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FORM 10-Q. QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 For the period ended June 30, 2002
or -------------------
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
Commission File Number: 100 ------------ ------------
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CROFF ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
Utah 87-0233535
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
621 17th St., Suite 830, Denver, Colorado 80293
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(Address of principal executive offices) (Zip Code)
(303) 383-1555
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal
year, if changed since last report.)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant has required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
X Yes No
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APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's class of
common stock, as of the latest practicable date: 566,060 shares, one class only
as of August 10, 2002.
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INDEX
INDEX TO INFORMATION INCLUDED IN THE QUARTERLY REPORT (FORM 10-Q) TO THE
SECURITIES AND EXCHANGE COMMISSION FOR THE THREE AND SIX MONTHS ENDED
JUNE 30, 2002 (UNAUDITED).
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Page Number
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PART I. UNAUDITED FINANCIAL INFORMATION
Item 1. Unaudited financial statements 3
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
Exhibit 99.1 Certification Pursuant to 18 U.S.C. Section
1350; as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 9
Exhibit 99.2 Certification Pursuant to 18 U.S.C. Section
1350; as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 9
PART II. OTHER INFORMATION 10
ITEM 6 Exhibits and reports on Form 8-K 10
Signatures 10
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Forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties; including without limitation to, the following: (i) the
Company's plans, strategies, objective, expectations and intentions are subject
to change at any time at the discretion of the Company; (ii) the Company's
plans and results of operations will be affected by the Company's ability to
manage its growth and inventory (iii) other risks and uncertainties indicated
from time to time in the Company's filings with the Securities and Exchange
Commission. Neither the Securities and Exchange Commission nor any other
regulatory body takes any position as to the accuracy of forward-looking
statements.
PART I. UNAUDITED FINANCIAL INFORMATION
ITEM 1. UNAUDITED FINANCIAL STATEMENTS
CROFF ENTERPRISES, INC.
BALANCE SHEETS
(Unaudited)
December 31, June 30,
2001 2002
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ASSETS
Current assets:
Cash and cash equivalents $ 338,870 $ 247,267
Marketable equity securities, available for sale 4,600 72,920
Accounts receivable 49,226 34,702
Notes receivable, related parties 16,159 16,893
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408,855 371,782
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Oil and gas properties, at cost, successful efforts method:
Proved properties 578,091 627,676
Unproved properties 97,102 97,102
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675,193 724,778
Accumulated depletion and depreciation (388,924) (404,924)
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286,269 319,854
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Total assets $ 695,124 $ 691,636
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,568 $ 14,837
Accrued liabilities 5,471 2,136
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23,039 16,973
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Stockholders' equity:
Class A Preferred stock, no par value
5,000,000 shares authorized, none issued - -
Class B Preferred stock, no par value; 1,000,000
shares authorized, 540,659 shares issued and
outstanding 397,085 412,414
Common stock, $.10 par value; 20,000,000 shares
authorized, 629,143 shares issued and outstanding 62,914 62,914
Capital in excess of par value 530,071 514,742
Treasury stock, at cost, 63,083 shares (83,151) (83,151)
Accumulated other comprehensive loss (1,150) (36,803)
Accumulated deficit (193,618) (154,177)
Notes receivable from directors (40,066) (41,276)
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672,085 674,663
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Total liabilities and stockholders' equity $ 695,124 $ 691,636
========== ==========
See accompanying notes to unaudited condensed financial statements.
3
CROFF ENTERPRISES, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------ ------------------
2001 2002 2001 2002
-------- -------- -------- --------
Revenues
Oil and gas sales $ 93,143 $ 65,537 $215,504 $114,858
Gain on sale of marketable
equity securities - - - 23,026
Other income 2,768 1,465 5,794 3,356
-------- -------- -------- --------
95,911 67,002 221,298 141,240
-------- -------- -------- --------
Expenses
Lease operating expense including
production taxes 27,555 14,571 74,307 28,585
General and administrative 20,317 21,808 43,658 45,214
Overhead expense, related party 6,000 6,000 12,000 12,000
Depreciation and depletion 10,000 8,000 20,000 16,000
-------- -------- -------- --------
63,872 50,379 149,965 101,799
-------- -------- -------- --------
Net income $ 32,039 $ 16,623 $ 71,333 $ 39,441
======== ======== ======== ========
Net income applicable to
Class B Preferred stockholders' $ 29,877 $ 15,986 $ 67,760 $ 15,329
======== ======== ======== ========
Net income applicable to
Common stockholders' $ 2,162 $ 637 $ 3,573 $ 24,112
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Basic and diluted net income
per common share ** $ .01 $ .04
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*-Less than $.01 per share
See accompanying notes to unaudited condensed financial statements.
5
CROFF ENTERPRISES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the year ended December 31, 2001 and
the six month period ened June 30, 2002
(Unaudited)
Accumulated
Preferred B stock Common stock Capital in other
------------------ ------------------ excess of Treasury comprehensive Accumulated
Shares Amount Shares Amount par value stock loss deficit
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 2000 500,659 $475,359 589,143 $ 58,914 $ 415,797 $(82,951) $ - $ (255,153)
Stock warrants exercised 40,000 28,000 40,000 4,000 8,000 - - -
Purchase of 200 shares of
treasury stock - - - - - (200) - -
Net unrealized loss on marketable
equity securities - - - - - - (1,150) -
Net income for the year ended
December 31, 2001 - - - - - - - 61,535
Stock reallocation - (136,274) - - 136,274 - - -
Preferred stock reallocation - 30,000 - - (30,000) - - -
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at December 31, 2001 540,659 $397,085 629,143 $ 62,914 $ 530,071 $(83,151) $ (1,150) $ (193,618)
-------- -------- -------- -------- ---------- -------- ------------- -----------
Net unrealized loss on marketable
equity securities - - - - - - (35,653) -
Net income for the six months
ended June 30, 2002 - - - - - - - 39,441
Preferred stock reallocation - 15,329 - - (15,329) - - -
-------- -------- -------- -------- ---------- -------- ------------- -----------
Balance at June 30, 2002 540,659 $412,414 629,143 $ 62,914 $ 514,742 $(83,151) $ (36,803) $ (154,177)
======== ======== ======== ======== ========== ======== ============= ===========
See accompanying notes to unaudited condensed financial statements.
5
CROFF ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2001 and 2002
(Unaudited)
2001 2002
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Cash flows from operating activities:
Net income $ 71,333 $ 39,441
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depletion and depreciation 20,000 16,000
Realized (gain) loss on marketable
equity securities 375 (23,026)
Changes in operating assets and
liabilities:
Accounts receivable 25,358 14,524
Accrued interest on notes receivable - (1,944)
Other assets (62) -
Accounts payable 6,574 (2,731)
Accrued liabilities (1,470) (3,335)
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Net cash provided by operating
activities 122,108 38,929
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Cash flows from investing activities:
Purchase of marketable equity securities - (269,475)
Proceeds from sale of marketable equity
securities - 188,528
Purchased working interest in proved properties (5,205) (49,585)
Issuance of short-term note receivable (15,000) -
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Net cash used in investing activities (20,205) (130,532)
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Cash flows from financing activities:
Purchase of treasury stock (200) -
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Net Cash used in financing activities (200) -
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Net increase (decrease) in cash and
cash equivalents 101,703 (91,603)
Cash and cash equivalents
at beginning of period 191,634 338,870
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Cash and cash equivalents
at end of period $ 293,337 $ 247,267
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Supplemental disclosure of non-cash investing and financing activities:
During the six month period ended June 30, 2002, the Company had
unrealized losses on available for sale securities in the amount of $35,653.
See accompanying notes to unaudited condensed financial statements.
6
CROFF ENTERPRISES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
Basis of preparation
The condensed financial statements for the three and six month periods
ended June 30, 2002 and 2001 in this report have been prepared by the Company
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission and reflect, in the opinion of the management, all
adjustments necessary to present fairly the results of the operations of
the interim periods presented herein. Certain reclassifications have been
made to the prior year's condensed financial statements to conform to the
2002 presentation. Certain information in footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
omitted pursuant to such rules and regulations, although the Company
believes the disclosures presented herein are adequate to make the
information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2001, which report has been
filed with the Securities and Exchange Commission, and is available from
the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operation are based upon financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the year. The Company analyzes its estimates, including
those related to oil and gas revenues, oil and gas properties, marketable
securities, income taxes and contingencies. The Company bases its estimates
on historical experience and various other assumptions that are believed to
be reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. The Company believes
the following critical accounting policies affect its more significant
judgments and estimates used in the preparation of its financial statements
and the uncertainties that it could impact our results of operations,
financial condition and cash flows. The Company accounted for its oil and
gas properties under the successful efforts method of accounting. The
Company periodically evaluates its oil and gas properties for possible
impairment. Impairments are recorded when management believes that a
property's net book value is not recoverable based on current estimates of
expected future cash flows. The Company provides for depreciation and
depletion of its investment in producing oil and gas properties on the unit-
of-production method, based upon estimates of recoverable oil and gas reserves
from the property.
7
Results of Operations
Three months ended June 30, 2002 compared to three months ended June 30, 2001.
Revenues for the second quarter of 2002 totaled $67,002, a 30% decrease
from the prior year period. Net income for the second quarter of 2002 totaled
$16,623, a decrease of 48% compared to the second quarter of 2001. Oil and gas
sales for the second quarter totaled $65,537, a 30% decrease from the prior year
period. The major factor in this decrease in revenue was primarily a large drop
in the price for oil and natural gas. The average sale price of oil in 2002 for
the Company was approximately $22 compared to $25 in 2001. The average sale
price of natural gas in 2002 for the Company was approximately $2.45 per Mcf,
compared to $5.80 per Mcf in 2001. The secondary reason for the drop was that
production of both oil and gas decreased during the first quarter of 2002
compared to the first quarter of 2001 as the operators of the Company's wells
slowed production due to low prices and reduced demand. The Company's oil and
gas revenues are approximately divided equally between royalties and working
interest. Other income for the second quarter of 2002 totaled $1,465, a 47%
decrease from the prior year period.
Lease operation expense, which includes all production related taxes for
the second quarter of 2002, totaled $14,571, a decrease of 47% compared to the
second quarter of 2001, which totaled $27,555. This decrease was attributable
primarily to the decrease in oil and gas prices, which lowered production for
2002.
Depreciation and depletion expense for the first quarter of 2002 totaled
$8,000, a 20% decrease from the prior year period, which totaled $10,000.
General and administrative expense, including overhead, related party for
the second quarter of 2002 totaled $27,808, which is comparable to the prior
year period.
Six months ended June 30, 2002 compared to six months ended June 30, 2001.
Revenues for the six months ended June 30, 2002 totaled $141,240, a 36%
decrease from the prior year period. Net income for the six months ended
June 30, 2002 totaled $39,441, a decrease of 45% compared to the same period
in 2001. Oil and gas sales for the six months ended June 30, 2002 totaled
$114,858, a 47% decrease from the same period in 2001. The major factor in
this decrease in revenue was the combination of price and production for oil
and natural gas. The Company's oil and gas revenues are approximately divided
equally between royalties and working interest. During 2002, the Company
realized a gain on the sale of marketable equity securities totaling $23,026.
Other income for the six months ended June 30, 2002, total $3,356, a 42%
decrease from the prior year period. The decrease in other income is
attributable to the Company's increased investments in marketable equity
securities and decreased investment in interest bearing money market accounts.
Lease operating expense, which includes all production related taxes for
the six months ended June 30, 2002, totaled $28,585, a decrease of 62% compared
to the $74,307 spent in the same period in 2001. In 2001, the Company spent
approximately $22,000 on an unsuccessful well and production taxes were also
higher in 2001. The remaining decrease was due to lower production taxes due to
lower prices and less production.
8
Depreciation and depletion expense for the six months ended June 30, 2002
totaled $16,000, a 20% decrease from the same period in 2001.
General and administrative expense, including overhead, related party for
the six months ended June 30, 2002 totaled $57,214, compared to $55,658 from
the prior year period. The Company expects general and administrative costs
to remain stable this year.
Financial condition and capital resources
At June 30, 2002, the Company had $691,636 of assets and $674,663 of
stockholders' equity. In the first six months of 2002, net cash provided by
operations totaled $38,929 as compared to $122,108 for the prior year period.
Working capital at June 30, 2002 totaled $354,809, and is comparable to the
December 31, 2001 working capital, which totaled $385,816. The Company's
current ratio at June 30, 2002 is approximately 22:1. At June 30, 2002, there
were no significant commitments for capital expenditures. In June 2002, the
Company purchased working interests in producing leases in Michigan and Texas,
investing a total of $49,585. The Company is currently accumulating cash and
liquid assets to prepare for a possible reverse merger of the Company. The
Company expects to continue to operate at a positive cash flow for the remainder
of this year and continue buying producing oil and natural gas properties. The
Company has no short-term or long-term debt at this time. However, on June 11,
2002, the Company entered into a one-year variable rate revolving line of credit
agreement whereby the Company could borrow up to $100,000 for working capital
support to fund investments in oil and gas properties. The variable rate is
based on Prime plus 1.5%, subject to a floor of 7% and a ceiling of 12%.
EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350; AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350; AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
9
PART II. OTHER INFORMATION
ITEM 5 OTHER INFORMATION
On June 15, 2001, the Company loaned $15,000 to Reef Energy Corporation, a
company in which Croff's President owns approximately a one-fourth interest.
This short-term secured note bears interest at 10% per annum. In December 2001,
the Company loaned three of its Directors a total of $40,000 associated with the
exercise of their stock warrants. The fully recourse notes due December 31, 2002
bear interest at 6% per annum.
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
The registrant has filed no exhibits or reports on Form 8-K for the quarter
ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
REGISTRANT:
CROFF ENTERPRISES, INC.
Date: August 14, 2002 By: /s/ Gerald L. Jensen
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Gerald L. Jensen
Chief Executive Officer
Date: August 14, 2002 By: /s/ Stuart D. Kroonenberg
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Stuart D. Kroonenberg
Chief Financial Officer
10