SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
MARK
ONE
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES
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EXCHANGE
ACT OF 1934
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For
the fiscal year ended December 31, 2006
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OR
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TRANSITION
REPORT pursuant to section 13 or 15(d) of the Securities Exchange
Act of
1934
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FOR
THE TRANSITION PERIOD FROM N/A TO
N/A
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Commission
File Number: 000-16731
CROFF
ENTERPRISES, INC.
(Exact
Name Of Registrant As Specified In Its Charter)
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Utah
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3773 Cherry Creek Drive North, Suite 1025
Denver,
Colorado
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80209
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State
of Incorporation
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Address
of principal executive offices
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Zip
Code
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(303)
383-1555
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87-0233535
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Registrant’s
telephone number, including area code
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I.R.S.
Employer Identification Number
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Securities
registered pursuant to Section 12(b) of the Act: 0
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Securities
registered pursuant to Section 12(g) of the Act:
551,244-Common
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$0.10
Par Value
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None
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Title
of each class
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Name
of each exchange on which registered
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Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. YES x NO o
Indicate
by check mark whether the Registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. YES x
NO o
Indicate
by checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K/A. x
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer
o
Accelerated filer o
Non-accelerated filer x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.) YES o NO x
As
of
March 1, 2007, 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: $635,000.
As
of
March 1, 2007, the Registrant had outstanding 551,244 shares of common stock
(excludes 69,399 common shares held as treasury stock).
TABLE OF CONTENTS
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Page
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PART
I
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ITEM
1
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BUSINESS:
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CURRENT
EVENTS: CHANGE OF CONTROL AND SALE OF ASSETS
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4
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ITEM
2
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PROPERTIES
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13
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ITEM
3
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LEGAL
PROCEEDINGS
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20
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ITEM
4
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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20
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PART
II
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ITEM
5
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MARKET
FOR REGISTRANT’S SECURITIES, RELATED STOCKHOLDER
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MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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20
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ITEM
6
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SELECTED
FINANCIAL DATA
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22
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ITEM
7
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL
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CONDITION
AND RESULTS OF OPERATIONS
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22
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ITEM
7A
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES
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ABOUT
MARKET RISK
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27
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ITEM
8
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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27
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ITEM
9
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS
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ON
ACCOUNTING AND FINANCIAL DISCLOSURES
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27
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ITEM
9A
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CONTROLS
AND PROCEDURES
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27
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ITEM
9B
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OTHER
INFORMATION
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28
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PART
III
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ITEM
10
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DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
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28
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ITEM
11
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EXECUTIVE
COMPENSATION
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30
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ITEM
12
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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31
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ITEM
13
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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31
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ITEM
14
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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32
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PART
IV
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ITEM
15
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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33
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SIGNATURES
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34 |
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EXHIBITS
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CERTIFICATIONS
PURSUANT TO THE SARBANES-OXLEY
ACT OF 2002
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Basis
for
10-K Amendment
The
following 10-K/A is being filed by
Croff Enterprises, Inc. “The company” or “Croff” to correct what the company
regards as certain technical accounting disclosure matters. In all events,
the
company does not believe that the accounting changed any of the actual
performance data, such as, net earnings, cash flows or balance sheet data,
but the changes were made primarily to conform to categorizations and
description of certain financial information as requested by the SEC. Further,
the company does not intend to, for the forgoing reasons, restate any of
its
prior financial statements or prior filings. Any person wishing to obtain
a copy
showing the specific amendments in the financial data and narrative information
within the 10-K/A may obtain a copy identifying those changed sections from
the
company upon written request.
CROFF
ENTERPRISES, INC.
Annual
Report on Form 10-K
December
31, 2006
PART
I
ITEM
1. BUSINESS
General
Croff
Enterprises, Inc. (“Croff” or the “Company”) is an independent energy company
engaged in the business of oil and natural gas production, primarily through
ownership of perpetual mineral interests and acquisition of producing oil and
natural gas leases. The Company’s principal activity is oil and
natural gas production from non-operated properties. Croff’s business
strategy is focused on targeting opportunities that are of lower risk with
the
potential for stable cash flow and long asset life while seeking to keep
operating costs low. The Company acquires and owns producing and
non-producing leases and perpetual mineral interests in Alabama, Colorado,
Michigan, Montana, New Mexico, North Dakota, Oklahoma, Texas, Utah and Wyoming.
Over the past eleven years, the Company’s primary source of revenue has been oil
and natural gas production from leases and producing mineral
interests. Other companies operate all of the wells from which Croff
receives revenues and Croff has no control over the factors which determine
royalty or working interest revenues, such as markets, prices and rates of
production. The Company presently participates as a working interest
owner in 38 single wells and in 10 units of multiple wells. Croff
holds small royalty interests in approximately 215 wells.
Summary
of Current and Subsequent Material Events – (Discussion of Exchange Agreement
terminated on June 1, 2007).
Croff
Enterprises, Inc. announced on December 12, 2006, a now terminated Stock
Equivalent Exchange Agreement providing for the acquisition of the Taiyun
Rongan
Business Trading Company Limited, hereafter “TRBT”, a Chinese corporation
located in the city of Taiyun, Shanxi Province, in the People’s Republic of
China. The stock equivalent Exchange Agreement (hereafter “exchange agreement”)
provided for a change in control of Croff, a change in the business of Croff,
and a new management team.
The
essential provisions of the exchange agreement provided for Croff to issue
over
11 million new common shares (92.5%) of its common stock to the shareholders
of
TRBT in exchange for the acquisition of 80% of the outstanding equity and
ownership interest in TRBT by Croff. In the event of the completion and closing
of the Exchange Agreement, Croff would have owned eighty percent (80%) of
all of
the issued and outstanding equity interest of TRBT. TRBT owns a seventy-six
percent (76%) interest in six shopping malls located in or around the city
of
Taiyun, China which is located approximately 400 kilometers west of Beijing,
China. As a result, Croff would have owned approximately sixty-one percent
(61%)
net interest in the shopping malls as its sole assets. At closing, TRBT
shareholders would have received and owned approximately 92.5% of the common
shares of Croff and the Croff shareholders would have continued to hold
approximately 7.5% of the then issued and outstanding common shares of
Croff.
As
a provision of the exchange
agreement, Mr. Gerald L. Jensen, Croff’s President, and his affiliated
companies, the current principal shareholders of Croff, hereafter the “Croff
Principals,” would have, subject to shareholder vote, acquired 67.2% of all of
the Preferred B Oil and Gas assets from Croff in exchange for the conveyance
to
Croff of the 67.2% of the Class B Preferred Shares currently held by these
Croff
Principals. The Croff Principals would have exchanged three hundred sixty
three
thousand five hundred thirty five (363,535) shares, or 67.2% of the class
“B”
shares outstanding, in exchange for 67.2% of the shares of a new subsidiary
to
which all of the oil and gas assets and related bank accounts of the Company
will be transferred. These class “B” preferred shares would have been cancelled
by the Company upon assignment. The Croff Principals would have, concurrently,
tendered the sum of six hundred thousand dollars ($600,000) in cash to the
company, and assume all liabilities of the oil and gas assets, in exchange
for
the remaining 32.8% of the shares of the new subsidiary holding all of the
Croff
oil and gas assets.
Croff
would have, as part of the
exchange closing, converted all remaining preferred “B” shares held by the
public, being approximately 32.8% of the issued and outstanding class of
preferred “B” shares, to common shares on a ratio of two common shares for each
class “B” preferred share cancelled. Upon the closing of the exchange
transaction, all class “B” preferred shares would have been cancelled and
terminated of record, and all holders of Preferred “B” shares would have
received two common shares in exchange. All class “B” preferred
shareholders subsequent to closing would have been deemed to hold common
shares.
As provided in the exchange agreement upon closing, the company would have
outstanding only common shares. The company would have been authorized to
pay a
dividend of twenty cents per share to all common shareholders of record prior
to
closing. This dividend would not include the new common shares to be issued
to
the preferred shareholders at closing. The exchange agreement would also
have
provided that the sum of $530,000 must remain in Croff at closing, after
payment
of all proxy and closing expenses, dissenting shareholder rights, and the
dividend.
A
majority of the preferred B shareholders would have been required to approve
the
sale of the Preferred B assets and a majority of the common would have
been
required to approve all the terms for the exchange agreement to be closed
as
outlined herein.
The
exchange agreement would have been
subject to the completion of standard due diligence by both entities,
dissemination of a proxy statement, and a shareholders vote by Croff common
shareholders and Preferred B Shareholders, whose vote must approve this
transaction.
If
the transaction were closed, the
shareholders would have elected a new Board of Directors nominated and
designated by TRBT. The new Board could have appointed new officers for
the
company. As a net result, the business of the company would have changed
from
oil and gas production to the acquisition, development, and management
of retail
properties in Taiyuan, China, including the initial six properties as
identified. It was expected that the company’s offices in the United States
would be moved to the Los Angeles area from Denver, CO.
The
exchange agreement would have also
required majority approval by the common shareholders to increase the authorized
but unissued preferred “A” shares, no par, from five million shares to ten
million shares. It also required increasing the authorized common shares,
$0.10
par, from 20 million to 100 million shares. Each Croff common shareholder
would
have had the right to exercise dissenting shareholder rights and obtain
cash in
lieu of remaining as a common shareholder.
The
exchange agreement was anticipated
to be approved since the principal shareholders held a majority of the
preferred
“B” shares and the principal shareholders plus Mr. Julian D. Jensen, a director,
held a majority of the common shares.
The
exchange agreement was the subject
of negotiations for nearly one year, following the initial proposal to
Croff by
TRBT to have Croff acquire TRBT. After initial discussions beginning in
December, 2005, the President of Croff visited Taiyuan, China, in April
2006,
and inspected the shopping malls and met with the officers, staff, and
owners.
The President also met with legal counsel in Beijing, China, to be briefed
on
the legalities of the transaction under Chinese law. Subsequently negotiations
took place from April through November of 2006, with respect to all aspects
of
the transaction,
resulting in the signing of the Exchange Agreement on December 12,
2006. On June 1, 2007 Croff announced the termination of the TRBT
Exchange Agreement and filed an 8-K with the SEC announcing this
termination.
Other
Current Events in 2006
The
Company added non-operated working
interests in Colorado, Wyoming, and Utah in 2006. The Company sold its principal
oil and gas assets in DeWitt County, Texas. These interests were very small
non-operated working interest participations.
In
the third quarter of 2006, Croff
sold the balance of its principal properties in the Yorktown Reentry Program
in
Dewitt County, Texas. Previously the Company had participated with Tempest
Energy Resources, LP., in the Yorktown area. In June 2006, the
company reached an agreement to sell all of its assets in the Yorktown program,
except a working interest in two wells, one of which was commercial. The Company
also attempted to sell these two wells but was unable to find a buyer. The
sale
of the principal assets included the Eyhorn Lease, including the 20% working
interest in the Edward Dixel Gipps well. It also included the Panther Pipeline,
approximately 7.2 miles of natural gas gathering line which Croff had acquired
in 2006 from Panther Pipeline Limited of Houston, TX. The sale proceeds
approximately equaled the Company’s cost in the DeWitt County program. Since the
company had written off a portion of its cost in 2005, the sale resulted in
a
small gain reported in the third quarter of 2006. The Company agreed to sell
its
interest in the remaining two natural gas wells in Dewitt County, Texas, on
or
before the closing of the Exchange Agreement.
The
Company participated in the
drilling of the Shriners 2-10c5 Well in Duchesne County, Utah, which was drilled
by El Paso during 2006. The well currently is being completed, but has not
produced any revenue. Croff has a working interest of approximately 1.7% of
this
well and incurred costs of approximately $60,000. The Company also participated
in a small interest in three natural gas wells in Lincoln County, Wyoming,
which
were drilled by Whiting Petroleum. These three natural gas wells were successful
and began producing at the end of 2006. The Company also participated, in the
fourth quarter of 2006, in the Long knife Well in Eastern Colorado. This well
also was successfully completed as a natural gas producer with Croff retaining
an approximate one-eighth working interest. Croff expects revenues for this
well
to begin in 2007.
There
were also a number of small
royalty interests which began paying revenues due to leases executed by Croff
in
earlier years on which new wells were drilled. The most significant of these
wells were drilled in Uintah County, Utah by EOG Resources.
In
2006, two of the company’s long term
directors resigned. Mr. Edwin Piker declined to stand for re-election at
the
Company’s annual meeting held on December 8, 2006. He was replaced by Mr. Harvey
Fenster, a new Director. Mr. Dilworth Nebeker resigned just prior to the
annual
shareholders meeting, for which he was a candidate as director. The vacancy
due
to Mr. Nebeker’s resignation has not been filled. More information on these
changes in the Board of Directors is found in Part III of this
10-K. All new oil and gas interests described in this section will be
part of the class “B” preferred assets to be sold as part of the exchange
agreement.
Strategic
Direction of the Company - 2005
On
April
8, 2005, Croff filed a Form 8-K stating that the Board of Directors had
determined to review Croff’s strategic alternatives. The Board stated such a
review may include the possible sale or merger of all or part of the Company
or
the possible sale or disposition of all or part of the assets. In undertaking
this review, the Board stated two primary objectives. The first
objective was to increase shareholder
value. The second was to provide liquidity to shareholders. The Board
formed a non-management committee of its Board, excluding Gerald L. Jensen,
to
review acquisition proposals including an expected proposal from Gerald L.
Jensen personally and in conjunction with Jensen Development Company, and
C. S.
Finance L.L.C, companies wholly owned by Mr. Jensen.
On
April, 15, 2005 Jensen Development
Company and CS Finance LLC, two companies wholly owned by Gerald L.
Jensen, submitted an offer to purchase the assets pledged to the Preferred
B
shareholders of Croff. The offer was for $2.80 per Preferred B share.
The Company filed a Form 8-K on April 19, 2005 reporting this Offer. After
meeting to discuss the offer on April 20, 2005, the non-management committee
reported to the Offerors that while the committee was generally in favor of
a
transaction, they had concerns with potential tax consequences and requested
an
extension. At a May 4, 2005 meeting, the non-management committee rejected
this
offer based primarily on adverse tax and corporate consequences to the Company,
but invited the Offerors to make a tender offer directly to the
shareholders.
2005
Tender Offer
On
June 7, 2005, the non-management
committee received a draft of an issuer tender offer from the
Offerors. At a meeting of the Board of Directors on June 8, 2005, Mr.
Gerald L. Jensen presented the issuer tender offer to the Board of Directors.
On
June 15, 2005, the Offerors filed with the SEC an issuer tender offer to all
Preferred B shareholders for a cash purchase of $3 per share, for all shares
of
Preferred B stock not held by the Offerors.
The
Offerors received comments from the SEC in response to the Issuer Tender Offer
filed by them on June 15, 2005. The Offerors subsequently filed an
Amended Third Party Tender Offer on June 29, 2005 and again on July 5, 2005.
The
non-management committee of the Board of Directors filed a Schedule 14D-9 with
the SEC on July 6, 2005 on behalf of Croff. This Schedule included the position
of the non-management committee to the Offer as follows: The non-management
committee acting as the Board of Directors adopted the following resolution
with
respect to the Tender Offer: “The majority of the four Directors comprising the
non-management committee of the Board of Directors believe that each Preferred
B
shareholder should decide whether or not to tender shares in this Tender Offer
based upon their specific situation and investment
objectives. Therefore, the non-management committee was neutral and
made no recommendation for or against this Tender Offer.” Each
Director on the non-management committee expressed in the SEC filings an
inclination to tender all or part of their shares in this tender offer and
subsequently did so.
The
tender offer expired at 12:00
Midnight, Eastern Time, on August 19, 2005. The Offerors filed a final Amended
Third Party Tender Offer with the SEC on August 29, 2005 reporting the results
of the tender offer. The Offerors reported that the depository, American
National Bank, had received a total of 75,050 shares tendered and not withdrawn
prior to the expiration of the Offer, including 11,190 shares tendered subject
to delivery. The tendered shares represent approximately 13.9% of the
outstanding Class B Preferred stock of Croff Enterprises, Inc. The Offerors
accepted and approved for payment all of the tendered shares at $3.00 per share
for a total of $225,150. Along with the Class B Preferred shares previously
held
by Gerald L. Jensen and Jensen Development, the Offerors, after the expiration
of the tender offer, collectively held 328,241 Preferred B shares out of 540,659
Preferred B shares issued, or approximately 60.7% of the Preferred B shares
of
Croff Enterprises, Inc.
Of
the
11,190 shares tendered by the expiration of the tender offer, subject to
delivery, all but 150 shares were delivered by the deadline established by
the
Offerors. During the tender offer, two Directors tendered all of their shares
of
Preferred B stock. After the tender offer, one Director, Richard Mandel sold
the
majority of his Preferred B shares for a note due in 2006; retaining 8,000
Preferred B shares. After the tender offer, one of the Directors,
Julian Jensen, who had tendered approximately one third
of
his shares, sold the balance of his Preferred B shares at the same price as
offered for the tender offer for notes payable during 2006 and 2007. These
Additional purchases after the tender offer, by C.S. Finance L.L.C. totaled
another 33,418 Preferred B shares, of which 21,663 Preferred B shares were
purchased from Julian Jensen, and of which 7,702 shares were purchased from
Richard Mandel for the tender offer price. To date, the number of Preferred
B
shares collectively owned by Gerald L. Jensen, C.S. Finance L.L.C., and Jensen
Development Company total 67.2% of the Preferred B shares. The
holders of approximately 94,394 Preferred B shares were not located during
the
tender offer.
Yorktown
Re-entry Program
In
2005,
the Company continued to participate in the development of oil and gas leases
in
Dewitt County, Texas. Croff contributed the bulk of its Dewitt leases to a
participation agreement with Tempest Energy Resources L.P., for an area of
mutual interest in late 2004. Croff and Tempest first drilled the Helen Gips
#1
well, which was unsuccessful. The Helen Gips #1 well was plugged and abandoned
in 2005, and the Company incurred a loss of $52,638. Tempest and Croff purchased
another lease on which there was an existing re-entry well, and an existing
producing well, the A.C. Wiggins. The companies’ refraced (fracture or frac
refers to the process by which a formation is subject to mechanical or chemical
treatment to induce or enhance production) the Wiggins well in 2005 and it
is
currently producing approximately 50 Mcf per day. The working
interest in the Wiggins well is held 75% by Tempest and 25% by Croff. In 2005,
Tempest informed Croff that it would not exercise its option, pursuant to the
participation agreement, to acquire the additional Croff acreage in Dewitt
County. Croff then re-leased certain leases in the former area of mutual
interest. In December 2005, Croff prepared a re-entry well, the Dixel Gips,
on a
portion of its acreage and farmed out this wellbore and acreage, retaining
a 20%
carried interest through the drilling and completion phase. Croff then agreed
to
pay its 20% share of production and equipment costs after completion. The Dixel
Gips well was completed by Pool Operating Company in the first quarter of 2006,
and Croff’s position was then sold, as described above under other Current
Events in 2006.
Oil
and
Natural Gas Reserves
During
2006, the estimated value of the
Company’s discounted future net cash flow from proved reserves decreased from
$2,838,910 at December 31, 2005 to $2,585,000 at December 31, 2006. This
decrease was due to a drop in the Company’s average crude oil price from $55.93
per barrel on December 31, 2005, to $51.95 per barrel on December 31, 2006,
and
a drop in its average natural gas prices from $7.93 per Mcf on December 31,
2005
to $6.36 per MCF on December 31, 2006. During 2005, the estimated
value of the Company’s discounted future net cash flows from proved reserves
increased from $1,642,805 at December 31, 2004, to $2,838,910, an increase
of
$1,196,105 or 72%. This increase in the estimated value of the Company’s
discounted future net cash flows was the result of much higher prices at
December 31, 2005 as compared to December 31, 2004.
The
December 31, 2006 valuation reflected average wellhead prices of $6.36 per
Mcf
and $51.95 per barrel, while the December 31, 2005 valuation reflected average
wellhead prices of $7.93 per Mcf and $55.93 per barrel. At December
31, 2006, approximately 61% of the Company reserve values were from
oil. The Company’s proven oil reserves as of December 31, 2006 and
2005 were estimated at 87,116 barrels and 77,696 barrels
respectively. During 2006, the Company had production of 7,888
barrels of oil compared to production of 7,630 barrels during
2005. The Company’s proven natural gas reserves as of December 31,
2006 and 2005 were estimated at 443,227 Mcf and 385,811 Mcf,
respectively. During 2006, the Company had production of 59,452 Mcf
of natural gas compared to production of 59,403 Mcf of natural gas during 2005.
The Company’s December 31, 2006, reserve study included an overall increase in
the Company’s estimated proven natural gas reserves of 57,416 Mcf and an upward
revision of proven oil reserves of 9,420 barrels. The natural gas
revisions were primarily in the
four
corners leases in Colorado, and additional natural gas wells in
Utah. The oil increases were from new wells in Utah, and reevaluation
of oil wells in Michigan.
Revenues
from oil and natural gas sales for 2006 totaled $842,400. Net income for
2006
was $373,015. Net cash provided by operating activities in 2006
totaled $329,840. The Company’s cash flow from operations is highly dependent on
oil and natural gas prices. Capital expenditures for 2006 totaled
$57,746 and were primarily attributable to participation in new wells in
Utah,
Colorado, and Wyoming. The Company had no short-term or long-term
debt outstanding at December 31, 2006.
History
The
Company was incorporated in Utah in 1907 as Croff Mining Company. The
Company changed its name to Croff Oil Company in 1952, and in 1996 changed
its
name to Croff Enterprises, Inc. The Company, however, continues to
operate its oil and natural gas properties as Croff Oil Company.
In
November 1991, Croff reverse-split the common stock on a ratio of 1 share of
common stock for every 10 shares previously held.
In
1996,
the Company created a class of Preferred B stock to which the perpetual mineral
interests and other oil and natural gas assets were pledged. Thus,
the Preferred B stock represents the majority of the Company’s oil and natural
gas assets, exclusive of the Company’s prior interests which were held in Dewitt
County, Texas. The Preferred B share assets consist of all oil and
natural gas assets not located in Dewitt County, Texas, the Preferred B savings
account and the checking account, and the receivables and liabilities related
thereto. The common share assets consist of the remaining oil and gas assets
in
Dewitt County, Texas, the common stock savings and checking accounts, and the
balance of the Company’s assets. Each common shareholder, as of the February 28,
1996 record date, received one Preferred B share for each common share held,
at
the time of this restructuring of the capital of the Company. Subsequent to
this
date, the Company’s securities have been separately traded. The
Company’s common stock is listed and occasionally traded on the Over the Counter
Bulletin Board (www.otcbb.com) under the symbol “COFF”. The
Preferred B shares have limited trading in private
transactions. There are currently one million Preferred B shares
authorized and 540,659 issued and outstanding. All oil and gas assets presently
remaining in the company as of the date of this report are pledged to the
preferred “B” shares, except for non-operated working interests in two wells and
equipment in Dewitt County, Texas.
Available
Information
Our
Internet address is www.croff.com. We make available through
our website our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or furnish it
to,
the Securities and Exchange Commission.
Major
Customers
Customers
which accounted for over 10%
of oil and natural gas revenues were as follows for the years ended December
31,
2004, 2005 and 2006:
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
Jenex
Petroleum Corp., a related party
|
|
18.1%
|
|
25.8%
|
|
14.2%
|
Merit
Energy
|
|
14.4%
|
|
20.1%
|
|
18.1%
|
Sunoco,
Inc.
|
|
11.9%
|
|
12.4%
|
|
14.7%
|
Management
believes that the loss of any individual purchaser would not have a long-term
material adverse impact on the financial position or results of operations
of
the Company.
Financial
Information About Industry Segments
The
Company’s operations presently consist of a single business, oil and natural gas
production. During previous years the Company has generated revenues
through the sale or leasing of oil and natural gas leasehold interests; however,
no significant revenues were generated from this source for the last six
years.
Government
Regulation
The
Company’s operations are affected by political developments and by federal,
state and local laws and regulations. Legislation and administrative regulations
relating to the oil and natural gas industry are periodically changed for a
variety of political, economic, environmental and other reasons. Numerous
federal, state and local departments and agencies issue rules and regulations
binding on the oil and natural gas industry, some of which carry substantial
penalties and sanctions for failure to comply. The regulatory burden on the
industry increases the cost of doing business, decreases flexibility in the
timing of operations and may adversely affect the economics of capital
projects.
In
the past, the federal government has regulated the prices at which oil and
natural gas could be sold. Prices of oil and natural gas sold by the Company
are
not currently regulated, but there is no assurance that such regulatory
treatment will continue indefinitely into the future. Congress, or in the case
of certain sales of natural gas by pipeline affiliates over which it retains
jurisdiction, the Federal Energy Regulatory Commission (“FERC”) could re-enact
price controls or other regulations in the future.
In
recent
years, FERC has taken significant steps to increase competition in the sale,
purchase, storage and transportation of natural gas. FERC’s regulatory programs
allow more accurate and timely price signals from the consumer to the producer
and, on the whole, have helped natural gas become more responsive to changing
market conditions. To date, the Company believes it has not experienced any
material adverse effect as the result of these initiatives. Nonetheless,
increased competition in natural gas markets can and does add to price
volatility and inter-fuel competition, which increases the pressure on the
Company to manage its exposure to changing conditions and position itself to
take advantage of changing markets. Additional proposals are pending before
Congress and FERC that might affect the oil and natural gas industry. The oil
and natural gas industry has historically been heavily regulated at the federal
level; therefore, there is no assurance that the less stringent regulatory
approach recently pursued by FERC and Congress will continue.
State
statutes govern exploration and production operations, conservation of oil
and
natural gas resources, protection of the correlative rights of oil and natural
gas owners and environmental standards. State Commissions implement their
authority by establishing rules and regulations requiring permits for drilling,
reclamation of production sites, plugging bonds, reports and other matters.
There can be no assurance that, in the aggregate, these and other regulatory
developments will not increase the cost of operations in the
future.
Environmental
Matters
The
Company’s operations are subject to stringent federal, state and local laws
governing the discharge of materials into the environment or otherwise relating
to environmental protection. Numerous governmental departments such as the
federal Environmental Protection Agency (“EPA”) issue regulations to implement
and enforce such laws, which are often difficult and costly to comply with
and
which carry substantial civil and criminal penalties and sanctions for failure
to comply. These laws and regulations will require the acquisition of a permit
before drilling commences, restrict the types, quantities and concentrations
of
various substances that can be released into the environment in connection
with
drilling, production and transporting through pipelines, limit or prohibit
drilling activities on certain lands lying within wilderness, wetlands, frontier
and other protected areas, require some form of remedial action to prevent
pollution from former operations such as plugging abandoned wells, and impose
substantial liabilities for pollution resulting from operations. In addition,
these laws, rules and regulations may restrict the rate of production. The
regulatory burden on the oil and natural gas industry increases the cost of
doing business and therefore affects profitability. Changes in environmental
laws and regulations occur frequently, and changes that result in more stringent
and costly waste handling, disposal or clean-up requirements could adversely
affect the Company’s operations and financial position, as well as the industry
in general.
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 environmental
matters. In some instances the Company could in the future incur
liability, even as a non-operator, for potential environmental waste or damages
or employee claims occurring on oil and natural gas properties or leases in
which the Company has an ownership interest.
Forward-Looking
Statements
Certain
information included in this report, other materials filed or to be filed by
the
Company with the Securities and Exchange Commission (“SEC”), as well as
information included in oral statements or other written statements made or
to
be made by the Company contain or incorporate by reference certain statements
(other than statements of historical or present fact) that constitute
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements, other than statements of historical or present
facts, that address activities, events, outcomes or developments that the
Company plans, expects, believes, assumes, budgets, predicts, forecasts,
estimates, projects, intends or anticipates (and other similar expressions)
will
or may occur in the future are forward-looking statements. These forward-looking
statements are based on management’s current belief, based on currently
available information, as to the outcome and timing of future events. When
considering forward-looking statements, you should keep in mind the risk factors
and other cautionary statements in this Form 10-K/A. Such forward-looking
statements appear in a number of places and include statements with respect
to,
among other things, such matters as: future capital, development and exploration
expenditures (including the amount and nature thereof), drilling, deepening
or
refracing of wells, oil and natural gas reserve estimates (including estimates
of future net revenues associated with such reserves and the present value
of
such future net revenues), estimates of future production of oil and natural
gas, expected results or benefits associated with recent acquisitions, business
strategies, expansion and growth of the Company’s operations, cash flow and
anticipated liquidity, grassroots prospects and development and property
acquisition, obtaining financial or industry partners for prospect or program
development, or marketing of oil and natural gas. We caution you that these
forward-looking statements are subject to all of the risks and uncertainties,
many of which are beyond our control, incident to the exploration for and
development, production and sale
of
oil and natural gas. These risks include but are not limited to: general
economic conditions, the market price of oil and natural gas, the risks
associated with exploration, the Company’s ability to find, acquire, market,
develop and produce new properties, operating hazards attendant to the oil
and
natural gas business, uncertainties in the estimation of proved reserves and
in
the projection of future rates of production and timing of development
expenditures, the strength and financial resources of the Company’s competitors,
the Company’s ability to find and retain skilled personnel, climatic conditions,
labor relations, availability and cost of material and equipment, environmental
risks, the results of financing efforts, regulatory developments and the other
risks described in this Form 10-K/A.
Reserve
engineering is a subjective process of estimating underground accumulations
of
oil and natural gas that cannot be measured in an exact way. The accuracy of
any
reserve estimate depends on the quality of available data and the interpretation
of that data by geological and reservoir engineers. In addition, the results
of
drilling, testing and production activities may justify revisions of estimates
that were made previously. If significant, these revisions could change the
schedule of any further production and/or development drilling. Accordingly,
reserve estimates are generally different from the quantities of oil and natural
gas that are ultimately recovered.
Should
one or more of the risks or uncertainties described above or elsewhere in
this
Form 10-K/A occur, or should underlying assumptions prove incorrect, our
actual
results and plans could differ materially from those expressed in any
forward-looking statements. We specifically disclaim all responsibility to
publicly update any information contained in a forward-looking statement
or any
forward-looking statement in its entirety and therefore disclaim any resulting
liability for potentially related damages.
In
addition, the company is in a transition period, with the company considering
various “going forward” proposals that may materially alter the financing,
structure, and core business of the company, which may, in turn, significantly
affect current estimates or projections.
All
forward-looking statements attributable to Croff or its management are expressly
qualified in their entirety by this cautionary statement.
Fluctuations
in Profitability of the Oil and Natural Gas Industry
The
oil
and natural gas industry is highly cyclical and historically has experienced
severe downturns characterized by oversupply and weak demand. Many factors
affect our industry, including general economic conditions, international
incidents (politics, wars, etc.) consumer preferences, personal discretionary
spending levels, interest rates and the availability of credit and capital
to
pursue new production opportunities. It is possible that the oil and
natural gas industry will experience sustained periods of decline in the
future. Any such decline could have a material adverse affect on our
business.
Competition
The
oil
and natural gas industry is highly competitive. The Company encounters
competition in all of its operations, including the acquisition of exploration
and development prospects and producing properties. The Company competes for
acquisitions of oil and natural gas properties with numerous entities, including
major oil companies, other independents, and individual producers and operators.
Almost all of these competitors have financial and other resources substantially
greater than those of the Company. The ability of the Company to increase
reserves in the future will be dependent on its ability to select and
successfully acquire suitable producing properties and prospects for future
development and exploration.
Estimates
of Oil and Natural Gas Reserves, Production and Replacement
The
information on proved oil and natural gas reserves included in this document
are
simply estimates. The accuracy of any reserve estimate is a function of the
quality of available data, engineering and geological interpretation and
judgment, assumptions used regarding quantities of oil and natural gas in place,
recovery rates and future prices for oil and natural gas. Actual prices,
production, development expenditures, operating expenses and quantities of
recoverable oil and natural gas reserves will vary from those assumed in our
estimates, and such variances may be significant. If the assumptions used to
estimate reserves later prove incorrect, the actual quantity of reserves and
future net cash flow could be materially different from the estimates used
herein. In addition, results of drilling, testing and production along with
changes in oil and natural gas prices may result in substantial upward or
downward revisions.
All
of
the above risk factors and other information on oil and natural gas properties
could change in the event the TRBT exchange agreement is adopted. If the
exchange agreement, which is discussed under, “Summary of Current Events –
Change of Control and Sale of Assets,” in Item 1 of this report, is adopted, the
Company will exchange and then sell all of its oil and gas assets. The oil
and
gas assets, which are pledged to preferred “B” shares will be exchanged for
cancellation of all preferred “B” shares. The foregoing analysis will then
become irrelevant to the future operations of the Company.
Corporate
Offices and Employees
The
corporate offices are located at 3773 Cherry Creek Drive North, Suite 1025,
Denver, Colorado 80209. The Company is not a party to any lease, but
during 2006 paid Jenex Petroleum Corporation, which is owned by the Company’s
President, for office space and all office services, including rent, phone,
office supplies, secretarial, land, and accounting. The Company’s
expenses for these services were $48,000, $50,554, and $49,872 for the years
ended 2004, 2005, and 2006, respectively. Although these transactions
were not a result of “arms length” negotiations, the Company’s Board of
Directors believed the transactions are reasonable.
The
Company currently has four (4) directors. One director slot of the normal five
directors authorized by the bylaws is currently unfilled. The Company has one
employee, the President, and three part-time contract workers, one of which
is
also an officer. The contract workers are provided to the Company as
part of its office overhead agreement. The President and the contract
workers work from the Company’s corporate offices. None of the Croff
staff is represented by a union.
Foreign
Operations and Subsidiaries
The
Company has no foreign operations, exports, or subsidiaries at
present.
ITEM
2. PROPERTIES
Present
Activities
In
the
third quarter of 2006, Croff sold the balance of its principal properties in
the
Yorktown Reentry Program in Dewitt County, Texas. Previously the Company had
participated with Tempest Energy Resources, LP., in the Yorktown
area. In June 2006, the company reached an agreement to sell all of
its assets in the Yorktown program except a working interest in two wells,
one
of which was commercial. The Company also attempted to sell these two wells
but
was unable to find a buyer. The sale of the principal assets included the Eyhorn
Lease, including the 20% working interest in the Edward Dixel Gipps well. It
also included the Panther Pipeline, approximately 7.2 miles of natural gas
gathering line which Croff had acquired in 2006 from Panther Pipeline Limited
of
Houston, Texas. The sale proceeds approximately equaled the Company’s cost in
the DeWitt County program. Since the Company had written off a portion of its
cost in 2005, the sale resulted in a small gain reported in the third quarter
of
2006. The Company agreed to sell its interest in the remaining two wells in
Dewitt County, Texas, on or before closing of the Exchange
Agreement.
The
Company participated in the
drilling of the Shriner 2-10 Well in Duchesne County, Utah, which was drilled
by
El Paso during 2006. The Company also participated in a very small interest
in
three natural gas wells in Lincoln County, Wyoming. The Company also
participated, in the fourth quarter of 2006, in the Longknife Well in Eastern
Colorado. These participations are more particularly described under “Drilling
Activities,” below.
There
were also a number of small
royalty interests which began paying revenues due to leases executed by Croff
in
earlier years on which new wells were drilled. None of these wells has a
material effect upon revenue or net income.
During
2005, the Company was informed that Tempest Energy Resources, hereafter
“Tempest,” pursuant to its 2004 Participation Agreement, declined to participate
further in the re-entry program in Dewitt County, Texas. Tempest’s
decision followed the determination that the Helen Gips #1 well was
non-commercial and, and subsequently, it was plugged and abandoned. In early
2005, Croff, along with Tempest, acquired the Wiggins lease which was not
included in the Participation Agreement. This lease has an existing
producing well, the Wiggins, as well as one re-entry well, the Gansow. The
Company owns a 25% working interest in this lease and Tempest owns the remaining
75%. Tempest and Croff participated in a refrac of the Wiggins well into the
Wilcox zone during 2005. This well is currently producing 45-50 Mcf per day
of
natural gas.
After
Tempest had withdrawn from the re-entry program, Croff re-leased several leases
for a farmout agreement for the re-entry of the Dixel Gips well. The
Company provided the leases, the re-entry wellbore, geological, engineering,
and
other wellsite improvements for a 20% working interest, carried through
completion. Under the Farmout Agreement, the Farmees pay for drilling
and completion and all parties, including Croff, pay for production and
equipment. The Dixel Gips well was completed in the first quarter of 2006.
Croff
subsequently purchased a gas gathering system in Dewitt County, and then sold
all of these assets in the third quarter of 2006.
In
2004, Croff and Tempest Energy
Resources L.P. had entered into a Prospect Participation Agreement which
established an area of mutual interest, to participate in the development of
the
leases around Yorktown in Dewitt County, Texas. The Agreement outlined the
Parties intent to potentially develop an area containing approximately 830
acres
with eight re-entry prospects, as well as potential new drilling
locations. Because Tempest chose not to exercise its options on the
remaining acreage following the plugging and abandoning of the Helen Gips well,
and Croff subsequently sold its leases, this Agreement is no longer
material.
Drilling
Activities
The
Company participated in the drilling of the Shriner 2-10 Well in Duchense
County, Utah, which was drilled by El Paso during 2006. The well currently
is
being completed, but has not produced any revenue. Croff has a working interest
of approximately 1.7% of this well and incurred costs of approximately $60,000.
The Company also participated in a very small interest in three natural gas
wells in Lincoln County, Wyoming, which were drilled by Whiting Petroleum.
These
three natural gas wells were successful and began producing at the end of 2006.
The Company expects payout within 30 months. The Company also participated,
in
the fourth quarter of 2006, in the Longknife Well in Eastern Colorado. This
well
was also successfully completed as a natural gas producer with Croff retaining
an approximate one-eighth working interest. Croff expects revenues for this
well
to begin in 2007. There were also a number of small royalty interests which
began paying revenues due to leases executed by Croff in earlier years
on
which new wells were drilled. The most significant of these were six natural
gas
wells drilled in the Green River formation in Uintah, County,
Utah.
The
Company re-entered the Helen Gips #1 well in DeWitt County, Texas, and
re-completed the wellbore to the Wilcox formation during 2004. The
Helen Gips #1 well was not commercial and was plugged and abandoned by Tempest
in 2005.
The
Company owns 25% of the Wiggins well and Tempest owns 75%. This well was
fractured in the Wilcox formation in 2005. It is presently producing
approximately 45 mcf per day of natural gas.
Delivery
Commitments
For
the years ended December 31, 2006
and 2005, the Company had no delivery commitments with respect to the production
of oil and natural gas. The Company is unaware of any arrangements pertaining
to
any delivery commitments on royalty wells.
General
The
Company’s “Developed acreage” consists of leased acreage spaced or assignable to
production on wells having been drilled or completed to a point that would
permit production of commercial quantities of oil or natural gas. The
Company’s “Gross acreage” is defined as total acres in which the Company has an
interest; “Net acreage” is the actual number of mineral acres owned or leased by
the Company. Most developed acreage is held by
production. The acreage is concentrated in Alabama, Michigan, New
Mexico, Oklahoma, Texas, and Utah and is widely dispersed in Colorado, Michigan,
Montana, North Dakota, and Wyoming.
During
2006, the Company produced approximately 59,452 Mcf of natural gas and 7,888
barrels of crude oil. The Company’s production averaged approximately 163 Mcf of
natural gas per day and approximately 21 Bbl of oil per day. The
Company’s average daily production during 2005 was 159 Mcf of natural gas and 21
Bbl of oil. “Proved developed” oil and natural gas reserves are
reserves expected to be recovered from existing wells with existing equipment
and operating methods. “Proved undeveloped” oil and natural gas
reserves are reserves that are expected to be recovered from new wells on
undrilled acreage, or from existing wells where a relative major expenditure
is
required for re-completion.
The
quantities and values in the tables that follow are based on average prices
over
the year 2006, which averaged, over the 2006 year, were approximately $52.92
per
barrel of oil and approximately $5.84 per Mcf of natural gas, or in some cases,
constant prices in effect at December 31, 2006. The prices used in the Company’s
2006 reserve study used December 31, 2006, prices of $51.95 per barrel of oil
and $6.36 per Mcf of natural gas. Higher prices increase reserve values by
raising the future net revenues attributable to the reserves and increasing
the
quantities of reserves that are recoverable on an economic
basis. Price decreases have the opposite effect.
Future
prices received from production and future production costs may vary, perhaps
significantly, from the prices and costs assumed for purposes of these
estimates. There can be no assurance that the proved reserves will be
developed within the periods indicated or that the prices and costs will remain
constant. There can be no assurance that actual production will equal
the estimated amounts used in the preparation of reserve
projections.
The
present values shown should not be construed as the current market value of
the
reserves. The quantities and values shown in the tables that follow
are based on oil and natural gas prices in effect on December 31,
2006. The value of the Company’s assets is in part dependent on the
prices the Company receives for oil and natural gas, and a decline in the price
of oil or natural gas could have a material adverse effect on the Company’s
financial condition and results of operations. The 10% discount
factor used to calculate present value, which is specified by the Securities
and
Exchange Commission (the “SEC”), is not necessarily the most appropriate
discount rate, and present value, no matter what discount rate is used, is
materially affected by assumptions as to timing of future production, which
may
prove to be inaccurate. The calculation of estimated future net
revenues does not take into account the effect of various cash outlays,
including, among other things, general and administrative costs.
There
are
numerous uncertainties inherent in estimating quantities of proved reserves
and
in projecting future rates of production and timing of development
expenditures. The data in the tables that follow represent estimates
only. Oil and natural gas reserve engineering is a subjective process
of estimating underground accumulations of oil and natural gas that cannot
be
measured in an exact way. The accuracy of any reserve estimate is a
function of the quality of available data and engineering and geological
interpretation and judgment. Results of drilling, testing and
production after the date of the estimate may justify
revisions. Accordingly, reserve estimates are often materially
different from the quantities of oil and natural gas which are ultimately
recovered.
An
independent petroleum engineering firm compiled the proved oil and natural
gas
reserves and future revenues as of December 31, 2004, 2005 and 2006 for the
Company’s oil and natural gas assets. Since December 31, 2006, the
Company has not filed any estimates of its oil and natural gas reserves with,
nor was any such estimates included in any reports to, any state or federal
authority or agency, other than the Securities and Exchange Commission. The
reserve study provided to the Company for December 31, 2006 for its reserves
and
used in the preparation of this filing was prepared by McCartney Engineering,
LLC, Consulting Petroleum Engineers, 4251 Kipling Street, Suite 575, Wheat
Ridge, CO 80033, 303-830-7208.
For
additional information concerning oil and natural gas reserves, see Supplemental
Information - Disclosures about Oil and Natural Gas Producing Activities
-
Unaudited, included with the Financial Statements filed as a part of this
report.
The
following table sets forth summary information with respect to estimated
proved
reserves at December 31, 2006. (See table F-22 through
F-24)
ESTIMATED
PROVED RESERVES
As
of December 31, 2006
|
|
Net
Oil
|
|
|
Net
Natural Gas
|
|
|
Standardized
Measure
of
discounted future cash
flows
related to proved
Oil
and Gas Reserves
|
|
Area
|
|
(Bbls)
|
|
|
(Mcf)
|
|
|
|
|
Alabama
|
|
|
-
|
|
|
|
1,335
|
|
|
$ |
3,075
|
|
Colorado
|
|
|
-
|
|
|
|
101,941
|
|
|
|
277,945
|
|
Michigan
|
|
|
58,739
|
|
|
|
126,508
|
|
|
|
1,237,211
|
|
Montana
|
|
|
2,258
|
|
|
|
-
|
|
|
|
25,684
|
|
New
Mexico
|
|
|
152
|
|
|
|
76,031
|
|
|
|
256,954
|
|
North
Dakota
|
|
|
6,857
|
|
|
|
3,788
|
|
|
|
78,185
|
|
Oklahoma
|
|
|
1,405
|
|
|
|
53,160
|
|
|
|
134,333
|
|
Texas
|
|
|
329
|
|
|
|
10,754
|
|
|
|
44,699
|
|
Utah
|
|
|
9,153
|
|
|
|
54,123
|
|
|
|
367,292
|
|
Wyoming
|
|
|
8,223
|
|
|
|
15,587
|
|
|
|
159,622
|
|
Total
|
|
|
87,116
|
|
|
|
443,227
|
|
|
$ |
2,585,000
|
|
The
above
table is a state by state summary of the information disclosed on page
F-22.
The
following table sets forth summary information with respect to oil and natural
gas production for the year ended December 31, 2006.
STATE
GEOGRAPHIC DISTRIBUTION OF NET PRODUCTION
|
|
Net
Oil
|
|
|
Net
Natural Gas
|
|
State
|
|
(Bbls)
|
|
|
(Mcf)
|
|
Alabama
|
|
|
-
|
|
|
|
125
|
|
Colorado
|
|
|
41
|
|
|
|
12,323
|
|
Michigan
|
|
|
4,571
|
|
|
|
7,429
|
|
Montana
|
|
|
152
|
|
|
|
-
|
|
New
Mexico
|
|
|
182
|
|
|
|
7,337
|
|
North
Dakota
|
|
|
636
|
|
|
|
215
|
|
Oklahoma
|
|
|
270
|
|
|
|
15,582
|
|
Texas
|
|
|
110
|
|
|
|
4,111
|
|
Utah
|
|
|
1,465
|
|
|
|
10,027
|
|
Wyoming
|
|
|
461
|
|
|
|
2,765
|
|
Total
|
|
|
7,888
|
|
|
|
59,915
|
|
The
following table sets forth summary information with respect to the Company’s
estimated number of productive wells as of December 31, 2006.
PRODUCTIVE
WELLS AND ACREAGE (1)
(2) (3)
As
of December 31, 2006
|
|
Area
|
|
Gross
Oil
Wells(2)
|
|
|
Gross
Natural Gas
Wells(2)
|
|
|
Net
Oil
Wells
|
|
|
Net
Natural Gas
Wells
|
|
|
Net
Acreage
with
Production
|
|
Alabama
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
.01
|
|
|
|
10
|
|
Colorado
|
|
|
1
|
|
|
|
13
|
|
|
|
.04
|
|
|
|
.02
|
|
|
|
40
|
|
Michigan
|
|
|
3
|
|
|
|
33
|
|
|
|
.98
|
|
|
|
.19
|
|
|
|
188
|
|
Montana
|
|
|
1
|
|
|
|
-
|
|
|
|
.05
|
|
|
|
-
|
|
|
|
5
|
|
New
Mexico
|
|
|
1
|
|
|
|
57 |
(3) |
|
|
.01
|
|
|
|
.03
|
|
|
|
55
|
|
North
Dakota
|
|
|
10
|
|
|
|
6
|
|
|
|
.12
|
|
|
|
.12
|
|
|
|
38
|
|
Oklahoma
|
|
|
3
|
|
|
|
8
|
|
|
|
.25
|
|
|
|
1.28
|
|
|
|
173
|
|
Texas
|
|
|
3
|
|
|
|
11
|
|
|
|
.38
|
|
|
|
.38
|
|
|
|
160
|
|
Utah
|
|
|
121
|
|
|
|
36
|
|
|
|
.22
|
|
|
|
.19
|
|
|
|
730
|
|
Wyoming
|
|
|
11
|
|
|
|
5
|
|
|
|
.14
|
|
|
|
.18
|
|
|
|
240
|
|
Total
|
|
|
154
|
|
|
|
171
|
|
|
|
2.19
|
|
|
|
2.40
|
|
|
|
1,639
|
|
The
Company’s “Gross Wells” are defined as the total number of wells in which the
Company has any interest. “Net Wells” are defined as the Company’s total
aggregate percentage of interest in all wells in that state. “Net acreage” is
the actual number of acres in the producing well unit multiplied by the
Company’s percentage interest in that acreage, listed by state.
|
(1)
|
This
chart contains estimates associated with small mineral interests
and small
leases.
|
|
(2)
|
A
well is included twice if it produces both oil and natural gas, so
the
actual total gross wells are less than the number
shown.
|
|
(3) |
These
natural gas wells in New Mexico also produce some
condensate. |
The
following table sets forth summary information with respect to the Company’s
undeveloped acreage as of December 31, 2006.
UNDEVELOPED
ACREAGE
|
|
As
of December 31, 2006
|
|
|
|
|
|
Total
Undeveloped Acreage
|
|
Area
|
|
Proven
|
|
|
Unproven
|
|
|
|
Gross
Acres
|
|
|
Net
Acres
|
|
|
Gross
Acres
|
|
|
Net
Acres
|
|
Colorado
|
|
|
80
|
|
|
|
7
|
|
|
|
600
|
|
|
|
40
|
|
Montana
|
|
|
-
|
|
|
|
-
|
|
|
|
3,800
|
|
|
|
250
|
|
Texas
|
|
|
160
|
|
|
|
60
|
|
|
|
160
|
|
|
|
40
|
|
Utah
|
|
|
8,000
|
|
|
|
140
|
|
|
|
102,000
|
|
|
|
3,300
|
|
Oil
and
Natural Gas Mineral Interests and Royalties
The
Company owns perpetual mineral interests which total approximately 3,300 net
mineral acres, of which approximately 1,100 net acres are
producing. The mineral interests are located in 102,000 gross acres
primarily in Duchesne, Uintah, Carbon and Wasatch Counties in Utah, and
approximately 40 net mineral acres in La Plata County, Colorado, and San Juan
County, New Mexico.
The
Company continues to execute new
leases or renewals on its perpetual mineral interests. In 2006, the
Company executed new leases on its acreage in Duchesne and Uintah County, Utah.
The amount of new leasing activity during 2005 and 2006 was not
significant. In 2006, the Company elected to participate in the
drilling of a well in Duchesne County, Utah, with El Paso Production Company
based on the Company’s mineral ownership in the proposed location. In 2005, new
wells were drilled on the recent leases in Uintah County by EOG Resources,
Inc.
In November and December 2004, the Company leased about 100 net acres in
Duchesne and Uintah County, Utah.
As
of December 31, 2006, the Company
was receiving royalties from approximately 216 producing wells, primarily in
the
Bluebell-Altamont field in Duchesne and Uintah Counties, Utah and from coal
bed
methane wells in the four corners region of Colorado and New Mexico. Royalties
also were received from scattered interests in Alabama, Michigan, Texas, and
Wyoming.
Oil
and
Natural Gas Working Interests
The
Company has sought to increase its
production of oil and natural gas through the purchase of producing
leases. The Company believes, in general, that it is able to purchase
working interests at a more reasonable price than royalty
interests. A working interest requires the owner to pay its
proportionate share of the costs of producing the well, while a royalty is
paid
out of the revenues without a deduction for the operating costs of the
well. When oil or natural gas prices drop, the proportion of the
revenues going to pay the expense of operating the well increases, and when
oil
and natural gas prices are rising, expenses decrease as a percentage of total
revenues. The Company’s purchases of working interests are intended
to increase oil and natural gas production over time. The Company
also participates in new wells 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.
AVERAGE
SALES PRICES AND PRODUCTION COST
The
following table sets forth summary information with respect to the Company’s
approximate average sales price per barrel (oil) and per Mcf (1000 cubic
feet of
natural gas), together with approximate average production costs for units
of
production for the Company’s production revenues by geographic area for the last
three years.
AVERAGE
SALES PRICES AND PRODUCTION COST
Past
Three Years by Geographic Area
Average
Sales Price*
|
|
|
Average
Production Cost*
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
Geographic
Area
|
|
Oil
|
|
|
Natural Gas
|
|
|
Oil
|
|
|
Natural Gas
|
|
|
Oil
|
|
|
Natural Gas
|
|
|
Oil
|
|
|
Natural
Gas
|
|
|
Oil
|
|
|
Natural Gas
|
|
|
Oil
|
|
|
Natural Gas
|
|
Alabama
|
|
$ |
-
|
|
|
$ |
7.23
|
|
|
$ |
-
|
|
|
$ |
9.38
|
|
|
$ |
-
|
|
|
$ |
6.10
|
|
|
$ |
-
|
|
|
$ |
1.56
|
|
|
$ |
-
|
|
|
$ |
1.30
|
|
|
$ |
-
|
|
|
$ |
2.24
|
|
Colorado
|
|
$ |
71.12
|
|
|
$ |
5.46
|
|
|
$ |
58.33
|
|
|
$ |
6.69
|
|
|
$ |
36.01
|
|
|
$ |
5.05
|
|
|
$ |
15.50
|
|
|
$ |
.55
|
|
|
$ |
14.76
|
|
|
$ |
0.23
|
|
|
$ |
16.64
|
|
|
$ |
1.11
|
|
Michigan
|
|
$ |
58.38
|
|
|
$ |
7.34
|
|
|
$ |
53.56
|
|
|
$ |
8.29
|
|
|
$ |
38.80
|
|
|
$ |
6.10
|
|
|
$ |
23.20
|
|
|
$ |
1.12
|
|
|
$ |
26.79
|
|
|
$ |
0.92
|
|
|
$ |
16.91
|
|
|
$ |
2.82
|
|
Montana
|
|
$ |
61.82
|
|
|
$ |
-
|
|
|
$ |
56.40
|
|
|
$ |
-
|
|
|
$ |
40.45
|
|
|
$ |
-
|
|
|
$ |
26.43
|
|
|
$ |
-
|
|
|
$ |
29.55
|
|
|
$ |
-
|
|
|
$ |
24.30
|
|
|
$ |
-
|
|
New
Mexico
|
|
$ |
61.26
|
|
|
$ |
6.80
|
|
|
$ |
53.14
|
|
|
$ |
7.02
|
|
|
$ |
40.26
|
|
|
$ |
4.73
|
|
|
$ |
16.10
|
|
|
$ |
.48
|
|
|
$ |
15.00
|
|
|
$ |
0.02
|
|
|
$ |
3.12
|
|
|
$ |
0.52
|
|
North
Dakota
|
|
$ |
55.78
|
|
|
$ |
4.78
|
|
|
$ |
52.16
|
|
|
$ |
4.98
|
|
|
$ |
39.25
|
|
|
$ |
2.12
|
|
|
$ |
18.20
|
|
|
$ |
2.10
|
|
|
$ |
17.18
|
|
|
$ |
2.08
|
|
|
$ |
10.60
|
|
|
$ |
1.63
|
|
Oklahoma
|
|
$ |
50.17
|
|
|
$ |
5.42
|
|
|
$ |
54.05
|
|
|
$ |
6.44
|
|
|
$ |
38.20
|
|
|
$ |
4.66
|
|
|
$ |
22.17
|
|
|
$ |
2.32
|
|
|
$ |
18.96
|
|
|
$ |
2.21
|
|
|
$ |
10.46
|
|
|
$ |
1.74
|
|
Texas
|
|
$ |
61.53
|
|
|
$ |
6.88
|
|
|
$ |
54.61
|
|
|
$ |
7.98
|
|
|
$ |
39.58
|
|
|
$ |
5.33
|
|
|
$ |
14.05
|
|
|
$ |
1.84
|
|
|
$ |
6.71
|
|
|
$ |
1.28
|
|
|
$ |
7.27
|
|
|
$ |
7.27
|
|
Utah
|
|
$ |
58.51
|
|
|
$ |
5.04
|
|
|
$ |
53.92
|
|
|
$ |
6.38
|
|
|
$ |
40.42
|
|
|
$ |
5.07
|
|
|
$ |
2.90
|
|
|
$ |
.60
|
|
|
$ |
3.13
|
|
|
$ |
0.25
|
|
|
$ |
6.70
|
|
|
$ |
1.12
|
|
Wyoming
|
|
$ |
51.26
|
|
|
$ |
6.38
|
|
|
$ |
48.40
|
|
|
$ |
7.05
|
|
|
$ |
34.73
|
|
|
$ |
4.64
|
|
|
$ |
9.83
|
|
|
$ |
1.30
|
|
|
$ |
8.66
|
|
|
$ |
1.28
|
|
|
$ |
10.03
|
|
|
$ |
1.67
|
|
|
(*)
|
States
with higher production
from Croff’s royalty interests such as New Mexico and Utah, reflect a
lower average production cost per barrel or Mcf. During
2006 and 2005, different grades of crude oil traded at greater spreads
than in prior years. Sour crude traded at a greater discount to
sweet crude, and Wyoming and Utah Sweet fell in price, compared to
west
Texas intermediate.
|
ITEM
3. LEGAL
PROCEEDINGS
The
Company is not a party to any legal
actions.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
On
December 8, 2006, the annual meeting
of shareholders was held. The shareholders elected the five board
members listed in the proxy, ratified Ronald Chadwick as a new independent
auditor of the Company, and authorized the President to execute the Acquisition
Agreement with TRBT. Following the shareholders meeting, the Board accepted
Dilworth Nebeker’s resignation from the Board of Directors, which had been
previously submitted.
PART
II
ITEM
5.
|
MARKET
FOR REGISTRANT’S SECURITIES, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY
SECURITIES
|
The
Company’s common stock is listed
and traded on the Over The Counter Electronic Bulletin Board
(www.otcbb.com) under the symbol “COFF”. The Company has
authorized 20,000,000 shares of common stock, of which only 551,244 shares
are
outstanding to 1,154 shareholders. The Company has authorized
Preferred B stock of which 540,659 is issued and outstanding. The Preferred
B
shares also have an extremely limited market, but have been traded from time
to
time through a clearinghouse held by the Company on its website, or in private
transactions. The Company acts as its own transfer agent with respect
to these Preferred B shares. Shareholders interested in buying or selling
Preferred B shares may contact the Company, which will provide information
about
the buyers and sellers. The Company posts its SEC filings on the
Croff website at www.croff.com.
During
the year ended December 31, 2005, the Company purchased 1,500 shares of its
common stock for $2,362, which were cancelled. In December 2005, the
Company purchased on the Over-The-Counter-Bulletin-Board (“OTCBB”) 16,156 shares
of its common stock for $24,643 and included in Treasury stock at December
31, 2005. The Company has not repurchased any additional shares of its
common stock since December 2005. The total number
of common shares in the Treasury as of December 31, 2006 was
69,399.
The
trading range for 2004 through 2006 is shown for common shares and preferred
B
shares as a guide to as to what transactions have either taken place or of
which
the Company is aware of or the high and low bid or asking price.
COMMON
SHARES —
|
551,244
SHARES OUTSTANDING FOR 2005 - (The following data is
generated
from
limited trades on the Over-The-Counter Bulletin Board including
purchases
by
the
Company’s management.)
|
|
|
|
|
|
|
|
BID
RANGE
|
Year
|
Calendar
Quarter
|
|
Low
|
|
|
High
|
|
|
2004:
|
First
Quarter
|
|
$ |
.55
|
|
|
$ |
1.10
|
|
|
|
Second
Quarter
|
|
$ |
.25
|
|
|
$ |
1.60
|
|
|
|
Third
Quarter
|
|
$ |
1.75
|
|
|
$ |
1.80
|
|
|
|
Fourth
Quarter
|
|
$ |
1.01
|
|
|
$ |
2.20
|
|
|
2005:
|
First
Quarter
|
|
$ |
1.40
|
|
|
$ |
1.80
|
|
|
|
Second
Quarter
|
|
$ |
1.20
|
|
|
$ |
1.50
|
|
|
|
Third
Quarter
|
|
$ |
1.45
|
|
|
$ |
2.00
|
|
|
|
Fourth
Quarter
|
|
$ |
1.25
|
|
|
$ |
1.85
|
|
|
2006:
|
First
Quarter
|
|
$ |
1.40 |
|
|
$ |
1.75 |
|
|
|
Second
Quarter
|
|
$ |
1.50 |
|
|
$ |
2.40 |
|
|
|
Third
Quarter
|
|
$ |
1.50 |
|
|
$ |
2.00 |
|
|
|
Fourth
Quarter
|
|
$ |
1.60 |
|
|
$ |
3.00 |
|
As
of December 31, 2006, there were
approximately 1,110 holders of record of the Company’s common stock. The Company
has never paid a dividend and has no present plan to pay any
dividend.
PREFERRED
“B” SHARES-
|
540,659
SHARES OUTSTANDING - (The following data is generated
|
|
|
|
solely
from private transactions, internal purchases by the Company, or
the
|
|
2005
tender offer described in Part I, Item 1)
|
|
|
|
BID
RANGE
|
Year
|
Calendar
Quarter
|
|
Bid
|
|
|
Asked
|
|
|
2004:
|
First
Quarter
|
|
$ |
1.05
|
|
|
$ |
1.05
|
|
|
|
Second
Quarter
|
|
No
Trading
|
|
|
No
Trading
|
|
|
|
Third
Quarter
|
|
No
Trading
|
|
|
No
Trading
|
|
|
|
Fourth
Quarter
|
|
No
Trading
|
|
|
No
Trading
|
|
|
2005:
|
First
Quarter
|
|
No
Trading
|
|
|
No
Trading
|
|
|
|
Second
Quarter
|
|
$ |
2.80
|
|
|
$ |
3.00
|
|
|
|
Third
Quarter
|
|
$ |
3.00
|
|
|
$ |
3.00
|
|
|
|
Fourth
Quarter
|
|
$ |
3.00
|
|
|
$ |
3.00
|
|
|
2006:
|
First
Quarter
|
|
$ |
3.00
|
|
|
$ |
3.00
|
|
|
|
Second
Quarter
|
|
$ |
3.00
|
|
|
$ |
3.00
|
|
|
|
Third
Quarter
|
|
$ |
3.00
|
|
|
$ |
3.00
|
|
|
|
Fourth
Quarter
|
|
$ |
3.00
|
|
|
$ |
3.00
|
|
Historical
Events of Interest
In
November 1991, Croff reverse-split the common stock on a ratio of 1 share of
common stock for every 10 shares previously held.
On
February 28, 1996, the shareholders approved the issuance of the Preferred
B
stock to be issued to each common shareholder on the basis of one share
Preferred B for each share of common stock. The Company issued all of
the preferred shares and delivered the Preferred B shares to each of the
shareholders for which it had a current address. The oil and gas
assets and the proceeds from production were pledged to the Preferred B
shares.
In
June
2000, the Company approved the increase in the authorized Class B Preferred
stock to 1,000,000 shares.
During
2001, the Board determined that the cash of the Company, which had been building
during a period of high oil prices, should be formally allocated between the
common stock and the Preferred B stock. The Board decided to allocate $250,000
cash to the common stock and the balance of cash remaining with the Preferred
B
stock. The Board then determined that future oil and gas cash flow
from the Preferred B assets would be accumulated for Preferred B
shareholders. The Company established separate investment accounts
for the Preferred B and common stock investments.
In
2005,
the Preferred B shareholders of Croff received a Tender Offer from Jensen
Development Company and CS Finance L.L.C., (“Offerors”) two companies wholly
owned by Gerald L. Jensen, Chairman, President, and CEO of Croff. The
Offerors offered to purchase all outstanding Preferred B shares,
not owned by the Offerors for $3 per share. The tender offer was subsequently
amended before its conclusion on August 19, 2005. The Offerors reported the
results of the tender offer to the SEC on August 29, 2005. The Offerors reported
that the depository, American National Bank, had received a total of 75,050
Shares tendered and not withdrawn prior to the expiration of the Offer,
including 11,190 Shares tendered subject to delivery. The tendered shares
represent approximately 13.9% of the outstanding Class B Preferred stock
of
Croff Enterprises, Inc. The Offerors accepted and approved for payment all
of
the tendered shares at $3.00 per share for a total of $225,150. The Offerors
acquired additional shares of Preferred B stock through independent stock
purchases after the conclusion of the tender offer. Offerors
currently hold 363,535 Preferred B shares, or 67.2% of the total Preferred
B
shares. Please see 2005 Tender Offer under Item 1, for a more complete
description of these transactions.
ITEM
6. SELECTED
FINANCIAL DATA
The
following table presents selected historical financial data of the Company
for
the five-year period ended December 31, 2006. Future results may
differ substantially from historical results because of changes in oil and
natural gas prices, production increases or declines and other factors. This
information should be read in conjunction with the Financial Statements,
and
notes thereto, and Management’s Discussion and Analysis of Financial Condition
and Results of Operations, presented below, Item 7.
STATEMENT
OF OPERATIONS DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and Natural Gas
|
|
$ |
286,602
|
|
|
$ |
392,564
|
|
|
$ |
608,132
|
|
|
$ |
934,525
|
|
|
$ |
842,400
|
|
Other
Revenues
|
|
$ |
28,726
|
|
|
$ |
23,362
|
|
|
$ |
(1,403 |
) |
|
$ |
7,330
|
|
|
$ |
660
|
|
Expenses
|
|
$ |
216,416
|
|
|
$ |
321,817
|
|
|
$ |
434,046
|
|
|
$ |
644,025
|
|
|
$ |
519,716
|
|
Net Income
|
|
$ |
98,912
|
|
|
$ |
94,109
|
|
|
$ |
142,116
|
|
|
$ |
289,887
|
|
|
$ |
373,015
|
|
Per
Common Share(1)
|
|
$ |
.04 |
(1) |
|
$ |
.01 |
(1) |
|
$ |
(0.13 |
)(1) |
|
$ |
(0.05 |
)(1) |
|
$ |
0.15 |
(1) |
Working
capital
|
|
$ |
419,475
|
|
|
$ |
336,471
|
|
|
$ |
330,243
|
|
|
$ |
625,862
|
|
|
$ |
995,498
|
|
Dividends
per share
|
|
NONE
|
|
|
NONE
|
|
|
NONE
|
|
|
NONE
|
|
|
NONE
|
|
|
|
BALANCE
SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
753,212
|
|
|
$ |
898,221
|
|
|
$ |
1,088,553
|
|
|
$ |
1,807,502
|
|
|
$ |
1,867,161
|
|
Long-term
debt**
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Stockholders’
equity
|
|
$ |
736,408
|
|
|
$ |
866,112
|
|
|
$ |
1,051,438
|
|
|
$ |
1,314,320
|
|
|
$ |
1,687,335
|
|
**
There
were no long-term obligations from 2002-2006.
|
(1) The
Company allocates its net income between preferred B shares and
common
shares; accordingly, net income (loss) applicable to common shares
varies
from a fixed ratio to net income, depending on the source of income
and
expenses. See attached financials statement for further
detail.
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS
|
Critical
Accounting Policies and Estimates
The
Company’s discussion and analysis of its financial condition and results of
operation are based upon Financial Statements, which have been prepared in
accordance with accounting principles generally accepted
in the United States of America. The preparation of these Financial
Statements requires the Company to make estimates and judgments that affect
the
reported amounts of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the Financial Statements and the reported amounts
of revenues and expenses during the year. The Company analyzes its
estimates, including those related to oil and natural gas revenues, oil and
natural gas properties, marketable securities, income taxes and
contingencies. The Company bases its estimates on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its Financial
Statements and the uncertainties that it could impact our results of operations,
financial condition and cash flows. The Company 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. Impairments are recorded when
management believes that a property’s net book value is not recoverable based on
current estimates of expected future cash flows. The Company provides
for depreciation and depletion of its investment in producing oil and natural
gas properties on the unit-of-production method, based upon estimates of
recoverable oil and natural gas reserves from the property. The
Company designated its marketable equity securities as “securities available for
sale”.
Liquidity
and Capital Resources
At
December 31, 2006, the Company had assets of $1,867,161. At December 31, 2006,
the Company’s current assets totaled $1,110,629 compared to current liabilities
of $115,131. Working capital at December 31, 2006 totaled $995,498,
an increase of approximately 59% compared to $625,862 at December 31,
2005. The Company had a current ratio at December 31, 2006 of
approximately 10:1. During 2006, net cash provided by operations
totaled $329,840, as compared to $412,339 for 2005. This decrease was
due to lower prices in 2006. Liquidity increased due to the sale of Panther
Pipeline and the Edwards Dixel Gips lease. The cost basis for the Panther
pipeline was $40,000 and the cost basis in the Edwards Dixel Gips lease was
$102,459, for a total of $142,459. The proceeds from the sale were $255,000
yielding a gross gain for this transaction of $112,543. The Company’s cash flow
from operations is highly dependent on oil and natural gas prices; which were
at
historic highs in 2005, but dropped in 2006. The Company had no
short-term or long-term debt outstanding at December 31, 2006. In
December, 2005, the Company purchased 16,156 shares of its common stock at
a
cost of $24,643, which is included in the treasury as of year end.
At
December 31, 2006, there were no commitments for capital expenditures. In 2006,
the Company committed approximately $42,000 for an 18.75% interest in the Long
Knife #23-29 gas well in Colorado. The company decided to participate in the
proposed drilling, receiving an 18.75% working interest in the well which was
completed at the end of 2006. The company also decided to participate in
drilling of the Anderson Canyon wells located in Wyoming. The Company spent
approximately $7,000 yielding a working interest in the wells to .0015. The
Anderson Canyon wells were completed around July 1, 2006. In late 2005 and
early
2006, the Company executed an authorization for the drilling and completion
of
the Shriners 10-C-2 well in Utah. The estimated costs to Croff for the Shriners
10-C-2 well was around $52,000, and the Company would retain an approximate
1.7%
working interest in the well. The well is expected to be completed in early
2007. The drilling and completion of the above named wells, increased proven
oil
and gas properties. Under the successful efforts method, proved properties
increased from $1,016,442 as of December 31, 2005 to $1,074,188 as of December
31, 2006.
While
certain costs are affected by the general level of inflation, factors unique
to
the oil and natural gas industry result in independent price fluctuations.
Over
the past five years, significant fluctuations have occurred in oil and natural
gas prices. Although it is particularly difficult to estimate future prices
of
oil and natural gas, price fluctuations have had, and will continue to have,
a
material effect on the Company. Overall, it is management’s belief
that inflation is generally favorable to the Company since it does not have
significant operating expenses as a percent of revenues.
Results
of Operations
Revenues
for 2006 totaled $843,060, a
decrease of approximately 11% from $941,855 in 2005. Net income for
2006 totaled $373,015 compared to $289,887 for 2005. The increase in
revenue was primarily due to the gain from the sale of the Edward Dixel Gips
lease in Dewitt County, TX. Oil and gas sales for the December 31, 2006 year
end
totaled $842,400, a decrease of approximately 10% from $934,525, for the
year
ended December 31, 2005. A decrease in oil and gas prices were the factors
causing this decrease in oil and gas sales compared to the same period in
2005,
while production rose slightly.
Interest
income rose from $12,057
for the period ending December 31, 2005 to $49,671 for the year ending December
31, 2006. The interest income increased because there was an increase in
interest rates, and additional back interest from the settlement of the
Parry v. Amoco Production case. The interest income attributable to the
Preferred B and Common account bank accounts was $35,818, and the interest
income received from the settlement totaled $13,853 yielding a combined total
of
$49,671. Other Income as of the December 31, 2006 year end was $660 compared
to
$7,330 for the period ending December 31, 2005. The $660 was related to lease
bonuses received during the year.
Lease
operating expenses for 2006,
which includes all production related taxes, totaled $205,371 compared to
$272,129 for 2005. This decrease was due to the Company not having as
many major work over expenses in 2006. The lease operating expenses remained
nearly constant for the Company’s existing wells. Proposed drilling
program expense was zero as of December 31, 2006, compared to $52,638 for the
same period ending December 31, 2005. This decrease is attributed to the sale
of
the Dewitt County leases in Texas.
General
and administrative expenses,
including overhead expense paid to related party, for the year ending December
31, 2006 totaled $262,520 compared to $215,766 for the same period in 2005.
The
increase in general and administrative and overhead expenses is primarily
attributed to the costs of the audit increasing, printing and other costs paid
to related third parties, and the higher professional fees of the Company.
The
primary reason for this increase was professional expenses related to the
negotiating, drafting, and completing the exchange agreement entered into with
TRBT and related SEC filings. These matters are discussed in detail above under
Part I, Current Events 2006.
Depletion
and depreciation expense for
the year ending December 31, 2006 totaled $48,500 compared to $45,000 for the
year ending in 2005. This slight increase was due to the small increase in
producing assets in 2006. Accretion expense for the Asset Retirement
accrual was $10,187 for the year ending December 31, 2005 compared to $5,868
for
the year ending December 31, 2006. This decrease occurred because in 2005 the
Company established the asset retirement accruals and expensed the additional
amount that needed to be expensed.
Net
income for the year ending December
31, 2006 was $373,015 compared to $289,887 for the year ending December 31,
2005. The reason for this increase is because the Company had a significant
gain
on the sale of the Edward Dixel Gips lease in Dewitt County, TX, and because
the
expenses during the year was lower than the expenses incurred during 2005.
Provision for income taxes for the year ending December 31, 2006 totaled
$110,000 compared to $82,478 from December 31, 2005. This increase is
primarily attributable to an increase in net income for the year, which also
results in a higher tax bracket.
Recent
accounting pronouncements
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) 123R, "Share-Based
Payment." This revised standard addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for
either equity instruments of the company or liabilities that are based on the
fair value of the company's equity instruments or that may be settled by the
issuance of such equity instruments. Under the new standard, companies will
no
longer be able to account for share-based compensation transactions using the
intrinsic method in accordance with APB 25. Instead, companies will be required
to account for such transactions using a fair-value method and recognize the
expense in the statements of operations. SFAS 123R became effective for all
interim or annual periods beginning after June 15, 2005. SFAS 123R is not
expected to have a material impact on the Company’s financial condition or
results of operations as the Company currently does not receive employee
services in exchange for either equity instruments of the Company or liabilities
that are based on the fair value of the Company's equity instruments or that
may
be settled by the issuance of such equity instruments.
In
December 2004, the FASB issued SFAS
No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No.
29".
This standard requires exchanges of productive assets to be accounted for at
fair value, rather than at carryover basis, unless (1) neither the asset
received nor the asset surrendered has a fair value that is determinable within
reasonable limits or (2) the transactions lack commercial substance. The
Statement is effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company has not entered
into these types of nonmonetary asset exchanges during the last five
years. Accordingly, the adoption of this pronouncement is not
expected to have a material impact on the Company’s financial condition or
results of operations.
In
March
2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for
Conditional Asset Retirement Obligations” (“FIN No.
47”). FIN No. 47 clarifies that the term conditional
asset retirement obligation as used in FASB Statement No. 143, “Accounting for
Asset Retirement Obligations,” refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement
are
conditional on a future event that may or may not be within the control of
the
entity. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and (or) method
of
settlement. Uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. This
interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. Fin No. 47 is effective no later than the end of
fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year
companies). Retrospective application of interim financial
information is permitted but is not required. Management does not
expect adoption of FIN No. 47 to have a material impact on the Company’s
financial statements.
In
May
2005 the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections - a
replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154
replaces APB Opinion (“APB”) No. 20, “Accounting Changes”, and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements,” and changes the
requirements for the accounting for and reporting of a change in accounting
principle. SFAS No. 154 will apply to all voluntary changes in accounting
principle as well as to changes required by an accounting pronouncement in
the
unusual instance that the pronouncement does not include specific transition
provisions. APB No. 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period
of
the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 requires retrospective application to prior
periods' financial statements of changes in accounting principle, unless it
is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. When it is impracticable to determine the period-specific
effects of an accounting change on one or more individual prior periods
presented, SFAS No. 154 requires that the new accounting principle be applied
to
the balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of retained earnings
(or
other appropriate components of equity or net assets in the statement of
financial condition).
SFAS
155,
“Accounting for Certain Hybrid Financial Instruments—an amendment of FASB
Statements No. 133 and 140” (‘SFAS No. 155”). This Statement shall be
effective for all financial instruments acquired, issued, or subject to a
remeasurement (new basis) event occurring after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The fair value election
provided for in paragraph 4(c) of this Statement may also be applied upon
adoption of this Statement for hybrid financial instruments that had been
bifurcated under paragraph 12 of Statement 133 prior to the adoption of this
Statement. Earlier adoption is permitted as of the beginning of an entity’s
fiscal year, provided the entity has not yet issued financial statements,
including financial statements for any interim period, for that fiscal year.
Management does not expect adoption of SFAS No. 155 to have a material impact
on
the Company’s financial statements.
SFAS
157,
“Fair Value Measurements”, defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles (GAAP),
and
expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements,
the Board having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. However, for some entities,
the application of this Statement will change current practice. Management
has
not evaluated the impact of this statement.
In
June 2005, the Emerging Issues Task Force reached a consensus on Issue
No. 05-6 (“EITF No. 05-6”), “Determining the Amortization Period for
Leasehold Improvements Purchased after Lease Inception or Acquired in a Business
Combination.” EITF No. 05-6 clarifies that the
amortization period for leasehold improvements acquired in a business
combination or placed in service significantly after and not contemplated at
or
near the beginning of the lease term should be amortized over the shorter of
the
useful life of the assets or a term that includes the required lease periods
and
renewals that are reasonably assured of exercise at the time of the acquisition.
EITF No. 05-6 is to be applied prospectively to leasehold improvements purchased
or acquired in reporting periods beginning after June 29, 2005. The
adoption of EITF No. 05-6 did not have a material impact on the Company’s
consolidated financial statements.
In
June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting
forUncertainty in Income Taxes – an Interpretation of FASB Statement No.
109” (“FIN No. 48”). FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, “Accounting for
Income Taxes”. Fin No. 48 is effective for fiscal years
beginning after December 15, 2005. Management does not expect
adoption of FIN No. 48 to have a material impact on the Company’s financial
statements.
ITEM
7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The
Company’s major market risk exposure is in the pricing applicable to its oil and
natural gas production. Realized pricing is primarily driven by the prevailing
domestic price for oil and natural gas. Historically, prices received
for oil and natural gas production have been volatile and
unpredictable. Pricing volatility is expected to
continue. Natural gas prices received by the Company during 2006,
ranged from an annual average low of $2.39 per Mcf to an annual average high
of
$7.84 per Mcf. Oil prices received by the Company ranged from an
annual average low of $35 per barrel to an annual average high of $63.62 per
barrel during 2006. A decline in prices of oil or natural gas could have a
material adverse effect on the Company’s financial condition and results of
operations. In 2006, a 10% reduction in oil and natural gas prices
would have reduced revenues by approximately
$84,000.
ITEM
8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
Reference
is made to the Index to Financial Statements on page F-1 for a listing of the
Company’s Financial Statements and notes thereto and for the financial statement
schedules contained herein.
Management
Responsibility for Financial Statements
The
Financial Statements have been prepared by management in conformity with
accounting principles generally accepted in the United States of
America. Management is responsible for the fairness and reliability
of the Financial Statements and other financial data included in this
report. In the preparation of the Financial Statements, it is
necessary to make informed estimates and judgments based on currently available
information on the effects of certain events and transactions. The
Company maintains accounting and other controls which management believes
provide reasonable assurance that financial records are reliable, assets are
safeguarded and transactions are properly recorded.
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
The
Company has had no disagreements on accounting and financial disclosure matters
with its registered public accounting firm during 2004, 2005, 2006, or from
January 1, 2007 through the date of this filing.
ITEM
9A. CONTROLS
AND PROCEDURES
As
of the
end of the period covered by this Annual Report, our Chief Executive Officer
and
Chief Accounting Officer (the “Certifying Officers”) conducted evaluations of
our disclosure controls and procedures. As defined under Sections 13a-15(e)
and
15d-15(e) of the Securities Exchange Act of 1934 Act, as amended (the “Exchange
Act”) the term “disclosure controls and procedures” means controls and other
procedures of an issuer that are designed to ensure that information required
to
be disclosed by the issuer in the reports that it files or submits under
the
Exchange Act is recorded, processed, summarized and reported, within the
time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed
to
ensure that information required to be disclosed by an issuer in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the issuer’s management, including the Certifying Officers, to allow timely
decisions regarding required disclosure. Based on this evaluation, the
Certifying Officers originally concluded that our disclosure controls and
procedures were effective to ensure that material information is recorded,
processed, summarized and reported by our management on a timely basis in
order
to comply with our disclosure obligations under the Exchange Act, and the
rules
and regulations promulgated thereunder.
Further,
there were no changes in our internal control over financial reporting during
the fourth fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM
9B. OTHER
INFORMATION
The
Company is not aware of any previously undisclosed, but required information
since its last filing; that is not included in this 10-K report.
PART
III
ITEM
10. DIRECTORS
AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification
of Directors, Officers and Significant Employees.
The
Croff
Board consists of Gerald L. Jensen, Richard H. Mandel Jr., Harvey Fenster,
and
Julian D. Jensen. The fifth Director, Dilworth Nebeker, resigned, and a
replacement has not been elected. Mr. Edwin Peiker did not stand for reelection
at the annual meeting in 2006, and Mr. Harvey Fenster was elected as his
replacement. Each director will serve until the next annual meeting
of shareholders, or until his successor is duly elected and
qualified. The Company has no knowledge of any arrangements or
understandings between directors or any other person pursuant to which any
person was or is to be nominated or elected to the office of director of
the
Company. The following is provided with respect to each officer and
director of the Company as of March 1, 2007:
GERALD
L.
JENSEN, 67, PRESIDENT & DIRECTOR
President
and Chairman of Croff Enterprises, Inc. since October 1985. Mr.
Jensen has been an officer and director of Jenex Petroleum Corporation, a
private oil and natural gas company, for over ten years, and an officer and
director of other Jenex companies. In 2000, Mr. Jensen became
Chairman of Provisor Capital Inc., a private finance company. Mr.
Jensen was a director of Pyro Energy Corp., a public company (N.Y.S.E.) engaged
in coal production and oil and natural gas, from 1978 until it was sold in
1989. Mr. Jensen is also an owner of private real estate, finance,
and oil and natural gas companies.
RICHARD
H. MANDEL, JR., 77, DIRECTOR
Mr.
Mandel has been a director of Croff Enterprises, Inc. since
1985. Since 1982, Mr. Mandel has been President and a Board Member of
American Western Group, Inc., an oil and natural gas producing company in
Denver, Colorado. From 1977 to 1984, he was President of Universal
Drilling Co., Denver, Colorado. Prior to 1977, Mr. Mandel worked for
The Superior Oil Co., Honolulu Oil Co., and Signal Oil and Gas Co. as an
engineer and in management. Mr. Mandel was also director of Wichita River Oil,
which was on the American Stock Exchange.
HARVEY
FENSTER, 66, DIRECTOR
Mr. Fenster currently is the President of BA Capital Company, a financial
advisory services company. From 1991 to 1994, he served as Senior Vice
President and Chief Financial Officer of The Katz Corporation, a publicly owned
international media representation firm. Previously, Mr. Fenster was
Executive Vice President and Chief Financial Officer of Pyro Energy Corp.,
a New
York Stock Exchange listed public company engaged in coal mining, oil and gas
exploration and development. Mr. Fenster has also served as a director of
Uranium Resources, Inc., a public company engaged in uranium exploration and
production. Mr. Fenster, a Certified Public Accountant, is retired from
public practice.
JULIAN
D.
JENSEN, 59, DIRECTOR
Mr.
Jensen has been a director of Croff Enterprises, Inc. since November
1991. Mr. Jensen is the brother of the Company’s president and has
served as legal counsel to the Company for the past twelve years. Mr.
Jensen has practiced primarily in the areas of corporate and securities law,
in
Salt Lake City, Utah, since 1975. Mr. Jensen is currently associated
with the firm of Jensen, Duffin & Dibb L.L.P., which acts as legal counsel
for the Company.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Based
solely on a review of such forms furnished to the Company and certain written
representations from the Executive Officers and Directors, the Company believes
that all Section 16(a) filing requirements applicable to its Executive Officers,
Directors and greater than ten percent beneficial owners were complied with
on a
timely basis in 2006.
Audit
Committee
The
Board
has an Audit Committee to assist it in the discharge of its responsibilities
including the presentation and disclosures of Croff’s financial condition and
results of operations and disclosure controls and procedures. The
Audit Committee is presently comprised of Harvey Fenster and Richard Mandel.
both of whom are independent directors of Croff. Mr. Fenster is the
Chairman of the Committee and the “Audit Committee Financial Expert.” Prior to
December 2006, the Audit Committee consisted of Dilworth Nebeker, Chairman
and
“Audit Committee Financial Expert”, and Edwin Peiker, member which conducted all
Audit Committee functions during the earlier part of 2006.
During
2006, the Audit Committee selected and recommended the firm of Ronald Chadwick
to act as Croff’s auditors for the 2006 year to the full Board of
Directors. The Board of Directors and shareholders approved the
retention of Ronald Chadwick. The Audit Committee then negotiated and
executed an agreement between Croff and Ronald Chadwick.
The
Audit
Committee reviewed each of the quarterly Form 10-Q’s filed with the SEC during
the year 2006. Members of the Committee discussed each of the filings
with management of Croff before the filings were made. The Committee
also discussed Croff’s disclosure controls and procedures with management each
quarter.
The
Audit
Committee members have each reviewed this 2006 Form 10-K. Members of
the Committee have discussed the Form 10-K and Financial Statements for the
year
2006 with management of Croff. The Committee has also discussed
Croff’s disclosure controls and procedures with management. The Audit
Committee met and discussed the Form 10-K and Financial Statements prior to
this
filing. The Audit Committee voted to recommend this 2006 Form 10-K
and Financial Statements to the Board of Directors for filing with the
SEC.
Members
of the Audit Committee have discussed the audit and financial statements with
the appropriate principal of Ronald Chadwick, and Causey, Demgen, and Moore,
including those matters required by SAS 61. They also discussed
Croff’s disclosure controls and procedures.
The
Croff
Board of Directors have each received a letter from Ronald Chadwick that as
of
February 11, 2007, Ronald Chadwick was the independent accountant with respect
to Croff, within the meaning of the Securities Acts administered by the SEC
and
the requirements of the Independence Standard Board.
ITEM
11. EXECUTIVE
COMPENSATION
Remuneration
During
the fiscal year ended December 31, 2006, there were no officers, employees
or
directors whose total cash or other remuneration exceeded $80,000.
Summary
Compensation Table
2006
Compensation Gerald L. Jensen, President and Chairman. (No other executive
salaries)
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
Annual
Compensation
|
|
|
|
|
|
|
|
Salary
|
|
$54,000
|
|
$54,000
|
|
$54,000
|
|
Bonus
|
|
$0
|
|
$0
|
|
$0
|
|
Other
Annual Compensation
|
|
$0
|
|
$0
|
|
$0
|
|
|
Long
Term Compensation
|
|
|
|
|
|
|
|
Awards
|
|
|
|
|
|
|
|
Restricted
Stock Awards
|
|
$0
|
|
$0
|
|
$0
|
|
Payouts
|
|
|
|
|
|
|
|
Number
of Shares Covered by Option Grant
|
|
0
|
|
0
|
|
0
|
|
Long
Term Incentive Plan Payout
|
|
$0
|
|
$0
|
|
$0
|
|
All Other Compensation
|
|
$1,620
|
(1)
|
$1,620
|
(1)
|
$1,620
|
(1)
|
|
(1)
Company IRA Contribution
|
|
|
|
|
|
|
|
Gerald
L.
Jensen is employed as the President and Chairman of Croff Enterprises,
Inc. Mr. Jensen commits a substantial amount of his time, but not
all, to his duties with the Company. Directors, excluding the
President, are not paid a salary by the Company, but are paid $350 for each
half-day board meeting and $500 for each full-day board meeting. The
Chairman of the Company’s Audit Committee is paid $500 per quarter and the other
member of the Audit Committee is paid at the rate of $350 per
meeting.
Proposed
Remuneration:
During
2007, the Company intends to compensate outside directors at the rate of $350
for a half day meeting and $500 for a full day meeting. The Chairman
of the Company’s Audit Committee will be paid $500 per quarter and the other
member of the Audit Committee will be paid at the rate of $350 per meeting.
This
compensation will be followed during 2007, unless a new Board of Directors
is
elected if the exchange agreement is closed. Based on the proposed remuneration,
for the fiscal year ending December 31, 2007, no officer or director shall
receive total cash remuneration in excess of $80,000.
Options,
Warrants or Rights
The
Company had no outstanding stock options, warrants or rights as of December
31,
2005 or 2006.
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth the beneficial ownership of common stock and
Preferred B stock of the Company as of March 1, 2007, 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
of
Common
Stock
Owned
Beneficially
|
|
Percentage
of
Class of
Common
Stock
|
|
Shares
of
Preferred
B
Stock
Owned
Beneficially
|
|
Percentage
of
Class B
Preferred
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gerald
L. Jensen
|
|
257,878(1)
|
|
47%
|
|
363,535(1)
|
|
67.2%
|
3773 Cherry Creek Drive N, #1025
|
|
|
|
|
|
|
|
|
Denver, Colorado 80209
|
|
|
|
|
|
|
|
|
|
Richard
H. Mandel, Jr.
|
|
18,100
|
|
3.2
%
|
|
8,000
|
|
1.5%
|
3333 E. Florida #94
|
|
|
|
|
|
|
|
|
Denver, Colorado 80210
|
|
|
|
|
|
|
|
|
|
Julian
D. Jensen
|
|
31,663
|
|
5.7%
|
|
0
|
|
0%
|
311 South State Street, Suite 380
|
|
|
|
|
|
|
|
|
Salt Lake City, Utah 84111
|
|
|
|
|
|
|
|
|
|
Harvey
Fenster
|
|
0
|
|
0%
|
|
0
|
|
0%
|
|
Directors
as a Group
|
|
307,641
|
|
55.9%
|
|
371,535
|
|
68.7%
|
(1)
|
Includes
132,130 shares of Common and 240,584 shares Preferred B held by Jensen
Development Company and CS Finance L.L.C., both of which are wholly
owned
by Gerald L. Jensen.
|
ITEM
13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
In
2006, the Company entered into the
exchange agreement with TRBT described under Item 1. This Transaction would
have
included the exchange of the principal shareholders Preferred “B” shares for
shares of a new subsidiary which would be assigned the Company’s oil and gas
assets. This potential conflict is now moot.
In
2005,
the Company’s Preferred B Shareholders received a tender offer from Jensen
Development Company and C.S. Finance L.L.C., companies wholly owned by Gerald
L.
Jensen, President and Chairman of the Company. This tender offer is fully
described under Item 1 of the 2005 Form 10-K and is incorporated herein by
reference.
The
Company currently has an office sharing arrangement with Jenex Petroleum
Corporation, hereafter “Jenex”, which is owned by the Company’s
President. The Company is not a party to any lease, but during 2006
paid Jenex for office space and all office services, including rent, phone,
office supplies, secretarial, land, and accounting. These
arrangements were entered into to reduce the Company’s overhead and are
currently on a month-to-month basis. The Company’s expenses for these
services were $49,872, $50,554, and $48,000 for the years ended 2006, 2005,
and
2004, respectively. Although these transactions were
not
a result of “arms length” negotiations, the Company’s Board of Directors
believes the transactions are reasonable.
The
Company retains the legal services of Jensen, Duffin, & Dibb, LLP. Julian
Jensen, a Director of the Company, is part of this professional
firm. Legal fees paid to this law firm for the years ending 2006,
2005, and 2004, were $23,493, $16,920, and $2,410, respectively. The
reason for the increase in legal fees in 2005 and 2006 is the added time and
expense related to the strategic alternatives for the Company, the exchange
agreement, and increased compliance costs.
The
Company has working interests in five Oklahoma natural gas wells, which are
operated by Jenex, a company wholly owed by Gerald Jensen, the Company’s
President. As part of the 1998 purchase agreement, Jenex agreed to
rebate to Croff $150 of operating fees per well, each month, which now totals
$750 per month, as long as Jenex operated the wells and Croff retained its
interest.
The
Company compensated Richard H. Mandel, Jr., a member of its Board of Directors,
1,000 and 2,000 shares of common stock during 2003 and 2004, respectively,
for
consulting services rendered in connection with the Company’s Yorktown Re-entry
Program in South Texas. The common shares were valued at $1.00 per
share.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Audit
Fees
Ronald
Chadwick was recommended by the Audit Committee of the Board and approved by
the
Company stockholder’s for appointment as the registered public accounting firm
for the Company for the fiscal year ended December 31, 2006. Ronald
Chadwick is registered with the Public Company Accounting Oversight
Board. Ronald Chadwick is in the first year of acting as independent
accountant for the company, and his fees for each quarterly review are $1,250
and the fee for the 2006 year end audit is $10,000. Previously, Causey Demgen
and Moore, “CDM,” has been acting as independent accountants for the Company for
over fifteen years. Aggregate fees for professional services rendered by CDM
in
connection with its audit of the Company’s Financial Statements as of and for
the year ended December 31, 2005, and its limited reviews of the Company’s
unaudited condensed quarterly Financial Statements during 2005 totaled $14,145.
During 2006, CDM did not perform any additional services for the
Company.
PART
IV
ITEM
15. EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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, which follow the exhibits below.
Reports
on Form 8-K:
8-K:
December 15, 2006 Croff Announces
Merger Plan
(Includes
definitive Stock for Stock Exchange Agreement filed as an exhibit)
8-K:
December 6, 2006 Resignation of
Dilworth Nebeker from Board of Directors
8-K:
July 24, 2006 Completion of
Acquisition or Disposition of Assets
8-K/A:
April 13, 2006 Changes in
Registrants Certifying Accountant
8-K:
March 31, 2006 Changes in Registrants Certifying Accountant
Other
Filings:
Schedule
14A; November 8, 2006- 2006
Proxy Statement
10Q;
November 9, 2006 For the Quarter
and Nine Months ended September 30, 2006
10Q;
August 16, 2006 For the Quarter
and Six Months ended Ended June 30, 2006
10Q;
May 15, 2006 For the Quarter Ended
March 31, 2006
10K;
March 28, 2006 For the Fiscal Year
Ended December 31, 2005
Exhibit
Index
23.1
Consent letter from Ronald R. Chadwick, P.C.
23.2
Consent letter from Causey Demgen & Moore Inc.
31.1
Certification by C.E.O.
31.2
Certification of C.A.O
32.1
Section 906 Certification by C.E.O.
32.2
Section 906 Certification by C.A.O
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:
|
08/27/2007
|
|
By
|
|
/s/
Gerald L. Jensen
|
|
|
|
|
|
Gerald
L. Jensen,
President,
|
|
|
|
|
|
Chief
Executive
Officer
|
|
|
|
|
|
|
Date:
|
|
|
By
|
|
/s/
Gerald L. Jensen
|
|
|
|
|
|
Gerald
L. Jensen
|
|
|
|
|
|
Acting
Chief Financial
Officer
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the following
persons on behalf of the Registrant and in the capacities and on the date
indicated have signed this report below.
Date:
|
|
|
By
|
|
/s/
Gerald L. Jensen
|
|
|
|
|
|
Gerald
L. Jensen,
Chairman
|
|
|
|
|
|
|
Date:
|
|
|
By
|
|
/s/
Richard H. Handel,
Jr.
|
|
|
|
|
|
Richard
H. Mandel, Jr.,
Director
|
|
|
|
|
|
|
Date:
|
|
|
By
|
|
/s/
Harvey Fenster
|
|
|
|
|
|
Harvey
Fenster,
Director
|
|
|
|
|
|
|
Date:
|
|
|
By
|
|
/s/
Julian D. Jensen
|
|
|
|
|
|
Julian
D. Jensen,
Director
|
CROFF
ENTERPRISES, INC.
FINANCIAL
STATEMENTS
December
31, 2005 and 2006
WITH
REPORT
OF REGISTERED PUBLIC ACCOUNTING FIRM
CROFF
ENTERPRISES, INC.
INDEX
TO FINANCIAL STATEMENTS, SCHEDULES
AND
SUPPLEMENTAL INFORMATION
|
|
Page
Number
|
|
|
|
I.
|
Financial
Statements
|
|
|
|
|
|
Report
of Registered Public Accounting Firm
|
F-2
|
|
|
|
|
Report
of Registered Public Accounting Firm
|
F-3
|
|
|
|
|
Balance
Sheets as of December 31, 2005 and 2006
|
F-4
|
|
|
|
|
Statements
of Operations for the years ended December 31,
|
|
|
2004,
2005 and 2006
|
F-5
|
|
|
|
|
Statements
of Stockholders' Equity for the years ended
|
|
|
December
31, 2004, 2005 and 2006
|
F-6
|
|
|
|
|
Statements
of Cash Flows for the years ended December 31,
|
|
|
2004,
2005 and 2006
|
F-7
|
|
|
|
|
Notes
to Financial Statements
|
F-8
|
|
|
|
II.
|
Supplemental
Information - Disclosures About Oil and
|
|
|
|
|
|
Gas
Producing Activities – Unaudited
|
F-20
|
RONALD
R.
CHADWICK, P.C.
Certified
Public Accountant
2851
South Parker Road, Suite 720
Aurora,
Colorado 80014
Telephone
(303)306-1967
Fax
(303)306-1944
REPORT
OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
Croff
Enterprises, Inc.
Denver,
Colorado
I
have
audited the accompanying balance sheet of Croff Enterprises, Inc. as of December
31, 2006, and the related statements of operations, stockholders' equity
and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express
an
opinion on these financial statements based on my audit.
I
conducted my audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
I plan
and perform the audit 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. I believe that my audit provides a
reasonable basis for my opinion.
In
my
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Croff Enterprises, Inc.
as of December 31, 2006, and the results of its operations and its cash flows
for the year then ended in conformity with accounting principles generally
accepted in the United States of America.
Aurora,
Colorado Ronald
R. Chadwick, P.C.
March
22,
2007 RONALD
R. CHADWICK, P.C.
REPORT
OF
REGISTERED PUBLIC ACCOUNTING FIRM
Board
of
Directors and Stockholders
Croff
Enterprises, Inc.
We
have
audited the balance sheets of Croff Enterprises, Inc. at December 31, 2005,
and
the related statements of operations, stockholders' equity and cash flows
for
each of the two years in the period ended December 31, 2005. These financial
statements are the responsibility of management. Our responsibility is to
express an opinion on these financial statements based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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
audit provides 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, 2005, and the results of its operations and its cash flows for
each
of the two years in the period ended December 31, 2005, in conformity with
U.S.
generally accepted accounting principles.
Denver,
Colorado
|
|
March
17, 2006
|
CAUSEY
DEMGEN & MOORE INC.
|
CROFF
ENTERPRISES, INC.
BALANCE
SHEETS
December
31, 2005 and 2006
|
|
2005
|
|
|
|
2006
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
902,257
|
|
|
|
$ |
985,729
|
|
|
Accounts receivable
|
|
|
157,959
|
|
|
|
|
124,900
|
|
|
|
|
|
1,060,216
|
|
|
|
|
1,110,629
|
|
|
|
Oil
and gas properties, at cost, successful efforts method:
|
|
|
|
|
|
|
|
|
|
|
Proved properties
|
|
|
1,016,442
|
|
|
|
|
1,074,188
|
|
|
Unproved properties
|
|
|
266,174
|
|
|
|
|
266,174
|
|
|
|
|
|
1,282,616
|
|
|
|
|
1,340,362
|
|
|
Accumulated depletion and depreciation
|
|
|
(535,330 |
) |
|
|
|
(583,830 |
) |
|
|
|
|
747,286
|
|
|
|
|
756,532
|
|
|
|
Total assets
|
|
$ |
1,807,502
|
|
|
|
$ |
1,867,161
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
37,945
|
|
|
|
$ |
58,756
|
|
|
Farmout agreement liability
|
|
|
300,621
|
|
|
|
|
-
|
|
|
Current portion of ARO liability
|
|
|
23,000
|
|
|
|
|
23,000
|
|
|
Accrued liabilities
|
|
|
72,788
|
|
|
|
|
33,375
|
|
|
|
|
|
434,354
|
|
|
|
|
115,131
|
|
|
|
Long-term
portion of ARO liabilities
|
|
|
58,828
|
|
|
|
|
64,695
|
|
|
|
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
|
|
|
1,089,233
|
|
|
|
|
1,380,387
|
|
|
Common stock, $.10 par value; 20,000,000 shares
authorized,
|
|
|
|
|
|
|
|
|
|
|
622,143 and 620,643 shares issued and
outstanding at
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 and 2006
|
|
|
62,064
|
|
|
|
|
62,064
|
|
|
Capital in excess of par value
|
|
|
155,715
|
|
|
|
|
155,715
|
|
|
Treasury stock, at cost, 69,399 and 69,399 shares issued
and
|
|
|
|
|
|
|
|
|
|
|
outstanding at December 31, 2005 and 2006
|
|
|
(107,794 |
) |
|
|
|
(107,794 |
) |
|
Retained earnings
|
|
|
115,102
|
|
|
|
|
196,963
|
|
|
|
|
|
1,314,320
|
|
|
|
|
1,687,335
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$ |
1,807,502
|
|
|
|
$ |
1,867,161
|
|
|
|
|
See
accompanying notes to the financial statements.
|
|
|
|
|
|
|
|
|
|
|
CROFF
ENTERPRISES, INC.
STATEMENTS
OF OPERATIONS
For
the
years ended December 31, 2004, 2005 and 2006
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
Oil and natural gas sales
|
|
$ |
615,731
|
|
|
$ |
934,525
|
|
|
$ |
842,400
|
|
Loss on natural gas “put” contracts
|
|
|
(7,599 |
) |
|
|
--
|
|
|
|
--
|
|
Other income (lease payments)
|
|
|
6,196
|
|
|
|
7,330
|
|
|
|
660
|
|
|
|
|
614,328
|
|
|
|
941,855
|
|
|
|
843,060
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease operating expense including
|
|
|
|
|
|
|
|
|
|
|
|
|
production taxes
|
|
|
192,187
|
|
|
|
272,129
|
|
|
|
205,371
|
|
Proposed drilling program
|
|
|
30,825
|
|
|
|
52,638
|
|
|
|
--
|
|
General and administrative
|
|
|
112,157
|
|
|
|
165,212
|
|
|
|
212,648
|
|
Overhead expense, related party
|
|
|
48,000
|
|
|
|
50,554
|
|
|
|
49,872
|
|
(Gain) on sale of equipment
|
|
|
--
|
|
|
|
(14,173 |
) |
|
|
(112,543 |
) |
Accretion expense
|
|
|
--
|
|
|
|
10,187
|
|
|
|
5,868
|
|
Depletion and depreciation
|
|
|
42,000
|
|
|
|
45,000
|
|
|
|
48,500
|
|
|
|
|
425,169
|
|
|
|
581,547
|
|
|
|
409,716
|
|
Income
from operations
|
|
|
189,159
|
|
|
|
360,308
|
|
|
|
433,344
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) on sale of marketable equity securities
|
|
|
(38,166 |
) |
|
|
--
|
|
|
|
--
|
|
Interest income
|
|
|
--
|
|
|
|
12,057
|
|
|
|
49,671
|
|
|
|
|
(38,166 |
) |
|
|
12,057
|
|
|
|
49,671
|
|
Income
before income taxes
|
|
|
150,993
|
|
|
|
372,365
|
|
|
|
483,015
|
|
Provision for income taxes
|
|
|
8,877
|
|
|
|
82,478
|
|
|
|
110,000
|
|
Net income
|
|
$ |
142,116
|
|
|
$ |
289,887
|
|
|
|
373,015
|
|
|
|
Net income applicable to
|
|
|
|
|
|
|
|
|
|
|
|
|
preferred B shares
|
|
|
213,634
|
|
|
|
316,304
|
|
|
|
291,154
|
|
|
|
Net income (loss) applicable to
|
|
|
|
|
|
|
|
|
|
|
|
|
common shares
|
|
$ |
(71,518 |
) |
|
$ |
(26,417 |
) |
|
$ |
81,861
|
|
|
|
Basic and diluted net income
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss) per common share
|
|
$ |
(0.13 |
) |
|
$ |
(0.05 |
) |
|
$ |
0.15
|
|
See
accompanying notes to the financial statements.
CROFF
ENTERPRISES, INC.
STATEMENTS
OF STOCKHOLDERS’ EQUITY
For
the
years ended December 31, 2004, 2005 and 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
in
|
|
|
|
|
|
|
|
|
|
other
|
|
|
|
|
Retained
|
|
|
|
Preferred
B stock
|
|
Common
stock
|
|
|
|
excess
of
|
|
|
|
|
Treasury
|
|
|
|
|
comprehensive
|
|
|
|
|
earnings
|
|
|
|
Shares
|
|
|
Amount
|
|
Shares
|
|
|
|
|
Amount
|
|
|
|
par
value
|
|
|
|
|
stock
|
|
|
|
|
loss
|
|
|
|
|
(deficit)
|
|
|
Balance
at December 31, 2003
|
|
540,659
|
|
$
|
559,295
|
|
620,143
|
|
|
|
$
|
62,014
|
|
|
$
|
369,761
|
|
|
|
$
|
(83,151
|
)
|
|
|
$
|
(41,210
|
)
|
|
|
$
|
(597
|
)
|
Realization of net loss on
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
marketable equity securities
|
|
-
|
|
|
-
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
41,210
|
|
|
|
|
-
|
|
Net income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
-
|
|
|
-
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
142,116
|
|
Common stock issued for services
|
|
-
|
|
|
-
|
|
2,000
|
|
|
|
|
200
|
|
|
|
1,800
|
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Preferred stock reallocation
|
|
-
|
|
|
213,634
|
|
-
|
|
|
|
|
-
|
|
|
|
(213,634
|
)
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
|
Balance
at December 31, 2004
|
|
540,659
|
|
|
772,929
|
|
622,143
|
|
|
|
|
62,214
|
|
|
|
157,927
|
|
|
|
|
(83,151
|
)
|
|
|
|
|
|
-
|
|
|
|
|
141,519
|
|
Net income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
-
|
|
|
-
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
289,887
|
|
Cancellation of treasury stock
|
|
-
|
|
|
-
|
|
(1,500
|
)
|
|
|
|
(150
|
)
|
|
|
(2,212
|
)
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Purchase of treasury stock
|
|
-
|
|
|
-
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(24,643
|
)
|
|
|
|
|
|
-
|
|
|
|
|
-
|
|
Preferred stock reallocation
|
|
-
|
|
|
316,304
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
(316,304
|
)
|
|
Balance
at December 31, 2005
|
|
540,659
|
|
|
1,089,233
|
|
620,643
|
|
|
|
|
62,064
|
|
|
|
155,715
|
|
|
|
|
(107,794
|
)
|
|
|
|
|
|
-
|
|
|
|
|
115,102
|
|
Net income for the year ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006
|
|
-
|
|
|
-
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
373,015
|
|
Preferred stock reallocation
|
|
-
|
|
|
291,154
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
|
|
|
-
|
|
|
|
|
(291,154
|
)
|
|
Balance
at December 31, 2006
|
|
540,659
|
|
$
|
1,380,387
|
|
620,643
|
|
|
|
$
|
62,064
|
|
|
$
|
155,715
|
|
|
|
$
|
(107,794
|
)
|
|
|
$
|
|
|
-
|
|
|
$
|
|
196,963
|
|
See
accompanying notes to the financial statements.
CROFF
ENTERPRISES, INC.
STATEMENTS
OF CASH FLOWS
For
the
years ended December 31, 2004, 2005 and 2006
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
142,116
|
|
|
$ |
289,887
|
|
|
$ |
373,015
|
|
Adjustments to reconcile net income to
|
|
|
|
|
|
|
|
|
|
|
|
|
net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion, depreciation, and
accretion
|
|
|
42,000
|
|
|
|
55,187
|
|
|
|
54,368
|
|
Loss on abandonment
|
|
|
-
|
|
|
|
56,089
|
|
|
|
--
|
|
(Gain) on sale of equipment
|
|
|
-
|
|
|
|
(14,173 |
) |
|
|
(112,000 |
) |
Realized (gain) loss on
marketable equity securities
|
|
|
38,166
|
|
|
|
--
|
|
|
|
--
|
|
Loss on natural gas “put”
contracts
|
|
|
7,599
|
|
|
|
--
|
|
|
|
--
|
|
Other items, net
|
|
|
2,000
|
|
|
|
--
|
|
|
|
--
|
|
Accounts
receivable
|
|
|
(29,160 |
) |
|
|
(48,268 |
) |
|
|
33,059
|
|
Accounts
payable
|
|
|
7,027
|
|
|
|
9,535
|
|
|
|
20,811
|
|
Accrued
liabilities
|
|
|
(2,021 |
) |
|
|
64,082
|
|
|
|
(39,413 |
) |
Net cash provided by operating activities
|
|
|
207,727
|
|
|
|
412,339
|
|
|
|
329,840
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from natural gas “put” contracts
|
|
|
61
|
|
|
|
--
|
|
|
|
--
|
|
Proceeds from sale of investments
|
|
|
128,943
|
|
|
|
--
|
|
|
|
--
|
|
Proceeds from sale of equipment
|
|
|
--
|
|
|
|
48,500
|
|
|
|
112,000
|
|
Net participation fees received
|
|
|
77,500
|
|
|
|
--
|
|
|
|
--
|
|
Purchase of treasury stock
|
|
|
--
|
|
|
|
(24,643 |
) |
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of oil and gas properties and improvements
|
|
|
(311,054 |
) |
|
|
(92,228 |
) |
|
|
(57,746 |
) |
Net cash used in investing activities
|
|
|
(104,550 |
) |
|
|
(68,371 |
) |
|
|
54,254
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from Farmout agreement
|
|
|
-
|
|
|
|
450,000
|
|
|
|
--
|
|
Costs incurred for the benefit of Farmout agreement
|
|
|
-
|
|
|
|
(149,378 |
) |
|
|
(300,622 |
) |
Net cash provided by financing
activities
|
|
|
-
|
|
|
|
300,622
|
|
|
|
(300,622 |
) |
Net
increase (decrease) in cash and cash equivalents
|
|
|
103,177
|
|
|
|
644,590
|
|
|
|
83,472
|
|
Cash
and cash equivalents at beginning of year
|
|
|
154,490
|
|
|
|
257,667
|
|
|
|
902,257
|
|
Cash
and cash equivalents at end of year
|
|
$ |
257,667
|
|
|
$ |
902,257
|
|
|
$ |
985,729
|
|
Supplemental
disclosure of non-cash investing and financing activities:
During
the years ended December 31, 2004, the Company issued 2,000 shares of its
common
stock to a Director for services rendered valued at $2,000. During the year
ended December 31, 2005, the Company purchased 1,500 shares of its common
stock
for $2,362 and the shares were cancelled.
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
1. ORGANIZATIONS
AND NATURE OF BUSINESS
Croff
Enterprises, Inc. (“Croff” or the “Company”) is an independent energy company
engaged in the business of oil and natural gas production, primarily through
ownership of perpetual mineral interests and acquisition of producing oil and
natural gas leases. The Company’s principal activity is oil and
natural gas production from non-operated properties. The Company’s
business strategy is focused on targeting opportunities that are of lower risk
with the potential for stable cash flow and long asset life while seeking to
keep operating costs low. The Company acquires and owns producing and
non-producing leases and perpetual mineral interests in Alabama, Colorado,
Michigan, Montana, New Mexico, North Dakota, Oklahoma, Texas, Utah, and Wyoming.
Over the past eleven years, the Company’s primary source of revenue has been oil
and natural gas production from leases and producing mineral
interests. Other companies operate almost all of the wells from which
the Company receives revenues and the Company has no control over the factors
which determine royalty or working interest revenues, such as markets, prices
and rates of production. The Company presently participates as a working
interest owner in 34 single wells and in 10 units of multiple wells. The Company
holds small royalty interests in approximately 215 wells.
The
Company was incorporated in Utah in 1907 as Croff Mining Company. The
Company changed its name to Croff Oil Company in 1952, and in 1996 changed
its
name to Croff Enterprises, Inc. The Company continues to operate its
oil and natural gas properties as Croff Oil Company.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Producing
activities
The
Company follows the "successful efforts" method of accounting for its oil and
gas properties. Under this method, all property acquisition costs and costs
of
exploratory and development wells are capitalized when incurred, pending
determination of whether the well has proven reserves. If an exploratory well
does not result in reserves, the capitalized costs of drilling the well, net
of
any salvage, are charged to expense. The costs of development wells are
capitalized, whether the well is productive or nonproductive.
The
Company re-entered the Helen Gips #1 well in Dewitt County, Texas, and
re-completed the wellbore to the Wilcox formation during 2004. Under the
successful efforts method of accounting the Company has capitalized $65,213
as
of December 31, 2004, for costs incurred on this unevaluated exploratory
well. The capitalized costs associated with this unevaluated
exploratory well have been excluded from depletion and depreciation during
the
2004. In 2005, the Helen Gips #1 was deemed noncommercial and was plugged and
abandoned, and $52,638 of the capitalized costs was expensed to drilling
operations for the year ended December 31, 2005. The amount to be recovered
from
the tubing of $13,000 remains capitalized at December 31, 2005.
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
In
2005,
the Company purchased a 25% working interest in a lease on which there is an
existing re-entry well and a producing well. (A.C. Wiggins). The Wiggins well
was refraced in 2005 and is currently producing gas.
The
Company was informed that Tempest Energy Resources, pursuant to its 2004
Participation Agreement, declined to participate in the re-entry program in
Dewitt County, Texas. Although the Company abandoned most of these
leases, it did renew several leases for a farmout agreement for the re-entry
of
the Dixel Gips well, in December 2005. The Company provided the leases, the
re-entry wellbore, geological, engineering and other wellsite improvements
for a
20% working interest, carried through completion. Under the Farmout
Agreement, the Farmees pay for drilling and completion and all parties,
including The Company, pay for production and equipment.
The
Dixel
Gips well was completed in the first quarter of 2006 and sold in the third
quarter of 2006. The proceeds from the sale of the Panther Pipeline and the
Edward Dixel Gips lease in Dewitt County Texas was $255,000. The cost of
the pipeline and lease were $142,459 and yielded a gain of
$112,543.
Maintenance
and repairs are charged to expense; improvements of property are capitalized
and
depreciated as described below.
Lease
bonuses
The
Company defers bonuses received from leasing minerals in which unrecovered
costs
remain by recording the bonuses as a reduction of the unrecovered costs. Bonuses
received from leasing mineral interests previously fully expensed are taken
into
income. For federal income tax purposes, lease bonuses are regarded as advance
royalties (ordinary income). The Company received lease bonuses
totaling $3,743, $2,415 and $660, for the years ended December 31, 2004, 2005,
and 2006, respectively, which were included in other income.
Depreciation,
depletion, and accretion
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.
The
Company has established a working interest reserve relating to the Asset
Retirement Obligation (“ARO”) for the four wells that the Company operates. The
reserve, based on the estimates of management, complies with the Financial
Standards Board Rule 143 (FAS 143). The accretion of $10,187 and $5,868 for
the
years ended December 31, 2005 and 2006, respectively, represent an increase
in
the ARO liability based on the discounted cash flow of the future retirement
costs.
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
Recent
accounting pronouncements
In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) 123R, "Share-Based
Payment." This revised standard addresses the accounting for share- based
payment transactions in which a company receives employee services in exchange
for either equity instruments of the company or liabilities that are based
on
the fair value of the company's equity instruments or that may be settled by
the
issuance of such equity instruments. Under the new standard, companies will
no
longer be able to account for share-based compensation transactions using the
intrinsic method in accordance with APB 25. Instead, companies will be required
to account for such transactions using a fair-value method and recognize the
expense in the statements of operations. SFAS 123R became effective for all
interim or annual periods beginning after June 15, 2005. SFAS 123R is not
expected to have a material impact on the Company’s financial condition or
results of operations as the Company currently does not receive employee
services in exchange for either equity instruments of the Company or liabilities
that are based on the fair value of the Company's equity instruments or that
may
be settled by the issuance of such equity instruments.
In
December 2004, the FASB issued SFAS
No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No.
29".
This standard requires exchanges of productive assets to be accounted for at
fair value, rather than at carryover basis, unless (1) neither the asset
received nor the asset surrendered has a fair value that is determinable within
reasonable limits or (2) the transactions lack commercial substance. The
Statement is effective for non-monetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The Company has not entered
into these types of nonmonetary asset exchanges during the last five
years. Accordingly, the adoption of this pronouncement is not
expected to have a material impact on the Company’s financial condition or
results of operations.
In
May
2005 the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections - a
replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154
replaces APB Opinion (“APB”) No. 20, “Accounting Changes”, and SFAS No. 3,
“Reporting Accounting Changes in Interim Financial Statements,” and changes the
requirements for the accounting for and reporting of a change in accounting
principle. SFAS No. 154 will apply to all voluntary changes in accounting
principle as well as to changes required by an accounting pronouncement in
the
unusual instance that the pronouncement does not include specific transition
provisions. APB No. 20 previously required that most voluntary changes in
accounting principle be recognized by including in net income of the period
of
the change the cumulative effect of changing to the new accounting
principle. SFAS No. 154 requires retrospective application to prior
periods' financial statements of changes in accounting principle, unless it
is
impracticable to determine either the period-specific effects or the cumulative
effect of the change. When it is impracticable to determine the period-specific
effects of an accounting change on one or more individual prior periods
presented, SFAS No. 154 requires that the new accounting principle be applied
to
the balances of assets and liabilities as of the beginning of the earliest
period for which retrospective application is practicable and that a
corresponding adjustment be made to the opening balance of retained earnings
(or
other appropriate components of equity or net assets in the statement of
financial condition).
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
Recent
accounting pronouncements (continued)
In
March
2005, the FASB issued FASB Interpretation (“FIN”) No. 47, “Accounting for
Conditional Asset Retirement Obligations” (“FIN No.
47”). FIN No. 47 clarifies that the term conditional
asset retirement obligation as used in FASB Statement No. 143, “Accounting for
Asset Retirement Obligations,” refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement
are
conditional on a future event that may or may not be within the control of
the
entity. The obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and (or) method
of
settlement. Uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when sufficient information exists. This
interpretation also clarifies when an entity would have sufficient
information to reasonably estimate the fair value of an asset retirement
obligation. Fin No. 47 is effective no later than the end of
fiscal years ending after December 15, 2005 (December 31, 2005 for calendar-year
companies). Retrospective application of interim financial
information is permitted but is not required. Management does not
expect adoption of FIN No. 47 to have a material impact on the Company’s
financial statements.
SFAS
155,
“Accounting for Certain Hybrid Financial Instruments—an amendment of FASB
Statements No. 133 and 140” (‘SFAS No. 155”). This Statement shall be
effective for all financial instruments acquired, issued, or subject to a
remeasurement (new basis) event occurring after the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The fair value election
provided for in paragraph 4(c) of this Statement may also be applied upon
adoption of this Statement for hybrid financial instruments that had been
bifurcated under paragraph 12 of Statement 133 prior to the adoption of this
Statement. Earlier adoption is permitted as of the beginning of an entity’s
fiscal year, provided the entity has not yet issued financial statements,
including financial statements for any interim period, for that fiscal year.
Management does not expect adoption of SFAS No. 155 to have a material impact
on
the Company’s financial statements.
SFAS
157,
“Fair Value Measurements”, defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles (GAAP),
and
expands disclosures about fair value measurements. This Statement applies under
other accounting pronouncements that require or permit fair value measurements,
the Board having previously concluded in those accounting pronouncements that
fair value is the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. However, for some entities,
the application of this Statement will change current practice. Management
has
not evaluated the impact of this statement.
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
Recent
accounting pronouncements (continued)
In
June 2005, the Emerging Issues Task Force reached a consensus on Issue
No. 05-6 (“EITF No. 05-6”), “Determining the Amortization Period for
Leasehold Improvements Purchased after Lease Inception or Acquired in a Business
Combination.” EITF No. 05-6 clarifies that the
amortization period for leasehold improvements acquired in a business
combination or placed in service significantly after and not contemplated at
or
near the beginning of the lease term should be amortized over the shorter of
the
useful life of the assets or a term that includes the required lease periods
and
renewals that are reasonably assured of exercise at the time of the acquisition.
EITF No. 05-6 is to be applied prospectively to leasehold improvements purchased
or acquired in reporting periods beginning after June 29, 2005. The
adoption of EITF No. 05-6 did not have a material impact on the Company’s
consolidated financial statements.
In
June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting
forUncertainty in Income Taxes – an Interpretation of FASB Statement No.
109” (“FIN No. 48”). FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109, “Accounting for
Income Taxes”. Fin No. 48 is effective for fiscal years
beginning after December 15, 2005. Management does not expect
adoption of FIN No. 48 to have a material impact on the Company’s financial
statements.
Revenue
recognition
Oil
and
gas revenues are accounted for using the sales method. Under this method,
revenue is recognized based on the cash received rather than the Company's
proportionate share of the oil and gas produced. Oil and gas
imbalances and related value at December 31, 2004, 2005 and 2006 were
insignificant.
Risks
and
uncertainties
Historically,
oil and gas prices have experienced significant fluctuations and have been
particularly volatile in recent years. Price fluctuations can result
from variations in weather, levels of regional or national production and
demand, availability of transportation capacity to other regions of the country
and various other factors. Increases or decreases in prices received
could have a significant impact on future results.
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
Comprehensive
Income
The
Company follows the provisions of SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting comprehensive
income. In addition to net income, comprehensive income includes all
changes in equity during a period, except those resulting from investments and
distributions to the owners of the Company. The components of other
comprehensive income net of the related tax effects for the twelve months ended
December 31, 2003 totaled $23,995, and was related to net unrealized gains
(losses) on the Company’s marketable equity securities, which were available for
sale. The Company liquidated its marketable equity securities and recognized
a
net realized loss of $38,166 for the year ended December 31, 2004.
Fair
value of financial instruments
The
carrying amounts of financial instruments including cash and cash equivalents,
marketable equity securities, accounts receivable, notes receivable, accounts
payable and accrued liabilities approximate fair value as of December 31, 2005
and 2006.
Concentrations
of credit risk
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash, cash equivalents and accounts receivable.
The
Company places its cash with high quality financial institutions. At times
during the year, the balance at any one financial institution may exceed FDIC
limits.
Derivative
instruments and hedging activities
On
March
21, 2003, the Company purchased a series of put contracts for 10,000 MMBTU’s per
month of natural gas beginning in June 2003 and ending May 2004 at the strike
price of $4.75. The Company paid $58,044 for these twelve
contracts. The Company realized a loss during 2003 and 2004 of
$45,022 and $7,599, respectively, related to its purchase of these natural
gas
“put” contracts. During the years ended December 31, 2006, 2005 and
2004, the Company did not enter into commodity derivative contracts or
fixed-price physical contracts to manage its exposure to oil and gas price
volatility.
Stock
options and warrants
The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123R "Share-Based Payment" related to its stock options
and warrants. Since December 2001, the Company has had no outstanding
stock options or warrants.
Cash
equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments purchased with maturity of three months or less to be cash
equivalents.
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
Accounts
receivable
The
Company considers accounts receivable to be fully collectible; accordingly,
no
allowance for doubtful accounts is required. If amounts become un-collectible,
they will be charged to operations when that determination is made.
Income
taxes
The
provision for income taxes is based on earnings reported in the financial
statements. Deferred income taxes are provided using a liability approach based
upon enacted tax laws and rates applicable to the periods in which the taxes
become payable.
Net
income per common share
In
accordance with the provisions of SFAS No. 128, "Earnings per Share," basic
income per common share amounts were computed by dividing net income after
deduction of the net income attributable to the preferred B shares by the
weighted average number of common shares outstanding during the
period. Diluted income per common share assumes the conversion of all
securities that are exercisable or convertible into either preferred B or common
shares that would dilute the basic earnings per common share during the
period.
Use
of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. RELATED
PARTY TRANSACTIONS
The
Company retains the services of a law firm in which a partner of the firm is
a
director of the Company. Legal fees paid to this firm for the years ended
December 31, 2004, 2005 and 2006 amounted to $2,410, $16,920 and $23,493,
respectively.
The
Company currently has an office sharing arrangement with Jenex Petroleum
Corporation, hereafter “Jenex”, which is owned by the Company’s
President. The Company is not a party to any lease, but paid Jenex
for office space and all office services, including rent, phone, office
supplies, secretarial, land, and accounting. The Company’s expenses
for these services were $48,000, $50,554, and $49,872 for the years ended 2004,
2005 and 2006, respectively. Although these transactions were not a
result of “arms length” negotiations, the Company’s Board of Directors believes
the transactions are reasonable.
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
3. RELATED
PARTY TRANSACTIONS (CONTINUED)
The
Company has working interests in five Oklahoma natural gas wells, which are
operated by Jenex, a company solely owed by Gerald Jensen, the Company’s
President. As part of the 1998 purchase agreement, Jenex agreed to
rebate to the Company $150 of operating fees per well, each month, which now
totals $750 per month, as long as Jenex operated the wells and the Company
retained its interest. During the years ending December 31, 2004,
2005 and 2006, $9,000, $9,000, and $9,000 respectively, have been offset against
lease operating expense, in this manner. Total trade accounts
receivable from Jenex as of December 31, 2005, and 2006, totaled $35,307 and
$16,973, respectively.
The
Company compensated a member of its Board of Directors 2,000 shares of common
stock during 2004 for consulting services rendered in connection with the
Company’s Yorktown Re-entry Program in South Texas. The common shares
were valued at $1.00 per share
In
2005,
the Preferred B Shareholders received a tender offer from Jensen Development
Company and C.S. Finance L.L.C., companies wholly owned by Gerald L. Jensen,
President and Chairman of the Company. This tender offer is fully described
in
Footnote 4 below, and incorporated herein by reference.
4. PREFERRED
B STOCK TENDER OFFER
In
April,
2005, the Company’s Board of Directors reviewed the Company’s strategic
alternatives, including the possible sale or merger of all or part of the
Company. The two objectives were to increase shareholder value and to
provide liquidity to the shareholders. The Board of Directors formed
a non-management committee to review the objectives, and any opportunities
related to these objectives. The Preferred B shareholders of the
Company received a tender offer from C.S. Finance L.L.C. and Jensen Development
Company, “Offerors,” two companies wholly owned by Gerald L. Jensen, to purchase
all of the outstanding shares of Preferred B stock at $3 per
share.
The
Offerors Preferred B tender offer was filed with the SEC in June 2005.
The
Company filed a Form 14D9 with the SEC outlining the position of the
non-management committee of the Board of Directors which was neutral as
to the
tender offer, and advised shareholders to consider the offer based on each
individual’s situation. The results of the tender offer were reported to the SEC
in September 2005. There were 75,050 shares tendered and accepted prior
to the
expiration of the tender offer, or 13.9% of the Preferred B stock, at a
cost of
$225,150.
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
4.
|
PREFERRED
B STOCK TENDER OFFER (CONTINUED)
|
During
the tender offer, two Directors tendered all of their shares of Preferred B
stock. After the tender offer a Director, sold the majority of his Preferred
B
shares at the tender price for a note due in 2006; retaining 8,000 Preferred
B
shares. Also after the tender offer, a Director who had tendered one third
of
his shares, sold the balance of his Preferred B shares at the tender price
for
notes payable during 2006 and 2007. These subsequent purchases at $3 per share
by C.S. Finance L.L.C. totaled another 33,418 Preferred B shares, of which
29,365 Preferred B shares were purchased from the two Directors. To date, the
number of Preferred B shares collectively owned by Gerald L. Jensen, C.S.
Finance L.L.C., and Jensen Development Company total 363,535, or 67.2% of the
Preferred B shares. The holders of approximately 94,394 Preferred B
shares were unable to be located during the tender offer.
During
2001, the Board determined that the cash of the Company, which had been building
during a period of high oil prices, should be formally allocated between the
common stock and the Preferred B stock. The Board decided to allocate
$250,000 cash to the common stock and the balance of cash remaining with the
Preferred B stock. The Board then determined that future oil and gas cash flow
from the Preferred B assets would be accumulated for Preferred B
shareholders. The Company established separate investment accounts
for the Preferred B and common stock investments.
During
the year ended December 31, 2005, the Company purchased 1,500 shares of its
common stock for $2,362 and the shares were cancelled. In December 2005, the
Company purchased on the Over–The-Counter-Bulletin-Board (“OTCBB”) 16,156 shares
of its common stock for $24,643 and included in Treasury stock at December
31,
2005. The Company has not repurchased any additional shares of its common stock
since December 2005.
The
Company has no outstanding stock options, warrants or rights as of December
31,
2005 or 2006.
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.
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
5. STOCKHOLDERS’
EQUITY (Continued)
In
1996,
the Company created a class of Preferred B stock to which the perpetual mineral
interests and other oil and gas assets were pledged. Thus, the
Preferred B stock represents the current oil and gas assets of the Company,
along with all Preferred B checking and savings accounts and receivables owed
to
these accounts. The common stock represents the 2004 Yorktown
Re-entry Program and all of the oil and natural gas assets in Dewitt County,
Texas, along with all common stock checking and savings accounts and receivables
owed to these accounts. Each common shareholder received an
equal number of Preferred B shares, one for one, at the time of this
restructuring of the capital of the Company. The Class B Preferred
stock has no par value and limited voting privileges. The Class B Preferred
stockholders are entitled exclusively to all dividends, distributions, and
other
income, which are based directly or indirectly on the Preferred B oil and
natural gas assets. 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.
6. INCOME
TAXES
The
provisions for income taxes from operations consist of the
following:
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
Current tax
expense
|
|
$ |
8,877
|
|
|
$ |
82,478
|
|
|
$ |
110,000
|
|
Deferred
income tax expense
|
|
|
-
-
|
|
|
|
-
-
|
|
|
|
-
-
|
|
|
|
$ |
8,877
|
|
|
$ |
82,478
|
|
|
$ |
110,000
|
|
A
reconciliation of the Company’s effective income tax rate and the United States
statutory rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
United
States statutory rate
|
|
|
34.00 |
% |
|
|
34.00 |
% |
|
|
34.00 |
% |
State
income taxes, net of Federal income tax benefit
|
|
|
2.55
|
|
|
|
2.55
|
|
|
|
2.55
|
|
Reduction
of valuation allowance (used NOL)
|
|
|
(2.55 |
) |
|
|
(0.45 |
) |
|
|
(0.45 |
) |
Percentage
depletion
|
|
|
(29.79 |
) |
|
|
(15.62 |
) |
|
|
(14.45 |
) |
Book
depletion & depreciation in excess of tax
|
|
|
1.67
|
|
|
|
1.67
|
|
|
|
1.12
|
|
|
|
|
5.88 |
% |
|
|
22.15 |
% |
|
|
22.77 |
% |
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
6. INCOME
TAXES (continued)
At
December 31, 2006, the Company had capital loss carry-forwards of approximately
$31,000. The loss was due to the sale of marketable securities and hedging
transactions during fiscal year December 2002. The capital loss has indefinite
life and can only used to reduce gains created by sale of capital
assets.
Deferred
taxes results primarily from state net operating loss carry forwards and capital
loss carry forwards and asset basis differences between book and income tax
depreciation and depletion methods. In addition, the Company uses percentage
depletion which does not create a basis difference between book and tax above
the book/tax cost depletion. The net operating loss carry forward is only for
two of the states the Company operates in and expires in 2006. The income tax
percentage depletion continues to exceed book depletion and is considered a
permanent difference.
At
December 31, 2004, 2005 and 2006, total deferred tax assets, liabilities and
valuation allowance are as follows:
Deferred
tax assets resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
Net
operating loss carry forwards
|
|
$ |
10,220
|
|
|
$ |
7,688
|
|
|
$ |
5,156
|
|
Capital
loss carry forward
|
|
|
10,540
|
|
|
|
10,540
|
|
|
|
10,540
|
|
Depreciation
& depletion differences
|
|
|
(2,532 |
) |
|
|
(2,532 |
) |
|
|
(5,425 |
) |
Total
deferred tax asset
|
|
|
18,228
|
|
|
|
15,696
|
|
|
|
10,271
|
|
Less
valuation allowance
|
|
|
(18,228 |
) |
|
|
(15,696 |
) |
|
|
(10,271 |
) |
|
|
$ |
--
|
|
|
$ |
--
|
|
|
$ |
--
|
|
A
100%
valuation has been established against the deferred tax assets, as utilization
of the net operating and capital loss carry forwards cannot be reasonably
assured.
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
568,401 shares in 2004, 568,027 shares in 2005, and 551,244 shares in
2006.
CROFF
ENTERPRISES, INC.
NOTES
TO
FINANCIAL STATEMENTS
For
the
years ended December 31, 2004, 2005 and 2006
8. MAJOR
CUSTOMERS
Customers
which accounted for over
10% of oil and natural gas revenues were as follows for the years ended December
31, 2003, 2004 and 2005:
2004
2005
2006
Jenex
Petroleum Corp., a related
party 18.1% 25.8%
14.2%
Merit
Energy 14.4% 20.1% 18.1%
Sunoco,
Inc. 11.9% 12.4% 14.7%
Management
believes that the loss of any individual purchaser would not have a long-term
material adverse impact on the financial position or results of operations
of
the Company.
NOTE:
The
following footnote is now moot since the Exchange Agreement referred to herein,
was terminated on June 1, 2007.
The
Company executed a definitive Stock Equivalent Exchange Agreement (the “Exchange
Agreement”) on December 12, 2006. The Exchange Agreement is between Taiyuan
Rongan Business Trading Company Limited, (TRBT), a private Chinese company.
The
Exchange Agreement provides that Croff will issue over eleven million shares
(92.5%) of its common stock to the shareholders of TRBT in exchange for 80%
of
TRBT. Upon closing of the transaction Croff will own approximately sixty-one
percent (61%) of the assets controlled by TRBT. The existing shareholders of
record of Croff will hold approximately seven and half percent (7.5%) of the
issued and outstanding common stock.
As
part
of the Exchange Agreement the Preferred B shareholders will exchange their
shares and cash for all of the oil and gas properties and related cash of Croff.
The properties will be transferred into a newly formed entity that is controlled
by the CEO of Croff for approximately (67.2%) or three hundred sixty three
thousand five hundred thirty five shares of the Preferred B and is part of
the
Exchange Agreement. In addition, theses shareholders of the new entity will
contribute cash of approximately six hundred thousand dollars ($600,000) to
purchase the balance of the properties that represents the Preferred B
shareholders who did not participate in the Preferred B tender offer. These
Preferred B shareholders will receive 2 for 1 common shares for their Preferred
B stock. Lastly, the Exchange Agreement provides for a payment of a $0.20 per
share dividend to all common shareholders of record prior to the closing. Croff
will have $530,000 in cash remaining to provide for the dividend and other
closing related expenses, including dissenting shareholder rights
cases.
CROFF
ENTERPRISES, INC.
SUPPLEMENTAL
INFORMATION - DISCLOSURES
ABOUT
OIL
AND GAS PRODUCING ACTIVITIES – UNAUDITED
In
November, 1982, the Financial Accounting Standards Board issued and the SEC
adopted Statement of Financial Accounting Standards No. 69 (SFAS 69)
"Disclosures about Oil and Gas Producing Activities". SFAS 69 requires that
certain disclosures be made as supplementary information by oil and gas
producers whose financial statements are filed with the SEC. The
Company bases these disclosures upon estimates of proved reserves and related
valuations. Independent petroleum engineering firms compiled oil and
gas reserve and future revenues as of December 31, 2004, 2005 and 2006 for
the
Company’s most significant wells, and consolidated estimates for the balance of
the wells.
The
standardized measure of discounted future net cash flows relating to proved
reserves as computed under SFAS 69 guidelines may not necessarily represent
the
fair value of the Company’s oil and gas properties in the market place. Other
factors, such as changing prices and costs and the likelihood of future
recoveries differing from current estimates, may have significant effects upon
the amount of recoverable reserves and their present value.
The
standardized measure does not include any "probable" and "possible" reserves,
which may exist and may become available through additional drilling
activity.
The
standardized measure of discounted future net cash flows is developed as
follows:
1.
|
Estimates
are made of quantities of proved reserves and the future periods
during
which they are expected to be produced based on year-end economic
conditions.
|
2.
|
The
estimated future production of proved reserves is priced on the basis
of
year-end prices except that future prices of gas are increased for
fixed
and determinable escalation provisions in contracts (if
any).
|
3.
|
The
resulting future gross revenue streams are reduced by estimated future
costs to develop and produce the proved reserves, based on year-end
cost
and timing estimates.
|
4.
|
A
provision is made for income taxes based upon year-end statutory
rates.
Consideration is made for the tax basis of the property and permanent
differences and tax credits relating to proved reserves. The tax
computation is based upon future net cash inflow of oil and gas production
and does not contemplate a tax effect for interest income and expense
or
general and administrative costs.
|
5.
|
The
resulting future net revenue streams are reduced to present value
amounts
by applying a 10% discount factor.
|
CROFF
ENTERPRISES, INC.
SUPPLEMENTAL
INFORMATION - DISCLOSURES
ABOUT
OIL
AND GAS PRODUCING ACTIVITIES – UNAUDITED
Changes
in the standardized measure of
discounted future net cash flows are calculated as follows:
1.
|
Acquisition
of proved reserves is based upon the standardized measure at the
acquisition date before giving effect to related income
taxes.
|
2.
|
Sales
and transfers of oil and gas produced, net of production costs, are
based
upon actual sales of products, less associated lifting costs during
the
period.
|
3.
|
Net
changes in price and production costs are based upon changes in prices
at
the beginning and end of the period and beginning
quantities.
|
4.
|
Extensions
and discoveries are calculated based upon the standardized measure
before
giving effect to income taxes.
|
5.
|
Purchase
of reserves are calculations based on increases from the Company's
acquisition activities.
|
6.
|
Revisions
of previous quantity estimates are based upon quantity changes and
end of
period prices.
|
7.
|
The
accretion of discount represents the anticipated amortization of
the
beginning of the period discounted future net cash
flows.
|
8.
|
Net
change in income taxes primarily represents the tax effect related
to all
other changes described above and tax rate changes during the
period.
|
All
of
the Company's oil and gas producing activities are in the United
States.
OIL
AND
GAS PRICES
During
the year ended December 31,
2006, crude oil and natural gas prices remained highly volatile. The average
sale price of oil per barrel in 2006 for the Company was $51.95, compared to
$55.93 in 2005. The average sale price of natural gas per Mcf in 2006 for the
Company was $6.36 per Mcf, compared to $7.93 per Mcf in 2005. 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.
EXPLANATION
OF REVISIONS TO PROVEN OIL AND GAS RESERVES IN 2006
Crude
oil
reserves increased in Michigan and Montana due to the revision of previous
estimates as the decline curve on these oil wells decreased. In North Dakota,
rework on a well increased the recoverable reserves. Oil reserves decreased
in
Texas due to the sale of minerals in place. In Utah, oil reserves increased
due
to extensions and discoveries on Uintah County fields. Wyoming oil reserves
increased due to revision of previous estimates resulting from the engineer’s
increasing the life of a lease in Campbell County, Wyoming. Natural gas reserves
increased in Colorado and New Mexico due to extensions of existing fields on
the
Company’s leases in the Four Corners coal bed methane production area. In
Michigan, improved recovery on one lease and revisions of previous quantity
estimates in Otsego County, increased natural gas reserves. Extensions and
discoveries in Uintah County, Utah increased natural gas reserves in that
area.
CROFF
ENTERPRISES, INC.
SUPPLEMENTAL
INFORMATION - DISCLOSURES
ABOUT
OIL
AND GAS PRODUCING ACTIVITIES – UNAUDITED
RESULTS
OF OPERATIONS FOR PRODUCING ACTIVITIES
The
results of operations for oil and gas producing activities, excluding capital
expenditures, impairment charges, corporate overhead and interest expense,
are
as follows for the years ended December 31, 2004, 2005 and 2006:
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
Revenues
|
|
|
|
|
|
|
|
|
Oil and natural gas sales
|
|
$ |
615,731
|
|
|
$ |
934,525
|
|
|
$ |
842,400
|
Loss on natural gas “put” contracts
|
|
|
(7,599 |
) |
|
|
--
|
|
|
|
--
|
Other revenue (lease payments)
|
|
|
6,196
|
|
|
|
7,330
|
|
|
|
660
|
|
|
|
614,328
|
|
|
|
941,855
|
|
|
|
843,060
|
|
|
Lease
operating costs
|
|
|
148,844
|
|
|
|
257,813
|
|
|
|
150,011
|
Production
taxes
|
|
|
43,343
|
|
|
|
66,954
|
|
|
|
55,360
|
Impairment
charges
|
|
|
--
|
|
|
|
52,638
|
|
|
|
--
|
Depletion,
depreciation and accretion
|
|
|
42,000
|
|
|
|
55,187
|
|
|
|
54,368
|
Income
tax expense
|
|
|
8,877
|
|
|
|
82,478
|
|
|
|
110,000
|
|
|
|
|
243,064
|
|
|
|
515,070
|
|
|
|
369,739
|
|
Results
of operations from producing
|
|
|
|
|
|
|
|
|
|
|
|
activities
(excluding capital
|
|
|
|
|
|
|
|
|
|
|
|
expenditures,
corporate overhead,
|
|
|
|
|
|
|
|
|
|
|
|
and
interest expense)
|
|
$ |
371,264
|
|
|
$ |
426,785
|
|
|
$ |
473,321
|
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,
|
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
Future
cash inflows
|
|
$ |
4,829,000
|
|
|
$ |
7,618,000
|
|
|
$ |
7,343,000
|
|
Future
production and development costs
|
|
|
(2,259,000 |
) |
|
|
(2,790,000 |
) |
|
|
(2,679,000 |
) |
|
|
|
2,570,000
|
|
|
|
4,828,000
|
|
|
|
4,664,000
|
|
Future
income tax expense
|
|
|
(450,000 |
) |
|
|
(966,000 |
) |
|
|
(933,000 |
) |
Future
undiscounted net cash flows
|
|
|
2,120,000
|
|
|
|
3,862,000
|
|
|
|
3,731,000
|
|
10%
annual discount for
|
|
|
|
|
|
|
|
|
|
|
|
|
estimated timing of cash flows
|
|
|
(477,000 |
) |
|
|
(1,023,000 |
) |
|
|
(1,146,000 |
) |
Standardized
measure of
|
|
|
|
|
|
|
|
|
|
|
|
|
discounted future net
|
|
|
|
|
|
|
|
|
|
|
|
|
cash flows
|
|
$ |
1,643,000
|
|
|
$ |
2,839,000
|
|
|
$ |
2,585,000
|
|
|
The
following are the principal sources of
|
|
|
|
|
|
|
|
|
|
|
|
|
change in the standardized measure of
|
|
|
|
|
|
|
|
|
|
|
|
|
discounted future net cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
balance
|
|
$ |
1,257,000
|
|
|
$ |
1,643,000
|
|
|
$ |
2,839,000
|
|
|
Evaluation
of proved undeveloped
|
|
|
|
|
|
|
|
|
|
|
|
|
reserves, net of future production
|
|
|
|
|
|
|
|
|
|
|
|
|
and development costs
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Purchase
of proved reserves
|
|
|
7,000
|
|
|
|
43,000
|
|
|
|
58,000
|
|
Sales
and transfer of oil and gas
|
|
|
|
|
|
|
|
|
|
|
|
|
produced, net of production costs
|
|
|
(405,000 |
) |
|
|
(607,000 |
) |
|
|
(638,000 |
) |
Net
increase (decrease) in prices and costs
|
|
|
1,022,000
|
|
|
|
2,207,000
|
|
|
|
(124,000 |
) |
Extensions
and discoveries
|
|
|
-
|
|
|
|
60,000
|
|
|
|
223,000
|
|
Revisions
of previous quantity estimates
|
|
|
(106,000 |
) |
|
|
522,500
|
|
|
|
381,000
|
|
Accretion
of discount
|
|
|
(55,000 |
) |
|
|
(649,500 |
) |
|
|
(158,000 |
) |
Net
change in income taxes
|
|
|
(77,000 |
) |
|
|
(380,000 |
) |
|
|
4,000
|
|
Other
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
Ending
balance
|
|
$ |
1,643,000
|
|
|
$ |
2,839,000
|
|
|
$ |
2,585,000
|
|
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
Reserves
|
|
|
Gas
Reserves
|
|
|
|
(bbls)
|
|
|
(mcf)
|
|
|
Balance
at December 31, 2003
|
|
|
84,110
|
|
|
|
531,377
|
|
|
Revisions of previous estimates
|
|
|
4,119
|
|
|
|
(66,837
|
|
Extensions, discoveries and other additions
|
|
|
250
|
|
|
|
2,500
|
|
Production
|
|
|
(8,011 |
) |
|
|
(59,959
|
|
|
Balance
at December 31, 2004
|
|
|
80,468
|
|
|
|
407,084
|
|
|
Revisions of previous estimates
|
|
|
5,434
|
|
|
|
32,837
|
|
Extensions, discoveries and other additions
|
|
|
(576 |
) |
|
|
5,293
|
|
Production
|
|
|
(7,630 |
) |
|
|
(59,403
|
|
Balance
at December 31, 2005
|
|
|
77,696
|
|
|
|
385,811
|
|
|
Revisions of previous estimates
|
|
|
11,198
|
|
|
|
79,054
|
|
Extensions, discoveries and other additions
|
|
|
6,110
|
|
|
|
38,277
|
|
Production
|
|
|
(7,888 |
) |
|
|
(59,915
|
|
|
Balance
at December 31, 2006
|
|
|
87,116
|
|
|
|
443,227
|
|
|
Proved
developed reserves
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
72,262
|
|
|
|
352,974
|
|
December 31, 2005
|
|
|
77,696
|
|
|
|
385,811
|
|
December 31, 2006
|
|
|
87,116
|
|
|
|
443,227
|
|
Costs
incurred in oil and gas producing activities for the years ended December
31,
2004, 2005, and 2006 are as follows:
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
Property
acquisition
|
|
|
|
|
|
|
|
|
|
Proven
|
|
$ |
122,222
|
|
|
$ |
30,000
|
|
|
$ |
--
|
|
Unproven
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Exploration
costs capitalized
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Development
costs capitalized
|
|
$ |
188,832
|
|
|
$ |
62,228
|
|
|
$ |
57,825
|
|
Impairment
of property
|
|
|
--
|
|
|
|
52,638
|
|
|
|
--
|
|
Production
costs
|
|
|
192,187
|
|
|
|
272,129
|
|
|
|
205,371
|
|
Depletion,
depreciation, and accretion
|
|
|
42,000
|
|
|
|
55,187
|
|
|
|
54,368
|
|