CROFF
ENTERPRISES, INC.
Annual
Report on Form 10-K
December
31, 2007
PART I
ITEM
1. BUSINESS
Division
of the Company
In
December, 2007 Croff Enterprises, Inc. hereafter “Croff Enterprises” or “Croff”
spun-off its oil and gas assets, related bank accounts, along with all related
assets and liabilities to a new wholly owned subsidiary Croff Oil Company, Inc.
All shares of Croff Oil Company, Inc were then exchanged to the Croff preferred
B shareholders and the preferred B shares cancelled. All of the oil and gas
assets, including perpetual mineral interests, were pledged to the preferred B
shareholders at the creation of the preferred B class in 1996. All shareholders
of Croff Enterprises, Inc at the date of issuance in 1996 were given an
equivalent number of shares of preferred B stock, while keeping their common
shares. Since that time the preferred B stock has had a limited trading market
as it is not listed on any exchange. Based on the limited number of shareholders
and small capitalization, Croff Oil Company, Inc. is a private
corporation.
The oil
and gas assets were transferred to a wholly owned subsidiary of Croff
Enterprises formed under Utah law named Croff Oil Company, Inc., hereafter
“Croff Oil”. Croff Oil issued one common share for each Croff preferred B share.
Croff Oil then exchanged all of its common shares for the oil and gas assets of
Croff Enterprises, Inc. Croff then cancelled all preferred B shares and offered
the common stock to all preferred B shareholders. All Croff preferred B
shareholders either obtained one share of common stock of Croff Oil Company,
Inc. for each preferred B share, or received $4.25 in cash per share pursuant to
the Dissenting Shareholder Rights Statute under Utah Law as described below.
During 2007, and prior years, Croff operated as an independent energy company
engaged in the business of oil and natural gas production, primarily through
ownership of perpetual mineral interests and the acquisition of producing oil
and gas leases.
Beginning
December 31, 2007, and until any subsequent reorganization, Croff Enterprises
will not be engaged in any active business, but primarily is seeking to acquire
a private company with more scalable assets which desires to merge with a public
company in order to obtain a more active public market. Thus the oil and gas
business reported in this annual report on Form 10-K for 2007 is no longer
relevant to its activities in the future. At this time, Croff Enterprises has
approximately $350,000 in cash, only one class of stock, its common stock, and
no active business. While Croff may acquire another private or public company in
the energy business, it is also possible it may acquire another company in a
different business if such an acquisition would provide an opportunity for
growth in the company’s business and the chance of increasing the value of the
company’s stock. This division of the Company occurred approximately three years
after Croff’s Board of Directors had determined to review Croff’s strategic
alternatives with a view to obtain more liquidity for the Company’s two classes
of stock and to increase the value to its shareholders of the company’s stock.
In the first quarter of 2005, The Board felt the combined value of $2.30 for a
common plus a preferred B share did not reflect the total value of the company.
The Board set the value under the Utah Dissenting Shareholders Rights Act in the
fourth quarter of 2007 at $5.25 for a combination of both a preferred B and a
common share, allowing shareholders to receive this cash buyout. Set
out below, in chronological order, are the steps that the Company took,
beginning in April 2005, and continuing through the present, to increase
shareholder value.
Strategic
Direction of the Company - 2005
On April
8, 2005, Croff filed a Form 8-K stating that the Board of Directors had
determined to review Croff’s strategic alternatives. The Board stated such a
review may include the possible sale or merger of all or part of the Company or
the possible sale or disposition of all or part of the assets. In undertaking
this review, the Board stated two primary objectives. The first
objective was to increase shareholder value. The second was to
provide liquidity to shareholders. The Board formed a non-management committee
of its Board, excluding Gerald L. Jensen, to review acquisition proposals
including an expected proposal from Gerald L. Jensen personally and in
conjunction with Jensen Development Company, and C. S. Finance L.L.C, companies
wholly owned by Mr. Jensen.
On April, 15, 2005 Jensen Development
Company and CS Finance LLC, two companies wholly owned by Gerald L.
Jensen, submitted an offer to purchase the oil and gas assets pledged to the
Preferred B shareholders of Croff. The offer was for $2.80 per
Preferred B share. The Company filed a Form 8-K on April 19, 2005 reporting this
Offer. After meeting to discuss the offer on April 20, 2005, the non-management
committee reported to the Offerors that while the committee was generally in
favor of a transaction, they had concerns with potential tax consequences and
requested an extension. At a May 4, 2005 meeting, the non-management committee
rejected this offer based primarily on adverse tax and corporate consequences to
the Company, but invited the Offerors to make a tender offer directly to the
shareholders.
2005
Tender Offer
On June 7, 2005, the non-management
committee received a draft of an issuer tender offer from the
Offerors. At a meeting of the Board of Directors on June 8, 2005, Mr.
Gerald L. Jensen presented the issuer tender offer to the Board of Directors. On
June 15, 2005, the Offerors filed with the SEC an issuer tender offer to all
Preferred B shareholders for a cash purchase of $3 per share, for all shares of
Preferred B stock not held by the Offerors. The non-management committee acting
as the Board of Directors adopted the following resolution with respect to the
Tender Offer: “The majority of the four Directors comprising the non-management
committee of the Board of Directors believe that each Preferred B shareholder
should decide whether or not to tender shares in this Tender Offer based upon
their specific situation and investment objectives. Therefore, the
non-management committee is neutral and makes no recommendation for or against
this Tender Offer.” Each Director on the non-management committee
expressed in the SEC filings an inclination to tender all or part of their
Preferred B shares in the tender offer and subsequently did so.
The
Offerors filed a final Amended Third Party Tender Offer with the SEC on August
29, 2005 reporting the results of the tender offer. The Offerors reported that
the depository, American National Bank, had received a total of 75,050 shares
tendered and not withdrawn prior to the expiration of the Offer, including
11,190 shares tendered subject to delivery. The tendered shares represented
approximately 13.9% of the outstanding Class B Preferred stock of Croff
Enterprises, Inc. The Offerors accepted and approved for payment all of the
tendered shares at $3.00 per share for a total of $225,150. At December 31,
2005, the number of Preferred B shares collectively owned by Gerald L. Jensen,
and his affiliated companies, C.S. Finance L.L.C., and Jensen Development
Company totaled 67.2% of the Preferred B shares. The holders of
approximately 94,394 Preferred B shares were not located during the tender
offer.
Strategic
Direction of the Company - 2006
During
2006, the Company sought potential acquisitions and/or companies which could
merge with Croff Enterprises Inc. These included negotiations with a newly
formed energy Company, Canary Resources, Inc, and a Chinese company, Taiyuan
Rongan Business Trading Company, Limited, hereafter TRBT. After negotiating with
these two companies and with some preliminary discussions with other companies,
the Company announced on December 12, 2006, an agreement providing for the
acquisition of TRBT. TRBT is a Chinese corporation located in the city of
Taiyuan, Shanxi Province, in the People’s Republic of China.
The
essential provisions of the exchange agreement provided for Croff to issue over
11 million new common shares (92.5%) of its common stock to the shareholders of
TRBT in exchange for the acquisition of 80% of the outstanding equity and
ownership interest in TRBT by Croff. In the event of the completion and closing
of the Exchange Agreement, Croff would own eighty percent (80%) of all of the
issued and outstanding equity interest of TRBT. TRBT owns a seventy-six percent
(76%) interest in six shopping malls located in or around the city of Taiyuan,
China which is located approximately 400 kilometers west of Beijing, China. As a
result, Croff would have owned approximately sixty-one percent (61%) net
interest in the shopping malls as its sole assets. At closing, TRBT shareholders
would receive and own approximately 92.5% of the common shares of Croff and the
Croff shareholders would continue to hold approximately 7.5% of the then issued
and outstanding common shares of Croff.
As a provision of the exchange
agreement, Mr. Gerald L. Jensen, Croff’s President, and his affiliated
companies, the current principal shareholders of Croff, hereafter the “Croff
Principals,” would have, subject to shareholder vote, acquired 67.2% of all of
the Preferred B Oil and Gas assets from Croff in exchange for the conveyance to
Croff of the 67.2% of the Class B Preferred Shares currently held by these Croff
Principals. The Croff Principals would have exchanged three hundred sixty three
thousand five hundred thirty five (363,535) shares, or 67.2% of the class “B”
shares outstanding, in exchange for 67.2% of the shares of a new subsidiary to
which all of the oil and gas assets and related bank accounts of the company
will be transferred. These class “B” preferred shares would have been cancelled
by the company upon assignment. The Croff Principals would have, concurrently,
tendered the sum of six hundred thousand dollars ($600,000) in cash to the
Company, and assume all liabilities of the oil and gas assets, in exchange for
the remaining 32.8% of the shares of the new subsidiary holding all of the Croff
oil and gas assets.
Croff would have, as part of the
exchange agreement closing, converted all remaining preferred “B” shares held by
the public, being approximately 32.8% of the issued and outstanding class of
preferred “B” shares, to common shares on a ratio of two common shares for each
class “B” preferred share cancelled. Upon the closing of the exchange
transaction, all class “B” preferred shares would have been cancelled and
terminated of record, and all holders of Preferred “B” shares would have
received two common shares in exchange. All class “B” preferred
shareholders subsequent to closing would have been deemed to hold common shares.
As provided in the exchange agreement upon closing, the company would have
outstanding only common shares. The exchange agreement also provided that the
sum of $530,000 must remain in Croff at closing, after payment of all proxy and
closing expenses, dissenting shareholder rights, and the dividend.
Strategic
Direction of the Company - 2007
The exchange agreement was the subject
of negotiations and due diligence for nearly one year, before signing of the
Exchange Agreement on December 12, 2006. On June 1, 2007 Croff announced the
termination of the TRBT Exchange agreement and filed an 8-K with the SEC
announcing this termination. The termination was due to failure of performance
by TRBT, particularly related to providing timely and adequate financial
statements.
Subsequent to the termination of the
proposed transaction with TRBT, Croff’s board of director’s appointed an
independent committee to review the strategic direction of Croff, including
whether to go forward with the transfer of the preferred “B” assets to a new
entity and to cancel the preferred “B” shares. The independent committee
determined and the full board adopted a plan to create a new separate entity and
transfer the Croff preferred “B” assets to the new entity, Croff Oil, and issue
one common share in the new entity for each preferred “B” share outstanding.
Croff Enterprises would continue as a public company and continue to seek a
strategic reorganization through acquisition or merger with an, as yet,
undetermined business entity. The oil and gas assets of Croff which were pledged
to the preferred “B” shareholders would be transferred, subject to approval of
shareholders, to a new private entity to be known as Croff Oil Company, Inc.,
owned by the preferred “B” shareholders.
Each current preferred “B”
shareholder would be entitled to one common share of Croff Oil for each Croff
Enterprises preferred “B” share presently held of record. It was intended that
Croff Oil Company, Inc would be operated as a private company with the existing
management of Croff Enterprises constituting its initial officers. Croff Oil’s
initial board of directors would be Mr. Gerald L. Jensen, Mr. Richard Mandel and
Mr. Julian Jensen. All preferred “B” shares would be cancelled of record after
the exchange to common shares of Croff Oil Company, Inc as described above.
Existing preferred “B” shareholders, not tendering for exchange, would continue
to be entitled to the common share exchange right until such time as the
exchange rights may be surrendered to the state of Utah as lost or abandoned
property.
Under the Utah Dissenting Share
Rights Statute any shareholder not approving the division of the Company and
asset transfer would be afforded an opportunity to tender his, her or its common
or preferred shares for cash in lieu of remaining as a shareholder in the public
or intended private company. The Board determined to offer $4.25/share for each
preferred “B” share and $1.00/share for each common share under the dissenting
shareholder rights provisions of Utah law. The preferred “B” purchase amounts
would be paid by Croff Oil Company, Inc from the preferred “B” accounts or by
the Croff Oil principal shareholders, which had agreed to provide all additional
amounts needed. The common shares would be purchased from corporate funds. Each
shareholder would also have a right under the Utah statute to challenge these
offered redemption prices and to require a judicial determination if a
compromise was not reached.
The independent committee had
determined that the simplified capital structure existing after and in the event
of the transfer of oil and gas assets would more likely allow Croff to grow and
gain more scalable oil and gas assets and that the company would have greater
flexibility and success in going forward to acquire new oil and gas assets or
other business opportunities if the existing assets were transferred, and
control of the Company was available.
Summary
of the Plan of Corporate Division and Asset Transfer.
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The
essential terms of the plan provided for the transfer, without other
consideration, of all oil and gas assets of Croff Enterprises to the newly
created Utah corporation known as Croff Oil Company, Inc. The
shareholders of Croff Oil Company, Inc would be the current “B” preferred
shareholders of Croff Enterprises who would receive one restricted common
share in Croff Oil in exchange for each preferred “B” share currently
held. The preferred “B” shares subsequently would be cancelled
of record. The transferred assets constitute approximately $1,450,000 of
the total approximate $1,800,000 book value of Croff Enterprises, Inc and
would constitute the sole assets of the new private
entity. Croff Enterprises would essentially continue as a shell
corporation with a book value of approximately $350,000, almost all of
which would be in cash or cash equivalents. All preferred “B”
shares would be cancelled of record and all “B” shareholders would be
entitled to one share of restricted common stock in the private entity,
Croff Oil Company, for each preferred “B” share previously held in
Croff.
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The
common shares to be issued in the new entity, Croff Oil Inc, would be
restricted securities in a private company. That is, the shares
would not be registered under federal or state securities laws or
regulations for distribution or trading; and, therefore, would not be free
trading, but could only be resold upon the consent of counsel for the
issuer. It is intended that the board of directors of Croff Oil Inc. would
be three members of the existing board of directors of Croff, Gerald
Jensen, Richard Mandel, and Julian Jensen. Croff Oil would continue
managing the existing oil and gas assets, presently under management in
Croff, and would attempt to build or expand those assets for the benefit
of the shareholders.
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Croff
will continue as a publicly held company with the same common shareholders
as existed prior to the corporate division. It is anticipated
that Croff will be, for an interim period, essentially a shell corporation
with approximately $350,000 of capitalization and will continue to seek
opportunities including merger or acquisition possibilities with
individuals and/or entities to advance its business
purposes. The company intends primarily, though not
exclusively, to focus upon various oil and gas opportunities which may
result in new assets being acquired which are more expandable and more
readily fit into the model of a public corporation. Croff, as a
condition of the plan of division and asset transfer closing, amended its
Articles of Incorporation to cancel all preferred “B” shares
outstanding. All “B” preferred shares have been cancelled and
terminated of record. Croff will provide common shares in the
new subsidiary, Croff Oil Company, Inc. with one common shares issued to
each former “B” shareholder in Croff. Any subsequent presentation of “B”
preferred shares will entitle the holder to receive a common share in
Croff Oil for each “B” share for which the holder has not previously been
delivered a common share.
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Since
Croff is essentially dividing the assets of the Company between its
preferred “B” and common shareholders, there is no change of value for the
“B” shareholders. For any dissenting preferred “B” or common
shareholders, the company has valued such shares for dissenting
shareholder rights purposes at $4.25 per each preferred “B” share and
$1.00 per common share, based upon the company’s analysis of a reasonable
value.
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The
Company amended its Articles of Incorporation to increase the authorized
class of Preferred “A” shares, no par, from five million shares to ten
million shares to facilitate potential future funding by
Croff. No preferred “A” shares are presently issued and no
distribution is contemplated. Authorized common stock was increased from
20,000,000 common shares to 50,000,000 common
shares.
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Proxy materials providing information
on the plan of corporate division and reorganization were sent to shareholders
on approximately December 7, 2007, for a meeting which was held on December 21,
2007. At the shareholders meeting, the shareholders approved the plan of
corporate division and reorganization and reelected the Board of Directors and
Auditors for the next year. On December 24, 2007 Croff Enterprises
Inc announced that the company was being separated into the two companies, Croff
Oil Company Inc, and the existing Croff Enterprises Inc. Prior to the end of
December 2007, all oil and gas assets and related bank accounts were transferred
to the previous formed Croff Oil Company Inc. Croff Enterprises Inc also
received approval to increase its authorized common and Preferred A share stock.
The authorized common stock was increased from twenty to fifty million shares,
while the authorized Preferred A stock was increased from five to ten million
shares. As part of the division which was completed prior to December 31, 2007,
the President of Croff Enterprises Inc agreed that his salary and $4,000 of
monthly overhead, being paid by Croff Enterprises Inc, would be assumed by Croff
Oil Company Inc. Currently the President is serving Croff Enterprises, Inc for a
compensation of $1 per year and Croff’s overhead is $1,000 per month. The
Directors of Croff Enterprises, Inc continue to receive the same compensation as
prior years, which is set out in Item II.
Results
of the shareholders exercising dissenting shareholder rights under Utah law
resulted in 34,445 shares of common stock being purchased by Croff Enterprises,
Inc, resulting in 516,799 shares of common stock being outstanding at the filing
of this 10-K. In Croff Oil Company Inc, 35,930 Preferred B shareholders
exercised dissenting rights resulting in a payment of approximately $152,703 to
these former Preferred B shareholders. These amounts were paid out by Croff Oil
Company, Inc.
History
of the Company prior to the Corporate Division
The
Company was incorporated in Utah in 1907 as Croff Mining Company. The
Company changed its name to Croff Oil Company in 1952, and in 1996 changed its
name to Croff Enterprises, Inc.
In
November 1991, Croff reverse-split the common stock on a ratio of 1 share of
common stock for every 10 shares previously held. In 1996, the
Company created a class of Preferred B stock to which the perpetual mineral
interests and other oil and natural gas assets were pledged. Each
common shareholder, as of the February 28, 1996 record date, received one
Preferred B share for each common share held, at the time of this restructuring
of the capital of the Company. Subsequent to this date, the Company’s securities
have been separately traded. The Company’s common stock was listed and
occasionally traded on the Over the Counter Bulletin Board (www.otcbb.com) under
the symbol “COFF”. The Preferred B shares had limited trading in private
transactions.
In June
2000, the Company approved the increase in the authorized Class B Preferred
stock to 1,000,000 shares. During 2001, the Board determined that the cash of
the Company, which had been building during a period of higher oil prices,
should be formally allocated between the common stock and the Preferred B stock.
The Board decided to allocate $250,000 cash to the common stock and the balance
of cash remaining with the Preferred B stock. The Board then
determined that future oil and gas cash flow from the Preferred B assets would
be accumulated for the Preferred B shareholders.
In 2007,
the Company transferred its oil and natural gas properties to Croff Oil Company
and cancelled all preferred B shares, in exchange for common shares in Croff Oil
or cash.
Available
Information
Our
Internet address is www.croff.com. We
make available through our website our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the Securities and Exchange Commission.
The
portions of the following sections which discuss oil and gas operations are not
relevant after the transfer of all oil and gas assets which occurred in
December, 2007.
Major
Customers of Discontinued Operations
During the three previous years of oil
and gas operations, the major customers are set out below. None of these
companies constitute customers in 2008 as these assets are now in Croff Oil
Company, Inc. Customers which accounted for over 10% of oil and natural gas
revenues were as follows for the years ended December 31, 2005, 2006 and
2007:
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2005
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2006
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2007
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Jenex
Petroleum Corp., a related party
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25.8%
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14.2%
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11.9%
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Merit
Energy
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20.1%
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18.1%
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16.5%
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Sunoco,
Inc.
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12.4%
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14.7%
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12.9%
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Financial
Information About Industry Segments
The
Company’s operations for the last twenty years consisted of a single business,
oil and natural gas production, which is now discontinued. The Company currently
has no ongoing business and its assets consist primarily of cash. Therefore it
currently has no business segments.
Government
Regulation
The
Company’s oil and gas operations, which were discontinued, were affected by
political developments and by federal, state and local laws and regulations.
Legislation and administrative regulations are periodically changed for a
variety of political, economic, environmental and other reasons. If the company
remains in the oil and gas business, numerous federal, state and local
departments and agencies issue rules and regulations binding on the oil and
natural gas industry, some of which carry substantial penalties and sanctions
for failure to comply. The regulatory burden on the industry increases the cost
of doing business, decreases flexibility in the timing of operations and may
adversely affect the economics of capital projects.
Environmental
Matters
If the
company re-enters the oil and natural gas business, its’ operations will be
subject to stringent federal, state and local laws governing the discharge of
materials into the environment or otherwise relating to environmental
protection. Numerous governmental departments such as the federal Environmental
Protection Agency (“EPA”) issue regulations to implement and enforce such laws,
which are often difficult and costly to comply with and which carry substantial
civil and criminal penalties and sanctions for failure to comply. These laws and
regulations will require the acquisition of a permit before drilling commences,
restrict the types, quantities and concentrations of various substances that can
be released into the environment in connection with drilling, production and
transporting through pipelines, limit or prohibit drilling activities on certain
lands lying within wilderness, wetlands, frontier and other protected areas,
require some form of remedial action to prevent pollution from former operations
such as plugging abandoned wells, and impose substantial liabilities for
pollution resulting from operations. In addition, these laws, rules and
regulations may restrict the rate of production. The regulatory burden on the
oil and natural gas industry increases the cost of doing business and therefore
affects profitability. Changes in environmental laws and regulations occur
frequently, and changes that result in more stringent and costly waste handling,
disposal or clean-up requirements could adversely affect the Company’s
operations and financial position, as well as the industry in
general.
The
Company is not aware of any instance in which it was found to be in violation of
any environmental or employee regulations or laws, and the Company is not
subject to any present litigation or claims concerning such environmental
matters, or other regulatory matters. In some instances the Company
could in the future incur liability, even as a non-operator, for potential
environmental waste or damages or employee claims occurring on oil and natural
gas properties or leases in which the Company has an ownership
interest.
Forward-Looking
Statements
Certain
information included in this report, other materials filed or to be filed by the
Company with the Securities and Exchange Commission (“SEC”), as well as
information included in oral statements or other written statements made or to
be made by the Company contain or incorporate by reference certain statements
(other than statements of historical or present fact) that constitute
“forward-looking statements” within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All
statements, other than statements of historical or present facts, that address
activities, events, outcomes or developments that the Company plans, expects,
believes, assumes, budgets, predicts, forecasts, estimates, projects, intends or
anticipates (and other similar expressions) will or may occur in the future are
forward-looking statements. These forward-looking statements are based on
management’s current belief, based on currently available information, as to the
outcome and timing of future events. When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this Form 10-K. Such forward-looking statements appear in a number
of places and include statements with respect to, among other things, such
matters as: future capital, development and exploration expenditures (including
the amount and nature thereof), drilling, deepening or refracing of wells, oil
and natural gas reserve estimates (including estimates of future net revenues
associated with such reserves and the present value of such future net
revenues), estimates of future production of oil and natural gas, expected
results or benefits associated with recent acquisitions, business strategies,
expansion and growth of the Company’s operations, cash flow and anticipated
liquidity, grassroots prospects and development and property acquisition,
obtaining financial or industry partners for prospect or program development, or
marketing of oil and natural gas. We caution you that these forward-looking
statements are subject to all of the risks and uncertainties, many of which are
beyond our control, incident to the exploration for and development, production
and sale of oil and natural gas. These risks included but were not limited to:
general economic conditions, the market price of oil and natural gas, the risks
associated with exploration, the Company’s ability to find, acquire, market,
develop a new business or new oil and gas properties, the strength and financial
resources of the Company’s competitors, the Company’s ability to find and retain
skilled personnel, climatic conditions, labor relations, availability and cost
of material and equipment, environmental risks, the results of financing
efforts, regulatory developments and the other risks described in this Form
10-K.
In the
future, should one or more of the risks or uncertainties described above or
elsewhere in this Form 10-K occur, or should underlying assumptions prove
incorrect, our actual results and plans could differ materially from those
expressed in any forward-looking statements. We specifically disclaim all
responsibility to publicly update any information contained in a forward-looking
statement or any forward-looking statement in its entirety and therefore
disclaim any resulting liability for potentially related damages.
All
forward-looking statements attributable to Croff or its management are expressly
qualified in their entirety by this cautionary statement.
Fluctuations
in Profitability of the Oil and Natural Gas Industry
If the
Company re-enters the oil and gas industry it will face these commodity risks.
The oil and natural gas industry is highly cyclical and historically has
experienced severe downturns characterized by oversupply and weak demand. Many
factors affect this industry, including general economic conditions,
international incidents (politics, wars, etc.) consumer preferences, personal
discretionary spending levels, interest rates and the availability of credit and
capital to pursue new production opportunities. It is possible that
the oil and natural gas industry will experience sustained periods of decline in
the future. Any such decline could have a material adverse affect on
the Company if it remains in the oil and gas business.
Corporate
Offices and Employees
The
corporate offices are located at 3773 Cherry Creek Drive North, Suite 1025,
Denver, Colorado 80209. The Company is not a party to any lease, but
during 2007 paid Jenex Petroleum Corporation, which is owned by the Company’s
President, for office space and all office services, including rent, phone,
office supplies, secretarial, land, and accounting. The Company’s
expenses for these services were $50,554, and $49,872 and $51,258 for the years
ended 2005, 2006, and 2007, respectively. Although these transactions
were not a result of “arms length” negotiations, the Company’s Board of
Directors believed the transactions are reasonable.
The
Company currently has four (4) directors. One director slot of the normal five
directors authorized by the bylaws is currently unfilled. The Company has one
employee, the President, and three part-time contract workers, one of which is
also an officer. The contract workers are provided to the Company as
part of its office overhead agreement. The President and the contract
workers work from the Company’s corporate offices. None of the Croff
staff is represented by a union.
Foreign
Operations and Subsidiaries
The
Company has no foreign operations, exports, or subsidiaries at
present.
Inactive
Public Company
Since
December 31st, 2007,
the Company has functioned as an inactive public company without productive
assets, revenues, or earnings. As previously indicated and disclosed,
the business plan going forward is to attempt to seek various possible merger or
acquisition possibilities for the Company as an inactive public company,
sometimes know as a “shell” corporation. Operating as an inactive
public company poses certain impediments and risk factors to the Company and the
shareholders, the most significant of which are outlined below:
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While
the Company has approximately $350,000 in liquid assets and negligible
debt, these assets must be considered during the period of business
inactivity as “wasting assets” which will be expended to continue the
operation of the Company on a minimal basis and as a public reporting
company pending a subsequent acquisition, merger, or
reorganization. There can be no warranty or assurance how long
the Company can continue in its present state as a inactive public company
without further capitalization.
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The
Company can make no warranty or assurance it will be successful in
obtaining a suitable merger or acquisition candidate and is pursuing such
objectives on a best efforts basis through its part-time management and
board members.
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There
are imposed by SEC regulation certain restrictions and limitations upon
investors who can purchase shares in an inactive public corporation
through brokerage firms, which limits the suitability of any shares to be
sold while inactive to a limited range of individuals who are able to bear
high risk investments.
|
|
·
|
The
fact that the Company shares are limited to a restricted group of buyers
and the fact that the Company must report itself as a shell company in its
periodic reporting requirements may limit the value of the Company as a
public entity and the tradability of its shares in the
market.
|
|
·
|
There
are certain limitations and restraints upon the use of the SEC Rule 144
for the resale of restricted securities in a shell corporation which may
have to be satisfied by various individuals holding restricted stock in
the Company.
|
|
·
|
In
the future, the SEC or various state security regulatory agencies may
impose further or additional regulations or limitations on the Company or
the tradability of its stock as a shell
company.
|
ITEM
2. PROPERTIES
Currently the Company’s properties
consist solely of its value as a public company, cash, and other short term
assets. All its previous oil and gas properties were exchanged, as described in
Item 1 above.
ITEM
3. LEGAL PROCEEDINGS
The Company is not a party to any legal
actions.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
On December 21, 2007, a special meeting
of shareholders was held, which also included the election of directors and
approval of auditors which normally are done at the annual
meeting. The shareholders elected the four board members listed in
the proxy, and ratified Ronald Chadwick as the independent auditor of the
Company. The shareholders then approved the cancellation of the Preferred B
shares, and distribution in exchange of an equal number of common shares of
Croff Oil Company, Inc. to which the oil and gas assets of Croff had been
transferred. Shareholders also voted to increase the authorized common shares
from 20,000,000 to 50,000,000 and to increase the authorized Preferred A shares
from 5 million to 10 million shares. Please see Item 1 for a more complete
description of the Plan of Corporate Division and Reorganization which was
approved.
PART II
|
ITEM
5.
|
MARKET
FOR REGISTRANT’S SECURITIES, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
The Company’s common stock is listed
and traded on the Over The Counter Electronic Bulletin Board (www.otcbb.com) under
the symbol “COFF”. The Company has authorized 50,000,000 shares of common stock,
of which only 516,799 shares are outstanding to approximately 1,000
shareholders. The Company previously had authorized Preferred B
stock, all of which has now been cancelled. The Company’s SEC filings
can be found on the Croff website at www.croff.com.
During
the year ended December 31, 2005, the Company purchased 1,500 shares of its
common stock for $2,362, which were cancelled. In December 2005, the
Company purchased on the Over-The-Counter-Bulletin-Board (“OTCBB”) 16,156 shares
of its common stock for $24,643 and included in Treasury stock at December
31, 2005. No common shares were purchased in 2006. Under the Utah
Dissenting Shareholder Rights Statute, 34,445 common shares were tendered by
shareholders exercising their rights to tender their shares to the Company for
cash from December 2007 to March 2008. This reduced the outstanding common stock
to 516,799 shares outstanding.
The trading range for 2005 through 2007
for common shares is a guide to as to what transactions have either taken place
or of which the Company is aware of or the high and low bid or asking
price.
COMMON
SHARES – 516,799 SHARES OUTSTANDING FOR 2008 - (The following data is generated
from limited trades on the Over-The-Counter Bulletin Board including purchases
by the Company’s management.)
BID
RANGE
|
Year
|
|
Calendar Quarter
|
|
Low
|
|
|
High
|
|
|
|
|
|
|
|
|
|
|
|
|
2005:
|
|
First
Quarter
|
|
$ |
1.40 |
|
|
$ |
1.80 |
|
|
|
|
Second
Quarter
|
|
$ |
1.20 |
|
|
$ |
1.50 |
|
|
|
|
Third
Quarter
|
|
$ |
1.45 |
|
|
$ |
2.00 |
|
|
|
|
Fourth
Quarter
|
|
$ |
1.25 |
|
|
$ |
1.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
First
Quarter
|
|
$ |
1.40 |
|
|
$ |
1.75 |
|
|
|
|
Second
Quarter
|
|
$ |
1.50 |
|
|
$ |
2.40 |
|
|
|
|
Third
Quarter
|
|
$ |
1.50 |
|
|
$ |
2.00 |
|
|
|
|
Fourth
Quarter
|
|
$ |
1.60 |
|
|
$ |
3.00 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007:
|
|
First
Quarter
|
|
$ |
1.75 |
|
|
$ |
3.00 |
|
|
|
|
Second
Quarter
|
|
$ |
2.00 |
|
|
$ |
2.75 |
|
|
|
|
Third
Quarter
|
|
$ |
2.00 |
|
|
$ |
2.50 |
|
|
|
|
Fourth
Quarter
|
|
$ |
1.00 |
|
|
$ |
1.75 |
|
As of December 31, 2007, there were
approximately 1,000 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
The
following table presents selected historical financial data of the Company for
the five-year period ended December 31, 2007. Future results will
differ substantially from historical results because the oil and gas assets were
assigned to Croff Oil Company, Inc., and the Preferred B shares were cancelled.
This information should be read in conjunction with the Financial Statements,
and notes thereto, and Management’s Discussion and Analysis of Financial
Condition and Results of Operations, presented below, Item 7.
STATEMENT
OF OPERATIONS DATA(1)
| Year
Ended December 31, |
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
Oil
and Natural Gas
|
|
$ |
392,564 |
|
|
$ |
608,132 |
|
|
$ |
934,525 |
|
|
$ |
842,400 |
|
|
$ |
876,505 |
|
|
Other
Revenues
|
|
$ |
23,362 |
|
|
$ |
(31,970 |
) |
|
$ |
33,560 |
|
|
$ |
162,874 |
|
|
$ |
42,740 |
|
|
Expenses
|
|
$ |
321,817 |
|
|
$ |
434,046 |
|
|
$ |
678,198 |
|
|
$ |
632,259 |
|
|
$ |
694,785 |
|
|
Net
Income
|
|
$ |
94,109 |
|
|
$ |
142,116 |
|
|
$ |
289,887 |
|
|
$ |
373,015 |
|
|
$ |
170,542 |
|
|
Per
Common Share(1)
|
|
$ |
0.01 |
(1) |
|
$ |
(0.13 |
)
(1) |
|
$ |
(0.05 |
)
(1) |
|
$ |
0.15 |
(1) |
|
$ |
(0.09 |
) |
|
Working
capital
|
|
$ |
336,471 |
|
|
$ |
330,243 |
|
|
$ |
625,862 |
|
|
$ |
995,498 |
|
|
$ |
417,538 |
|
|
Dividends
per share
|
|
NONE
|
|
|
NONE
|
|
|
NONE
|
|
|
NONE
|
|
|
NONE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE
SHEET DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
898,221 |
|
|
$ |
1,088,553 |
|
|
$ |
1,807,502 |
|
|
$ |
1,867,161 |
|
|
$ |
495,364 |
|
|
Long-term
debt**
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
Stockholders’
equity
|
|
$ |
866,112 |
|
|
$ |
1,051,438 |
|
|
$ |
1,314,320 |
|
|
$ |
1,687,335 |
|
|
$ |
417,538 |
|
** There
were no long-term obligations from 2003-2007.
|
|
(1) The
Company allocated its net income between preferred B shares and common
shares from 2003-2007. Accordingly, net income (loss) applicable to common
shares varies from a fixed ratio to net income, depending on the source of
income and expenses. See attached financials statement for further
detail.
|
|
ITEM
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS`
|
Critical
Accounting Policies and Estimates
The
Company’s discussion and analysis of its financial condition and results of
operation are based upon Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these Financial Statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the Financial Statements and the reported amounts of revenues and
expenses during the year. The Company analyzes its estimates,
including those related to oil and natural gas revenues, oil and natural gas
properties, marketable securities, income taxes and
contingencies. The Company bases its estimates on historical
experience and various other assumptions that are believed to be reasonable
under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
The
Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its Financial
Statements and the uncertainties that it could impact our results of operations,
financial condition and cash flows. The Company follows the
"successful efforts" method of accounting for its oil and gas properties. Under
this method, all property acquisition costs and costs of exploratory and
development wells are capitalized when incurred, pending determination of
whether the well has proven reserves. If an exploratory well does not result in
reserves, the capitalized costs of drilling the well, net of any salvage, are
charged to expense. The costs of development wells are capitalized, whether the
well is productive or nonproductive. Impairments are recorded when
management believes that a property’s net book value is not recoverable based on
current estimates of expected future cash flows. The Company provides
for depreciation and depletion of its investment in producing oil and natural
gas properties on the unit-of-production method, based upon estimates of
recoverable oil and natural gas reserves from the property. The
Company designated its marketable equity securities as “securities available for
sale”.
Liquidity
and Capital Resources
With the approval of the Plan of
Corporate Division and Reorganization by the Croff shareholders on December 21,
2007 all of the oil and gas assets, liabilities, and future income was split
into a new corporation, Croff Oil Company, Inc. Because of this all
of the oil and gas revenues and expenses are no longer a part of Croff
Enterprises, Inc. and are not included in the liquidity section. More detailed
information regarding the oil and gas assets prior to the division can be found
in the results of Discontinued Operations section below. The Company’s liquidity
is no longer affected by the fluctuations of the prices of oil and natural
gas.
At
December 31, 2007, the Company had assets of 495,364. At December 31, 2007, the
Company’s current assets totaled $495,364 compared to current liabilities of
$77,826. Working capital at December 31, 2007 totaled $417,538, a decrease of
approximately 118% compared to $995,498 at December 31, 2006. The Company had a
current ratio at December 31, 2007 of approximately 6:1 During 2007, net cash
provided by operations totaled $344,098 as compared to $329,840 for 2006. This
increase was due to higher prices in 2007. The Company had no short-term or
long-term debt outstanding at December 31, 2007.
At
December 31, 2007, there were no commitments for capital
expenditures.
Results
Including Discontinued Operations
Revenues for 2007 totaled $876,505 an
increase of approximately 4% from $843,060 in 2006. Net income for
2007 totaled $170,542 compared to $373,015 for 2006. This decrease
primarily was due to the write off of leases in Texas and costs of
reorganization. Oil and gas sales for the December 31, 2007 year end totaled
$876,505, an increase of approximately 4% from $842,400, for the year ended
December 31, 2006. An increase in oil and gas prices, as well as production,
were the factors causing this increase in oil and gas sales compared to the same
period in 2006.
Lease operating expenses for 2007,
which includes all production related taxes, totaled $267,328 compared to
$205,871 for 2006. This increase was due to the Company participating in two
wells and several workovers. The lease operating expenses remained nearly
constant for the Company’s existing wells.
Depletion and depreciation expense for
the year ending December 31, 2007 totaled $56,610 compared to $48,500 for the
year ending in 2006. This was due to the small increase in producing assets in
2007. Accretion expense for the Asset Retirement accrual was $7,157 for the year
ending December 31, 2007 compared to $5,868 for the year ending December 31,
2006.
Net income for the year ending December
31, 2006 was $373,015 compared to $289,887 for the year ending December 31,
2005. Provision for income taxes for the year ending December 31, 2006 totaled
$110,000 compared to $82,478 from December 31, 2005. This increase is primarily
attributable to an increase in net income for the year, which also resulted in a
higher tax bracket.
Results
of Continued Operations
The only
material revenue from continuing operations was from interest earned in 2007,
since all other revenue related to discontinued operations. Interest income was
$42,740 in 2007.
General
and administrative expenses, including overhead expense paid to a related party,
for the year ending December 31, 2007 totaled $201,317 compared to $262,520 for
the same period in 2006. The decrease in general and administrative
and overhead expenses is primarily attributed to the higher costs in 2006 of
printing and other costs paid to related third parties, and the higher
professional fees of the Company. The primary reasons for this decrease were
lower professional expenses related to the negotiating, drafting, and then
terminating the exchange agreement entered into with TRBT and related SEC
filings in 2006.
Interest
income decreased from $49,671 for the period ending December 31, 2006 to $42,741
for the year ending December 31, 2007. The interest income decreased due to
lower interest rates.
Recent
accounting pronouncements
SFAS 155,
“Accounting for Certain Hybrid
Financial Instruments—an amendment of FASB Statements No. 133 and 140”
(‘SFAS No. 155”). This Statement shall be effective for all financial
instruments acquired, issued, or subject to a remeasurement (new basis) event
occurring after the beginning of an entity’s first fiscal year that begins after
September 15, 2006. The fair value election provided for in paragraph 4(c) of
this Statement may also be applied upon adoption of this Statement for hybrid
financial instruments that had been bifurcated under paragraph 12 of Statement
133 prior to the adoption of this Statement. Earlier adoption is permitted as of
the beginning of an entity’s fiscal year, provided the entity has not yet issued
financial statements, including financial statements for any interim period, for
that fiscal year. Management does not expect adoption of SFAS No. 155 to have a
material impact on the Company’s financial statements.
SFAS 157,
“Fair Value
Measurements”, defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the
Board having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does
not require any new fair value measurements. However, for some entities, the
application of this Statement will change current practice. Management has not
evaluated the impact of this statement.
In
June 2005, the Emerging Issues Task Force reached a consensus on Issue
No. 05-6 (“EITF No. 05-6”), “Determining the Amortization Period
for Leasehold Improvements Purchased after Lease Inception or Acquired in a
Business Combination.” EITF No. 05-6 clarifies that the
amortization period for leasehold improvements acquired in a business
combination or placed in service significantly after and not contemplated at or
near the beginning of the lease term should be amortized over the shorter of the
useful life of the assets or a term that includes the required lease periods and
renewals that are reasonably assured of exercise at the time of the acquisition.
EITF No. 05-6 is to be applied prospectively to leasehold improvements purchased
or acquired in reporting periods beginning after June 29, 2006. The adoption of
EITF No. 05-6 did not have a material impact on the Company’s consolidated
financial statements.
In June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN
No. 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with FASB Statement No.
109, “Accounting for Income Taxes”. Fin No. 48 is effective for
fiscal years beginning after December 15, 2005. Management does not
expect adoption of FIN No. 48 to have a material impact on the Company’s
financial statements.
SFAS 158
“Employers” Accounting for Defined Benefit Pension and Other Postretirement
Plans-an amendment of SFAS 87, 88, 106, and 132(R).” This statement requires an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multi-employer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This statement requires an employer to measure the
funded status of a plan as of the date of its year-end statement of financial
position, with limited exceptions. The Company does not maintain a defined
benefit pension plan and offers no other post retirement benefits.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of SFAS No. 115
(“SFAS No. 159”), which becomes effective for fiscal periods beginning
after November 15, 2007. Under SFAS No. 159, companies may elect to measure
specified financial instruments and warranty and insurance contracts at fair
value on a contract-by-contract basis, with changes in fair value recognized in
earnings each reporting period. This election, called the “fair value option”,
will enable some companies to reduce volatility in reported earnings caused by
measuring related assets and liabilities differently. We do not expect the
impact of adoption to have a material impact on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations, (“SFAS
141 R”). SFAS 141 R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, including goodwill, the liabilities assumed and any non-controlling
interest in the acquiree. The Statement also establishes disclosure requirements
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
impact of adopting SFAS 141R will be dependent on the future business
combinations that the Company may pursue after its effective date.
In
December 2007, the SEC issued SAB 110 Share-Based Payment. SAB 110
amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based
Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of
Topic 14 expressed the views of the staff regarding the use of the “simplified”
method in developing an estimate of the expected term of “plain vanilla” share
options and allows usage of the “simplified” method for share option grants
prior to December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to continue
use for the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007. SAB 110 is effective
January 1, 2008. We currently use the “simplified” method to estimate the
expected term for share option grants as we do not have enough historical
experience to provide a reasonable estimate. We will continue to use the
“simplified” method until we have enough historical experience to provide a
reasonable estimate of expected term in accordance with SAB 110. The Company
does not expect SAB 110 will have a material impact on its consolidated balance
sheets, statements of income and cash flows.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
The
Company’s major market risk exposure is the ability to find a private company
that desires to be acquired in a reverse merger where in the private company’s
management would provide the management of Croff to obtain a reasonable value
for the Company’s common shares.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Reference
is made to the Index to Financial Statements on page F-1 for a listing of the
Company’s Financial Statements and notes thereto and for the financial statement
schedules contained herein.
Management
Responsibility for Financial Statements
The
Financial Statements have been prepared by management in conformity with
accounting principles generally accepted in the United States of
America. Management is responsible for the fairness and reliability
of the Financial Statements and other financial data included in this
report. In the preparation of the Financial Statements, it is
necessary to make informed estimates and judgments based on currently available
information on the effects of certain events and transactions. The
Company maintains accounting and other controls which management believes
provide reasonable assurance that financial records are reliable, assets are
safeguarded and transactions are properly recorded.
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
|
The
Company has had no disagreements on accounting and financial disclosure matters
with its registered public accounting firm during 2005, 2006, 2007 or from
January 1, 2008 through the date of this filing.
ITEM
9A(T). CONTROLS AND PROCEDURES
As of the
end of the period covered by this Annual Report, our Chief Executive Officer,
and also acting as the Chief Financial Officer (the “Certifying Officer”)
conducted evaluations of our disclosure controls and procedures. As defined
under Sections 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934
Act, as amended (the “Exchange Act”) the term “disclosure controls and
procedures” means controls and other procedures of an issuer that are designed
to ensure that information required to be disclosed by the issuer in the reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the
Exchange Act is accumulated and communicated to the issuer’s management,
including the Certifying Officer, to allow timely decisions regarding required
disclosure. Based on this evaluation, the Certifying Officer originally
concluded that our disclosure controls and procedures were effective to ensure
that material information is accurately recorded, processed, summarized and
reported by our management on a timely basis in order to comply with our
disclosure obligations under the Exchange Act, and the rules and regulations
promulgated thereunder and there are adequate safeguards to protect against
misuse of corporate assets or fraud.
Management
Report
As a
small public company, management can and does directly review all expenditures
and revenues. Further, the company employs an independent audit
committee that works directly with our outside auditors to review all financial
transactions of the company, to include standard reviews and checks to detect
and report any misappropriation, defalcation, or other form of
fraud. Management is not aware of any financial abuse pursuant to
this review process.
Management
believes the foregoing processes combining management direct review and control
over all revenues and expenditures coupled with an independent audit committee
consisting solely of non-management board members having experience in financial
and financial accounting provides a reasonably effective financial control
system for a small public company.
Further,
there were no changes in our internal control over financial reporting during
the fourth fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
During portions of 2006 and 2007, the company’s principal executive officer also
acted as the company’s chief financial officer to evaluate the effectiveness of
the company’s disclosure controls and procedures.
Management’s
report was not subject to attestation by the Company’s registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the company to provide only management’s report in this
annual report.
ITEM
9B. OTHER INFORMATION
The
Company is not aware of any previously undisclosed, but required information
since its last filing; that is not included in this 10-K report.
PART III
ITEM
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Identification
of Directors, Officers and Significant Employees.
The Croff
Board consists of Gerald L. Jensen, Richard H. Mandel Jr., Harvey Fenster, and
Julian D. Jensen. The fifth director, has not been selected or
elected. Each director will serve until the next annual meeting of
shareholders, or until his successor is duly elected and qualified. The Company
has no knowledge of any arrangements or understandings between directors or any
other person pursuant to which any person was or is to be nominated or elected
to the office of director of the Company. The following is provided
with respect to each officer and director of the Company as of March 31,
2008:
GERALD L.
JENSEN, 68, PRESIDENT & DIRECTOR
President
and Chairman of Croff Enterprises, Inc. since October 1985. Mr. Jensen has been
an officer and director of Jenex Petroleum Corporation, a private oil and
natural gas company, for over ten years, and an officer and director of other
Jenex companies. Mr. Jensen also is an owner and member of Pecos Gathering and
Marketing, L.L.C, a crude oil gathering company. Mr. Jensen was a director of
Pyro Energy Corp., a public company (N.Y.S.E.) engaged in coal production and
oil and natural gas, from 1978 until it was sold in 1989. Mr. Jensen
is also an owner of private real estate, finance, and oil and natural gas
companies.
RICHARD
H. MANDEL, JR., 78, DIRECTOR
Mr.
Mandel has been a director of Croff Enterprises, Inc. since
1985. Since 1982, Mr. Mandel has been President and a Board Member of
American Western Group, Inc., an oil and natural gas producing company in
Denver, Colorado. From 1977 to 1984, he was President of Universal
Drilling Co., Denver, Colorado. Prior to 1977, Mr. Mandel worked for
The Superior Oil Co., Honolulu Oil Co., and Signal Oil and Gas Co. as an
engineer and in management. Mr. Mandel was also director of Wichita River Oil,
which was on the American Stock Exchange.
HARVEY
FENSTER, 67, DIRECTOR
Mr. Fenster has been a director of
Croff Enterprises, Inc. since 2006. Mr. Fenster currently is the President of BA
Capital Company, a financial advisory services company. From 1991 to 1994,
he served as Senior Vice President and Chief Financial Officer of The Katz
Corporation, a publicly owned international media representation firm.
Previously, Mr. Fenster was Executive Vice President and Chief Financial Officer
of Pyro Energy Corp., a New York Stock Exchange listed public company engaged in
coal mining, oil and gas exploration and development. Mr. Fenster has also
served as a director of Uranium Resources, Inc., a public company engaged in
uranium exploration and production. Mr. Fenster, a Certified Public
Accountant, is retired from public practice.
JULIAN D.
JENSEN, 60, DIRECTOR
Mr.
Jensen has been a director of Croff Enterprises, Inc. since November
1991. Mr. Jensen is the brother of the Company’s president and has
served as legal counsel to the Company for the past twelve years. Mr.
Jensen has practiced primarily in the areas of corporate and securities law, in
Salt Lake City, Utah, since 1975. Mr. Jensen is currently associated
with the firm of Jensen, Duffin & Dibb L.L.P., which acts as legal counsel
for the Company.
Compliance
with Section 16(a) of the Securities Exchange Act of 1934
Based
solely on a review of such forms furnished to the Company and certain written
representations from the Executive Officers and Directors, the Company believes
that all Section 16(a) filing requirements applicable to its Executive Officers,
Directors and greater than ten percent beneficial owners were complied with on a
timely basis in 2007.
Audit
Committee
The Board
has an Audit Committee to assist it in the discharge of its responsibilities
including the presentation and disclosures of Croff’s financial condition and
results of operations and disclosure controls and procedures. The
Audit Committee is presently comprised of Harvey Fenster and Richard Mandel.
both of whom are independent directors of Croff. Mr. Fenster is the
Chairman of the Committee and the “Audit Committee Financial Expert.” Prior to
December 2006, the Audit Committee consisted of Dilworth Nebeker, Chairman and
“Audit Committee Financial Expert”, and Edwin Peiker, member.
During
2007, the Audit Committee selected and recommended the firm of Ronald Chadwick
to act as Croff’s auditors for the 2007 year to the full Board of
Directors. The Board of Directors and shareholders approved the
retention of Ronald Chadwick. The Audit Committee then negotiated and
executed an agreement between Croff and Ronald Chadwick.
The Audit
Committee reviewed each of the quarterly Form 10-Q’s filed with the SEC during
the year 2007. Members of the Committee discussed each of the filings
with management of Croff before the filings were made. The Committee
also discussed Croff’s disclosure controls and procedures with management each
quarter.
The Audit
Committee members have each reviewed this 2007 Form 10-K. Members of
the Committee have discussed the Form 10-K and Financial Statements for the year
2007 with management of Croff. The Committee has also discussed
Croff’s disclosure controls and procedures with management. The Audit
Committee met and discussed the Form 10-K and Financial Statements prior to this
filing. The Audit Committee voted to recommend this 2007 Form 10-K
and Financial Statements to the Board of Directors for filing with the
SEC.
Members
of the Audit Committee have discussed the audit and financial statements with
the appropriate principal Ronald Chadwick P.C., C.P.A, including those matters
required by SAS 61. They also discussed Croff’s disclosure controls
and procedures.
The Croff
Board of Directors have each received a letter from Ronald Chadwick that as of
March 1, 2008, Ronald Chadwick was the independent accountant with
respect to Croff, within the meaning of the Securities Acts administered by the
SEC and the requirements of the Independence Standard Board.
Code of
Ethics
The company has adopted and refined
over time a code of ethics that is applicable to its directors and managers. The
code of ethics is currently contained in various writings by the company, but in
all events contains the following essential provisions as agreed to and adopted
by the board of directors:
|
·
|
All
officers and directors have agreed to act in the best interest and under
the highest fiduciary standards owed to the company and its
shareholders.
|
|
·
|
There
is an attempt to avoid conflicts of interest between the Company and any
officers or directors to the extent that an officer and/or director had
previously been, or subsequently will be, engaged in any independent oil
and gas activities, the director or officer will make known to the company
any oil and gas business opportunities which are applicable to the
company’s operations and interest on a first right of refusal
basis.
|
|
·
|
No
member of the board or management has or will engage in any competitive
business activities to the company.
|
|
·
|
Should
any oil and gas or other business opportunities be made available to the
company by an interested member of the board or management, such proposal
has been and will be reviewed by an independent quorum of the
directors. This has historically included any proposals for
sale or acquisition of assets by and between a principal officer and the
company.
|
|
·
|
No
member of the audit committee will be involved in management of the
company in any manner and the audit committee will function independently
with the outside auditors for the
company.
|
The various provisions of the ethics
code which is currently being compiled will be posted on the company’s website
and can be made available without charge upon request in writing to the
company.
Corporate
Governance
The board of directors consists of
“inside directors” which are affiliated or participate in the management of the
company and “independent directors” which are not part of management and act
independently of management of the company in the discharge of their duties as
directors. The only management director, Mr. Gerald L. Jensen, also
serves the company as its president and CFO. All of the remaining
directors, Mr. Julian D. Jensen, Mr. Richard Mandel, Jr., and Mr. Harvey Fenster
are not affiliated with the company in any manner as part of management and
receive compensation solely on a participation basis in board of directors
meetings.
Management believes that the foregoing
definition of independent directors is consistent with the definitions
promulgated by the securities self regulatory agencies governing the
over-the-counter trading of the Company’s securities.
Various potential conflicts which may
exist between the company and its various officers and directors are believed to
be limited, and substantial safeguards implemented, to prevent undue influence
or self dealing pursuant to the general outline of the code of ethics described
above.
During calendar year 2007, there were
approximately 12 regular and special meetings of the board of
directors. All of the named directors in this report attended
seventy-five percent (75%) or more of those meetings.
Mr. Fenster and Mr. Mandel who
constitute the audit committee each attended 4 audit committee meetings during
calendar year 2007.
The company does not have any other
standing committees other than the audit committee and handles nominations to
the board by a committee of the whole, along with any review and determination
of conflicts, ethics issues, and compensation.
ITEM
11. EXECUTIVE COMPENSATION
Remuneration
During
the fiscal year ended December 31, 2007, there were no officers, employees or
directors whose total cash or other remuneration exceeded $80,000. Directors
currently receive $350 for each half-day session of meetings of the Board and
$500 for each full day meeting. The Audit Committee Chairman receives
$500 per quarter and each member receives $350 per quarter. The company has only
one compensated principal officer, its president and CEO, Mr. Gerald L. Jensen,
who is currently paid at the rate of $54,000 per year.
Compensation
Discussion and Analysis
In the sections and tables that follow,
Croff has attempted to delineate the present compensation structure to existing
management.
|
·
|
Objectives of Croff
Compensation Program. Historically, and currently, Croff has only
had one compensated principal officer, its president, CEO and chairman of
the board, Mr. Gerald L. Jensen. Mr. Jensen serves the company
utilizing a substantial amount of his time, but also is an officer in
various private companies, and thus is essentially a part-time
officer. As a result, an independent majority of the board on
an annual basis have reviewed the compensation to Mr.
Jensen. Independent members of the board have determined since
2003 that $54,000 as an annual compensation salary for the services
rendered by Mr. Jensen were a reasonable and adequate salary based upon
the size and nature of the company, the size of its revenues and income,
and the part-time nature of the position. Within these
considerations, it was also determined that there should be no collateral
benefits or indirect compensation extended to the president or the board
members, except that the board did agree to make an annual IRA (Individual
Retirement Account) contribution in the amount of $1,620 per year for the
periods subsequent to 2003, to the president. There have been
no stock options to directors since they were last exercised or expired in
2002. Croff currently does not have a Chief Financial Officer
(CFO), but employs a chief accounting officer. This employee is
paid on a part-time basis through a third party contract
arrangement.
|
|
·
|
Services to be
Rewarded. Historically, the Croff board had determined
that the chief executive officer should be given a salary to reward him
for the day-to-day management and operation of the oil and gas business of
the company and completing other administrative duties and governmental
filings. As subsequently noted, the chief executive officer in
the existing management structure also had the responsibilities to do
initial reviews and screening of any merger or other acquisition proposals
and to determine what, if any, of those proposal would be suitable for
further board review and due diligence. As also noted previously, an
independent majority of the board, excluding Mr. Gerald L. Jensen,
determined and set the salary for the president and believes that the
compensation is reasonable for the size and the nature of the company and
the services performed. The board also determined, acting as a
committee of the whole, that no annual compensation would be paid to board
members as such; but that they would be reimbursed for meeting attendance
as previously described. Further, there has been no stock
rights, warrants or other options granted as part of compensation for
management in any capacity or for other purposes, since the last exercised
options in 2002.
|
|
·
|
Elements of
Compensation. As noted above, as to historical
management there were no stock options, rights, benefits, or other
collateral benefits paid to the single compensated officer of the
corporation or to any director since 2002. In addition to the
base salary, the company did pay a small annual IRA contribution as
outlined above to the president. The board of directors are compensated
only for meeting on a stipend basis. This compensation pattern
and the absence of any collateral or indirect compensation is fully
set-out in the summary compensation
below.
|
|
·
|
Compensation After
Corporate Division. Mr. Gerald L. Jensen has agreed to
serve both Croff and Croff Oil as their respective president with all
compensation being paid by Croff
Oil.
|
Within the context of the foregoing
discussion and analysis of current and prospective compensation, this
information is also set-out in tabular format as follows for all current and
prospective executive officers. The board has agreed it will continue
paying directors for attendance at board meetings on a per diem basis at the
current rate.. Further, the board has asked the president to
investigate the cost and procedures for obtaining liability insurance for board
members.
SUMMARY
EXECUTIVE COMPENSATION TABLE
CURRENT MANAGEMENT
1
|
Name
and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
Change
in Pension
Value
and Nonqualified
Deferred
Compensation
Earnings
($)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mr.
Gerald L. Jensen:
|
|
2004
|
|
$54,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Annual
IRA
|
|
$55,620
|
|
President,
|
|
2005
|
|
$54,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
Contribution
|
|
$55,620
|
|
CEO
and
|
|
2006
|
|
$54,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
$1,620
|
|
$55,620
|
|
Chairman
of the Board
|
|
2007
|
|
$54,000
|
|
None
|
|
None
|
|
None
|
|
None
|
|
None
|
|
For
Each Year
|
|
$55,620
|
¹
Compensation was reduced to one dollar per year on January 1, 2008.
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
The
following table sets forth the beneficial ownership of common stock of the
Company as of March 1, 2008, by (a) each person who owned of record, or
beneficially, more than five percent (5%) of the Company’s $.10 par value common
stock, its common voting securities, and (b) each director and nominee and all
directors and officers as a group.
|
|
|
Shares of Common Stock Owned
Beneficially
|
|
Percentage of Class of Common
Stock
|
|
|
|
|
|
|
|
Gerald
L. Jensen
3773
Cherry Creek Drive N, #1025
Denver,
Colorado 80209
|
|
258,878(1)
|
|
50.1%
|
|
|
|
|
|
|
|
Richard
H. Mandel, Jr.
3333
E. Florida #94
Denver,
Colorado 80210
|
|
18,100
|
|
3.5%
|
|
|
|
|
|
|
|
Julian
D. Jensen
311
South State Street, Suite 380
Salt
Lake City, Utah 84111
|
|
31,663
|
|
6.1%
|
|
|
|
|
|
|
|
Harvey
Fenster
400
Post Avenue, Suite 205
Westbury,
New York 11590
|
|
-0-
|
|
0%
|
|
|
|
|
|
|
|
Directors
as a Group
|
|
308,641
|
|
59.7%
|
|
(1)
|
Includes
132,130 shares of Common held by Jensen Development Company and CS Finance
L.L.C., both of which are wholly owned by Gerald L.
Jensen.
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The
Company currently has an office sharing arrangement with Jenex Petroleum
Corporation, hereafter “Jenex”, which is owned by the Company’s
President. The Company is not a party to any lease, but during
2007paid Jenex for office space and all office services, including rent, phone,
office supplies, secretarial space, land, and accounting. These
arrangements were entered into to reduce the Company’s overhead and are
currently on a month-to-month basis. The Company’s expenses for these
services were$51,258, $49,872, and $50,554 for the years ended 2007, 2006, and
2005, respectively. Although these transactions were not a result of
“arms length” negotiations, the Company’s Board of Directors believes the
transactions are reasonable.
The
Company retains the legal services of Jensen, Duffin, & Dibb, LLP. Julian
Jensen, a Director of the Company, is part of this professional
firm. Legal fees paid to this law firm for the years ending 2007,
2006, and 2005, were $28,073.83, $23,493, and $16,920,
respectively. The reason for the increase in legal fees in 2007 is
the added time and expense related to the strategic alternatives for the
Company, the exchange agreement, and increased compliance costs.
ITEM
14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES
Audit
Fees
Ronald
Chadwick was recommended by the Audit Committee of the Board and approved by the
Company stockholder’s for appointment as the registered public accounting firm
for the Company for the fiscal year ended December 31, 2007. Ronald
Chadwick is registered with the Public Company Accounting Oversight
Board. Ronald Chadwick is in the third year of acting as independent
accountant for the company, and his fees for each quarterly review are $1,250
and the fee for the 2007 year end audit is $10,000. Previously, Causey Demgen
and Moore, “CDM,” has been acting as independent accountants for the Company for
over fifteen years. Aggregate fees for professional services rendered by CDM in
connection with its audit of the Company’s Financial Statements as of and for
the year ended December 31, 2005, and its limited reviews of the Company’s
unaudited condensed quarterly Financial Statements during 2005 totaled $14,145.
During 2006, CDM did not perform any additional services for the
Company.
PART IV
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
Financial
Statements
See index
to Financial Statements, financial statement schedules and supplemental
information as referenced in Part II, Item 8, and the financial index on page
F-1 hereof, which follow the exhibits below.
Reports
on Form 8-K:
8-K: December 24, 2007 Croff Plan of
Corporate Division Approved
8-K: November 12, 2007 Croff Announces
Plan of Corporate Division
8-K: June
1, 2007 Termination of Stock for Stock Equivalent Exchange
Agreement
Other
Filings:
Schedule 14A; December 7, 2007- 2007
Proxy Statement
10Q; November 13, 2007 For the Quarter
and Nine Months ended September 30, 2007
10K/A; August 28, 2007 For the Fiscal
Year Ended December 31, 2006
10Q; August 21, 2007 For the Quarter
Ended June 30, 2007
10Q; May 15, 2007 For the Quarter Ended
March 31, 2007
10K; March 28, 2007 For the Fiscal Year
Ended December 31, 2006
Exhibit
Index
23.1
Consent letter from Ronald R. Chadwick, P.C.
31.1
Certification by C.E.O.
31.2
Certification of C.A.O
32.1
Section 906 Certification by C.E.O.
32.2
Section 906 Certification by C.A.O
33.1
Articles of Amendment to Articles of Incorporation
33.2 Plan
of Corporate Division and Reorganization
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on behalf by the
undersigned, thereunto duly authorized.
REGISTRANT:
CROFF ENTERPRISES, INC.
Date:
04/30/2008
By /s/ Gerald L.
Jensen
Gerald L. Jensen,
President,
Chief Executive Officer
Date:
04/30/2008
By /s/ Gerald L
Jensen
Gerald L. Jensen
Acting Chief Financial
Officer
Pursuant
to the requirements of the Securities Exchange Act of 1934, the following
persons on behalf of the Registrant and in the capacities and on the date
indicated have signed this report below.
Date:
04/30/2008
By /s/ Gerald L.
Jensen
Gerald L. Jensen,
Chairman
Date:
04/30/2008
By /s/ Richard H. Handel,
Jr.
Richard H. Mandel, Jr.,
Director
Date:
04/30/2008
By /s/ Harvey
Fenster
Harvey Fenster,
Director
Date:
04/30/2008
By /s/ Julian D.
Jensen
Julian D. Jensen,
Director
CROFF
ENTERPRISES, INC.
FINANCIAL
STATEMENTS
December
31, 2006 and 2007
WITH
REPORT
OF REGISTERED PUBLIC ACCOUNTING FIRM
CROFF
ENTERPRISES, INC.
INDEX
TO FINANCIAL STATEMENTS, SCHEDULES
AND
SUPPLEMENTAL INFORMATION
|
|
|
Page
|
|
|
|
|
|
I.
|
Financial
Statements
|
|
|
|
|
|
|
|
Report
of Registered Public Accounting Firm
|
F –
2
|
|
|
|
|
|
|
Balance
Sheets as of December 31, 2006 and 2007
|
F –
3
|
|
|
|
|
|
|
Statements
of Operations for the years ended December 31, 2006 and
2007
|
F –
4
|
|
|
|
|
|
|
Statements
of Stockholders' Equity for the years ended December 31, 2006 and
2007
|
F –
5
|
|
|
|
|
|
|
Statements
of Cash Flows for the years ended December 31, 2006 and
2007
|
F –
6
|
|
|
|
|
|
|
Notes
to Financial Statements
|
F –
7 to F - 12
|
RONALD R.
CHADWICK, P.C.
Certified
Public Accountant
2851
South Parker Road, Suite 720
Aurora,
Colorado 80014
Telephone
(303)306-1967
Fax
(303)306-1944
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Croff
Enterprises, Inc.
Denver,
Colorado
I have
audited the accompanying balance sheets of Croff Enterprises, Inc. as of
December 31, 2006 and 2007, and the related statements of operations,
stockholders' equity and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. My responsibility
is to express an opinion on these financial statements based on my
audit.
I
conducted my audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that I plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audit provides a
reasonable basis for my opinion.
In my
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Croff Enterprises, Inc. as of
December 31, 2006 and 2007, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The
Company has restated its 2006 statement of operations and cash flows to provide
for consistent presentation of operations discontinued in 2007, as described in
footnote 10 to the financial statements.
Aurora,
Colorado /s/
Ronald R. Chadwick,
P.C.
April 14,
2008 RONALD
R. CHADWICK, P.C.
CROFF
ENTERPRISES, INC.
BALANCE
SHEETS
December
31, 2006 and 2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$ |
985,729 |
|
|
$ |
408,634 |
|
|
Accounts receivable
|
|
|
124,900 |
|
|
|
86,730 |
|
|
|
|
|
1,110,629 |
|
|
|
495,364 |
|
|
|
|
|
|
|
|
|
|
|
|
Oil
and gas properties, at cost, successful efforts method:
|
|
|
|
|
|
|
|
|
|
Proved properties
|
|
|
1,074,188 |
|
|
|
-- |
|
|
Unproved properties
|
|
|
266,174 |
|
|
|
-- |
|
|
|
|
|
1,340,362 |
|
|
|
-- |
|
|
Accumulated
depletion and depreciation
|
|
|
(583,830 |
) |
|
|
-- |
|
|
|
|
|
756,532 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
1,867,161 |
|
|
$ |
495,364 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$ |
58,756 |
|
|
$ |
7,159 |
|
|
Current portion of ARO liability
|
|
|
23,000 |
|
|
|
-- |
|
|
Accrued liabilities
|
|
|
33,375 |
|
|
|
70,667 |
|
|
|
|
|
115,131 |
|
|
|
77,826 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
portion of ARO liabilities
|
|
|
64,695 |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
Class A Preferred stock, no par value,
10,000,000 shares authorized, none issued
|
|
|
-- |
|
|
|
-- |
|
|
Class B Preferred stock, no par value; 1,000,000 shares
authorized,
540,659 (2006) and 0 (2007) shares issued and outstanding
|
|
|
1,380,387 |
|
|
|
-- |
|
|
Common stock, $.10 par value; 50,000,000 shares authorized,
620,643 shares issued and outstanding at December 31, 2006 and
2007
|
|
|
62,064 |
|
|
|
62,064 |
|
|
Capital in excess of par value
|
|
|
155,715 |
|
|
|
439,615 |
|
|
Treasury stock, at cost, 69,399 shares issued and outstanding
at
December 31, 2006 and 2007
|
|
|
(107,794 |
) |
|
|
(107,794 |
) |
|
Retained earnings
|
|
|
196,963 |
|
|
|
23,653 |
|
|
|
|
|
1,687,335 |
|
|
|
417,538 |
|
|
Total
liabilities and stockholders’ equity
|
|
$ |
1,867,161 |
|
|
$ |
495,364 |
|
See accompanying notes to the financial statements.
CROFF
ENTERPRISES, INC.
STATEMENTS
OF OPERATIONS
For the
years ended December 31, 2006 and 2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
Oil
and natural gas sales
|
|
$ |
-- |
|
|
$ |
-- |
|
|
Other
income (lease payments)
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
Lease operating expense including production taxes
|
|
|
-- |
|
|
|
-- |
|
|
Proposed drilling program
|
|
|
-- |
|
|
|
-- |
|
|
General and administrative
|
|
|
111,186 |
|
|
|
69,743 |
|
|
Overhead expense, related party
|
|
|
24,000 |
|
|
|
24,000 |
|
|
(Gain) on sale of equipment
|
|
|
-- |
|
|
|
-- |
|
|
Accretion expense
|
|
|
-- |
|
|
|
-- |
|
|
Depletion and depreciation
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
135,186 |
|
|
|
93,743 |
|
|
(Loss)
from operations
|
|
|
(135,186 |
) |
|
|
(93,743 |
) |
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
49,671 |
|
|
|
42,740 |
|
|
|
|
|
49,671 |
|
|
|
42,740 |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income
taxes
|
|
|
(85,515 |
) |
|
|
(51,001 |
) |
|
Provision for income taxes
|
|
|
-- |
|
|
|
-- |
|
|
Income
(loss) from continuing operations
|
|
|
(85,515 |
) |
|
|
(51,001 |
) |
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
Income from operations of discontinued component
(including loss on disposal in 2007
of $93,371)
|
|
|
568,530 |
|
|
|
331,543 |
|
|
Provision for income taxes
|
|
|
110,000 |
|
|
|
110,000 |
|
|
Income
from discontinued operations
|
|
|
458,530 |
|
|
|
221,543 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
373,015 |
|
|
$ |
170,542 |
|
|
|
|
|
|
|
|
|
|
|
|
Net
income applicable to preferred B shares
|
|
$ |
291,154 |
|
|
$ |
343,852 |
|
|
Net
income (loss) applicable to common shares
|
|
$ |
81,861 |
|
|
$ |
(173,310 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) from continuing operations
|
|
$ |
(0.16 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted income from discontinued operations
|
|
$ |
0.84 |
|
|
$ |
0.40 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income per common share
|
|
$ |
0.15 |
|
|
$ |
(0.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
551,224 |
|
|
|
551,224 |
|
See accompanying notes to the financial statements.
CROFF
ENTERPRISES, INC.
STATEMENTS
OF STOCKHOLDERS’ EQUITY
For the
years ended December 31, 2006 and 2007
|
|
|
Preferred B stock
|
|
|
Common stock
|
|
|
Capital
in excess
|
|
|
Treasury
|
|
|
Retained
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
of par value
|
|
|
stock
|
|
|
earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
540,659 |
|
|
|
1,089,233 |
|
|
|
620,643 |
|
|
|
62,064 |
|
|
|
155,715 |
|
|
|
(107,794 |
) |
|
|
115,102 |
|
|
Net
income for the year ended
December 31, 2006
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
373,015 |
|
|
Preferred
stock reallocation
|
|
|
-- |
|
|
|
291,154 |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
(291,154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
540,659 |
|
|
|
1,380,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for the year ended
December 31, 2007
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
170,542 |
|
|
Preferred
stock reallocation
|
|
|
|
|
|
|
343,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(343,852 |
) |
|
Contribution
to capital – common
|
|
|
|
|
|
|
(283,900 |
) |
|
|
|
|
|
|
|
|
|
|
283,900 |
|
|
|
|
|
|
|
-- |
|
|
Preferred
redemption
|
|
|
(540,659 |
) |
|
|
(1,440,339 |
) |
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
-- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
-- |
|
|
$ |
-- |
|
|
|
620,643 |
|
|
$ |
62,064 |
|
|
$ |
439,615 |
|
|
$ |
(107,794 |
) |
|
$ |
23,653 |
|
See accompanying notes to the financial statements.
CROFF
ENTERPRISES, INC.
STATEMENTS
OF CASH FLOWS
For the
years ended December 31, 2006 and 2007
|
|
|
2006
|
|
|
2007
|
|
|
|
|
As Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
373,015 |
|
|
$ |
170,542 |
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
(43,175 |
) |
|
|
182,460 |
|
|
Accounts
receivable
|
|
|
35,901 |
|
|
|
(39,843 |
) |
|
Accounts
payable
|
|
|
3,512 |
|
|
|
(6,353 |
) |
|
Accrued
liabilities
|
|
|
(39,413 |
) |
|
|
37,292 |
|
|
Net
cash provided by operating activities
|
|
|
329,840 |
|
|
|
344,098 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
54,254 |
|
|
|
22,756 |
|
|
Net
cash used in investing activities
|
|
|
54,254 |
|
|
|
22,756 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Discontinued
operations
|
|
|
(300,622 |
) |
|
|
(943,949 |
) |
|
Net
cash provided by financing activities
|
|
|
(300,622 |
) |
|
|
(943,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
83,472 |
|
|
|
(577,095 |
) |
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
902,257 |
|
|
|
985,729 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
985,729 |
|
|
$ |
408,634 |
|
Supplemental
disclosure of non-cash investing and financing activities:
During
the year ended December 31, 2007, the Company distributed to a company
controlled by the Preferred B Stockholders, the Preferred B share of the
Company’s oil & gas properties and cash accounts, and canceled the Preferred
B Stock of $1,440,339. In addition, the related company purchased the remaining
balance of the oil & gas properties for $66,096 in cash and owes the Company
$8,904.
See accompanying notes to the financial
statements.
CROFF
ENTERPRISES, INC.
NOTES TO
FINANCIAL STATEMENTS
For the
years ended December 31, 2006 and 2007
1. ORGANIZATIONS
AND NATURE OF BUSINESS
The
Company was incorporated in Utah in 1907 as Croff Mining Company. The
Company changed its name to Croff Oil Company in 1952, and in 1996 changed its
name to Croff Enterprises, Inc. The Company operated as an independent oil and
gas company since 1952. All oil and gas assets were pledged to the Preferred B
shares except a few leases in Texas which the Preferred B shareholders were
obligated to purchase. The Company assigned all of its oil and natural gas
properties to Croff Oil Company, Inc. in December of 2007. Croff Oil Company,
Inc is owned by the former Preferred B shareholders of the Company.
The oil
and gas assets were transferred to a wholly owned subsidiary of Croff
Enterprises, Inc. formed under Utah law named Croff Oil Company, Inc., hereafter
“Croff Oil”. Croff Oil issued one common share for each Croff preferred B share.
Croff Oil then exchanged all of its common shares for the oil and gas assets of
Croff Enterprises, Inc. Croff then cancelled all preferred B shares and offered
the common stock to all former preferred B shareholders. All Croff preferred B
shareholders, at their option received either one share of common stock of Croff
Oil Company, Inc, or received $4.25 in cash per share pursuant to the Dissenting
Shareholder Rights Statute under Utah Law for each Preferred B share. During
2007, and prior years, Croff operated as an independent energy company engaged
in the business of oil and natural gas production, primarily through ownership
of perpetual mineral interests and the acquisition of producing non-operated oil
and gas leases. Beginning December 31, 2007, Croff Enterprises, Inc. is seeking
to acquire a private company with scalable assets which desires to merge with a
public company in order to obtain a more active public market.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Producing
activities
The
Company followed 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.
Depreciation,
depletion, and accretion
The
Company provided for depreciation and depletion of its investment in producing
oil and gas properties on the unit-of-production method, based upon estimates of
recoverable oil and gas reserves from the property.
The
Company established a working interest reserve relating to the Asset Retirement
Obligation (“ARO”) for the four wells that the Company operates. The reserve,
based on the estimates of management, complies with the Financial Standards
Board Rule 143 (FAS 143). The accretion of $5,868 for the year ended December
31, 2006, represented an increase in the ARO liability based on the discounted
cash flow of the future retirement costs.
Recent
accounting pronouncements
SFAS 155,
“Accounting for Certain Hybrid
Financial Instruments—an amendment of FASB Statements No. 133 and 140”
(‘SFAS No. 155”). This Statement shall be effective for all financial
instruments acquired, issued, or subject to a remeasurement (new basis) event
occurring after the beginning of an entity’s first fiscal year that begins after
September 15, 2006. The fair value election provided for in paragraph 4(c) of
this Statement may also be applied upon adoption of this Statement for hybrid
financial instruments that had been bifurcated under paragraph 12 of Statement
133 prior to the adoption of this Statement. Earlier adoption is permitted as of
the beginning of an entity’s fiscal year, provided the entity has not yet issued
financial statements, including financial statements for any interim period, for
that fiscal year. Management does not expect adoption of SFAS No. 155 to have a
material impact on the Company’s financial statements.
SFAS 157,
“Fair Value
Measurements”, defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles (GAAP), and expands
disclosures about fair value measurements. This Statement applies under other
accounting pronouncements that require or permit fair value measurements, the
Board having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, this Statement does
not require any new fair value measurements. However, for some entities, the
application of this Statement will change current practice. Management has not
evaluated the impact of this statement.
In
June 2005, the Emerging Issues Task Force reached a consensus on Issue
No. 05-6 (“EITF No. 05-6”), “Determining the Amortization Period for
Leasehold Improvements Purchased after Lease Inception or Acquired in a Business
Combination.” EITF No. 05-6 clarifies that the amortization period for leasehold
improvements acquired in a business combination or placed in service
significantly after and not contemplated at or near the beginning of the lease
term should be amortized over the shorter of the useful life of the assets or a
term that includes the required lease periods and renewals that are reasonably
assured of exercise at the time of the acquisition. EITF No. 05-6 is to be
applied prospectively to leasehold improvements purchased or acquired in
reporting periods beginning after June 29, 2006. The adoption of EITF No. 05-6
did not have a material impact on the Company’s consolidated financial
statements.
CROFF
ENTERPRISES, INC.
NOTES TO
FINANCIAL STATEMENTS
For the
years ended December 31, 2006 and 2007
(continued)
In June
2006, the FASB issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income
Taxes – an Interpretation of FASB Statement No. 109” (“FIN No. 48”). FIN
No. 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise’s financial statements in accordance with FASB Statement No.
109, “Accounting for Income Taxes”. Fin No. 48 is effective for
fiscal years beginning after December 15, 2005. Management does not
expect adoption of FIN No. 48 to have a material impact on the Company’s
financial statements.
SFAS 158
“Employers” Accounting for Defined Benefit Pension and Other Postretirement
Plans-an amendment of SFAS 87, 88, 106, and 132(R).” This statement requires an
employer to recognize the over funded or under funded status of a defined
benefit postretirement plan (other than a multi-employer plan) as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income of a business entity or changes in unrestricted net assets of a
not-for-profit organization. This statement requires an employer to measure the
funded status of a plan as of the date of its year-end statement of financial
position, with limited exceptions. The Company does not maintain a defined
benefit pension plan and offers no other post retirement benefits.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities—Including an Amendment of SFAS No. 115
(“SFAS No. 159”), which becomes effective for fiscal periods beginning
after November 15, 2007. Under SFAS No. 159, companies may elect to measure
specified financial instruments and warranty and insurance contracts at fair
value on a contract-by-contract basis, with changes in fair value recognized in
earnings each reporting period. This election, called the “fair value option”,
will enable some companies to reduce volatility in reported earnings caused by
measuring related assets and liabilities differently. We do not expect the
impact of adoption to have a material impact on our consolidated financial
statements.
In
December 2007, the FASB issued SFAS 141 (revised 2007), Business Combinations, (“SFAS
141R”). SFAS 141R establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, including goodwill, the liabilities assumed and any non-controlling
interest in the acquire. The Statement also establishes disclosure requirements
to enable users of the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141R is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. The
impact of adopting SFAS 141R will be dependent on the future business
combinations that the Company may pursue after its effective date.
In
December 2007, the SEC issued SAB 110 Share-Based Payment. SAB 110
amends and replaces Question 6 of Section D.2 of Topic 14, “Share-Based
Payment,” of the Staff Accounting Bulletin series. Question 6 of Section D.2 of
Topic 14 expressed the views of the staff regarding the use of the “simplified”
method in developing an estimate of the expected term of “plain vanilla” share
options and allows usage of the “simplified” method for share option grants
prior to December 31, 2007. SAB 110 allows public companies which do not have
historically sufficient experience to provide a reasonable estimate to continue
use for the “simplified” method for estimating the expected term of “plain
vanilla” share option grants after December 31, 2007. SAB 110 is effective
January 1, 2008. We currently use the “simplified” method to estimate the
expected term for share option grants as we do not have enough historical
experience to provide a reasonable estimate. We will continue to use the
“simplified” method until we have enough historical experience to provide a
reasonable estimate of expected term in accordance with SAB 110. The Company
does not expect SAB 110 will have a material impact on its consolidated balance
sheets, statements of income and cash flows.
Revenue
recognition
Oil and
gas revenues were accounted for using the sales method. Under this method,
revenue is recognized based on the cash received rather than the Company's
proportionate share of the oil and gas produced. Oil and gas
imbalances and related value at December 31, 2006 and 2007 were
insignificant.
Risks and
uncertainties
Historically,
oil and gas prices have experienced significant fluctuations and have been
particularly volatile in recent years. Price fluctuations can result
from variations in weather, levels of regional or national production and
demand, availability of transportation capacity to other regions of the country
and various other factors.
Fair
value of financial instruments
The
carrying amounts of financial instruments including cash and cash equivalents,
marketable equity securities, accounts receivable, notes receivable, accounts
payable and accrued liabilities approximate fair value as of December 31, 2006
and 2007.
Concentrations
of credit risk
Financial
instruments, which potentially subject the Company to concentrations of credit
risk, consist principally of cash, cash equivalents and accounts receivable. The
Company places its cash with high quality financial institutions. At times
during the year, the balance at any one financial institution may exceed FDIC
limits.
CROFF
ENTERPRISES, INC.
NOTES TO
FINANCIAL STATEMENTS
For the
years ended December 31, 2006 and 2007
(continued)
Stock
options and warrants
The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123R "Share-Based Payment" related to its stock options
and warrants. Since December 2001, the Company has had no outstanding
stock options or warrants.
Cash
equivalents
For
purposes of the statement of cash flows, the Company considers all highly liquid
debt instruments purchased with maturity of three months or less to be cash
equivalents.
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.
Income
taxes
The
provision for income taxes is based on earnings reported in the financial
statements. Deferred income taxes are provided using a liability approach based
upon enacted tax laws and rates applicable to the periods in which the taxes
become payable.
Net
income
In
accordance with the provisions of SFAS No. 128, "Earnings per Share," basic
income per common share amounts were computed by dividing net income after
deduction of the net income attributable to the preferred B shares by the
weighted average number of common shares outstanding during the
period. Diluted income per common share assumes the conversion of all
securities that are exercisable or convertible into either preferred B or common
shares that would dilute the basic earnings per common share during the
period.
Use of
estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
Restatement
– discontinued operations
The
Company has restated its 2006 statements of operations and cash flows to
consistently present the discontinuance of its oil and gas operations at the end
of 2007.
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, 2006 and 2007 amounted to $23,493 and $36,303,
respectively.
The
Company currently has an office sharing arrangement with Jenex Petroleum
Corporation, hereafter “Jenex”, which is owned by the Company’s
President. The Company is not a party to any lease, but paid Jenex
for office space and all office services, including rent, phone, office
supplies, secretarial, land, and accounting. The Company’s expenses
for these services were $49,872, and $51,258 for the years ended 2006 and 2007,
respectively. Although these transactions were not a result of “arms
length” negotiations, the Company’s Board of Directors believes the transactions
are reasonable.
The
Company had working interests in five Oklahoma natural gas wells, which are
operated by Jenex, a company solely owed by Gerald Jensen, the Company’s
President. As part of the 1998 purchase agreement, Jenex agreed to
rebate to the Company $150 of operating fees per well, each month, During the
years ending December 31, 2006 and 2007, $9,000, and $9,000 respectively, have
been offset against lease operating expense, in this manner.
CROFF
ENTERPRISES, INC.
NOTES TO
FINANCIAL STATEMENTS
For the
years ended December 31, 2006 and 2007
(continued)
4. PREFERRED
B STOCK TENDER OFFER
In April,
2005, the Company’s Board of Directors reviewed the Company’s strategic
alternatives, including the possible sale or merger of all or part of the
Company. The two objectives were to increase shareholder value and to
provide liquidity to the shareholders. The Board of Directors formed
a non-management committee to review the objectives, and any opportunities
related to these objectives. The Preferred B shareholders of the
Company received a tender offer from C.S. Finance L.L.C. and Jensen Development
Company, “Offerors,” two companies wholly owned by Gerald L. Jensen, to purchase
all of the outstanding shares of Preferred B stock at $3 per share.
The
Offerors Preferred B tender offer was filed with the SEC in June 2005. The
Company filed a Form 14D9 with the SEC outlining the position of the
non-management committee of the Board of Directors which was neutral as to the
tender offer, and advised shareholders to consider the offer based on each
individual’s situation. The results of the tender offer were reported to the SEC
in September 2005. There were 75,050 shares tendered and accepted prior to the
expiration of the tender offer, or 13.9% of the Preferred B stock, at a cost of
$225,150.
During
the tender offer, two Directors tendered all of their shares of Preferred B
stock. After the tender offer a Director, sold the majority of his Preferred B
shares at the tender price for a note due in 2006; retaining 8,000 Preferred B
shares. Also after the tender offer, a Director who had tendered one third of
his shares, sold the balance of his Preferred B shares at the tender price for
notes payable during 2006 and 2007. These subsequent purchases at $3 per share
by C.S. Finance L.L.C. totaled another 33,418 Preferred B shares, of which
29,365 Preferred B shares were purchased from the two Directors. To date, the
number of Preferred B shares collectively owned by Gerald L. Jensen, C.S.
Finance L.L.C., and Jensen Development Company total 363,535, or 67.2% of the
Preferred B shares. The holders of approximately 94,394 Preferred B
shares were unable to be located during the tender offer.
5.
PLAN
OF REORGANIZATION AND DIVISON OF THE COMPANY
This Plan of Reorganization and
Division of the Company was adopted by the shareholders on December 21, 2007.
The essential terms of the plan provided for the transfer, without other
consideration, of all oil and gas assets of Croff Enterprises to the newly
created Utah corporation known as Croff Oil Company, Inc. The
shareholders of Croff Oil Company, Inc would be the current “B” preferred
shareholders of Croff Enterprises who would receive one restricted common share
in Croff Oil in exchange for each preferred “B” share currently
held. The preferred “B” shares subsequently would be cancelled of
record. The transferred assets constitute approximately $1,450,000 of the total
approximate $1,800,000 book value of Croff Enterprises, Inc and would constitute
the sole assets of the new private entity. Croff Enterprises would essentially
continue as a shell corporation with a book value of approximately $350,000,
almost all of which would be in cash or cash equivalents. All
preferred “B” shares would be cancelled of record and all “B” shareholders would
be entitled to one share of restricted common stock in the private entity, Croff
Oil Company, for each preferred “B” share previously held in Croff.
Non-transferrable liabilities of the Company, such as corporate income taxes
payable and other items remain on the Company’s balance sheet at December 31,
2007 in the amount of $77,826. As Croff Oil Company, Inc. is responsible for
these payables, the Company has recorded an offsetting receivable in the same
amount, as well as $8,904 due from Croff Oil from the sale of an oil and gas
property, for total related party receivables of $86,730.
6.
STOCKHOLDERS’
EQUITY
During
2001, the Board determined that the cash of the Company, which had been building
during a period of high oil prices, should be formally allocated between the
common stock and the Preferred B stock. The Board decided to allocate
$250,000 cash to the common stock and the balance of cash remaining with the
Preferred B stock. The Board then determined that future oil and gas cash flow
from the Preferred B assets would be accumulated for Preferred B
shareholders. The Company established separate investment accounts
for the Preferred B and common stock investments.
In 1996,
the Company created a class of Preferred B stock to which the perpetual mineral
interests and other oil and gas assets were pledged. Thus, the
Preferred B stock represents the current oil and gas assets of the Company,
along with all Preferred B checking and savings accounts and receivables owed to
these accounts. Each common shareholder received an equal
number of Preferred B shares, one for one, at the time of this restructuring of
the capital of the Company. The Class B Preferred stock has no par
value and limited voting privileges. The Class B Preferred stockholders are
entitled exclusively to all dividends, distributions, and other income, which
are based directly or indirectly on the Preferred B oil and natural gas assets.
In addition, in the event of liquidation, distribution or sale of the Company,
the Class B Preferred stockholders have an exclusive preference to the net asset
value of the natural gas and oil assets over all other classes of common and
preferred stockholders. In December 2007, these pledged assets were assigned to
Croff Oil Company, Inc. All common share of Croff Oil Company, Inc., where then
exchanged for the Preferred B shares which were then cancelled.
7. INCOME
TAXES
The
provisions for income taxes from operations consist of the
following:
|
|
|
2006
|
|
|
2007
|
|
|
Current tax
expense
|
|
$ |
110,000 |
|
|
$ |
110,000 |
|
|
Deferred
income tax expense
|
|
|
- - |
|
|
|
- - |
|
|
|
|
$ |
110,000 |
|
|
$ |
110,000 |
|
CROFF
ENTERPRISES, INC.
NOTES TO
FINANCIAL STATEMENTS
For the
years ended December 31, 2006 and 2007
(continued)
A
reconciliation of the Company’s effective income tax rate and the United States
statutory rate is as follows:
|
|
|
2006
|
|
|
2007
|
|
|
United
States statutory rate
|
|
|
34.00 |
% |
|
|
34.00 |
% |
|
State
income taxes, net of Federal income tax benefit
|
|
|
2.55 |
|
|
|
2.55 |
|
|
Reduction
of valuation allowance (used NOL)
|
|
|
(0.45 |
) |
|
|
-- |
|
|
Percentage
depletion
|
|
|
(14.45 |
) |
|
|
(5.78 |
) |
|
Book
depletion & depreciation in excess of tax
|
|
|
1.12 |
|
|
|
6.13 |
|
|
|
|
|
22.77 |
% |
|
|
36.85 |
% |
At
December 31, 2006, the Company had capital loss carry-forwards of approximately
$31,000. The loss was due to the sale of marketable securities and hedging
transactions during fiscal year December 2002. The capital loss has indefinite
life and can only used to reduce gains created by sale of capital
assets.
Deferred
taxes results primarily from state net operating loss carry forwards and capital
loss carry forwards and asset basis differences between book and income tax
depreciation and depletion methods. In addition, the Company uses percentage
depletion which does not create a basis difference between book and tax above
the book/tax cost depletion. The net operating loss carry forward is only for
two of the states the Company operates in and expired in 2006. The income tax
percentage depletion continues to exceed book depletion and is considered a
permanent difference.
At
December 31, 2006 and 2007, total deferred tax assets, liabilities and valuation
allowance are as follows:
|
Deferred
tax assets resulting from:
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2007
|
|
|
Net
operating loss carry forwards
|
|
$ |
5,156 |
|
|
$ |
-- |
|
|
Capital
loss carry forward
|
|
|
10,540 |
|
|
|
-- |
|
|
Depreciation
& depletion differences
|
|
|
(5,425 |
) |
|
|
-- |
|
|
Total
deferred tax asset
|
|
|
10,271 |
|
|
|
-- |
|
|
Less
valuation allowance
|
|
|
(10,271 |
) |
|
|
-- |
|
|
|
|
$ |
-- |
|
|
$ |
-- |
|
A 100%
valuation has been established against the deferred tax assets, as utilization
of the net operating and capital loss carry forwards cannot be reasonably
assured.
8. BASIC
AND DILUTED INCOME (LOSS) PER COMMON SHARE
Basic
income (loss) per common share information is based on the weighted average
number of shares of common stock outstanding during each year, approximately
551,244 shares in 2006, and 551,244 shares in 2007.
9. MAJOR
CUSTOMERS
Customers
which accounted for over 10% of oil and natural gas revenues were as follows for
the years ended December 31, 2006 and 2007:
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Jenex
Petroleum Corp., a related party
|
|
|
14.2% |
|
|
|
11.8% |
|
|
Merit
Energy
|
|
|
18.1% |
|
|
|
22.1% |
|
|
Sunoco,
Inc.
|
|
|
14.7% |
|
|
|
12.9% |
|
CROFF
ENTERPRISES, INC.
NOTES TO
FINANCIAL STATEMENTS
For the
years ended December 31, 2006 and 2007
(continued)
10.
DISCONTINUED
OPERATIONS
December
31, 2007 by the terms of proxy statement filed and as described in notes 1, 3,
4, and 5 discontinued its oil and gas operations to a Company owned by the
shareholders of the Preferred B Stock. The effect of these discontinued
operations on the Company is included in the attached Schedule of discontinued
operations:
SCHEDULE
OF DISCONTINUED OPERATIONS