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FORM 10K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
MARK ONE
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES
EXCHANGE OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
TRANSITION REPORT pursuant to section 13 or 15(d) of
the securities exchange act of 1934
FOR THE TRANSITION PERIOD FROM N/A TO N/A
COMMISSION FILE NUMBER: 1-100
CROFF ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UTAH 87-0233535
STATE OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION
NUMBER)
1675 BROADWAY
SUITE 1030
DENVER, COLORADO 80202
ADDRESS OF PRINCIPAL ZIP CODE
EXECUTIVE OFFICES
Registrant's telephone number, including area code: (303) 628-
1963
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common - $0.10 Par Value None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registration (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
As of March 1, 1999, the aggregate market value of the common
voting stock held by non-affiliates of the Registrant, computed
by reference to the average of the bid and ask price on such date
was: $218,316.
As of March 1, 1999, the Registrant had outstanding 516,315
shares of common stock ($0.10 par value)
TABLE OF CONTENTS
PART I
Page
ITEM 1 BUSINESS......................... 3
ITEM 2 PROPERTIES........................ 7
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 COMMON EQUITY........
14
ITEM 6 SELECTED FINANCIAL DATA................. 16
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS........... 16
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA......
20
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES....... 20
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT..
21
ITEM 11 EXECUTIVE COMPENSATION.................. 22
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT...................... 22
ITEM 13 CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS.... 24
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES AND
REPORTS ON FORM 8-K.................... 25
SIGNATURES........................ 26
FINANCIAL STATEMENTS.................. 27
ITEM 1. BUSINESS
Forward-looking statements in this report, including without
limitation, statements relating to the Company's plans,
strategies, objectives, expectations, intentions and adequacy of
resources, are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Investors are
cautioned that such forward-looking statements involve risks and
uncertainties; including without limitation to, the following:
(i) the Company's plans, strategies, objective, expectations and
intentions are subject to change at any time at the discretion of
the Company; (ii) the Company's plans and results of operations
will be affected by the Company's ability to manage its growth
and inventory (iii) other risks and uncertainties indicated from
time to time in the Company's filings with the Securities and
Exchange Commission. Neither the Securities and Exchange
Commission nor any other regulatory body takes any position as to
the accuracy of forward looking statements.
(a) Description of Business
Croff Enterprises, Inc. (formerly Croff Oil Company) and
hereafter "Croff" or "the Company, was incorporated in Utah in
1907 as Croff Mining Company. The Company changed its name to
Croff Oil Company in 1952, and in 1996 changed its name to Croff
Enterprises, Inc. The Company, however, continues to operate its
oil and gas properties as Croff Oil Company. The principal
office of the Company is located at 1675 Broadway, Suite 1030,
Denver, Colorado 80202. The telephone number is (303) 628-1963.
Croff is engaged in the business of oil and gas exploration
and production, primarily through ownership of perpetual mineral
interests and acquisition of oil and gas leases. The Company's
principal activity is oil and gas production from non-operated
properties. The Company also acquires, owns, and sells,
producing and non-producing leases and perpetual mineral
interests. Over the past ten years, Croff's primary source of
revenue has been oil and gas royalties from producing mineral
interests. Croff participates as a working interest owner in
approximately 40 wells. Croff holds small royalty interests in
over 200 wells. In 1998, Croff purchased working interests in
six natural gas wells in the state of Oklahoma. The Company
began receiving revenue from these wells in the second half of
the year. In 1997, Croff purchased working interests in five
additional wells, three gas wells in Michigan, a gas well in
Colorado, and an oil well in Texas. In 1996 Croff also purchased
an additional interest in the Rentuer, a gas and oil well in
Wyoming, and an oil well in Colorado. All of the wells from
which Croff receives revenues are operated by other companies and
Croff has no control over the factors which determine royalty or
working interests revenues such as markets, prices and rates of
production.
In 1995, Croff purchased a two percent interest in a
mortgage note secured by an equal interest in an Indiana Coal
Mine. This venture failed when the utility canceled the coal
contract and Croff had to write off most of this investment. In
1996, the Company sold its carved-out production interest in
South Texas and purchased three interests in oil and gas wells in
Wyoming and Colorado. In 1997, the Company leased several tracts
of its perpetual mineral interests in Northeast Utah as drilling
activity increased. Drilling and leasing activity nearly ceased
on the Company's properties in 1998 as oil and natural gas prices
dropped.
Croff has one part-time employee, the President, and two
Assistant Secretaries, who work for the Company as part of its
contracted office space arrangement described in Item 13.
(b) Current Activities
In 1998 the Company purchased six gas wells located in
Oklahoma. The Company spent $208,000, primarily from its cash
reserves, to buy these working interests. While the wells
occasionally oil and condensate, these wells are all primarily
gas wells. This purchase closed in April 1998, and the Company
began receiving revenue from these wells during the last half of
calendar year 1998. Because of the low prices of oil and natural
gas, the effect of this greater production nearly offset a
decline in the revenue from the existing wells in the Company.
In 1996, the shareholders voted to adopt changes in the
capital structure of the Company in order to provide more
liquidity to the shareholders. The purpose of this
recapitalization was to allow the Company to pursue ventures
outside of the oil and gas business while retaining the Company's
core oil and natural gas assets. In order to do this, the
Company created a class of Preferred B stock to which all of the
perpetual mineral interests and other oil and gas assets were
pledged. Thus the Preferred B stock represents the oil and gas
assets of the Company and all other assets are represented by the
common stock. Each common shareholder received an equal number
of Preferred B shares, one for one, at the time of this
restructuring of the capital of the Company.
The Preferred B shares are not publicly traded, but are
bought and sold by shareholders privately. The Company provides,
each year, a clearinghouse to assist shareholders wishing to
trade Preferred B shares. Any shareholder or any outsider is
able to bid and ask for the Preferred B shares of the Company.
This process first took place in January and February of 1997,
again in 1998, and 1999. In 1997, the sale of the Preferred B
shares were closed at prices ranging from $.75 to $.90 per share.
In 1998, the average price is approximately $1.00 per share. In
1997, approximately 13,500 shares were traded, and in 1998
approximately 30,000 were traded. This system provides some
liquidity to the Preferred B shareholders, and is paid for by the
Company without charge or commission to the shareholders.
In February of 1998, the Company completed its annual
clearinghouse for the Preferred B stock. At the time of this
clearinghouse, one purchaser had committed for the largest amount
of the stock and the sellers had been notified of this purchase
at a price of $0.95 per share. At the time for closing these
purchases, this purchaser was unable to close and the sellers had
no other purchaser. The Board of Directors determined that the
Company would repurchase the agreed upon shares at the amount
that had been bid by this purchaser. This allowed the sellers
who had been told their shares would be purchased to complete
their sales and at the same time allowed the Company to increase
the per share value of the Preferred B shares by retiring 25,646
shares at an average price of $0.94 per share. The Company does
not intend to purchase shares on a regular basis, and will not be
purchasing shares in the clearinghouse in 1999.
In 1997, the Company reported a small loss, which was the
first loss reported by the Company in over five years. This loss
was due to a write down of the Company's investment in Carbon
Opportunities, L.L.C. The Company, in March of 1995, purchased a
2% interest in Carbon Opportunities, L.L.C. Carbon
Opportunities, L.L.C. had purchased a non-performing $6,000,000
note secured by the Buck Creek Coal Mine. The only source of
repayment of the note was from operations at the Buck Creek Coal
Mine. In December 1995, the utility which was the major
purchaser of coal from the mine, canceled the contract. Later,
the mine filed a Chapter 11 bankruptcy. By the third quarter of
1997, it was clear that the mine would not be reopened, the
lawsuit against the utility had been lost at the trial level, and
liquidation of the equipment would not yield sufficient monies to
recoup the investment. The Company determined that $62,000 of
its original $100,000 investment would have to be written off.
The Company had received $18,000 of its original investment and
had written the investment down to approximately $82,000.
Subsequently, the Company received $4,000, and there remains cash
and equipment left to be liquidated of approximately $11,000,
which is the remaining value of this asset on the Company's
books. The Company now considers this a liquidated asset and
expects to credit any monies received against its remaining value
on the Company's books.
The Company in 1996 purchased three interests in oil and gas
wells, primarily an oil and gas well in Campbell County, Wyoming.
The Company was also the beneficiary of increased drilling and
higher prices in San Juan County, New Mexico, and La Plata
County, Colorado, from coal gas methane wells which produced
higher revenues. The Company also received a 1/16 royalty in an
offsetting gas well to the Company's current production in
Western Colorado. The Company entered into two leases for
additional drilling on its mineral interests in the Blue Bell
Altamont field in northeast Utah.
In the second quarter of 1996, the Company sold its carved-
out production interest in the Taylor Ina field in Medina County,
Texas. This carve-out production interest was sold for cash in
the approximate amount of $106,000 to the operator of the field.
Also during the second quarter, the Company sold its interest in
a North Dakota well for cash, which well required a significant
workover. This allowed the Company to accumulate significant
amounts of cash to attempt to secure other oil and gas interests
In 1995, the Company also purchased a small interest in the
Ash Unit, a pooled oil field in Campbell County, Wyoming. The
Company also participated in a small interest in a gas well in
Wyoming and as a royalty owner, it continued development in the
Bluebell-Altamont Field.
In 1994, the Company purchased small non-operating working
interest in three oil wells and one gas well. It purchased a
royalty interest in a gas well in Texas. In 1994, the Company
received an increase in production from coal seam gas wells in La
Plata County, Colorado, and San Juan County, New Mexico.
The Company is currently continuing to pursue its
acquisition/merger with a private group in a non oil and gas
business which would have the potential to create a public
trading market for the Company's shares in an expanding line of
business. The Company has had negotiations, at this point, with
several private companies which were interested in merging with
Croff in order to become public. These negotiations occurred
throughout 1997 and are continuing. . The Company has
concentrated on meeting Companies in various high-tech areas, but
has not yet completed any agreement. The Board has adopted an
acquisitions strategy, however, as a long-term strategy, and
intends to continue to search for a potential partner or
acquisition, which would be of most benefit to the common
shareholders and create a public market for the common shares.
(c) Major Customers
Customers which accounted for over 10% of revenues were as
follows for the years ended December 31, 1996, 1997 and 1998:
1996 1997 1998
Oil and gas:
ANR Production Company * 23.7% * 23.0% 13.9%
Burlington Resources Oil and Gas Company 10.5% 18.4%
10.4%
Jenex Petroleum Corp. -------- --------
21%
Pennzoil Production Company 11.1% 12.2%
- --------
*Includes Coastal Production Company
(d) Financial Information About Industry Segments
The Company's operations presently consist of oil and gas
production. During previous years the Company has generated
revenues through the purchase and resale of oil and gas leasehold
interests, however, no significant revenues were generated from
this source for the last five years. Further information
concerning the results of the Company's operations in this one
industry segment can be found in the Financial Statements.
(e) Environmental and Employee Matters
The Company's interest in oil and gas operations are
indirectly subject to various laws and governmental regulations
concerning environmental matters, as well as employee safety and
health within the United States. The Company does not believe
that it has any direct responsibility for or control over these
matters, as it does not act as operator of any oil or gas wells.
The Company is advised that oil and gas operations are
subject to particular and extensive environmental concerns,
hazards, and regulations. Among these regulations would be
included the Toxic Substance Control Act; Resources Conservation
and Recovery Act; The Clean Air Act; The Clean Water Act; The
Safe Drinking Water Act; and The Comprehensive Environmental
Response, Compensation and Liability Act (also known as
Superfund). Oil and gas operations are also subject to
Occupational Safety and Health Administration (OSHA) regulations
concerning employee safety and health matters. The United States
Environmental Protection Agency (EPA), OSHA, and other federal
agencies have the authority to promulgate regulations that have
an impact on all oil and gas operations.
In addition, various state and local authorities and
agencies also impose and regulate environmental and employee
concerns pertaining to oil and gas production, such as The Texas
Railroad Commission. Often, though not exclusively, compliance
with state environmental and employee regulations constitutes an
exemption or compliance with federal mandates and regulations.
As indicated above, the Company does not have any direct
control over or responsibility for insuring compliance with such
environmental or employee regulations as they primarily pertain
to the operator of oil and gas wells and leases. In no instances
does the Company act as the operator. The effect of a violation
by an Operator of a well in which the Company had a working
interest would be that the Company may incur its pro-rata share
of the cost of the violation.
The Company is not aware of any instance in which it was
found to be in violation of any environmental or employee
regulations or laws, and the Company is not subject to any
present litigation or claims concerning such matters. In some
instances the Company could in the future incur liability even as
a non-operator for potential environmental waste or damages or
employee claims occurring on oil and gas properties or leases in
which the Company has an ownership interest.
ITEM 2. PROPERTIES
Oil and Gas Mineral Interests and Royalties
The Company owns perpetual mineral interests which total
approximately 4,600 net mineral acres, of which approximately
1,100 net acres are producing. The mineral interests are located
in 110,000 gross acres in Duchesne, Utah, Wasatch and Carbon
Counties in Utah, and approximately 40 net mineral acres in La
Plata County, Colorado, and San Juan County, New Mexico.
In 1998, there was a virtual halt to leasing on the
Company's acreage due to declining petroleum prices. While the
leasing had increased in 1996 and 1997, leasing activity came to
a halt shortly after the first of the year. Croff participated
in royalties on two wells which were drilled in Duchesne County,
Utah and one well in Wyoming. In addition, three small leases of
15.66 net acres, 6.8 net acres, and 50.69 net acres were drilled
late in 1997, and the early part of 1998. These leases were for
mineral interests in Duchesne County, Utah. As prices continued
to drop throughout the year, there was no further leasing or
drilling activity on the Company's acreage.
After a period of approximately four years in which there
was minimal leasing, the Company entered into four leases on
acreage in Duchesne County, Utah, in 1997. This generated
several thousand dollars in lease bonus revenue and should result
in some production on this acreage in the next three years if the
drilling is successful. In addition, the Company has received
new royalty payments from development drilling on previously
leased acreage in Northeast Utah.
In 1996, the Company sold its carved-out production payment
on 110 stripper wells in Medina County, Texas, which it had
purchased in 1993. This carved-out production payment operated
similarly to a royalty, with the Company receiving 200 barrels of
oil a month, without operating expenses. The Company sold this
interest for approximately $106,000 after owning this interest
for approximately three years.
As of December 31, 1998, the Company was receiving royalties
from approximately 200 producing wells in the Bluebell-Altamont
field in Duchesne and Uintah Counties, Utah. Because of the
drastic drop in oil prices, there were only three wells started
in 1998. Royalties also were received from scattered interests
in Wyoming, Colorado, New Mexico, Alabama, and Texas. Oil and
gas revenues to the Company, primarily from royalties, were
approximately $194,000 in 1998, $193,000 in 1997, $216,000 in
1996, and $196,000 in 1995. Natural gas production to the
Company increased by nearly one-third during the last half of the
year, after the purchase of the Oklahoma gas wells, but the drop
in prices offset the increase in production. Natural gas income
increased in 1996 and 1997 with increased gas sales from
royalties on coal bed methane gas in San Juan County, New Mexico,
and new wells in Western Colorado and Wyoming. Royalty income is
contingent upon market demand, prices, producing capacity, rate
of production, and taxes, none of which are in the control of the
Company.
The most important factor to the Company's revenue and
profit, is the price of oil and natural gas. Posted prices of
oil continued to drop throughout 1998 from an already low average
price of $15 per barrel in January to around $10 per barrel by
June and ending the year with the Company's price averaging below
$10 per barrel. Oil prices had dropped drastically during 1997
with posted prices for sweet oil in Utah dropping from around $23
per barrel in January to a low of less than $17 per barrel by the
end of the year. The drop in prices has continued into 1999,
with the first recovery occurring in March 1999. The market in
oil prices, having declined from 1990 to 1993, turned around, and
average oil prices increased from 1994 to 1996. In 1997, they
started down and by 1999, they have declined to the lowest level,
adjusted for inflation, since 1917. Most onshore U.S. production
is uneconomic at these prices, so oil exploration in the
continental U.S. has almost shut down. Natural gas prices
sustained a continuing decline in 1998 due to warmer than average
weather and cheaper fuel oil prices. Beginning the year over $2,
they fell by over $0.60 to about $1.40 by September 1998. There
was a small recovery in the winter of 1999, but currently prices
are only 2/3 of the 1997 level. Natural gas prices in 1997 were
stable at the higher level of $2-$3 per MCF achieved by the final
two months of 1996. Natural gas prices averaged $2.03 for the
Company in 1997, the average price being higher for the first
half of the year. The average price in 1996 was $1.86 per MCF.
The warm winter of 1998 contributed to the falling natural gas
prices. Because much of Croff's natural gas is in the Rocky
Mountains and Oklahoma, Croff's average price for natural gas was
not as high as gas producers in Texas and the Gulf area received.
Oil and Gas Working Interests
On April 7, 1998, the Company purchased six working
leasehold interests in oil and gas wells in Oklahoma. These
wells are primarily natural gas but occasionally produce a load
of oil. The Company paid the sum of $208,000 for the minority
working interests in each of the following leases. There are two
wells in Woodward County, Oklahoma, a 13% working interest in the
Harper #1 and a 16% working interest in the Miller well. There
is one well in Caddo County, Oklahoma, a 22% working interest in
the Fannie Brown well. In Kingfisher County, Oklahoma there are
two wells, a 30% interest in the Dickerson and a 43% interest in
the Mueggenborg. The sixth well in is LeFlore County, Oklahoma
and is a 32% interest in the Duncan well. These wells were
purchased from St. James Oil Company which is owned by the
brother of the President of Croff. Jenex Operating Company which
was owned one half by St. James Oil Ltd. was sold to Jenco
Petroleum which is owned by Gerald Jensen, the President of
Croff, in a separate transaction. Jenex Operating Company is the
operator of the wells, and agreed to provide a credit of $150 per
month per well against the operating expenses of these wells as a
condition of purchase. The Dickerson and Mueggenborg sell
natural gas through Conoco, and the Harper and Miller sell gas
through KN Energy. The Fanny Brown sells its gas to Pan Energy
Services, Inc., and the Duncan to AOG. The Company used
approximately $120,000 of its own cash and borrowed the balance
of $90,000 on a one year Bank Note. The purchase was completed
effective April 1, 1998 and the Company began receiving revenues
the second half of 1998.
In 1997, the Company purchased an interest in seven wells.
The Company increased its interest in the Rentuer oil and gas
well in Wyoming, by purchasing a portion of Exxon's interest.
The Company purchased an interest in a helium and gas well in
Southeast Colorado. The Company also purchased a working
interest in an oil well in North Dakota. In November of 1997,
the Company purchased an interest in three gas wells in Michigan
for approximately $50,000.
During 1996, the Company purchased an interest in the
Rentuer well in Campbell County, Wyoming, and in the Jones well
in Colorado. Both have been successful oil and gas producers.
The Company sold its interest in the Anderson State well in North
Dakota and in the Taylor-Ina field in Medina County, Texas.
Overall, this increased the Company's cash reserves to
approximately $200,000 by the end of 1996.
In 1995, the Company purchased a working interest in the Ash
Unit in Campbell County, Wyoming. This is a pooled field which
has operating costs equal to about one-half of the net revenue.
The Company invested primarily in a note secured by a coal mine
in 1995 and thus purchased less oil and natural gas leases.
In 1994, the Company purchased small working interests in a
gas well in New Mexico; a gas well in Alabama; an oil well in
Montana, a gas well in Oklahoma; and a waterflood in Wyoming in
which the Company already had a working interest. The Company
spent an aggregate of less than $25,000 on these purchases. In
1993, the Company sold its working interest in the five wells
which it had purchased in 1992 in Frio County, Texas. It
determined these wells were not profitable and were sold for
salvage value. The company did not participate in any other
drilling in 1993, and did not purchase any further working
interests, but received a royalty interest on four new wells.
Except for purchasing a small interest in the drilling of
one well in 1991, one well in 1995, and a well in 1997, the
Company has not engaged in drilling activity. The Company has
participated, in the last five years, in the reworking of four
existing wells, three in Utah and one in North Dakota. The
Company participates in new wells drilled by other operators as a
royalty owner. A royalty owner generally receives a smaller
interest, but does not share in the expense of drilling or
operating the wells. In 1998 the Company participated in a tiny
working interest in a new well; but until oil and natural gas
prices improve, the Company does not anticipate participating in
any further drilling.
ESTIMATED PROVED RESERVES,
FUTURE NET REVENUES AND PRESENT VALUES
The Company's interests in proved developed and undeveloped
oil and gas properties have been evaluated by management for the
fiscal years ending December 31, 1998, 1997, and 1996. All of
the Company's revenues are located within the continental United
States. The following table summarizes the Company's estimate
of proved oil and gas reserves at December 31, 1998, 1997, and
1996.
Reserve Category
As of Proved Developed Proved Undeveloped
Total
12/31 Oil (Bbls) Gas (Mcf) Oil (Bbls) Gas
(Mcf) Oil (Bbls) Gas (Mcf)
1996 38,101 265,748 13,011
9,376 51,012 275,124
1997 39,339 301,343 12,612
13,423 51,951 314,766
1998 36,686 410,651 12,612
13,423 49,298 424,074
The Company sold oil reserves in 1996, and purchased natural gas
reserves in 1998.
The estimated future net reserves (using December 31 prices
and costs for each respective year), and the present value of
future revenues (discounted at 10%); for the company's proved
developed and proved undeveloped oil and gas reserves, for the
years ended December 31, 1996, 1997, and 1998 are summarized as
follows:
Proved Developed Proved Undeveloped Total
Present Present
Present
Future Value Future Value of
Future Value of
As of Net Future Net Net Future Net Net
Future Net
12/31 Revenue Revenue Revenue Revenue Revenue
Revenue
1996 $942,653 $574,473 $238,347 $191,527 $1,181,000
$766,000
1997 $970,392 $629,784 $199,701 $129,606 $1,170,093
$759,390
1998 $892,795 $579,423 $147,038 $ 95,428 $1,039,832
$674,851
"Proved developed" oil and gas reserves are reserves that
can be expected to be recovered from existing wells with existing
equipment and operating methods. "Proved undeveloped" oil and
gas reserves are reserves that are expected to be recovered from
new wells on undrilled acreage, or from existing wells where a
relative major expenditure is required for recompletion.
For additional information concerning oil and gas reserves,
see Supplemental Information - Disclosures about Oil and Gas
Producing Activities - Unaudited, included with the Financial
Statements filed as a part of this report.
Since December 31, 1997, the Company's has not filed any
estimates of its oil and gas reserves with, nor were any such
estimates included in any reports to, any state or federal
authority or agency, other than the Securities and Exchange
Commission.
Oil and Gas Acreage
During the last five fiscal years, the Company decreased its
holdings in undeveloped oil and gas leases and generally retained
its holdings in developed oil and gas leases. The Company's
acreage position was relatively static during the fiscal years
ending December 31, 1996, 1997, and 1998.
"Developed acreage" consists of lease acreage spaced or
assignable to production on wells having been drilled or
completed to a point that would permit production of commercial
quantities of oil or gas. "Gross acreage" is defined as total
acres in which the Company has any interest; "Net acreage" is the
actual number of mineral acres in which the mineral interest is
owned entirely by the Company. All developed acreage is held by
production.
The acreage is concentrated in Utah, Texas, Oklahoma,
Michigan, and Alabama and is widely dispersed in Colorado,
Montana, New Mexico, North Dakota, and Wyoming.
COMPANY'S INTEREST IN PRODUCTIVE WELLS
(Gross and Net)
The following table shows the Company's interest in
productive wells as of December 31, 1998.
Oil Wells (1) Gas Wells (2)
Gross Net Gross Net
208 1.81 42 2.1
(1) Primarily located in the Bluebell-Altamont field in
Northeastern Utah. These wells include some natural gas
production, but are primarily oil wells.
(2) Primarily located in Rio Blanco and LaPlata Counties,
Colorado, Beaver, Woodward and Kingfisher Counties, Oklahoma, San
Juan County, New Mexico, Otsego County, Michigan, and Duchesne
and Uintah Counties, Utah.
HISTORICAL PRODUCTION TO COMPANY
The following table shows approximate net production to the
Company of crude oil and natural gas for the years ended December
31, 1996, 1997, and 1998:
Crude Oil Natural Gas
(Barrels) (Thousands of Cubic
Feet)
MCF
Year Ended December 31, 1996: 5,886 44,938
Year Ended December 31, 1997: 5,295 46,222
Year Ended December 31, 1998: 5,278 65,673
There are no delivery commitments with respect to the above
production of oil and natural gas, since Croff is not the
operator, but allows the operator to contract for delivery. The
Company is unaware of the circumstances of any delivery
commitments on royalty wells.
AVERAGE SALES PRICE AND COSTS BY GEOGRAPHIC AREA
The following table shows the approximate average sales
price per barrel (oil) and Mcf (1000 cubic feet of natural gas),
together with production costs for units of production for the
Company's production revenues for 1996, 1997, and 1998.
1996 1997 1998
Average sales price per bbl of oil $20.38
$18.55 $11.74
Average production cost per bbl $ 5.90
$ 4.24 $ 5.57
Average sales price per Mcf of natural gas $ 1.86
$ 2.03 $ 1.81
Average production cost per Mcf of natural gas $ .51
$ .40 $ .61
The average production cost for oil was higher in 1998, when
compared to 1997, $5.57 per barrel in 1998 and $4.24 per barrel
in 1997. The Company had more workovers on its oil wells in
1998, and a greater percentage of income from working interests.
In 1997 there were fewer workovers, but more production taxes due
to higher oil prices.
The average production cost for natural gas increased in
1998 due to more production from working interests in higher cost
wells in Oklahoma. These Oklahoma wells added up to a third of
natural gas production which was mostly from royalty wells in
1997.
The average production cost for natural gas dropped in 1997,
due to a large amount of royalty gas from San Juan County, New
Mexico. The cost of production for natural gas was $ .61 in
1998, $.40 in 1997, and $.51 in 1996. This was caused by
increased sales of natural gas but with more production coming
from working interest wells, resulting in a high production cost
per MCF.
The Company's oil and gas operations are conducted by the
Company through its corporate headquarters in Denver, Colorado.
Mining Interests
The Company formerly owned stock and a note in Carbon
Opportunities, L.L.C. which was secured against the assets of
Buck Creek Coal Company in Indiana. The Company thus had an
indirect interest in coal leases in Sullivan County, Indiana.
These coal leases were security for a promissory note owned by
Carbon Opportunities, L.L.C., in which the Company holds a 2%
interest. The leases were operated as the Buck Creek Coal Mine
during 1995, but have since gone into bankruptcy and are
currently in a Chapter 11 liquidation. The Company has not made
any reserve estimates of coal in place on such leases as the
value of the leases has been written off. The Company currently
has no mining operations on its mineral interests.
Corporate Offices and Employees
The corporate offices are located at 1675 Broadway, Suite
1030, Denver, Colorado 80202. The Company is not a party to any
lease but currently pays $1,600 a month to Jenex Operating
Company, which is owned by the Company's president, for office
space and all office services, including rent, phone, office
supplies, secretarial, land, and accounting. The Company's
expenses for these services are approximately $20,000 per year.
The Company is continuing this arrangement on a month-to-month
basis. The Company believes this arrangement is below true
market rate for equivalent facilities and services.
The Company currently has five (5) directors. The Company
has one part time employee, the President, and two assistant
secretaries on a contract basis employed at the Company's
corporate offices. None of the officers or employees are
represented by a union.
Foreign Operations and Subsidiaries
The Company has no foreign operations, exports, or
subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
There are no legal actions of a material nature in which the
Company is engaged.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not hold a shareholder's meeting in 1998,
due to a meeting being held late in the preceding year, on
November 25, 1997. The results of this meeting are in the 10-K
filed for December 31, 1997. The Company intends to hold a
shareholder's meeting in 1999.
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED
STOCKHOLDER MATTERS
On February 28, 1996, the shareholders approved the issuance
of the Preferred B stock to be issued to each common shareholder
on the basis of one share Preferred B for each share of common
stock. The Company in the fourth quarter of 1996 issued all of
the Preferred Shares and delivered the Preferred B shares to each
of the shareholders for which it had a current address. The
Preferred B shares have an extremely limited market, but are
traded through a clearinghouse held by the Company from December
through February of each year. The Company established a bid and
ask format, whereby any shareholder could submit a bid or ask
price for each Preferred B share. During the first bid and ask
period in 1997, bids of $.75 were received and asked prices of
$.75 and $.90 were received, and 13,365 Preferred B shares were
traded at $.75 or $.90. In 1998, the bid prices received were
$.90-$1.00 and approximately 31,110 shares were traded at this
price. The Company is acting as its own transfer agent, with
respect to these Preferred B shares only. In the wake of the
disastrous oil market in 1998, bids for only 550 shares were
received to purchase the Preferred B shares in 1999.
In November 1991, the Common Stock was reversed split, 1:10,
and a trading range of approximately $1.00 bid to $1.10 was
established and prevailed for approximately four years. A few
transactions were conducted in the pink sheets, but the stock was
not listed on any exchange and did not qualify to be listed on
the NASDAQ small cap exchange. Therefore, there has been almost
no trading in the Company's securities during the last five
years. The Company has purchased common stock on an unsolicited
basis during this period at a price of $1.00-$1.20 per share and
certain limited transactions known to the Company were traded
within this same range. The chart below shows the limited
trading of which the Company is aware during the last three
years.
The trading range for 1998-1999 is shown for Preferred
shares and common shares as a guide to the shareholders as to
what transactions have either taken place or of which the Company
is aware of the bid or ask price. One of the principal reasons
for issuance of the Preferred B shares, was to attempt to use the
common shares of the Company to grow the Company to a size
whereby an active trading market will develop.
COMMON SHARES - 516,315 SHARES OUTSTANDING
BID RANGE (1), (2), (3)
Calendar Quarter Bid Asked
1996: First Quarter $1.10
$1.20
Second Quarter $1.10 $1.20
Third Quarter $1.10 $1.20
Fourth Quarter $1.10 $1.20
1997: First Quarter $.50 (4)
$.75 (4)
Second Quarter $.50 (4) $.75
(4)
Third Quarter $.50 (4) $.75
(4)
Fourth Quarter $.50 (4) $.75
(4)
1998: First Quarter $.65 (4)
$.75 (4)
Second Quarter $.65 (4) $.75
(4)
Third Quarter $.65 (4) $.75
(4)
Fourth Quarter $.75 (4) $.85
(4)
1999: First Quarter
$.75 (4) $.85 (4)
Only a few transactions resulting in the transfer of stock took
place in 1996, 1997 or 1998.
(1) In 1991, the Company tendered for its own 1:10 reverse split
shares at $1.00 per share net to the shareholder. Approximately
29,000 shares were purchased by the Company. All prices shown
are following the implementation of the reverse split.
(2) The Company repurchased approximately 10,000 of its common
shares for its Treasury in 1995 at $1.00 and $1.05 per share from
an estate and a bankruptcy trustee.
(3) (4) The restricted Preferred B shares were first issued in
1996, and trade in a Company sponsored clearinghouse from
December-February of each year, so the 1997 and prices subsequent
reflect the common share price to which the Preferred B price
must be added to compare earlier periods.
As of December 31, 1998, there were approximately 1,100
holders of record of the Company's common stock. The Company has
never paid a dividend and has no present plan to pay any
dividend.
PREFERRED "B" SHARES- 490,859 SHARES OUTSTANDING
BID RANGE (1), (2), (3), (4)
Calendar Quarter Bid Asked
1997: First Quarter $.75-$.90 $.90
Second Quarter No Trading No
Trading
Third Quarter No Trading No
Trading
Fourth Quarter $.75-$.90 $1.00
1998: First Quarter $.90 $1.00
Second Quarter No Trading No
Trading Third Quarter No
Trading No Trading
Fourth Quarter $.85 $.90
1999: First Quarter $.85 $.90
ITEM 6. SELECTED FINANCIAL DATA
Fiscal Year Ended December 31:
1994 1995 1996 1997 1998
REVENUES
Operations
Oil and Gas $196,780 $195,834 $216,870 $193.099 $
193,971
Other Revenues $ 6,139 $ 9,596 $ 27,181 $
14,790 $ 7,505
Expenses $167,080 $173,919 $170,258 $220.627 $ 213,970
Net Income $ 34,183 $ 31,511 $ 73,793 $(12,738)
$(15,582)
Per Common Share $ .06 $ .06 $ .14
$ (.12) $ (.01)
Working capital $ 74,401 $ 26,457 $226,367 $205,339
$ 1,866
Long-term debt -- -- --
- -- --
Total assets $430,327 $505,018 $515,704 $504,875
$508,847
Stockholders' equity $418,856 $440,527 $510,880 $497,892
$458,123
Dividends per share NONE NONE NONE NONE NONE
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
This Form 10-K includes "forward-looking" statements about
future financial results, future business changes and other
events that haven't yet occurred. For example, statements like
we "expect," we "anticipate" or we "believe" are forward-looking
statements. Investors should be aware that actual results may
differ materially from our expressed expectations because of
risks and uncertainties about the future. We will not
necessarily update the information in this Form 10-K if any
forward-looking statement later turns out to be inaccurate.
Details about risks affecting various aspects of our business are
discussed throughout this Form 10-K. Investors should read all
of these risks carefully.
Results of Operations
Oil and gas sales in 1998 were aided by a slight increase in
oil production and a 50% increase in natural gas production.
However, total sales barely increased over the 1997 sales figures
due to oil prices dropping nearly in half from late 1997 levels
and natural gas prices dropping around 20%. Oil and gas sales
were $193,971 in 1998, compared to $193,099 in 1997. The
increased production came from purchased working interests with
higher operating costs, so net income from oil and gas production
fell. The share of production revenues from natural gas
increased to about 65% of oil and gas revenues.
Oil and gas sales for the fiscal year ended December 31,
1997, decreased from $216,870 in 1996 to $193,099 in 1997. This
decrease was due to the steep decline in oil prices. Natural gas
sales increased primarily from increased sales from coal seam gas
in New Mexico. Oil sales decreased due to the natural decline in
the fields.
Oil and gas sales for the fiscal year ended December 31,
1996, increased from $195,834 in 1995 to $216,870 in 1996. This
was caused by several factors, natural gas production from coal
seam gas increased, the price of oil reached a three year high,
and production from purchased oil wells was added. Oil prices in
1996 benefited from a cold winter that caused heating oil to rise
carrying crude prices upward. Then prices firmed up at the
higher levels and increased again at the end of the year. The
shortage of oil in Western Colorado and Eastern Utah resulted in
a premium price for much of this oil. Natural gas prices
benefited from the cold winter which drew down storage levels.
An actual or perceived shortage of natural gas during November,
1996, through February, 1997, resulted in a price level of $3-$4
per MCF by early 1998.
Operating expenses increased significantly in 1998, when
compared to 1997, due principally to two factors. The First was
due to the purchase of six new wells in Oklahoma. Due to these
new wells, depletion and depreciation almost doubled, from
$21,108 in 1997, to $39,577 in 1998. The cost of operating these
wells was also high, with production taxes and operating cost
increases almost $30,000 from the six new wells, which was then
offset by the operating expense rebate on these six wells. The
remaining operating cost increases came from an increase in
workover expenses, which were higher in 1998 than in 1997.
Operating expenses, including production taxes, in the
fiscal year ending December 31, 1997, were $40,824 compared to
$58,356 in 1996. This decrease was due to less workover expenses
in 1997, the sale of higher operating cost oil wells, and the
purchase of lower operating cost natural gas wells. During 1997
production increases were being offset by lower prices.
Operating costs increased from $55,584 in 1995 to $58,356 in
1996. This increase in lease operating expenses was due to
higher costs in some of the Utah fields where Coastal completed
workovers on wells acquired from Linmar Petroleum Company. The
overall strategy of the Company in using its cash flow to
purchase interests in oil and gas properties has resulted in
gradual increases in total oil and gas production. The Company
has attempted to sell or abandon its interest in wells with high
operational costs, as a percent of revenues.
General and administrative expenses decreased slightly from
$79,495 in 1997 to $75,467 in 1998. This small decrease was due
to holding an annual meeting late in 1997, and deferring the next
shareholder's meeting until 1999. The Company also incurred
interest expense in 1998 of $5,745 due to the one year borrowing
for the natural gas purchase, versus no interest expense in 1997.
Other income in 1997 included interest from the Company's cash
reserves which were expended for oil and gas purchases and
Preferred B stock repurchases in 1998. The Company's other
income of $7,505 in 1998 included lease bonus income, interest
and dividends income, and gains on stock sales.
General and administration expenses increased from $73,673
in 1996 to $79,495 in 1997. The principal reason for this
increase was a raise of $6,000 per year to the President. The
President's salary had not been increased in over ten years and
the Board of Directors raised it, effective April 1, 1997. Other
income increased due to interest on cash and dividends on stock
and lease bonus income.
General and administrative expenses increased in the fiscal
year ended December 31, 1996, to $73,673 from $66,698 in 1995.
This increase was due to a higher legal, accounting and
administrative expense incurred in designing, authorizing and
delivering the new capital structure of the Company including the
Preferred B shares which were issued in 1996. Other income also
increased due to higher interest being paid on the Company's
higher cash balances, and profits on sales of oil and gas
properties.
Year 2,000 Disclosure
There has been increasing concern about the effect upon the
financial results of all public companies due to the year 2000
problem. The year 2000 problem is based on the concern that
certain computer programs and computers are not presently
configured to recognize the year 2000 or succeeding years. This
defect in computer functions could have an adverse impact upon
our company and other industries in which we deal if the various
programs and applications cease to function or function
erroneously as we approach the year 2000. Programs dealing with
accounting and financial functions of the Company could cease to
function if they are not year 2000 compliant. This Company has
viewed the year 2000 problem hereafter "Y2K" compliance, in three
general categories. The first is the impact on the Company's own
information technology system consisting of its computers,
software, and financial records. The second is the possible
failure of other equipment which the Company uses such as
security systems, telephone systems, vehicles, and gas meters
which rely on computer components The third potential adverse
effect upon the Company would be third party service and product
suppliers for which the Company depends including payment by the
various companies which operate the wells in which the Company
has interests in, and which provide the Company's cash flow.
The Company has addressed the first of its systems, its own
accounting and financial records, and its well records by
confirming the software systems are Y2K compliant. The Company
financial records are being transferred to the "Roughneck" system
which has been Y2K compliant for two years and amply tested.
This system is owned and operated by Jenex Petroleum Corp. which
provides it to the Company as part of its overhead services. The
Company intends to have its complete 1999 records on the
Roughneck system and fully compliant by the second quarter of
1999. The previous records of the Company are also being kept on
a Y2K compliant system, primarily on Excel, which has been
upgraded to a Y2K compliant status. The Company anticipates no
further problems with its own records in order to be fully Y2K
compliant.
With respect to other IT systems which may fail on or around
the advent of the year 2000, the Company is conferring with its
supplier of services, Jenex, and has confirmed that its
telephone, fax, and email systems are Y2K compliant. The Company
does not anticipate any major problems with these systems.
Because the Company does not operate any of its oil or natural
gas wells, it is in a position to withstand, without any material
adverse consequences, a break down of days or even weeks in these
systems.
With respect to the third possibility, the third party
suppliers from which the Company derives its cash flow being
unable to operate wells and or pay timely for the Company's
production, the Company has begun a program of reserving cash, as
a contingency in the event of a disruption in its cash flow. The
Company believes in its capacity as a low overhead company with
no operations of its own, and that this problem can be addressed
by simply having adequate cash reserves to replace at least two
months of total revenue. The Company plans to be in this
position by the end of 1999.
Under the Company's agreements, the Company's costs to
become Y2K compliant, will not increase its overhead from its
normal operations. The Company feels its efforts are adequate to
handle any Y2K problems that can be reasonably anticipated.
Capital Resources and Liquidity
At December 31, 1998, the Company's current assets totaled
$52,590 and its current liabilities totaled $50,724 for a working
capital position of $1,866. This drastic decrease in the
Company's working capital position was due to the use of cash to
purchase the six natural gas wells, and the short term borrowing
of $90,000. The final payment on this debt was made in March
1999, and the Company's current liabilities should drop, to less
than half of the Company's current assets in 1999. The drop in
oil and natural gas prices resulted in the Company depleting its
cash resources to a greater extent than anticipated by
management.
At December 31, 1997, the Company's current assets totaled
$212,322 and the Company's current liabilities totaled $6,983,
for a working capital position of $205,339. This liquidity
decreased from $226,367 at December 31, 1996, to the $205,339 at
December 31, 1997. This decrease was due to the Company
purchasing oil and gas wells during 1997. The Company's current
ratio was in excess of 30:1 during 1996 and 1997. As the Company
purchased oil and natural gas properties, the current ration
dropped during 1998.
In 1996, the Company increased its current ratio by
decreasing its current liabilities from $64,491 to $4,824, while
increasing its current assets to $231,191. In 1996, the
Company's current ratio increased as it paid off bank debt and
paid down payables and utilized its cash flow to accumulate cash.
The Company, in March 1999, paid off the final installments
of its' bank debt. The Company intends to pay down payables and
accumulate cash during the next year. The Company would expect
that future cash positions and liquidity will be dependent upon
its success in doing a merger, acquisition, or reverse
acquisition, and the amount of oil and gas properties it buys.
Because the Company's revenues are primarily from royalty
payments and the Company does not have significant operating
expenses, inflation is favorable to the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to financial statements, financial statement
schedules, and supplemental information, beginning with Page 22
(F-1) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a)(b)(c) Identification of Directors, Officer and
Significant Employees.
The Croff Board consists of Gerald L. Jensen, Dilworth A.
Nebeker, Richard H. Mandel, Edwin W. Peiker, and Julian D.
Jensen. Each director will serve until the next annual meeting
of shareholders, or until his successor is duly elected and
qualified. The following is provided with respect to each
officer and director of the Company as of March 1, 1999.
GERALD L. JENSEN, 59, PRESIDENT AND DIRECTOR
President of Croff Oil Company since October 1985. Mr. Jensen
has been an officer and director of Jenex Petroleum Corporation,
a private oil and gas company for over ten years. Mr. Jensen was
a director of Pyro Energy Corp., a public company (N.Y.S.E.)
engaged primarily in coal production, from 1978 until the Company
was sold in 1989. Mr. Jensen is also an owner of private real
estate, development, and oil and gas companies.
RICHARD H. MANDEL, JR., 69, DIRECTOR
Since 1982, Mr. Mandel has been President and a Board Member of
American Western Group, Inc., an oil and gas producing company in
Denver, Colorado. From 1977 to 1984, he was President of
Universal Drilling Co., Denver, Colorado.
DILWORTH A. NEBEKER, 58, DIRECTOR
Mr. Nebeker served as President of Croff from September 2, 1983
to June 24, 1985, and has been a director of Croff since December
1981. He has been a lawyer in private practice for the past ten
years. Prior thereto, he was a lawyer employed by Tosco
Corporation, a public corporation, from 1973 to 1978. He was a
lawyer with the Securities and Exchange Commission from 1967 to
1973.
EDWIN W. PEIKER, JR., 67, DIRECTOR AND SECRETARY
Mr. Peiker was President of Royal Gold, Inc., from 1988 through
1991, and continues to be a director. Since 1986, Mr. Peiker has
been a Vice President and Director of Royal Gold, Inc., a public
company engaged in gold exploration and mining activities. Prior
thereto he was involved in private investments in oil and gas
exploration and production. Mr. Peiker was employed in
responsible positions with AMAX, Inc., a public corporation, from
1963 to 1983. AMAX is primarily engaged in mine evaluation and
resource analysis.
JULIAN D. JENSEN, 50, DIRECTOR
Mr. Jensen is the brother of the Company's president and has
served as legal counsel to the Company for the past seven years.
Mr. Jensen has practiced law, primarily in the areas of corporate
and securities law, in Salt Lake City, Utah, since 1975. Mr.
Jensen is currently associated with the firm of Jensen, Duffin,
Carman, Dibb & Jackson, which acts as legal counsel for the
Company.
The Company has no knowledge of any arrangements or
understandings between directors or any other person pursuant to
which any person was or is to be nominated or elected to the
office of director of the Company.
ITEM 11 EXECUTIVE COMPENSATION
Remuneration
During the fiscal year ended December 31, 1998, there were
no officers, employees or directors whose total cash or other
remuneration exceeded $60,000.
Summary Compensation Table
1998 Compensation of C.E.O. (1)
Total All
Salary Bonus Other Stock Options
Compensation
$53,625 0 0 No new options $53,625
per annum
Gerald L. Jensen is employed part time as the President and
C.E.O. of Croff Enterprises, Inc.
(1) Effective March 20, 1997, the President's salary was
increased to $54,000 per year. In addition, the Company will
contribute 3% of his salary to a Simple IRA Plan.
Directors, excluding the President, are not paid a set
salary by the Company, but are paid $350 for each half-day board
meeting and $500 for each full-day board meeting.
Proposed Remuneration
During the current fiscal year, the Company intends to
compensate outside directors at the rate of $350 for a half day
meeting and $500 for a full day meeting.
Based on the current remuneration, for the fiscal year
ending December 31, 1998, no officer or director shall receive
total cash remuneration in excess of $60,000.
Options, Warrants or Rights
Directors were authorized and issued stock warrants in 1991,
that essentially provide each director a warrant to purchase
10,000 shares of the Company's stock at $1.00 per share through
1995. The President's warrant is for 20,000 shares. The
warrants to purchase stock were extended for four more years at
the Board of Directors meeting on November 1, 1995. The
expiration date of the warrants is December 31, 1999. No stock
options were granted in the fiscal year ending December 31, 1998.
The chart below sets out the terms and value of the above
warrants to all officers and directors, none of which have been
exercised.
Officers and Directors Warrants and Compensation (1998)
Warrant Terminat Exerci Current Director
to ion se Value Compensati
Buy Date Price (Estimate on (2)
d) (1)
Directors (Excluding 10,000 12/31/99 $1.00 $ 6,500 $ 1,050
President): Shares
President and 20,000 12/31/99 $1.00 $13,000 $53,625
Director: Shares
(1) Based on a current stock price of $1.00 for Preferred B
shares and $.75 for common shares for a total estimated value of
$1.65, over option price of $1.00 per share. There is no market
for the warrants and an extremely limited market for stock.
(2) Director compensation based on holding three one half day
meetings per year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
(b) Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth the beneficial ownership of
Common stock of the Company as of December 31, 1998, by (a) each
person who owned of record, or beneficially, more than five
percent (5%) of the Company's $.10 par value common stock, its
common voting securities, and (b) each director and nominee and
all directors and officers as a group.
Shares Percentage
of
Beneficially Class of
Owned Stock
Jensen Development Company 132,130 (1)
25.58%
1675 Broadway, Suite 1030
Denver, Colorado 80202
Gerald L. Jensen 71,215 (2)
13.27%
1675 Broadway, Suite 1030
Denver, Colorado 80202
Edwin W. Peiker, Jr. 14,000 (2)
2.66%
550 Ord Drive
Boulder, Colorado 80401
Dilworth A. Nebeker 11,300 (2) 2.15%
201 East Figueroa Street
Santa Barbara, California 93101
Richard H. Mandel, Jr. 10,100 (2)
1.92%
3333 E. Florida #94
Denver, Colorado 80210
Julian D. Jensen 46,532 (2)(3) 8.84%
311 South State Street, Suite 380
Salt Lake City, Utah 84111
Directors as a Group 285,277
49.48%
(1) Jensen Development Company is primarily owned by Gerald L.
Jensen
(2) Includes a warrant to purchase 10,000 shares of the
Company's stock at $1.00 per share, expiring December 31, 1999.
Mr. Gerald L. Jensen's warrant is for 20,000 shares. None of the
warrants have been exercised.
(3) Includes shares held in Jensen Family Trust (31,532) in
which Julian D. Jensen is the Trustee and approximate 43%
beneficial owner. Mr. Gerald L. Jensen holds an approximate 38%
beneficial interest in these Trusts.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company currently is in an office sharing arrangement
with Jenex Petroleum Corporation, hereafter "Jenex", a company
formerly owned 50% by the President, Gerald L. Jensen, which
during the last year was acquired 100% by Mr. Jensen. Jenex
provides offices, phones, office supplies, computers,
photocopier, fax, and all normal and customary office services.
In addition, the Company shares an accountant and two assistant
secretaries who are paid by Jenex. Jenex also provides
assistance from a geologist. Croff currently reimburses Jenex
$1,600 per month for all of these expenses. These arrangements
were entered into in order to reduce the Company's overhead. The
Company is currently continuing this arrangement on a month-to-
month basis. Jenex provides similar services to Jenex Operating
Company of Texas, Inc. for $6,500 per month, a Company in which
the President owns a 50% interest. In the opinion of management,
the amounts paid by Croff to Jenex for the personnel, office,
equipment use, and other services are below the cost for such
items if independently obtained.
The Company retains the legal services of Jensen, Duffin,
Carman, Dibb & Jackson. Julian Jensen, a director, as a
professional corporation, is part of this association. Legal
fees paid to this law firm for the years ending 1998, 1997, and
1996 are, respectively, $525, $2,086, and $4,398.
Effective April 1, 1998, the Company purchased six working
interests in Oklahoma natural gas wells from St. James Oil Ltd. a
company owned by a brother of the Company's President. The price
of $208,000 was slightly less than an unaffiliated parties offer,
to St. James Oil Ltd. which offer, however, included the third
party taking over operations from Jenex. As part of this
transaction, Gerald Jensen, the Company's President, purchased
the one half ownership of Jenex which he did not already own, and
Jenex then retained operations of these wells, but agreed to
rebate to Croff $150 of the operating fees per well, each month,
or a total of $900 per month as long as Jenex operated the wells
and Croff retained its interest. Croff then agreed to purchase
the wells for $208,000. This acquisition was approved by the
Board of Directors in March 1998, with the President abstaining
from the vote.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a)(1) Financial Statements. See index to financial statements,
financial statement schedules, and supplemental information as
referenced in Part II, Item 8, and the financial index on Page F-
1 hereof. These reports are attached as Exhibits and are
incorporated herein.
Reports on Form 8-K
None
Exhibit Index
Report of Independent Certified Public Accountants
Note Agreement with Union Bank
Croff Purchase Agreement
Assignment of Oil, Gas, and Mineral Lease
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on behalf by the undersigned, thereunto
duly authorized.
REGISTRANT:
CROFF ENTERPRISES, INC.
Date: March 31, 1998 By: /S/Gerald L.
Jensen
Gerald L. Jensen, President,
Chief Executive Officer
Date: March 31, 1998 By: /S/ Beverly
Licholat
Beverly Licholat,
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the date indicated.
Date: March 31, 1998 By: /S/Gerald L.
Jensen
Gerald L. Jensen, President
Date: March 31, 1998 By: /S/ Richard H.
Mandel
Richard H. Mandel, Jr.,
Director
Date: March 31, 1998 By: /S/ Edwin Peiker
Edwin Peiker, Jr., Director
Date: March 31, 1998 By: /S/ Dilworth A.
Nebeker
Dilworth A. Nebeker, Director
Date: March 31, 1998 By: /S/ Julian D.
Jensen
Julian D. Jensen, Director
CROFF ENTERPRISES, INC.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES
AND SUPPLEMENTAL INFORMATION
Page Number
I. Financial Statements
Report of Independent Certified Public Accountants
F-2
Balance Sheet - December 31, 1997 and 1998
F-3
Statement of Operations - years ended December 31, 1996,
1997 and 1998
F-5
Statement of Stockholders' Equity - years ended
December 31, 1996, 1997 and 1998
F-6
Statement of Cash Flows - years ended December 31,
1996, 1997 and 1998
F-7
Notes to Financial Statements
F-8
II. Supplemental Information - Disclosures about Oil and
Gas Producing Activities - Unaudited
F-14
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Croff Enterprises, Inc.
We have audited the balance sheet of Croff Enterprises, Inc.
at December 31,
1997 and 1998, and the related statements of operations,
stockholders' equity
and cash flows for each of the three years in the period ended
December 31,
1998. These financial statements are the responsibility of
management. Our
responsibility is to express an opinion on them based on our
audits.
We conducted our audits in accordance with generally
accepted auditing
standards. Those standards require that we plan and perform the
audits to obtain
reasonable assurance about whether the financial statements are
free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes
assessing the accounting principles used and significant
estimates made by
management, as well as evaluating the overall financial
statement presentation.
We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above
present fairly, in
all material respects, the financial position of Croff
Enterprises, Inc. as of
December 31, 1997 and 1998, and the results of its operations and
its cash flows
for each of the three years in the period ended December 31,
1998, in conformity
with generally accepted accounting principles.
Denver, Colorado
March 17, 1999 CAUSEY
DEMGEN & MOORE INC.
F-2
CROFF ENTERPRISES, INC.
BALANCE SHEET
December 31, 1997 and 1998
ASSETS
1997
1998
------
- ------
Current assets:
Cash and cash equivalents $166,883
$ 14,294
Marketable equity securities 15,687
3,125
Accounts receivable:
Oil and gas purchasers 26,552
32,271
Refundable income taxes 3,200
2,900
--------
- --------
Total current assets 212,322
52,590
Oil and gas properties, at cost, successful
efforts method:
Proved properties 429,903
636,595
Unproved properties 97,102
97,102
--------
- --------
527,005
733,697
Less accumulated depletion and depreciation
(250,729) (288,717)
--------
- --------
Net property and equipment 276,276
444,980
Coal investment (Note 2) 16,277
11,277
--------
- --------
$504,875
$508,847
========
========
See accompanying notes.
F-3
CROFF ENTERPRISES, INC.
BALANCE SHEET
December 31, 1997 and 1998
LIABILITIES AND STOCKHOLDERS' EQUITY
1997
1998
--------
- --------
Current liabilities:
Note payable - bank (Note 3) $ -
$ 23,369
Accounts payable 4,378
19,290
Accrued liabilities (Note 4) 2,605
8,065
--------
- --------
Total current liabilities 6,983
50,724
Contingencies (Note 2)
Stockholders' equity (Note 5):
Class A preferred stock, no par value;
5,000,000 shares authorized, none issued
- - -
Class B preferred stock, no par value;
520,000 shares authorized, 516,505 shares (1997)
and 490,859 shares (1998) issued and outstanding
364,328 329,559
Common stock, $.10 par value; 20,000,000 shares
authorized, 579,143 shares issued
57,914 57,914
Capital in excess of par value
542,215 552,797
Accumulated deficit
(383,669) (399,251)
-------
- - --------
580,788 541,019
Less treasury common stock at cost, 62,828 shares
(1997 and 1998)
(82,896) (82,896)
-------
- - --------
Total stockholders' equity
497,892 458,123
-------
- - --------
$504,875 $508,847
======== ========
See accompanying notes.
F-4
CROFF ENTERPRISES, INC.
STATEMENT OF OPERATIONS
For the years ended December 31, 1996, 1997 and
1998
1996 1997
1998
---- ----
- ----
Revenue:
Oil and gas sales (Note 8) $216,870
$193,099 $193,971
Gain (loss) on disposal of oil and gas
properties 19,678
- - (3,088)
Other income 7,503
14,790 7,505
-------- ------
- -- --------
Total revenue 244,051
207,889 198,388
Costs and expenses:
Lease operating expense and production taxes 58,356
40,824 68,981
General and administrative (Note 4) 73,673
79,495 75,467
Rent expense - related party (Note 4) 16,800
17,200 19,200
Depreciation and depletion 20,759
21,108 39,577
Interest 670
- - 5,745
Write down of coal investment (Note 2) -
62,000 5,000
-------- ------
- -- --------
Total costs and expenses 170,258
220,627 213,970
-------- ------
- -- --------
Net income (loss) (Note 6) 73,793
(12,738) (15,582)
Net income (loss) applicable to preferred
stock (Note 5) -
49,262 (10,582)
-------- ------
- -- --------
Net income (loss) applicable to common
shareholders $ 73,793
$(62,000) $ (5,000)
========
======== ========
Basic and diluted net income (loss)
per common share (Note 7) $ .14 $
(.12) $ (.01)
========
======= =======
See accompanying notes.
F-5
CROFF ENTERPRISES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1996, 1997 and
1998
Capital in
Preferred stock
Common stock excess of Treasury Accumulated
Shares Amount Shares
Amount par value stock deficit
------ ------ ------
- ------ --------- ------- -----------
Balance, December 31, 1995 - $ - 579,143
$ 57,914 $ 909,983 $ (82,646) $ (444,724)
Issuance of preferred stock
(Note 5) 516,505 233,744 -
- - (233,744) - -
Costs of issuance of preferred
stock - - -
- - (3,440) - -
Net income for the year ended
December 31, 1996 - - -
- - - - 73,793
-------- -------- -------
- -------- -------- -------- ----------
Balance, December 31, 1996 516,505 233,744 579,143
57,914 672,799 (82,646) (370,931)
Purchase of 200 shares of
treasury stock - - -
- - - (250) -
Net loss for the year ended
December 31, 1997 - - -
- - - - (12,738)
Preferred stock reallocation
(Note 5) - 130,584 -
- - (130,584) - -
-------- -------- -------
- -------- -------- -------- ----------
Balance, December 31, 1997 516,505 364,328 579,143
57,914 542,215 (82,896) (383,669)
Purchase and retirement of 25,646
shares of preferred stock (25,646) (24,187) -
- - - - -
Net loss for the year ended
December 31, 1998 - - -
- - - - (15,582)
Preferred stock reallocation
(Note 5) - (10,582) -
- - 10,582 - -
-------- -------- -------
- ------- -------- -------- ---------
Balance, December 31, 1998 490,859 $329,559 579,143
$57,914 $552,797 $(82,896) $(399,251)
======== ======== =======
======= ======== ======== =========
See accompanying notes.
F-6
CROFF ENTERPRISES, INC.
STATEMENT OF CASH FLOWS
For the years ended December 31, 1996, 1997 and
1998
1996 1997
1998
---- ----
- ----
Cash flows from operating activities:
Net income (loss) $ 73,793 $
(12,738) $ (15,582)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Depreciation and depletion 20,759
21,108 39,577
(Gain) loss on disposal of properties (19,678)
- - 3,088
(Gain) loss on marketable equity
securities (3,012)
(1,377) (2,438)
Loss on write down of investment -
62,000 5,000
Change in assets and liabilities:
Decrease (increase) in accounts
receivable (3,411)
6,374 (5,419)
Increase (decrease) in accounts payable (7,665)
1,214 14,912
Increase (decrease) in accrued
liabilities (2,002)
945 5,460
-------- -----
- -- -------
Total adjustments (15,009)
90,264 60,180
-------- -----
- -- -------
Net cash provided by operating activities 58,784
77,526 44,598
Cash flows from investing activities:
Note receivable 4,800
- - -
Proceeds from sale and leases of property 131,585
- - -
Purchase of oil and gas interests (15,875)
(95,404) (211,369)
Purchase of marketable equity securities -
(3,810) -
Proceeds from sale of marketable
equity securies 8,012
- - 15,000
Distributions from coal investment 12,766
4,256 -
-------- ----
- --- -------
Net cash provided by (used in)
investing activities 141,288
(94,958) (196,369)
Cash flows from financing activities:
Purchase of preferred stock -
- - (24,187)
Purchase of treasury stock -
(250) -
Proceeds from note payable -
- - 90,000
Repayment of note payable (50,000)
- - (66,631)
Cost of issuance of preferred stock (3,440)
- - -
-------- -----
- -- -------
Net cash provided by (used in) financing
activities (53,440)
(250) (818)
-------- -----
- -- -------
Increase (decrease) in cash 146,632
(17,682) (152,589)
Cash and cash equivalents at beginning of year 37,933
184,565 166,883
-------- -----
- -- -------
Cash and cash equivalents at end of year $184,565
$166,883 $14,294
========
======== =======
Supplemental disclosure of cash information:
During the years ended December 31, 1996, 1997 and 1998, the
Company paid cash
for interest in the amount of $1,115, $0 and $5,745,
respectively.
F-7
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
1. Summary of significant accounting policies
Croff Enterprises, Inc. (the Company) is engaged primarily
in the business
of oil and gas exploration and production, primarily
through ownership of
perpetual mineral interests in Oklahoma, Utah, Colorado and
New Mexico, and
acquisition of oil and gas leases.
A summary of the Company's significant accounting policies
is as follows:
Use of estimates:
The preparation of financial statements in conformity
with generally
accepted accounting principles requires management to
make estimates and
assumptions that affect the reported amounts of assets and
liabilities and
disclosure of contingent assets and liabilities at
the date of the
financial statements and the reported amounts of
revenues and expenses
during the reporting period. Actual results could
differ from those
estimates.
Fair value of financial instruments:
The carrying amount of cash, cash equivalents and note
payable - bank is
assumed to approximate fair value because of the short
maturities of those
instruments.
Marketable equity securities:
The Company has adopted Statement of Financial Accounting
Standards No.
115, Accounting for Certain Investments in Debt and
Equity Securities,
which provides for reporting certain equity securities at
fair value, with
unrealized gains and losses included in earnings. The
aggregate cost of
marketable equity securities at December 31, 1997 and 1998
was $5,958 and
$1,663, respectively.
Accounts receivable:
The Company considers accounts receivable to be
fully collectible;
accordingly, no allowance for doubtful accounts is
required. If amounts
become uncollectible, they will be charged to
operations when that
determination is made.
Oil and gas property and equipment:
The Company follows the "successful efforts" method of
accounting for its
oil and gas properties. Under this method, all property
acquisition costs
and costs of exploratory and development wells are
capitalized when
incurred, pending determination of whether the well has
proven reserves. If
an exploratory well does not result in reserves, the
capitalized costs of
drilling the well, net of any salvage, are charged to
expense. The costs of
development wells are capitalized, whether the well is
productive or
nonproductive.
F-8
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
1. Summary of significant accounting policies (continued)
The Company annually evaluates the net present value of
future cash flows,
by lease, and records a loss if necessary, when net book
value exceeds
projected discounted cash flow. The acquisition
costs of unproved
properties are assessed periodically to determine whether
their value has
been impaired and, if impairment is indicated, the costs
are charged to
expense.
Geological and geophysical costs and the costs of
carrying and retaining
undeveloped properties (including delay rentals) are
expensed as incurred.
Capitalized costs are amortized on a units-of-production
method based on
estimates of proved developed reserves.
Income taxes:
The provision for income taxes is based on earnings
reported in the
financial statements. Deferred income taxes are provided
using a liability
approach based upon enacted tax laws and rates applicable to
the periods in
which the taxes become payable.
Coal investment:
The investment was initially recorded at cost. Revenues
and distributions
are recorded using the cost recovery method (see Note 2).
Cash equivalents:
For purposes of the statement of cash flows, the Company
considers all
highly liquid debt instruments purchased with a maturity of
three months or
less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject
the Company to
concentrations of credit risk consist principally of cash,
cash equivalents
and trade receivables. The Company places its cash
with high quality
financial institutions. At times during the year, the
balance at any one
financial institution may exceed FDIC limits.
2. Coal investment
In March 1995, the Company purchased a 2% interest in a
limited liability
company (LLC) in exchange for $100,000, $50,000 of which
was borrowed by
the Company pursuant to a one year 10.5% bank loan,
guaranteed by the
Company' president. The loan was repaid during 1996. The
LLC acquired a
mortgage note on a coal mine in Indiana, and the Company
had an option to
acquire a 2% interest in the mine for a nominal payment.
F-9
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
2. Coal investment (continued)
In December 1995, the major purchaser of coal from the
mine, a utility,
canceled the contract. In January 1996, creditors of the
coal mine filed an
involuntary petition under Chapter 7 of the Bankruptcy
Code which, upon
motion of the mining company was converted to a case under
Chapter 11 of
the Bankruptcy Code. The operations at the mine have
subsequently been shut
down and the assets were being liquidated while the LLC
sued the utility.
In July 1997, the trial court ruled against the LLC. As
a result, the
Company recorded a write down of $62,000 in 1997, and an
additional $5,000
in 1998, to adjust its carrying value of the investment
to the estimated
liquidation value of cash, land and equipment remaining.
3. Note payable - bank
In connection with the purchase of certain producing oil
and gas interests
(see Note 4), the Company obtained a loan from a bank as
evidenced by a
promissory note dated March 23, 1998, in the principal
amount of $90,000,
with interest at 2.0 percentage points above the Norwest
Bank Colorado,
N.A. prime rate (9.75% at December 31, 1998). The loan
is unsecured,
guaranteed by an officer and shareholder of the Company as
a co-borrower,
and is due in twelve monthly installments of principal plus
interest, with
final payment due March 23, 1999. At December 31, 1998,
$23,369 remains
outstanding under this obligation.
4. Related party transactions
The Company retains the services of a law firm in which a
partner of the
firm is a director of the Company. Legal fees paid to
this firm for the
years ended December 31, 1996, 1997 and 1998 amounted to
$4,398, $2,086 and
$525, respectively.
The Company has a month-to-month agreement with an
affiliated company to
provide for office services and sublease office space for
$1,600 per month.
Accrued liabilities at December 31, 1998 include
$4,800 due to the
affiliated company pursuant to this agreement.
Purchase of proved oil and gas properties:
On April 7, 1998, the Company purchased certain working
leasehold interests
in oil and gas wells in Oklahoma, from an affiliated
company, for cash in
the amount of $208,000. Another affilated entity is the
operator of these
wells, and has offered to offset the Company's lease
operating expenses on
these wells in the amount of $150 per month per well (an
aggregate of $900
per month) for as long as the Company owns the wells. In
October of 1998,
this amount was increased to $180 per month per well (an
aggregate of
$1,080 per month). At December 31, 1998, $4,860 has been
offset against
lease operating expense, in this manner.
F-10
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
5. Stockholders' equity
On November 1, 1991, the Company's shareholders approved
the issuance of
warrants to purchase 60,000 shares of the Company's common
stock at $1.00
per share to members of the Company's Board of Directors.
During 1995, the
warrants were extended and are exercisable at any time
through December 31,
1999. The warrants must be exercised for not less than
5,000 shares at any
time of exercise. As of December 31, 1998, no warrants have
been exercised.
The Company has adopted the disclosure-only provisions of
Statement of
Financial Accounting Standards No. 123 "Accounting
for Stock-Based
Compensation". Accordingly, no compensation cost has been
recognized for
the warrants. Had compensation costs for the Company's
warrants been
determined based on the fair value at the extension date
consistent with
the provision of SFAS No. 123, the Company's net earnings
and earnings per
share would not be materially different from the amounts
recorded on the
accompanying statement of operations for the years ended
December 31, 1996,
1997 or 1998
On February 28, 1996, the shareholders of the Company
approved the creation
of 5,000,000 authorized Class A Preferred shares and
520,000 authorized
Special Class B Preferred shares.
The Class A preferred stock was authorized for
possible future
capitalization and funding purposes of the Company and
has not yet been
designated as voting or non-voting. Presently, there
are no plans or
intentions to issue these shares.
The Class B preferred stock was authorized to protect
the existing
perpetual mineral interests and other oil and gas assets of
the Company for
the benefit of existing stockholders while the Company
pursues other
business ventures. In October 1996, the Company
issued to its common
shareholders one share of Class B preferred stock for every
share of common
stock held which totaled 516,505 shares. The Class B
preferred stock has no
par value and limited voting privileges. The Class B
preferred stockholders
are entitled exclusively to all dividends, distributions,
and other income
which are based directly or indirectly on the oil and
natural gas assets of
the Company. In addition, in the event of liquidation,
distribution or sale
of the Company, the Class B preferred stockholders
have an exclusive
preference to the net asset value of the natural gas and
oil assets over
all other classes of common and preferred stockholders.
The value of the Class B preferred shares was originally
based on the book
value of the oil and gas assets at December 31, 1996.
Effective December
31, 1997, the Company's board of directors approved an
allocation of oil
and gas assets to the preferred shares totaling $364,328.
Subsequent to
December 31, 1997, net oil and gas income after
operating expenses and
applicable general and administrative expense is allocated
to the Class B
preferred shares.
F-11
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
5. Stockholders' equity (continued)
During 1997 and 1998, the Company conducted a clearing
house where it
brough together certain buyers and sellers of its Class B
preferred stock,
which is not otherwise traded. At the conclusion of the
trading period in
1998, one large purchaser was unable to complete its
intended purchases,
due to lack of financing. The Board of Directors determined
to purchase and
retire 25,646 shares. In April 1998, the Company completed
the purchase of
25,646 shares of the Class B preferred stock for the cash
in the amount of
$24,187, which reduced the issued and outstanding Class B
preferred shares,
leaving a remaining balance of 490,859 shares.
6. Income taxes
At December 31, 1998, the Company had net operating loss
carry-forwards of
approximately $501,000, which, if not used, will expire as
follows:
Year of expiration Amount
------------------ --------
2000 $471,000
2001 23,000
2018 7,000
--------
$501,000
In addition, the Company has a depletion carryover of
approximately
$512,000 which has no expiration date.
The Company did not record an income tax provision for
the year ended
December 31, 1996 due to the utilization of a tax loss
carryforward for the
year. The recognized tax benefit of the utilized
carryforward was $15,600
for the year ended December 31, 1996. The Company has a
financial statement
loss carryover of approximately $399,000 remaining at
December 31, 1998.
The difference in financial statement and tax return loss
carryovers is
principally the difference in the timing of deducting
intangible drilling
costs. Income tax credit carryovers for financial and
tax purposes
approximate $2,700 from pre-1986 transactions.
F-12
CROFF ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996, 1997 and 1998
6. Income taxes (continued)
As of December 31, 1997 and 1998, total deferred tax
assets, liabilities
and valuation allowance are as follows:
1997
1998
----
- ----
Deferred tax assets resulting from loss
carryforward $168,000
$ 187,000
Deferred tax liabilities
(21,000) (39,000)
Valuation allowance
(147,000) (148,000)
--------
- --------
$ -
$ -
========
========
7. Basic and diluted income (loss) per common share
Basic income (loss) per common share information is based
on the weighted
average number of shares of common stock outstanding
during each year,
approximately 517,000 shares in 1996, 1997 and 1998.
Outstanding warrants
are not dilutive in any of the periods presented.
8. Major customers
Customers which accounted for over 10% of revenues were as
follows for the
years ended December 31, 1996, 1997 and 1998:
1996 1997
1998
---- ----
- ----
Oil and gas:
Customer A 23.7% 23.0%
13.9%
Customer B 11.1% 12.2%
10.4%
Customer C * *
21.0%
Customer D 10.5% 18.4%
*
* - less than 10%
F-13
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
In November, 1982, the Financial Accounting Standards Board
issued and the
SEC adopted Statement of Financial Accounting Standards
No. 69 (SFAS 69)
"Disclosures about Oil and Gas Producing Activities". SFAS
69 requires that
certain disclosures be made as supplementary information
by oil and gas
producers whose financial statements are filed with
the SEC. These
disclosures are based upon estimates of proved
reserves and related
valuations by the Company. No attempt is made in this
presentation to
measure "income" from the changes in reserves and costs.
The standardized measure of discounted future net cash
flows relating to
proved reserves as computed under SFAS 69 guidelines may
not necessarily
represent the fair value of Croff's oil and gas properties
in the market
place. Other factors, such as changing prices and costs and
the likelihood
of future recoveries differing from current estimates, may
have significant
effects upon the amount of recoverable reserves and their
present value.
The standardized measure does not include any "probable"
and "possible"
reserves which may exist and may become available
through additional
drilling activity.
The standardized measure of discounted future net cash
flows is developed
as follows:
1. Estimates are made of quantities of proved reserves and the
future periods
during which they are expected to be produced based on
year-end economic
conditions.
2. The estimated future production of proved reserves is
priced on the basis
of year-end prices except that future prices of gas are
increased for fixed
and determinable escalation provisions in contracts (if
any).
3. The resulting future gross revenue streams are reduced by
estimated future
costs to develop and produce the proved reserves, based on
year-end cost
and timing estimates.
4. A provision is made for income taxes based upon year-end
statutory rates.
Consideration is made for the tax basis of the property
and permanent
differences and tax credits relating to proved
reserves. The tax
computation is based upon future net cash inflow of oil and
gas production
and does not contemplate a tax effect for interest income
and expense or
general and administrative costs.
5. The resulting future net revenue streams are reduced to
present value
amounts by applying a 10% discount factor.
F-14
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
(continued)
Changes in the standardized measure of discounted future net
cash flows are
calculated as follows:
1. Acquisition of proved reserves is based upon the
standardized measure at
the acquisition date before giving effect to related income
taxes.
2. Sales and transfers of oil and gas produced, net of
production costs, are
based upon actual sales of products, less associated
lifting costs during
the period.
3. Net changes in price and production costs are based upon
changes in prices
at the beginning and end of the period and beginning
quantities.
4. Extensions and discoveries are calculated based upon
the standardized
measure before giving effect to income taxes.
5. Purchase of reserves are calculations based on increases
from the Company's
acquisition activities.
6. Revisions of previous quantity estimates are based upon
quantity changes
and end of period prices.
7. The accretion of discount represents the anticipated
amortization of the
beginning of the period discounted future net cash flows.
8. Net change in income taxes primarily represents the tax
effect related to
all other changes described above and tax rate changes
during the period.
All of the Company's oil and gas producing activities
are in the United
States.
Oil prices
During the year ended December 31, 1998, crude oil prices
decreased and
natural gas prices were stable. The ultimate amount and
duration of oil and
gas price fluctuations and their effect on the
recoverability of the
carrying value of oil and gas properties and future
operations is not
determinable by management at this time.
F-15
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The results of operations for oil and gas producing
activities, excluding
capital expenditures, corporate overhead and interest costs,
are as follows
for the years ended December 31, 1996, 1997 and 1998:
1996 1997
1998
---- ----
- ----
Revenues $216,870 $193,099
$193,971
-------- --------
- --------
Lease operating costs 47,759 26,966
52,679
Production taxes 10,597 13,858
16,302
Depletion and depreciation 20,759 21,108
39,577
------- -------
- ------
79,115 61,932
108,558
Income tax expense - -
- -
------- -------
- ------
Results of operations from producing
activities (excluding corporate
overhead and interest expense) $137,755 $131,167
$ 85,413
======== ========
========
F-16
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
Year ended
December 31,
---------------
- --------
1996 1997
1998
---- ----
- ----
Future cash inflows $1,540,000
$1,487,000 $1,346,000
Future production and development costs (359,000)
(317,000) (306,000)
1,181,000
1,170,000 1,040,000
Future income tax expense - -
- -
-- -
- - -
Future net cash flows 1,181,000
1,170,000 1,040,000
10% annual discount for estimated timing of
cash flows (415,000)
(411,000) (365,000)
--------- -------
- -- ---------
Standardized measure of discounted
future net cash flows $ 766,000 $
759,000 $ 675,000
==========
========== =========
The following are the principal sources of change in the
standardized measure of
discounted future net cash flows:
Beginning balance $ 736,000 $
766,000 $ 759,000
Evaluation of proved undeveloped reserves, net
of future production and development costs (5,000)
(22,000) (8,000)
Purchase of proved reserves 16,000
95,000 211,000
Sales and transfer of oil and gas produced, net
of production costs (264,000)
(152,000) (166,000)
Net increase (decrease) in prices and costs 204,000
(20,000) (151,000)
Extensions and discoveries 74,000
53,000 12,000
Revisions of previous quantity estimates (7,000)
28,000 8,000
Accretion of discount 12,000
11,000 10,000
Net change in income taxes -
- - -
Other -
- - -
--------- --------
- - ---------
Ending balance $ 766,000 $
759,000 $ 675,000
==========
========== =========
F-17
CROFF ENTERPRISES, INC.
SUPPLEMENTAL INFORMATION - DISCLOSURES
ABOUT OIL AND GAS PRODUCING ACTIVITIES - UNAUDITED
PROVED OIL AND GAS RESERVE QUANTITIES
(All within the United States)
Oil reservesGas
reserves
(bbls.) (Mcf.)
Balance, December 31, 1995 70,555
217,976
Revisions of previous estimates (2,493)
23,148
Purchase of reserves 700
26,000
Extensions, discoveries and other additions 550
54,000
Sale of reserves (12,414)
- -
Production (5,886)
(46,000)
------- ------
- --
Balance, December 31, 1996 51,012
275,124
Revisions of previous estimates -
7,000
Purchase of reserves 3,200
68,864
Extensions, discoveries and other additions 3,034
10,000
Sale of reserves -
- -
Production (5,295)
(46,222)
------- ------
- --
Balance, December 31, 1997 51,951
314,766
Revisions of previous estimates -
3,000
Purchase of reserves 1,522
171,981
Extensions, discoveries and other additions 1,103
- -
Production (5,278)
(65,673)
------- ------
- --
Balance, December 31, 1998 49,298
424,074
=======
=======
Proved developed reserves
December 31, 1996 38,101
265,748
December 31, 1997 39,339
301,343
December 31, 1998 36,686
410,651
Costs incurred in oil and gas producing activities for the years
ended December
31, 1996, 1997, 1998 are as follows:
1996 1997
1998
---- ----
- ----
Property acquisition, exploration and
development costs capitalized $ 15,875 $
95,404 $ 211,369
Production costs 58,356
40,824 68,981
Depletion and depreciation 20,759
21,108 39,577
F-18
CROFF ENTERPRISES, INC.
INDEX TO FINANCIAL STATEMENTS, SCHEDULES
AND SUPPLEMENTAL INFORMATION
Page No.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
F-2
BALANCE SHEET-DECEMBER 31, 1997 AND 1998
F-3
INCOME STATEMENT-YEARS ENDED DECEMBER 31, 1996,
1997 AND 1998 F-5
STATEMENT OF STOCKHOLDERS' EQUITY-YEARS ENDED
DECEMBER 31, 1996, 1997, AND 1998 F-6
STATEMENT OF CASH FLOWS-YEARS ENDED DECEMBER 31,
1996, 1997, AND 1998
F-7
NOTES TO FINANCIAL STATEMENTS F-8
SUPPLEMENTAL INFORMATION-DISCLOSURES ABOUT OIL
AND GAS PRODUCING ACTIVITIES-UNAUDITED F-14