrants to classify costs associated
with mineral rights, including both proved and unproved lease acquisition costs,
as intangible assets in the balance sheet, apart from other oil and natural gas
property costs, and provide specific footnote disclosures.
Historically, the Company has included oil and natural gas lease
acquisition costs as a component of oil and natural gas properties. In the
event the FASB determines that costs associated with mineral rights are
required to be classified as intangible assets, approximately $216,000 of the
Company's oil and natural gas property acquisition costs may be required to be
separately classified on its balance sheets as intangible assets. However, the
Company currently believes that its results of operations and financial
condition would not be affected since such intangible assets would continue to
be depleted and assessed for impairment in accordance with existing successful
efforts accounting rules and impairment standards.
Quantitative and qualitative disclosures about market risk
The Company's major market risk exposure is in the pricing applicable to
its oil and natural gas production. Realized pricing is primarily driven by the
prevailing domestic price for oil and natural gas. Historically, prices
received for oil and natural gas production have been volatile and
unpredictable. Pricing volatility is expected to continue. Natural gas price
realizations during 2003, ranged from a monthly low of $2.05 per Mcf to a
monthly high of $6.19 per Mcf. Oil prices ranged from a monthly low of $20.05
per barrel to a monthly high of $35.67 per barrel during 2003. A decline in
prices of oil or natural gas could have a material adverse effect on the
Company's financial condition and results of operations. In 2003, a 10%
reduction in oil and natural gas prices would have reduced revenues by
approximately $43,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the Index to Financial Statements on page F-1 for a
listing of the Company's financial statements and notes thereto and for the
financial statement schedules contained herein.
Management Responsibility for Financial Statements
The Financial Statements have been prepared by management in conformity
with accounting principles generally accepted in the United States of America.
Management is responsible for the fairness and reliability of the Financial
Statements and other financial data included in this report. In the
preparation of the Financial Statements, it is necessary to make informed
estimates and judgments based on currently available information on the
effects of certain events and transactions.
The Company maintains accounting and other controls which management
believes provide reasonable assurance that financial records are reliable,
assets are safeguarded and transactions are properly recorded.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
Controls and procedures
The Company's principal executive officer and principal financial
officer have evaluated the effectiveness of Croff's "disclosure controls
and procedures," as such term is defined in Rule 13a-15(e) and 15d-15(c)
of the Securities Exchange Act of 1934, as amended, as of the end of the
period covered by this Annual Report on Form 10-K. Based upon their
evaluation, they have concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls, since the date the controls were evaluated.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors, Officers and Significant Employees.
The Croff Board consists of Gerald L. Jensen, Dilworth A. Nebeker,
Richard H. Mandel, Edwin W. Peiker, and Julian D. Jensen. Each director will
serve until the next annual meeting of shareholders, or until his successor is
duly elected and qualified. The 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. The following is provided with respect to each officer and director
of the Company as of March 16, 2004.
GERALD L. JENSEN, 64, 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
natural gas company, for over ten years, and an officer and director of other
Jenex companies. In 2000, Mr. Jensen became Chairman of Provisor Capital
Inc., a private finance company. Mr. Jensen was a director of Pyro Energy
Corp., a public company (N.Y.S.E.) engaged in coal production and oil and
atural gas, from 1978 until it was sold in 1989. Mr. Jensen is also an
owner of private real estate, finance, and oil and natural gas companies.
STUART D. KROONENBERG, 35, CHIEF FINANCIAL OFFICER AND SECRETARY
Mr. Kroonenberg has been the Company's Chief Financial Officer since
May 2001. Mr. Kroonenberg has over ten years experience as a CPA, including
two years as an Assurance Services Manager, for a large international CPA firm.
Mr. Kroonenberg has extensive experience working with small and mid-size public
and privately held companies. Mr. Kroonenberg is a contract employee of the
company described in Item 13.
RICHARD H. MANDEL, JR., 74, DIRECTOR
Mr. Mandel has been a director of Croff Enterprises, Inc. since 1986.
Since 1982, Mr. Mandel has been President and a Board Member of American
Western Group, Inc., an oil and natural gas producing company in Denver,
Colorado. From 1977 to 1984, he was President of Universal Drilling Co.,
Denver, Colorado.
DILWORTH A. NEBEKER, 63, DIRECTOR
Mr. Nebeker served as President of Croff from September 2, 1983 to
June 24, 1985, and has been a director of Croff since December 1981. He
is presently a consultant. Mr. Nebeker was a lawyer in private practice
from 1986 to 2001. He was a lawyer employed by Tosco Corporation, a
public corporation, from 1973 to 1978. He was a lawyer with the Securities and
Exchange Commission from 1967 to 1973. Mr. Nebeker is Chairman of the Croff
Audit Committee.
EDWIN W. PEIKER, JR., 72, DIRECTOR
Mr. Peiker currently serves as director of Croff. He was President of Royal
Gold, Inc., from 1988 through 1991, and continues to be a director. Since 1986,
Mr. Peiker has been a Vice President and Director of Royal Gold, Inc., a public
company engaged in gold exploration and mining activities. Prior thereto he was
involved in private investments in oil and natural gas exploration and
production. Mr. Peiker was employed in responsible positions with AMAX, Inc., a
public corporation, from 1963 to 1983. Mr. Peiker is a member of the Croff
Audit Committee.
JULIAN D. JENSEN, 56, DIRECTOR
Mr. Jensen has been a director of Croff Enterprises, Inc. since November
1991. Mr. Jensen is the brother of the Company's president and has served as
legal counsel to the Company for the past nine years. Mr. Jensen has practiced
primarily in the areas of corporate and securities law, in Salt Lake City, Utah,
since 1975. Mr. Jensen is currently associated with the firm of Jensen, Duffin
& Dibb, which acts as legal counsel for the Company.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Based solely on a review of such forms furnished to the Company and certain
written representations from the Executive Officers and Directors, the Company
believes that all Section 16(a) filing requirements applicable to its
Executive Officers, Directors and greater than ten percent beneficial owners
were complied with on a timely basis.
Audit Committee
The Board has established an Audit Committee to assist it in the discharge
of its responsibilities. The Audit Committee reviews the professional services
provided by independent public accountants and the independence of such
accountants from management. This Committee also reviews the scope of the audit
coverage, the quarterly and annual financial statements and such other matters
with respect to the accounting, auditing and financial reporting practices and
procedures as it may find appropriate or as have been brought to its attention.
Messrs. Nebeker and Peiker presently serve as members of the Audit Committee.
ITEM 11. EXECUTIVE COMPENSATION
Remuneration
During the fiscal year ended December 31, 2003, there were no officers,
employees or directors whose total cash or other remuneration exceeded
$80,000.
<CAPATION>
Summary Compensation Table
2003 Compensation Gerald L. Jensen, President. (No other executive salaries)
Name and position:
Gerald L. Jensen, President and Chairman
2001 2002 2003
- ---------------------------------------- --------- --------- ---------
Annual Compensation
- -------------------
Salary $54,000 $54,000 $54,000
Bonus $ - $ - $ -
Other Annual Compensation $ - $ - $ -
Long Term Compensation
- ----------------------
Awards
Restricted Stock Awards $ - $ - $ -
Payouts
No. Shares Covered by Option Grant 20,000 - -
Long Term Incentive Plan Payout $ - $ - $ -
All Other Compensation $ 1,620(1) $ 1,620(1) $ 1,620(1)
(1) Company IRA Contribution
Gerald L. Jensen is employed as the President and Chairman of Croff
Enterprises, Inc. Mr. Jensen commits a substantial amount of his time, but
not all, to his duties with the Company. Directors, excluding the President,
are not paid a set salary by the Company, but are paid $350 for each half-day
board meeting and $500 for each full-day board meeting.
Proposed Remuneration:
During 2004, the Company intends to compensate outside directors at the
rate of $350 for a half day meeting and $500 for a full day meeting. The
Chairman of the Company's Audit Committee is paid $500 per quarter and the
other member of the Audit Committee is paid at the rate of $350 per meeting.
Based on the proposed remuneration, for the fiscal year ending December 31,
2003, no officer or director shall receive total cash remuneration in excess
of $80,000.
Options, Warrants or Rights
The Company had no outstanding stock options, warrants or rights as of
December 31, 2002 or 2003. During 2001, 40,000 warrants were exercised and
10,000 warrants expired. In December 2001, the Company loaned three of its
directors a total of $40,000 associated with the exercise of their stock
warrants. The fully recourse notes due on December 31, 2002 bore interest at
6% per annum. All notes have been repaid.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Common stock and
preferred B stock of the Company as of December 31, 2003, 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.
<CAPTION
Shares of Percentage of Shares of Percentage
Owned Common Stock Owned Preferred
Beneficially Stock Beneficially Stock
------------ ------------- ------------ ----------
Gerald L. Jensen 230,514(1) 40.7% 253,191 46.8%
621 17th Street, Suite 830
Denver, Colorado 80293
Edwin W. Peiker, Jr. 4,000 0.7% 4,000 0.7%
550 Ord Drive
Boulder, Colorado 80401
Dilworth A. Nebeker 2,900 0.5% 2,900 0.5%
10823 Palliser Bay Drive
Las Vegas, Nevada 89141
Richard H. Mandel, Jr. 11,100 2.0% 16,202 3.0%
3333 E. Florida #94
Denver, Colorado 80210
Julian D. Jensen 31,663 5.6% 31,663 5.9%
311 South State Street, Suite 380
Salt Lake City, Utah 84111
Directors as a Group 280,177 49.4% 307,956 57.0%
(1) Includes 132,130 shares of Common and 132,130 shares preferred B held by
Jensen Development Company which is wholly owned by Gerald L. Jensen.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company currently has an office sharing arrangement with Jenex
Petroleum Corporation, hereafter "Jenex", which is owned by the Company's
President. The Company is not a party to any lease, but during 2003 paid Jenex
for office space and all office services, including rent, phone, office
supplies, secretarial, land, and accounting. Mr. Stuart Kroonenberg, the Chief
Financial Officer of the Company, is paid by Jenex pursuant to this arrangement,
but serves as an officer of Croff. These arrangements were entered into to
reduce the Company's overhead and are currently on a month-to-month basis. The
Company's expenses for these services were $30,000, $24,000 and $24,000 for the
years ended 2003, 2002 and 2001, respectively. Although these transactions
were not a result of "arms length" negotiations, the Company's Board of
Directors believes the transactions are reasonable.
In 2001 the Company considered acquiring Reef Energy Corporation, a
private oil and gas firm, in which the Company's President had purchased
approximately one-fourth interest. The Company loaned Reef Energy, as part of
a larger loan, $15,000 secured by assets of Reef Energy. This short-term
secured note bore interest at 10% per annum. At December 31, 2002, the balance
on this note including accrued interest was $9,318. This note was paid off in
full during 2003.
In 2001, the Company loaned three of its Directors, a total of $40,000
associated with the exercise of their stock warrants. The fully recourse notes
due on December 31, 2002 carried interest at 6% per annum. At December 31,
2002, one note remained unpaid, which totaled $10,600 including accrued
interest. This note was paid off in full during 2003.
The Company retains the legal services of Jensen, Duffin, & Dibb, LLP.
Julian Jensen, a Director of the Company, is part of this professional firm.
Legal fees paid to this law firm for the years ending 2003, 2002, and 2001 were
$2,256, $3,109 and $1,800, respectively.
The Company has working interests in five Oklahoma natural gas wells, which
are operated by Jenex, a company solely owed by Gerald Jensen, the Company's
President. As part of the 1998 purchase agreement, Jenex agreed to rebate to
Croff $150 of operating fees per well, each month, which now totals $750 per
month, as long as Jenex operated the wells and Croff retained its interest.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Causey Demgen & Moore Inc. ("CDM") has been recommended by the Audit
Committee of the Board and approved by the Company stockholder's for
reappointment as the independent auditors for the Company for the fiscal year
ended December 31, 2003. CDM is a member of the SEC Practice Section of the
American Institute of Certified Public Accountants. CDM have been acting as
independent accountants for the Company for thirteen years. Aggregate fees for
professional services rendered by CDM in connection with its last audit of the
company's consolidated Financial Statements as of and for the year ended
December 31, 2002 and its limited reviews of the Company's unaudited condensed
quarterly Financial Statements during 2003 and for other services rendered
during 2003 totaled $8,580.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
Financial Statements
See index to financial statements, Financial Statement schedules, and
supplemental information as referenced in Part II, Item 8, and the financial
index on page F-1 hereof. These reports are attached as exhibits and are
incorporated herein.
Reports on Form 8-K
None
Exhibit Index
Index certifications, financial statements, and supplemented information.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
REGISTRANT:
CROFF ENTERPRISES, INC.
Date: March 18, 2004 By: /S/Gerald L. Jensen
---------------- ------------------------------
Gerald L. Jensen, President,
Chief Executive Officer
Date: March 18, 2004 By: /s/Stuart D. Kroonenberg
---------------- ------------------------------
Stuart D. Kroonenberg,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, the
following persons on behalf of the Registrant and in the capacities and on the
date indicated have signed this report below.
Date: March 18, 2004 By: /S/Gerald L. Jensen
---------------- --------------------------------
Gerald L. Jensen, Chairman
Date: March 18, 2004 By: /S/Richard H. Mandel, Jr.
---------------- --------------------------------
Richard H. Mandel, Jr., Director
Date: March 18, 2004 By: /S/Edwin Peiker, Jr.
---------------- --------------------------------
Edwin Peiker, Jr., Director
Date: March 18, 2004 By: /S/Dilworth A. Nebeker
---------------- --------------------------------
Dilworth A. Nebeker, Director
Date: March 18, 2004 By: /S/Julian D. Jensen
---------------- --------------------------------
Julian D. Jensen, Director
Exhibit 31.1
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934: RULES 13a-14, 13a-15, 15d-14, and 15d-15
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Gerald L. Jensen, certify that:
1. I have reviewed this annual report on Form 10-K of Croff Enterprises, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying 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 is made known to us,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2004 By: /S/Gerald L. Jensen
---------------- ------------------------------
Gerald L. Jensen, President,
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECURITIES EXCHANGE ACT OF 1934: RULES 13a-14, 13a-15, 15d-14, and 15d-15
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stuart D. Kroonenberg, certify that:
1. I have reviewed this annual report on Form 10-K of Croff Enterprises, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual
report;
4. The registrant's other certifying 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 is made known to us,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the
registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2004 By: /S/Stuart D. Kroonenberg
---------------- ------------------------------
Stuart D. Kroonenberg
Chief Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Croff Enterprises, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Gerald
L. Jensen, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
Date: March 18, 2004 By: /S/Gerald L. Jensen
---------------- ------------------------------
Gerald L. Jensen, President,
Chief Executive Officer
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Croff Enterprises, Inc. (the "Company")
on Form 10-K for the period ending December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Stuart
D. Krooneberg, Chief Financial Officer of the Company, certify, pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations
of the Company.
Date: March 18, 2004 By: /S/Stuart D. Kroonenberg
---------------- ------------------------------
Stuart D. Kroonenberg
Chief Financial Officer
CROFF ENTERPRISES, INC.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES
AND SUPPLEMENTAL INFORMATION
Page Number
-----------
I. Financial Statements
Report of Independent Certified Public Accountants.................F-2
Balance Sheets as of December 31, 2002 and 2003....................F-3
Statements of Operations for the years ended December 31,
2001, 2002 and 2003................................................F-4
Statements of Stockholders' Equity for the years ended
December 31, 2001, 2002 and 2003...................................F-5
Statements of Cash Flows for the years ended December 31,
2001, 2002 and 2003................................................F-6
Notes to Financial Statements......................................F-7
II. Supplemental Information - Disclosures About Oil and
Gas Producing Activities - Unaudited..........................F-15
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Croff Enterprises, Inc.
We have audited the balance sheets of Croff Enterprises, Inc. at
December 31, 2002 and 2003, and the related statements of operations,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2003. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Croff Enterprises, Inc. as
of December 31, 2002 and 2003, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2003, in
conformity with accounting principles generally accepted in the United States
of America.
Denver, Colorado
March 15, 2004 CAUSEY DEMGEN & MOORE INC.
F-2
CROFF ENTERPRISES, INC.
BALANCE SHEETS
December 31, 2002 and 2003
2002 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 316,473 $ 154,490
Investments
Marketable equity securities, available for sale 61,540 48,470
Mutual funds - 77,429
Natural gas "put" contracts, at fair value - 7,660
Accounts receivable 48,948 80,531
Notes receivable, related parties 9,318 -
---------- ----------
436,279 368,580
---------- ----------
Oil and gas properties, at cost, successful efforts method:
Proved properties 640,755 888,463
Unproved properties 97,102 97,102
---------- ----------
737,857 985,565
Accumulated depletion and depreciation (420,924) (455,924)
---------- ----------
316,933 529,641
---------- ----------
Total assets $ 753,212 $ 898,221
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 15,481 $ 21,383
Accrued liabilities 1,323 10,726
---------- ----------
16,804 32,109
---------- ----------
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 470,910 559,295
Common stock, $.10 par value; 20,000,000 shares
authorized, 629,143 shares issued
and outstanding 62,914 62,014
Capital in excess of par value 456,246 369,761
Treasury stock, at cost, 63,083 shares
issued and outstanding (83,151) (83,151)
Accumulated other comprehensive loss (65,205) (41,210)
Accumulated deficit (94,706) (597)
Notes receivable from directors (10,600) -
---------- ----------
736,408 866,112
---------- ----------
Total liabilities and stockholders' equity $ 753,212 $ 898,221
========== ==========
See accompanying notes to the financial statements.
F-3
CROFF ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 2001, 2002 and 2003
2001 2002 2003
---------- ---------- ----------
Revenues
Oil and gas sales $ 332,573 $ 286,602 $ 437,586
Loss on natural gas "put" contracts - - (45,022)
Gain on sale of marketable equity
securities 22,193 23,026 19,450
Other income 10,459 5,700 3,912
---------- ---------- ----------
365,225 315,328 415,926
---------- ---------- ----------
Expenses
Lease operating expense including
production taxes 116,190 77,065 130,793
Proposed drilling fund - - 13,780
General and administrative 89,393 83,351 102,244
Overhead expense, related party 24,000 24,000 30,000
Impairment of oil and gas properties 34,107 - -
Depletion and depreciation 40,000 32,000 35,000
---------- ---------- ----------
303,690 216,416 311,817
---------- ---------- ----------
Pretax income 61,535 98,912 104,109
Provision for income taxes - - 10,000
---------- ---------- ----------
Net income 61,535 98,912 94,109
Net income applicable to
preferred B shares 30,000 73,825 88,385
---------- ---------- ----------
Net income applicable to
common shares $ 31,535 $ 25,087 $ 5,724
========== ========== ==========
Basic and diluted net income
per common share $ .06 $ .04 $ .01
========== ========== ==========
See accompanying notes to the financial statements.
F-4
CROFF ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 2001, 2002 and 2003
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 - - - - - - (64,055) -
Net income for the year ended
December 31, 2002 - - - - - - - 98,912
Preferred stock reallocation - 73,825 - - (73,825) - - -
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 2002 540,659 470,910 629,143 62,914 456,246 (83,151) (65,205) (94,706)
Net unrealized gain on marketable
equity securities - - - - - - 23,995 -
Net income for the year ended
December 31, 2003 - - - - - - - 94,109
Common stock issued for services - - 1,000 100 900 - - -
Cancellation of treasury stock - - (10,000) (1,000) 1,000 - - -
Preferred stock reallocation - 88,385 - - (88,385) - - -
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 2003 540,659 $559,295 620,143 $ 62,014 $ 369,761 $(83,151) $ (41,210) $ (597)
======== ======== ======== ======== ========== ======== ============= ===========
See accompanying notes to the financial statements.
F-5
CROFF ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
For the years ended December 31, 2001, 2002 and 2003
2001 2002 2003
---------- ---------- ----------
Cash flows from operating activities:
Net income $ 61,535 $ 98,912 $ 94,109
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depletion and depreciation 40,000 32,000 35,000
Loss on disposal or impairment of
property 34,107 - -
Realized gain on marketable equity
securities (22,193) (23,026) (19,450)
Loss on natural gas "put" contracts - - 45,022
Other items, net 375 - 1,000
Changes in operating assets and
liabilities:
Accounts receivable 42,516 278 (31,583)
Accrued interest on notes receivable (1,225) (1,852) 600
Accounts payable 6,730 (2,087) 5,902
Accrued liabilities 103 (4,148) 9,403
---------- ---------- ----------
Net cash provided by operating
activities 161,948 100,077 140,003
---------- ---------- ----------
Cash flows from investing activities:
Purchase of natural gas "put" contracts - - (58,041)
Proceeds from natural gas "put" contracts - - 5,359
Purchase of investments (72,931) (286,669) (77,429)
Proceeds from sale of investments 95,124 188,700 56,515
Notes receivable issued (15,000) - -
Payments from notes receivable - 8,159 9,318
Additions to oil and gas properties (21,705) (62,664) (247,708)
---------- ---------- ----------
Net cash used in investing activities (14,512) (152,474) (311,986)
---------- ---------- ----------
Cash flows from financing activities:
Purchase of treasury stock (200) - -
Payments on notes receivable
from directors - 30,000 10,000
---------- ---------- ----------
Net cash provided by (used in)
financing activities (200) 30,000 10,000
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 147,236 (22,397) (161,983)
Cash and cash equivalents
at beginning of year 191,634 338,870 316,473
---------- ---------- ----------
Cash and cash equivalents
at end of year $ 338,870 $ 316,473 $ 154,490
========== ========== ==========
Supplemental disclosure of non-cash investing and financing activities:
In December 2001, the Company received notes from certain Directors
associated with the exercise of $40,000 in stock warrants. During the years
ended December 31, 2001, 2002 and 2003, the Company had unrealized gains (losses)
on available for sale securities in the amount of $(1,150), $(64,055) and $23,995
respectively. During the year ended December 31, 2003, the Company issued 1,000
shares of its common stock to a Director for services rendered valued at $1,000.
See accompanying notes to the financial statements.
F-6
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2001, 2002 and 2003
1. ORGANIZATIONS AND NATURE OF BUSINESS
Croff Enterprises, Inc. (the Company) is engaged in the business of oil
and gas exploration and production, primarily through ownership of perpetual
mineral interests and acquisition of producing oil and gas leases. The
Company's principal activity is oil and natural gas production from
non-operated properties. The Company also acquires, owns, and sells,
producing and non-producing leases and perpetual mineral interests in Alabama,
Colorado, Michigan, Montana, New Mexico, North Dakota, Oklahoma, Texas, Utah,
and Wyoming. Over the past ten years, the Company's primary source of revenue
has been oil and gas production from leases and producing mineral interests.
Croff participates as a working interest owner in approximately 50 wells.
Croff holds small royalty interests in approximately 200 wells.
The Company was incorporated in Utah in 1907 as Croff Mining Company.
The Company changed its name to Croff Oil Company in 1952, and in 1996 changed
its name to Croff Enterprises, Inc. The Company, however, continues to operate
its oil and gas properties as Croff Oil Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Producing activities
The Company follows the "successful efforts" method of accounting for its
oil and gas properties. Under this method, all property acquisition costs and
costs of exploratory and development wells are capitalized when incurred,
pending determination of whether the well has proven reserves. If an
exploratory well does not result in reserves, the capitalized costs of drilling
the well, net of any salvage, are charged to expense. The costs of development
wells are capitalized, whether the well is productive or nonproductive.
Maintenance and repairs are charged to expense; betterments of property are
capitalized and depreciated as described below.
Lease bonuses
The Company defers bonuses received from leasing minerals in which
unrecovered costs remain by recording the bonuses as a reduction of the
unrecovered costs. Bonuses received from leasing mineral interests previously
expensed are taken into income. For federal income tax purposes, lease bonuses
are regarded as advance royalties (ordinary income). In 2001, 2002 and 2003,
the Company received lease bonuses totaling $2,220, $150 and $1,101,
respectively, which was included in other income.
F-7
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2001, 2002 and 2003
Depreciation and depletion
The Company provides for depreciation and depletion of its investment in
producing oil and gas properties on the unit-of-production method, based upon
estimates of recoverable oil and gas reserves from the property.
Recent accounting pronouncements
Producing property costs are evaluated for impairment and reduced to fair
value if the sum of expected undiscounted future cash flows is less than net
book value pursuant to Statement of Financial Accounting Standard No. 121
(SFAS 121) "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of." Impairment of non-producing leasehold costs
and undeveloped mineral and royalty interests are assessed periodically on a
property-by-property basis, and any impairment in value is currently charged to
expense. There was an impairment loss during 2001 in the amount of $34,107 due
to the plugging and abandoning of the Fannie Brown well in Oklahoma. There was
no impairment loss during either 2002 or 2003.
In August 2001, the Financial Accounting Standards Board approved for
issuance Statement of Financial Accounting Standards No. 144 (SFAS 144),
Accounting for the Impairment or Disposal of Long-Lived Assets. This standard
addresses financial accounting and reporting for the impairment of disposal of
long-lived assets. This standard establishes a single framework, based on
Statement of Financial Accounting Standards No. 121 (SFAS 121), Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, for long-lived assets to be disposed of or held for sale and resolves
certain implementation issues related to SFAS 121. SFAS 144 is effective for
fiscal years beginning after December 15, 2001. The issuance of SFAS 144 did
not have a material effect on the Company's 2002 or 2003 financial position,
result of operations, or cash flows, as the Company did not have an impairment
loss during 2002 or 2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated With Exit or Disposal Activities," which provides guidance for
financial accounting and reporting of costs associated with exit or disposal
activities and nullifies EITF Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." This statement
requires the recognition of a liability for a cost associated with an exit or
disposal activity when the liability is incurred, as opposed to when the entity
commits to an exit plan under EITF No. 94-3. The statement is effective for the
Company in 2003. The adoption of SFAS No. 146 is not expected to have a
material effect on the Company's financial position or results of operations as
the Company currently is not the operator of its wells.
The FASB is currently evaluating the application of certain provisions of
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets," to companies in the extractive industries, including oil and
natural gas companies. The FASB is considering whether the provisions of SFAS
No. 141 and SFAS No.142 require registrants to classify costs associated with
mineral rights, including both proved and unproved lease acquisition
F-8
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2001, 2002 and 2003
costs, as intangible assets in the balance sheet, apart from other oil and
natural gas property costs, and provide specific footnote disclosures.
Historically, the Company has included oil and natural gas lease
acquisition costs as a component of oil and natural gas properties. In the event
the FASB determines that costs associated with mineral rights are required to be
classified as intangible assets, approximately $216,000 of the Company's oil and
natural gas property acquisition costs may be required to be separately
classified on its balance sheets as intangible assets. However, the Company
currently believes that its results of operations and financial condition would
not be affected since such intangible assets would continue to be depleted and
assessed for impairment in accordance with existing successful efforts
accounting rules and impairment standards.
Revenue recognition
Oil and gas revenues are accounted for using the sales method. Under this
method, revenue is recognized based on the cash received rather than the
Company's proportionate share of the oil and gas produced. Oil and gas
imbalances and related value at December 31, 2001, 2002 and 2003 were
insignificant.
Risks and uncertainties
Historically, oil and gas prices have experienced significant fluctuations
and have been particularly volatile in recent years. Price fluctuations can
result from variations in weather, levels of regional or national production
and demand, availability of transportation capacity to other regions of the
country and various other factors. Increases or decreases in prices received
could have a significant impact on future results.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting comprehensive
income. In addition to net income, comprehensive income includes all changes
in equity during a period, except those resulting from investments and
distributions to the owners of the Company. The Company had no such changes
prior to 2001. The components of other comprehensive income net of the related
tax effects for the twelve months ended December 31, 2001, 2002 and 2003
totaled $1,150, $64,055, and $23,995 respectively, and are related to a net
unrealized loss on the Company's marketable equity securities, which are
available for sale.
Fair value of financial instruments
The carrying amounts of financial instruments including cash and cash
equivalents, marketable equity securities, accounts receivable, notes
receivable, accounts payable and accrued liabilities approximate fair value as
of December 31, 2002 and 2003.
F-9
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2001, 2002 and 2003
Concentrations of credit risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash, cash equivalents
and accounts receivable. The Company places its cash with high quality
financial institutions. At times during the year, the balance at any one
financial institution may exceed FDIC limits.
Derivative instruments and hedging activities
On March 21, 2003, the Company purchased a series put contracts for 10,000
MMBTU's per month of natural gas beginning in June 2003 and ending May 2004 at
the strike price of $4.75. The Company paid $58,044 for these twelve
contracts. The Company realized a loss during 2003 of $45,022 related to its
purchase of these natural gas "put" contracts. During the years ended
December 31, 2001 and 2002, the Company did not enter into commodity
derivative contracts or fixed-price physical contracts to manage its exposure
to oil and gas price volatility.
Stock warrants
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 "Accounting for Stock-Based Compensation"
related to its stock warrants. Since December 2001, the Company has had no
outstanding stock options or warrants.
Cash equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with maturity of three months or less
to be cash equivalents.
Marketable equity securities
The Company has designated its marketable equity securities as "securities
available for sale" pursuant to Statement of Financial Accounting Standards
No. 115, Accounting for Certain Investments in Debt and Equity Securities. The
net unrealized gains (losses) related to these securities before taxes for
December 31, 2001, 2002, and 2003 was $(1,150), $(65,205), and $23,995
respectively and is reflected as accumulated other comprehensive loss. During
2001, 2002 and 2003, a portion of the available-for-sale securities were sold
for $95,124, $188,700, and $56,515 respectively, resulting in a net gain
before taxes of $22,193, $23,026, and $19,450 respectively, based upon
historical cost.
F-10
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2001, 2002 and 2003
Accounts receivable
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
un-collectible, they will be charged to operations when that determination is
made.
Income taxes
The provision for income taxes is based on earnings reported in the
financial statements. Deferred income taxes are provided using a liability
approach based upon enacted tax laws and rates applicable to the periods in
which the taxes become payable.
Net income per common share
In accordance with the provisions of SFAS No. 128, "Earnings per Share,"
basic income per common share amounts were computed by dividing net income
after deduction of the net income attributable to the preferred B shares by the
weighted average number of common shares outstanding during the period. Diluted
income per common share assumes the conversion of all securities that are
exercisable or convertible into either preferred B or common shares that would
dilute the basic earnings per common share during the period. All of the
Company's outstanding stock warrants were either exercised or expired on or
prior to December 31, 2001.
Use of estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
3. RELATED PARTY TRANSACTIONS
The Company retains the services of a law firm in which a partner of the
firm is a director of the Company. Legal fees paid to this firm for the years
ended December 31, 2001, 2002 and 2003 amounted to $1,800, $3,109 and $2,256,
respectively.
The Company currently has an office sharing arrangement with Jenex
Petroleum Corporation, hereafter "Jenex", which is owned by the Company's
President. The Company is not a party to any lease, but during 2003 paid
Jenex for office space and all office services, including rent, phone, office
supplies, secretarial, land, and accounting. The Company's expenses for these
services were $24,000, $24,000 and $30,000 for the years ended 2001, 2002 and
2003, respectively. Although these transactions were not a result of "arms
length" negotiations, the Company's Board of Directors believes the
transactions are reasonable.
F-11
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2001, 2002 and 2003
In 2001 the Company considered acquiring Reef Energy Corporation, a private
oil and gas firm, in which the Company's President had purchased approximately
one-fourth interest. The Company loaned Reef Energy, as part of a larger loan,
$15,000 secured by assets of Reef Energy. This short-term secured note bore
interest at 10% per annum. At December 31, 2002, the balance on this note
including accrued interest was $9,318. This note was paid off in full during
2003.
In 2001, the Company loaned three of its Directors, a total of $40,000
associated with the exercise of their stock warrants. The fully recourse notes
due on December 31, 2002 carried interest at 6% per annum. At December 31,
2002, one note remained unpaid, which totaled $10,600 including accrued
interest. This note was paid off in full during 2003.
Purchase of proved oil and gas properties
On April 7, 1998, the Company purchased certain working leasehold interests
in oil and gas wells in Oklahoma, from an affiliated company, for cash in the
amount of $208,000. Another affiliated entity is the operator of these wells,
and agreed to offset the Company's lease operating expenses on these wells in
the amount of $150 per month per well (an aggregate of $900 per month) for as
long as the Company owns the wells. In August 2002, one well was plugged so
this amount was lowered to $750 per month aggregate at the same rate of $150
per well. During the years ending December 31, 2001, 2002 and 2003, $10,800,
$10,050, and $9,000 respectively, have been offset against lease operating
expense, in this manner.
4. STOCKHOLDERS' EQUITY
During 2001, the Board determined that the cash of the Company, which had
been building during a period of high oil prices, should be formally allocated
between the common stock and the preferred B stock. The Board decided to
allocated $250,000 cash to the common stock and the balance of cash remaining
with the preferred B stock. The Board then determined that all future oil and
gas cash flow would be allocated solely to the preferred B stock. The Company
established separate investment accounts for the preferred B and common stock
investments.
The Company has no outstanding stock options, warrants or rights as of
December 31, 2002 and 2003. During 2001, warrants to purchase 40,000 common
shares and 40,000 Class B Preferred shares were exercised by the Directors
for $40,000. The Company issued short-term full recourse interest bearing
notes related to this exercise of options that have paid back in full.
The Class A Preferred stock was authorized for possible future
capitalization and funding purposes of the Company and has not yet been
designated as voting or non-voting. Presently, there are no plans or
intentions to issue these shares.
F-12
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2001, 2002 and 2003
In 1996, the Company created a class of preferred B stock to which the
perpetual mineral interests and other oil and gas assets were pledged. Thus,
the preferred B stock represents the current oil and gas assets of the Company,
exclusive of the 2004 Edwards-Wilcox Natural Gas Development Program, 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 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 its oil and natural
gas assets of the Company. In addition, in the event of liquidation,
distribution or sale of the Company, the Class B Preferred stockholders have
an exclusive preference to the net asset value of the natural gas and oil
assets over all other classes of common and preferred stockholders.
The Class B Preferred shares have an extremely limited market, but are
traded from time to time through a clearinghouse held by the Company. The
Company established a bid and ask format, whereby any shareholder could submit
a bid or ask price for each Class B Preferred share. The Company is acting as
its own transfer agent, with respect to these Class B Preferred shares only.
5. INCOME TAXES
At December 31, 2003, the Company had net tax capital loss carry-forwards
of approximately $9,000. In addition, the Company has a depletion carryover of
approximately $302,000, which has no expiration date.
The Company did not record an income tax provision for the years ended
December 31, 2001 or 2002 due to the utilization of various tax loss carry
forwards and general business credits. The recognized tax benefit of the
utilized carry forward was approximately $17,100 and $40,000 respectively, for
the years ended December 31, 2001 and 2002. The difference in financial
statement and tax return loss carryovers is principally the difference in the
timing of deducting intangible drilling costs as well as from expired and
unused tax net operating losses.
As of December 31, 2002 and 2003, total deferred tax assets; liabilities
and valuation allowance are as follows:
2002 2003
-------- --------
Deferred tax assets resulting
from loss carry forwards $ 156,900 $ 135,000
Valuation allowance (156,900) (135,000)
--------- ---------
$ - $ -
========= =========
6. BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share information is based on the weighted
average number of shares of common stock outstanding during each year,
approximately 526,000 shares in 2001 and 527,000 in 2002 and approximately
566,000 shares in 2003.
F-13
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
For the years ended December 31, 2001, 2002 and 2003
7. MAJOR CUSTOMERS
Customers which accounted for over 10% of oil and natural gas revenues
were as follows for the years ended December 31, 2001, 2002 and 2003:
2001 2002 2003
------ ------ ------
Burlington Resources Oil and Gas Company 13.2% 10.0% *
El Paso Production 10.6% 14.6% *
Energetics, LTD. * 10.0% *
Jenex Petroleum Corp., a related party 24.3% 17.2% 23.0%
* less than 10%
Management believes that the loss of any individual purchaser would not
have a long-term material adverse impact on the financial position or results
of operations of the Company.
F-14
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
In November, 1982, the Financial Accounting Standards Board issued and the
SEC adopted Statement of Financial Accounting Standards No. 69 (SFAS 69)
"Disclosures about Oil and Gas Producing Activities". SFAS 69 requires that
certain disclosures be made as supplementary information by oil and gas
producers whose financial statements are filed with the SEC. The Company bases
these disclosures upon estimates of proved reserves and related valuations.
An independent petroleum engineering firm compiled provided oil and gas reserve
and future revenues as of December 31, 2002 and December 31, 2003 for the
Company's most significant wells. Management completed the 2002 and 2003
reserve report from these studies. For 2001, management of the Company, none of
whom are licensed as either a petroleum reservoir engineer or geologist,
compiled these estimates. No attempt is made in this presentation to measure
"income" from the changes in reserves and costs.
The standardized measure of discounted future net cash flows relating to
proved reserves as computed under SFAS 69 guidelines may not necessarily
represent the fair value of the Company's oil and gas properties in the market
place. Other factors, such as changing prices and costs and the likelihood of
future recoveries differing from current estimates, may have significant effects
upon the amount of recoverable reserves and their present value.
The standardized measure does not include any "probable" and "possible"
reserves, which may exist and may become available through additional drilling
activity.
The standardized measure of discounted future net cash flows is developed
as follows:
1. Estimates are made of quantities of proved reserves and the future periods
during which they are expected to be produced based on year-end economic
conditions.
2. The estimated future production of proved reserves is priced on the basis of
year-end prices except that future prices of gas are increased for fixed and
determinable escalation provisions in contracts (if any).
3. The resulting future gross revenue streams are reduced by estimated future
costs to develop and produce the proved reserves, based on year-end cost and
timing estimates.
4. A provision is made for income taxes based upon year-end statutory rates.
Consideration is made for the tax basis of the property and permanent
differences and tax credits relating to proved reserves. The tax computation
is based upon future net cash inflow of oil and gas production and does not
contemplate a tax effect for interest income and expense or general and
administrative costs.
5. The resulting future net revenue streams are reduced to present value amounts
by applying a 10% discount factor.
F-15
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
Changes in the standardized measure of discounted future net cash flows are
calculated as follows:
1. Acquisition of proved reserves is based upon the standardized measure at the
acquisition date before giving effect to related income taxes.
2. Sales and transfers of oil and gas produced, net of production costs, are
based upon actual sales of products, less associated lifting costs during the
period.
3. Net changes in price and production costs are based upon changes in prices at
the beginning and end of the period and beginning quantities.
4. Extensions and discoveries are calculated based upon the standardized measure
before giving effect to income taxes.
5. Purchase of reserves are calculations based on increases from the Company's
acquisition activities.
6. Revisions of previous quantity estimates are based upon quantity changes and
end of period prices.
7. The accretion of discount represents the anticipated amortization of the
beginning of the period discounted future net cash flows.
8. Net change in income taxes primarily represents the tax effect related to all
other changes described above and tax rate changes during the period.
All of the Company's oil and gas producing activities are in the United
States.
OIL AND GAS PRICES
During the year ended December 31, 2003, crude oil and natural gas prices
were highly volatile. The average sale price of oil in 2003 for the Company
was $28.32, compared to $22.62 in 2002. The average sale price of natural gas
in 2003 for the Company was $4.09 per Mcf, compared to $2.56 per Mcf in 2002.
The ultimate amount and duration of oil and gas price fluctuations and their
effect on the recoverability of the carrying value of oil and gas properties
and future operations is not determinable by management at this time.
F-16
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The results of operations for oil and gas producing activities, excluding
capital expenditures, impairment charges, corporate overhead and interest
expense, are as follows for the years ended December 31, 2001, 2002 and 2003:
2001 2002 2003
-------- -------- --------
Revenues
Oil and natural gas sales $332,573 $286,602 $437,586
Loss on natural gas "put" contracts - - (45,022)
-------- -------- --------
332,573 286,602 392,564
Lease operating costs 83,700 61,238 100,563
Production taxes 32,490 15,827 30,230
Depletion and depreciation 40,000 32,000 35,000
Income tax expense - - 10,000
-------- -------- --------
156,190 109,065 175,793
-------- -------- --------
Results of operations from producing
Activities (excluding capital
expenditures, impairment charges
corporate overhead, and interest
expense) $176,383 $177,537 $216,771
======== ======== ========
F-17
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
Year ended December 31,
-----------------------
2001 2002 2003
---------- ---------- ----------
Future cash inflows $1,486,000 $3,019,000 $4,655,000
Future production and development costs (223,000) (1,075,000) (2,134,000)
---------- ---------- ----------
1,263,000 1,944,000 2,521,000
Future income tax expense (210,000) (274,000) (444,000)
---------- ---------- ----------
Future net cash flows 1,053,000 1,670,000 2,077,000
10% annual discount for
estimated timing of cash flows (418,000) (651,000) (820,000)
---------- ---------- ----------
Standardized measure of
discounted future net
cash flows $ 635,000 $1,019,000 $1,257,000
========== ========== ==========
The following are the principal sources of
change in the standardized measure of
discounted future net cash flows:
Beginning balance $1,241,000 $ 635,000 $1,019,000
Evaluation of proved undeveloped
reserves, net of future production
and development costs 14,000 8,000 (9,000)
Purchase of proved reserves - 200,000 450,000
Sales and transfer of oil and gas
produced, net of production costs (218,000) (210,000) (307,000)
Net increase (decrease) in prices
and costs (663,000) 871,000 385,000
Extensions and discoveries - 12,000 -
Revisions of previous quantity estimates 57,000 268,000 58,000
Accretion of discount 414,000 (701,000) (169,000)
Net change in income taxes (210,000) (64,000) (170,000)
Other - - -
---------- ---------- ----------
Ending balance $ 635,000 $1,019,000 $1,257,000
========== ========== ==========
F-18
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
PROVED OIL AND GAS RESERVE QUANTITIES
(All within the United States)
Oil Gas
reserves reserves
(bbls) (mcf)
-------- --------
Balance at December 31, 2000 40,144 469,749
Revisions of previous estimates (241) (12,479)
Extensions, discoveries and other additions - (2,000)
Production (4,760) (57,804)
-------- --------
Balance at December 31, 2001 35,143 397,466
Revisions of previous estimates 14,342 (2,352)
Extensions, discoveries and other additions 19,989 119,932
Production (6,143) (57,526)
-------- --------
Balance at December 31, 2002 63,331 457,520
Revisions of previous estimates (5,601) 35,359
Extensions, discoveries and other additions 34,036 91,496
Production (7,656) (52,998)
-------- --------
Balance at December 31, 2003 84,110 531,377
======== ========
Proved developed reserves
December 31, 2001 26,223 387,974
December 31, 2002 54,411 448,028
December 31, 2003 75,904 477,267
Costs incurred in oil and gas producing activities for the years ended
December 31, 2001, 2002, and 2003 are as follows:
2001 2002 2003
-------- -------- --------
Property acquisition, exploration and
development costs capitalized $ 21,705 $ 62,664 $247,708
Impairment of property 34,107 - -
Production costs 116,190 77,065 130,793
Depletion and depreciation 40,000 32,000 35,000
F-19