Back to GetFilings.com
FORM 10K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
MARK ONE
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
_____ TRANSITION REPORT pursuant to section 13 or 15(d)
of the securities exchange act of 1934 [No fee
required]
FOR THE TRANSITION PERIOD FROM N/A TO N/A
COMMISSION FILE NUMBER: 1-100
CROFF OIL COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
UTAH 87-0233535
STATE OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION
NUMBER)
1433 SEVENTEENTH STREET
SUITE 220
DENVER, COLORADO 80202
ADDRESS OF PRINCIPAL ZIP CODE
EXECUTIVE OFFICES
Registrant's telephone number, including area code: (303) 297-3383
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common - $0.10 Par Value
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registration (1) has filed all reports
required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such
shorter period that the Registrant was required to file such reports), and (2)
has been subject to such
filing requirements for the past 90 days. YES X NO _____
As of March 1, 1996, the aggregate value of the 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:
$305,800
As of March 1, 1996, the Registrant had outstanding 516,515 shares of common
stock ($.10 par value)
An index of the documents incorporated herein by reference and/or annexed as
exhibits to the signed
originals of this report appears on page 2.
TABLE OF CONTENTS
PART I
Page
ITEM 1 BUSINESS................................ 3
ITEM 2 PROPERTIES.............................. 8
ITEM 3 LEGAL PROCEEDINGS....................... 12
ITEM 4 SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS.................... 12
PART II
ITEM 5 MARKET FOR REGISTRANT'S
COMMON EQUITY ......................... 13
ITEM 6 SELECTED FINANCIAL DATA................. 14
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.................. 14
ITEM 8 FINANCIAL STATEMENTS AND SUPPLE-
MENTAL DATA............................ EX I.
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.............. 15
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS
OF THE REGISTRANT...................... 16
ITEM 11 EXECUTIVE COMPENSATION.................. 17
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................. 18
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS........................... 19
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENTS AND
SCHEDULES AND REPORTS
ON FORM 8-K............................ 20
SIGNATURES.............................. 21
PART I
ITEM 1. BUSINESS
(a) Description of Business
Croff Oil Company ("Croff" or "the Company"), was
incorporated in Utah in 1907 as Croff Mining Company. The
principal office of the Company is located at 1433 Seventeenth
Street, Suite 220, Denver, Colorado 80202. The telephone
number is (303) 297-3383.
Croff is engaged in the business of oil and gas
exploration and production, primarily through ownership of
perpetual mineral interests and acquisition of oil and gas
leases. The Company's principal activity is oil and gas
production from non-operated properties. The Company also
acquires, owns, and sells, producing and non-producing leases
and perpetual mineral interests. Over the past fifteen years,
Croff's primary source of revenue has been oil and gas
royalties from producing mineral interests. Croff
participates as a working interest owner in approximately 35
wells. Croff holds small royalty interests in over 200 wells.
In 1993 Croff acquired a carved out production interest of
from 200-360 barrels of oil per month from a stripper field of
approximately 110 wells in South Texas. All of the wells from
which Croff receives revenues are operated by other companies
and Croff has no control over the factors which determine
royalty revenues such as markets, prices and rates of
production.
During the period 1981 through 1985, the Company
increased its participation in exploratory and development
drilling ventures. In certain instances, Croff acquired
leases for the purpose of initiating a drilling venture. In
other instances, Croff chose to participate in drilling by
paying its share of the drilling costs, or by farming out to
others for a carried interest in the well. Over the past ten
years, Croff's primary source of revenues has evolved from
lease bonuses to oil and natural gas production.
After the drop in oil prices during 1986, the Company did
not participate in exploration drilling through 1990. The
Company in 1990, after paying off the last of its' long-term
debt, again began to acquire producing oil and gas leases, and
took a minor interest in a new well in 1991 and 1992. In 1992
the Company purchased working interests in eleven wells,
royalty interests in three wells, and participated in a
workover of an existing working
interest well. In 1993 the Company purchased a stripper field
in South Texas, and sold it to a local operator, reserving a
carved out production interest, secured by a mortgage on the
field. In 1994, the Company continued to purchase producing
oil and natural gas wells. In 1995, Croff purchased a two
percent interest in a mortgage note secured by an equal
interest in an Indiana Coal Mine.
Previous to 1987, Croff owned investment securities in
certain natural resource companies. These companies had a
current market value and Croff sold these securities
periodically to generate
revenues. Since 1991 Croff has purchased interests in
publicly traded oil and gas companies out of cash reserves.
The Company
intends to earn a better yield than cash on these current
funds, which will be liquidated, as needed, to fund the
purchase of oil and gas wells or other natural resource
investments.
Croff has three part-time employees, consisting of the
President, and two Assistant Secretaries.
(b) Current Activities
In 1995, the Company determined it would seek to become
large enough to create an active market for its common stock,
( the only class of stock the Company has ever issued).
Croff's shares are not traded on any exchange, and no active
market exists for the stock.
Only a few transactions in trading the stock have occurred
within the last ten years. The Board developed a Plan to be
presented at the 1995 annual meeting of shareholders. The
plan would authorize the pledge of the current oil and gas
assets of the Company to a new class of preferred shares to be
issued to each existing shareholder on the basis of one
preferred share for each common share. The Company would then
seek to grow by issuing common shares to acquire assets or
business in order to grow the Company to a size to qualify for
a listing on the NASDAQ Stock Exchange. Because the Proxy
statement was delayed, for a number of reasons, the annual
meeting was actually held on February 28, 1996.
At the Annual meeting, shareholders voted to create a new
Class B preferred share. The oil and gas assets of the Company
would be pledged for the benefit of these Preferred B shares.
These Class B shares will be distributed, on a one for one
basis, to the existing shareholders. The shareholders then
authorized a new Class A preferred share to be issued to
provide management of the Company with both preferred and
common shares to be utilized in investing in new businesses.
The shareholders also authorized the name of the Company to be
changed to Croff Enterprises, Inc. The management, using the
existing common shares and the newly authorized Class A shares
now intend to use these shares and available cash to acquire
assets or businesses in order to enable the Company, over
time, to reach a size that its stock can be traded on the
NASDAQ stock Exchange.
Management presented no specific proposals for new
acquisitions or businesses, to the shareholders, nor had any
been discussed by the Board of Directors at or before the
Annual meeting. The Board is currently considering a number
of ideas for the growth of the Company in the future. It is
expected that there will be very significant dilution to the
existing shareholders in the common stock of Croff
Enterprises, Inc. The assets of the Company, not being
pledged to the Preferred B shares, are its status as a public
company, its liquid assets, and its tax loss carryforward.
With the distribution of the Class B preferred shares, which
carry with it the benefit of the current oil and gas assets,
the Board determined to set out to expand the Company by
acquiring assets with more potential for growth.
The Company in March of 1995, purchased a 2% interest in
a $6 million note secured by a mortgage on a coal mine in
Indiana. This investment of $100,000 was made using $50,000
in cash on hand and borrowing $50,000 from the Company's bank,
Union Bank and Trust of Denver, Colorado. The note was repaid
on March 1, 1996. The Company's investment is as a
stockholder in Carbon Opportunities, L.L.C., a limited
liability company formed in Indiana by a group of investors
and the owners of the mine, who are in control of this
venture.
Carbon Opportunities, L.L.C. purchased a non-performing
$6 million note, secured by the Buck Creek Coal Mine, from the
Old Nation Bank in Evansville, Indiana, for the discounted
price of $3,500,000. Carbon Opportunities, L.L.C. was funded
with $5 million, of which $3,500,000 purchased the note and
$1,500,000 provided working capital. Carbon Opportunities,
L.L.C. is secured by the mine and equipment, and has an option
to acquire control of the mine following payoff of the note.
The current mine owners have a right to retain 20% of the
equity in the mine after the note is paid off.
The mine operated during 1995 and interest payments were
made on the $6 million note. In December of 1995, the major
purchaser of the coal from the mine, a utility, cancelled the
contract. Management of the mine determined to shut down the
mine at that time, because a new contract was not likely, and
losses at the mine would be significant without a market for
the coal. Currently, no payments are being made on the note
and the equipment at the mine is being liquidated. Buck Creek
Mine has now filed for protection under Chapter 11 of the
United States Bankruptcy Code. Carbon Opportunities, L.L.C.,
as the major creditor of the Mine, expects to receive the mine
and its equipment in the Plan of Reorganization in Bankruptcy,
which is expected to be a plan of liquidation. Croff Oil
Company has elected to treat the payments received so far as
repayment on its investment and not as income. Croff expects
to receive payments on its investment from the cash in Carbon
Opportunities, L.L.C., the litigation against the utility, and
the sale of equipment at the mine. At this time, management
of the L.L.C. and the mine expect that investors in Carbon
Opportunities, L.L.C. will receive at least 100% of their
investment returned. Management of the Company will continue
to monitor this investment and seek to obtain a liquidation of
this investment as soon as possible.
In 1995, the Company also purchased a small interest in
the Ash Unit, a pooled oil field in Campbell County, Wyoming.
The Company also participated in a small interest in a gas
well in Wyoming and as a royalty owner in continued
development in the Bluebell-Altamont Field.
In 1994, the Company purchased small non-operating
working interest in three oil wells and one gas well. It also
purchased a royalty interest in a gas well in Texas. This was
a continuation of the Company's policy of continuing to
purchase non-operated interest in long-lived wells. In 1994,
the Company received an increase in production from coal seam
gas wells in La Plata County, Colorado, and San Juan County,
New Mexico.
In 1993, the Company purchased a small stripper field in
Medina County, Texas. The Company paid $135,000 in aggregate
for this field during 1993 and 1994. The Company entered into
an agreement with a local operator in Medina County to
purchase the production company and the leases, subject to a
carved-out production payment to Croff Oil Company. The
carved-out production payment is secured by a mortgage on the
leases and the equipment. The local operator does not have
significant financial resources, so the continued payment of
the "carved out production payment" is dependent on the
ability of this operator to stay in business, which is
dependent on the price of oil.
Production Resources has continued to operate and rework
many of the wells in this field. The Taylor Ina field has
produced at a level enabling the operator to maintain the 200
barrel per month carved-out production during most of this
time, but not the higher production payments the Company had
anticipated might develop. Currently the production payments
have totaled over $70,000 on the Company's $135,000
investment.
(c) Major Customers
Customers which accounted for over 10% of revenues were
as follows for the years ended December 31, 1993, 1994 and
1995:
1993 1994 1995
Oil and gas:
ANR Production Company 23.9% 20.0% 25.3% *
Pennzoil Production Company 19.2% 12.5% 11.9%
Oasis Oil Company/E&A Oil ----- 16.3% 15.6%
* Includes Coastal Production Company
(d) Financial Information About Industry Segments
The Company's operations presently consist of oil and gas
production. During previous years the Company has generated
revenues through the purchase and resale of oil and gas
leasehold interests, however, no significant revenues were
generated from this source for the last five years. Further
information concerning the results of the Company's operations
in this one industry segment can be found in the Financial
Statements.
(e) Environmental and Employee Matters
The Company's interest in oil and gas operations are
indirectly subject to various laws and governmental
regulations concerning environmental matters, as well as
employee safety and health within the United States. The
Company does not believe that it has any direct responsibility
for or control over these matters as it does not act as
operator of any oil or gas wells.
The Company is advised that oil and gas operations are
subject to particular and extensive environmental concerns,
hazards, and regulations. Among these regulations would be
included the Toxic Substance Control Act; Resource
Conservation and Recovery Act; The Clean Air Act; The Clean
Water Act; The Safe Drinking Water Act; and The Comprehensive
Environmental Response, Compensation and Liability Act (also
known as Superfund). Oil and gas operations are also subject
to Occupational Safety and Health Administration (OSHA)
regulations concerning employee safety and health matters.
The United States Environmental Protection Agency (EPA), OSHA,
and other federal agencies have the authority to promulgate
regulations that have an impact on all oil and gas operations.
In addition, various state and local authorities and
agencies also impose and regulate environmental and employee
concerns per-taining to oil and gas production, such as The
Texas Railroad Commission. Often, though not exclusively,
compliance with state environmental and employee regulations
constitutes an exemption or compliance with federal mandates
and regulations.
As indicated above, the Company does not have any direct
control over or responsibility for insuring compliance with
such environmental or employee regulations as they primarily
pertain to the operator of oil and gas wells and leases. In
no instances does the Company act as the operator. The effect
of a violation by an Operator of a well in which the Company
had a working interest would be that the Company may incur its
pro-rata share of the cost of the violation.
In all events, the Company is not aware of any instance
in which it was found to be in violation of any environmental
or employee regulations or laws, and the Company is not
subject to any present litigation or claims concerning such
matters. It should be noted, however, that in some instances
the Company could in the future incur liability even as a non-
operator for potential environmental waste or damages or
employee claims occurring on oil and gas properties or leases
in which the Company has an ownership interest.
ITEM 2. PROPERTIES
(a) Oil and Gas Mineral Interests and Royalties
The Company owns perpetual mineral interests which total
approximately 4,600 net mineral acres, of which approximately
1,100 net acres are producing. These mineral interests are
located in 110,000 gross acres in Duchesne, Uintah, Wasatch
and Carbon Counties in Utah, and approximately 40 net mineral
acres in La Plata County, Colorado, and San Juan County, New
Mexico.
In 1993, the Company purchased a carved out production
payment in Medina County, Texas. This carved out production
payment is for a fixed number of barrels, from 200 to 360
barrels per month, for which no operating expenses are charged
other than taxes. For this reason, the carved out production
payment is similar to an overriding royalty interest rather
than a working interest. This carved out production payment
is received from approximately 110 wells in Medina County,
Texas .
As of December 31, 1995, the Company was receiving
royalties from approximately 200 producing wells in the
Bluebell-Altamont field in Duchesne and Uintah Counties,
Utah. Royalties were also received from scattered interests
in Wyoming, Colorado, New Mexico, and Texas. Oil and gas
revenues to the Company, primarily from royalties, were
approximately $196,000 in 1995, $197,000 during 1994, and
$201,000 during 1993. Royalty income is contingent upon
market demand, prices, producing capacity, rate of production,
and taxes, none of which are in the control of the Company.
The most important factor to the Company's revenue and
profit, is the price of oil and natural gas. Oil prices have
fluctuated during the last year with posted prices for sweet
oil in Utah ranging from almost $19 in January to a low of
around $16 during the year, and back to $18 a barrel by the
end of the year. Oil prices overall in 1995, maintained the
recovery in the latter half of 1994 from the extremely low
prices in 1993. In early 1996 the prices have increased from
the prices of late 1995. The market in oil prices, having
declined since late 1990, appears to have turned around, and
average oil prices may be higher in 1996 than in 1995.
Natural gas prices were definitely higher, averaging up to $2
per MCF by the final quarter of 1995. After hitting a low in
the summer of 1995, the average price moved upward each month.
The cold winter of 1995-1996 has sustained these prices during
the first quarter of 1996. However, due to the low natural
gas prices in the Rocky Mountains, Croff Oil Company's average
price for natural gas was about the same in 1995 as in 1994.
(b) Oil and Gas Working Interests
In 1995, the Company purchased a working interest in the
Ash Unit in Campbell County, Wyoming. This is a pooled field
which has operating costs equal to about one half of the net
revenue. The Company invested primarily in a note secured by
a coal mine in 1995 and thus purchased less oil and natural
gas leases.
In 1994, the Company purchased small working interests
in a gas well in New Mexico; a gas well in Alabama; a gas well
in Oklahoma; and a waterflood in Wyoming in which the Company
already had a working interest. The Company spent an
aggregate of less than $25,000 on these purchases. The
remaining cash flow of the Company was spent on acquiring the
remaining one-third interest in the producing leases in Medina
County, Texas. While the Company does not participate in
expenses on this lease, it did loan Production Resources, Inc.
the sum of $5,500 in order to buy equipment to increase
production on this lease. The Company expects to recover this
amount over a period of approximately 18 months.
The Company anticipates improved income from higher
prices from its natural gas sales during the next year. The
Company plans on resuming its oil and gas well purchases in
1996. The Company sold its interest in one well in North
Dakota in 1995.
In 1993, the Company sold its working interest in the
five wells which it had purchased in 1992 in Frio County,
Texas. It determined these wells were not profitable and were
sold for salvage value. The Company did not participate in
any other drilling in 1993 and did not purchase any further
working interests.
In 1992, the Company purchased working interests in
eleven wells in North Dakota. The Company sold its interest
in three of these wells at a profit during the year. Of the
remaining wells, six are currently producing and one is
plugged and abandoned. All are operated by outside operators.
The Company also purchased a small working interest in a well
in Lea County, New Mexico.
In 1991, the Company participated (less than a 1%
interest) in the successful drilling of a natural gas well in
Utah. In 1990, the Company participated in a rework of a Utah
well, and purchased small working interests in 7 wells in
North Dakota, Wyoming, and Louisiana. The Company owns an
interest in two gas wells in Beaver County, Oklahoma, and owns
an interest in two gas wells in Rio Blanco County, Colorado,
one gas well in Washington County, Colorado, and seven wells
in the Bluebell-Altamont field in Northeastern Utah.
Except for purchasing a small interest in the one well in
1991, and another in 1995, the Company has not engaged in
drilling activity. The Company has participated in the
reworking of two existing wells, one in Utah and one in North
Dakota. The Company participates in new wells drilled by
other operators as a royalty owner. A royalty owner generally
receives a smaller interest, but does not share in the expense
of drilling or operating the wells.
During 1993 the Company received a royalty interest in
four wells drilled in the Bluebell-Altamont field in Utah.
The Company is not involved in any current drilling activity,
but may participate in drilling ventures during the next
fiscal year.
ESTIMATED PROVED RESERVES,
FUTURE NET REVENUES AND PRESENT VALUES
The Company's interests in proved developed and
undeveloped oil and gas properties have been evaluated by
management for the fiscal years ending December 31, 1995, 1994
and 1993. All of the Company's reserves are located within
the continental United
States. The following table summarizes the Company's estimate
of proved oil and gas reserves at December 31, 1995, 1994 and
1993.
____________________________________________________________________________
Reserve Category
As of Proved Developed Proved Undeveloped Total
12/31 Oil (Bbls) Gas (Mcf) Oil (Bbls) Gas (Mcf) Oil (Bbls) Gas (Mcf)
1993 57,564 153,328 20,054 24,993 77,618 178,321
1994 56,772 167,394 17,047 21,246 73,819 188,640
1995 53,508 204,865 17,047 13,111 70,555 217,976
__________________________________________________________________________
The estimated future net revenues (using December 31, prices
and costs for each respective year, and the present value of future
net revenues (discounted at 10%) for the Company's proved developed
and proved undeveloped oil and gas reserves for the years ended
December 31, 1993, 1994, and 1995 are summarized as follows:
_______________________________________________________________________________
Proved Developed Proved Undeveloped Total
___________________________________________________________________________________________________________
Present Present Present
Future Value of Future Value of Future Value of
As of Net Future Net Net Future Net Net Future Net
12/31 Revenue Revenue Revenue Revenue Revenue Revenue
1993 $ 760,586 $ 487,219 $ 284,954 $ 182,977 $ 1,045,540 $ 670,196
1994 $ 843,349 $ 528,504 $ 254,226 $ 200,831 $ 1,097,465 $ 729,335
1995 $ 866,034 $ 539,782 $ 246,791 $ 196,504 $ 1,112,824 $ 736,287
___________________________________________________________________________________________________________
"Proved developed" oil and gas reserves are reserves that can
be expected to be recovered from existing wells with existing
equipment and operating methods. "Proved undeveloped" oil and gas
reserves are reserves that are expected to be recovered from new
wells on undrilled acreage, or from existing wells where a relative
major expenditure is required for recompletion.
For additional information concerning oil and gas reserves,
see the Supplemental Information - Disclosures About Oil and Gas
Producing Activities - Unaudited, included with the Financial
Statements filed as a part of this report.
Since December 31, 1994, the Company has not filed any
estimates of its oil and gas reserves with, nor were any such
estimates included in any reports to, any state or federal
authority or agency, other than the Securities and Exchange
Commission.
Oil and Gas Acreage
During the last five fiscal years, the Company decreased its
holdings in undeveloped oil and gas leases and generally retained
its holdings in developed oil and gas leases. The Company's
acreage position was relatively static during the fiscal years
ending December 31, 1993, 1994 and 1995.
"Developed Acreage" consists of lease acres spaced or
assignable to production on wells having been drilled or completed
to a point that would permit production of commercial quantities of
oil or gas. "Gross Acreage" is defined as total acres in which the
Company has any interest; "Net Acreage" is the actual number of
mineral acres in which the mineral interest is owned entirely by
the Company. All developed acreage is held by production.
The acreage is concentrated in Utah, Texas, Oklahoma and
Alabama widely dispersed in Colorado, Montana, New Mexico, North
Dakota, and Wyoming.
COMPANY'S INTEREST IN PRODUCTIVE WELLS
(Gross and Net)
The following table shows the Company's interest in productive
wells as of December 31, 1995.
Oil Wells (1) Gas Wells (2)
Gross Net Gross Net
359 36.9 10 .75
(1) Primarily located in the Bluebell-Altamont field in
Northeastern Utah, and Taylor-Ina field, Medina County, Texas.
(2) Primarily located in Rio Blanco and LaPlata Counties,
Colorado, Beaver County, Oklahoma, and San Juan County, New
Mexico.
HISTORICAL PRODUCTION TO COMPANY
The following table shows approximate net production to the
Company of crude oil and natural gas for the years ended December
31, 1993, 1994, and 1995:
_________________________________________________________________
Crude Oil Natural Gas
(Barrels) (Thousands of Cubic Feet)
MCF
Year Ended Dec. 31, 1993: 8,680 23,903
Year Ended Dec. 31, 1994: 8,823 30,884
Year Ended Dec. 31, 1995: 8,278 35,250
______________________________________________________________
There are no delivery commitments with respect to the above
production of oil and natural gas, except on wells in which the
Company has a royalty interest. The Company is unaware of the
circumstances of any delivery commitments on royalty wells.
AVERAGE SALES PRICE AND COSTS BY GEOGRAPHIC AREA
The following table shows the approximate average sales price
per barrel (oil) and Mcf (1000 cubic feet of natural gas), together
with production costs for units of production for the Company's
production revenues for 1993, 1994 and 1995.
___________________________________________________________________________
1993 1994 1995
Average sales price
per bbl of oil $ 17.05 $15.59 $15.62
Average production cost
per bbl $ 5.47 $ 4.62 $ 4.70
Average. sales price
per Mcf of natural gas $ 2.17 $ 1.68 $ 1.40
Average production cost
per Mcf of natural gas $ .50 $ .49 $ .47
_______________________________________________________________________
The average production cost for oil was stable in 1995 when
compared to 1994, $4.62 per barrel in 1994 and $ 4.70 per barrel in
1995. The average production cost is dependent on the percent of
working interest wells to total production. The Company's purchase
of a "carved out" production interest which is free of operating
expenses in 1994, nearly offset higher operating costs and workover
costs on existing wells in 1995, resulting in a slight increase in
overall production costs during the last year.
The average production cost for natural gas remained stable
the last three years, $0.50 in 1993, $0.49 in 1994, and $0.47 in
1995. This was caused by increased sales of natural gas against a
fixed operating cost, and higher gas production from royalty wells,
resulting in a lower price per MCF.
The Company's oil and gas operations are conducted by the
Company through its corporate headquarters in Denver, Colorado.
(c) Mining Interests
The Company has an indirect interest in coal leases in
Sullivan County, Indiana. These coal leases are security for a
promissory note in which the Company holds a 2% interest. The
leases were operated as the Buck Creek Coal Mine during 1995, but
were shut down at the end of 1995, due to cancellation of a
contract by the purchasing utility. The Company has not made any
reserve estimates of coal in place on such leases as the interest
is indirect and the Company does not anticipate that the mine will
be operated in the future. The Company expects the mine to be sold
and the equipment liquidated at the present time.
The Company currently has no mining operations on its mineral
interests. The Company owned patented mining claims in Tooele
County, Utah which had a cost basis of $6,855. Management wrote
off their value for financial reporting purposes in 1985. In early
1992, these claims were sold for $100.
(d) Corporate Offices and Employees
The corporate offices are located at 1433 Seventeenth Street,
Suite 220, Denver, Colorado 80202. The Company is not a party to
any lease but currently pays $1,400 a month to Jenex Operating
Company, which is partially owned by the Company's president, for
office space and all office services, including rent, phone, office
supplies, secretarial, land, and geology. The Company's office
expenses are approximately $17,000 per year. The Company's
agreement with Jenex committed it to continuing this office sharing
arrangement through 1992. Currently the Company is continuing this
arrangement on a month-to-month basis. The Company believes this
arrangement is below true market rate for equivalent facilities and
services.
The Company currently has five (5) directors. The Company has
three (3) part-time employees, a president and two assistant
secretaries employed at the Company's corporate offices. None of
the officers or employees are represented by a union.
(e) Foreign Operations and Subsidiaries
The Company has no foreign operations, exports, or
subsidiaries.
ITEM 3. LEGAL PROCEEDINGS
There are no legal actions of a material nature in which the
Company is engaged.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1995 annual meeting was held at the Croff Oil
Company office in Denver, CO on February 28, 1996. The Company
solicited proxies on the following matters, with the results of the
balloting being as follows:
RESULTS
Election of Directors Approval of Auditors
Gerald L. Jensen For: 283,284
For: 283,649 Against
Abstain: 1,200 Abstain: 800
Richard H. Mandel, Jr. Class A Preferred Shares
For: 278,649 For: 272,919
Abstain: 5,360 Against: 10,415
Dilworth A. Nebeker Abstain: 750
For: 255,248 Special Class B Shares
Abstain: 9,593 For: 282,709
Edwin Peiker Against: 625
For: 278,649 Abstain: 750
Abstain 5,360
Julian Jensen
For: 278,649
Abstain: 5,360
PART II
ITEM 5. MARKET FOR REGISTRANT'S SECURITIES AND RELATED
STOCKHOLDER MATTERS
In November 1991, the stock was reverse split 1 for 10 and the
current trading range of approximately $1.00 bid $1.10 asked, was
established. The pink sheets must be considered an arbitrary
broker listing rather than an actual trading range. No assurance
can be given that the stock will trade in such range, or at all.
In all events, there is almost no trading in the Company's
securities. The following tabulation represents the limited
reported transactions known to the Company or reported on the local
inter-dealer quotation system (pink sheets) during the last three
years. There is no precise information available to the Company
with respect to transactions in the pink sheets during the last
twelve months, since only a very limited market exists for trading
the shares.
_______________________________________________________________
BID RANGE (1), (2), (3)
Calendar Quarter Bid Asked
1993:
First Quarter $1.00 $1.10
Second Quarter $1.00 $1.10
Third Quarter $1.00 $1.10
Fourth Quarter $1.00 $1.10
1994:
First Quarter $1.10 $1.20
Second Quarter $1.00 $1.10
Third Quarter $1.00 $1.10
Fourth Quarter $1.00 $1.10
1995:
First Quarter $1.00 $1.10
Second Quarter $1.00 $1.10
Third Quarter $1.00 $1.10
Fourth Quarter $1.10 $1.20
_________________________________________________________________
(1) Only a few transactions resulting in the transfer of
stock took place in 1993, 1994 or 1995.
(2) In 1991, the Company tendered for its own 1:10 reverse
split shares at $1.00 per share net to the shareholder.
Approximately 29,000 shares were purchased by the
Company. All prices shown are following the
implementation of the reverse split.
(3) The Company repurchased approximately 10,000 of its
shares for its treasury in 1995 at $1.00 and $1.05 per
share from an estate and a bankruptcy trustee.
As of December 31, 1995, there were approximately 1,200
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.
ITEM 6. SELECTED FINANCIAL DATA
______________________________________________________________________________________________________________
Fiscal Year Ended December 31:
1991 1992 1993 1994 1995
______________________________________________________________________________________________________________
REVENUES
Operations
Oil and Gas $ 177,676 $ 183,171 $ 201,182 $196,780 $195,834
Other Revenues 13,742 6,993 7,606 6,139 9,596
Expenses 153,773 159,670 166,854 167,080 173,919
Net Income 37,645 23,350 42,579 34,183 31,511
Net Income Per Common Share (1) .07 .04 .08 .06 .06
Working capital
89,196 50,723 74,934 74,401 26,457
Long-term debt -- -- --
-- --
Total assets 332,752 356,486 402,414 430,327 505,018
Stockholders'
equity 319,050 342,199 384,673 418,856 440,527
Dividends per share NONE NONE NONE NONE
NONE
_________________________________________________________________
(1) Amounts restated for reverse split in 1991.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITIONS AND RESULTS OF OPERATIONS
(a) Results of Operations
Oil and gas sales for the fiscal year ended December 31, 1995,
were on par with 1994, $195,834 in 1995 versus $196,780 in 1994.
Carved out production payments was a larger percent of the total,
and natural gas production from coal seam gas increased, which,
because of its low price, brought the average gas price lower. Oil
revenue, from slightly lower total production was increased by the
higher prices. Lower prices for higher production of natural gas
was due to expiration, in 1994 and 1995, of fixed price contracts
where prices had been above market.
While oil prices from various fields vary, the price of oil,
rose during the first quarter of the year, fell in the second
quarter, was flat in the third quarter and then rose in the fourth
quarter of 1995. Overall the price increased by the end of the
year approximately a dollar over the beginning of the year. This
was the first year in the last three when oil production was
essentially flat as the Company benefitted from higher prices.
Natural gas prices were lower during the first half of 1995,
and then began to rise. During the last half of the year, natural
gas prices rose from around $1.20 MCF to about $1.70/MCF. Because
some of Croff's natural gas production had been locked in at higher
prices due to previous contracts, only a portion of Croff's natural
gas production benefitted because of this increase. The natural
gas production for Croff was higher with the increase in coal seam
gas which is a lower priced product. The oil revenues of Croff
comprise approximately seventy percent of its revenues and natural
gas is approximately thirty percent.
Operating costs increased from 1994 to 1995 from $51,983 in
1994 to $55,584 in 1995. This increase in lease operating expenses
was due to higher costs in some of the Utah fields where Coastal
completed workovers on wells acquired from Linmar Petroleum
Company. The overall strategy of the Company in using its cash
flow to purchase interests in oil and gas properties has resulted
in gradual increases in net oil and gas production. The Company
has sold or abandoned its interest in wells with high operational
costs.
General and administrative costs varied little in 1995 at
$66,698 from $65,815 in 1994. There was no shareholders meeting in
1994 and the shareholders meeting in 1995 involved a reorganization
of the Company. There were increased accounting and legal costs
incurred as part of the proposed reorganization. The Company's
other income in 1995 was the result of the sale of an oil well and
interest on cash and liquid assets.
(b) Capital Resources and Liquidity
The Company increased its current assets in 1995 to $90,948.
However, its current liabilities increased from $11,471 to $64,491
due investing in the promissory note secured by the coal mine in
Indiana. The Company accumulated cash in order to pay off this
note, which was paid off on March 1, 1996. Thus while the current
ratio of the Company at the end of December, 1995 was approximately
3:2, the current ratio in early 1996 is approximately 3:1. The
Company is currently seeking oil and gas assets which would set its
investment criteria and would be likely to borrow funds again in
order to purchase properties which would add to its cash flow.
Since the Company has no long term debt, it would intend to repay
any loans within less than two years. The Company continues to
enjoy a positive cash flow that it will utilize to invest. Because
of the recent reorganization of the Company, the Company intends to
use its cash flow for oil and gas purchases which will benefit the
new Class B preferred share stockholders, and to acquire assets
using its stock, primarily to benefit the common shareholders of
the Company. The Company would expect that future cash positions
and liquidity will be dependent upon its success in finding
acquisitions.
Because the Company's revenues are primarily from royalty
payments and the Company does not have significant operating
expenses, inflation is favorable to the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to financial statements, financial statement
schedules, and supplemental information, beginning with Page 26
(F-l) hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a)(b)(c) Identification of Directors, Officer and Signifi-
cant Employees.
The Croff Board consists of Gerald L. Jensen, Dilworth A.
Nebeker, Richard H. Mandel, Edwin W. Peiker, and Julian D.
Jensen. Each director will serve until the next annual
meeting of shareholders, or until his successor is duly
elected and qualified. The following is provided with respect
to each officer and director of the Company as of March 1,
1996.
GERALD L. JENSEN, 56, PRESIDENT AND DIRECTOR.
President of Croff Oil Company since October, 1985. Prior to
this date, Mr. Jensen was Chairman of Petro-Silver, Inc., a
public company, for over five years. Mr. Jensen was a director
of Pyro Energy Corp., a public company engaged primarily in
coal production, from 1978 until the Company was sold in
1989. Mr. Jensen is also an owner of private real estate,
development, and oil and gas companies.
RICHARD H. MANDEL, JR., 66, DIRECTOR.
Since 1982, Mr. Mandel has been President and a Board Member
of American Western Group, Inc., an oil and gas producing
company in Denver, Colorado. He is President and also a Board
Member of Richard H. Mandel, Ltd., an oil and gas
production company in Denver, Colorado. From 1977 to 1984, he
was President of Universal Drilling Co., Denver, Colorado.
Since May 1988, he has been a Board Member of Richmond
Exploration Company. Since July 1994, he has been a Board
Member of Wichita River Oil Company which is listed on the
American Stock Exchange.
DILWORTH A. NEBEKER, 55, DIRECTOR.
Mr. Nebeker served as President of Croff from September 2,
1983 to June 24, 1985, and has been a director of Croff since
December, 1981. He has been a lawyer in private practice for
the past nine years. Prior thereto, he was a lawyer employed
by Tosco Corporation, a public corporation, from 1973 to 1978.
He was a lawyer with the Securities and Exchange Commission
from 1967 to 1973.
EDWIN W. PEIKER, JR., 64, DIRECTOR AND SECRETARY.
Mr. Peiker was President of Royal Gold, Inc. from 1988 through
1991, and continues to be a director. Since 1986, Mr. Peiker
has been a Vice President and director of Royal Gold, Inc., a
public company engaged in gold exploration and mining
activities. Prior thereto he was involved in private
investments in oil and gas exploration and production.
Mr. Peiker was employed in responsible positions with AMAX,
Inc., a public corporation, from 1963 to 1983. AMAX is
primarily engaged in mine evaluation and resource analysis.
JULIAN D. JENSEN, 48, DIRECTOR
Mr. Jensen is the brother of the Company's president and has
served as legal counsel to the Company for the past seven
years. Mr. Jensen has practiced law, primarily in the areas
of corporate and securities law, in Salt Lake City, Utah,
since 1975. Mr. Jensen is currently associated with the firm
of Jensen, Duffin, Carman, Dibb & Jackson, which acts as legal
counsel for the Company.
The Company has no knowledge of any arrangements or
understandings between directors or any other person pursuant to
which any person was or is to be nominated or elected to the office
of director of the Company.
ITEM 11. EXECUTIVE COMPENSATION
(a) Remuneration
During the fiscal year ended December 31, 1995, there were no
officers, employees or directors whose total cash or other
remuneration exceeded $60,000.
____________________________________________________________________________________________________________
Summary Compensation Table
1995 Compensation of C.E.O. (1)
Salary Bonus Other Stock Options Total All
Compensations
$48,000 per 0 0 0 $48,000
annum
____________________________________________________________________________________________________________
(1) Gerald L. Jensen is employed part time as the President
and C.E.O. of Croff Oil Company.
Directors, excluding the President, are not paid a set salary
by the Company, but are paid $250 for each half-day board meeting
and $350 for each full-day board meeting.
(b) Proposed Remuneration
During the current fiscal year, the Company intends to
compensate outside directors at the rate of $250 for a half day
meeting and $350 for a full day meeting, a rate which was
instituted in October, 1985.
Based on the current remuneration, for the fiscal year ending
December 31, 1996, no officer or director shall receive total cash
remuneration in excess of $60,000.
(c) Options, Warrants or Rights
Directors were authorized and issued stock warrants in 1991,
that essentially provide each director a warrant to purchase 10,000
shares of the Company's stock at $1.00 per share through 1995. The
President's warrant is for 20,000 shares.
The warrants to purchase stock were extended for four more
years at the Board of Directors meeting on November 1, 1995. The
expiration date of the warrants is December 31, 1999.
The chart below sets out the terms and value of the above
warrants to all officers and directors.
_
__________________________________________________________________________________________________________
Current Officers and Directors Warrants (1)
Warrant to Termination Exercise Current
Value
Buy Date Price (Estimated) (2)
Each Director except
President 10,000 shares 12/31/99 $ 1.00 $ 1,100
President 20,000 shares 12/31/99 $ 1.00 $ 2,200
____________________________________________________________________________________________________________
(1) All warrants were granted in November, 1991. None have
been exercised.
(2) Current stock price $1.00 - $1.10. Warrant value
estimated at 10% of current stock price. There is no
market for warrants and extremely limited market for
stock.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
(a)(b) Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth the beneficial ownership of
Common Stock of the Company as of December 31, 1995, by (a) each
person who owned of record, or beneficially, more than five (5%)
percent of the Company's $0.10 par value common stock, its only
class of outstanding voting securities, and (b) each director and
nominee and all directors and officers as a group.
Shares Percentage of
Beneficially Class of
Owned Stock
_________________________________________________________________
Jensen Development Company(1) 132,130 25.58%
1433 Seventeenth Street, Suite 220
Denver, Colorado 80202
Gerald L. Jensen 71,215 (2) 13.22%
1433 Seventeenth Street, Suite 220
Denver, CO 80202
Edwin W. Peiker, Jr. 14,000 (2) 2.66%
550 Ord Drive
Boulder, CO 80401
Dilworth A. Nebeker 11,300 (2) 2.15%
201 East Figueroa Street
Santa Barbara, CA 93101
Richard H. Mandel, Jr. 10,100 (2) 1.92%
3333 E. Florida #94
Denver, Colorado 80210
Julian D. Jensen 46,532 (2)(3) 8.84%
South State Street, Suite 380
Salt Lake City, Utah 84111
Directors as a Group 285,277 49.48%
_________________________________________________________________
(1) Jensen Development Company is wholly owned by Gerald
L. Jensen.
(2) Includes a warrant to purchase 10,000 shares of the Company's
stock at $1.00 per share, expiring December 1999. Mr. Gerald
Jensen's warrant is for 20,000 shares. None of the warrants
have been exercised.
(3) Includes shares held in Jensen Family Trust (21,432) and
Jensen Revocable Trust (10,100) in which Julian D. Jensen is the
Trustee and approximate 33% beneficial owner. Mr. Gerald L. Jensen
holds an approximate 38% beneficial interest in these Trusts.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company currently is in an office sharing arrangement with
Jenex Corporation, hereafter "Jenex", a company in which the
President, Gerald L. Jensen, is a 50% shareholder. Jenex provides
offices, phone, office supplies, photocopier, fax, and all normal
and customary office services. In addition, the Company shares two
assistant secretaries who are paid by Jenex. Jenex also provides
assistance from a geologist. Croff currently reimburses Jenex
$1,400 per month for all of these expenses. These arrangements
were entered into in order to reduce the Company's overhead. The
Company is currently continuing this arrangement on a month-to-
month basis. In the opinion of management, the amounts paid by
Croff to Jenex for the lease, equipment use, and other services is
below the cost for such items if independently obtained.
The Company retains the legal services of Jensen, Duffin,
Carman, Dibb & Jackson. Julian Jensen, a director, as a
professional corporation, is part of this association. Legal fees
paid to this law firm for the years ending 1995, 1994 and 1993 are,
respectively, $2,221, $370, and $1,594.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a)(1) Financial Statements. See index to financial
statements, financial statement schedules, and supplemental
information as referenced in Part II, Item 8, and the financial
index on Page F-1 (p.26) hereof. These reports are attached as
Exhibits and are incorporated herein.
(b) Reports on Form 8-K
None.
(c) Exhibit Index
I. Report of Independent Certified Public Accountants
II. Proxy Statement for Meeting on February 28, 1996
III. Carbon Opportunities, L.L.C. Corporate Articles and By-
Laws
IV. Memo and Letter from Carbon Opportunities, L.L.C. dated
February 8, 1996 and December 26, 1995.
V. Letter to Production Resources, Inc., dated March 4,
1996.
Page Number
I. Financial Statements
Report of Independent Certified Public Accountants. . . . . .F-2
Balance Sheet - December 31, 1994 and 1995. . . . . . . . . .F-3
Income Statement - Years ended December 31, 1993,
1994 and 1995 . . . . . . . . . . . . . . . . . . . . . . .F-5
Statement of Stockholders' Equity - Years ended
December 31, 1993, 1994 and 1995. . . . . . . . . . . . . .F-6
Statement of Cash Flows - Years ended December 31,
1993, 1994 and 1995 . . . . . . . . . . . . . . . . . . . .F-7
Notes to Financial Statements . . . . . . . . . . . . . . . .F-8
II. Supplemental Information - Disclosures about Oil and
Gas Producing Activities - Unaudited. . . . . . . . . .. . F-13
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Croff Oil Company
We have audited the balance sheet of Croff Oil Company at December 31,
1994 and 1995, and the related statements of income, stockholders'
equity and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility
of management. Our responsibility is to express an opinion on them
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Croff Oil
Company as of December 31, 1994 and 1995, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the financial statements, the Company
changed its method of accounting for marketable equity securities in
1993.
Denver, Colorado
March 18, 1996 CAUSEY DEMGEN & MOORE INC.
ASSETS
1994 1995
Current assets:
Cash, including an interest bearing
account of $13,953 (1994) and
$28,051 (1995) $ 19,385 $ 37,933
Marketable equity securities 24,250 15,500
Accounts receivable:
Oil and gas purchasers 26,684 28,425
Refundable income taxes 10,053 4,290
Note receivable 5,500 4,800
Total current assets 85,872 90,948
Property and equipment, at cost:
Oil and gas properties, successful
efforts method:
Proved properties 457,198 457,874
Unproved properties 110,051 110,051
567,249 567,925
Less accumulated depletion and
depreciation (222,794) (249,154)
344,455 318,771
Furniture, fixtures and equipment 4,536 -
Less accumulated depreciation (4,536) -
- -
Net property and equipment 344,455 318,771
Coal investment (Note 2) - 95,299
$430,327 $505,018
LIABILITIES AND STOCKHOLDERS' EQUITY
1994 1995
Current liabilities:
Accounts payable $ 10,934 $ 10,829
Accrued liabilities 537 3,662
Note payable (Note 2) - 50,000
Total current liabilities 11,471 64,491
Commitments (Notes 2, 4 and 9)
Stockholders' equity (Notes 5 and 10):
Common stock, $.10 par value;
20,000,000 shares authorized,
579,143 shares issued 57,914 57,914
Capital in excess of par value 909,983 909,983
Accumulated deficit (476,235) (444,724)
491,662 523,173
Less treasury stock at cost,
52,788 shares (1994) and
62,628 shares (1995) (72,806) (82,646)
Total stockholders' equity 418,856 440,527
$430,327 $505,018
1993 1994 1995
Revenue:
Oil and gas sales (Note 8) $201,182 $196,780 $195,834
Gain (loss) on disposal of oil and
gas properties 645 (1,656) 5,289
Other income 7,606 6,139 4,307
Total revenue 209,433 201,263 205,430
Costs and expenses:
Lease operating expense 59,346 51,983 55,584
General and administrative
(Note 3) 69,633 65,815 66,698
Rent expense - related party
(Note 4) 16,800 16,800 16,800
Depreciation and depletion 21,075 32,482 30,245
Interest - - 4,592
Total costs and expenses 166,854 167,080 173,919
Net income (Note 6) $ 42,579 $ 34,183 $ 31,511
Net income per share (Note 7) $ .08 $ .06 $ .06
Capital in
Common Stock excess of Treasury Accumulated
Shares Amount par value stock deficit
Balance, December 31, 1992 579,143 $57,914 $909,983 $(72,701) $(552,997)
Purchase of 100 shares of
Treasury stock - - - (105)
Net income for the year ended
December 31, 1993 - - - -42,579
Balance, December 31, 1993 579,143 57,914 909,983 (72,806) (510,418)
Net income for the year ended
Balance, December 31, 1994 579,143 57,914 909,983 (72,806) (476,235)
Purchase of 9,840 shares of
treasury stock (Note 5) - - - (9,840) -
Net income for the year
ended December 31, 1995 - - - - 31,511
1993 1994 1995
Cash flows from operating activities:
Net income $ 42,579 $ 34,183 $ 31,511
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and depletion 21,075 32,482 30,245
Loss (gain) on disposal of
properties (645) 1,656 (5,289)
Loss (gain) on marketable equity
securities (4,080) 4,250 (60)
Bad debt expense 2,250 3,000 -
Change in assets and liabilities:
Decrease (increase) in accounts
receivable (4,869) 3,558 4,022
Increase (decrease) in accounts
payable 2,320 (5,046) (105)
Increase (decrease) in accrued
liabilities 1,134 (1,224) 3,125
Total adjustments 17,185 38,676 31,938
Net cash provided by operating activities 59,764 72,859 63,449
Cash flows from investing activities:
Note receivable - (5,500) 700
Proceeds from sale and leases of
property 51,307 1,500 11,285
Purchase of oil and gas interests (90,000) (70,354) (10,557)
Purchase of marketable equity securities (16,660) - -
Proceeds from sale of marketable
equity securities 8,910 - 8,810
Purchase of coal investment - - (100,000)
Distributions from coal investment - - 4,701
Net cash used in investing activities (46,443) (74,354) (85,061)
Cash flows from financing activities:
Purchase of treasury stock (105) - (9,840)
Proceeds from note payable - - 50,000
Net cash provided by (used in)
financing activities (105) - 40,160
Increase (decrease) in cash 13,216 (1,495) 18,548
Cash at beginning of year 7,664 20,880 19,385
Cash at end of year $ 20,880 $ 19,385 $ 37,933
Supplemental disclosure of cash information:
During the year ended December 31, 1995, the Company paid cash for
interest in the amount of $4,138.
See accompanying notes.
F-7
1. Summary of significant accounting policies
Croff Oil Company (the Company) is engaged in the business of oil
and gas exploration and development, primarily through ownership of
perpetual mineral interests and acquisition of oil and gas leases.
A summary of the Company's significant accounting policies is as
follows:
Use of estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Marketable equity securities:
In 1993, the Company changed its method of accounting for
marketable equity securities as a result of adopting Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This statement provides
for reporting certain equity securities at fair value, with
unrealized gains and losses included in earnings. The effect of
this change on the operating results for the year ended December
31, 1993 is to recognize unrealized gains of $3,251 in earnings.
The aggregate cost of marketable equity securities at December 31,
1994 and 1995 was $25,249 and $8,590, respectively.
Accounts receivable:
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If
amounts become uncollectible, they will be charged to operations
when that determination is made.
Oil and gas property and equipment:
The Company follows the "successful efforts" method of accounting
for its oil and gas properties. Under this method, all property
acquisition costs and costs of exploratory and development wells
are capitalized when incurred, pending determination of whether the
well has proven reserves. If an exploratory well does not result
in reserves, the capitalized costs of drilling the well, net of any
salvage, are charged to expense. The costs of development wells
are capitalized, whether the well is productive or nonproductive.
The Company annually evaluates the net present value of future cash
flows, by lease, and records a loss if necessary, when net book
value exceeds projected discounted cash flow. The acquisition
costs of unproved properties are assessed periodically to determine
whether their value has been impaired and, if impairment is
indicated, the costs are charged to expense.
Geological and geophysical costs and the costs of carrying and
retaining undeveloped properties (including delay rentals) are
expensed as incurred. Capitalized costs are amortized on a units-
of-production method based on estimates of proved developed
reserves.
Other property and equipment:
Depreciation is provided for on the straight-line method over
estimated lives ranging from three to seven years.
Income taxes:
The provision for income taxes is based on earnings reported in the
financial statements. Deferred income taxes are provided using a
liability approach based upon enacted tax laws and rates applicable
to the periods in which the taxes become payable.
Coal investment:
The investment is recorded at cost. Revenues and distributions are
recorded using the cost recovery method (see Notes 2 and 10).
Cash equivalents:
For purposes of the statement of cash flows, the Company considers
all highly liquid debt instruments purchased with a maturity of
three months or less to be cash equivalents.
Financial statement reclassifications:
Certain reclassifications have been made to the prior years'
financial statements to conform to the 1995 presentation.
2. Coal investment
In March 1995, the Company purchased a 2% interest in a limited
liability company (LLC) in exchange for $100,000, $50,000 of which
was borrowed by the Company pursuant to a one year 10.5% bank loan,
guaranteed by the Company' president. The LLC acquired a mortgage
note on a coal mine in Indiana, and the Company has an option to
acquire a 2% interest in the mine for a nominal payment.
In December 1995, the major purchaser of coal from the mine, a
utility, canceled the contract. The operations at the mine have
subsequently been shut down and assets are being liquidated. Based
upon an analysis of available assets, the Company believes that an
impairment of the recorded asset is not indicated.
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, 1993, 1994 and 1995 amounted
to $1,594, $370 and $2,222, respectively.
4. Operating lease commitments
The Company has a month-to-month agreement with an affiliated
company to provide for office services and sublease office space
for $1,400 per month.
5. Common stock
On November 1, 1991, the Company's shareholders approved the
issuance of warrants to purchase 60,000 shares of the Company's
common stock at $1.00 per share to members of the Company's Board
of Directors. During 1995, the warrants were extended and are
exercisable at any time through December 31, 1999. The warrants
must be exercised for not less than 5,000 shares at any time of
exercise. As of December 31, 1995, no warrants have been
exercised.
6. Income taxes
At December 31, 1995, the Company had net operating loss carry-
forwards of approximately $550,500, which, if not used, will expire
as follows:
Year of expiration Amount
1997 $ 10,500
1998 93,000
2000 447,000
$550,500
In addition, the Company has a depletion carryover of approximately
$512,000 which has no expiration date.
The Company did not record an income tax provision for the years
ended December 31, 1993, 1994 and 1995 due to the utilization of a
tax loss carryforward for each of the years. The recognized tax
benefit of the utilized carryforward was $7,600, $7,500 and $8,400
for each of the years ended December 31, 1993, 1994, and 1995,
respectively. The Company has a financial statement loss carryover
of approximately $433,000 remaining at December 31, 1995. The
difference in financial statement and tax return loss carryovers is
principally the difference in the timing of deducting intangible
drilling costs. Income tax credit carryovers for financial and tax
purposes approximate $2,700 from pre-1986 transactions.
As of December 31, 1994 and 1995, total deferred tax assets,
liabilities and valuation allowance are as follows:
1994 1995
Deferred tax assets resulting from loss
carryforwards $222,000 $205,000
Deferred tax liabilities (44,000) (44,000)
Valuation allowance (178,000) (161,000)
$ - $ -
7.Income per share
Income per share information is based on the weighted average
number of shares of common stock outstanding during each year,
approximately 526,000 shares in 1993 and 1994, and 521,000 shares
in 1995.
8. Major customers
Customers which accounted for over 10% of revenues were as follows
for the years ended December 31, 1993, 1994 and 1995:
1993 1994 1995
Oil and gas:
Customer A 23.9% 20.0% 25.3%
Customer B 19.2% 12.5% 11.9%
Customer C * 16.3% 15.6%
* - less than 10%
9. Contingent note payable
The Company executed a $50,000 note payable on October 1, 1993 to
an individual in conjunction with an agreement to purchase certain
oil and gas leases in Medina County, Texas. Pursuant to the
agreement, the note bore interest at 8% and was due on September
30, 1994. Payment of the note principal and interest was
contingent upon obtaining the one-third interest assignment of the
underlying oil and gas leases. During the year ended December 31,
1994, certain assignments were received and the Company paid
$45,000 in full settlement of its obligation under the note.
10.Subsequent events
On February 28, 1996, the shareholders of the Company approved the
creation of 5,000,000 authorized Class A Preferred shares and
520,000 authorized Special Class B Preferred shares. The
shareholders also approved the issuance of the Special Class B
Preferred shares to existing shareholders of the Company on the
basis of one share per each share of common stock currently held,
to operate and pledge the oil and gas assets of the Company for the
benefit of the Special Class B Preferred shares, and to change the
name of the Company to Croff Enterprises, Inc.
In November, 1982, the Financial Accounting Standards Board issued and
the SEC adopted Statement of Financial Accounting Standards No. 69
(SFAS 69) "Disclosures about Oil and Gas Producing Activities". SFAS
69 requires that certain disclosures be made as supplementary
information by oil and gas producers whose financial statements are
filed with the SEC. These disclosures are based upon estimates of
proved reserves and related valuations by the Company. No attempt is
made in this presentation to measure "income" from the changes in
reserves and costs.
The standardized measure of discounted future net cash flows relating
to proved reserves as computed under SFAS 69 guidelines may not
necessarily represent the fair value of Croff's oil and gas properties
in the market place. Other factors, such as changing prices and costs
and the likelihood of future recoveries differing from current
estimates, may have significant effects upon the amount of recoverable
reserves and their present value.
The standardized measure does not include any "probable" and
"possible" reserves which may exist and may become available through
additional drilling activity.
The standardized measure of discounted future net cash flows is
developed as follows:
1. Estimates are made of quantities of proved reserves and the
future periods during which they are expected to be produced
based on year-end economic conditions.
2. The estimated future production of proved reserves is priced on
the basis of year-end prices except that future prices of gas
are increased for fixed and determinable escalation provisions
in contracts (if any).
3. The resulting future gross revenue streams are reduced by
estimated future costs to develop and produce the proved
reserves, based on year-end cost and timing estimates.
4. A provision is made for income taxes based upon year-end
statutory rates. Consideration is made for the tax basis of the
property and permanent differences and tax credits relating to
proved reserves. The tax computation is based upon future net
cash inflow of oil and gas production and does not contemplate
a tax effect for interest income and expense or general and
administrative costs.
5. The resulting future net revenue streams are reduced to present
value amounts by applying a 10% discount factor.
(Continued)
Changes in the standardized measure of discounted future net cash
flows are calculated as follows:
1. Acquisition of proved reserves is based upon the standardized
measure at the acquisition date before giving effect to related
income taxes.
2. Sales and transfers of oil and gas produced, net of production
costs, are based upon actual sales of products, less associated
lifting costs during the period.
3. Net changes in price and production costs are based upon changes
in prices at the beginning and end of the period and beginning
quantities.
4. Extensions and discoveries are calculated based upon the
standardized measure before giving effect to income taxes.
5. Purchase of reserves are calculations based on increases from
the Company's acquisition activities.
6. Revisions of previous quantity estimates are based upon quantity
changes and end of period prices.
7. The accretion of discount represents the anticipated
amortization of the beginning of the period discounted future
net cash flows.
8. Net change in income taxes primarily represents the tax effect
related to all other changes described above and tax rate
changes during the period.
All of the Company's oil and gas producing activities are in the
United States.
Oil prices
During the year ended December 31, 1995, crude oil prices and natural
gas prices remained relatively flat. 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.
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES
The results of operations for oil and gas producing activities,
excluding capital expenditures, corporate overhead and interest costs,
are as follows for the years ended December 31, 1993, 1994 and 1995:
1993 1994 1995
Revenues $201,182 $196,780 $195,834
Lease operating costs 59,346 51,983 55,584
Depletion, depreciation, and
amortization 21,075 32,482 30,245
80,421 84,465 85,829
Income tax expense - - -
Results of operation from producing
activities (excluding corporate
overhead and
interest expense) $120,761 $112,315 $110,005
STANDARDIZED MEASURE OF DISCOUNTED FUTURE
NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
Year ended December 31, 1993 1994 1995
Future cash inflows $1,475,000 $1,465,000 $1,480,000
Future production and
developmentcosts (430,000) (368,000) (367,000)
1,045,000 1,097,000 1,113,000
Future income tax expense - - -
Future net cash flows 1,045,000 1,097,000 1,113,000
10% annual discount for estimated
timing of cash flows (375,000) (367,000) (377,000)
Standardized measure of dis-
counted future net cash
flows $ 670,000 $ 730,000 $ 736,000
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
Beginning balance $ 660,000 $ 670,000 $ 730,000
Evaluation of proved undeveloped
reserves, net of future
production and
development costs (12,000) 18,000 6,000
Purchase of proved reserves 90,000 70,000 10,000
Sales and transfer of oil
and gas produced, net of
production costs (142,000) (145,000) (140,000)
Net increase (decrease) in
prices and costs (193,000) 51,500 81,000
Extensions and discoveries 33,000 16,500 7,000
Revisions of previous quantity
estimates 224,000 - 36,000
Accretion of discount 10,000 49,000 6,000
Net change in income taxes - - -
Other - - -
Ending balance $ 670,000 $ 730,000 $ 736,000
PROVED OIL AND GAS RESERVE QUANTITIES
(All within the United States)
Oil reserves Gas reserves
(bbls.) (Mcf.)
Balance, December 31, 1992 45,744 113,700
Revisions of previous estimates 16,054 50,000
Purchase of reserves 21,000 -
Extensions, discoveries and
other additions 3,500 38,524
Production (8,680) (23,903)
Balance, December 31, 1993 77,618 178,321
Revisions of previous estimates - -
Purchase of reserves 3,980 31,400
Extensions, discoveries and
other additions 1,044 9,803
Production (8,823) (30,884)
Balance, December 31, 1994 73,819 188,640
Revisions of previous estimates 2,514 36,000
Purchase of reserves 2,500 -
Extension, discoveries and
other additions - 28,586
Production (8,278) (35,250)
Balance, December 31, 1995 70,555 217,976
Proved developed reserves
December 31, 1993 57,564 153,328
December 31, 1994 56,772 167,394
December 31, 1995 53,508 204,865
Costs incurred in oil and gas producing activities for the years ended
December 31, 1993, 1994 and 1995 are as follows:
1993 1994 1995
Property acquisition, exploration
and development costs capitalized $90,000 $70,354 $10,557
Production costs 59,346 51,983 55,584
Depletion and depreciation 21,075 32,482 30,245
EXHIBIT II.
PROXY STATEMENT
CROFF OIL COMPANY
1995 ANNUAL MEETING OF SHAREHOLDERS
February 28, 1996
THIS PROXY STATEMENT IS BEING MAILED TO SHAREHOLDERS
OF RECORD IN CONNECTION WITH THE SOLICITATION OF THEIR
VOTE BY THE BOARD OF DIRECTORS OF CROFF OIL COMPANY (the
Company) with regard to the Annual Meeting to be held on
February 28, 1996 at 10:00 a.m. at 1433 Seventeenth
Street, Suite 220, Denver, Colorado 80202, Telephone:
(303) 297-3383. This Proxy Statement should be reviewed
in connection with the enclosed copy of the Annual Report
filed on SEC Form 10-K dated December 31, 1994, and the
most recent 10-Q unaudited report for the quarter ending
September 30, 1995.
VARIOUS ITEMS OF IMPORTANT INFORMATION AND
ACCOUNTING FOR THE COMPANY RELATED TO THIS PROXY
STATEMENT ARE SET-OUT IN THE ENCLOSED ANNUAL REPORT ON
FORM 10-K OR THE MOST RECENT QUARTERLY REPORT ON FORM 10-
Q. SUCH DETAILED INFORMATION MAY BE RELEVANT IN
REVIEWING THIS PROXY STATEMENT, BUT IS NOT REPEATED IN
THIS DOCUMENT. ACCORDINGLY, EACH SHAREHOLDER SHOULD
REFER TO THE FORMS 10-K & 10-Q BEFORE COMPLETING THEIR
PROXY BALLOT.
Proxies voted in accordance with the accompanying
ballot form which are properly executed and received by
the Secretary to the Company prior to the Annual Meeting
will be voted.
Revocability of Proxy
A shareholder returning the enclosed proxy ballot
has the power to revoke it at any time before it is
exercised and may do so by written notice to the
Secretary of the Company at the address set forth above,
effective upon receipt of such written notice, or by
voting in person at the Annual Meeting. Attendance at
the Annual Meeting, in and of itself, will not constitute
revocation of a proxy.
Voting Securities
The record date for the determination of
shareholders entitled to vote at the Annual Meeting is
the close of business on December 31, 1995. There were
issued, outstanding and entitled to vote on such date
approximately 516,515 shares of the 20,000,000 authorized
shares. The Company has only one class of Common Shares,
each of which is entitled to one vote. The Company does
not have cumulative voting. Accordingly, each
shareholder may vote all of his shares on each separate
ballot proposal. The Company will bear all costs of this
proxy solicitation.
Shares entitled to vote will be determined based
upon the official shareholder record of January 1, 1996.
Actual votes cast will be determined by the physical
counting of votes in person or proxy by the inspector of
elections to be appointed prior to the meeting by the
Board of Directors. Any dispute as to votes or
entitlement to vote will be decided by majority vote of
the Board of Directors. Abstentions and broker non-votes
will not be counted for either quorum or ballot purposes.
As to each item to be voted upon in this Proxy, a
numerical majority of the issued and outstanding shares
must be present or voted by Proxy at the meeting (258,258
shares, or as otherwise determined by the inspector of
elections at the time of meeting). Each proposal to be
voted upon will only be adopted by a majority vote of
shares voted at the meeting, provided a quorum is
present. That is, each item will be adopted by an
affirmative vote of not less than 129,129 shares, or a
greater majority of those shares present as otherwise
determined by the inspector of elections.
There are no matters to be voted upon as described
by this Proxy upon which management will proceed absent
majority shareholder approval as described above.
The Company knows of no person or group, except the
following, which, as of the date of this Proxy Statement,
beneficially owns and has the right to vote more than 5%
of the Company's Common Stock:
Names and Address of Beneficial Owner Shares Beneficially Owned Percent
of Class
1. Jensen Development Company (1) 132,130 25.10%
1433 17th Street, Suite 220
Denver, Colorado 80202
2. Gerald L. Jensen (2) 71,215 13.03%
3. Julian D. Jensen (2)&(3) 46,532 8.68%
Jensen Revocable Trust
4. Directors as a Group (2) 285,277 49.50%
___________________________________________________________________
(1) Jensen Development Company is wholly owned by Gerald
L. Jensen.
(2) Includes warrants to purchase 10,000 shares of the
Company's stock by each director at $1.00 per
share, expiring December 31, 1998. Mr. Gerald
Jensen's warrant is for 20,000 shares. None of the
warrants have been exercised.
(3) Mr. Julian D. Jensen owns 5,000 shares directly and
holds a warrant for 10,000 shares (see Note 2,
above); 21,432 are held by him as the Trustee of
the Jensen Family Trust and 10,000 as the Trustee
of the Jensen Revocable Trust. Mr. Julian D.
Jensen has an approximate 25% beneficial interest
in these Trusts and Mr. Gerald L. Jensen has an
approximate 33% beneficial interest.
MATTERS SUBJECT TO SHAREHOLDER VOTE
I.
Election of Directors
The Croff Board consists of Gerald L. Jensen,
Dilworth A. Nebeker, Richard H. Mandel, Jr., Edwin W.
Peiker, Jr., and Julian D. Jensen. Each director will
serve until the next annual meeting of shareholders, or
until his successor is duly elected and qualified. The
following information is provided with respect to each
current officer and director of the Company who are
current nominees for re-election.
GERALD L. JENSEN, 55, PRESIDENT AND DIRECTOR.
President of Croff Oil Company on a part-time basis
since October, 1985. Prior to this date, Mr.
Jensen was Chairman of Petro-Silver, Inc., a public
company, for over five years. Mr. Jensen was a
director of Pyro Energy Corp., a public company
engaged primarily in coal production from 1978
until the company was sold in 1989. Mr. Jensen is
also an owner of private real estate, development,
and oil and gas companies.
RICHARD H. MANDEL, JR., 66, DIRECTOR.
Since 1982, Mr. Mandel has been President and a
Board Member of American Western Group, Inc., an
oil and gas producing company in Denver, Colorado.
He is President and also a Board Member of Richard
H. Mandel, Ltd., an oil and gas production company
in Denver, Colorado. From 1977 to 1984, he was
President of Universal Drilling Co., Denver,
Colorado. Since May 1988, he has been a Board
Member of Richmond Exploration Company. Since July
1994, he has been a Board Member of Wichita River
Oil Company, listed on the American Stock Exchange.
DILWORTH A. NEBEKER, 54, DIRECTOR.
Mr. Nebeker served as President of Croff from
September 2, 1983 to June 24, 1985, and has been a
director of Croff since December, 1981. He has
been a lawyer in private practice for the past
seven years. Prior thereto, he was a lawyer
employed by Tosco Corporation, a public
corporation, from 1973 to 1978. He was a lawyer
with the Securities and Exchange Commission from
1967 to 1973.
EDWIN W. PEIKER, JR., 63, DIRECTOR AND SECRETARY.
Mr. Peiker was President of Royal Gold, Inc. from
1988 through 1991, and continues to be a director.
Since 1986, Mr. Peiker has been a Vice President
and director of Royal Gold, Inc., a public company
engaged in gold exploration and mining activities.
Prior thereto he was involved in private
investments in oil and gas exploration and
production. Mr. Peiker was employed in responsible
positions with AMAX, Inc., a public corporation,
from 1963 to 1983. AMAX is primarily engaged in
mine evaluation and resource analysis.
JULIAN D. JENSEN, 47, DIRECTOR.
Mr. Jensen is the brother of the Company's
president and has served as legal counsel to the
Company for the past seven years. Mr. Jensen has
practiced law, primarily in the areas of corporate
and securities law, in Salt Lake City, Utah since
1975. Mr. Jensen is currently associated with the
firm of Jensen, Duffin, Carman, Dibb & Jackson
which acts as legal counsel for the Company.
SUMMARY OF INFORMATION AS TO DIRECTORS
NAME Director Since Compensation Number of Shares Percentage
(Beneficial &Legal) of Issued
Outstanding
GERALD L. JENSEN (1) 1985 Salary as 203,345 38.13%
President: (See Principal
$48,000 - No Shareholder Chart
Benefits - above)
No Director
Compensation
See Below
DILWORTH NEBEKER 1981 Normal 11,300 2.11%
(2) Director
Stipend Only
(See Below)
RICHARD MANDEL 1985 Normal 10,100 1.88%
(2) Director
Stipend Only
(See Below)
EDWIN PEIKER, JR. 1985 Normal 14,000 2.61%
(2) Director
Stipend Only
(See Below)
JULIAN D. JENSEN 1990 Normal 46,532 8.68%
(2) & (3) Director (See Principal
Stipend Only Shareholder Chart,
(See Below) above
(1) Includes shares held by Jensen Development Corporation (132,130) as
wholly owned by Gerald L. Jensen.
(2) Includes warrant expiring December 31, 1998 to acquire 10,000 shares
by each Director, except Gerald L. Jensen, who holds a warrant for 20,000
shares. No warrant has been exercised to date. Warrants may be extended by
majority vote of the Board.
(3) Includes shares held in Jensen Family Trust (21,432) and Jensen
Revocable Trust (10,100) in which Julian D. Jensen is the sole Trustee and
an approximate 25% beneficial owner. Mr. Gerald L. Jensen holds an
approximate 33% beneficial interest in these Trusts.
Executive Compensation
Certain additional required information concerning
remuneration, other compensation and ownership of
securities by the Directors and Officers is set-out in
the enclosed 10-K Report and incorporated by this
reference. See particularly pg. 21.
Proposed Remuneration
During the current fiscal year, the Company intends
to compensate outside directors at the rate of $250 for
a half-day meeting and $350 for a full day meeting, a
rate which was instituted in October, 1985. No changes
are currently contemplated in officer salaries.
Certain Relationships and Related Transactions
Certain significant relationships and related
transactions are set-out in the enclosed 10-K Report and
incorporated by this reference. See particularly pg. 24.
Management's Stock Rights and Options
A discussion of managements stock rights and
options are discussed at page 22 of the enclosed and
incorporated 10-K Report.
II.
Creation and Issuance of Class B Preferred Stock
The Board of Directors of your corporation, over a
period of time, has discussed solutions to the problem of
achieving shareholder value and liquidity considering the
size, nature and structure of the business of Croff Oil
Company. Specifically, the Board of Directors believes
that the present oil and gas interests, consisting
chiefly of small royalty interests in numerous non-
operating holdings, creates unique problems when these
assets are vested in a public company which is too small
to have an active trading market. In summary, the Board
is concerned about the following issues:
1 While revenues and income from Croff's oil and
natural gas interests have been generally stable, they
are insufficient for significant growth and expansion of
the Company. Management does not expect that the present
Company can substantially grow in value or size with
existing income from its present oil and gas assets.
2 At present, there is no active trading market
for Croff stock; nor is there any foreseeable probability
that an active trading market will develop. Based upon
preliminary inquiries, there seems to be very little
interest in the brokerage community for any underwriting
to raise additional capital for the Company, as presently
constituted, in order to expand its present oil and gas
operations.
In considering various alternative solutions to the
foregoing problems, the Board has considered and approved
a proposal for shareholder ratification whereby the oil
and gas assets of the Company would be pledged to secure
a new Class B of preferred stock. This preferred stock
would be distributed to shareholders on a one share for
one share basis (1:1) to the existing shareholders. The
oil and gas assets would remain in the Company, but the
benefit of these assets would be exclusively represented
by the preferred Class B shares held by each shareholder
instead of the common shares, as more particularly
described below. There will be 520,000 Preferred Class
B shares authorized.
The purpose of this proposal is to protect, so far
as possible, the existing perpetual mineral interests and
other oil and gas assets of the Company, for the benefit
of existing shareholders, while management seeks to grow
the Company through more risky business ventures with
potentially greater growth potentials.
It is proposed, for the reasons explained below,
that each of the present shareholders in Croff Oil
Company will receive one (1) new share of preferred Class
B stock in the Company (to be renamed Croff
Enterprises, Inc.) for each common share currently owned.
To avoid confusion, and to reflect the future
business activities of the old Croff, it is proposed that
Croff Oil Company become known as Croff Enterprises,
Inc., ("CEI"). The Board believes that this name will
more accurately reflect the intent of the Board of
Directors to search out diversified business
opportunities, domestically or internationally, for the
company, and that such business activities may or may not
be related to its historical oil and gas operations or
interests. The Board intends to continue to employ the
trade name Croff Oil Company for existing oil and gas
operations where appropriate.
If the within proposal to create the special Class
B preferred shares is adopted, management of Croff will
then enter into a Pledge Assignment whereby the company's
beneficial interest in all oil and gas or other mineral
assets, including products and revenues, (oil and gas
assets) will be irrevocably and exclusively assigned to
the Class B preferred shareholders (the current Croff
shareholders), subject only to the terms of the
Assignment, as generally outlined below.
In essential terms, the assignment of the
beneficial interest will mean that all income or other
distributions from the oil and gas assets will only be
paid or distributed to the Class B shareholders, pro rata
to your sharehold interest. It would further mean that
the Class B shareholders would have the exclusive right
to claim their proportional interest in the oil and gas
assets, or proceeds therefrom, in the event of the
liquidation and final distribution or other sale or
transfer of the company's assets.
While the company will retain legal title and
ownership of the oil and gas assets for administrative,
liability and management reasons, it is intended to
beneficial interest (beneficial interest is defined for
this Proxy as that aspect or attribute of any asset or
interest having monetary value after all normal costs of
production or operations are paid) is believed to be
subject to claims by any person or entity other than the
Class B shareholders.
It should be understood Croff will reserve
management control over the oil and gas assets, to
include, the right to buy and sell oil and gas leases or
other interests or products, pay all normal and customary
costs of production and operations from revenues, and to
enter into farmouts, pooling agreements or operating
contracts with the oil and gas assets as is customary or
typical in the oil and gas industry. However all such
transactions will be subject to the preservation of the
Class B shareholder's security in the beneficial interest
of such assets, or proceeds therefrom, unless released
by the Class B shareholders pursuant to majority vote.
It is intended that any net income (net income being
defined for this Proxy as income remaining from revenues
of oil and gas production after payment of normal costs
of production and operations) will be used either: (i) to
acquire other oil and gas interest, (ii) to buy back
preferred Class B shares if such a program is
subsequently adopted by the Board and the shareholder
elects to participate, (iii) or to pay dividend
distributions to Class B shareholders from the net income
derived from the oil and gas assets. The company has no
present plans to pay dividends.
The foregoing purports to be a general description
of the Pledge Assignment to be entered by Croff in favor
of the Class B shareholders if the proposed
reorganization, as described herein, is adopted by the
required number of shareholders. Any shareholder wishing
to examine the proposed Pledge Assignment or Amended
Articles may obtain a copy of such documents by
contacting the company offices at the address indicated
at the beginning of this Proxy Solicitation and a copy
will by promptly mailed or faxed to you.
IT IS REPRESENTED THAT WHILE MANAGEMENT HAS
ATTEMPTED TO DRAFT THE PLEDGE ASSIGNMENT TO PROVIDE
MAXIMUM PRIORITY AND PROTECTION TO THE CLASS B
SHAREHOLDERS IN RELATIONSHIP TO THIRD PARTY CREDITOR
CLAIMS; NO WARRANTY OR ASSURANCE, HOWEVER, CAN BE MADE
THAT THE COMPANY WILL, IN ALL INSTANCES, BE SUCCESSFUL IN
ASSERTING THE PRIORITY OF THE CLASS B SHAREHOLDERS IN THE
OIL AND GAS ASSETS AS TO ANY FUTURE THIRD PARTY
CLAIMANTS.
The company does represent the oil and gas assets
are not presently subject to any current third party
claims, liens or charges, nor does Croff presently intend
to create any future subordinate liens or encumbrances in
the oil and gas assets.
As a net result of approval of the reorganization,
each Croff shareholder will hold one (1) share of
preferred Class B stock in the new CEI for each share of
common stock which you presently hold. You would continue
to own your common stock in Croff, which would be
designated common stock of CEI. The existing Board of
Croff Oil Company will continue as the Board of the
renamed Company (Croff Enterprises, Inc.).
None of you, as prospective preferred Class B
shareholders of CEI, will have any additional voting
interest in or control over CEI. The preferred shares
will have voting rights only in special situations, such
as any sale, pledge, mortgage or exchange of the oil and
gas assets.
EACH PRESENT SHAREHOLDER OF THE COMPANY SHOULD NOTE
THAT, AT PRESENT, MANAGEMENT, OR PARTIES AFFILIATED WITH
MANAGEMENT, HOLD A NEAR MAJORITY OF VOTING SHARES
(43.60%) AND WILL MOST LIKELY CONTINUE TO EXERCISE AN
EFFECTIVE CONTROL POSITION IN THE COMPANY IN THE EVENT
OF THE CLOSE OF THE PROPOSED REORGANIZATION. FURTHER, IT
IS ANTICIPATED THAT CEI, TO ACHIEVE ITS PURPOSES, WILL BE
REQUIRED TO RAISE ADDITIONAL CAPITAL WHICH WOULD FURTHER
REDUCE THE VOTING INTEREST OF ALL OF ITS PRESENT
SHAREHOLDERS.
CEI will not only continue to operate in the oil and
natural gas business, but intends to act as an investor
or principal in new business ventures or endeavors either
in the United States or on an international basis. It
should be emphasized that there are no present business
plans, proposals, contracts or agreements defining any
potential business activities in which CEI may engage in
the future. It is the desire of the Board that CEI may
engage in various aspects of international start-up and
development businesses, or acquire existing domestic
businesses desiring to be part of a public company.
Future business activities may or may not include
companies in the oil and natural gas business.
CEI has no present capital commitments or proposals
to engage in its intended business enterprises and can
give no assurance that it will be successful in efforts
to raise sufficient start-up capital through private
funding to engage in new business activities.
CEI will continue to operate the existing oil and
gas and other mineral interests of the Company as
described in the periodic reports (10K & 10Q). The Board
of Directors will create amended Articles of
Incorporation for CEI which, together with the pledge
documents, will provide that each of you as preferred
Class B shareholders will have a preferred and priority
interest in and to the oil and gas assets, and an
exclusive right to receive any net income distribution
from the oil and gas assets of CEI, as may be approved by
its Board. However, even these provisions within the
Articles and pledge documents will not create a priority
in such assets in derogation of legitimate third party
creditor rights and claims against CEI. The preferred
Class B shareholders, however, will have claim to the
assets or income of the oil and gas assets in the event
of liquidation, merger, acquisition or spin-off. These
assets are reserved for the preferred shareholders.
No provision exists, nor is there any proposal, to
change the present compensation to management of CEI as
set-out above under the section on "Executive
Compensations" in the event of approval of the proposed
reorganization.
It is further intended and proposed that the Board
of Directors of CEI may utilize a portion of its cash
flow to repurchase preferred Class B shares as requested
by preferred shareholders. The exact details of any
stock repurchase program are not presently available and
will not be formulated in detail, if at all, prior to the
recommendation to shareholders to adopt the proposals
set-out above. It is generally intended that any
repurchase would be based upon an annual notice and that
payments for shares would be completed on a cash basis.
Any present offer to purchase the preferred Class B
shares would be priced, initially, at a base of Eighty
Cent ($0.80) per share. This price per share was
determined by the Board utilizing the current approximate
net worth of the oil and gas assets of the Company,
$314,620, as derived from the most recent unaudited
financials (September 1995 10-Q) and assigning another
$100,000 to such net worth figure to represent an
estimated fair market value of the oil and gas assets for
the Company. This computation was then rounded to $0.80
per share to create the base valuation.
Hereafter, the Board would set a repurchase price
based on the Board's best estimate of the increase in
value of the oil and gas assets of the Company, each
year, which would be added onto or subtracted from the
existing base valuation of $413,212. This valuation
divided by the proposed 516,515 preferred shares to be
issued to each current company shareholder would yield a
new repurchase evaluation each year. The net asset value
is anticipated to change over time, such that present
valuations are no assurance of future valuations.
The Board will most likely adopt this repurchase
program in an effort to create an alternative potential
selling opportunity for the preferred Class B shares,
with the understanding that no viable market or liquidity
has existed during the last ten (10) years for the Croff
common shares, and is unlikely to exist for the preferred
Class B shares. The Board also may consider
implementation of a dividend program for preferred Class
B shares, as it may subsequently determine, although such
a dividend program is not presently foreseeable. All
cash flow from the oil and gas assets not utilized to
provide for a buyback program for the preferred shares,
or a dividend (if the Board elects to prepurchase stock
or pay a dividend) will be reinvested in the oil and
natural gas business with the intent to increase cash
flow and the net asset value of the preferred shares.
Management believes this reorganization should
substantially insulate the historical oil and gas
interests of the Company, so far as possible, from
potential risk and business factors associated with CEI
engaging in what should be considered high risk ventures,
such as participation in international start-up companies
or other types of venture capital funding which may be
authorized by the Board of Directors.
The Company in order to reach a size necessary to
sustain a trading market, must increase it
capitalization. There is not sufficient capitalization,
at present, to actively engage in other business
activities unless CEI is successful in exchanging its
common shares or the newly proposed Class A preferred
shares, for income producing companies or assets, or the
Company engages in subsequent private placement
financing, public offerings, or borrowing programs to
raise development capital. No assurance can be given
that such future financing or business endeavors will be
successful. If successful, such capital raising
endeavors will most likely result in substantial
dilution, both in voting control and ownership interest
in CEI to each of you as current shareholders.
It is also the position of management, in
consultation with their legal counsel, that the
distribution of preferred shares in CEI to existing Croff
shareholders does not constitute the sale of a security
subjecting the Company to registration requirements due
to the fact that no consideration would be requested or
paid by existing shareholders for the stock dividend in
CEI. Moreover, it is believed each shareholder will have
substantially the same information which would be
available to shareholders pursuant to a registration
through the information contained in the accompanying 10-
K and 10-Q Reports and this Proxy.
Management does not believe the proposed
reorganization, if adopted, will result in any material
tax consequences to shareholders as the total value of
sh