<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT #1 TO
FORM 10-KSB/A
(Mark One)
X Annual report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from ________ to ________
Commission file number 0-277443
BLUE RIDGE ENERGY, INC.
(name of small business Issuer in the Charter)
NEVADA 61-1306702
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
632 ADAMS STREET, SUITE 710,
BOWLING GREEN, KY 42101
(Address of Principle Executive Offices) (Zip Code)
(270) 842-2421
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK PAR VALUE $.005 PER SHARE
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by filed by
Section 13 or 15(d) of the Exchange Act during the part 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $5,870,649
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $6,371,890 as of March 24,
2000 based upon the closing price of the common stock on the OTC "Pink Sheets"
on March 24, 2000 of $2.375 per share. As of March 24, 2000 the registrant had
5,809,794 shares of Common Stock, par value $0.005 per share, and 697,700 shares
of Series D Preferred Stock, par value $0.001 per share, outstanding.
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APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
5,809,794 SHARES OF COMMON STOCK OUTSTANDING AT MARCH 25, 2000
697,700 SHARES OF PREFERRED STOCK OUTSTANDING AT MARCH 25, 2000
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference in this report: NONE
<PAGE> 3
FORM 10-KSB/A
TABLE OF CONTENTS
-----------------
PART I
1. Description of Business...................................................1
2. Description of Properties.................................................4
3. Legal Proceedings.........................................................7
4. Submission of Matters to a Vote of Security Holders.......................7
PART II
5. Market Price for Common Equity and Related Stockholders Matters...........8
6. Management's Discussion and Financial Analysis of Financial Condition.....9
7. Financial Statements.....................................................13
8. Change in and Disagreements with Accountants
on Accounting and Financial Disclosure................................13
PART III
9. Directors, Executive Officers, Promoters and Control Persons
Compliance with Section 16(a) of the Exchange Act.....................13
10. Executive Compensation...................................................15
11. Securities Ownership of Certain Beneficial Owners and Management.........15
12. Certain Relationships and Related Transactions...........................16
13. Exhibits and Reports on Form 8-K.........................................19
PART IV
Signatures....................................................................19
Exhibit Index.................................................................19
Financial Statements
Independent Auditors' Report.................................................F-1
Balance Sheets...............................................................F-2
Statements of Income.........................................................F-3
Statements of Changes in Stockholders' Equity................................F-4
Statements of Cash Flows.....................................................F-5
Notes to Financial Statement's...............................................F-6
PART I
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1. BUSINESS
GENERAL DESCRIPTION
Blue Ridge Energy, Inc. ("BR Energy"), 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. BR Energy has offices at 632 Adams Street, Suite 710, Bowling Green, KY
42101.
BR Energy is engaged in the oil and gas business primarily in Texas,
Kentucky, New Mexico and West Virginia. BR Energy sponsors oil & gas drilling
partnerships through which it raises funds for the drilling of oil and gas wells
and participates for a 1% partnership interest as the managing general partner
of the partnerships. BR Energy also owns two drilling rigs. These rigs are used
to drill oil and gas wells for the sponsored oil and gas drilling partnerships
and also other non-affiliated oil and gas companies. The rigs are operated on
behalf of BR Energy by an affiliate, Blue Ridge Group, Inc. ("BR Group").
BR Energy also acquires direct working interest participation in
oil and gas properties. The working interest participation include exploratory
and development wells and include both operated and non-operated working
interest participation. BR Energy 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.
COMPETITION, MARKETS AND REGULATIONS
COMPETITION
The oil and gas industry is highly competitive in all its phases. BR
Energy encounters strong competition from other independent oil and gas
producers. Major and independent oil and gas companies actively bid for
desirable oil and gas properties, as well as, for the equipment and labor
required to operate and develop such properties. Many of its competitors possess
substantially greater financial resources, personnel and budgets that are
substantially greater than ours which may affect our ability to compete with
companies in Kentucky, Texas, New Mexico or West Virginia.
MARKETS
The price obtainable for oil and gas production from BR Energy
properties is affected by market factors beyond the control of the Company. 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
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 BR Energy properties. From time to time,
there may exist a surplus of gas or oil supplies, the effect of which may be to
reduce the amount of hydrocarbons that BR Energy may produce and sell, while
such oversupply exists. In recent years, initial steps have been taken to
provide additional gas pipelines 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.
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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 by the oil and gas industry. These laws and regulations may require
the acquisition of permits by oil and gas 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 BR Energy of compliance
with existing and future environmental regulations cannot be predicted.
The company generates wastes that may be subject to the Federal
Resource Conservation and Recovery Act ("RCRA") and comparable state statutes.
The U.S. Environmental Protection Agency ("EPA") and various state agencies have
limited the approved methods of disposal for certain hazardous and nonhazardous
wastes. Furthermore, certain wastes generated by the Company's operations that
are currently exempt from treatment as "hazardous wastes" may in the future be
designated as "hazardous wastes," and therefore be subject to more rigorous and
costly operating and disposal requirements.
The Company currently owns or leases numerous properties that for many
years have been used for the exploration and production of oil and natural gas.
Although the Company believes that it has utilized good operating and waste
disposal practices, prior owners and operators of these properties may not have
utilized similar practices, and hydrocarbons or other wastes may have been
disposed of or released on or under the properties owned or leased by the
company or on or under locations where such wastes have been taken for disposal.
These properties and the wastes disposed thereon may be subject to the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"),
RCRA and analogous state laws, as well as state laws governing the management of
oil and natural gas wastes. Under such laws, the company could be required to
remove or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators) or property contamination (including
groundwater contamination) or to perform remedial plugging operations to prevent
future contamination.
CERCLA and similar state laws impose liability, without regard to fault
or the legality of the original conduct, on certain classes of persons that are
considered to have contributed to the release of a "hazardous substance" into
the environment. These persons include the owner or operator of the disposal
site or sites where the release occurred and companies that disposed of or
arranged for the disposal of the hazardous substances found at the site. Persons
who are or were responsible for the waste of hazardous substances under CERCLA
may be subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for neighboring landowners
and third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment.
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 BR Energy
properties.
2
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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 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 resell
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 BR Energy's properties will be significantly
affected by FERC Order No. 500. Gas produced from BR Energy'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 BR Energy's properties is affected
by state regulations. States in which BR Energy operates 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. State regulatory authorities also regulate the
amount of oil and gas produced by assigning allowable rates of production to
each well or proration unit.
OPERATING HAZARDS AND INSURANCE
The oil and gas business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, casing
collapse, abnormally pressured formations and environmental hazards such as oil
spills, gas leaks, ruptures and discharges of toxic gases, the occurrence of any
of which could result in substantial losses to BR Energy due to injury or loss
of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations. In
accordance with customary industry practice, we maintain insurance against some,
but not all, of the risks described above. However, there can be no assurance
that any
3
<PAGE> 7
insurance obtained by us will be adequate to cover any losses or liabilities. We
cannot predict the continued availability of insurance or the availability of
insurance at premium levels that justify its purchase. The occurrence of a
significant event not fully insured or indemnified against, could materially and
adversely affect our financial condition and operations.
EMPLOYEES
BR Energy has no employees. BR Energy's majority shareholder, Blue
Ridge Group, however, has a staff of geologists, petroleum engineers, drilling
and accounting personnel who administer the operations of BR Group and BR
Energy. As of December 31, 1999, BR Group had sixty (60) employees of which
approximately fifteen (15) are geological and administrative personnel. The
remainder are employed in oil and gas drilling and service activities. BR Energy
pays a $20,000 per month management fee to BR Group for administrative and
overhead expenses. This management fee is intended to cover only the expenses
attributable to the fifteen (15) geological and administrative personnel which
are applicable to BR Energy's operations.
During 1998, management of BR Group conducted an analysis of the time
spent by each of the fifteen (15) employees that performed services for BR
Energy. Based on these time estimates, the employees' annual compensation was
allocated to the applicable entity (Group or Energy) receiving the services.
Although the actual services rendered on a month to month basis may vary,
depending on many factors, management of BR Energy is of the opinion that the
method used is reasonable and the Company receives fair value for these
services.
Annually, Management reviews the salary structure of applicable
employees and proportional allocations to determine the reasonableness of the
amounts and that fair value is received for services rendered. For the year
ended December 31, 1999. No material modifications in the management contract or
management fee were made as it was determined by management that the amounts
charged and the services received were reasonable.
Annually, the Board of Directors will determine if any of the executive
officers of BR Energy (discussed on page 14) are eligible for a performance
bonus. During 1998, Robert D. Burr was paid a performance bonus of $25,000.
2. PROPERTIES
As of December 31, 1999, BR Energy has participated, either directly or
indirectly through its sponsored limited partnerships, in 43 wells, of which 30
are presently productive, located in Kentucky, Texas , West Virginia and New
Mexico.
The following table summarizes by geographic area BR Energy's reserves
and gross and net interests in producing oil and gas wells and oil and gas wells
in progress as of December 31, 1999. Productive wells are producing wells and
wells capable of production, including gas wells awaiting pipeline connections
and oil wells awaiting connection to production facilities. Wells that are
completed in more than one producing horizon are counted as one well.
<TABLE>
<CAPTION>
WELLS IN PROGRESS GROSS WELLS NET WELLS
GEOGRAPHIC AREA ------------------ ---------
OIL GAS OIL GAS
--- --- --- ---
<S> <C> <C> <C> <C>
Kentucky 0.00 3.00 0.00 0.90
West Virginia 0.00 6.00 0.00 0.41
---- ------- ---- ----
Totals 0.00 9.00 0.00 1.31
==== ======= ==== ====
PRODUCTIVE WELLS GROSS WELLS NET WELLS RESERVES
----------- --------- --------
</TABLE>
4
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<TABLE>
<CAPTION>
GEOGRAPHIC AREA OIL GAS OIL GAS OIL GAS
--- --- --- --- --- ---
(BBLS) (MCF)
<S> <C> <C> <C> <C> <C> <C>
New Mexico 1.00 0.00 0.67 0.00 17,963 18,000
Texas 1.00 4.00 1.00 1.31 3,611 69,000
Kentucky 0.00 15.00 0.00 3.92 0 731,977
---- ------ ---- ---- ------ -------
Totals 2.00 19.00 1.67 5.23 21,574 818,977
==== ====== ==== ==== ====== =======
</TABLE>
KEY PROPERTIES
The working interest owned by BR Energy, either directly or indirectly
through the oil and gas partnerships, is owned jointly with other working
interest partners and is subject to various royalty and overriding royalty
interests which generally range in total to between 20%-30% on each property.
Management does not believe any of these burdens materially detract from the
value of the properties or will materially detract from the value of properties
or materially interfere with their use.
The following are the primary properties held by BR Energy as of
December 31, 1999:
HOMESTAKE #1: The Homestake #1 oil well is a development well located
in Lea County, New Mexico. BR Energy owns 66.9% of the Working Interest in the
Homestake #1 which is a 50.2% Net Revenue Interest.
HARLAN/BIG SANDY PROSPECTS: Since December 31, 1998, BR Energy has
embarked on an Appalachian Basin twenty-five (25) development well drilling
program in Bell, Knox and Harlan counties of Kentucky. As of December 31, 1999,
eighteen (18) wells have been drilled. Of the eighteen (18), seven (7) are
currently in production and selling gas, the remaining eleven (11) have been
drilled and are in various stages of completion. These wells account for 74% of
the total value of BR Energy's reserves as of December 31, 1999, with no single
well being a majority of the reserve value attributed thereto. BR energy owns
varying Working Interests in these wells ranging from 25% to 30.25% of the
Working Interest with Net Revenue Interests ranging from 18.75% to 22.69% in
each well. Four (4) of the gas wells in the completion phase are in an area in
Harlan County, Kentucky, where local utilities have not hooked into the gas
pipeline as scheduled by the gas purchaser. The date on which gas sales are
anticipated from these four (4) wells is uncertain.
KEEGAN GIBSON #1: The Keegan Gibson #1 oil well is a development well
located in Smith County, Texas and accounts for 3% of the total value of BR
Energy's reserves as of December 31, 1999. In December of 1999, BR Energy
increased its ownership in this well to 100% of the Working Interest which is a
75% Net Revenue Interest.
AMEND #1 & CATOR #1: The Amend #1 and Cator #1 wells are development
wells located in Sherman County, Texas and account for 4% of the total value of
BR Energy's reserves as of December 31, 1999. In December of 1999, BR Energy
purchased 100% of the Working Interest which is a 75% Net Revenue Interest in
these two wells.
MACK PIERCE #1: During 1999, BR Energy acquired an interest in the Mack
Pierce #1 well in Wharton County, Texas, which began drilling in December, 1999,
was determined commercially productive, and will be completed and put into
production during the first quarter of 2000. BR Energy owns 18.67% of the
Working Interest in the Mack Pierce #1 which is a 14.00% Net Revenue Interest.
Since the well had not been completely drilled and evaluated as of December 31,
1999, no reserves attributable to this well were included in BR Energy's reserve
valuations.
SHELBY COUNTY, TEXAS: At the end of 1999, BR Energy acquired an
interest in one (1) development well in Shelby County, Texas, which is scheduled
to begin drilling during the first quarter of 2000.
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MINGO AND WYOMING COUNTIES, WEST VIRGINIA: At the end of 1999, BR
Energy acquired an interest in six (6) development wells in Mingo and Wyoming
Counties, West Virginia. Drilling activities for these wells began in December,
1999.
DRILLING RIGS: During 1999, the Company acquired two drilling rigs and
ancillary equipment. Rig #4 is a 1999 Ingersoll Rand RD-20 which is capable of
drilling to 5,000 feet and Rig #2 which is an Ingersoll Rand TR-4 acquired from
BR Group which is capable of drilling to 3,000 feet. The drilling rigs are
managed by BR Group on behalf of BR Energy and are used to drill wells for oil
and gas partnerships sponsored by BR Energy as well as on a contract basis for
other third parties.
TITLE TO PROPERTIES
In the normal course of business, the operator of each lease has the
responsibility of examining the title on behalf of all working interest
partners. Title to substantially all significant producing properties of BR
Energy has been examined by various attorneys. The properties are subject to
royalty, overriding royalty and other interests customary in the industry.
The working interest owned by BR Energy, either directly or indirectly
through the oil and gas partnerships, is owned jointly with other working
interest partners and is subject to various royalty and overriding royalty
interest which generally range in total between 20%-30% on each property.
Management does not believe any of these burdens materially detract
from the value of the properties or materially interfere with their use.
PRODUCTION AND SALES PRICE
The following table summarizes the sales volumes of BR Energy's net oil
and gas production expressed in barrels of oil. Equivalent barrels 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 NET PRODUCTION
FOR THE YEAR FOR THE YEAR FOR THE YEAR
12/31/99 12/31/98 12/31/97
-------- -------- --------
<S> <C> <C> <C>
Net Volumes (Equivalent Barrel) 3,238 2,051 1,414
Average Sales Price per Equivalent Barrel $18.60 $13.41 $20.00
Average Production Cost per Equivalent Barrel
(includes production taxes) $ 5.48 $13.27 $11.72
</TABLE>
The Average Production Costs per Equivalent Barrel represents the Lease
Operating Expenses divided by the Net Volumes in equivalent barrels. Lease
Operating Expenses includes normal operating costs such as pumper fees, operator
overhead fees, electric costs, pump repair costs, chemicals, pulling unit costs,
production taxes, etc. The 1998 amount of $13.41 is higher than the average
costs used in the calculation of the Standardized Measure of Discounted Future
Net Cash Flows because the 1998 year included significant workover costs
(pulling units and pump repairs) related to the Blue Ridge Energy Production
Fund Wells. These workover costs will not be incurred again in future years due
to the abandonment of those wells.
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NET PROVED OIL AND GAS RESERVES
Presented below are the estimates of BR Energy's proved reserves as of
December 31, 1999, 1998 and 1997. All of BR Energy's proved reserves are located
in the United States.
<TABLE>
<CAPTION>
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
NATURAL NATURAL NATURAL
OIL GAS OIL GAS OIL GAS
--- --- --- --- --- ---
(BBLS) (MCF) (BBLS) (MCF) (BBLS) (MCF)
<S> <C> <C> <C> <C> <C> <C>
Proved developed reserves at end of year:
Balance at beginning of year 34,959 30,850 2,236 0 1,005 40,005
Extensions, discoveries and other additions 0 734,840 20,989 20,989 1,076 0
Revisions of previous estimates (14,397) 12,850 0 0 (989) (40,000)
Purchases of minerals in place 3,564 70,252 13,452 10,850 580 0
Production (2,552) (4,115) (1,718) (2,000) (1,414) (5)
-------- -------- -------- -------- -------- --------
Balance at end of year 21,574 818,977 34,959 30,850 2,236 0
-------- -------- -------- -------- -------- --------
</TABLE>
BBLS-Barrels of Oil MCF-Million cubic feet of gas
In estimating the oil and natural gas reserves, BR Energy, in
accordance with criteria prescribed by the Securities and Exchange Commission,
has used prices received as of December 31, 1997, 1998 and 1999 without
escalation, except in those instances where fixed and determinable gas price
escalations are covered by contracts, limited to the price BR Energy reasonably
expects to receive.
Future prices received for the sale of BR Energy'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 SEC.
DRILLING ACTIVITIES
<TABLE>
<CAPTION>
Oil Wells Gas Wells
1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Exploratory Wells - -- -- -- -- 2
Development Wells - 2 8 20 3 --
---- ---- ---- ---- ---- ----
Total Wells - 2 8 20 3 2
</TABLE>
3. LEGAL PROCEEDINGS
Neither BR Energy nor any of its properties is subject to any material
pending legal proceedings. From time to time, BR Energy may be a party to
litigation in the ordinary course of business, none of which is expected to have
a material adverse effect on the financial condition of the company.
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
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PART II
5. MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Common Stock of BR Energy is traded on the OTC 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:
HIGH BID LOW BID
March 31, 1997 No Activity No Activity
June 30, 1997 No Activity No Activity
September 30, 1997 No Activity No Activity
December 31, 1997 No Activity No Activity
March 31, 1998 No Activity No Activity
June 30, 1998 $ 1.75 $ .125
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
September 30, 1999 $ 4.00 $ 2.00
December 31, 1999 $ 2.50 $ 2.25
There was no public market activity in the BR Energy common stock from
January 1, 1997 until May 7, 1998. The only common stock transactions during
this period were private purchases of the Company's common stock by BR Group.
These quotations reflect inter dealer prices, without retail mark-up, markdown
or commission, and may not represent actual transactions.
The Preferred Stock of BR Energy is not traded on any exchange and
there is no trading market for the BR Energy Preferred Stock.
DIVIDEND INFORMATION
No cash dividends have been declared or paid on BR Energy's Common
Stock since BR Energy's inception. BR Energy does not plan to pay cash dividends
in the future. BR Energy's dividend policy will be subject to any restrictions
placed on it in connection with any debt offering or significant long-term
borrowing.
BR Energy's Preferred Stock entitles all holders to receive dividends
of 12% per annum, payable monthly, based upon the total number of shares
outstanding. BR Energy has paid cash dividends on its Preferred Stock as
follows:
1999 1998 1997
------------ ------------ -----------
$ 313,114 $ 336,448 $ 231,447
BR Energy has not paid, nor does it intend to pay, cash dividends on
our common stock in the forseeable future. We intend to retain earnings, if any,
for the future operation and development of our business.
SHAREHOLDER INFORMATION
As of December 31, 1999, there are approximately 490 shareholders of BR
Energy's Common Stock.
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6. MANAGEMENT'S DISCUSSION AND FINANCIAL ANALYSIS OF FINANCIAL CONDITION
The following discussion is intended to assist in an understanding of
BR Energy's financial position and results of operations for each year of the
three year period ended December 31, 1999. The Financial Statements and the
notes thereto which follow, contain detailed information that should be referred
to in conjunction with the following discussion.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995:
Statements, other than historical facts, contained in this report on
Form 10-KSB, including statements of estimated oil and gas production and
reserves, drilling plans, future cash flows, anticipated capital expenditures
and Management's strategies, plans and objectives, are "forward looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Although we believe that our forward looking statements are based on reasonable
assumptions, we caution that such statements are subject to a wide range of
risks and uncertainties incident to the exploration for, acquisition,
development and marketing of oil and gas; and we can give no assurance that our
estimates and expectations will be realized. Important factors that would cause
actual results to differ materially from the forward looking statements include,
but are not limited to, changes in production volumes, worldwide demand, and
commodity prices for petroleum natural resources; the timing and extent of our
success in discovering, acquiring, developing and producing oil and gas
reserves; risks incident to the drilling and operation of oil and gas wells;
future production and development costs; the effect of existing and future laws,
governmental regulations and the political and economic climate of the United
States and foreign countries in which we may operate, if any; the effect of
hedging activities; and conditions in the capital markets. Other risk factors
are discussed elsewhere in this Form 10-KSB.
FINANCIAL OVERVIEW
Blue Ridge Energy, Inc. (BR Energy), is a publicly traded, independent
oil and gas company engaged in the drilling, exploration, development and
production of oil and gas properties in Texas, Kentucky, West Virginia and New
Mexico. BR Energy has participated in 43 wells and owns two drilling rigs, which
are used to drill oil and gas wells for joint ventures and limited partnerships
sponsored by it and for other non-affiliated oil and gas companies.
Historically, BR Energy has grown through drilling with joint ventures
and limited partnerships it has sponsored. While BR Energy will continue to
sponsor joint ventures and limited partnerships in the future, it will
complement those programs with the expansion of its oil and gas reserves through
acquisitions and greater participation in oil and gas properties.
To accomplish these expanded goals, it has recently appointed Ed
Stillie as President, with a mandate to grow BR Energy through parallel courses
of increasing the reserves and production through acquisitions and exploratory
programs and expanding our sponsorship of industry and limited partnership
drilling programs.
RESULTS OF OPERATION
Net income was $153,000 in 1999 compared to $48,000 in 1998, and a net
loss of $89,000 in 1997. On a per share basis, which takes into account cash
dividends paid on preferred stock, BR Energy had a net loss of $0.03 per share
in 1999, as compared to a net loss of $0.09 per share in 1998 and a net loss of
$0.20 per share in 1997.
9
<PAGE> 13
OPERATING REVENUES
Operating revenues totaled $5,900,000 in 1999; a 181% increase from the
$2,100,000 in 1998 which was a 29.7% decrease from the $3,000,000 recorded in
1997. Turnkey drilling contract sales included in operating revenues were
$4,634,000 in 1999, as compared to $1,743,000 in 1998 and $2,616,843 for 1997.
Oil and gas sales included in operating revenues were $60,226 for 1999, as
compared to $27,501 for 1998 and $28,277 for 1997. Operating revenues also
includes fees earned from the sponsoring of oil and gas drilling partnership in
the form of management fees, syndication fees, and other reimbursed costs. These
fees included in operating revenues totaled $383,895 in 1999 as compared to
$316,978 for 1998 and $325,791 for 1997. BR Energy also acquired two (2)
drilling rigs in 1999 which generated revenues of $792,000 for 1999 versus 0
such revenues in 1998 or 1997.
The increase in operating revenues in 1999 from 1998 was caused by an
improved demand for limited partnership interests generated from an increased
marketing effort and an improved pricing structure for oil and gas. The decrease
in operating revenues in 1998 from 1997 was directly related to lower sales of
BR Energy's sponsored oil and gas drilling partnerships during 1998. In the
opinion of BR Energy, the sale of oil and gas drilling partnership interests was
hampered by low prices for oil and gas during much of 1998.
Production from BR Energy's oil and gas activities continued to
increase in 1999 from 1998 despite the abandonment of eight (8) oil wells for
economic reasons. Increased production in 1998, from that of 1997, from BR
Energy's oil and gas activities was negated by a sharp decline in oil prices in
the early portion of 1998, thereby causing oil and gas revenues to remain
essentially unchanged.
DIRECT OPERATING COSTS
Direct operating costs totaled $4,300,000 in 1999, a 207% increase from
the total of $1,400,000 in 1998, which was a 35.1% decrease from the $2,200,000
incurred in 1997. Direct operating costs are the turnkey drilling contract costs
for the drilling, completion, and equipping of oil and gas wells. The increase
in these costs for 1999 are a result of increased activity levels previously
discussed, as well as the addition of $709,000 in drilling rig operation costs;
while the decrease during 1998 was a result of lower oil and gas prices causing
a reduction in drilling funds raised during 1998 and correspondingly, resulted
in reduced drilling costs.
OTHER OPERATING EXPENSES
Other operating expenses increased 96.9% to $1,290,000 from $655,000 in
1998 which was a decrease of 23.3% from the $854,000 experienced in 1997
primarily as a result of concurrent variations in the marketing efforts in the
marketing of BR Energy's Limited Partnerships as previously discussed.
Additionally, a 112% increase in General and Administrative costs to $354,000 in
1999 as compared to $166,000 in 1998, was directly caused by legal and
professional fees incurred in satisfying SEC reporting requirements.
The decrease in 1998 from $293,000 in 1997 was caused by fewer of these
costs being associated with corporate activities and more being directly
associated with operating activities. General and administration costs during
all three years consisted primarily of management fees paid to BR Group and
legal and professional fees.
Depreciation, depletion and amortization continued increasing to
$117,695 in 1999 from $17,978 in 1998 and from $118 in 1997. These increases are
primarily related to the purchase of drilling rigs and oilfield service
equipment in 1999 and 1998.
10
<PAGE> 14
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative costs for 1999 were $353,860 and $166,104
for 1998. Such amounts include a portion of the management fee charged by BR
Group; $155,000 for 1999 and $78,000 for 1998. The remainder of the management
fee is allocated to cost of sales, amounting to $85,000 in 1999 and $162,000 in
1998. The allocation of the management fee is based on management's estimate of
the percentage of costs applicable to each of the categories (i.e., cost of
sales or g & a expenses). This is determined by the volume of activity during
the year and type of services that are rendered by BR Group.
The balance of general and administrative expenses consists primarily
of legal and accounting fees of $150,058 in 1999 and $57,005 in 1998. The
increase in professional fees was due to additional reporting requirements in
connection with the filing of a 1934 Act Registration Statement in September,
1999.
OTHER INCOME (EXPENSE)
Other income (expense) decreased to $1,669 in 1999 as compared to
$95,000 in 1998 as interest income dropped and interest expense increased with
the utilization of BR Energy's cash in the acquisition of oil and gas properties
and drilling equipment. The increase in 1998 from $3,000 in 1997 was a result of
interest income generated by the funds received from BR Energy's preferred stock
offering.
INCOME TAXES
BR Energy provided for Federal and state income tax expense (benefit)
of $86,000, $25,000, and ($41,000) in 1999, 1998 and 1997, respectively. These
provisions represent effective tax rates of 35% in each of those years. In 1999,
1998 and 1997, BR Energy had tax deductions for Intangible Drilling Costs
resulting in tax credits of $162,000 $100,000 and $89,000, respectively. These
tax credits were utilized, whenever possible, in order to reduce the cash impact
of the income taxes.
A valuation allowance for BR Energy's deferred tax asset of $35,442 in
1998 (see note 8 to the accompanying audited financial statements) was not
provided due to existing taxable temporary differences sufficient to offset the
net operating loss ("NOL") carryforward. At December 31, 1999, the Company had
$35,000 of its NOL remaining to reduce its future taxable net income.
BALANCE SHEET REVIEW
ASSETS
BR Energy's current assets decreased 49% to $1,200,000 at the end of
1999 from $2,300,000 at the end of 1998. The decrease in 1999 was caused by the
purchase of oil and gas properties and drilling equipment, as previously
discussed. These purchases were the primary cause of a 57% decrease in advances
to BR Group of $627,000 at the end of 1999 as compared to $1,470,000 at the end
of 1998.
These interest bearing, unsecured advances were made to BR Group in
order to facilitate; (1) the acquisition and development of oil and gas
properties in the Appalachian Basin, (2) to purchase a new Ingersoll Rand RD20
rig and a TR4 drilling rig and ancillary equipment and (3) improved interest
income from available funds. Such advances were repaid in full by June of 1999
and the balances at December 31, 1999 represent temporary balances incurred in
normal daily business as
11
<PAGE> 15
properties are developed.
BR Energy's property purchases were the primary cause of the 72%
decrease in cash to $131,000 and its daily operations were cause of the 18%
increase in accounts receivable from managed limited partnerships, trade and
other accounts receivable at the end of 1999 as compared to the end of 1998.
Property and equipment increased 488% to $3,200,000 at the end of 1999 as
compared to $540,000 at the end of 1998 due to the property and equipment
acquisitions previously discussed.
Other assets decreased 92% to $10,000 at the end of 1999 from $150,000
at the end of 1998 primarily as a result of the application of deposits made for
the purchase of the drilling rigs and ancillary equipment previously mentioned.
LIABILITIES
BR Energy's current liabilities decreased 61% to $201,000 at year-end
1999 from $520,000 at the end of 1998 as a result of BR Energy's fulfilling its
turnkey drilling commitments during normal operations and the payment of various
short term promissory notes to limited partner investors.
BR Energy adopted provisions of the Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (required for fiscal years
beginning after December 15,1992) 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 $86,000 and $24,000 at
December 31, 1999 and December 31, 1998, respectively. For further information
regarding income taxes, see Note 8 of the Financial Statements.
During 1999, BR Energy entered into various long-term notes payable,
secured by drilling equipment, in order to purchase drilling equipment. The
balance due under these notes at December 31, 1999, is approximately $529,000.
STOCKHOLDERS' EQUITY
Total capital invested in BR Energy for Common and Preferred Stock
increased 45% to $4,200,000 at year-end 1999 from $2,900,000 at the end of 1998
as a result of the purchases of 369,250 shares of Series D. Preferred Stock by
investors as previously discussed. Approximately 667,970 shares of Preferred
Stock were converted into 1,038,194 shares of Common Stock during 1999 and 1998.
BR Energy's majority shareholder, BR Group exercised options to purchase
2,800,000 shares of Common Stock in 1998. For further information regarding the
capital structure of BR Energy (see Note 10 of the Financial Statements).
Despite recording net income of $153,000, BR Energy's retained earnings
declined 45% to an accumulated deficit of $648,000 at December 31, 1999 from an
accumulated deficit of $448,000 at December 31, 1998 as the result of the
payment of cash dividends totaling $313,000 to BR Energy's Preferred
Shareholders during the year, 1999.
CAPITAL RESOURCES AND LIQUIDITY
BR Energy's current ratio (current assets / current liabilities) was
5.82 to 1 in 1999 and 4.05 to 1 in 1998. Such calculations include the accounts
receivable from managed oil and gas drilling partnerships ($337,000 in 1999 and
$248,000 in 1998) and advances to related parties ($627,000 in 1999 and
$1,467,000 in 1998). The change in the current ratio from 1999 to 1998 was due
primarily to contributed capital from the sale of Preferred Stock combined with
borrowing proceeds, more than
12
<PAGE> 16
offsetting funds used in the acquisition of oil and gas properties and drilling
equipment.
BR Energy's primary source of cash in 1999 was derived from the sale of
oil and gas limited partnerships, equity and the operation of oil and gas
properties. Without these sources of cash, BR Energy would not have adequate
sources of cash for its operations. While BR Energy expects that its revenue
sources will not significantly change in 2000, BR Energy will be increasing its
emphasis on drilling and developing oil and gas properties in order to increase
its revenue from oil and gas production.
During the two years ended December 31, 1999 and December 31, 1998, BR
Energy has relied upon net inflows of cash from the sale of equity, 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.
As of December 31, 1999, the Company had sufficient cash to satisfy its
operating needs for a period of 90 days or longer considering the funds
previously advanced to Blue Ridge Group as of December 31, 1999 of $627,304. The
Company plans to continue funding its operating needs by sponsoring 3 to 5
limited partnership oil and gas drilling programs a year.
7. FINANCIAL STATEMENTS
The response to this item is set forth herein in a separate section of
this Report, beginning on Page F-1.
8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
PART III
9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below is certain information regarding the directors and
executive officers of BR Energy. These individuals are not employed directly by
BR Energy. Their compensation is included under a management agreement with BR
Group as more fully discussed on page 15.
<TABLE>
<CAPTION>
DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
NAME AGE POSITION(S) WITH BR ENERGY
<S> <C> <C>
Robert D. Burr 54 Chairman of the Board of BR Energy, President and Chief Executive
Officer
Edward L. Stillie 55 Director of BR Energy, President & Chief Executive Officer
James T. Cook, Jr. 47 Director of BR Energy, Senior Vice President-Finance and Chief
Financial Officer
Harry Peters 56 Director of BR Energy, Senior Vice President-Sales and Marketing
Gregory B. Shea 38 Director of BR Energy, Senior Vice President-Operations
Russell L. Vera 38 Director of BR Energy, Senior Vice President-Exploration and
Development
</TABLE>
ROBERT D. BURR, age 54, Bowling Green, Kentucky, has been Chairman of
the Board, President and Chief Executive Officer of BR Energy since May, 1996.
He resigned as President and
13
<PAGE> 17
Chief Executive Officer on March 1, 2000. A native of Port Arthur, Texas, Mr.
Burr attended McNeese State College, Lake Charles, Louisiana. He has been active
for over 20 years in the oil and gas business with a myriad of companies. He has
been the Chairman of the Board, President and Chief Executive Officer of BR
Group, since August 1993.
EDWARD L. STILLIE, age 55, Bowling Green, Kentucky, Mr. Stillie joined
BR Energy on March 1, 2000 as President and Chief Executive Officer and became a
Director on April 10, 2000,. He has a strong background in management and oil
and gas syndication, having been a senior executive for the past 20 years with
companies such as NRM Corporation, Boston Financial, Inc. and most recently, as
National Marketing Director and Senior Vice President for Houston-based Swift
Energy Company.
JAMES T. COOK, Jr., age 47, Bowling Green, Kentucky, has been Sr. Vice
President, Finance and a Director of BR Energy since May 1996. Mr. Cook also
serves as Secretary and Treasurer of BR Energy. He is an accountant by training,
and a graduate of Stephen F. Austin State University, Nacogdoches, Texas. 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. 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 BR Group. In 1997, Mr.
Cook became the brother-in-law of Mr. Burr.
HARRY J. PETERS, age 56, Bowling Green, Kentucky. Mr. Peters joined BR
Energy as a Director and Sr. Vice President-Sales and Marketing on April 10,
2000. A native of New York, he has over 30 years of experience in sales and
marketing, both domestic and international. Over the years, he has developed
close working relationships with investment bankers, institutional investors,
and securities dealers while directing market financing of reserve purchases,
and raising drilling risk capital and venture capital for wells in Texas,
Kentucky, Oklahoma, Louisiana, Colorado, West Virginia and Utah. Mr. Peters has
been a Director and Sr. Vice President-Sales and Marketing of BR Group since
April of 1999. He is a graduate of St. Michaels College in Santa Fe, New Mexico.
GREGORY B. SHEA, age 38, Bowling Green, Kentucky, has been a Director
and Senior Vice President-Operations of BR Energy 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 BR Group
since November, 1994 and he was elected a Director of BR Group in February,
1995. Since that time, Mr. Shea has managed BR Group's Kentucky drilling and
field operations. He is a native of Plano, Texas. Between 1981 and 1986, he
attended the University of North Texas. Mr. Shea is a son-in-law of Mr. Burr.
RUSSELL L. VERA, age 38, Bowling Green, Kentucky, became a Director and
Sr. Vice President-Exploration and Development on April 10, 2000. A native of
Gonzales, Texas, Mr. Vera is a graduate of Ball High School, Galveston, Texas,
and attended the University of Houston for four years a graphic arts major. He
has been President of Fortune Exploration of Kentucky, Inc. since 1992 and he
was President of Fortune Exploration, Inc., Irving, Texas, an independent oil
and gas producer, from 1989 until 1992, and President of Oak Ridge Exploration,
Inc., Shreveport, Louisiana, in 1992. Between 1987 and 1989, he was a registered
representative in Santa Monica, California, of West Coast Securities Corp., a
registered broker dealer. Mr. Vera is a son-in-law of Mr. Burr.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1034
Section 16(a) of the Securities Exchange Act of 1934 requires BR
Energy's officers and directors and persons who own more than 10% of a
registered class of BR Energy's equity securities
14
<PAGE> 18
to file reports of ownership and changes in ownership with the SEC. Officers,
directors and greater than 10% stockholders are required by SEC regulation to
furnish BR Energy with copies of all Section 16(a) forms they file.
Based solely upon a review of the copies of such forms furnished to BR
Energy or written representations that no other reports were required, BR Energy
believes that during the 1999 fiscal year, all filing requirements applicable to
its officers, directors and greater than 10% beneficial owners have been
complied with.
10. EXECUTIVE COMPENSATION
The following compensation was paid directly to the executives of BR Energy
during the years ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Name and
Principal Position Year Annual Compensation Long-Term Compensation All
Other
Awards Payouts Compensation
Salary Bonus Other Annual Restricted Securities LTIP ($)
($) ($) Compensation Stock Awards Underlying Payouts
($) ($) Options/SAR's ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert D. Burr 1999 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
1998 $ 0 $ 25,000 $ 0 $ 0 0 $ 0 $ 0
1997 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
James T. Cook, Jr. 1999 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
1998 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
1997 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
Gregory B. Shea 1999 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
1998 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
1997 $ 0 $ 0 $ 0 $ 0 0 $ 0 $ 0
</TABLE>
11. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth each stockholder who is known to the Company
to be the beneficial owner of more than 5% of the common stock of the Company at
December 31, 1999.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
Name and Address Amount and Nature
Title of Class of Beneficial Owner of Beneficial Owner Percent of Class
-------------- ------------------- ------------------- ----------------
Indirect Ownership:
<S> <C> <C> <C>
Common stock Robert D. Burr 1,872,235 (1) 19.1%
632 Adams Street-Suite 710
Bowling Green, KY 42101
Common stock Russell L. Vera 1,872,235 (2) 19.1%
632 Adams Street-Suite 110
Bowling Green, KY 42101
</TABLE>
15
<PAGE> 19
<TABLE>
<S> <C> <C> <C>
Direct Ownership:
Common stock Blue Ridge Group, Inc. 7,126,893 (3) 72.7%
632 Adams Street Suite 700
Bowling Green KY 42101
</TABLE>
(1) Mr. Burr's beneficial ownership is attributable to his trust's ownership of
26.27% of BR Group which owns 72.7% of BR Energy. Included in this table are
warrants held by BR Group to purchase 4,000,000 shares of BR Energy at $0.05 per
share. Said warrants expire March 31, 2003.
(2) Mr. Vera's beneficial ownership is attributable to his trust's ownership of
26.27% of BR Group which owns 72.7% of BR Energy. Included in this table are
warrants held by BR Group to purchase 4,000,000 shares of BR Energy. Said
warrants expire March 31, 2003.
(3) BR Group's beneficial ownership is attributable to its direct ownership of
3,126,893 shares of common stock and warrants to purchase 4,000,000 shares at
$0.05. Said warrants expire March 31, 2003.
(4) Mr. Burr and Mr. Vera (Mr. Burr's son-in-law) have disclaimed beneficial
interest in each others respective shares.
The table below sets forth the beneficial stock ownership of all directors and
officers of BR Energy as of December 31, 1999.
<TABLE>
<CAPTION>
Name and Address Amount and Nature
Title of Class of Beneficial Owner of Beneficial Owner Percent of Class
-------------- ------------------- ------------------- ----------------
<S> <C> <C> <C>
Common stock Robert D. Burr, President 1,872,235 (1) 19.1%
Common stock All Directors and Officers 1,872,235 19.1%
as a group (3 persons)
</TABLE>
(1) Mr. Burr's beneficial ownership is attributable to his trust's ownership of
26.27% of BR Group which in turn owns 72.7% of BR Energy. Included in this table
are warrants held by BR Group to purchase and additional 4,000,000 shares of BR
Energy at $0.05 a share. Said warrants expire on March 31, 2003.
12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BR Group owns approximately 53.9% of the Common Stock of BR Energy as
of December 31, 1999. BR Energy has entered into several transactions with BR
Group as follows:
STOCK TRANSACTIONS
In March 1996, BR Group acquired 1,000,000 shares of BR Energy's common
stock from BR Energy for $0.10 a share, or $100,000. In June 1996, after a five
to one share reverse stock split BR Group acquired another 1,000,000 shares of
common stock from BR Energy for $0.05 per share, or $50,000 and warrants to
purchase an additional 2,000,000 shares of common stock at $0.05 per share.
During February 1998, BR Energy granted warrants to BR Group to purchase an
additional 5,000,000 shares of restricted common stock at $0.05 per share.
In June 1997, BR Group exercised warrants to purchase 200,000
restricted shares of BR Energy's common stock.
In June 1998, BR Group exercised warrants to purchase 2,800,000
restricted shares of BR Energy's common stock. At December 31, 1999, BR Group
owned warrants to purchase an
16
<PAGE> 20
additional 4,000,000 shares of common stock at $0.05 per share.
In October, 1996, the Smackover/Woodbine I Joint Venture sponsored by
BR Energy, and the West Currie Joint Venture sponsored by an affiliate, agreed
to purchase 117,500 shares of BR Energy Series B Preferred Stock at $3.00 per
share. As of December 31, 1998, 117,500 shares of Series B Preferred Stock had
been issued under this arrangement. These Series B Preferred shares were
exchanged for 235,000 shares of BR Energy Common shares during 1998.
Under a previous arrangement with one of the company's partnerships
(the Home Stake Joint Venture, as described in Note 4), the company had agreed
to provide certain workover funds and had the rights to 100% of the
partnership's revenues from the well until the workover funds had been
recovered. Thereafter, the Home Stake Joint Venture would revert to its original
working interest position. During 1999, the company issued 250,000 shares of its
common stock in exchange for the partnership's reversionary interest in the
well.
LOANS FROM BR GROUP
During 1996, BR Group loaned $126,000 to BR Energy for the purchase of
a working interest in a gas well in Vermillion Parish, Louisiana. This loan was
repaid during the first quarter of 1997.
During 1997, BR Energy purchased for $250,000 the JW Harris #1C oil
well, Frio County, Texas from two shareholders of BR Group. The shareholders
were the Longhorn Trust and the Argyle Trust, which were Trusts established
under Kentucky law for the benefit of the families of Robert Burr and Russell
Vera, respectively. Russell Vera is a son-in-law of Robert Burr. Subsequent to
this purchase, the well's performance deteriorated significantly and the selling
parties agreed to buy the well back from BR Energy for the original purchase
price of $250,000. This $250,000 was paid in March, 1998.
During 1998, the company agreed to participate with BR Group in the
acquisition and development of oil and gas properties in the Appalachian Basin
of Kentucky. The Company advanced $1,300,000, bearing interest at 12% per annum,
to BR Group related to these acquisitions.
During the years ended 1998 and 1999, the Company earned interest
income under this arrangement of $73,400 and $27,153, respectively. During 1999,
BR Group reduced this obligation through the sale of a drilling rig and
ancillary equipment to the Company and performance of services in the drilling
and completion of various oil and gas wells under the terms of turnkey drilling
contracts. As of December 31, 1999, the balance had been reduced to $627,304. BR
Group reduced this obligation to $-0- in 2000 through the performance of
additional services under the terms of turnkey drilling contracts and cash
payments.
CONTRACTUAL AGREEMENTS
Since June of 1996, BR Energy has entered into turnkey drilling
contracts with BR Group and other affiliates for the acquisition, drilling,
completing and equipping of oil and gas wells for BR Energy and the nine (9) oil
and gas drilling partnerships that BR Energy has sponsored. A summary of the
amounts involved in these contracts is as follows:
Year Ended December 31, 1996 $ 1,308,070
Year Ended December 31, 1997 $ 2,227,560
Year Ended December 31, 1998 $ 1,428,382
Year Ended December 31, 1999 $ 3,616,100
The terms of the contracts or transactions that the Company entered
into with BR Group were
17
<PAGE> 21
on terms that were no more favorable than those obtained from unaffiliated
parties.
BR Group provides various management, administrative, accounting and
geological services for the Company at a rate of $20,000 per month which has
been determined on a proportional basis because specific identification of
expenses is not practical. Management believes that this cost allocation method
of expenses is reasonable.
BR Energy also reimburses BR Group for marketing costs paid on its
behalf which amounted to $176,540 in 1999. As of December 31, 1999 and 1998,
approximately $-0- was due and payable to BR Group under this arrangement.
In March 1999, BR Energy purchased ancillary equipment to be used in
association with drilling rig #4 from BR Group at a price of $415,000. In April
1999, BR Energy purchased drilling rig #2 with associated ancillary equipment
from BR Group at a price of $750,000.
During 1999 and 1998, BR Energy had no significant customers or
suppliers, other than its major stockholder, (BR Group) who could individually
have a significant adverse effect on the Company's operations. See Note 4 to BR
Energy's Financial Statements, included herein, for additional information.
BR Energy has an affiliated broker dealer, Ridgemont Securities, Inc.,
that raises the majority of BR Energy's funds through private placement
offerings for oil and gas wells and the issuance of preferred stock for which BR
Energy pays Ridgemont Securities various fees and commissions. The fees and
expenses paid to Ridgemont Securities, Inc. by BR Energy and the oil and gas
partnerships during 1999 and 1998 are as follows:
1999 1998
--------------- -------------
Commissions $ 1,088,138 $ 546,713
Due Diligence Fees 43,493 49,938
Promotional Services 200,000 --
Reimbursed Expenses 80,780 101,511
-------------- -------------
Total $ 1,412,411 $ 698,162
============== =============
The Company contracts with BR Group to manage and operate the two
drilling rigs it owns. BR Group also manages two other rigs owned by other
affiliates of BR Group.
BR Group collects all drilling revenues and pays all expenses related
to the drilling operations and accounts to BR Energy on a periodic basis for the
net profits from operations for the two rigs owned by BR Energy. The Company
reported revenues of $792,439 and costs of $709,308 from the operation of the
drilling rigs for the year ended December 31, 1999.
During 1999, the company made the following property acquisitions from
partnerships they had previously syndicated:
In 1999, the Company acquired a 100% working interest in the Keegan
Gibson #1 oil well in Smith County, Texas in exchange for issuing warrants to
purchase 335,725 shares of BR Energy Common stock at $3.00 per share. The
warrants are exercisable during the period March 27, 2000 and March 27, 2005.
This Property acquisition was recorded at the Company's cost basis in the
partnership including accounts receivable, which management believes
approximates the fair market value of the property. No basis was attributed to
the warrants issued.
The Company acquired in 1999, a 100.0% working interest in two gas
wells in Sherman County, Texas in exchange for warrants to purchase 521,208
shares of BR Energy Common stock at $3.00 per share. The transaction was
recorded at the Company's cost basis in the partnership which approximates fair
value. The Company did not allocate any cost basis to the common stock warrants.
During November, 1999, the company acquired a 30% working interest in
nine gas wells in Harlan County, Kentucky owned by two of its oil and gas
partnerships in exchange for BR Energy's 53.4% working interest in a gas well in
Wharton County, Texas, BR Energy's 12.5% working interest
18
<PAGE> 22
in five development wells in Mingo and Wyoming Counties of West Virginia, and
968,300 warrants to purchase BREY Common stock at $3.00 per share. The
transaction was recorded, in accordance with FASB 123, at the estimated fair
value of the assets received being $338,400, as this was considered a more
reliable measurement.
During 1999 and 1998, BR Energy had no significant customers or
suppliers, other than its major stockholder, (BR Group) who could individually
have a significant adverse effect on the Company's operations, see Note 4 to
Blue Ridge Energy's Financial Statements, included herein, for additional
information.
The terms of the contracts or transactions that BR Energy entered into
with BR Group were on terms that were no more favorable than those obtained from
unaffiliated parties.
13. EXHIBITS AND REPORTS ON FORM 8K
23.1 Consent of Independent Consulting Engineer
(R. A. Lenser & Associates)
23.2. Consent of Independent Consulting Engineer (Wright & Company)
23.3 Consent of Independent Auditors
Signatures and Exhibit Index
Signatures
PART IV
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: March 30, 2000
By: /s/James T. Cook, Jr. _______James T. Cook, Jr._____________
Director, Senior Vice President-Finance and Chief Financial Officer
Exhibit Index
23.1 Consent of Independent Consulting Engineer (R. A. Lenser & Associates)
23.2. Consent of Independent Consulting Engineer (Wright & Company)
23.3 Consent of Independent Auditors
19
<PAGE> 23
Independent Auditors' Reports
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, 1999 and 1998, and the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1999, 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 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, 1999 and 1998, and the results of its operations and
cash flows for the years ended December 31, 1999, 1998 and 1997 in conformity
with generally accepted accounting principles.
Looney, Samson & Associates, P.L.L.C.
Dallas, Texas
March 24, 2000
F-1
<PAGE> 24
<TABLE>
<CAPTION>
Blue Ridge Energy, Inc.
BALANCE SHEETS
DECEMBER 31, 1999 1998
------------ ----------- -----------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash $ 131,465 $ 480,952
Short Term Investments (Note 3) -- 19,925
Accounts Receivable:
Managed Limited Partnerships (Note 2) 337,276 315,508
Trade and Other 74,275 91,691
Advances to Related Parties (Note 4) 627,304 1,467,916
----------- -----------
Total Current Assets 1,170,320 2,337,992
PROPERTY AND EQUIPMENT, NET (Notes 5 and 6) 3,178,606 540,068
Other Assets 10,810 146,556
----------- -----------
TOTAL ASSETS $ 4,359,736 $ 3,062,616
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 90,835 $ 84,952
Drilling Advances (Note 2) -- 284,074
Amounts Due Managed Limited Partnerships (Note 2) -- 67,274
Current Portion of Long Term Debt (Note 7) 110,231 150,675
----------- -----------
Total Current Liabilities 201,066 586,975
Long Term Debt (Note 7) 418,511 --
Deferred Income Tax Liability (Note 8) 150,139 64,232
----------- -----------
Total Liabilities 769,716 651,207
COMMITMENTS AND CONTINGENCIES (Notes 4, 9 and 10) -- --
STOCKHOLDERS' EQUITY: (Note 10)
Preferred Stock, $0.001 par value; 5,000,000 shares authorized; 637 464
636,950 and 464,308 shares issued and outstanding at
December 31, 1999 and 1998, respectively (Notes 4 and 10)
(liquidation preferences of $3,185,000 in 1999 and
$2,440,000 in 1998.)
Common stock, $0.005 par value; 20,000,000 shares authorized; 29,049 25,858
5,809,794 and 5,171,578 shares issued and outstanding at
December 31, 1999 and 1998, respectively (Notes 4 and 10)
Additional Paid-In Capital 4,208,735 2,873,341
Accumulated Deficit (648,401) (488,254)
----------- -----------
Total Stockholders' Equity 3,590,020 2,411,409
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,359,736 $ 3,062,616
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-2
<PAGE> 25
<TABLE>
<CAPTION>
Blue Ridge Energy, Inc.
STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING REVENUES (Note 2):
Turnkey Contract Sales $ 4,634,089 $ 1,743,211 $ 2,616,843
Management Fees 244,739 212,624 215,214
Reimbursed Costs 139,156 104,354 110,577
Contract Drilling Sales 792,439 -- --
Oil and Gas Sales 60,226 27,501 28,277
----------- ----------- -----------
Total Operating Revenues 5,870,649 2,087,690 2,970,911
OPERATING COSTS AND OTHER EXPENSES
(Notes 2 and 4):
Turnkey Contract Costs 3,616,100 1,428,382 2,227,560
Lease Operating Costs 17,741 27,225 16,578
Cost of Contract Drilling 709,308 -- --
Abandonment and Dry Hole Costs 142,571 16,817 10,464
Impairment of Oil and Gas Properties (Notes 1 and 5) -- 327,405 203,413
Depreciation, Depletion and Amortization 117,695 17,978 118
Marketing Costs 676,169 126,588 346,415
General and Administrative Costs 353,860 166,104 293,535
----------- ----------- -----------
Total Operating Costs 5,633,444 2,110,499 3,098,083
OPERATING INCOME (LOSS) 237,205 (22,809) (127,172)
OTHER INCOME (EXPENSE):
Interest Income (Note 4) 27,153 82,181 7,085
Interest Expense (25,484) -- --
Other -- 13,441 (10,409)
----------- ----------- -----------
Total Other Income (Expense) 1,669 95,622 (3,324)
----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES 238,874 72,813 (130,496)
Income Tax Provision (Benefit) (Note 8) 85,907 24,762 (41,134)
----------- ----------- -----------
NET INCOME (LOSS) $ 152,967 $ 48,051 $ (89,362)
=========== =========== ===========
EARNINGS/(LOSS) PER COMMON SHARE: (Note 1):
Basic $ (0.03) $ (0.09) $ (0.20)
Diluted $ (0.03) $ (0.09) $ (0.20)
Weighted Average Common Shares Outstanding 5,453,611 3,062,868 1,576,200
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 26
<TABLE>
<CAPTION>
Blue Ridge Energy, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Preferred Common Additional Accumulated
Stock Stock Paid-In Capital (Deficit) Total
--------------------- ---------------------- --------------- ------------- --------
No. of No of
Shares Amount Shares Amount
------ ------ ------ ------
<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
Sale of Stock:
(Notes 4 and 10)
Common Stock 200,000 1,000 9,000 10,000
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 (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:
(Note 4, and 10)
Series D 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 (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
Retirement of
Common Stock (5,000) (25) (14,975) (15,000)
Issuance of
Common Stock 250,000 1,250 11,250 12,500
Conversion of
Preferred Stock (196,608) (196) 393,216 1,966 (1,770) --
Sale of Stock
(Note 10)
Series D 369,250 369 1,340,889 1,341,258
Dividends Paid on
Preferred Stock (313,114) (313,114)
Net Income 152,967 152,967
----------- ---------- ----------- ---------- ----------- ----------- -----------
BALANCE
DECEMBER 31,1999 636,950 $ 637 5,809,794 $ 29,049 $ 4,208,735 $ (648,401) $ 3,590,020
=========== ========== =========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 27
<TABLE>
<CAPTION>
Blue Ridge Energy, Inc.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 152,967 $ 48,051 $ (89,362)
Adjustments to Reconcile Net Income to Net Cash
Flow from Operating Activities:
Depreciation, Depletion and Amortization 117,695 17,978 118
Impairment. Dry Holes and Abandonment Losses 142,571 344,222 203,413
Increase (Decrease) in Deferred Income Taxes 85,907 24,025 (2,633)
Increase (Decrease) in Income Taxes Payable -- 737 (45,519)
(Increase) Decrease in Accounts Receivable 17,416 (184,441) (1,607)
Increase (Decrease) in Accounts Payable and Accrued Expenses (278,191) 286,524 (237,599)
Gain on Sale of Oil and Gas Properties -- (75,000) --
----------- ----------- -----------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 238,365 562,106 (173,189)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in Advances to Affiliate (1,153,565) (1,166,456) (609,008)
(Increase) in Other Assets 70,746 (125,020) (15,464)
Proceeds from Sale of Oil and Gas Properties -- 325,000 --
Purchase of Oil and Gas Properties and Equipment (294,260) (492,700) (549,507)
----------- ----------- -----------
NET CASH (USED) IN INVESTING ACTIVITIES (1,377,079) (1,459,176) (1,173,979)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to Long Term Debt -- 205,675 --
Retirement of Long Term Debt (236,417) (59,000) --
Issuance of Common Stock 12,500 140,000 10,000
Issuance of Preferred Stock 1,341,258 1,066,370 1,010,417
Retirement of Stock (15,000) (4,800) --
Cost of Conversion of Preferred Stock -- (1,230) --
Dividends Paid (313,114) (336,448) (231,447)
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 789,227 1,010,567 788,970
NET INCREASE (DECREASE) IN CASH (349,487) 113,497 (558,198)
CASH AT BEGINNING OF PERIOD 480,952 367,455 925,653
----------- ----------- -----------
CASH AT END OF PERIOD $ 131,465 $ 480,952 $ 367,455
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 25,484 $ -- $ --
Cash Paid for Federal Income Taxes $ -- $ -- $ 45,519
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Purchase of drilling rigs and equipment financed through long
term debt of $614,484, reduction in other assets of $65,000
and reduction in advances to Blue Ridge Group of $1,190,000 $ 1,869,484 $ -- $ --
Producing property acquisition through reductions in
advances to Blue Ridge Group and Limited Partnerships $ 687,022 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 28
Blue Ridge Energy, Inc.
NOTES TO FINANCIAL STATEMENTS
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.
The Company is engaged in the oil and gas business primarily in Texas,
Kentucky, New Mexico and West Virginia. The Company sponsors oil and gas
drilling partnerships through which it raises money for the drilling of oil and
gas wells and participates for a 1% partnership interest as the managing general
partner of the oil and gas exploration partnerships. The Company also owns two
drilling rigs. These rigs are used to drill oil and gas wells for the sponsored
oil and gas drilling partnerships and also other non-affiliated oil and gas
companies. The rigs are operated on behalf of the Company by an affiliate, Blue
Ridge Group, Inc.
The Company also acquires direct working interest participation in oil
and gas properties. The participation includes both operated and non-operated
working interest in exploratory and development wells. These acquisitions are
funded by a combination of the profits earned from sponsoring oil and gas
drilling programs, the profit earned from contract drilling and from the
proceeds of private offerings of preferred stock.
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.
PRINCIPALS OF CONSOLIDATION
The accompanying financial statement include the accounts of Blue Ridge
Energy, Inc. and its investment in limited partnerships for which it acts as
managing general partner. As such, the company has the sole and exclusive right
and power to manage and control the partnership. The Company accounts for its
investment in limited partnerships under the proportionate consolidation method.
Under this method, the Company's financial statements include its pro-rata share
of assets and liabilities and revenues and expenses, respectively, of the
limited partnership in which it participates. All material intercompany accounts
and transactions have eliminated in consolidation.
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 income under turnkey
drilling contracts, expenses under turnkey drilling contracts, all 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., 5-10 days.
F-6
<PAGE> 29
NOTES TO FINANCIAL STATEMENTS
WORKING INTERESTS
Oil and gas revenue from working interests the Company owns are
recognized at the point of sale.
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. The
Company normally participates for 1% of the Limited Partnerships as the Managing
General Partner.
The Company follows the industry practice of pro rata consolidation of
its investments in these partnerships. Accordingly, the Company records on its
financial statements its pro rata share of the assets, liabilities, revenues and
expenses of each partnership. In connection with the sponsorship of oil and gas
partnerships, the Company receives a management fee of approximately 5% of the
capital contributions. Such fees are credited to income as earned.
PROPERTY AND EQUIPMENT
Property and equipment (other than oil and gas) are stated at cost.
Depreciation is recognized on the straight line method, after considering
salvage value, 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 producing activities. Under the successful efforts method of accounting,
costs which relate directly to the discovery of oil and gas reserves are
capitalized. These capitalized costs include;
(1) the costs of acquiring mineral interest in properties,
(2) costs to drill and equip exploratory wells that find proved
reserves,
(3) costs to drill and equip development wells and
(4) costs for support equipment and facilities used in oil and gas
producing activities.
These costs are depreciated, depleted or amortized on the unit of
productions method, based on estimates of recoverable proved developed oil and
gas reserves.
Costs to drill exploratory wells that do not find proved reserves,
geological and geophysical costs, and costs of carrying and retaining unproved
properties are expensed.
The costs of acquiring unproved properties are capitalized as incurred
and carried until the property is reclassified as a producing oil and gas
property, or considered impaired. The Company annually assesses its unimproved
properties to determine whether they have been impaired. If the results of this
assessment indicate impairment, a loss is recognized by providing a valuation
allowance. When an unproved property is surrendered, the costs related thereto
are charged to the application valuation allowance, if adequate, or charged as a
loss to current operations.
F-7
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
The costs of drilling exploration wells are capitalized as part of the
Company's uncompleted wells, equipment and facilities pending determination of
whether the well has found proved reserves. Once a determination is made, the
capitalized costs are either charged to expense or reclassified as part of the
costs of the Company's wells and related equipment. In the absence of a
determination as to whether the reserves that have been found can be classified
as proved, the costs of drilling such an exploratory well are not carried as an
asset for more than one year following completion of drilling. If after a year
has passed, the Company is unable to determine that proved reserves have been
found, the well is assumed to be impaired, and its costs are charged to expense.
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 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 and for 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 for proved
properties and capitalized exploration and development costs is recognized. The
Company assesses impairment of capitalized costs of proved oil and gas
properties by comparing net capitalized costs to undiscounted future net cash
flows on a field-by-field basis using expected prices. If an impairment is
indicated based on undiscounted expected future cash flows, then an impairment
is recognizable to the extent that net capitalized costs exceed the estimated
fair value of the property. Fair value of the property is estimated by the
company using the present value of future cash flows discounted at 10%.
The following expected future prices were used to estimate future cash
flows to assess properties for impairment.
Oil Price per BBL 1999 1998
-------- --------
Year 1 $ 25.60 $ 12.35
Year 2 25.60 13.73
Year 3 25.60 14.57
Year 4 25.60 15.81
Thereafter 25.60 Escalated 3%-Year
Maximum 25.60 23.00
Gas Price Per MMCF
Year 1 $ 3.31 $ 1.96
Year 2 3.31 2.25
Year 3 3.31 2.34
Year 4 3.31 2.55
Thereafter 3.31 Escalated 3%-Year
Maximum 3.31 3.50
F-8
<PAGE> 31
NOTES TO FINANCIAL STATEMENTS
Oil and gas expected future price estimates were based on NYMEX future
prices at each year-end. Expected future prices were escalated if such prices
were unusually low at year-end compared to historical averages. These prices
were applied to production profiles of proved developed reserves at December 31,
1999 and 1998. The Company's price assumptions change based on current industry
conditions and the Company's future plans. During 1999 and 1998, the Company
recognized impairments, abandonments and dry holes of $142,571 and $344,222,
respectively. The impairments were determined based on the difference between
the carrying value of the assets and the present value of future cash flows
discounted at 10%. It is reasonable possible that a change in reserve or price
estimates could occur in the near term and adversely impact management's
estimate of future cash flows and consequently the carrying value of properties.
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, 1999 and 1998:
<TABLE>
<CAPTION>
Basic EPS computation- 1999
------------
<S> <C>
Net Income $ 152,967
Less: Preferred Stock Dividends (313,114)
------------
Loss Available to Common Stockholders $ (160,147)
============
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
<S> <C> <C> <C>
January 1-December 31 5,171,578 100.0% 5,171,578
Issuance of Common Stock 250,000 25.0% 62,500
Conversion of Preferred Stock Feb.-July 393,216 57.0% 224,133
Repurchase of Common Stock Jan. 31 (5,000) 92.0% (4,600)
------------ ---------- ----------
5,809,794
============
Weighted Average Shares 5,453,611
==========
Basic EPS (Loss) $ (0.03)
==========
<CAPTION>
Basic EPS computation- 1998
----------
<S> <C>
Net Income $ 48,051
Less: Preferred Stock Dividends (336,448)
------------
Loss Available to Common Stockholders $ (288,397)
============
<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
Pref. Stock Converted September 30 644,978 25.2% 162,569
------------- ----------
5,171,578
Weighted Average Shares ============= 3,062,868
==========
Basic EPS (Loss) $ (0.09)
==========
</TABLE>
F-9
<PAGE> 32
NOTES TO FINANCIAL STATEMENTS
SUPPLEMENTAL EARNINGS PER SHARE DATA
The following supplemental information presents the Company's pro forma
earnings per share assuming that all preferred stock was converted to common
stock as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
1999 1998
------------ -----------
<S> <C> <C>
Net Income $ 152,967 $ 48,051
Preferred stock dividends paid (313,114) (336,448)
Pro forma preferred stock dividends avoided 313,114 336,448
----------- -----------
Pro forma Net Income available for common stockholders $ 152,967 $ 48,051
=========== ===========
Weighted average shares outstanding 5,453,611 3,062,868
Pro forma conversion of all preferred stock
as of the beginning of year 636,950 660,916
----------- -----------
Pro forma weighted average shares outstanding
assuming conversions of all preferred stock 6,090,561 3,723,784
=========== ===========
Pro forma earnings (loss) per common share $ .03 $ .01
=========== ===========
</TABLE>
The preceding pro forma EPS disclosure in presented to enable the user
of the financial statements to determine the effect of the conversion of
potential common shares outstanding into common shares. Each share of the Series
A, B, C and D Preferred Stock will be converted automatically into common stock
two years from issuance or effective when a Securities Act Registration
Statement for the common stock is filed with the SEC, whichever occurs first.
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 AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
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 $4,634,089,
$1,743,211 and $2,616,843 during 1999, 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. Management fees earned during the year ended December 31,
1999, 1998 and 1997 amounted to $244,739, $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, legal
F-10
<PAGE> 33
NOTES TO FINANCIAL STATEMENTS
fees, accounting fees, printing costs and other miscellaneous expenses. These
reimbursements totaled $139,156, $104,354 and $110,577 during the years ended
December 31, 1999, 1998 and 1997, respectively.
Included in the Company's financial statements are contributions made to
the various Company sponsored oil and gas partnerships. 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, 1999 and 1998, the various partnerships owed the Company
$337,276 and $248,234, 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 1999 and 1998, the Company
owed the partnerships for capital contributions totaling $-0-and $67,274,
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 $284,074.
3. SHORT TERM INVESTMENTS
During 1996, the Company purchased $19,925 of precious metals consisting
of gold Krugerrand coins as a short-term investment. This amount is reflected in
Current Assets in the accompanying financial statements. The Company follows the
policy of carrying its short-term investment in precious metals at cost. The
Company disposed of this investment in 1999 at no gain or loss.
4. RELATED PARTY TRANSACTIONS
A. COMMON STOCK TRANSACTIONS
The Company was organized in November, 1994, as a Nevada corporation
under the name of Gem Source, Incorporated (Gem Source).
Blue Ridge Group, Inc. (BR Group) acquired control of Gem Source in
March, 1996 when BR Group 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 reducing the outstanding shares to 526,600 and the
name of the Company was changed from Gem Source, Incorporated to Blue Ridge
Energy, Inc. (BR Energy). In June 1996, BR Group acquired another 1,000,000 of
restricted common stock from the Company treasury for $0.05 a share, or $50,000.
During 1997, the Company's majority shareholder, BR Group, Inc.
exercised warrants to purchase 200,000 shares of the Company's common stock at
$0.05 per share or $10,000. Subsequently, BR 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 BR Group, Inc. to purchase 5,000,000 shares of BR Energy, Inc.
restricted common stock at $0.05 per share. BR 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, BR Group exercised
warrants to purchase 2,800,000 shares of the Company's common stock at $0.05 per
share, or $140,000. Subsequently, BR Group distributed 890,427 of these shares
to investors in several of its partnerships.
Under a previous arrangement with one of the Company's partnerships (the
Home Stake Joint Venture), the Company had agreed to provide certain workover
funds and had the right to 100% of the partnership's revenues from the well
until the workover funds had been recovered. Thereafter, the Home Stake Joint
Venture reverted to its original working interest position. During 1999, the
Company issued 250,000 shares of its Common stock in exchange for the
partnership's reversionary interest in the well.
As of December 31, 1999, there are 5,809,794 shares of common stock
issued and outstanding. A total
F-11
<PAGE> 34
NOTES TO FINANCIAL STATEMENTS
of 3,126,893 shares are held by BR Group and the remainder of 2,682,901 shares
are held by approximately 500 shareholders.
B. PREFERRED STOCK TRANSACTIONS
In May 1996, BR Energy authorized the issuance of 300,000 shares of
Series A Preferred Stock which had a par value of $0.001 per share at a price of
$3.00 per share. In July 1996, BR Energy acquired the assets (primarily accounts
receivable and undeveloped oil and gas leases in eastern Kentucky) of Target
Leasing Ltd. I ("Target"), a Kentucky limited partnership, by the issuance and
exchange of 265,746 shares of BR Energy's Series A Preferred Stock. The assets
acquired were initially valued at $797,238. Legal fees related to the issuance
of these securities were $7,500. At the time of its issuance, there was no
established market for the Series A Preferred Stock.
For financial statement purposes, the value of the Series A Preferred
Stock issued and the assets acquired were recorded at the estimated fair value
of the assets, which was considered the value more clearly determinable. The
difference between the par value of the shares issued and the value of the
property received, plus the associated expenses related to the issuance of these
securities, was recorded as additional paid in capital of BR Energy.
At December 31, 1996, management reviewed the undeveloped leases
acquired in the Target Leasing, Ltd. I acquisition for impairment. Due to
adverse economic conditions and the near term expiration of a significant number
of these leases, management concluded these assets had been impaired and
adjusted the purchase price allocation by $615,000 as prescribed by FAS 38.
In 1997, BR Energy issued an additional 32,000 shares of Series A
Preferred Stock at a cash price of $3.00 per share. The Series A Preferred Stock
bore a 12% annual dividend and each share was converted into one (1) share of BR
Energy Common Stock. In total, 297,746 shares of Series A Preferred Stock were
issued by BR Energy.
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 BR Energy Series B Preferred Stock
at $3.00 per share. As of December 31, 1998, 95,500 shares of Series B Preferred
Stock had been issued under this arrangement.
C. ADVANCES FROM/TO RELATED PARTIES
During 1997, the Company purchased for $250,000 the J.W. Harris 1 C 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 was recorded
in Advances to Affiliates at December 31, 1997, and was paid in full in March of
1998.
During 1998, the Company agreed to participate with BR Group in the
acquisition and development of oil and gas properties in the Appalachian Basin
of Kentucky. The Company advanced $1,300,000, bearing interest at 12% per annum,
to BR Group related to these acquisitions.
During the years ended 1998 and 1999, the Company earned interest income
under this arrangement of $73,400 and $27,153, respectively. During 1999, BR
Group reduced this obligation through the sale of a drilling rig and ancillary
equipment to the Company and performance of services in the drilling and
completion of various oil and gas wells under the terms of turnkey drilling
contracts. As of December 31, 1999, the balance had been reduced to $627,304. BR
Group reduced this obligation to $ -0- in 2000 through the performance of
additional services under the terms of turnkey drilling contracts and cash
payments.
F-12
<PAGE> 35
NOTES TO FINANCIAL STATEMENTS
D. MANAGEMENT FEE ARRANGEMENTS
BR Group provides various management, administrative, accounting and
geological services for the Company at a rate of $20,000 per month which has
been determined on a proportional basis because specific identification of
expenses is not practical. Management believes that this cost allocation method
of expenses is reasonable. Management of BR Energy is of the opinion that this
management fee represents the fair market value of the services rendered. BR
Energy also reimburses BR Group for marketing costs paid on its behalf which
amounted to $176,540 in 1999. As of December 31, 1999 and 1998, approximately $0
was due and payable to BR Group under this arrangement.
E. TURNKEY DRILLING CONTRACTS
The Company enters into turnkey drilling contracts to drill the oil and
gas wells for its privately sponsored oil and gas partnerships.
The Company also enters into turnkey drilling contracts with BR Group
to contract out the drilling and completion operations of all of its oil and gas
wells. Both the Company and BR Group anticipate making a profit under these
turnkey drilling contracts. During 1999, 1998 and 1997, BR Energy paid BR Group
$3,616,100, $1,428,382 and $2,227,560 for these turnkey drilling and completion
services. See Footnote 2 for additional disclosure.
F. PURCHASE OF DRILLING EQUIPMENT FROM BR GROUP
In March 1999, BR Energy purchased ancillary equipment to be used in
association with drilling rig #4 from BR Group at a price of $415,000.
In April 1999, BR Energy purchased drilling rig #2 with associated
ancillary equipment from BR Group at a price of $750,000.
G. MANAGEMENT OF DRILLING RIGS
The Company contracts with BR Group to manage and operate the two
drilling rigs it owns. BR Group also manages two other rigs owned by other
affiliates of BR Group. BR Group collects all drilling revenues and pays all
expenses related to the drilling operations and accounts to BR Energy on a
periodic basis for the net profits from operations for the two rigs owned by BR
Energy. The Company reported revenues of $792,439 and costs of $709,308 from the
operation of the drilling rigs for the year ended December 31, 1999.
H. OTHER PROPERTY ACQUISITIONS
The Company acquired certain oil and gas properties from its privately
sponsored oil and gas partnerships more fully described in footnote 6, Property
Acquisitions.
F-13
<PAGE> 36
NOTES TO FINANCIAL STATEMENTS
I. FEES TO BROKER DEALER
The Company has an affiliated broker dealer, Ridgemont Securities, Inc., that
raises the majority of its funds through private placement offerings for oil and
gas wells and the issuance of preferred stock. The fees and expenses paid to
Ridgemont Securities, Inc. by BR Energy and the oil and gas partnerships during
1999 and 1998 are as follows:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Commissions $ 1,088,138 $ 546,713
Due Diligence Fees 43,493 49,938
Promotion Services 200,000 --
Reimbursed Expenses 80,780 101,511
----------- -----------
Total $ 1,412,411 $ 698,162
=========== ===========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consisted of the following at December
31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Proved Oil and Gas Properties $ 1,208,175 $ 555,899
Drilling Rigs and Related Equipment 2,105,774 --
Furniture and Fixtures 364 364
----------- -----------
3,314,313 556,263
Less Accumulated Depreciation and Amortization (135,707) (16,195)
----------- -----------
$ 3,178,606 $ 540,068
=========== ===========
</TABLE>
Depreciation, depletion and amortization expense was $117,695, $17,978
and $118 during the years ended 1999, 1998 and 1997, respectively.
During 1996, the Company acquired approximately certain non-producing
leasehold interests from Target Leasing, Ltd. I in exchange for preferred stock.
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 loss of $77,405
each year for these leases. As of December 31, 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 bankruptcy, the Company was 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 in this project, or $126,000 during 1997.
The Company has had no further involvement or operations related to the
Brookshire #1 well.
During 1998, the Company evaluated its investment of $392,380 in the
Home Stake #1 re-entry well. The estimated undiscounted future cash flows from
the Home Stake #1 well were estimated to be $186,426 as of December 31, 1998.
This estimated cash flow was calculated using the expected price disclosed in
note 1 and utilizing revised projected reserve data. Such reserve data was based
primarily on the consulting petroleum engineers December 31, 1998 reserve
estimate, revised for actual production data obtained in late 1998 and early
1999. The expected future cash flow was discounted at 10% to arrive at a fair
value of the property of $142,892. The excess of the carrying value of the asset
over the fair value of the property was recorded as an impairment loss in 1998
of $250,000.
The Company has pledged one of its drilling rigs and related equipment
as collateral on the long term debt disclosed in Note 7.
F-14
<PAGE> 37
NOTES TO FINANCIAL STATEMENTS
6. PROPERTY ACQUISITIONS
During 1999, the Company made the following property acquisitions from
partnerships they have previously syndicated:
A. In 1999, the Company acquired a 100% working interest in the Keegan
Gibson #1 oil well in Smith County, Texas in exchange for issuing warrants to
purchase 335,728 shares of BREY Common stock at $3.00 per share. The warrants
are exercisable during the period March 27, 2000 and March 27, 2005. This
property acquisition was recorded at the Company's cost basis in the partnership
including accounts receivable, which management believes approximates the fair
market value of the property. No basis was attributed to the warrants issued.
B. The Company acquired in 1999, a 100.0% working interest in two gas
wells in Sherman County, Texas in exchange for warrants to purchase 521,208
shares of BREY Common stock at $3.00 per share (See Note 10). The transaction
was recorded at the Company's cost basis in the partnership which approximates
its fair value. The Company did not allocate any cost basis to the Common stock
warrants.
C. During November, 1999, the Company acquired a 30% working interest in
nine gas wells in Harlan County, Kentucky, owned by two of its oil and gas
partnerships in exchange for BR Energy's 53.4% working interest in a gas well in
Wharton County, Texas, BR Energy's 12.5% working interest in five development
wells in Mingo and Wyoming Counties of West Virginia, and 968,300 warrants to
purchase BREY Common stock at $3.00 per share (See Note 10). The transaction was
recorded, in accordance with FASB 123, at the estimated fair value of the assets
received being $338,400, as this was considered a more reliable measurement.
D. During 1999, the Company acquired two Ingersoll Rand drilling rigs
and ancillary equipment. These drilling rigs and equipment were purchased
through the reduction of advances to Blue Ridge Group by $1,190,000 and the
issuance of long-term debt for $614,484, The remainder of the purchase price,
$301,290, was paid in cash.
7. LONG-TERM DEBT
During April 1999, the Company purchased a drilling rig and related
equipment with a cash down payment of $245,000 and the balance of $614,484
financed over five years. The terms of the financing agreements requires monthly
payments of $12,631 at interest rates ranging from 7.7% to 8.75%. The aggregate
amount of required payments over the next five years as of December 31, 1999 are
as follows:
2000 $151,572
2001 151,572
2002 151,572
2003 151,572
2004 50,524
--------
656,812
Less-amount representing interest 128,070
--------
Principal balance at December 31, 1999 $528,742
========
These obligations are secured by a drilling rig and related equipment
costing $656,486 and $230,150, respectively (See Note 5).
F-15
<PAGE> 38
NOTES TO FINANCIAL STATEMENTS
8. INCOME TAXES
The Company has 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>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Expected Tax Provision (Benefit) $ 85,907 $ 28,575 $ (50,241)
Effect of Progressive Tax Rates -- (3,813) 9,107
--------- --------- ---------
Tax Provision (Benefit) $ 85,907 $ 24,762 $ (41,134)
========= ========= =========
</TABLE>
The tax effect of significant temporary differences representing the net
deferred tax liability at December 31, were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Net Operating Loss Carry Forward $ (12,000) $ (35,442) $ (48,681)
Intangible Drilling Costs 162,139 99,674 88,888
--------- --------- ---------
Net Deferred Tax Liability $ 150,139 $ 64,232 $ 42,207
========= ========= =========
</TABLE>
Income Tax Expense (Benefit) consists of the following components:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Currently Payable (Refundable):
Federal Income Tax $ -- $ -- $ (31,124)
State Income Tax 3,000 737 (7,377)
--------- --------- ---------
3,000 737 (38,501)
Deferred Provision (Credit) 82,907 24,025 (2,633)
--------- --------- ---------
Total Tax Expense (Benefit) $ 85,907 $ 24,762 $ (41,134)
========= ========= =========
</TABLE>
At December 31, 1999, the Company had a net operating loss carry forward
of approximately $35,000 to offset future taxable income. This net operating
loss carry forward will expire in 2019 unless utilized sooner. During 1998, the
Company filed a refund claim with the IRS to carry back a portion of its 1997
net operating loss ($122,000). Accordingly, the Company recorded a tax refund of
$31,124 in the 1997 financial statements.
9. COMMITMENTS AND CONTINGENCIES
COMMITMENTS
The Company has agreed to automatically convert all shares of preferred
stock outstanding effective when a Securities Act Registration Statement for the
Company's common stock is filed with the SEC, or June 30, 2000, whichever comes
first.
F-16
<PAGE> 39
NOTES TO FINANCIAL STATEMENTS
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 $5 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, 1999, the Company had no significant customers or
suppliers, other than Blue Ridge Group, which could 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.
10. 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, 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 AND WARRANTS
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,
Incorporated 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 warrants to purchase an additional 2,000,000 shares of
restricted common stock at $0.05 per share. The effective term of these warrants
is from June 30, 1996 through June 30, 2001. 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. The effective term of
these warrants is from March 31, 1998 through March 31, 2003.
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 of stock to investors in one of its partnerships.
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,
F-17
<PAGE> 40
NOTES TO FINANCIAL STATEMENTS
Blue Ridge Group, Inc. distributed 890,427 of these shares to investors in
several of its partnerships.
A table at the end of this footnote discloses additional warrants issued
and to be issued as of December 31, 1999.
SERIES A PREFERRED STOCK
During May 1996, the Company authorized the issuance and sale of 300,000
shares of Series A Preferred Stock ("BRE Series A Preferred 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
Securities Act 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, existing 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 was $189,190. As of December 31, 1999 and 1998 all of the Series A
Stock had been converted into Common stock.
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 Securities
Act 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, existing 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, 1999, 1998 and 1997 there were -0-, 27,158 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 400,000
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 Securities
Act 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, existing 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
F-18
<PAGE> 41
NOTES TO FINANCIAL STATEMENTS
plus all unpaid dividends on such share of each share of Series C Stock then
held by the shareholder.
At December 31, 1999, 1998 and 1997, there were -0-, 169,450 and 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. Each share of the Series D Stock shall be converted
automatically into one (1) share of Common Stock effective when a Securities Act
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, existing 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, 1999 and 1998, there were 636,950 and 267,700 shares of
Series D Stock issued and outstanding, respectively. The total amount received
from the sale of this stock was $3,184,750, less expenses paid of $777,759.
A summary of the common and preferred stock account at December 31, 1999
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 5,809,794 $ 0.005 $ 29,049 $ 1,801,744
Preferred
Series D 1,000,000 636,950 $ 0.001 637 2,406,991
</TABLE>
Warrants issued and to be issued December 31, 1999:
<TABLE>
<CAPTION>
Title of Aggregate Amount Date from Price at Exchange of
Issue of of Securities called Which Warrants Which Warrants Partnership
Securities for by Warrants are Exercisable are Exercisable Interest and terms
---------- --------------- --------------- --------------- ------------------
Warrants Issued (1)
-------------------
<S> <C> <C> <C> <C>
Series D Preferred 267,700 May 31, 1998 $1.00 for 1 share Issued in conjunction
Stock Warrants Warrants through of BREY with Series D
May 31, 2003 Common Stock Preferred Stock
Series D2 Preferred 369,250 June 8, 2000 $1.00 for 1 share Issued in conjunction
Stock Warrants Warrants through of BREY with Series D2
May 31, 2004 Common Stock Preferred Stock
Series E 632,133 January 1, 2000 $3.00 for 1 share Issued in connection
Stock Warrants Warrants through of BREY with sale of units in
January 1, 2004 Common Stock 1998 Year End
Drilling Program
</TABLE>
F-19
<PAGE> 42
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Warrants to be Issued (2)
-------------------------
<S> <C> <C> <C> <C>
Series F 335,728 March 27, 2000 $3.00 for 1 share Issued in connection
Stock Warrants Warrants through of BREY exchange of proved
March 27, 2005 Common Stock properties from Paluxy
Series F 521,208 March 27, 2000 $3.00 for 1 share Issued in connection
Stock Warrants Warrants through of BREY exchange of proved
March 27, 2005 Common Stock properties from
Sherman Moore Part
Series G 438,262 November, 2000 $3.00 for 1 share Issued in connection
Stock Warrants Warrants through of BREY with sale of units in
October, 2002 Common Stock B. U. Ranch #1 Partner
Series G 600,000 November, 2000 $3.00 for 1 share Issued in connection
Stock Warrants Warrants through of BREY exchange of proved
October, 2002 Common Stock properties from
Cumberland Gap 10
Series G 368,300 November, 2000 $3.00 for 1 share Issued in connection
Stock Warrants Warrants through of BREY exchange of proved
October, 2002 Common Stock properties from
Harlan County Partner
Series G 82,500 November, 2000 $3.00 for 1 share Issued in connection
Stock Warrants Warrants through of BREY with the sale of units
October, 2002 Common Stock in Mid South Partner
<FN>
Notes: (1) These Warrants have not been registered with the SEC and accordingly, are restricted as to sale
under Rule 144.
(2) As of December 31, 1999, BREY had committed to issue common stock warrants to the above listed partnerships.
</TABLE>
11. SUBSEQUENT EVENTS
During the first quarter of 2000, Blue Ridge Group, Inc. reduced the
balance on its line of credit with the Company from approximately $600,000 to
approximately $0.00. This was accomplished through: (1) cash payments and (2)
services performed in the drilling and completion of several wells in the
Appalachian Basin for the Company.
12. SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING PROPERTIES
(UNAUDITED)
Costs incurred in oil and gas acquisition, exploration and development
activities:
<TABLE>
<CAPTION>
(UNAUDITED)
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Acquisition of properties
-Proved $629,052 $ -- $175,000
-Unproved -- 75,000 --
Exploration costs -- -- --
Development costs 294,260 225,350 374,507
Company's share of equity method investees of
property acquisition exploration and development 57,970 192,350 --
-------- -------- --------
$981,282 $492,700 $549,507
======== ======== ========
</TABLE>
F-20
<PAGE> 43
NOTES TO FINANCIAL STATEMENTS
Results of Operations for Oil and Gas Producing Activities for the Years ended
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(UNAUDITED)
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Oil and gas sales $ 60,226 $ 27,501 $ 28,277
Gain on sale of oil and gas leases -- 75,000 --
Production costs (17,741) (27,225) (16,578)
Exploration expenses (142,571) (16,817) (10,464)
Depreciation, depletion, and amortization
and valuation provision (9,272) (343,405) (203,531)
--------- --------- ---------
(109,358) (284,946) (202,296)
Income tax credit 37,182 96,882 68,780
--------- --------- ---------
Results of operations for oil and gas
producing activities (excluding
corporate overhead and financing cost) $ (72,176) $(188,064) $(133,516)
========= ========= =========
</TABLE>
RESERVE QUANTITIES (UNAUDITED)
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. All of the Company's reserves
are located in the United States.
Proved reserves are estimated reserves of crude oil (including
condensate and natural gas liquids) and natural gas that geological and
engineering data demonstrate with reasonable certainty to be recoverable in
future years from known reservoirs under existing economic and operating
conditions. Proved developed reserves are those expected to be recovered through
existing wells, equipment, and operating methods.
<TABLE>
<CAPTION>
Oil (BBLS) Gas (MCF)
<S> <C> <C>
Reserves-December 31, 1997 2,236 --
Purchases of minerals in place 13,452 10,850
Extensions 20,989 22,000
Production (1,718) (2,000)
-------- --------
Reserves-December 31, 1998 34,959 30,850
Revisions (14,397) (12,850)
Purchase of minerals in place 3,564 70,252
Extensions -- 734,840
Production (2,552) (4,115)
-------- --------
Reserves-December 31, 1999 21,574 818,977
======== ========
Proved Developed Reserves
December 31, 1997 2,236 --
-------- --------
December 31, 1998 34,959 30,850
-------- --------
December 31, 1999 21,574 818,977
-------- --------
</TABLE>
F-21
<PAGE> 44
NOTES TO FINANCIAL STATEMENTS
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
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>
December 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
Future cash inflows $ 3,068,912 $ 414,648
Future development costs (130,663) --
Future production costs (1,136,182) (122,981)
Future income taxes (391,162) (8,419)
----------- -----------
Future net cash flows 1,410,905 283,248
10% annual discount for estimated timing of cash flow (704,030) (102,836)
----------- -----------
Standardized measure of discounted future net cash flows $ 706,875 $ 180,412
=========== ===========
Changes in Standardized Measure of Discounted
Future Net Cash Flows:
Standardized measure of discounted future net
cash flows (beginning) $ 180,412 $ 18,138
Sales of oil and gas, net of production costs (42,485) (276)
Net changes in price and production costs 202,716 (26,832)
Revisions of previous quantity estimates (89,388) (1,546)
Change in future income taxes (382,743) (4,548)
Accretion of discount (601,194) (96,349)
Extensions and discoveries less related costs 1,271,096 180,157
Purchases and extensions of reserves in place 163,461 111,668
----------- -----------
Standardized measure of discounted future net
cash flows (ending) $ 706,875 $ 180,412
=========== ===========
</TABLE>
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of prices changed
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses (based on year-end statutory
tax rates, with consideration of future tax rates already legislated) to be
incurred on pretax net cash flows less tax basis of the properties and available
credits, and assuming continuation of existing economic conditions. The
estimated future net cash flows are then discounted using a rate of 10 percent a
year to reflect the estimated timing of the future cash flows.
13. FINANCIAL INFORMATION RELATING TO INDUSTRY SEGMENTS
The Company's operating activities can be divided into three major segments:
turnkey drilling services for Company sponsored partnerships, contract drilling
services and the operation of oil and gas properties. The Company earns income
from drilling oil and gas wells for Company-sponsored drilling partnerships and
retains an interest in each well. The Company also engages in providing contract
drilling services for its limited partnerships and third parties. The Company
charges Company sponsored partnerships and other third parties competitive
industry rates for well operations and drilling services. Segment information
for the years ended December 31, 1999 and 1998 is as follows:
F-22
<PAGE> 45
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
SEGMENT REVENUES:
Turnkey Revenue and Related Partnership Fees $ 5,017,984 $ 2,060,189
Contract Drilling Services 792,439 --
Oil and Gas Sales 60,226 27,501
Unallocated Amounts (1) 27,153 82,181
----------- -----------
Total Revenues $ 5,897,802 $ 2,169,871
=========== ===========
(1) Interest income is not allocated in assessing segment performance.
SEGMENT INCOME / LOSS BEFORE INCOME TAXES:
Turnkey Income and Related Partnership Fees $ 583,144 $ 160,997
Contract Drilling Services (25,239) --
Oil and Gas Production 33,160 (17,702)
Unallocated Amounts:
General and Administrative (353,860) (166,104)
Interest Income (Expense), net 1,669 82,181
Other -- 13,441
----------- -----------
Total Income (Loss) $ 238,874 $ 72,813
=========== ===========
SEGMENT ASSETS:
Turnkey Drilling Operations $ 1,049,665 $ 1,889,397
Contract Drilling Rig Operations 1,995,703 65,000
Oil and Gas Production Operations 1,182,903 540,068
Unallocated Amounts
Cash 131,465 480,952
Other -- 19,925
----------- -----------
Total Assets $ 4,359,736 $ 2,995,342
=========== ===========
EXPENDITURES FOR SEGMENT LONG-LIVED ASSETS
Turnkey Operations $ -- $ --
Contract Drilling Services 2,105,774 --
Oil and Gas Production Operations 744,992 492,700
----------- -----------
Total Expenditures $ 2,850,766 $ 492,700
=========== ===========
</TABLE>
F-23
