<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES ACT OF 1934
BLUE RIDGE ENERGY, INC
(Name of Small Business Issuer in Its Charter)
NEVADA 61-1306702
(State of Organization) (I.R.S. Employer Identification No.)
632 ADAMS STREET, SUITE 710, BOWLING GREEN, KY 42101
(502) 842-2421
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common
Stock par value $.005 per value.
<PAGE> 2
TABLE OF CONTENTS
Form 10-SB
BLUE RIDGE ENERGY, INC.
<TABLE>
<S> <C> <C>
PART I
Item 1. Description of Business 3
Item 2. Management's Discussion and Financial Analysis 6
Item 3. Description of Property 14
Item 4. Security Ownership of Certain Beneficial Owners and Management 17
Item 5. Directors, Executive Officers, Promoters and Control Persons 17
Item 6. Executive Compensation 18
Item 7. Certain Relationships and Related Transactions 18
Item 8. Description of Securities 20
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters 21
Item 2. Legal Proceedings 21
Item 3. Changes in and Disagreements with Accountants 22
Item 4. Recent Sales of Unregistered Securities 22
Item 5. Indemnification of Directors and Officers 23
PART F/S
Financial Statements F-1
PART III
Index to Exhibits 24
OTHER
Signatures 25
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
Blue Ridge Energy, Inc. (the "Registrant"), a Nevada corporation, was
organized in November, 1994, as Gem Source, Incorporated ("Gem Source"), and
subsequently changed the name of the company to Blue Ridge Energy, Inc. in May,
1996. The Registrant has offices at 632 Adams Street, Suite 710, Bowling Green,
KY 42101.
The Registrant is engaged in the exploration and development of oil and
gas leases located primarily in Texas and Kentucky through one or more of the
following activities: (i) acquisition of oil and gas leases, (ii) investment in
partnerships sponsored by itself or affiliates, (iii) purchase of producing oil
and gas properties, and (iv) acquisition of oil and gas companies which own
properties and/or production. Wells drilled by the Registrant include both
exploratory and development wells.
The Registrant also owns and operates drilling rigs and provides such
services to its affiliates and investment partnerships as well as to third
parties. The Registrant intends to continue providing drilling services to the
oil and gas industry and will actively pursue the acquisition of other service
operations which complement its ongoing philosophy of vertically integrating
such services.
The Registrant intends to maintain an active role in the oil and gas
industry as an operator of oil and gas wells, a sponsor of oil and gas drilling
programs, a participant in oil and gas programs and as an independent producer
of oil and gas. A discussion of the Registrant's historical development over the
past three years can be found in Item 2, Management's Discussion and Financial
Analysis.
COMPETITION, MARKETS AND REGULATIONS
COMPETITION
The oil and gas industry is highly competitive in all its phases. The
Registrant encounters strong competition from other oil and gas producers. Many
of its competitors possess substantially greater financial resources, which they
can use to acquire economically desirable oil and gas properties.
MARKETS
The amounts of and price obtainable for oil and gas production from the
Registrant's properties will be affected by market factors beyond the control of
the Registrant. Such factors include the extent of domestic production, the
level of imports of foreign oil and gas, the general level of market demand on a
regional, national and worldwide basis, domestic and foreign economic conditions
that determine levels of industrial production, political events in foreign
oil-producing
3
<PAGE> 4
regions, and variations in governmental regulations and tax laws and the
imposition of new governmental requirements upon the oil and gas industry. There
can be no assurance that oil and gas prices will not decrease in the future,
thereby decreasing net Revenues from the Registrant's Properties.
From time to time, there may exist a surplus of natural gas or oil
supplies. The effect of which may be to reduce the amount of hydrocarbons that
the Registrant may produce and sell, while such oversupply exists. In recent
years, initial steps have been taken to provide additional gas transportation
lines from Canada to the United States. If additional Canadian gas is brought to
the United States market, it could create downward pressure on United States gas
prices.
REGULATIONS
Environmental Regulation
The federal government and various state and local governments have
adopted laws and regulations regarding the control of contamination of the
environment. These laws and regulations may require the acquisition of a permit
by Operators before drilling commences, prohibit drilling activities on certain
lands lying within wilderness areas or where pollution arises and impose
substantial liabilities for pollution resulting from operations, particularly
operations near or in onshore and offshore waters or on submerged lands. These
laws and regulations may also increase the costs of routine drilling and
operation of wells. Because these laws and regulations change frequently, the
costs to the Registrant of compliance with existing and future environmental
regulations cannot be predicted. However, the Registrant does not believe that
the Company is affected in a significantly different manner by these regulations
than are its competitors in the oil and gas industry.
Federal Regulation of Natural Gas
The transportation and sale of natural gas in interstate commerce is
heavily regulated by agencies of the federal government. The following
discussion is intended only as a summary of the principal statutes, regulations
and orders that may affect the production and sale of natural gas from
Registrant's properties. This summary should not be relied upon as a complete
review of applicable natural gas regulatory provisions.
FERC Orders
Several major regulatory changes have been implemented by the Federal
Energy Regulatory Commission ("FERC") from 1985 to the present that affect the
economics of natural gas production, transportation and sales. In addition, the
FERC continues to promulgate revisions to various aspects of the rules and
regulations affecting those segments of the natural gas industry that remain
subject to the FERC's jurisdiction. In April 1992, the FERC issued Order No. 636
pertaining to pipeline restructuring. This rule requires interstate pipelines to
unbundle transportation and sales services by separately stating the price of
each service and by providing customers only the particular service desired,
without regard to the source for purchase of the gas. The rule also requires
pipelines to (i) provide nondiscriminatory "no-notice" service allowing firm
commitment shippers to receive delivery of gas on demand up to certain limits
without penalties, (ii) establish a basis for release and
4
<PAGE> 5
reallocation of firm upstream pipeline capacity and (iii) provide
non-discriminatory access to capacity by firm transportation shippers on a
downstream pipeline. The rule requires interstate pipelines to use a straight
fixed variable rate design. The rule imposes these same requirements upon
storage facilities.
FERC Order No. 500 affects the transportation and marketability of
natural gas. Traditionally, natural gas has been sold by producers to pipeline
companies, which then resold the gas to end-users. FERC Order No. 500 alters
this market structure by requiring interstate pipelines that transport gas for
others to provide transportation service to producers, distributors and all
other shippers of natural gas on a nondiscriminatory, "first-come, first-served"
basis ("open access transportation"), so that producers and other shippers can
sell natural gas directly to end-users. FERC Order No. 500 contains additional
provisions intended to promote greater competition in natural gas markets.
It is not anticipated that the marketability of and price obtainable
for natural gas production from the Registrant's Properties will be
significantly affected by FERC Order No. 500. Gas produced from Registrant's
properties normally will be sold to intermediaries who have entered into
transportation arrangements with pipeline companies. These intermediaries will
accumulate gas purchased from a number of producers and sell the gas to
end-users through open access pipeline transportation.
State Regulations
Production of any oil and gas from the Registrant's properties will be
affected to some degree by state regulations. Many states in which the
Registrant will operate have statutory provisions regulating the production and
sale of oil and gas, including provisions regarding deliverability. Such
statutes, and the regulations promulgated in connection therewith, are generally
intended to prevent waste of oil and gas and to protect correlative rights to
produce oil and gas between owners of a common reservoir. Certain state
regulatory authorities also regulate the amount of oil and gas produced by
assigning allowable rates of production to each well or proration unit.
Federal Leases
Some of the Registrant's properties are located on federal oil and gas
leases administered by various federal agencies, including the Bureau of Land
Management. Various regulations and orders affect the terms of leases,
exploration and development plans, methods of operation and related matters.
Employees
The Registrant has no employees. The Registrant's majority shareholder,
Blue Ridge Group, Inc. ("Group"), however, has a staff of geologists, petroleum
engineers, drilling and accounting personnel who administer the operations of
Group and the Registrant. As of December 31, 1998, Blue Ridge had 63 employees.
The Registrant pays a $20,000 per month Management Fee to Group for
administrative and overhead expenses attributable to the Registrant's
operations.
5
<PAGE> 6
ITEM 2. MANAGEMENT'S DISCUSSION AND FINANCIAL ANALYSIS
FINANCIAL OVERVIEW
Blue Ridge Energy, Inc. ("Registrant") is an oil and gas exploration
company incorporated in the state of Nevada with its home office in the
Commonwealth of Kentucky. It currently conducts operations in Texas and
Kentucky. The Registrant's Common Stock is traded "over-the-counter" with "BREY"
as its stock symbol.
During March, 1996, Blue Ridge Group, Inc. ("Group") acquired a
majority interest in the Common Stock of the Registrant with the intent to
develop it into a successful oil and gas exploration and development company. In
May 1996, (1) a new Board of Directors and Executive Officers were elected, (2)
the name of the company was changed from Gem Source, Incorporated to Blue Ridge
Energy, Inc., and (3) the capitalization of Registrant was restructured. This
included a 1 for 5 reverse stock split of the Registrant's Common Stock
effective May 6, 1996, which brought the total shares of Common Stock issued and
outstanding to 526,000 shares. Additionally, 5,000,000 shares of Preferred Stock
were authorized at that time. Also, in 1996, Group decided to further capitalize
the Registrant by loaning it $126,000 and by purchasing an additional 1,000,000
shares of restricted Common Stock for $50,000 bringing its total ownership at
December 31, 1996 of the issued and outstanding Common Stock to 1,200,000
shares.
Registrant has continued the development of its equity base from 1996
through 1998 with a series of four Preferred Stock private placements. In 1996
the Registrant acquired the assets (primarily cash and undeveloped oil and gas
leases in eastern Kentucky) of Target Leasing, Ltd. I ("Target") with the
issuance and exchange of 267,746 shares of Registrant's non-voting Series A
Preferred Stock for the limited partners' interest in Target. The non-voting
Series A Preferred Stock was valued at $0.93 per share. The Target limited
partnership interests were valued at $2.78 per Unit based upon a valuation of
the Partnerships oil and gas lease inventory. The Series A Preferred Stock bore
a 12% annual dividend and was converted into one (1) share of Blue Ridge Energy
Common Stock during 1998. A total of 267,746 common shares were issued for the
Series A Preferred Stock.
In conjunction with the above exchange offer, the Registrant also
authorized the issuance and sale of up to 300,000 shares of Registrant's Series
B Preferred Stock for $3.00 per share, cash. The Series B Preferred Stock bears
a 12% annual dividend and is convertible into two (2) shares of Blue Ridge
Energy, Inc. Common Stock During 1996 and 1997, 202,374 shares of Series B
Preferred Stock were sold for approximately $607,000 and in 1998 approximately
175,000 shares of the issued Series B Preferred Stock were converted into Common
Stock of the Registrant. By August 31, 1999, a total of 202,374 Series B
Preferred shares had been converted into 404,748 shares of the Registrant's
common stock.
During 1997,the Registrant authorized the issuance and sale of up to
400,000 shares of Registrant's non-voting Series C Preferred Stock for $6.00 per
share, cash, and sold 169,450 shares of Series C Preferred Stock for
approximately $1,000,000 to shareholders. The Series C Preferred Stock bears a
12% annual dividend and is convertible into two (2) shares of Registrant's
Common Stock by August 31, 1999. A total of 156,550 Series C shares have been
converted into 313,100 shares of Registrant's common stock.
6
<PAGE> 7
The Registrant continued increasing its equity base, in 1998, by
authorizing the issuance and sale of 1,000,000 shares of Registrant's non-voting
Series D Preferred Stock for $5.00 per share, cash. In addition, the Registrant
agreed to issue one Common Stock Warrant exercisable to purchase one share of
the Registrant's Common Stock for $1.00 with each share of Series D Preferred
Stock sold. The Series D Preferred Stock bears a 12 % annual dividend and is
convertible into one (1) share of Blue Ridge Energy, Inc. Common Stock. As of
December 31, 1998, 267,700 shares of Series D Preferred Stock had been sold for
approximately $1,300,000 to 49 shareholders and 267,700 Common Stock Warrants
were outstanding. By August 31, 1999, 474,450 Shares of Series D Preferred Stock
had been sold for approximately $2,400,000 and 474,450 Common Stock Warrants
were outstanding. None of the Series D Shares have been converted into the
Registrant's Common Stock.
The funds provided by these activities, as well as by the exercise in
1998 by Group of Warrants to purchase an additional 2,800,000 shares of Common
Stock for $140,000 by Group at $0.05 per share, enabled the Registrant to
continue to explore for and develop oil and gas wells through one or more of the
following activities,: (i) acquisition and development of oil and gas leases;
(ii) investment in partnerships sponsored by itself or affiliates; (iii)
purchase of producing oil and gas properties; and (iv) acquisition of oil and
gas companies which own properties and/or production. Wells drilled and
developed by the Registrant include both exploratory and development wells
located, primarily, in Texas and Kentucky.
Over the past three years, the Registrant has sponsored and invested in
the private placement of nine (9) Limited Partnerships with subscriptions of
approximately $11,500,000. Through these Limited Partnerships Blue Ridge has
participated in and developed forty (40) oil and gas wells of which ten (10) are
producing oil wells; eight (8) are producing gas wells; three (4) are dry holes;
and eighteen gas wells (18) are in the process of being completed. It is
anticipated that all seventeen of the gas wells will be completed as gas
producers in 1999, thereby increasing the Registrant's oil and gas reserves
substantially.
The Registrant has also directly participated in the acquisition and
development of oil and gas leases with mixed results over the past three years.
As previously discussed, the Registrant acquired approximately 35,000 acres of
undeveloped leasehold interests in 1996 from Target in exchange for Series A
Preferred Stock. These leases had an average term of two to three years and,
during that period, further evaluation of the leases determined that development
of the leases would not be economically feasible. Therefore, the Registrant
wrote the full carrying value of approximately $154,000 off as an impairment
loss during 1997 and 1998.
Also in 1996, the Registrant acquired an interest in drilling a gas
well in Vermilion Parish, Louisiana for $126,000. Although initial results were
very promising, the operator of the well, Mescalero Energy, Inc., filed for
bankruptcy in 1997. As a result of the operator's difficulties Blue Ridge was
unable to determine the productive capabilities of the well or the legal status
of the production resulting from the well. Therefore, the Registrant recorded,
in 1997, an impairment loss for the entire amount ($126,000) invested in this
project.
7
<PAGE> 8
The end of 1997 and the beginning of 1998 saw a drastic decline in oil
prices, thereby affecting the valuation of some of the Registrant's oil
properties per its reserve reports at December 31, 1998. Based upon these
prices, the Registrant determined that the carrying value of some of its oil and
gas leases should be impaired, resulting in further impairment losses for 1998
of approximately $250,000.
In the latter half of 1998, the Registrant entered into an agreement
with its majority shareholder, Blue Ridge Group, Inc., to acquire and develop
oil and gas wells in the Appalachian Basin of Kentucky and acquire drilling
equipment. Historically, development of wells in this area has averaged an 85%
to 90% success rate with four to five year payouts. At June 30, 1999, eleven
wells in this program had been drilled; all of which are expected to be
completed as commercial gas producers. The interests owned by the Registrant in
these eleven wells are part of the eighteen wells in the process of being
completed mentioned previously.
During the first half of 1998, the Registrant expanded its activities
with the purchase of two Ingersoll Rand drilling rigs and ancillary equipment
for approximately $2,100,000. Approximately 50% of these rig and equipment
purchases were from Blue Ridge Group, Inc. These purchases were funded by
proceeds from the Registrant's Preferred Stock offerings and approximately
$600,000 in long-term debt.
By December 31, 1998, the Registrant had total assets of $3,000,000,
total liabilities of $600,000 and shareholders' equity of $2,400,000. The
Registrant's net income increased 154% to $48,000 from a net loss of $89,000 in
1997. Earnings per common share, which take into account cash dividends paid on
preferred stock, increased 55% to a loss of $0.09 per share in 1998 from a loss
of $0.20 per share in 1997. All per share data in this report has been adjusted
to give effect to applicable stock issues and conversions.
INCOME STATEMENT REVIEW
Net income was $48,000 in 1998, compared to a net loss of $89,000 in
1997. On a per share basis, which takes into account cash dividends paid on
preferred stock, the Registrant had a net loss of $0.09 per share in 1998 as
compared to a net loss of $0.20 per share in 1997.
OPERATING REVENUES
Operating revenues totaled $2,100,000 in 1998; a 29.7% decrease from
the $3,000,000 recorded in 1997. The decrease in 1998 from 1997 was directly
related to the activity level in the Registrant's sponsorship of Limited
Partnerships for the drilling and development of oil and gas properties during
these periods. As a result of this activity, the Registrant generated $2,100,000
in turnkey drilling contract sales and related fee income during 1998 as
compared to $2,900,000 during 1997, a decrease of 29.9%. This decrease was
caused by the Registrant spending a significant portion of the year raising
capital through the sale of preferred stock rather than marketing its oil and
gas Limited Partnerships.
8
<PAGE> 9
Increased production from the Registrant's oil and gas activities was
negated by a sharp decline in oil prices in the early portion of 1998 thereby by
causing oil and gas revenues to remain essentially unchanged.
DIRECT OPERATING COSTS
Direct operating costs totaled $1,400,000 in 1998, a 35.1% decrease
from the $2,200,000 incurred in 1997. The changes in direct operating costs are
directly and proportionally related to the changes in operating revenues
previously discussed.
OTHER OPERATING EXPENSES
Other operating expenses decreased 23.3% to $655,000 in 1998 from the
$854,000 experienced in 1997 despite an increase of 62.5%, or $127,000, in
impairment losses on oil and gas leases recorded in 1998 as compared to such
losses recorded in 1997. This decrease was accomplished primarily by improved
efficiencies in the marketing of the Registrant's Limited Partnerships reduced
marketing costs 63.5% to $127,000 in 1998 as compared to $346,000 in 1997.
Additionally, a 43.3% reduction in General and Administrative costs to $166,000
in 1998 from $293,000 was caused by fewer of these costs being associated with
corporate activities and more being directly associated with operating
activities.
OTHER INCOME (EXPENSE)
Other income (expense) increased 2,976% to $95,000 in 1998 from $3,000
as a result of interest income generated by the funds received from Blue Ridge's
preferred stock offering.
INCOME TAXES
The Registrant provided for income tax expense (benefit) of $25,000,
$41,000 and $88,000 in 1998, 1997 and 1996, respectively. These provisions
represent effective tax rates of 33% in each of those years. In 1998, 1997 and
1996, the Registrant had tax deductions for Intangible Drilling Costs resulting
in tax credits of $100,000, $89,000 and $43,000, respectively. These tax credits
were utilized, whenever possible, in order to reduce the cash impact of the
income taxes.
BALANCE SHEET REVIEW
ASSETS
The Registrant's current assets increased 153% to $2,300,000 at the end
of 1998 from $900,000 at the end of 1997. The increase in 1998 was generated by
funds derived from the sale of the Registrant's preferred stock, as previously
discussed. These funds were the primary source of a 387% increase in Advances to
Related Parties to $1,470,000 at the end of 1998 as compared to $300,000 at the
end of 1997. These short-term, interest bearing, unsecured advances were made to
a related party in order to facilitate; (1) the acquisition and development of
oil and gas properties in the Appalachian Basin, (2) the purchase of new
Ingersoll Rand RD20 and TR4 drilling rigs and
9
<PAGE> 10
ancillary equipment and (3) improved interest income from available funds. The
Registrant's operations were the primary source of the 31% increase in cash to
$481,000 and the 52% increase in accounts receivable from oil and gas
development activities at the end of 1998 as compared to the end of 1997.
Property and equipment decreased 18% to $540,000 at the end of 1998 as
compared to $657,000 at the end of 1997 due to the recording of impairment
losses on the Registrant's oil and gas lease inventory as previously discussed.
Other assets increased 535% to $147,000 at the end of 1998 from $23,000
at the end of 1997 as a result of deposits made for the purchase of the drilling
rig and ancillary equipment previously mentioned.
LIABILITIES
The Registrant's current liabilities increased 88% to $520,000 at
year-end 1998 from $53,000 at the end of 1997 as a result of the Registrant's
increased operations. Income taxes payable decreased zeroed out in 1998 and due
to the Registrant's ability to utilize various tax credits and loss carry
forwards to offset any tax liabilities.
Effective January 1, 1996, the Registrant adopted provisions of the
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" which requires the use of the "liability" method under which deferred tax
assets and liabilities are recognized for their estimated future tax
consequences. The tax effect of significant temporary differences representing
these net deferred taxes was $24,000 and $3,000 at December 31, 1998 and
December 31, 1997, respectively. For further information regarding income taxes,
see Note 8 of the Financial Statements.
The Registrant had no long-term debt in any of the years ended December
31, 1998 and December 1997.
STOCKHOLDERS' EQUITY
Total capital invested in the Registrant for Common and Preferred Stock
increased 71% to $2,900,000 at year-end 1998 from $1,700,000 at the end of 1997
as a result of the purchases of Preferred Stock by investors as previously
discussed. Approximately 183,708 shares of Preferred Stock were converted into
367,416 shares of Common Stock during 1998 and the first 8 months of 1999. The
Registrant's majority shareholder, Blue Ridge Group, Inc., exercised options to
purchase 2,800,000 shares of Common Stock for $140,000 in February, 1998. For
further information regarding the capital structure of the Registrant, see Note
7 of the Financial Statements.
Despite recording net income of $48,000, the Registrant's retained
earnings declined 144% to an accumulated deficit of $488,000 at December 31,
1998 from an accumulated deficit of $200,000 at December 31, 1997 as the result
of the payment of cash dividends totaling $336,000 to the Registrant's Preferred
Shareholders during the year.
10
<PAGE> 11
CAPITAL RESOURCES AND LIQUIDITY
Both the Registrant's current ratio (current assets/current
liabilities) and quick ratio (quick assets/quick liabilities) are the same, due
to the quick nature of the Registrant's current assets and liabilities. As a
result of the Registrant's increased operating functions, at December 31, 1998,
the current and quick ratios were 4.44 to 1, a decrease of 74% from 17.19 to 1
at the end of 1997. Management intends to maintain the Registrant's liquidity at
levels designed to maximize the Registrant's flexibility in taking advantage of
profitable opportunities as they arise while minimizing its cost of having
adequate funds available for conducting its operations.
During the two years ended December 31, 1998 and December 31, 1997, the
Registrant has relied upon net inflows of cash from equity transactions,
supplemented by net inflows of cash generated by its operating activities to
fund the purchase of assets and its expansion. Generally speaking, management
intends to fund further growth with similar equity transactions and improved
cash flows from operations. It is also possible that further expansion will be
aided through the use of long-term debt transactions, both secured and
unsecured.
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Net Income was $293,000 for the six months ended June 30, 1999, as
compared to $133,000 for the same period in 1998. On a per share basis, which
takes into account cash dividends paid on preferred stock, the Registrant had
earnings of $0.03 per share in 1999 as compared to a net loss of $0.01 per share
for the same period in 1998. Operating revenues totaled $3,500,000 during the
six months ended June 30, 1999, a 102% increase over the $1,700,000 recorded
during the same period in 1998. This increase was directly related to increased
activities by the Registrant in the sponsorship of Limited Partnerships for the
drilling and development of oil and gas properties during 1999 as compared to
1998. The changes in direct operating costs, other operating expenses and other
income were directly and proportionally related to those changes in operating
revenues.
The Registrant's current assets decreased 43.5% to $667,000 at June 30,
1999, as compared to $1,200,000 at June 30, 1998, as a result of the investments
in drilling equipment previously discussed. Total assets increased 8.5% to
$3,700,000 as a result of additions to long-term debt associated with the
acquisition of the drilling equipment and a 45% increase in stockholders' equity
to $2,800,000. The increase in stockholders' equity resulted from the sales of
the Registrant's Preferred Stock as previously discussed.
As a result of the Registrant's increased operating functions, at June
30, 1999 the current and quick ratios were 6.78 to 1, a decrease of 89% from
56.86 to 1 at June 30, 1998. During the six months ended June 30, 1999 and June
30, 1998, the Registrant has relied upon net inflows of cash from equity
transactions, supplemented by net inflows of cash generated by its operating
activities and additions to long-term debt to fund the purchase of assets and
expansion. Management intends to continue funding further growth in a similar
manner.
11
<PAGE> 12
SELECTED FINANCIAL DATA
The following selected financial data, prepared in accordance with generally
accepted accounting principles as of June 30, 1999 and 1998 along with December
31, 1998 and 1997, should be read in conjunction with the financial statements
included in Part F/S.
<TABLE>
<CAPTION>
Six Months Ended Year Ended
------------------------------ ----------------------------
June 30, June 30, December 31, December 31,
1999 1998 1998 1997
------------ ------------ ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating Revenues $ 3,498,331 $ 1,725,400 $ 2,087,690 $ 2,970,911
Direct Operating Costs 2,715,594 1,334,073 1,455,607 2,244,138
------------ ------------ ------------- ------------
Gross Operating Income 782,737 391,327 632,083 726,773
Other Operating Expenses 361,852 181,320 654,892 853,945
------------ ------------ ------------- ------------
Net Operating Income (Loss) 420,885 210,007 (22,809) (127,172)
Other Income (Expense) 16,364 4,035 95,622 (3,324)
------------ ------------ ------------- ------------
Net Income (Loss) Before Taxes 437,249 214,042 72,813 (130,496)
Provision (Benefit)for Income Taxes 144,281 81,336 24,762 (41,134)
------------ ------------ ------------- ------------
Net Income (Loss) $ 292.968 $ 132,706 $ 48,051 $ (89,362)
============ ============ ============= ============
Earnings (Loss) per Share $ 0.03 $ (0.01) $ (0.09) $ (0.20)
============ ============ ============= ============
Weighted Average
Common Shares Outstanding 5,219,698 1,726,600 3,062,868 1,576,200
============ ============ ============= ============
<CAPTION>
June 30, June 30, December 31, December 31,
1999 1998 1998 1997
------------ ------------ ------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Total Assets $ 3,663,438 $ 1,974,460 $ 2,995,342 $ 1,592,702
Total Current Assets $ 667,864 $ 1,181,922 $ 2,308,718 $ 911,598
Total Liabilities $ 894,559 $ 60,995 $ 583,933 $ 93,236
Total Current Liabilities $ 98,443 $ 20,788 $ 519,701 $ 53,029
Total Shareholders' Equity $ 2,768,879 $ 1,913,465 $ 2,411,409 $ 1,499,466
Cash Dividends Paid $ 147,923 $ 151,312 $ 336,448 $ 231,447
Total Retained Deficit $ (343,209) $ (137,128) $ (488,254) $ (199,857)
</TABLE>
12
<PAGE> 13
YEAR 2000
The Year 2000 issue results from computer programs and embedded
computer chips with date fields that cannot distinguish between the years 1900
and 2000. The Registrant is currently implementing the steps necessary to make
its operations and the related operations of the Registrant capable of
addressing the Year 2000. These steps include upgrading and certifying its
computer systems and field operation services and obtaining Year 2000 compliance
certification from all important business suppliers. The Registrant anticipates
that all of its mission critical systems will be capable of Year 2000
operations.
The Registrant's business systems are almost entirely comprised of
off-the-shelf software. Most of the necessary changes in computer instructional
code can be made by upgrading this software. The Registrant is currently in the
process of either upgrading the off-the-shelf software or receiving
certification as to Year 2000 compliance from vendors or third party
consultants.
The Registrant does not believe that costs incurred to address the Year
2000 issue with respect to its business systems will have a material effect on
the Registrant's results of operations, or its liquidity and financial
condition. The estimated total cost to the Registrant to address Year 2000
issues is projected to be less than $10,000.
The failure to correct a material Year 2000 problem could result in an
interruption, or failure of certain normal business activities or operations.
Based on activities to date, the Registrant believes that it will be able to
resolve any Year 2000 problems concerning its financial and administrative
systems. It is undeterminable how all the aspects of the Year 2000 will impact
the Registrant. The most reasonably likely worst case scenario would involve a
prolonged disruption of external power sources upon which core equipment relies,
resulting in a substantial decrease in the Registrant's oil and gas production
activities. In addition, the pipeline operators to whom the Registrant sells the
Registrant's natural gas, as well as other customers and suppliers, could be
prone to Year 2000 problems that could not be assessed or detected by the
Registrant. The Registrant is contacting its major purchasers, customers,
suppliers, financial institutions and others with whom it conducts business to
determine whether they will be able to resolve in a timely manner any Year 2000
problems directly affecting the Registrant and to inform them of the
Registrant's internal assessment of its Year 2000 review. There can be no
assurance that such third parties will not fail to appropriately address their
Year 2000 issues or will not themselves suffer a Year 2000 disruption that could
have a material adverse effect on the Registrant's activities, financial
condition or operating results. Based upon these responses and any problems that
arise during the testing phase, contingency plans or back-up systems would be
determined and addressed.
13
<PAGE> 14
ITEM 3. PROPERTIES
As of December 31, 1998, the Registrant has acquired interests in
producing oil and gas properties, which are generally described below.
PRINCIPAL OIL AND GAS PRODUCING PROPERTIES
The Registrant's most valuable wells, based upon year-end engineering estimates
of discounted future net revenues using constant pricing and costs, are
described below.
1. Approximately 75% of total value is from the Homestake #1oil well in Lea
County, New Mexico. The Homestake #1 produces from the Wilcox formation.
2. The Keagan Gibson #1 oil well is in Smith, County, Texas and produces from
the Frio and Vicksburg formations, accounting for 12% of the value.
3. Eight oil wells are in Fayette County, Texas and produce from the Austin
Chalk Formation, accounting for 13% of the value.
There are no other wells owned by the Registrant contributing to the
Registrant's total reserve values at December 31, 1998.
Since December 31, 1998 Registrant' has embarked on an Appalachian Basin
drilling program. To date 25 wells have been drilled, 8 of which are currently
selling gas. There has been one dry hole. The remaining 16 wells are in varying
stages of development.
TITLE TO PROPERTIES
Title to substantially all significant producing properties of the
Registrant has been examined. The properties are subject to royalty, overriding
royalty and other interests customary in the industry. Management does not
believe any of these burdens materially detract from the value of the properties
or will materially detract from the value of the properties or materially
interfere with their use in the operation of the business of the Registrant.
14
<PAGE> 15
PRODUCTION AND SALES PRICE
The following table summarizes the sales volumes of the Registrant's
net oil and gas production expressed in BBLs of oil. Equivalent BBLs of oil are
obtained by converting gas to oil on the basis of their relative energy content;
Six thousand cubic feet of gas equals one barrel of oil.
<TABLE>
<CAPTION>
Net Production Net Production
For the Year Ended For the Year Ended
December 31, 1998 December 31, 1997
------------------ ------------------
<S> <C> <C>
Net Volumes (Equivalent BBls) 1,719 76
Average Sales Price
per Equivalent BBL $ 15.99 $ 16.80
Average Production Cost
per Equivalent BBL
(includes production taxes) $ 15.85 $218.13
</TABLE>
NET PROVED OIL AND GAS RESERVES
Presented below are the estimates of the Registrant's proved reserves
as of December 31, 1998 and 1997. All of the Registrant's proved reserves are
located in the United States.
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------------------ -----------------------
Natural Natural
Oil Gas Oil Gas
--------- -------- -------- --------
(BBLS) (MMCF) (BBLS) (MMCF)
<S> <C> <C> <C> <C>
Proved developed reserves at end of
year 58,037 13 2,236 4
========= ======== ======== ========
Proved reserves:
Balance at beginning of year 2,236 4 1,005 40,005
Extensions, discoveries
and other additions 44,067 -- 1,076 --
Revisions of previous estimates -- -- (349) (40,000)
Purchases of minerals in place 13,452 11 580 --
Production (1,718) (2) (76) (1)
--------- -------- -------- --------
Balance at end of year 58,037 13 2,236 4
========= ======== ======== ========
</TABLE>
15
<PAGE> 16
The following table summarizes by acquisition the Registrant's reserves
and gross and net interests in producing oil and gas wells as of December 31,
1998:
Reserves
December 31, 1998
<TABLE>
<CAPTION>
Natural
Acquisition States Oil Gas Wells
- ---------------------- ------ --------- ---------- --------------------
(BBLS) (MMCF) Gross Net
<S> <C> <C> <C> <C> <C>
Interests in Sponsored
Limited Partnerships:
Blue Ridge Energy
Production Fund LP TX 6,885 13 8.0 0.95934
Paluxy LP TX 7,085 -- 1.0 0.09410
Homestake LP NM 25 -- 1.0 0.00040
Direct Interest NM 44,042 -- 1.0 0.66866
--------- ---------- ------ --------
Homestake #1 Well
Total Interests 58,037 13 11.0 1.72250
========= ========== ====== ========
</TABLE>
There are numerous uncertainties inherent in estimating quantities of
proven reserves and in projecting the future rates of production, timing and
plan of development. Oil and gas reserve engineering must be recognized as a
subjective process of estimating underground accumulations of oil and gas that
cannot be measured in an exact way, and estimates of other engineers might
differ from those above. The accuracy of any reserve estimate is a function of
the quality of available data and of engineering and geological interpretation
and judgment. Results of drilling, testing and production subsequent to the date
of the estimate may justify revision of such estimate, and, as a general rule,
reserve estimates based upon volumetric analysis are inherently less reliable
than those based on lengthy production history. Accordingly, reserve estimates
are often different from the quantities of oil and gas that are ultimately
recovered.
In estimating the oil and natural gas reserves, the Registrant, in
accordance with criteria prescribed by the Securities and Exchange Commission,
has used prices received as of December 31, 1998 without escalation, except in
those instances where fixed and determinable gas price escalations are covered
by contracts, limited to the price the Registrant reasonably expects to receive.
Future prices received for the sale of the Registrant's product may be
higher or lower than the prices used in the evaluation described above; the
operating costs relating to such production may also increase or decrease from
existing levels. The estimates presented above are in accordance with rules
adopted by the Securities and Exchange Commission.
16
<PAGE> 17
ITEM 4. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Blue Ridge Group, Inc. ("Group") acquired control of the Registrant in
March, 1996 when Group acquired 1,000,000 shares of restricted common stock at
$0.10 per share. In May, 1996 the Common shares were the subject of a 5 to 1
reverse split and in June, 1996 Group acquired another 1,000,000 shares of
restricted common stock from the Registrant's treasury for $0.05 a share, or
$50,000 and options to purchase an additional 2,000,000 shares of restricted
common stock a $0.05 per share. No significant market existed for the common
shares at the time. During February, 1998, the Registrant granted options to
Group to purchase an additional 5,000,000 shares of restricted common stock at
$0.05 per share. The option exercise price was 40% of the bid price for
Registrants common stock at the time.
During 1997 and 1998 Group exercised options to purchase 3,000,000
shares of restricted common stock at $0.05 per share. Group distributed
1,089,425 of these shares to investors in several of its partnerships. As of
December 31, 1998 and June 30, 1999, there were 5,171,578 and 5,219,698 shares,
respectively, of the Registrant's common stock issued and outstanding. Of these
outstanding shares Group held a total of 3,110,575 shares or approximately
59.6%. As of August 31, 1999, there were 5,788,994 shares of Registrants common
stock issued and outstanding of which Group held a total of 3,110,575 shares or
approximately 53.7%.
As of December 31, 1998 and June 30,1999 there are no other
shareholders holding 5% or more of the issued and outstanding common stock.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below is certain information as of August 25, 1999 regarding
the directors and executive officers of the Registrant.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
Position(s) with
Name Age The Registrant and Other Companies
- ------------------- --- ----------------------------------
<S> <C> <C>
Robert D. Burr 53 Chairman of the Board of the Registrant,
President and Chief Executive Officer
J. Thomas Cook, Jr. 46 Director of the Registrant, Senior Vice President-
Finance and Chief Financial Officer
Gregory B. Shea 37 Director of the Registrant; Senior Vice President-Operations
</TABLE>
ROBERT D. BURR, age 53, Bowling Green, Kentucky, has been Chairman of the Board,
President and Chief Executive Officer of the Registrant since May, 1996. A
native of Port Arthur, Texas, Mr. Burr attended McNeese State College, Lake
Charles, Louisiana. He has been active for over 20 years in
17
<PAGE> 18
the oil and gas business with a myriad of companies. During that time, he has
drilled or operated over 350 wells in Texas, Kentucky, Oklahoma, Utah and West
Virginia. During the last five years, he has been associated with Pacific
Capital Energy, Ltd. and has been the Chairman of the Board, President and Chief
Executive Officer of Blue Ridge Group, Inc., Bowling Green, Kentucky, since
August, 1993.
J. THOMAS COOK, JR., age 46, Bowling Green, Kentucky, has been Vice President,
Finance and a Director of the Registrant since May, 1996. Mr. Cook also serves
as Secretary and Treasurer of the Registrant. He is an accountant by training,
and a graduate of Stephen F. Austin State University, Nacogdoches, Texas. He has
11 years experience in various phases of the financial side of the oil and gas
industry between 1978 and 1989. From 1983 to 1989, he was Vice President,
Finance and Treasurer of the Shanley Corp., Dallas, Texas, a publicly owned oil
and gas exploration company with retail gas stations and public drilling funds.
From 1990 through 1994, he served in various financial capacities for a group of
Florida based companies with interests in Caribbean resorts, stores, and
manufacturer of bath products. Since June 1, 1995, he has been a Director and
the Vice-President - Finance and Chief Financial Officer of Blue Ridge Group,
Inc. In 1997, Mr. Cook became the brother-in-law of Mr. Burr.
GREGORY B. SHEA., age 37, Bowling Green, Kentucky, has been a Director and
Senior Vice President-Operations of the Registrant since August, 1999. Mr. Shea
has been President of Blue Ridge Builders, Inc. a residential/commercial builder
in Bowling Green, Kentucky and a majority-owned subsidiary of Blue Ridge Group,
Inc. since November 1994 and he was elected a Director of Blue Ridge Group, Inc.
in February, 1995. Since that time, Mr. Shea has successfully managed Group's
Kentucky Drilling and Field Operations. A native of Plano, Texas, he relocated
in late 1987 to California and in 1989 accepted a position managing the sales
and finance divisions of an Infiniti dealership in Tustin, California. In 1994,
he was engaged to assist in the restructure of a stagnating Ford dealership in
Warrensburg, Missouri by developing a profitable, successful dealership through
the reorganization of its sales, service and management teams. Between 1981 and
1986, he attended the University of North Texas. Mr. Shea is the son-in-law of
Mr. Burr.
ITEM 6. EXECUTIVE COMPENSATION
The following compensation was paid to the executives of the Registrant
during the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Robert D. Burr $ 0.00 $ 25,000.00
</TABLE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Blue Ridge Group, Inc. ("Group") owns approximately 53.7% of the Common
Stock of the Registrant as of August 31, 1999. The Registrant has entered into
several transactions with Group as follows:
18
<PAGE> 19
COMMON STOCK TRANSACTIONS
In March, 1996, Group acquired 1,000,000 shares of restricted common
stock for $0.10, or $100,000. In June, 1996, Group acquired another 1,000,000
shares of restricted common stock from the Registrant for $0.05 per share, or
$50,000 and options to purchase an additional 2,000,000 shares of restricted
common stock at $0.05 per share. During February, 1998 the Registrant granted
warrants to Group to purchase an additional 5,000,000 shares of restricted
common stock at $0.05 per share.
During 1997 Group exercised options to purchase 200,000 restricted
shares of the Registrant's common stock and subsequently distributed these
shares to the investors in one of its partnerships. During 1998 Group exercised
options to purchase 2,800,000 restricted shares of the Registrant's common stock
and subsequently distributed 889,425 of these shares to investors in several of
its partnerships. At June 30, 1999, Group owned 3,110,575 shares of the
Registrant's common stock and had options remaining to purchase 4,000,000 shares
of restricted common stock at $0.05 per share.
ADVANCES TO RELATED PARTIES
During 1996, Group advanced $126,000 to the Registrant for the purchase
of a working interest in a well in Louisiana. This advance was repaid during the
first quarter of 1997.
During 1997, the Registrant purchased for $250,000 the JW Harris #1C
oil well from two shareholders of Group. Subsequent to this purchase, the well's
performance deteriorated significantly and the selling parties agreed to buy the
well back from the Registrant of the original purchase price of $250,000. This
$250,000 was paid in full in March of 1998.
During 1998, the Registrant agreed to acquire drilling equipment and
acquire and develop oil and gas properties in the Appalachian Basin of Kentucky
with Group. In order to facilitate the acquisition of these properties and
equipment, the Registrant advanced approximately $1,300,000, bearing interest at
12% per annum, to Group. As of June 30, 1999, approximately $98,989 in interest
had been earned under this arrangement and the entire balance had been repaid
via Group's drilling of 10 gas wells for the Registrant and the sale of a
drilling rig and ancillary drilling equipment to the Registrant.
CONTRACTUAL AGREEMENTS
Since June of 1996, the Registrant has entered into turnkey drilling
contracts with Group for the acquisition, drilling, completing and equipping of
oil and gas wells for the Registrant and the Limited Partnerships that the
Registrant has sponsored. A summary of the amounts involved in these contracts
is as follows:
<TABLE>
<S> <C> <C> <C>
Year Ended December 31, 1996 $ 1,308,070
Year Ended December 31, 1997 $ 2,227,560
Year Ended December 31, 1998 $ 1,428,382
Six Months Ended June 30, 1999 $ 2,417,000
</TABLE>
19
<PAGE> 20
Additionally, Group provides various management, administrative,
accounting and geological services for the Registrant for a fee of $20,000 per
month. The Registrant also reimburses Group for direct costs paid on its behalf.
ITEM 8. DESCRIPTION OF SECURITIES
The Registrant is authorized to issue two classes of stock that are
designated, respectively, common and preferred stock. The total number of shares
of stock which the Registrant initially had the authority to issue was
20,000,000 shares being designated as common stock. As of June 30, 1999 the
Registrant was authorized to issue 25,000,000 shares of stock, 20,000,000 being
designated as common stock and 5,000,000 designated as preferred stock.
COMMON STOCK
As of August 31, 1999, there were 5,788,944 shares of the Registrant's
Common Stock, which has a par value of $0.005 per share issued and outstanding.
Each holder of the Common Stock shall be entitled to one vote for each share of
the Common Stock standing in his name on the books of the Registrant. Series A
and B Preferred Stock had all been converted to common stock by August 31, 1999.
A total of 156,550 Series C Preferred shares had also been converted to common
stock. See footnote 7 to the accompanying December 31, 1998 financial
statements for additional disclosure concerning the Company's Preferred and
Common Stock.
SERIES D PREFERRED STOCK
During 1998, the Registrant authorized the issuance and sale of
1,000,000 shares of Series D Preferred Stock ("Series D Stock") which has a par
value of $0.001 per share at $5.00 per share. The Series D Stock bears a 12% per
annum dividend payable monthly. . Each share of the Series D Stock shall be
converted automatically into one (1) share of Common Stock effective when a
registration statement for the Common Stock is filed with the SEC or two years
from issuance, whichever occurs first.
In the event of any liquidation, dissolution or winding up of the
Registrant, either voluntary or involuntary, the holders of Series D Stock shall
be entitled to receive, prior and in preference to any distribution of any
assets or surplus funds of the Registrant to the holders of Common Stock, but
subordinate to the liquidation preference of the Series C Preferred Stock, the
amount of $5.00 per share plus all unpaid dividends on such share of each share
of Series D Stock then held by the shareholder. At August 31, 1999, there were
474,450 shares of Series D Stock issued and outstanding and 12,900 shares of
Series C Preferred stock outstanding.
SERIES D COMMON STOCK WARRANTS
During 1998, the Company authorized the issuance and sale of 1,000,000
Series D Common Stock Warrants ("Warrants") exercisable to purchase one share of
the Company's Common Stock for $1.00. One Warrant is to be issued with each
share of Series D Preferred Stock sold. At August 31, 1999, there were 474,450
Warrants issued and outstanding.
20
<PAGE> 21
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
The Common Stock of the Registrant is traded OTCBB with "BREY" as its
stock symbol. The range of high and low bid information as quoted by
bigcharts.com for each quarter since January 1, 1997 is as follows:
<TABLE>
<CAPTION>
High Bid Low Bid
---------- ---------
<S> <C> <C>
March 31, 1997 $ 7.00 $ 5.00
June 30, 1997 $ 6.00 $ 1.125
September 30, 1997 $ 3.00 $ 1.125
December 31, 1997 $ 1.00 $ 0.125
March 31, 1998 $ 0.50 $ 0.125
June 30, 1998 $ 1.75 $ 1.75
September 30, 1998 $ 1.375 $ 1.0625
December 31, 1998 $ 1.0312 $ 0.4062
March 31, 1999 $ 0.50 $ 0.4062
June 30, 1999 $ 3.50 $ 2.25
</TABLE>
These quotations reflect inter dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions.
The Preferred Stock of the Registrant is not traded on any exchange and
there is no trading market for the Preferred Stock.
DIVIDEND INFORMATION
No cash dividends have been declared or paid on the Registrant's Common
Stock since the Registrant's inception.
SHAREHOLDER INFORMATION
As of August 31, 1999, there are 467 shareholders of the Registrant's
Common Stock.
ITEM 2. LEGAL PROCEEDINGS
The Registrant is not aware of any material pending legal proceedings
to which it is a party or of which any of its property is the subject.
21
<PAGE> 22
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES SALES OF PREFERRED STOCK
<TABLE>
<CAPTION>
TITLE OF CLASS OF NO. OF APPROX. PRICE PER SHARES TOTAL AMT. COMMISSIONS &
SECURITY INVESTOR INVESTORS DATE SOLD SHARE SOLD SOLD DISCOUNTS PAID
- --------------- -------------- --------- --------- --------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A Accredited 38 7/96 to $ 0.93 224,664 $ 208,938 $ 0
Preferred Stock Non-Accredited 29 8/96 73,082 68,753 0
--------- -------- ---------- --------------
67 297,746 $ 277,691 $ 0
Series B Accredited 15 8/96 to 3.00 60,658 $ 181,974 $ 27,296
Preferred Stock Non-Accredited 11 8/97 20,683 62,049 9,037
--------- -------- ---------- --------------
26 81,341 $ 244,023 $ 36,603
Series C Accredited 29 5/97 to 6.00 71,750 $ 730,500 $ 64,575
Preferred Stock Non-Accredited 29 12/97 97,700 586,200 87,930
--------- -------- ---------- --------------
58 169,450 $1,016,700 $ 152,505
Series D Accredited 96 6/98 to 5.00 451,700 $2,258,500 $ 338,775
Preferred Stock Non-Accredited 8 present 22,750 113,750 17,063
--------- -------- ---------- --------------
104 474,450 $2,372,250 $ 355,838
</TABLE>
RECENT SALES OF UNREGISTERED SALES OF COMMON STOCK.
During the year ended 1998 and six months ended June 30, 1999, certain preferred
stockholders converted their preferred stock, into the Company's unregistered
common stock at various conversion ratios. A detail of such transaction is
described in Part I, item 8 of this registration statement.
During the period March 1996 through June 30, 1999, Blue Ridge Group Inc.
acquired a total of 3,110,575 of restricted common stock of the Registration
through cash purchases and exercise of options at varying prices. Such
transactions are explained in more detail in Part I, item 4 and item 7 of this
registration statement.
22
<PAGE> 23
RECENT SALES OF UNREGISTERED SECURITIES
SALES OF PARTNERSHIP INTEREST
<TABLE>
<CAPTION>
COMMISSIONS
CLASS OF NO. OF SALES PRICE PER UNITS TOTAL AMT. & DISCOUNTS
TITLE OF SECURITY INVESTOR INVESTORS PERIOD UNIT SOLD SOLD PAID
- ------------------ -------------- --------- ------ --------- ------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Blue Ridge Energy Accredited 38 8/96 to 12,000 68.725 $ 825,000 123,750
Production Fund LP Non-Accredited 33 10/96 36.000 432,000 64,800
--------- ------- ---------- -----------
71 101.750 $1,257,000 188,550
Smackover/ Accredited 31 10/96 to 10,000 79.370 $ 793,750 119,062
Woodbine LP Non-Accredited 19 2/97 35.500 355,000 53,250
--------- ------- ---------- -----------
50 114.870 $1,148,750 172,312
Paluxy LP Accredited 36 2/97 to 12,950 46.050 $ 596,347 89,452
Non-Accredited 33 8/97 31.750 411,163 61,674
--------- ------- ---------- -----------
69 77.800 $1,007,510 151,126
Home Stake LP Accredited 29 7/97 to 14,775 58.250 $ 860,644 129,097
Non-Accredited 30 10/97 29.750 439,556 65,933
--------- ------- ---------- -----------
59 89.000 $1,300,200 195,030
Sherman/Moore LP Accredited 31 10/97 to 18,500 62.250 $1,151,625 172,744
Non-Accredited 19 11/97 25.250 467,125 70,069
--------- ------- ---------- -----------
50 87.500 $1,618,750 242,813
Phillips/ Accredited 45 2/98 to 15,000 57.350 $ 860,250 129,037
Blue Ridge LP Non-Accredited 24 4/98 25.000 375,000 56,250
--------- ------- ---------- -----------
69 82.350 $1,235,000 185,287
1998 Year End LP Accredited 68 12/98 to 15,000 113.420 $1,701,300 255,195
Non-Accredited 9 3/99 10.420 156,300 23,445
--------- ------- ---------- -----------
77 123.840 $1,657,600 278,640
Harlan County LP Accredited 63 3/99 to 9,000 103.000 $ 927,000 139,050
Non-Accredited 13 4/99 22.000 198,000 29,700
--------- ------- ---------- -----------
76 125.000 $1,125,000 168,750
Cumberland Gap LP Accredited 85 4/99 to 6,000 170.250 $1,021,500 153,225
Non-Accredited 17 7/99 31.500 189,000 28,350
--------- ------- ---------- -----------
102 201.750 $1,210,500 181,575
</TABLE>
The Company claimed exemptions from the registraton of the
aforementioned securities (preferred stock, common stock and partnership
interest) under Regulation D, Rule 505 and 506 of the Securities Act of 1933.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each Director and each Officer of the Registrant has been indemnified
by the Registrant pursuant to its Articles of Incorporation.
23
<PAGE> 24
PART F/S
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Audited Financial Statements for December 31, 1998 and 1997 F - 2
Independent Auditors' Report F - 3
Balance Sheets F - 4-5
Statements of Income F - 6
Statements of Changes in Stockholders' Equity F - 7
Statements of Cash Flows F - 8
Notes to Financial Statements F - 9
Unaudited Condensed Financial Statements for June 30, 1999 and 1998 F - 24
Balance Sheets F - 25-26
Statements of Income F - 27
Statements of Cash Flows F - 28
Notes to Financial Statements F - 29
Financial Statement Schedules
Not Applicable or included in Financial Statements and Notes thereto.
</TABLE>
F-1
<PAGE> 25
BLUE RIDGE ENERGY, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
F-2
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND
STOCKHOLDERS OF BLUE RIDGE ENERGY, INC.
BOWLING GREEN, KENTUCKY
WE HAVE AUDITED THE ACCOMPANYING BALANCE SHEETS OF BLUE RIDGE ENERGY, INC. AS OF
DECEMBER 31, 1998 AND 1997, AND THE RELATED STATEMENTS OF INCOME, STOCKHOLDERS'
EQUITY AND CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997. THESE
FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR
RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON
OUR AUDITS.
WE HAVE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE 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.
WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT FAIRLY, IN
ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF BLUE RIDGE ENERGY, INC. AS OF
DECEMBER 31, 1998 AND 1997, AND THE RESULTS OF ITS OPERATIONS AND CASH FLOWS FOR
THE YEARS THEN ENDED IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
/s/ SAMSON, ROBBINS & ASSOCIATES, P.L.L.C.
SAMSON, ROBBINS & ASSOCIATES, P.L.L.C.
DALLAS, TX
MARCH 17, 1999, EXCEPT AS TO NOTE 9, WHICH IS AS OF SEPTEMBER 23, 1999.
F-3
<PAGE> 27
BLUE RIDGE ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 480,952 $ 367,455
Short Term Investments (Note 3) 19,925 19,925
Accounts Receivable:
Managed Limited Partnerships (Note 2) 248,234 143,806
Trade and Other 91,691 78,952
Advances to Related Parties (Notes 4 and 9) 1,467,916 301,460
---------- ----------
Total Current Assets 2,308,718 911,598
PROPERTY AND EQUIPMENT, NET (Notes 5 and 9) 540,068 657,639
OTHER ASSETS, NET 146,556 23,465
---------- ----------
TOTAL ASSETS $2,995,342 $1,592,702
========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-4
<PAGE> 28
BLUE RIDGE ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 84,952 $ 49,029
Drilling Advances (Note 2) 284,074 --
Notes Payable 150,675 4,000
----------- -----------
TOTAL CURRENT LIABILITIES 519,701 53,029
DEFERRED INCOME TAX LIABILITY (Note 8) 64,232 40,207
----------- -----------
TOTAL LIABILITIES 583,933 93,236
COMMITMENTS AND CONTINGENCIES -- --
(Notes 4, 6 and 9)
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 5,000,000
shares authorized; 464,308 and 669,570 shares
issued and outstanding at December 31, 1998
and 1997, respectively (Notes 4 and 7) 464 669
Common Stock, $0.005 par value; 20,000,000
shares authorized; 5,171,578 and 1,726,600 shares
issued and outstanding at December 31, 1998
and 1997, respectively (Notes 4 and 7) 25,858 8,633
Additional Paid-In Capital 2,873,341 1,690,021
Accumulated Deficit (488,254) (199,857)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,411,409 1,499,466
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,995,342 $ 1,592,702
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-5
<PAGE> 29
BLUE RIDGE ENERGY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
OPERATING REVENUES:
Turnkey Contract Sales $ 1,743,211 $ 2,616,843
Management Fees 182,618 165,667
Syndication Fees 30,006 49,547
Reimbursed Costs 104,354 110,577
Oil and Gas Sales 27,501 28,277
----------- -----------
Total Operating Revenues 2,087,690 2,970,911
OPERATING COSTS AND OTHER EXPENSES:
Turnkey Contract Costs 1,428,382 2,227,560
Lease Operating Costs 27,225 16,578
Depreciation, Depletion and Amortization 17,978 118
Dry Hole Costs 16,817 10,464
Impairment of Oil & Gas Properties (Notes 1 and 5) 327,405 203,413
Marketing Costs 126,588 346,415
General and Administrative Costs 166,104 293.535
----------- -----------
Total Operating Costs 2,110,499 3,098,083
----------- -----------
OPERATING (LOSS) (22,809) (127,172)
OTHER INCOME (EXPENSE):
Interest Income 82,181 7,085
Other, net 13,441 (10,409)
----------- -----------
Total Other Income (Expense) 95,622 (3,324)
----------- -----------
INCOME (LOSS) BEFORE TAXES 72,813 (130,496)
Income Tax Provision (Benefit) (Note 8) 24,762 (41,134)
----------- -----------
NET INCOME (LOSS) $ 48,051 $ (89,362)
=========== ===========
(LOSS) PER COMMON SHARE (NOTE 1):
Basic $ (0.09) $ (0.20)
Diluted $ (0.09) $ (0.20)
----------- -----------
Weighted Average Common Shares Outstanding 3,062,868 1,576,200
----------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-6
<PAGE> 30
BLUE RIDGE ENERGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
-------------------- ------------------- ADDITIONAL RETAINED
NO. OF NO. OF PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
-------- --------- --------- -------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1996 319,933 $ 320 1,526,600 $ 7,633 $ 670,953 $ 120,952 $ 799,858
Stock Warrants Exercised 200,000 1,000 9,000 10,000
Sale of Stock (Notes 4 and 7):
Preferred Stock:
Series A 31,996 32 95,969 96,001
Series B 148,191 148 157,926 158,074
Series C 169,450 169 756,173 756,342
Dividends Paid on
Preferred Stock (Note 7) (231,447) (231,447)
Net (Loss) (89,362) (89,362)
-------- --------- --------- -------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1997 669,570 669 1,726,600 8,633 1,690,021 (199,857) 1,499,466
Stock Warrants Exercised 2,800,000 14,000 126,000 140,000
Sale of Stock (Notes 4 and 7):
Series D Preferred Stock 267,700 268 1,066,102 1,066,370
Conversion of Preferred Stock (471,362) (471) 644,978 3,225 (3,984) (1,230)
Retirement of Preferred Stock (1,600) (2) (4,798) (4,800)
Dividends Paid on
Preferred Stock (Note 7) (336,448) (336,448)
Net Income 48,051 48,051
-------- --------- --------- -------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1998 464,308 $ 464 5,171,578 $ 25,858 $2,873,341 $ (488,254) $2,411,409
======== ========= ========= ======== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-7
<PAGE> 31
BLUE RIDGE ENERGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 48,051 (89,362)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Flows from Operating Activities:
Depreciation, Depletion and Amortization 17,978 118
Impairment Loss 344,222 203,413
(Gain) on Sale of Oil and Gas Properties (75,000) --
Increase (Decrease) in Deferred Income Taxes 24,025 (2,633)
Increase (Decrease) in Income Taxes Payable 737 (45,519)
(Increase) in Accounts Receivable (117,167) (1,607)
Increase (Decrease) in Accounts Payable
and Accrued Liabilities 319,260 (237,599)
----------- -----------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 562,106 (173,189)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) in Advances to Affiliate (1,166,456) (609,008)
(Increase) in Other Assets (125,020) (15,464)
Proceeds from Sale of Oil and Gas Properties 325,000 --
Purchase of Oil and Gas Properties and Equipment (492,700) (549,507)
----------- -----------
NET CASH (USED) IN INVESTING ACTIVITIES (1,459,176) (1,173,979)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to Notes Payable 205,675 --
Payments of Notes Payable (59,000) --
Proceeds from Exercise of Stock Warrants 140,000 10,000
Issuance of Preferred Stock 1,066,370 1,010,417
Retirement of Preferred Stock (4,800) --
Cost of Conversion of Preferred Stock (1,230) --
Payments of Preferred Stock Dividends (336,448) (231,447)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,010,567 788,970
----------- -----------
NET INCREASE (DECREASE) IN CASH 113,497 (558,198)
CASH AT BEGINNING OF PERIOD 367,455 925,653
----------- -----------
CASH AT END OF PERIOD $ 480,952 $ 367,455
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ -- $ --
=========== ===========
Cash Paid for Income Taxes $ -- $ 45,519
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-8
<PAGE> 32
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Blue Ridge Energy, Inc., (the Company), a Nevada corporation, was organized in
November, 1994, as Gem Source, Incorporated (Gem Source), and subsequently
changed the name of the Company to Blue Ridge Energy, Inc. in May 1996. The
Company has offices at 632 Adams Street, Suite 710, Bowling Green, Kentucky,
42101 (See Note 4).
The Company is engaged in the exploration and development of oil and gas leases
located primarily in Texas and Kentucky through one or more of the following
activities: (i) acquisition of oil and gas leases; (ii) investment in
partnerships sponsored by itself or affiliates; (iii) purchase of producing oil
and gas properties, and (iv) acquisition of oil and gas companies which own
properties and/or production. Wells drilled by the Company include both
exploratory and development wells.
The Company intends to maintain an active role in the oil and gas industry as an
operator of oil and gas wells, a sponsor of oil and gas drilling programs, a
participant in oil and gas programs, and as an independent producer of oil and
gas.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Drilling Operations
The Company follows the completed contract method of accounting for turnkey
drilling arrangements. Under this method, all drilling advances, direct
costs, and appropriate portions of indirect costs related to contracts in
progress are recognized as revenues and expenses in the period the contracts are
substantially complete. This accounting method has been utilized by the Company
based on the short term nature of the drilling contracts, i.e. 4-5 days.
Working Interests
Revenues from working interests the Company owns are recognized when the natural
gas and oil are produced.
F-9
<PAGE> 33
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
Managed Limited Partnerships
The Company sponsors privately offered limited partnerships for which it
serves as the Managing General Partner. The purpose of these partnerships
is to acquire and develop oil and gas leases. The partnerships enter into
turnkey drilling contracts with the Company to drill, complete and equip,
if warranted, the oil and gas leases. The Company receives direct
compensation, reimbursement of costs and expenses, and revenues related to
turnkey drilling contracts. Additionally, the Company earns a carried
working interest to the tanks and pays only its pro rata share of well
operating costs, while the partnerships pay 100% of the costs of this
carried working interest.
Property and Equipment
Property and equipment (other than oil and gas) are stated at cost.
Depreciation is recognized on the straight line method over the estimated
useful lives of the assets as follows:
Lives (years)
-------------
Machinery and Equipment 10
Autos and Trucks 5
Furniture and Fixtures 10
The Company follows the successful efforts method of accounting for oil and
gas properties, using the lease as its accumulation center for capitalized
costs. Under the successful efforts method of accounting, costs which
relate directly to the discovery of oil and gas reserves and all
development costs are capitalized.
Exploration costs which do not result directly in the discovery of oil and
gas reserves are charged to expense as incurred. The capitalized costs,
consisting of lease and well equipment, lease acquisition costs and
intangible development costs are depreciated, depleted and amortized on the
unit-of-production method, based on estimates of recoverable proved
developed oil and gas reserves of each respective lease.
The costs of acquiring undeveloped properties are capitalized as incurred
and carried until the property is capitalized as a producing oil and gas
property, or is surrendered or otherwise disposed of, at which time the
full amount is charged to operations. Maintenance and repairs are charged
against operations as incurred. Renewals and betterments which extend the
life or improve existing properties are capitalized.
Upon disposition or retirement of property and equipment other than oil and
gas properties, the cost and related accumulated depreciation are removed
from the accounts and the gain or loss thereon, if any, is credited or
charged to income. The Company recognizes the gain or loss on the sale of
either a part of a proved oil and gas property or of an entire proved oil
and gas property constituting a part of a field upon the sale or other
disposition of such. The unamortized cost of the property or
F-10
<PAGE> 34
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
group of properties, a part of which was sold or otherwise disposed of, is
apportioned to the interest sold and interest retained on the basis of the fair
value of those interests.
Impairment of Long-Lived Assets
The Company follows the provisions of SFAS 121 -- "Accounting for the Impairment
of Long-Lived Assets to be Disposed Of." Consequently, the Company reviews its
long-lived assets to be held and used, including oil and gas properties
accounted for under the successful efforts method of accounting, whenever events
or circumstances indicate the carrying value of those assets may not be
recoverable. An impairment loss is indicated if the sum of the expected future
cash flows is less than the carrying amount of the assets. At December 31, 1998
and 1997 the Company determined that the carrying value of some of its oil and
gas leases should be impaired, resulting in impairment losses of $327,405 and
$203,413, respectively.
Earnings Per Common Share
The Company's basic earnings per common share ("Basic EPS") is based on the
weighted average number of common shares outstanding during the respective
periods. The income available to common shareholders is computed after deducting
dividends on the preferred stock. The convertible preferred stock and
outstanding stock warrants are considered anti-dilutive and therefore, excluded
from the earnings per share calculations.
The following is a reconciliation of the numerators and denominators used in the
calculation of Basic EPS for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
Basic EPS computation - 1998
----
<S> <C>
Net Income $ 48,051
Less: Preferred Stock Dividends (336,448)
---------
Loss Available to Common Stockholders $(288,397)
=========
</TABLE>
<TABLE>
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
- ------------ ----------- --------- --------------
<S> <C> <C> <C>
January 1-December 31 1,726,600 100.0% 1,726,600
Stock Warrants Exercised July 31 2,800,000 41.9% 1,173,699
Preferred Stock Converted September 30 644,978 52.2% 162,569
--------- ---------
5,171,578
Weighted Average Shares 3,062,868
=========
Basic EPS (Loss) $(0.09)
</TABLE>
F-11
<PAGE> 35
BLUE RIDGE ENERGY INC.
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Basic EPS computation 1997
---------
<S> <C>
Net (Loss) $ (89,362)
Less: Preferred Stock Dividends (231,447)
---------
Loss Available to Common Stockholders $(320,809)
=========
</TABLE>
<TABLE>
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
- ----------- ------------ ----------- --------------
<S> <C> <C> <C>
January 1 - December 31 1,526,600 100.0% 1,526,600
Stock Warrants Exercised October 1 200,000 24.8% 49,600
--------- ---------
1,726,600
Weighted Average Shares 1,576,200
=========
Basic EPS (Loss) $(0.20)
</TABLE>
Income Taxes
Income taxes are provided based on earnings reported for financial statement
purposes. The provision for income taxes differ from the amounts currently
payable because of temporary differences (primarily intangible drilling costs)
in the recognition of certain income and expense items for financial reporting
and tax reporting purposes.
Cash Equivalents
For purposes of reporting cash flows, cash includes cash on hand and cash on
deposit.
2. AFFILIATED OIL AND GAS PARTNERSHIPS
The Company provides turnkey drilling services for the various oil and gas
partnerships which it sponsors. Fees earned for these drilling services,
including the sale of leases to the partnerships, amounted to $ 1, 743,211 and
$2,616,843 during 1998 and 1997, respectively. The Company receives a management
fee from the partnerships for its services in connection with the selection of
the joint venture prospects and the initial operations of the joint venture in
addition to syndication fees for funds raised directly by the Company.
Management fees and syndication fees earned during the year ended December 31,
1998 and 1997 amounted to $212,624 and $215,214, respectively.
In connection with the sponsorship of oil and gas partnerships, the Company is
reimbursed by the partnerships for certain operating and overhead costs incurred
on their behalf, including filing fees,
F-12
<PAGE> 36
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
legal fees, accounting fees, printing costs and other miscellaneous expenses.
These reimbursements totaled $104,354 and $110,577 during the years ended
December 31, 1998 and 1997, respectively.
Included in the Company's financial statements are contributions made to the
various Company sponsored oil and gas partnerships, less the applicable loss
generated by these partnerships relative to the Company's percentage ownership.
The Company has allocated, on a pro-rata basis the amounts associated with these
investments to the appropriate asset, liability, income and expense accounts.
At December 31, 1998 and 1997, the various partnerships owed the Company
$315,508 and $228,929, respectively, for amounts due the Company for turnkey
drilling services, syndication fees and reimbursement of fees and expenses
incurred on behalf of the partnerships. At year end 1998 and 1997, this was
offset by the amount owed by the Company for capital contributions totaling
$67,274 and $85,123, respectively resulting in a net receivable due from the
partnerships of $248,234 and $143,806, respectively.
During 1998, the Company received advances from the 1998 Year End Drilling
Program as prepayment of drilling fees for services to be performed by the
Company during 1999. At December 31, 1998 the amount of the advanced funds was
approximately $284,074.
3. INVESTMENTS
During 1996, the Company purchased $19,925 of precious metals as a short term
investment. This amount is reflected in Current Assets in the accompanying
financial statements.
4. RELATED PARTY TRANSACTIONS
Stock Transactions
The Company was organized in November, 1994, as a Nevada corporation under the
name of Gem Source, Incorporated (Gem Source). In 1995, Gem Source sold
1,633,000 shares for $0.001 per share under Rule 504, an exemption under
Regulation D from full registration with the SEC.
Blue Ridge Group, Inc. (BRG) acquired control of Gem Source in March, 1996 when
BRG acquired 1,000,000 shares of restricted stock at $0.10 a share. In May
1996, the 2,633,000 outstanding common shares were the subject of a 5 to 1
reverse split and the name of the Company was changed from Gem Source,
Incorporated to Blue Ridge Energy, Inc. In June 1996, BRG acquired another
1,000,000 of restricted common stock from the company treasury for $0.05 a
share, or $50,000.
F-13
<PAGE> 37
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
In a Confidential Private Placement Memorandum dated July 25, 1996, the Company
offered 300,000 shares of BRE Series A Preferred Stock in exchange for
partnership interests in Target Leasing, Ltd. I, which was comprised primarily
of non-producing leaseholds, in addition to 300,000 shares of BRE Series B
Preferred Stock for cash at $3.00 per share. As of December 31, 1998 and 1997,
- -0- and 297,746 shares of BRE Series A Preferred Stock and 158,158 and 202,374
shares of BRE Series B Preferred Stock were outstanding under the terms of this
Private Placement Memorandum.
In October 1996, the Smackover/Woodbine I Joint Venture sponsored by the
Company, and the West Currie Joint Venture sponsored by Fortune Exploration of
Kentucky, Inc. agreed to purchase shares of BRE Series B Preferred Stock at
$3.00 per share at a rate of 800 shares per participating interest. As of
December 31, 1998, 95,500 shares of Series B Preferred Stock had been issued
under this arrangement.
During 1997, the Company's majority shareholder, Blue Ridge Group, Inc.,
exercised warrants to purchase 200,000 shares of the Company's common stock at
$0.05 per share or $10,000. Subsequently, Blue Ridge Group, Inc. distributed
these shares to investors in one of its joint ventures.
During, 1998, the Company's Board of Directors approved the issuance of warrants
to Blue Ridge Group, Inc. to purchase 5,000,000 shares of Blue Ridge Energy,
Inc. restricted common stock at $0.05 per share. Blue Ridge Group, Inc.
previously held warrants to purchase 1,800,000 shares of restricted common stock
at $0.05 per share.
During 1998, the Company's majority shareholder, Blue Ridge Group, Inc.
exercised warrants to purchase 2,800,000 shares of the Company's common stock at
$0.05 per share, or $140,000. Subsequently, Blue Ridge Group, Inc. distributed
889,425 of these shares to investors in several of its partnerships.
As of December 31, 1998, there are 5,171,578 shares of common stock issued and
outstanding. A total of 3,110,575 shares are held by BRG and the remainder of
2,061,003 shares are held by approximately 300 shareholders, 40 of which are
original stockholders of the Company.
Advances from Related Parties
During 1996, the Company's majority shareholder, Blue Ridge Group, Inc.,
advanced $126,000 to the Company for the purchase of a working interest in a
well in Louisiana. This advance was repaid during the first quarter of 1997.
During 1997, the Company purchased for $250,000 the J.W. Harris 1C oil well from
two shareholders of the Company's majority shareholder, Blue Ridge Group, Inc.
Subsequent to this purchase, the well's performance deteriorated significantly
and the selling parties agreed to buy the well back from the company for the
original purchase price of $250,000. This $250,000 has been
F-14
<PAGE> 38
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
recorded in Advances to Affiliates at December 31, 1997 and was paid in full in
March of 1998.
During 1998, the Company agreed with Blue Ridge Group, Inc. to acquire and
develop oil and as oil and gas properties in the Appalachian Basin of Kentucky.
In order to facilitate the acquisition of these properties the Company advanced
approximately $1,300,000, bearing interest at 12% per annum, to Blue Ridge
Group, Inc. As of December 31, 1998 approximately $73,400 in interest had been
earned under this arrangement and approximately $200,000 had been repaid leaving
a remaining balance under this arrangement of approximately $1,100,000. During
the first quarter of 1999, Blue Ridge Group, Inc. has repaid an additional
$500,000 of this balance (See Note 9 - Subsequent Events).
Additionally, Blue Ridge Group, Inc. provides various management,
administrative, accounting and geological services for the Company at a rate of
$20,000 per month. Blue Ridge Energy also reimbursed Blue Ridge Group for direct
costs paid on its behalf. As of December 31, 1998 and 1997, approximately $0 was
due and payable to Blue Ridge Group under this arrangement.
See footnote 9 for additional disclosure regarding the Company's line of credit
with Blue Ridge Group, Inc.
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consisted of the following at December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Oil and Gas Properties $555,899 $657,429
Furniture and Fixtures 364 364
-------- --------
556,263 657,793
Less Accumulated Depreciation 16,195 154
-------- --------
$540,068 $657,639
======== ========
</TABLE>
Depreciation expense was $16,048 and $52 during the years ended 1998 and 1997,
respectively.
During 1996, the Company acquired approximately $154,810 of non-producing
leasehold interests from Target Leasing, Ltd. I in exchange for preferred stock.
The value assigned the acreage was based upon management's intention to utilize
these properties for future drilling efforts. These leases had an average term
of two to three years and were evaluated annually to determine the appropriate
carrying value. During 1998 and 1997, the Company evaluated these interests and
recorded an impairment of $77,405 each year for these leases. As of December 3
1, 1998, the remaining carrying value of these leases is $0. (See Note 4).
During 1996, the Company purchased an interest in drilling the Brookshire #1
well in Vermilion Parish, Louisiana from Mescalero Energy, Inc. for $126,000. In
1997, the operator of the well, Mescalero Energy filed for bankruptcy. As a
result of the operator's difficulties, the Company was
F-15
<PAGE> 39
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
unable to determine the present productive capabilities of the well or the legal
status of production resulting from the well. Therefore, the Company recorded an
impairment loss for the entire amount invested in this project, or $126,000
during 1997.
6. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has agreed to automatically convert all shares of preferred stock
outstanding effective as of the first day the Company's common stock is
publicly traded on any exchange or over-the-counter, or June 30, 2000, whichever
comes first.
During the latter part of 1998, the Company committed to, and placed a deposit
of $65,000 on, the purchase of a new Ingersoll Rand RD20 air-powered drilling
rig with a total purchase price of approximately $657,000. During March, 1999
the Company made an additional down payment of $200,000 and obtained financing
for the remaining balance due of approximately $392,000 at an interest rate of
8.75% for five years.
Contingencies
The Company's drilling and oil and gas exploration and production operations are
subject to inherent risks, including blowouts, fire and explosions which could
result in personal injury or death, suspended drilling operations, damage to or
destruction of equipment, damage to producing formations and pollution or other
environmental hazards. As a protection against these hazards, the Company
maintains general liability insurance coverage of approximately $2 million
limited to $1 million per occurrence. The Company believes it is adequately
insured for public liability and property damage to others with respect to its
operations. However, such insurance may not be sufficient to protect the Company
against liability for all consequences of well disasters, extensive fire damage,
or damage to the environment. The Company has never been fined or incurred
liability for pollution or other environmental damage in connection with its
operations.
As of December 31, 1998, the Company had no significant customers or suppliers
(other than its major stockholder, Blue Ridge Group, Inc. and its affiliates as
more fully described in footnote 4) which could, individually, have a
significant adverse effect on the Company's operations.
The Company conducts its banking relations with two local financial institutions
and does not anticipate any significant problems with future credit extensions.
A significant amount of the Company's operating funds are maintained in one
local bank insured by the FDIC.
F-16
<PAGE> 40
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of stock that are designated,
respectively, common and preferred stock. The total number of shares of stock
which the company initially had the authority to issue was 20,000,000 shares
being designated as common stock. As of December 31, 1998, the Company was
authorized. to issue 25,000,000 shares of stock - 20,000,000 being designated as
common stock and 5,000,000 shares designated as preferred stock.
Common Stock
The Company was organized in November, 1994, as a Nevada corporation under the
name of Gem Source, Incorporated (Gem Source) with an initial issuance of
1,000,000 shares of Common Stock with a par value of $0.001 per share. In 1995,
Gem Source had an offering of 1,633,000 shares under Rule 504, an exemption
under Regulation D from full registration with the SEC to bring the total
outstanding shares of common stock to 2,633,000.
Blue Ridge Group, Inc. (BRG) acquired control of Gem Source in March, 1996, when
BRG acquired 1,000,000 shares of restricted stock at $0.10 a share. In May
1996, the 2,633,000 outstanding common shares were the subject of a 5 to 1
reverse split resulting in outstanding shares of 526,600 with a par value of
$0.005 per share. The name of the Company was also changed from Gem Source to
Blue Ridge Energy, Inc. Additionally, in June 1996, BRG acquired another
1,000,000 of restricted common stock from the Company treasury for $0.05 a
share, or $50,000 and options to purchase an additional 2,000,000 shares of
restricted common stock at $0.05 per share. During February 1998, the Company
granted warrants to Blue Ridge Group, Inc. to purchase an additional 5,000,000
shares of restricted common stock at $0.05 per share.
During 1997, the Company's majority shareholder, Blue Ridge Group, Inc.,
exercised options to purchase 200,000 shares of the Company's common stock at
$0.05 per share or $10,000. Subsequently, Blue Ridge Group, Inc. distributed
these shares of stock to investors in one of its partnerships.
During 1998, the Company's majority shareholder, Blue Ridge Group, Inc.
exercised options to purchase 2,800,000 shares of the Company's common stock at
$0.05 per share, or $140,000. Subsequently, Blue Ridge Group, Inc. distributed
889,425 of these shares to investors in several of its partnerships.
During 1998, the Company authorized the issuance of 1,000,000 shares of Common
Stock Warrants ("Warrants") in conjunction with the sale of the Company's Series
D Preferred Stock. One Warrant will be issued with each share of Series D
Preferred Stock sold and will be exercisable to purchase Blue Ridge Energy, Inc.
Common Stock at $1.00 per share between May 31, 1998 and May 31, 2003.
F-17
<PAGE> 41
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
As of December 31, 1998, there were 267,700 Warrants issued and outstanding,
none of which had been exercised.
Series A Preferred Stock
During May 1996, the Company authorized the issuance and sale of 300,000 shares
of Series A Preferred Stock ("Series A Stock") which has a par value of $0.001
per share, at $3.00 per share. The Series A Stock bears a 12% per annum dividend
payable monthly. Each share of the Series A Stock shall be converted
automatically into one (1) share of Common Stock effective when a registration
statement for the Common Stock is filed with the U.S. Securities and Exchange
Commission (the "SEC") or September 30, 1998, whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company either
voluntary or involuntary, the holders of Series A Stock shall be entitled to
receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock the amount of $3.00 per
share plus all unpaid dividends on such share of each share of Series A Stock
then held by the shareholder.
In a Confidential Private Placement Memorandum dated July 25, 1996, the Company
offered 300,000 shares of Series A Stock in exchange for partnership interests
in Target Leasing, Ltd. I. The value assigned to the properties acquired of
$154,810 in addition to net proceeds received of $122,881 resulted in total
consideration received of $277,691. At December 31, 1998 and 1997 there were -0-
and 297,746 shares of Series A Stock issued and outstanding, respectively.
Series B Preferred Stock
During 1996, the Company authorized the issuance and sale of 300,000 shares of
Series B Preferred Stock ("Series B Stock") which has a par value of $0.001 per
share, at $3.00 per share. The Series B Stock bears a 12% per annum dividend
payable monthly. Each share of the Series B Stock shall be converted
automatically into two (2) shares of Common Stock effective when a registration
statement for the Common Stock is filed with the SEC or two years from issuance,
whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company either
voluntary or involuntary, the holders of Series B Stock shall be entitled to
receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock, but subordinate to the
liquidation preference of the Series A Stock, the amount of $3.00 per share plus
all unpaid dividends on such share of each share of Series B Stock then held by
the shareholder.
At December 31, 1998 and 1997 there were 27,158 and 202,374 shares of Series B
Stock issued and outstanding.
F-18
<PAGE> 42
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
Series C Preferred Stock
During 1997, the Company authorized the issuance and sale of 400,00 shares of
Series C Preferred Stock ("Series C Stock") which has a par value of $0.001 per
share at $6.00 per share. The Series C Stock bears a 12% per annum dividend
payable monthly. Each share of the Series C Stock shall be converted
automatically into two (2) shares of Common Stock effective when a registration
statement for the Common Stock is filed with the SEC or two years from issuance,
whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series C Stock shall be entitled
to receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock, but subordinate to the
liquidation preference of the Series A Stock and the Series B Stock, the amount
of $6.00 per share plus all unpaid dividends on such share of each share of
Series C Stock then held by the shareholder.
At December 31, 1998 and 1997, there were 169,450 shares of Series C Stock
issued and outstanding.
Series D Preferred Stock
During 1998, the Company authorized the issuance and sale of 1,000,000 shares of
Series D Preferred Stock ("Series D Stock") which has a par value of $0.001 per
share at $5.00 per share. The Series D Stock bears a 12% per annum dividend
payable monthly. In addition, the Company will issue one Common Stock Warrant
exercisable to purchase one share of the Company's Common Stock for $1.00 with
each share of Series D Stock sold. Each share of the Series D Stock shall be
converted automatically into one (1) share of Common Stock effective when a
registration statement for the Common Stock is filed with the SEC or two years
from issuance, whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series D Stock shall be entitled
to receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock, but subordinate to the
liquidation preference of the Series A Stock, the Series B Stock and the Series
C Stock, the amount of $5.00 per share plus all unpaid dividends on such share
of each share of Series D Stock then held by the shareholder.
At December 31, 1998, there were 267,700 shares of Series D Stock issued and
outstanding. The total amount received from the sale of this stock was
$1,338,500 less expenses paid of $272,130.
F-19
<PAGE> 43
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
A summary of the common and preferred stock account at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
Shares Par Value
----------------------- ------------------- Paid-In
Authorized Issued Per Share Total Capital
---------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C>
Common 20,000,000 5,171,578 $0.005 $25,858 $ 973,599
Series B
Preferred 300,000 27,158 $0.001 27 77,467
Series C
Preferred 400,000 169,450 $0.001 169 756,173
Series D
Preferred 400,000 267,700 $0.001 268 1,066,102
SUMMARY:
COMMON 20,000,000 5,171,578 $0.005 $25,858 $ 973,599
---------- --------- ------ ------- ----------
PREFERRED 5,000,000 464,308 $0.001 $ 464 $1,899,742
---------- --------- ------ ------- ----------
</TABLE>
8. INCOME TAXES
Effective January 1, 1996, the Company adopted the provisions of SFAS 109, which
requires the use of the "liability" method under which deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
The following reconciles the Company's Federal and State income tax provision
with the expected provision obtained by applying statutory rules to pre-tax
income:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Expected Tax Provision (Benefit) $28,575 $(50,241)
Effect of Progressive Tax Rates (3,813) 9,107
------- --------
Tax Provision (Benefit) $24,762 $(41,134)
======= ========
</TABLE>
The tax effect of significant temporary differences representing the net
deferred tax liability at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- ---------
<S> <C> <C>
Net Operating Loss Carryforward $(35,442) $(48,681)
99,674 88,888
Intangible Drilling Costs -------- --------
Net Deferred Tax Liability $ 64,232 $ 40,207
======== ========
</TABLE>
F-20
<PAGE> 44
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
Income Tax Expense (Benefit) consists of the following components:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Currently Payable (Refundable):
Federal Income Tax $ -- $(31,124)
State Income Tax 737 (7,377)
-------- --------
737 (38,501)
Deferred Provision (Credit) 24,025 (2,633)
-------- --------
Total Tax Expense (Benefit) $ 24,762 $(41,134)
======== ========
</TABLE>
At December 31, 1998, the Company had a net operating loss carryforward of
approximately $104,000 to offset future taxable income. This net operating loss
carryforward will expire in 2018 unless utilized sooner.
9. SUBSEQUENT EVENTS
During March of 1999, the Company made an additional down payment of $200,000
and took delivery of its new Ingersoll Rand RD20 air powered drilling rig
financing the balance due on the rig, of approximately $392,000, with a note
payable over five years.
During the first quarter of 1999, Blue Ridge Group, Inc. reduced the balance on
its line of credit with the Company from approximately $1,100,000 to
approximately $600,000. This was accomplished through; (1) cash payments of
approximately $100,000 for the purchase of the aforementioned drilling rig and
ancillary equipment, (2) the sale of, at cost, approximately $250,000 in
additional drilling equipment required for the new rig's operation and (3) the
drilling and completion of three wells in the Appalachian Basin for the Company
whereby the Company received a 25% Working Interest in each well for a total of
$135,000. Also, during the first quarter of 1999, Blue Ridge Group, Inc. began
the drilling of several other wells which will further contribute to the
reduction of this receivable.
During the first quarter of 1999, the Company entered into negotiations with
Premier Energy, LLC to purchase its 50% interest in Stone Mountain Energy, LLC
of Kingsport, Tennessee. Stone Mountain Energy, LLC owns a 150 mile natural gas
pipeline project which will run from Harlan county in eastern Kentucky to
Knoxville, Tennessee. Subsequent to June 30, 1999, these negotiations were
terminated with no agreement being reached.
F-21
<PAGE> 45
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
10. SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING PROPERTIES
(UNAUDITED)
Costs incurred in oil and gas acquisition, exploration and development
activities:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Beginning Balance $ 657,429 $ 298,252
Acquisition (Sale) of proved properties (175,000) 175,000
Impairment of unproved properties (327,405) (203,413)
Development Costs 400,875 387,590
--------- ---------
$ 555,899 $ 657,429
========= =========
</TABLE>
Reserve Quantities
The following tables present estimates of the Company's proved oil and gas
reserves. The Company emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than those
of producing oil and gas properties. Accordingly, the estimates are expected to
change as future information becomes available. The estimates are primarily
based on the report of independent petroleum engineers.
<TABLE>
<CAPTION>
Oil (BBLS) Gas (MCF)
---------- ---------
<S> <C> <C>
Reserves--December 31, 1996 1,005 40,005
Revisions (349) (40,000)
Purchases of minerals in place 580 --
Extensions 1,076 --
Production (76) (1)
------ -------
Reserves--December 31, 1997 2,236 4
Purchases of minerals in place 13,452 11
Extensions 44,067 --
Production (1,718) (2)
------ -------
Reserves--December 31, 1998 58,037 13
------ -------
Proved Developed Reserves
December 31, 1996 1,005 40,005
====== =======
December 31, 1997 2,236 4
====== =======
December 31, 1998 58,037 13
====== =======
</TABLE>
F-22
<PAGE> 46
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
Standardized Measure of Discounted Future Net Cash Flows
The following table presents the standardized measure of discounted future net
cash flows relating to proved oil and gas reserves in accordance with SFAS 69:
<TABLE>
<CAPTION>
As of As of
December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Future cash inflows $ 618,246 $ 49,532
Future production costs (122,981) (21,036)
Future income taxes (28,440) (3,871)
--------- --------
Future net cash flows 466,825 24,625
10% annual discount for estimated
timing of cash flow (174,873) (6,487)
--------- --------
Standardized measure of
discounted future net cash flows $ 291,952 $ 18,138
========= ========
</TABLE>
<TABLE>
<CAPTION>
Changes in Standardized Measure Year Ended Year Ended
of Discounted Future Net Cash Flows: December 31, December 31,
1998 1997
------------ ------------
<S> <C> <C>
Standardized measure of discounted
future net cash flows (beginning) $ 18,138 $ 76,941
Sales of oil and gas, net of production costs (276) (7,520)
Net changes in price and production costs (137,291) (32,124)
Net changes in reserve quantities 121,016 (81,623)
Change in future income taxes (24,569) 7,613
Accretion of discount 84,463 30,011
Purchases and extensions of reserves in place 230,471 24,840
--------- --------
Standardized measure of discounted
future net cash flows (ending) $ 291,952 $ 18,138
========= ========
</TABLE>
The estimates of cash flows and reserve quantities shown above are based on
year-end oil and gas prices for each period. In accordance with SEC guidelines,
the Company's estimates of future net revenues from the Company's proved
reserves and the PV-10 Value are made using oil and gas sale prices in effect
as of the dates of such estimates and are held constant throughout the life of
the properties. The standardized measure of discounted future net cash flows is
not intended to present the fair market value of the Company's oil and gas
reserves. An estimate of fair value would also take into account, among other
things, the recovery of reserves in excess of proved reserves, anticipated
future changes in prices and costs, an allowance for return on investment and
the risks inherent in reserve estimates.
F-23
<PAGE> 47
BLUE RIDGE ENERGY, INC.
CONDENSED FINANCIAL STATEMENTS
JUNE 30,1999 AND 1998
(UNAUDITED)
F-24
<PAGE> 48
BLUE RIDGE ENERGY, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 142,713 $ 154,961
Accounts Receivable:
Managed Limited Partnerships 191,675 477,038
Trade and Other 74,716 86,625
Advances to Related Parties 258,760 463,298
----------- -----------
TOTAL CURRENT ASSETS 667,864 1,181,922
PROPERTY AND EQUIPMENT, NET 2,903,891 757,490
OTHER ASSETS, NET 91,683 35,048
----------- -----------
TOTAL ASSETS $ 3,663,438 $ 1,974,460
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-25
<PAGE> 49
BLUE RIDGE ENERGY, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
----------- -----------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 88,768 $ 20,788
Current Portion Long Term Debt 9,675 --
----------- -----------
TOTAL CURRENT LIABILITIES 98,443 20,788
LONG TERM DEBT 587,603 --
DEFERRED INCOME TAX LIABILITY 208,513 40,207
----------- -----------
TOTAL LIABILITIES 894,559 60,995
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 5,000,000
shares authorized; 475,308 and 669,570 shares
issued and outstanding at June 30, 1999
and 1998, respectively 475 728
Common Stock, $0.005 par value; 20,000,000
shares authorized; 5,219,698 and 1,726,600 shares
issued and outstanding at June 30, 1999
and 1998, respectively 26,098 8,633
Additional Paid-In Capital 3,085,515 2,041,232
Accumulated Deficit (343,209) (137,128)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 2,768,879 1,913,465
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,663,438 $ 1,974,460
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-26
<PAGE> 50
BLUE RIDGE ENERGY, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
6 MONTHS ENDED 3 MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Turnkey Contract Sales $ 3,008,400 $ 1,581,181 $ 928,800 $ 180,500
Management Fees 115,675 88,675 60,000 --
Reimbursed Costs 65,415 50,672 33,600 --
Drilling Services Sales 294,651 -- 294,651 --
Oil and Gas Sales 14,190 4,872 7,485 3,653
----------- ----------- ----------- -----------
Total Operating Revenues 3,498,331 1,725,400 1,324,536 184,153
OPERATING COSTS AND
OTHER EXPENSES:
Turnkey Contract Costs 2,417,000 1,332,075 750,500 145,000
Drilling Services Costs 291,112 -- 291,112 --
Lease Operating Costs 7,482 1,998 3,224 1,998
Depreciation, Depletion
and Amortization 20,253 53 17,221 38
Marketing Costs 263,639 48,600 107,375 9,743
General and Administrative Costs 77,960 132,667 56,229 66,706
----------- ----------- ----------- -----------
Total Operating Costs 3,077,446 1,515,393 1,225,661 223,485
----------- ----------- ----------- -----------
OPERATING INCOME 420,885 210,007 98,875 (39,332)
OTHER INCOME (EXPENSE):
Interest Income (Expense) 16,364 4,035 (7,840) (30)
----------- ----------- ----------- -----------
Total Other Income 16,364 4,035 (7,840) (30)
----------- ----------- ----------- -----------
INCOME BEFORE TAXES 437,249 214,042 91,035 (39,362)
Income Tax Provision 144,281 81,336 30,041 (2,287)
----------- ----------- ----------- -----------
NET INCOME 292,968 $ 132,706 $ 60,994 $ (37,075)
=========== =========== =========== ===========
EARNINGS PER
COMMON SHARE:
Basic $ 0.03 $ (0.01) $ 0.00 $ (0.06)
Diluted $ 0.03 $ (0.01) $ 0.00 $ (0.06)
----------- ----------- ----------- -----------
Weighted Average Common
Shares Outstanding 5,219,698 1,726,600 5,168,245 1,726,600
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-27
<PAGE> 51
BLUE RIDGE ENERGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
6 MONTHS ENDED 3 MONTHS ENDED
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
1999 1998 1999 1998
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (Loss) $ 292,968 $ 132,706 $ 60,994 $ (37,075)
Adjustments to Reconcile Net Income to
Net Cash Flows from Operating Activities:
Depreciation, Depletion and Amortization 22,070 53 19,038 38
Increase (Decrease) in Deferred Taxes 144,281 81,336 30,041 (2,287)
(Decrease) in Drilling Advances (284,074) -- -- --
Decrease (Increase) in Accounts Receivable 73,534 (340,905) 522,928 195,565
Increase (Decrease) in Accounts Payable
and Accrued Liabilities 3,816 (28,241) 25,541 (12,960)
----------- ----------- ---------- -----------
NET CASH (USED) BY
OPERATING ACTIVITIES 252,595 (155,051) 658,542 143,281
CASH FLOWS FROM
INVESTING ACTIVITIES:
Decrease (Increase) in Advances to Affiliate 1,209,156 (161,838) 155,156 (271,313)
Decrease (Increase) in Other Assets 54,873 (11,583) (6,707) (34,399)
Purchase of Drilling Equipment (2,089,484) -- (997,150) --
Purchase of Oil and Gas Properties (296,409) (99,905) (33,847) (63,987)
----------- ----------- ---------- -----------
NET CASH PROVIDED (USED)
IN INVESTING ACTIVITIES (1,121,864) (273,326) (882,548) (369,699)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Additions to long term debt 587,603 -- 195,269 --
Payments of long term debt (141,000) (4,000) (90,500) --
Issuance of Preferred Stock 227,425 351,270 223,675 351,269
Retirement of Common Stock (15,000) -- -- --
Payments of Preferred Stock Dividends (147,923) (151,312) (72,546) (76,427)
----------- ----------- ---------- -----------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES 511,105 195,958 255,898 274,842
----------- ----------- ---------- -----------
NET INCREASE (DECREASE) IN CASH (358,164) (232,419) 31,892 48,424
CASH AT BEGINNING OF PERIOD 480,952 367,455 90,896 86,612
----------- ----------- ---------- -----------
CASH AT END OF PERIOD $ 122,788 $ 135,036 $ 122,788 $ 135,036
=========== =========== ========== ===========
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash Paid for Interest $ 5,062 $ -- $ 5,062 $ --
=========== =========== ========== ===========
Cash Paid for Income Taxes $ -- $ -- $ -- $ --
=========== =========== ========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-28
<PAGE> 52
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
(UNAUDITED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Blue Ridge Energy, Inc., (the Company), a Nevada corporation, was organized in
November, 1994, as Gem Source, Incorporated (Gem Source), and subsequently
changed the name of the Company to Blue Ridge Energy, Inc. in May 1996. The
Company has offices at 632 Adams Street, Suite 710, Bowling Green, Kentucky,
42101 (See Note 3).
The Company is engaged in the exploration and development of oil and gas leases
located primarily in Texas and Kentucky through one or more of the following
activities: (i) acquisition of oil and gas leases, (ii) investment in
partnerships sponsored by itself or affiliates; (iii) purchase of producing oil
and gas properties, and (iv) acquisition of oil and gas companies which own
properties and/or production. Wells drilled by the Company include both
exploratory and development wells.
The Company intends to maintain an active role in the oil and gas industry as an
operator of oil and gas wells, a sponsor of oil and gas drilling programs, a
participant in oil and gas programs, and as an independent producer of oil and
gas.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Drilling Operations
The Company follows the completed contract method of accounting for turnkey
drilling arrangements. Under this method, all drilling advances, direct costs,
and appropriate portions of indirect costs related to contracts in progress are
recognized as revenues and expenses in the period the contracts are
substantially complete. This accounting method has been utilized by the Company
based on the short term nature of the drilling contracts, i.e. 4-5 days.
Working Interests
Revenues from working interests the Company owns are recognized when the natural
gas and oil are produced.
Managed Limited Partnerships
The Company sponsors privately offered limited partnerships for which it serves
as the Managing General Partner. The purpose of these partnerships is to acquire
and develop oil and gas leases. The partnerships
F-29
<PAGE> 53
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
enter into turnkey drilling contracts with the Company to drill, complete and
equip, if warranted, the oil and gas leases. The Company receives direct
compensation, reimbursement of costs and expenses, and revenues related to
turnkey drilling contracts. Additionally, the Company earns a carried working
interest to the tanks and pays only its pro rata share of well operating costs,
while the partnerships pay 100% of the costs of this carried working interest.
Property and Equipment
Property and equipment (other than oil and gas) are stated at cost. Depreciation
is recognized on the straight line method over the estimated useful lives of the
assets as follows:
<TABLE>
<CAPTION>
Lives (years)
-------------
<S> <C>
Machinery and Equipment 10
Autos and Trucks 5
Furniture and Fixtures 10
</TABLE>
The Company follows the successful efforts method of accounting for oil and gas
properties, using the lease as its accumulation center for capitalized costs.
Under the successful efforts method of accounting, costs which relate directly
to the discovery of oil and gas reserves and all development costs are
capitalized.
Exploration costs which do not result directly in the discovery of oil and gas
reserves are charged to expense as incurred. The capitalized costs, consisting
of lease and well equipment, lease acquisition costs and intangible development
costs are depreciated, depleted and amortized oil the unit-of-production method,
based on estimates of recoverable proved developed oil and gas reserves of each
respective lease.
The costs of acquiring undeveloped properties are capitalized as incurred and
carried until the property is capitalized as a producing oil and gas property,
or is surrendered or otherwise disposed of, at which time the full amount is
charged to operations. Maintenance and repairs are charged against operations as
incurred. Renewals and betterments which extend the life or improve existing
properties are capitalized.
Upon disposition or retirement of property and equipment other than oil and gas
properties, the cost and related accumulated depreciation are removed from the
accounts and the gain or loss thereon, if any, is credited or charged to income.
The Company recognizes the gain or loss on the sale of either a part of a
proved oil and gas property or of an entire proved oil and gas property
constituting a part of a field upon the sale or other disposition of such. The
unamortized cost of tile property or group of properties, a part of which was
sold or otherwise disposed of, is apportioned to the interest sold and interest
retained on the basis of the fair value of those interests.
Earnings Per Common Share
The Company's basic earnings per common share ("Basic EPS") is based on the
weighted average number of common shares outstanding during the respective
periods. The income available to common shareholders is computed after deducting
dividends on the preferred stock. The convertible preferred stock and
outstanding stock warrants are considered anti-dilutive and therefore, excluded
from the earnings per share calculations.
F-30
<PAGE> 54
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
The following is a reconciliation of the numerators and denominators used in the
calculation of Basic EPS for tile 6 months and 3 months ended June 30, 1999 and
1998:
<TABLE>
<CAPTION>
6 Months 3 Months
1999 1999
--------- ---------
<S> <C> <C>
Basic EPS computation -
Net Income $ 292,968 $ 60,994
Less: Preferred Stock Dividends (147,923) (72,546)
--------- ---------
Earnings (Loss) Available to Common Stockholders $ 145,045 $ (11,552)
========= =========
</TABLE>
<TABLE>
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
<S> <C> <C> <C>
January 1 - June 30 5,171,578 100.0% 5,171,578
Common Stock Repurchased February 1 (5,000) 83.3% (4,165)
Series B Preferred Converted
April 1 - June 30 53,120 25.0% 13,280
--------- ---------
5,219,698
=========
Weighted Average Shares 5,180,693
=========
</TABLE>
<TABLE>
<CAPTION>
6 Months 3 Months
1999 1999
--------- ---------
<S> <C> <C>
Basic EPS $ 0.03 $ 0.00
--------- =========
</TABLE>
<TABLE>
<CAPTION>
6 Months 3 Months
1998 1998
---------- ---------
<S> <C> <C>
Basic EPS computation -
Net Income $ 132,706 $ (37,705)
Less: Preferred Stock Dividends (151,312) (72,546)
---------- ---------
Loss Available to Common Stockholders $ (18,606) $(113,502)
========== =========
</TABLE>
<TABLE>
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
<S> <C> <C> <C>
January 1 - June 30 1,726,600 100.0% 1,726,600
---------- ----------
Weighted Average Shares 1,726,600
==========
</TABLE>
<TABLE>
<CAPTION>
6 Months 3 Months
1999 1999
--------- ---------
<S> <C> <C>
Basic EPS $ (0.01) $ (0.07)
------- -------
</TABLE>
F-31
<PAGE> 55
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Income Taxes
Income taxes are provided based on earnings reported for financial statement
purposes. The provision for income taxes differ from the amounts currently
payable because of temporary differences (primarily intangible drilling costs)
in the recognition of certain income and expense items for financial reporting
and tax reporting purposes.
Cash Equivalents
For purposes of reporting cash flows, cash includes cash on hand and cash on
deposit.
2. AFFILIATED OIL AND GAS PARTNERSHIPS
The Company provides turnkey drilling services for the various oil and gas
partnerships which it sponsors. Fees earned for these drilling services,
including the sale of leases to the partnerships, amounted to $3,008,400 and
$1,581,181 during the six months ended June 30, 1999 and 1998, respectively. The
Company receives a management fee from the partnerships for its services in
connection with the selection of the joint venture prospects and the initial
operations of the joint venture in addition to syndication fees for funds raised
directly by the Company. Management fees and syndication fees earned during the
6 months ended June 30, 1999 and 1998 amounted to $115,675 and $88,675,
respectively.
In connection with the sponsorship of oil and gas partnerships, the Company is
reimbursed by the partnerships for certain operating and overhead costs
incurred on their behalf, including filing fees, legal fees, accounting fees,
printing costs and other miscellaneous expenses. These reimbursements totaled
$65,415 and $50,672 during the 6 months ended June 30, 1999 and 1998,
respectively.
Included in the Company's financial statements are contributions made to the
various Company sponsored oil and gas partnerships, less the applicable loss
generated by these partnerships relative to the Company's percentage ownership.
The Company has allocated, on a pro-rata basis the amounts associated with these
investments to the appropriate asset, liability, income and expense accounts.
3. RELATED PARTY TRANSACTIONS
Stock Transactions
The Company was organized in November, 1994, as a Nevada corporation under the
name of Gem Source, Incorporated (Gem Source). In 1995, Gem Source sold
1,633,000 shares for $0.001 per share under Rule 504, an exemption under
Regulation D from full registration with the SEC.
Blue Ridge Group, Inc. (BRG) acquired control of Gem Source in March, 1996 when
BRG acquired 1,000,000 shares of restricted stock at $0.10 a share. In May
1996, the 2,633,000 outstanding common shares were the subject of a 5 to 1
reverse split and the name of the Company was changed from Gem Source,
Incorporated to Blue Ridge Energy, Inc. In June 1996, BRG acquired another
1,000,000 of restricted common stock from the company treasury for $0.05 a
share, or $50,000.
F-32
<PAGE> 56
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
As of June 30, 1999, there are 5,219,698 shares of common stock issued and
outstanding. A total of 3,110,575 shares are held by BRG and the remainder of
2,109,123 shares are held by approximately 470 shareholders, 40 of which are
original stockholders of the Company.
Advances from Related Parties
During 1998, the Company agreed with Blue Ridge Group, Inc. to acquire and
develop oil and gas properties and drilling equipment in the Appalachian Basin
of Kentucky. In order to facilitate the acquisition of these properties the
Company advanced approximately $1,300,000, bearing interest at 12% per annum, to
Blue Ridge Group, Inc. As of June 30, 1999 approximately $98,989 in interest had
been earned under this arrangement and the entire balance had been repaid via
the drilling of 10 gas wells and the purchase of drilling equipment.
Additionally, Blue Ridge Group, Inc. provides various management,
administrative, accounting and geological services for the Company at a rate of
$20,000 per month. Blue Ridge Energy also reimbursed Blue Ridge Group for direct
costs paid on its behalf. As of June 30, 1999 and 1998, approximately $0 was due
and payable to Blue Ridge Group under this arrangement.
4. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consisted of the following at June 30,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- ----------
<S> <C> <C>
Oil and Gas Properties $ 852,308 $ 757,280
Drilling Rig and Equipment 2,089,484 --
Furniture and Fixtures 364 364
----------- ----------
2,942,156 757,644
Less Accumulated Depreciation 38,265 154
----------- ----------
$ 2,903,891 $ 757,490
=========== ==========
</TABLE>
Depreciation expense was $20,253 and $53 during the 6 months ended June 30, 1999
and 1998, respectively.
During the first quarter of 1999 the Company consummated the purchase of an
Ingersoll Rand drilling rig and its ancillary equipment for approximately $1.35
million of which approximately $600 thousand was provided by long term debt. In
June, 1999 the Company consummated the purchase of another Ingersoll Rand
drilling rig for approximately $750 thousand.
5. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has agreed to automatically convert all shares of preferred stock
outstanding effective as of the first day the Company's common stock is publicly
traded on any exchange or over-the-counter, or June 30, 2000, whichever comes
first.
F-33
<PAGE> 57
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
Contingencies
The company's drilling and oil and gas exploration and production operations are
subject to inherent risks, including blowouts, fire and explosions which could
result in personal injury or death, suspended drilling operations, damage to or
destruction of equipment, damage to producing formations and pollution or other
environmental hazards. As a protection against these hazards, the Company
maintains general liability insurance coverage of approximately $2 million
limited to $1 million per occurrence. The Company believes it is adequately
insured for public liability and property damage to others with respect to its
operations. However, such insurance may not be sufficient to protect the Company
against liability for all consequences of well disasters, extensive fire damage,
or damage to the environment. The Company has never been fined or incurred
liability for pollution or other environmental damage in connection with its
operations.
As of June 30, 1999, the Company had no significant customers or suppliers
(other than its majority stockholder, Blue Ridge Group, Inc.) which could,
individually, have a significant effect on the Company's operations.
The Company conducts its banking relations with two local financial institutions
and does not anticipate any significant problems with future credit extensions.
A significant amount of the Company's operating funds are maintained in one
local bank insured by tile FDIC.
6. STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of stock that are designated,
respectively, common and preferred stock. The total number of shares of stock
which the company initially had the authority to issue was 20,000,000 shares
being designated as common stock. As of June 30, 1999, the Company was
authorized to issue 25,000,000 shares of stock -- 20,000,000 being designated as
common stock and 5,000,000 shares designated as preferred stock.
Common Stock
The Company was organized in November, 1994, as a Nevada corporation under the
name of Gem Source, Incorporated (Gem Source) with an initial issuance of
1,000,000 shares of Common Stock with a par value of $0.001 per share. In 1995,
Gem Source had an offering of 1,633,000 shares under Rule 504, an exemption
under Regulation D from full registration with the SEC to bring the total
outstanding shares of common stock to 2,633,000.
Blue Ridge Group, Inc. (BRG) acquired control of Gem Source in March, 1996, when
BRG acquired 1,000,000 shares of restricted stock at $0.10 a share. In May 1996,
the 2,633,000 outstanding common shares were the subject of a 5 to 1 reverse
split resulting in outstanding shares of 526,600 with a par value of $0.005 per
share. The name of the Company was also changed from Gem Source to Blue Ridge
Energy, Inc. Additionally, in June 1996, BRG acquired another 1,000,000 of
restricted common stock from the Company treasury for $0.05 a share, or $50,000
and options to purchase an additional 2,000,000 shares of restricted common
stock at $0.05 per share. During February 1998, the Company granted warrants to
BRG to purchase an additional 5,000,000 shares of restricted common stock at
$0.05 per share.
F-34
<PAGE> 58
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
During 1997, the Company's majority shareholder, Blue Ridge Group, Inc.,
exercised options to purchase 200,000 shares of the Company's common stock at
$0.05 per share or $10,000. Subsequently, Blue Ridge Group, Inc. distributed
these shares of stock to investors in several of its partnerships.
During 1998, the Company's majority shareholder, Blue Ridge Group, Inc.
exercised options to purchase 2,800,000 shares of the Company's common stock at
$0.05 per share, or $140,000. Subsequently, Blue Ridge Group, Inc. distributed
889,425 of these shares to investors in several of its partnerships.
During 1998, the Company authorized the issuance of 1,000,000 shares of Common
Stock Warrants ("Warrants") in conjunction with the sale of the Company's Series
D Preferred Stock. One Warrant will be issued with each share of Series D
Preferred Stock sold and will be exercisable to purchase Blue Ridge Energy, Inc.
Common Stock at $1.00 per share between May 31, 1998 and May 31, 2003.
As of June 30, 1999, there were 305,258 Series D Warrants issued and
outstanding, none of which had been exercised.
Series A Preferred Stock
During May 1996, the Company authorized the issuance and sale of 300,000 shares
of Series A Preferred Stock ("Series A Stock") which has a par value of $0.001
per share, at $3.00 per share. The Series A Stock bears a 12% per annum dividend
payable monthly. Each share of the Series A Stock shall be converted
automatically into one (1) share of Common Stock effective when a registration
statement for the Common Stock is filed with the U.S. Securities and Exchange
Commission (the "SEC") or September 30, 1998, whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company either
voluntary or involuntary, the holders of Series A Stock shall be entitled to
receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock the amount of $3.00 per
share plus all unpaid dividends on such share of each share of Series A Stock
then held by the shareholder.
In a Confidential Private Placement Memorandum dated July 25, 1996, the Company
offered 300,000 shares of Series A Stock in exchange for partnership interests
in Target Leasing, Ltd. I. The value assigned to the properties acquired of
$154,810 10 in addition to net proceeds received of $ 122,881 resulted in total
consideration received of $277,691. At June 30, 1999 and 1998 there were -0- and
297,746 shares of Series A Stock issued and outstanding, respectively.
Series B Preferred Stock
During 1996, the Company authorized the issuance and sale of 300,000 shares of
Series B Preferred Stock ("Series B Stock") which has a par value of $0.001 per
share, at $3.00 per share. The Series B Stock bears a 12% per annum dividend
payable monthly. Each share of the Series B Stock shall be converted
automatically into two (2) shares of Common Stock effective when a registration
statement for the Common Stock is filed with the SEC OF two years from issuance,
whichever occurs first.
F-35
<PAGE> 59
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In the event of any liquidation, dissolution or winding up of the Company either
voluntary or involuntary, the holders of Series B Stock shall be entitled to
receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock, but subordinate to the
liquidation preference of the Series A Stock, the amount of $3.00 per share plus
all unpaid dividends on such share of each share of Series B Stock then held by
the shareholder.
At June 30, 1999 and 1998 there were 600 and 202,374 shares of Series B Stock
issued and outstanding.
Series C Preferred Stock
During 1997, the Company authorized the issuance and sale of 400,00 shares of
Series C Preferred Stock ("Series C Stock") which has a par value of $0.001 per
share at $6.00 per share. The Series C Stock bears a 12% per annum dividend
payable monthly. Each share of the Series C Stock shall be converted
automatically into two (2) shares of Common Stock effective when a registration
statement for the Common Stock is filed with the SEC or two years from issuance,
whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series C Stock shall be entitled
to receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock, but subordinate to the
liquidation preference of the Series A Stock and the Series B Stock, the amount
of $6.00 per share plus all unpaid dividends on such share of each share of
Series C Stock then held by the shareholder.
At June 30, 1999 and 1998, there were 169,450 shares of Series C Stock issued
and outstanding.
Series D Preferred Stock
During 1998, the Company authorized the issuance and sale of 1,000,000 shares of
Series D Preferred Stock ("Series D Stock") which has a par value of $0.001 per
share at $5.00 per share. The Series D Stock bears a 12% per annum dividend
payable monthly. In addition, the Company will issue one Common Stock Warrant
exercisable to purchase one share of the Company's Common Stock for $ 1.00 with
each share of Series D Stock sold. Each share of the Series D Stock shall be
converted automatically into one (1) share of Common Stock effective when a
registration statement for the Common Stock is filed with the SEC or two years
from issuance, whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series D Stock shall be entitled
to receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock, but subordinate to the
liquidation preference of the Series A Stock, the Series B Stock and the Series
C Stock, the amount of $5.00 per share plus all unpaid dividends on such share
of each share of Series D Stock then held by the shareholder.
At June 30, 1999, there were 305,258 shares of Series D Stock issued and
outstanding. The total amount received from the sale of this stock was
$1,831,548 less expenses paid of $537,753.
F-36
<PAGE> 60
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
7. SUBSEQUENT EVENTS
Beginning in the first quarter of 1999, the Company has been negotiating with
Premier Energy, LLC to purchase its 50% interest in Stone Mountain Energy, LLC
of Kingsport, Tennessee. Stone Mountain Energy, LLC owns a 150 mile natural gas
pipeline project which will run from Harlan county in eastern Kentucky to
Knoxville, Tennessee. Subsequent to June 30, 1999 these negotiations were
terminated with no agreement being reached.
F-37
<PAGE> 61
PART III
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
(3)(i) Articles of Incorporation of Blue Ridge Energy, Inc.*
(3)(ii) Bylaws of Blue Ridge Energy, Inc.*
(10) Material contracts*
(11) Computation of per share earnings
- included in Part F/S
</TABLE>
- --------------------
* The Registrant plans to request a Temporary Hardship Exemption under Rule
201 of Regulation S-T with respect to the electronic filing of Exhibits as
required under Rule 601 of Regulation S-B. Such hardship exemption is being
requested due to unanticipated technical difficulties encountered with the
electronic filing (this being the Company's initial registration statement on
Form 10-SB) of the numerous legal documents and material contracts required
under Rule 601 of Regulation S-B.
The Company anticipates filing all required exhibits within 15 to 30 days from
the filing of this registration statement.
24
<PAGE> 62
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Blue Ridge Energy, Inc.
Registrant
Date: September 24, 1999 By: /s/ ROBERT D. BURR
-----------------------------------
Robert D Burr,
Chairman of the Board, President
and Chief Executive Officer
Date: September 24, 1999 By: /s/ J. THOMAS COOK, JR.
-----------------------------------
J. Thomas Cook, Jr.
Director, Senior Vice President-
Finance and Chief Financial Officer
Date: September 24, 1999 By: /s/ GREGORY B. SHEA
-----------------------------------
Gregory B. Shea
Director, Senior Vice President-
Operations
25
<PAGE> 63
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
(3)(i) Articles of Incorporation of Blue Ridge Energy, Inc.*
(3)(ii) Bylaws of Blue Ridge Energy, Inc.*
(10) Material contracts*
(11) Computation of per share earnings
- included in Part F/S
</TABLE>
- --------------------
* The Registrant plans to request a Temporary Hardship Exemption under Rule
201 of Regulation S-T with respect to the electronic filing of Exhibits as
required under Rule 601 of Regulation S-B. Such hardship exemption is being
requested due to unanticipated technical difficulties encountered with the
electronic filing (this being the Company's initial registration statement on
Form 10-SB) of the numerous legal documents and material contracts required
under Rule 601 of Regulation S-B.
The Company anticipates filing all required exhibits within 15 to 30 days from
the filing of this registration statement.
