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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
AMENDMENT NUMBER 5 TO FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES ACT OF 1934
BLUE RIDGE ENERGY, INC
(Name of Small Business Issuer in Its Charter)
NEVADA 61-1306702
(State of Organization) (I.R.S. Employer Identification No.)
632 ADAMS STREET, SUITE 710, BOWLING GREEN, KY 42101 (270) 842-2421
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK PAR VALUE $.005 PER SHARE.
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TABLE OF CONTENTS
FORM 10-SB
BLUE RIDGE ENERGY, INC.
PART I
Item 1. Business 3
Item 2. Management's Discussion and Financial Analysis 9
Item 3. Properties 16
Item 4. Securities Ownership of Certain Beneficial Owners and 20
Management
Item 5. Directors, Executive Officers, Promoters and Control Persons 21
Item 6. Executive Compensation 23
Item 7. Certain Relationships and Related Transactions 23
Item 8. Description of Securities 26
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and Other Shareholder Matters 29
Item 2. Legal Proceedings 30
Item 3. Changes in and Disagreements with Accountants 30
Item 4. Recent Sales of Unregistered Securities 31
Item 5. Indemnification of Directors and Officers 35
PART F/S
Index to Financial Statements: 36
Audited Financial Statements--December 31, 1999 and 1998 F-1
Unaudited Condensed Financial Statements-June 30, 2000 F-26
PART III
Index to Exhibits 37
OTHER
Signatures 38
PART I
ITEM 1. DESCRIPTION OF BUSINESS
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BUSINESS DEVELOPMENT
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's majority stockholder is Blue Ridge Group, Inc. ("BR
Group"). BR Group owns approximately 53.9% the Common Stock of BR Energy as of
July 31, 2000.
During March 1996, BR Group, acquired a majority of the common stock of
BR Energy with the intent to develop it as an oil and gas exploration and
development company. In May 1996, (1) a new Board of Directors and Executive
Officers were elected, (2) the name of the company was changed from Gem Source,
Incorporated to Blue Ridge Energy, Inc., and (3) the capitalization of BR Energy
was restructured. The restructuring included a 1 for 5 reverse stock split of BR
Energy's Common Stock effective May 6, 1996, which reduced the total number
shares of common stock issued and outstanding to 526,000 shares. Additionally,
5,000,000 shares of BR Energy preferred stock were authorized at that time.
Also, in 1996, after the 1 for 5 reverse split, BR Group loaned BR Energy
$126,000 and BR Group purchased an additional 1,000,000 shares of BR Energy
Common Stock for $50,000 ($0.05 per share) bringing BR Group's total ownership
of BR Energy at December 31, 1996 to 1,200,000 shares out of a total of
1,526,600 shares. The $126,000 loan was repaid in March, 1997.
BR Energy has continued to increase its equity from 1996 through 1999
with a series of four preferred stock private placements described in detail in
Item 8, Description of Securities.
BUSINESS OF THE ISSUER
BUSINESS ACTIVITIES
-------------------
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, 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. 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 several private offerings of BR
Energy preferred stock.
The sponsored oil and gas drilling partnerships are governed by limited
partnership agreements which include provisions regarding capital contributions,
allocation of profits and losses, distributions to the partners, and management
of the partnership by BR Energy. Partners may be assessed for additional capital
requirements of the partnership by BR Energy. Partners failing to contribute
their pro rata share of
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the additional capital are subject to a 300% penalty of the amount which the
partner failed to contribute. Such penalty may be offset against any
distributions otherwise due such partner. Limited partners are not subject to
liability beyond their initial capital contributions but failure to contribute
may subject them to the 300% penalty. Additional General Partners are subject to
the debts and liabilities of the partnership, but if any Additional General
Partner is held liable for any loss or liability of the partnership, such party
shall be indemnified by the other partners to the extent of their respective
interests in the partnership. All of the limited partnership agreements are
substantially similar in content to the Home Stake Limited Partnership Agreement
which is attached hereto as Exhibit 10:39.
The turnkey drilling contracts entered into by BR Energy with the
sponsored oil and gas drilling partnerships cover the drilling, completing and
equipping of the partnership wells. The material provisions of the turnkey
drilling contracts include the identification of the specific wells to be
drilled, the turnkey price, the depth of the wells to be drilled, the time of
payment, the plan for completion of the well, the responsibility of BR Energy
for a sound drilling location, and the right of the partnership to direct the
stoppage of drilling at any time prior to reaching the contract total depth to
be drilled. No turnkey drilling contracts have been terminated. All contracts
have been either completed or are in the process of completion.
During 1999 and 1998, BR Energy had no significant customers or
suppliers, other than its major stockholder, BR Group. BR Energy contracts with
BR Group to provide turnkey drilling services, management, administrative,
accounting and geological services.
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.
OIL AND GAS DRILLING PARTNERSHIPS & WELLS DRILLED:
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As of October 31, 2000 BR Energy had sponsored and participated in the
private placement of twelve (12) Limited Partnerships and one (1) General
Partnership for total subscriptions of $15,020,000. Through these Partnerships
BR Energy participated in the drilling of thirty-nine (39) wells. In addition to
the wells associated with sponsored drilling partnerships, BR Energy has also
participated with direct working interest in twelve (12) additional wells.
In total, BR Energy has participated in the drilling of fifty-one (51)
wells and the current results are as follows:
# OF WELLS DESCRIPTION:
---------- ------------
7 Wells in Progress
2 Oil Wells - Producing
27 Gas Wells - Producing or capable
of producing
10 Wells that have produced in the past but
are now plugged and abandoned
5 Dry Holes
--
51 Total Wells
==
Properties are considered proved if proven reserves can be assigned to
the property. Proved oil and gas reserves are the estimated quantities of crude
oil, natural gas, and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty can be recovered in future years from
known reservoirs under existing economic and operating conditions. Reservoirs
are considered to contain proved reserves if the reserves can be produced
economically and such economic production is supported by either actual
production or a conclusive formation test. Proved developed reserves are
reserves that can be
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expected to be recovered through existing wells with existing equipment and
operating methods. Proved undeveloped reserves are reserves that are expected to
be recovered from new wells on undrilled acreage or from existing wells where a
relative major expenditure is required for recompletion.
Proved properties are evaluated annually for possible impairment.
Impairment is evaluated by comparing the estimated future cash flows of proved
reserves to the cost basis of the proved oil and gas properties on a field by
field basis. If the sum of the expected future cash flows (undiscounted) is less
than the carrying amount of the asset, an impairment loss is recognized.
BR Energy uses the following assumptions regarding changing production
levels and prices to evaluate the estimated future cash flows from proved
properties. Initial production rates are based on the current rates for those
reservoirs now on production. If a decline trend was established, this trend is
used as the basis for estimating future rates. The oil and gas prices used in
calculating the expected future cash flows of the Company's proved reserves for
purposes of the impairment test calculations are based upon the expected future
prices described in Note 1 to the accompanying financial statements.
During 1998, BR Energy drilled the Home Stake #1 well in Lea County,
New Mexico. BR Energy owns a 66.9% working interest in this well. This property
accounts for approximately 19% of BR Energy's proved developed reserves as of
December 31, 1999. During 1998 the Company evaluated its investment of $392,380
in the Home Stake #1 well. The estimated undiscounted future cash flows using
expected prices from the Home Stake #1 well were estimated to be $234,634 as of
December 31, 1998. This estimated cash flow was calculated using the expected
prices 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.
BR Energy has directly participated in the acquisition and development
of undeveloped oil and gas leases over the past three years. BR Energy acquired
approximately 35,000 acres of undeveloped leasehold interests in 1996 from
Target. These leases had an average term of two to three years. Because of the
significant decline in oil prices by early 1998, it was not economically
feasible to develop the leases. The prices continued to be depressed even into
1999 and the leases eventually expired. Because of the depressed oil prices BR
Energy evaluated these interests held and recorded an impairment loss of $77,405
in 1997 and $77,405 in 1998. As of December 31, 1998, December 31, 1999 and June
30, 2000. BR Energy had no cost basis in undeveloped oil and gas leases.
PURCHASE OF DRILLING RIGS AND DRILLING ACTIVITIES
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During the first half of 1999, BR Energy expanded its activities with
the purchase of two Ingersoll Rand drilling rigs and ancillary equipment for
approximately $2,100,000. Approximately 50% of these rig and equipment purchases
were from BR Group. These purchases were funded by proceeds from BR Energy's
Series D Preferred Stock offering and approximately $600,000 in long-term debt
to an unaffiliated entity. These rigs are operated and managed by Blue Ridge
Group. They are used to drill wells funded by Blue Ridge Energy's private
partnerships and also for the contract drilling of wells for non-affiliated
entities.
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COMPETITION, MARKETS AND REGULATIONS
COMPETITION:
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The oil and gas industry is highly competitive in all its phases. BR
Energy encounters strong competition from other independent oil and gas
producers. Many of its competitors possess substantially greater financial
resources, which they can use to acquire economically desirable oil and gas
properties. BR Energy does not consider itself a significant factor in the
domestic oil and gas industry nor in that segment of the oil and gas industry
located in Kentucky, Texas, New Mexico or West Virginia.
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.
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.
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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 states 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 release 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 other 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.
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
unbundled 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.
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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 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 one employee, BR Energy's President and CEO, Mr. Edward
L. Stillie. 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 and
October 31, 2000, BR Group had approximately sixty (60) and seventy five (75)
employees, respectively, 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
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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 and 1999, 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. Additionally, the Board of
Directors will determine on an annual basis, if any of the executive officers of
BR Energy are eligible for a performance bonus. During 1998, Robert D. Burr was
paid a performance bonus of $25,000. No bonuses were paid in 1999.
ITEM 2. 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
two year period ended December 31, 1999 and 1998 and for the six month periods
ended June 30, 2000 and 1999. The Financial Statements and the notes thereto
which follow contain detailed information that should be referred to in
conjunction with the following discussion.
FINANCIAL OVERVIEW:
-------------------
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 fifty-one (51) wells and owns two (2) 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 the drilling of oil and gas
wells funded by the 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.
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INCOME STATEMENT REVIEW FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998:
-----------------------------------------------------------------------
Net income was $153,000 in 1999 compared to $48,000 in 1998. 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.
OPERATING REVENUES
Operating revenues totaled $5,700,000 in 1999; a 185% increase from the
$2,000,000 in 1998. Turnkey drilling contract sales included in operating
revenues were $4,634,000 in 1999 as compared to $1,743,000 in 1998. Oil and gas
sales included in operating revenues were $60,226 for 1999 as compared to
$27,501 for 1998. 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 $245,000 in 1999 as compared to $212,000 for 1998. BR Energy
also acquired two (2) drilling rigs in 1999 which generated revenues of $792,000
for 1999 versus no such revenues in 1998.
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. 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 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 from
1997.
DIRECT OPERATING COSTS
Direct operating costs totaled $4,300,000 in 1999, a 187% increase from
the total of $1,500,000 in 1998. Direct operating costs are the turnkey drilling
costs for the drilling, completion, and equipping of oil and gas wells. The
increase in these costs for 1999 are a result of increased drilling activity,
lease operating expenses and the addition of $709,000 in drilling rig operation
costs. 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 turnkey drilling costs.
OTHER OPERATING EXPENSES
Other operating expenses increased 96.9% to $1,170,000 in 1999 from
$577,000 in 1998 primarily due to the increased marketing costs of BR Energy's
Limited Partnerships. Depreciation, depletion and amortization continued
increasing to $117,695 in 1999 from $17,978 in 1998. These increases are
primarily related to the purchase of drilling rigs and oilfield service
equipment in 1999.
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
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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 majority of the balance of general and administrative expenses
represented legal and accounting fees of $150,058 in 1999 and $57,005 in 1998.
The increase in professional fees was due to additional reporting requirement 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.
INCOME TAXES
BR Energy provided for Federal and state income tax expense of $86,000
and $25,000 in 1999 and 1998, respectively. These provisions represent effective
tax rates of 35% in each of those years. In 1999 and 1998, BR Energy had tax
deductions for intangible drilling costs resulting in tax deductions of $162,000
and $100,000, respectively. These tax deductions 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.
INCOME STATEMENT REVIEW FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999:
------------------------------------------------------------------------
The Company's net income decreased to $183,000 during the first half of
2000 as compared to $310,000 for the same period in 1999, Earnings per common
share, which take into account cash dividends paid on preferred stock decreased
to $(0.00) per share during the second quarter of 2000 as compared to $0.03
during the same period in 1999.
OPERATING REVENUES
Operating revenues totaled $2,500,000 during the six months ended June 30,
2000 as compared to the $3,400,000 recorded during the six months ended June 30,
1999. This decrease was primarily related to a decreased activity level in the
Company=s sponsorship of Limited Partnerships for the drilling and development
of oil and gas properties during 2000.
DIRECT OPERATING COSTS
Direct operating costs totaled $1,800,000 during the six months ended June
30, 2000, as compared to the $2,700,000 experienced during the same period in
1999. The changes in direct operating costs were primarily a result of the
decreased activity level in sponsoring Limited Partnerships previously
discussed.
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OTHER OPERATING EXPENSES
Marketing expenses decreased to $4,000 during the first half of 2000 from
the $181,000 experienced during this period in 1999 due to the decreased
activity in sponsoring Limited Partnerships previously discussed. General and
Administrative expenses increased 299% to $307,000 during the first half of 2000
as compared to $78,000 during the same period in 1999, primarily as a result of
Mr. Stillie's employment by the Company as well as legal and accounting fees
related to SEC reporting requirements and registration statements.
OTHER INCOME (EXPENSE)
Other Income (Expense) decreased 238% to $(22,000) in the first half of
2000 from $16,000 due to reductions in interest income as funds were utilized
for the purchase of two drilling rigs and development of oil and gas properties.
INCOME STATEMENT REVIEW FOR THE THREE MONTHS ENDED JUNE 30, 2000 AND 1999:
--------------------------------------------------------------------------
The Company's net income increased to $83,000 The Company's net income
increased to $83,000 during the second quarter of 2000 as compared to $78,000
for the same period in 1999. Earnings per common share, which take into account
cash dividends paid on preferred stock remained $(0.00) per share during the
second quarter of 2000 as compared to $(0.00) during the same period in 1999.
OPERATING REVENUES
Operating revenues totaled $1,200,000 during the three months ended
June 30, 2000 as compared to the $1,300,000 recorded during the three months
ended June 30, 1999, This decrease was primarily related to a decreased activity
level in the Company's sponsorship of Limited Partnerships for the drilling and
development of oil and gas properties during 2000.
DIRECT OPERATING COSTS
Direct operating costs totaled $851,000 during the three months ended
June 30, 2000, as compared to the $1,044,000 experienced during the same period
in 1999. The changes in direct operating costs were primarily a result of
increased efficiencies in the operation of the Company's drilling rigs and
decreased drilling activity from sponsored limited partnerships resulting in
lower operating costs.
OTHER OPERATING EXPENSES
Marketing expenses decreased to $4,000 during the second quarter of
2000 from the $56,000 experienced during this period in 1999 due to the
decreased activity in sponsoring Limited Partnerships previously discussed.
General and Administrative expenses increased 204% to $170,000 during the second
quarter of 2000 as compared to $56,000 during the same period in 1999, primarily
as a result of Mr. Stillie's employment by the Company as well as legal and
accounting fees related to SEC reporting requirements and registration
statements.
OTHER INCOME (EXPENSE)
Other Income (Expense) increased 63% to $(13,000) in the second quarter
of 2000 from
12
<PAGE> 13
$(8,000) due to reductions in interest income as funds were utilized for the
purchase of two drilling rigs and development of oil and gas properties
BALANCE SHEET REVIEW FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
-------------------------------------------------------------------
ASSETS:
BR Energy's current assets decreased 50% to $1,200,000 at the end of
1999 from $2,400,000 at the end of 1998. The decrease in 1999 was caused by the
purchase of oil and gas properties and drilling equipment. 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 $1,468,000 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 Ingersoll Rand TR-4 drilling rig and ancillary
equipment and (3) improved interest income from available funds. Such advances
were paid in full by June of 1999 and the balances at December 31, 1999
represent short term advances incurred in normal daily business as properties
are developed. BR Energy's property purchases were the primary cause of the 72%
decrease in cash to $131,000 and the increase in daily operations were the 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 $3,178,000 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 66% to $201,000 at year-end
1999 from $590,000 at the end of 1998 as a result of BR Energy's fulfilling its
turnkey drilling commitments during normal operations and the payment 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 the net deferred tax liability was $150,000 and $64,000
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
13
<PAGE> 14
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 33% to an accumulated deficit of $648,000 at December 31, 1999 from an
accumulated deficit of $488,000 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.
BALANCE SHEET REVIEW FOR THE SIX MONTHS ENDED JUNE 30, 2000:
------------------------------------------------------------
ASSETS:
BR Energy's current assets decreased 30% to $837,000 at June 30, 2000
as compared to $1,200,000 at December 31, 1999 primarily due to the utilization
of Advances to Affiliates in purchasing and developing oil and gas properties.
BR Energy's operations were the primary source of the fluctuations in accounts
receivable and in cash. Property and equipment increased 16% to $3,700,000 at
June 30, 2000 as compared to $3,200,000 at December 31, 1999 due to the purchase
and development of oil and gas properties as previously discussed.
LIABILITIES:
BR Energy's current liabilities increased 6% to $214,000at June 30,
2000 from $201,000 at December 31, 1999 as a result of normal fluctuations
caused by ongoing operations. BR Energy has reduced its long term debt 16% to
$445,000 at June 30, 2000 from $529,000 at December 31, 1999 as result of
fulfilling its normal payment obligations.
Effective January 1, 1996, BR Energy adopted provisions of the
Statement of Financial Accounting Standards No. 109 "Accounting for Income
Taxes" which requires the use of the "liability method" under which deferred tax
assets and liabilities are recognized for their estimated future tax
consequences. At June 30, 2000 and December 31, 1999 BR Energy had recognized
deferred income tax liabilities of $239,000 and $150,000, respectively as a
result of this methodology.
STOCKHOLDERS' EQUITY:
Total capital invested in BR Energy for Common and Preferred Stock
increased 6% to $3,800,000 at June 30, 2000 from $3,600,000 at December 31,
1999, primarily as a result of the sales of Series D Preferred Stock early in
the first quarter of 2000. Despite recording net income of $183,000, BR Energy's
retained earnings declined $18,000 to an accumulated deficit of $666,000 at June
30, 2000 from an accumulated deficit of $648,000 at December 31, 1999 as the
result of payment of approximately $200,000 of cash dividends to BR Energy's
Preferred Shareholders during the first half of 2000.
CAPITAL RESOURCES AND LIQUIDITY FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998:
-------------------------------------------------------------------------------
BR Energy's current ratio (current assets / current liabilities) was
5.82 to 1 as of December 31, 1999 and 4.05 to 1 as of December 31, 1998. Such
calculations include the accounts receivable
14
<PAGE> 15
from managed oil and gas drilling partnerships ($337,000 in 1999 and $316,000 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 the use
of cash and advances to affiliates in the acquisition of oil and gas properties
and drilling equipment.
BR Energy's primary source of cash in 1999 was derived from turnkey
profits related to privately sponsored oil and gas limited partnerships, the
sale of Preferred Stock, profits from drilling rig operations and the sale of
oil and gas. Without these sources of cash BR Energy would not have adequate
sources of cash for its operations. While BR Energy expects that its sources of
cash will not significantly change in 2000, it 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 securities,
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 privately sponsored oil and gas partnerships
and improved cash flows from operations.
As of December 31, 1999, BR Energy had sufficient cash to satisfy its
operating needs for a period of ninety (90) days or longer, considering the
funds previously advanced to Blue Ridge Group as of December 31, 1999 of
$627,304. BR Energy plans to continue funding its operating needs by sponsoring
3 to 5 oil and gas drilling programs a year.
CAPITAL RESOURCES AND LIQUIDITY FOR THE SIX MONTHS ENDED JUNE 30, 2000:
-----------------------------------------------------------------------
As a result of BR Energy's equity transactions and increased operating
functions, at June 30, 2000 the current ratio was 3.90 to 1, a decrease of 33%
from 5.82 to 1 at December 31, 1999. This change in the current ratio was
primarily due to the utilization of Advances to Affiliates in the acquisition
and development of oil and gas properties.
BR Energy's primary source of cash in 1999 and 2000 was derived from
turnkey profits related to privately sponsored oil and gas limited partnerships,
the sale of Preferred Stock, profits from drilling rig operations and the sale
of oil and gas. Without these sources of cash, BR Energy would not have adequate
sources of cash for its operations. While BR Energy expects that its sources of
cash will not significantly change for the remainder of 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.
As of June 30, 2000, BR Energy had sufficient cash to satisfy its operating
needs for a period of ninety (90) days or longer, considering the accounts
receivable from its managed limited partnerships. BR Energy plans to continue
funding its operating needs by sponsoring limited partnership oil and gas
drilling programs.
15
<PAGE> 16
ITEM 3. PROPERTIES
As of October 31, 2000, BR Energy has participated, either directly or
indirectly through its sponsored limited partnerships, in 51 wells, of which 29
are presently productive and 7 are in progress. These wells are located in
Kentucky, Texas, West Virginia and New Mexico. In 1999, BR Energy participated
in 20 wells: 18 wells in Kentucky and 2 wells in Texas; only one well was
commercially non-productive. During the first three quarters of 2000, BR Energy
participated in 15 wells: 8 wells in Kentucky, 6 wells in West Virginia and
1 well in Texas.
The following table summarizes BR Energy's reserves and gross and net
interests in oil and gas wells as of October 31, 2000. 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>
OCTOBER 31, 2000
--------------------------------------- DECEMBER 31, 1999
GROSS WELLS NET WELLS RESERVES
----------- ------------------- -------------------
GEOGRAPHIC AREA OIL GAS OIL GAS OIL GAS
----- ------ ----- ----- ------ -----
(BBLS) (MCF) (BBLS) (MCF) (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) 1.00 3.00 1.00 1.11 3,611 69,000
Kentucky 0.00 18.00 0.00 4.87 0 457,589
West Virginia (1) 0.00 6.00 0.00 0.43 0 0
---- ----- ---- ---- ------ -------
Totals 2.00 27.00 1.67 6.41 21,574 544,589
==== ===== ==== ==== ====== =======
</TABLE>
(1) The 6 West Virginia wells and 1 Texas well were determined to be
productive in 2000. No reserves will be assigned to these wells until the annual
reserve evaluation at December 31, 2000 is completed.
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 materially interfere with their use.
The following are the primary properties held by BR Energy as of
October 31, 2000:
Lawrence County, Kentucky: During the second quarter of 2000, BR Energy
committed to the acquisition and development of undeveloped and non-producing
oil and gas leases consisting of a 50% Working Interest in 11 wells to be
drilled in the Boon's Camp Prospect and a 50% Working Interest in 11 wells to be
drilled in the Contrary Creek Prospect in Lawrence County, Kentucky. Drilling in
the Boon's Camp Prospect will begin during the third quarter of 2000 and
drilling of the Contrary Creek Prospect is scheduled to begin during the fourth
quarter of 2000.
Logan County, West Virginia: During the second quarter of 2000, BR
Energy committed to the acquisition and development of undeveloped and
non-producing oil and gas leases consisting of a 50% Working Interest in 5 wells
to be drilled in the McDonald Prospect in Logan County, West Virginia. Drilling
in this prospect is scheduled to begin during the fourth quarter of 2000.
16
<PAGE> 17
Tyler County, Texas: During the second quarter of 2000, BR Energy
committed to the acquisition and development of undeveloped and non-producing
oil and gas leases consisting of a 40% Working Interest in 2 wells to be drilled
in the West Pebble Island Prospect in Tyler County, Texas. Drilling in this
prospect is scheduled to begin during the fourth quarter of 2000.
SHELBY COUNTY, TEXAS: At the end of 1999, BR Energy acquired an
interest in one (1) development well in Shelby County, Texas which was drilled
and completed and began production during the third quarter of 2000.
MINGO AND WYOMING COUNTIES, WEST VIRGINIA: At the end of 1999, BR
Energy acquired an interest in five (5) development wells in Mingo and Wyoming
Counties, West Virginia. Drilling activities on this program began in December,
1999. During the first quarter of 2000, BR Energy acquired an interest in a
sixth well and has commenced drilling activities on all of the six wells. All
of the wells have been drilled, completed and are presently producing gas.
MACK PIERCE #1: During 1999, BR Energy acquired an interest in the Mack
Pierce #1 well in Wharton County, Texas and began drilling in December, 1999.
This well was determined commercially productive and completed in the second
quarter of 2000. Initial production was 411MCFG/D but water broke 4 days later.
A recompletion attempt has failed and management decided to plug and abandon
the well in October, 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 year end reserve
valuations.
HARLAN / BIG SANDY PROSPECTS: Since December 31, 1998, BR Energy has
embarked on an Appalachian Basin development well drilling program in Bell, Knox
and Harlan counties of Kentucky. As of June 30, 2000, eighteen (18) wells have
been drilled. Of the eighteen (18), ten (10) are currently in production and
selling gas, three (3) wells are currently shut-in, four (4) wells are ready to
perforate and (1) well was a dry hole. These wells account for 68% 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 10.5% to 30.25% of the working
Interest with Net Revenue Interests ranging from 7.875% to 22.69% in each well.
HOME STAKE #1: The Home Stake #1 oil well is a development well located
in Lea County, New Mexico and accounts for 19% of the total value of BR Energy's
reserves as of December 31, 1999. BR Energy owns 66.9% of the Working Interest
in the Home Stake #1 which is a 50.2% Net Revenue Interest.
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: The Amend #1 well is a development well located in Sherman
County, Texas and accounts 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 this well.
17
<PAGE> 18
DRILLING RIGS: During 1999, BR Energy acquired two drilling rigs and
ancillary equipment. Rig #4 is a 1999 Ingersoll Rand RD-20 which is capable of
drilling 5,000 feet and Rig #2 which is an Ingersoll Rand TR-4 acquired from BR
Group is capable of drilling 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 no believe any of these burdens materially detract from the
value of the properties or materially interfere with their use.
PRODUCTION & SALES PRICES:
--------------------------
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.
NET PRODUCTION NET PRODUCTION
FOR THE YEAR FOR THE YEAR
12/31/99 12/31/98
-------------------- -------------------
Net Volumes (Equivalent Barrel) 3,238 2,051
Average Sales Price per
Equivalent Barrel $18.60 $13.41
Average Production Cost
per Equivalent Barrel
(includes production taxes) $ 5.48 $13.27
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 $13.27 included significant work over
costs (pulling units and pump repairs) related to the Blue Ridge Energy
Production Fund Wells. These wells were abandoned in 1999 and no further
production costs were incurred related to these 8 wells. Whereas, in 1999,
the nine wells were abandoned and the Company drilled eighteen new wells in
Kentucky with a much lower operating cost/equivalent barrel which reduced the
average production costs/equivalent barrel, in 1999, to $5.48.
18
<PAGE> 19
NET PROVED OIL AND GAS RESERVES:
--------------------------------
Presented below are the estimates of BR Energy's proved reserves as of
December 31, 1999 and 1998. All of BR Energy's proved reserves are located in
the United States.
DECEMBER 31, 1999 DECEMBER 31, 1998
NATURAL NATURAL
OIL GAS OIL GAS
-------- ------- ------- -------
(BBLS) (MCF) (BBLS) (MCF)
Proved developed reserves:
Balance at beginning of year 34,959 30,850 2,236 0
Extensions, discoveries
and other additions -- 303,843 20,989 22,000
Revisions of previous estimates (14,397) (12,850) -- --
Purchases of minerals in place 3,564 226,861 13,452 10,850
Production (2,552) (4,115) (1,718) (2,000)
-------- -------- -------- --------
Balance at end of year 21,574 544,589 34,959 30,850
======== ======== ======== ========
BBLS - Barrels of Oil MCF - Thousand 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, 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:
--------------------
The following table discloses the drilling activities of BR Energy
during 1998, 1999 and the nine months ended September 30. During 1998, BR Energy
contracted with its affiliate, BR Group, to drill the three gas wells and
contracted with third parties to drill the two oil wells. During 1999 and 2000,
BR Energy contracted with BR Group to utilize the two drilling rigs BR Energy
had purchased in 1999 to drill oil and gas wells for its sponsored limited
partnerships and third parties as well as conducting the drilling operations for
the eighteen gas wells drilled by BR Energy in 1999.
OIL WELLS GAS WELLS
---------------------- ---------------------
2000 1999 1998 2000 1999 1998
---- ---- ---- ---- ---- ----
Exploratory Wells -- -- -- -- -- --
Development Wells -- -- 2 9 18 3
---- ---- ---- ---- ---- ----
Total Wells -- -- 2 9 18 3
19
<PAGE> 20
ITEM 4. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
---------------------------------------------------------------
The table below sets forth each stockholder who is know to BR Energy to
be the beneficial owner of more than 5% of the common stock of BR Energy at
October 31, 2000.
<TABLE>
<CAPTION>
TITLE NAME AND ADDRESS AMOUNT AND NATURE PERCENT
CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER OF CLASS
-------------------------------------------------------------------------------
INDIRECT OWNERSHIP:
<S> <C> <C> <C>
Common Robert D. Burr 7,126,893 (1) 70.8%
632 Adams Street, Suite 710
Bowling Green, KY 42101
Common Russell L. Vera 1,602,103 (2) 15.9%
632 Adams Street, Suite 110
Bowling Green, KY 42101
DIRECT OWNERSHIP:
Common Blue Ridge Group, Inc. 7,126,893 (3) 70.8%
632 Adams Street, Suite 700
Bowling Green, KY 42101
</TABLE>
(1) By virtue of his position as Chairman of the Board of BR Group, Mr.
Burr may be deemed to have beneficial ownership of the 7,126,893 shares
of BR Energy beneficially owned by BR Group. Mr. Burr disclaims
beneficial ownership of these shares. In addition, Mr. Burr's
beneficial ownership is attributable to his ownership of 22.5% of BR
Group which owns 70.8% of BR Energy. This table assumes the warrants
held by BR Group to purchase 4,000,000 shares of BR Energy at $0.05 per
share have been exercised. Said warrants expire March 31, 2003.
(2) Mr. Vera's beneficial ownership is attributable to his ownership of
22.5% of BR Group which owns 70.8% of BR Energy. This table assumes the
warrants held by BR Group to purchase 4,000,000 shares of BR Energy at
$0.05 per share have been exercised. 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.
20
<PAGE> 21
The table below sets forth the beneficial stock ownership of all directors and
officers of BR Energy as of October 31, 2000.
<TABLE>
<CAPTION>
TITLE NAME AND ADDRESS AMOUNT AND NATURE PERCENT
CLASS OF BENEFICIAL OWNER OF BENEFICIAL OWNER OF CLASS
------- ------------------- -------------------- --------
<S> <C> <C> <C>
Common Robert D. Burr 7,126,893 (1) 70.8%
632 Adams Street, Suite 710
Bowling Green, KY 42101
Common All Directors and Officers as a group 7,126,893 70.8%
Robert D. Burr. Edward L. Stillie,
James T. Cook, Jr., Gregory B. Shea,
Russell L. Vera and Harry J. Peters
</TABLE>
1. By virtue of his position as Chairman of the Board of BR Group, Mr.
Burr may be deemed to have beneficial ownership of the 7,126,893 shares
of BR Energy beneficially owned by BR Group. Mr. Burr disclaims
beneficial ownership of these shares. In addition, Mr. Burr's
beneficial ownership is attributable to his ownership of 22.5% of BR
Group which owns 70.8% of BR Energy. This table assumes the warrants
held by BR Group to purchase 4,000,000 shares of BR Energy at $0.05 per
share have been exercised. Said warrants expire March 31, 2003.
This table assumes the warrants held by BR Group to purchase an
additional 4,000,000 shares of BR Energy Common Stock at $0.05 a share have been
exercised. Said warrants expire on March 31, 2003.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below is certain information as of October 31, 2000 regarding
the directors and executive officers of BR Energy. With the exception of BR
Energy's President & CEO, Mr. Edward L. Stillie, 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 5.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH BR ENERGY
----------------- ----- --------------------------
<S> <C> <C>
Robert D. Burr 54 Chairman of the Board of BR Energy
Edward L. Stillie 55 Director of BR Energy, President and Chief Executive Officer
James T. Cook Jr. 48 Director of BR Energy, Senior Vice President-Finance,
Secretary and Treasurer
Harry J. Peters 56 Director of BR Energy, Senior Vice President-Acquisitions
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>
21
<PAGE> 22
ROBERT D. BURR, age 54, Bowling Green, Kentucky, has been Chairman of the Board
of BR Energy since May, 1996. He served as President and Chief Executive Officer
from May, 1996 until March 1, 2000. A native of Port Arthur, Texas, Mr. Burr
attended McNeese State College, Lake Charles, Louisiana. He has been active for
over 25 years in the oil and gas business with a myriad of companies. He has
also been the Chairman of the Board, President and Chief Executive Officer of BR
Group, since August 1993. Mr. Burr became the brother-in-law of Mr Cook in 1997
and is the father-in-law of Mr. Vera and Mr. Shea.
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. For the past 20 years he has been a senior executive with
several nationally prominent companies. Most recently, he was National Marketing
Director and Senior Vice President for Houston-based Swift Energy Company from
October 30, 1994 to March 1, 2000. He holds a Bachelor of Science in Business
and Public Administration from the University of Maryland and a Masters Degree
in Business Administration from the University of Central Michigan..
JAMES T. COOK, JR., age 48, 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 and stores. 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
Sr. Vice President-Sales and Marketing from April, 2000 to July, 2000 and has
served as a Director since April, 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. Since that time, Mr.
Shea has managed BR Group's Kentucky drilling and field operations. 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. 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 attended the University of Houston for four years as a graphic
arts major. and he was President of Fortune Exploration, Inc., Irving, Texas, an
independent oil and gas producer, from 1989 until 1992,
22
<PAGE> 23
and President of Oak Ridge Exploration, Inc., Shreveport, Louisiana, in 1992. He
has served as President of Fortune Exploration of Kentucky, Inc. since 1992. Mr.
Vera is a son-in-law of Mr. Burr.
ITEM 6. EXECUTIVE COMPENSATION:
The following compensation was paid directly to the executives of BR
Energy during the years ended December 31, 1999 and 1998:
<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 1999 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Burr 1998 $ 0 $25,000 $ 0 $ 0 $ 0 $ 0 $ 0
James T 1999 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Cook, Jr 1998 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Gregory B 1999 $ 0 $ 0 $ $ 0 $ 0 $ 0 $ 0
Shea 1998 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
</TABLE>
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BR Group owns approximately 51.5% of the Common Stock of BR Energy as of
October 31, 2000. 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 one
to five 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. As
of July 31, 2000, BR Group owned warrants to purchase an additional 4,000,000
shares of common stock at $0.05 per share on or before March 31, 2003.
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 BR Energy's partnerships (the
Home Stake Joint Venture, as described in Note 4), BR Energy had agreed to
provide certain work over funds and had the right to 100% of the partnership's
revenues from the well until the work over funds had been
23
<PAGE> 24
recovered. Thereafter, the Home Stake Joint Venture would revert to its original
working interest position. During 1999, BR Energy 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 in early 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, BR Energy agreed to participate with BR Group in the
acquisition and development of oil and gas properties in the Appalachian Basin
of Kentucky. BR Energy advanced $1,300,000, bearing interest at 12% per annum,
to BR Group related to these acquisitions.
During the years ended 1998 and 1999 BR Energy 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 BR Energy 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 $82,545 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 for the acquisition, drilling, completing and equipping
of oil and gas wells for BR Energy and the eleven (11) 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 $4,634,089
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.
BR Group provides various management, administrative, accounting and
geological services for BR Energy 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,
24
<PAGE> 25
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, the BR Energy had no significant customers or
suppliers, other than its major stockholder, BR Group, who could individually
have a significant adverse effect on BR Energy'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 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:
1999 1998
----- ----
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
============= =========
BR Energy 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. BR Energy 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, BR Energy made the following property acquisitions from
partnerships they have previously syndicated:
In 1999, BR Energy 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 BR Energy Common Stock at $3.00 per share. The
warrants are exercisable from March 27, 2000 through March 27, 2005. This
property acquisition was recorded at the estimated fair value of the working
interest acquired. Such amount was equal to BR Energy's investment in the
respective partnership plus related accounts receivable from the partnership.
BR Energy 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 and expiring in March, 2005. The
transaction was recorded at the estimated fair value of the working interest
acquired. Such amount was equal to BR Energy's investment in the respective
partnership plus related accounts receivable from the partnership.
25
<PAGE> 26
During November, 1999, BR Energy 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 and expiring in October, 2002. The
transaction was recorded the estimated fair value of the working interest
acquired. Such amount was equal to BR Energy's investment in the respective
partnership plus related accounts receivable from the partnership.
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 BR Energy's operations. See Note 4 to BR
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.
ITEM 8. DESCRIPTION OF SECURITIES
BR Energy is authorized to issue two classes of stock that are
designated, respectively, common and preferred stock. BR Energy is authorized to
issue 25,000,000 shares of stock, 20,000,000 designated as common stock and
5,000,000 designated as preferred stock.
COMMON STOCK:
-------------
During the third quarter of 2000, 260,500 shares of Series D Preferred
Stock were converted into 260,500 shares of common stock.
As of October 31, 2000, there were 6,070,294 shares of BR Energy's
Common Stock, which has a par value of $0.005 per share issued and outstanding.
Each holder of the Common Stock shall be entitled to one vote for each share of
the Common Stock outstanding in his name on the books of BR Energy.
SERIES A PREFERRED STOCK:
-------------------------
During May 1996, BR Energy 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 was
convertable 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 occurred
first.
In the event of any liquidation, dissolution or winding up of BR Energy
either voluntary or involuntary, the holders of Series A Stock were entitled to
receive, prior and in preference to any distribution of any assets or surplus
funds of BR Energy 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 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 Series A Preferred Stock. At the time of
its issuance, there was no established market for the Series A Preferred Stock.
The exchange price was arbitrarily determined by the management of BR Energy. In
1997, BR Energy
26
<PAGE> 27
issued an additional 32,000 shares of Series A Preferred Stock at a cash price
of $3.00 per share. In total, 297,746 shares of Series A Preferred Stock were
issued by BR Energy. Each outstanding share of Series A Preferred Stock was
converted into one (1) share of BR Energy Common Stock as of September 30, 1998.
There have been no shares of Series A Preferred Stock outstanding since
September 30, 1998.
SERIES B PREFERRED STOCK:
-------------------------
During 1996, BR Energy 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 bore a 12% per annum
dividend payable monthly. Each share of the Series B Stock was convertable 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 occurred first.
In the event of any liquidation, dissolution or winding up of BR Energy
either voluntary or involuntary, the holders of Series B Stock were entitled to
receive, prior and in preference to any distribution of any assets or surplus
funds of BR Energy 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 of each share of Series B Stock then held by the
shareholder.
During 1996 and 1997, 202,374 shares of BR Energy Series B Preferred Stock were
sold for approximately $596,000 (net of expenses). All outstanding shares of
Series B Preferred Stock were converted into BR Energy Common Stock during 1998
and 1999.
SERIES C PREFERRED STOCK:
-------------------------
During 1997, BR Energy 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 and sold 169,450 shares of Series C
Preferred Stock for approximately $1,016,700. The Series C Stock bore a 12% per
annum dividend payable monthly. Each share of the Series C Stock was convertable
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 occurred first.
In the event of any liquidation, dissolution or winding up of BR
Energy, either voluntary or involuntary, the holders of Series C Stock are
entitled to receive, prior and in preference to any distribution of any assets
or surplus funds of BR Energy to the holders of common stock, but subordinate to
the liquidation preference of the Series A stock and Series B stock, the amount
of $6.00 per share plus all unpaid dividends of each share of Series C Stock
then held by the shareholder. During 1999 all 169,450 shares of Series C
Preferred Stock wre converted on a 2 for 1 basis into 338,900 shares of BR
Energy Common Stock.
SERIES D PREFERRED STOCK:
-------------------------
During 1998, BR Energy 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 a price of $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
27
<PAGE> 28
issuance, whichever occurs first In addition, BR Energy issued one Common Stock
Warrant associated with each share of Series D Preferred Stock purchased. Each
such Warrant is exercisable to purchase one share of BR Energy Common Stock for
$1.00 per share.
In the event of any liquidation, dissolution or winding up of BR
Energy, either voluntary or involuntary, the holders of Series D Stock shall be
entitled to receive, prior and in preference to any distribution of any assets
or surplus funds of BR Energy to the holders of Common 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.
During the third quarter of 2000, 260,500 shares of Series D Preferred
Stock were converted into 260,500 shares of Common Stock.
At October 31, 2000, December 31, 1999 and December 31, 1998, there
were 437,100, 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 $3,488,000, less expenses paid of $892,509.
COMMON STOCK WARRANTS:
In June 1996, BR Group acquired warrants to purchase 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, BR
Energy granted warrants to BR Group which expire on March 31, 2003 to purchase
an additional 5,000,000 shares of restricted common stock at $0.05 per share.
During 1997, BR Group exercised warrants to purchase 200,000 shares of BR
Energy's common stock at $0.05 per share or $10,000. During 1998, BR Group
exercised warrants to purchase 2,800,000 shares of BR Energy's common stock at
$0.05 per share, or $140,000.
As of December 31, 1999, BR Group held warrants to purchase 4,000,000
shares of BR Energy common stock for $0.05 per share. These warrants expire
March 31, 2003.
During 1998 and 1999, BR Energy authorized the issuance of the
following warrants to purchase common stock in BR Energy. These warrants have
not been registered under the Securities Act of 1933.
<TABLE>
<CAPTION>
Title of Aggregate Amount Date from Price at Issued
Issue of of Securities which Warrants which Warrants in
Securities Called for by Warrants are Exercisable are Exercisable Connection With
------------ ---------------------- --------------- --------------- ---------------
WARRANTS ISSUED (1)
<S> <C> <C> <C> <C>
Series D Preferred 267,700 May 31, 1998 $1.00 for 1 share
Stock Warrants Warrants through of BREY Series D
May 31, 2003 Common Stock Preferred Stock
Series D2 Preferred 429,900 June 8, 2000 $1.00 for 1 share
Stock Warrants Warrants through of BREY Series D2
May 31, 2004 Common Stock Preferred Stock
Series E 632,133 January 1, 2000 $3.00 for 1 share Sale of units in
Stock Warrants Warrants through of BREY 1998 Year End
January 1, 2004 Common Stock Drilling Program
</TABLE>
28
<PAGE> 29
<TABLE>
<S> <C> <C> <C> <C>
Series F 335,728 March 27, 2000 $3.00 for 1 share Exchange for proved
Stock Warrants Warrants through of BREY properties from
March 27, 2005 Common Stock Paluxy Partnership
Series F 521,208 March 27, 2000 $3.00 for 1 share Exchange for proved
Stock Warrants Warrants through of BREY properties from
March 27, 2005 Common Stock Sherman Moore
Series G 600,000 November, 2000 $3.00 for 1 share Exchange for proved
Stock Warrants Warrants through of BREY properties from
October, 2002 Common Stock Cumberland Gap 10
Series G 368,300 November, 2000 $3.00 for 1 share Exchange of proved
Stock Warrants Warrants through of BREY properties from
October, 2002 Common Stock Harlan Cnty Ptnshp
Series G 82,500 November, 2000 $3.00 for 1 share Sale of units
Stock Warrants Warrants through of BREY in Mid South
October, 2002 Common Stock Partnership
WARRANTS TO BE ISSUED (2)
Series G 438,262 November, 2000 $3.00 for 1 share Sale of units in
Stock Warrants Warrants through of BREY B. U. Ranch #1
October, 2002 Common Stock Partnership
</TABLE>
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, BR Energy had committed to issue common
stock warrants to these noted partnerships.
29
<PAGE> 30
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON
EQUITY AND OTHER SHAREHOLDER MATTERS
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
March 31, 2000 $ 2.00 $ 1.75
June 30, 2000 $ 2.00 $ 1.75
September 30, 2000 $ 2.00 $ 1.75
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 BR Energy's common stock by BR Group as
described in Part I, Item 7.
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
----- ----
$ 313,114 $ 336,448
30
<PAGE> 31
BR Energy has not paid, nor does it intend to pay, cash dividends on
its common stock in the foreseeable future. We intend to retain earnings, if
any, for the future operation and development of our business.
SHAREHOLDER INFORMATION:
------------------------
At October 31, 2000, there were approximately 554 shareholders of BR
Energy's Common Stock.
ITEM 2. LEGAL PROCEEDINGS
During the normal course of business, BR Energy receives inquires from
various federal and state regulatory agencies. These inquiries are quite
infrequent and responded to promptly by BR Energy. Occasionally, questions may
occur with regard to misunderstandings or misinterpretations of programs offered
by BR Energy or promotional material being used by BR Energy in connection with
the sale of its sponsored oil and gas drilling partnerships. As of October 31,
2000, management of BR Energy is not aware of any significant regulatory issues
presently outstanding.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Recent sales of unregistered BR Energy Preferred Stock
<TABLE>
<CAPTION>
TITLE OF CLASS OF NO. OF APPROX. PRICE PER SHARES TOTAL COMMISSIONS &
SECURITY INVESTOR INVESTORS DATE SOLD SHARE SOLD AMT. SOLD DISCOUNTS PAID
-------- --------- --------- --------- ------- ------ --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A(1) Accredited 34 7/96 to $ 3.00 198,664 $ 595,992 $ 7,500(4)
Preferred Stk Non-Accredited 27 12/96 67,082 201,246 0
-- ---------- ---------- ----------
61 265,746 $ 797,238 $ 7,500
Series A(2) Accredited 4 6/97 to $ 3.00 26,000 78,000 $ 0
Preferred Stk Non-Accredited 2 8/97 6,000 18,000 0
-- ---------- ---------- ----------
6 32,000 96,000 $ 0
Series B(3) Accredited 16 8/96 to $ 3.00 181,691 $ 545,073 $ 28,886(5)
Preferred Stk Non-Accredited 9 8/97 20,683 62,049 9,307
-- ---------- ---------- ----------
25 202,374 $ 607,122 $ 38,193
Series C Accredited 29 5/97 to $ 6.00 71,750 $ 430,500 $ 116,512(5)
Preferred Stk Non-Accredited 29 12/97 97,700 586,200 143,846
-- ---------- ---------- ----------
58 169,450 $1,016,700 $ 260,358
Series D Accredited 105 6/98 to $ 5.00 675,600 $3,378,000 $ 866,071(5)
Preferred Stk Non-Accredited 7 1/00 22,000 110,000 26,437
--- ---------- ---------- ----------
112 697,600 $3,488,000 $ 892.508(5)
</TABLE>
(1) Represents exchange for Target Leasing, Ltd. I partnership assets
(2) Sold for Cash
(3) Includes approximately 117,500 of Series B Preferred Stock sold to the
Smackover/Woodbine I Joint Venture sponsored by BR Energy and the West
Currie Joint Venture sponsored by an affiliate. The proceeds received by BR
Energy as related to these two transactions were approximately $352,500.
(4) Represents legal expenses
31
<PAGE> 32
(5) All commissions related to the aforementioned sales of unregistered
securities have been paid to Ridgemont Securities, Inc. (a related party
to BR Energy). BR Energy does not utilize the services of an underwriter
in connection with its security offerings.
RECENT SALES OF UNREGISTERED BR ENERGY COMMON STOCK:
----------------------------------------------------
During the years ended 1999 and 1998, certain preferred stockholders
converted their BR Energy preferred stock, into BR Energy common stock at
various conversion ratios. A detail of such transaction is contained in the
following table and in Part I, item 8 of this registration statement.
SECURITY NO. OF SALE EXCHANGE COMMON SHARES COMMISSION OR
INVESTORS YEAR YEAR ISSUED DISCOUNT PAID
--------- ----- ----- ----------- -------------
Series A Preferred 67 1996/97 1998 297,746 None
Series B Preferred 177 1996/97 1998 404,748 None
Series C Preferred 58 1997 1999 338,900 None
Series D Preferred 36 1998/99 2000 260,500 None
During the period March 1996 through October 31, 2000, BR Group
acquired a total of 3,126,893 shares of restricted common stock of BR Energy
through cash purchases and exercise of warrants at varying prices. Such
transactions are explained in more detail in Part I, item 7 of this registration
statement and in the following table.
ISSUANCE OF WARRANTS TO PURCHASE BR ENERGY COMMON STOCK:
--------------------------------------------------------
The Board of Directors of BR Energy authorized the issuance of warrants
to BR Group in June 1996 and February 1998 for 2,000,000 and 5,000,000 shares of
common stock. The exercise price was $.05 and they expire, if not exercised, on
June 30, 2001 and March 31, 2003, respectively. There were no trades in the BR
Energy common stock from March 1996, (when BR Group acquired control of BR
Energy) until May 1998. There was only nominal activity in the BR Energy common
stock during May and June 1998 at an average of $.125 shares. Management
determined that a reasonable valuation for the warrants was $.05 per share based
on the restricted nature of the common stock and the lack of any significant
trading volume. The following table discloses the aforementioned warrant
transactions:
<TABLE>
<CAPTION>
DATE NUMBER OF WARRANTS DATE WARRANT SHARES OF
WARRANT WARRANTS ISSUED TO WARRANT EXERCISE COMMON STK TOTAL
ISSUED ISSUED EXERCISED BY EXERCISED PRICE ISSUED CONSIDERATION
---------- ------------- ------------ --------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
6/96 2,000,000 BR Group $0.05
2/98 5,000,000 BR Group 0.05
(200,000) BR Group 6/97 0.05 200,000(1) $ 10,000
(2,800,000) BR Group 6/98 0.05 2,800,000(2) 140,000
--------- ---------- ---------
Warrants Expiration
Outstanding Date:
12/31/99 4,000,000 3/31/03
=========
</TABLE>
(1) Warrants exercised by BR Group.
(2) Warrants exercised by BR Group.
32
<PAGE> 33
WARRANTS ISSUED AND TO BE ISSUED:
---------------------------------
The following table discloses warrants issued and to be issued to
purchase Blue Ridge Energy common stock from 1998 through 2000. These warrants
were issued or authorized in connection with (1) the sale of Blue Ridge Energy
Preferred D Stock, (2) BR Energy's oil and gas drilling programs or (3) the
dissolution of several of BR Energy's oil and gas partnerships:
<TABLE>
<CAPTION>
Title of Aggregate Amount Date from Price at Issued
Issue of of Securities which Warrants which Warrants in
Securities Called for by Warrants are Exercisable are Exercisable Connection With
----------- ---------------------- --------------- --------------- ---------------
WARRANTS ISSUED (1)
<S> <C> <C> <C> <C>
Series D Preferred 267,700 May 31, 1998 $1.00 for 1 share
Stock Warrants Warrants through of BREY Series D
May 31, 2003 Common Stock Preferred Stock
Series D2 Preferred 429,900 June 8, 2000 $1.00 for 1 share
Stock Warrants Warrants through of BREY Series D2
May 31, 2004 Common Stock Preferred Stock
Series E 632,133 January 1, 2000 $3.00 for 1 share Sale of units in
Stock Warrants Warrants through of BREY 1998 Year End
January 1, 2004 Common Stock Drilling Program
Series F 335,728 March 27, 2000 $3.00 for 1 share Exchange for proved
Stock Warrants Warrants through of BREY properties from
March 27, 2005 Common Stock Paluxy Partnership
Series F 521,208 March 27, 2000 $3.00 for 1 share Exchange for proved
Stock Warrants Warrants through of BREY properties from
March 27, 2005 Common Stock Sherman Moore
Partnership
Series G 600,000 November, 2000 $3.00 for 1 share Exchange for proved
Stock Warrants Warrants through of BREY properties from
October, 2002 Common Stock Cumberland Gap 10
Partnership
Series G 368,300 November, 2000 $3.00 for 1 share Exchange of proved
Stock Warrants Warrants through of BREY properties from
October, 2002 Common Stock Harlan Cnty Ptnshp
Series G 82,500 November, 2000 $3.00 for 1 share Sale of units
Stock Warrants Warrants through of BREY in Mid South
October, 2002 Common Stock Partnership
</TABLE>
33
<PAGE> 34
WARRANTS TO BE ISSUED (2)
<TABLE>
<S> <C> <C> <C> <C>
Series G 438,262 November, 2000 $3.00 for 1 share Sale of units in
Stock Warrants Warrants through of BREY B. U. Ranch #1
October, 2002 Common Stock Partnership
</TABLE>
Notes: (1) These Warrants have not been registered with the SEC and
accordingly, are restricted as to sale under Rule 144.
(2) As of October 31, 2000, BR Energy had committed to issue common
stock warrants to these noted partnerships.
RECENT SALES OF UNREGISTERED SECURITIES SALES OF OIL AND GAS PARTNERSHIP
INTERESTS:
<TABLE>
<CAPTION>
TITLE OF CLASS OF NO. OF SALES PRICE PER UNITS TOTAL AMT. & DISCOUNTS
SECURITY INVESTOR INVESTORS PERIOD UNIT SOLD SOLD PAID
-------- -------- --------- ------ ---------- ------ --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Blue Ridge Accredited 38 8/96 to $12,000 68.725 $ 825,000 $ 123,750
Energy Non-Accredited 33 10/96 36.000 432,000 64,800
Production ---- ------- ----------- ---------
Fund LP Total 71 104.725 $ 1,257,000 $ 188,550
Smackover/ Accredited 31 10/96 to $10,000 79.370 $ 793,750 $ 119,062
Woodbine Non-Accredited 19 2/97 35.500 355,000 53,250
--- ------- ----------- ---------
Total 50 114.870 $ 1,148,750 $ 172,312
Paluxy LP Accredited 36 2/97 to $12,950 46.050 $ 596,347 $ 89,452
Non-Accredited 33 8/97 31.750 411,163 61,674
--- ------- ----------- ---------
Total 69 77.800 $1,007,510 $ 151,126
Home Stake Accredited 29 7/97 to $14,775 58.250 $ 860,644 $ 129,097
LP Non-Accredited 30 10/97 29.750 439,556 65,933
--- ------ ----------- --------
Total 59 88.000 $1,300,200 $ 195,030
Sherman/ Accredited 31 10/97 to $18,500 62.250 $ 1,151,625 $ 172,744
Moore LP Non-Accredited 19 11/97 25.250 467,125 70,069
--- ------ ----------- ---------
Total 50 87.500 $ 1,618,750 $ 242,813
Phillips/ Accredited 45 2/98 to $15,000 57.350 $ 860,250 $ 129,037
Blue Ridge Non-Accredited 24 4/98 25.000 375,000 56,250
--- ------ ----------- ---------
Total 69 82.350 $1,235,250 $ 185,287
1998 Year Accredited 68 12/98 to $15,000 113.420 $1,701,300 $ 255,195
End LP Non-Accredited 9 3/99 10.420 156,300 23,445
--- ------- ----------- ---------
Total 77 123.840 $ 1,857,600 $ 278,640
</TABLE>
34
<PAGE> 35
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Harlan Accredited 63 3/99 to $ 9,000 103.000 $ 927,000 $ 139,050
County LP Non-Accredited 13 4/99 22.000 198,000 29,700
--- ------- ---------- ---------
Total 76 125.000 $1,125,000 $ 168,750
Cumberland Accredited 85 4/99 to $ 6,000 170.250 $1,021,500 $ 153,225
Gap LP Non-Accredited 17 7/99 31.500 189,000 28,350
--- ------- ---------- ---------
Total 102 201.750 $1,210,500 $ 181,575
B.U. Ranch Accredited 63 8/99 to $ 9,500 81.250 771,875 $ 115,781
#1 L.P. Non-Accredited 11 12/99 13.000 123,500 18,525
--- ------ ---------- ---------
Total 74 94.250 $ 895,375 $ 134,306
Hailey/West Accredited 70 12/99 to $10,000 99.167 $ 991,670 $ 148,751
Virginia 1999 Non-Accredited 0 2/00 0.000 0 0
--- ------ ---------- ---------
Total 70 99.167 $ 991,670 $ 148,751
MidSouth Accredited 3 2/00 $ 9,500 165 $ 293,000 $ 44,550
Boons Corp. Accredited 17 6/00 to $10,000 112.5 $1,125,000 $ 56,250
9/00
</TABLE>
All commissions related to the aforementioned sales of unregistered
partnership interest were paid to Ridgemont Securities, Inc. BR Energy claimed
exemptions from the registration of the aforementioned securities (preferred
stock, common stock and partnership interest) under Regulation D, Rule 506 of
the Securities Act of 1933.
Registration under the Securities Act of 1933 of the securities issued
in the transactions described above was not required because such securities
were issued in transactions not involving any "public offering" within the
meaning of Section 4(2) of said Act. In the foregoing instances, the shares of
the preferred stock, common stock and units of partnership were issued to a
limited group of purchasers, each of whom was furnished with, or had broad
access to, information concerning BR Energy. The purchasers acquired the
securities for investment only and not with a view to the distribution thereof.
Each of the certificates, representing the preferred and common shares of BR
Energy, has been stamped with a legend restricting the transfer.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each Director and each Officer of Blue Ridge Energy has been
indemnified, against certain liabilities which they may incur in their
capacities, pursuant to its By Laws as follows:
The Corporation shall, unless prohibited by Nevada Law, indemnify any
person who is or was involved in any manner or is threatened to be so involved
in a threatened, pending or completed action suit or proceeding, whether civil,
criminal, administrative, arbitrative or investigative, including without
limitation, any action, suit or proceeding brought by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan or other entity or enterprise, again all Expense and Liabilities
actually and reasonably incurred by him in connection with such Proceeding. The
right to indemnification conferred in this Article shall be presumed to have
been relied upon by the directors, officers, employees and agents of the
corporation and shall be enforceable as a contract right and inure to the
benefit of heirs, executors and administrators of such individuals.
35
<PAGE> 36
PART F/S
PAGE
Audited Financial Statements for December 31, 1999 and 1998:
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 Statements F-6
Financial statement schedules are not applicable, are not required or
included in financial statements and notes thereto.
Unaudited Financial Statements for June 30, 2000:
Report on Review by Independent Accountants F-26
Condensed Balance Sheets (Unaudited) as of June 30, 2000
and December 31, 1999 F-27
Condensed Statements of Income (Unaudited) for the three months
and six months ended June 30, 2000 and 1999 F-29
Condensed Statements of Cash Flows (Unaudited) for the
six months ended June 30, 2000 and 1999 F-30
Notes to Condensed Financial statements (Unaudited) F-31
The condensed financial statements of BR Energy included herein have
been prepared, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Although certain information normally
included in financial statements prepared in accordance with generally accepted
accounting principles has been condensed or omitted, BR Energy believes that the
disclosures are adequate to make the information presented not misleading. It is
suggested that these condensed financial statements be read in conjunction with
the December 31, 1999 and 1998 Audited Financial Statements and the notes
thereto included in this Registration Statement on Form 10-SB.
The condensed financial statements included herein reflect all
adjustments (consisting only of normal recurring accruals) which, in the opinion
of management, are necessary to present a fair statement of the results for the
interim periods.
The results for interim periods are not necessarily indicative of trends or of
results to be expected for a full year.
36
<PAGE> 37
Independent Auditors' Report
To the Board of Directors and
Stockholders of Blue Ridge Energy, Inc.
Bowling Green, Kentucky
We have audited the accompanying balance sheets of Blue Ridge Energy,
Inc. as of December 31, 1999 and 1998, and the related statements of income,
stockholders' equity and cash flows for the years ended December 31, 1999 and
1998. These financial statements are the responsibility of Blue Ridge Energy'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 and 1998 in conformity with
generally accepted accounting principles.
Looney, Samson & Associates, P.L.L.C.
Dallas, Texas
March 24, 2000
F-1
<PAGE> 38
BLUE RIDGE ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999 1998
--------------------------------------------------------------- ----------- -----------
<S> <C> <C>
ASSETS
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 2,375,992
PROPERTY AND EQUIPMENT, NET (Notes 5and 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> 39
BLUE RIDGE ENERGY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998
----------- -----------
<S> <C> <C>
OPERATING REVENUES (Note 2 and 4):
Turnkey Contract Sales $ 4,634,089 $ 1,743,211
Management Fees 244,739 212,624
Contract Drilling Sales 792,439 --
Oil and Gas Sales 60,226 27,501
----------- -----------
Total Operating Revenues 5,731,493 1,983,336
OPERATING COSTS AND OTHER EXPENSES
(Notes 2 and 4):
Turnkey Contract Costs 3,616,100 1,428,382
Lease Operating Costs 17,741 27,225
Cost of Contract Drilling 709,308 --
Abandonment and Dry Hole Costs 142,571 16,817
Impairment of Oil and Gas Properties (Notes 1 and 5) -- 327,405
Depreciation, Depletion and Amortization 117,695 17,978
Marketing Costs (Note 2) 537,013 22,234
General and Administrative Costs 353,860 166,104
----------- -----------
Total Operating Costs 5,494,288 2,006,145
----------- -----------
OPERATING INCOME (LOSS) 237,205 (22,809)
OTHER INCOME (EXPENSE):
Interest Income (Note 4) 27,153 82,181
Interest Expense (25,484) --
Other -- 13,441
----------- -----------
Total Other Income (Expense) 1,669 95,622
----------- -----------
INCOME BEFORE TAXES 238,874 72,813
Income Tax Provision (Note 8) 85,907 24,762
----------- -----------
NET INCOME $ 152,967 $ 48,051
=========== ===========
EARNINGS/(LOSS) PER COMMON SHARE (Note 1):
Basic $ (0.03) $ (0.09)
Diluted $ (0.03) $ (0.09)
Weighted Average Common Shares Outstanding 5,453,611 3,062,868
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 40
BLUE RIDGE ENERGY, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
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>
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
----------- ----------- ----------- ----------- ----------- ----------- --------------
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
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
----------- ----------- ----------- ----------- ----------- ----------- --------------
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> 41
BLUE RIDGE ENERGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999 1998
-------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 152,967 $ 48,051
Adjustments to Reconcile Net Income to Net Cash
Flow from Operating Activities:
Depreciation, Depletion and Amortization 117,695 17,978
Impairment. Dry Holes and Abandonment Losses 142,571 344,222
Increase (Decrease) in Deferred Income Taxes 82,907 24,025
Increase (Decrease) in Income Taxes Payable 3,000 737
(Increase) Decrease in Accounts Receivable 17,416 (184,441)
Increase (Decrease) in Accounts Payable and Accrued Expenses (278,191) 386,534
Gain on Sale of Oil and Gas Properties -- (75,000)
----------- -----------
NET CASH PROVIDED (USED)
BY OPERATING ACTIVITIES 238,365 562,106
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) Decrease in Advances to Affiliate (1,153,565) (1,166,456)
(Increase) in Other Assets 70,746 (125,020)
Proceeds from Sale of Oil and Gas Properties 325,000
Purchase of Oil and Gas Properties and Equipment (294,260) (492,700)
----------- -----------
NET CASH (USED) IN INVESTING ACTIVITIES (1,377,079) (1,459,176)
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
Issuance of Preferred Stock 1,341,258 1,066,370
Retirement of Stock (15,000) (4,800)
Cost of Conversion of Preferred Stock -- (1,230)
Dividends Paid (313,114) (336,448)
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 789,227 1,010,567
NET INCREASE (DECREASE) IN CASH (349,487) 113,497
----------- -----------
CASH AT BEGINNING OF PERIOD 480,952 367,455
CASH AT END OF PERIOD $ 131,465 $ 480,952
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 25,484 $ --
Cash Paid for Federal Income Taxes $ -- $ --
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> 42
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 statements 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 been 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.
OPERATION OF DRILLING RIGS
The Company follows the completed contract method of accounting for its
drilling operations. Under this method, all income under drilling contracts,
expenses under drilling contracts, all direct costs, and appropriate
F-6
<PAGE> 43
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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.
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 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 wells of the partnerships. 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.
F-7
<PAGE> 44
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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.
The costs of drilling exploration wells are capitalized as wells in
progress 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.
SURRENDER OR ABANDONMENT OF DEVELOPED PROPERTIES
Normally, no gain or loss is recognized if only an individual well or
individual item of equipment is abandoned or retired or if only a single lease
or other part of a group of proved properties constituting the amortization base
is abandoned or retired as long as the remainder of the property or group of
properties continues to produce oil or gas. The asset being abandoned or retired
is deemed to be fully amortized, and its cost is charged to accumulated
depreciation, depletion, or amortization. When the last well on an individual
property or group of properties with common geological structures ceases to
produce and the entire property or property group is abandoned, gain or loss is
recognized.
OTHER DISPOSITIONS
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
F-8
<PAGE> 45
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 MCF 1999 1998
-------- --------
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
Oil and gas expected future price estimates were based on 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 reasonably 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:
Basic EPS computation- 1999
-----------
Net Income $ 152,967
Less: Preferred Stock Dividends (313,114)
-----------
Loss Available to Common Stockholders $ (160,147)
===========
F-9
<PAGE> 46
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<TABLE>
<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)
=========
</TABLE>
Basic EPS computation- 1998
------------
Net Income $ 48,051
Less: Preferred Stock Dividends (336,448)
------------
Loss Available to Common Stockholders $ (288,397)
============
<TABLE>
<CAPTION>
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
<S> <C> <C> <C>
January 1-December 31 1,726,600 100.0% 1,726,600
Stock Warrants Exercised July 31 2,800,000 41.9% 1,173,699
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)
=========
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.
December 31,
1999 1998
------------ -------------
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
F-10
<PAGE> 47
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 and the net operating loss carryforward) 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. The Company defines cash equivalents as
short-term and highly liquid investments that are both readily convertible to
known amounts of cash and have an original maturity of less than 90 days.
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 and
$1,743,211 during 1999 and 1998, respectively. The Company receives a management
fee from the partnerships for its services in connection with the selection of
the joint venture prospects and the initial operations of the joint venture.
Management fees earned during the year ended December 31, 1999 and 1998 amounted
to $244,739 and $212,624, respectively.
In connection with the sponsorship of oil and gas partnerships, the Company
is reimbursed by the partnerships for certain operating and overhead costs
incurred on their behalf, including filing fees, legal fees, accounting fees,
printing costs and other miscellaneous expenses. These reimbursements totaled
$139,156 and $104,354 during the years ended December 31, 1999 and 1998,
respectively, and are netted against marketing costs.
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 $315,508, 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
F-11
<PAGE> 48
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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
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 shares 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 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.
F-12
<PAGE> 49
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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. All outstanding Series A Preferred Stock were subsequently
converted to Common Stock on a 1 for 1 basis. No Series A Preferred Stock
remained outstanding at December 31, 1999 or 1998.
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. A total of 95,500 shares of Series B Preferred Stock had
been issued under this arrangement and all shares had been converted to Common
Stock by December 31, 1998.
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 $ 711 by March 31, 2000 through the performance
of additional services under the terms of turnkey drilling contracts and cash
payments.
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
F-13
<PAGE> 50
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
The Company enters into turnkey drilling contracts with its privately
sponsored oil and gas partnerships to drill oil and gas wells.
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 and 1998, BR Energy paid BR Group
$3,616,100 and $1,428,382, respectively, 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 and paid for these
purchases through a reduction in its advances receivable from BR Group.
G. MANAGEMENT OF DRILLING RIGS
The Company contracts with BR Group to manage and operate the two drilling
rigs it purchased in 1999. 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 through the issuance of 1,825,236 warrants to
purchase common stock as more fully described in footnote 6, Property
Acquisitions.
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:
1999 1998
----------- -----------
Commissions $ 1,088,138 $ 546,713
Due Diligence Fees 43,49 49,938
Promotion Services 200,000 -
Reimbursed Expenses 80,780 101,511
-------------- ------------
Total $ 1,412,411 $ 698,162
=========== ===========
F-14
<PAGE> 51
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consisted of the following at December
31, 1999 and 1998:
1999 1998
--------------- -----------
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
=============== ===========
Depreciation, depletion and amortization expense was $117,695 and $17,978
during the years ended 1999 and 1998, respectively.
During 1996, the Company acquired 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 was $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.
During 1999 and 1998, the Company provided for abandonment and dry hole
costs of $142,571 and $16,817. Abandonment losses represent the abandonment
of an entire group of development wells in a common geological structure
which ceased to be economically productive.
The Company has pledged one of its drilling rigs and related equipment as
collateral on the long term debt disclosed in Note 7.
6. PROPERTY ACQUISITIONS
During 1999, the Company made the following property acquisitions from
partnerships they have previously syndicated:
F-15
<PAGE> 52
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
A. In 1999, the Company acquired a 100% working interest in the Keegan
Gibson #1 oil well in Smith County, Texas from a limited partnership managed by
the Company in exchange for the company's equity ownership of the partnership,
the balance of the accounts receivable from the partnership and 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 to March 27, 2005 (See
Note 10). The purchase consideration recorded for this property acquisition
approximated the Company's historical investment and related accounts receivable
from the partnership The Company's investment and receivables approximated the
estimated fair value of the working interest received from the partnership.
B. The Company acquired in 1999, a 100.0% working interest in two gas
wells in Sherman County, Texas from a limited partnership managed by the Company
in exchange for the company's equity ownership of the partnership, the balance
of the accounts receivable from the partnership and for the issuance of warrants
to purchase 521,208 shares of BREY Common stock at $3.00 per share (See Note
10). The purchase consideration recorded for this property acquisition
approximated the Company's historical investment and related accounts receivable
from the partnership. The Company's investment
and receivables approximated the estimated fair value of the working interest
received from the partnership.
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.
Such amount approximated the Company's investment in the working interest of the
Wharton, Mingo and Wyoming County gas wells..
D. During 1999, the Company acquired two Ingersoll Rand drilling rigs
and ancillary equipment at a cost of $2,105,774. These drilling rigs and
equipment were purchased through the reduction of advances to Blue Ridge Group
by $1,190,000, the issuance of long-term debt for $614,484 and the remainder of
the purchase price, $301,290, being 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).
8. INCOME TAXES
F-16
<PAGE> 53
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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:
1999 1998
----------- -----------
Expected Tax Provision (Benefit) $ 85,907 $ 28,575
Effect of Progressive Tax Rates - (3,813)
----------- -----------
Tax Provision (Benefit) $ 85,907 $ 24,762
=========== ===========
The tax effect of significant temporary differences representing the net
deferred tax liability at December 31, were as follows:
1999 1998
----------- -----------
Net Operating Loss Carry Forward $ (12,000) $ (35,442)
Intangible Drilling Costs 162,139 99,674
----------- -----------
Net Deferred Tax Liability $ 150,139 $ 64,232
=========== ===========
Income Tax Expense (Benefit) consists of the following components:
1999 1998
------------ -----------
Currently Payable (Refundable):
Federal Income Tax $ - $ -
State Income Tax 3,000 737
----------- -----------
3,000 737
Deferred Provision (Credit) 82,907 24,025
----------- -----------
Total Tax Expense (Benefit) $ 85,907 $ 24,762
=========== ===========
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.
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 two years from issuance,
whichever comes first.
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
F-17
<PAGE> 54
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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 from existing
stockholders at $0.10 a share, thereby paying a premium, in order to gain
control. At the time of this acquisition, Gem Source, Inc. had total assets of
less than $10,000 and BRG recorded the excess of cost over net assets acquired,
approximately $90,000, as goodwill. 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.
F-18
<PAGE> 55
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
During 1998, the Company's majority shareholder, Blue Ridge Group, Inc.
exercised warrants to purchase 2,800,000 shares of the Company's common stock at
$0.05 per share, or $140,000. Subsequently, Blue Ridge Group, Inc. distributed
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.
As of December 31, 1999, Blue Ridge Group owned warrants to purchase
4,000,000 shares of the Company's common stock at $0.05 per share. The warrants
expire March 31, 2003.
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, the existing 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 (See Note 4). 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, the existing 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 and 1998 there were -0- and 27,158 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
F-19
<PAGE> 56
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
involuntary, the existing holders of Series C Stock shall be entitled to
receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock, but subordinate to the
liquidation preference of the Series A Stock and the Series B Stock, the amount
of $6.00 per share plus all unpaid dividends on such share of each share of
Series C Stock then held by the shareholder.
At December 31, 1999 and 1998, there were -0- 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, the existing 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>
The following table discloses warrants issued or
to be issued as December 31, 1999:
<TABLE>
<CAPTION>
Title of Aggregate Amount Date from Price at Issued
Issue of of Securities which Warrants which Warrants in
Securities called for by Warrants are Exercisable are Exercisable Connection with
--------------- ---------------------- --------------- --------------- ---------------
WARRANTS ISSUED (1)
<S> <C> <C> <C> <C>
Series D Preferred 267,700 May 31, 1998 $1.00 for 1 share
Stock Warrants Warrants through of BREY Series D
May 31, 2003 Common Stock Preferred Stock
Series D2 Preferred 429,900 June 8, 2000 $1.00 for 1 share
Stock Warrants Warrants through of BREY Series D2
May 31, 2004 Common Stock Preferred Stock
</TABLE>
F-20
<PAGE> 57
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<TABLE>
<S> <C> <C> <C> <C>
Series E 632,133 January 1, 2000 $3.00 for 1 share Sale of units in
Stock Warrants Warrants through of BREY 1998 Year End
January 1, 2004 Common Stock Drilling Program
WARRANTS TO BE ISSUED (2)
Series F 335,728 March 27, 2000 $3.00 for 1 share Exchange for proved
Stock Warrants Warrants through of BREY properties from
March 27, 2005 Common Stock Paluxy Partnership
Series F 521,208 March 27, 2000 $3.00 for 1 share Exchange for proved
Stock Warrants Warrants through of BREY properties from
March 27, 2005 Common Stock Sherman Moore
Series G 438,262 November, 2000 $3.00 for 1 share Sale of units in
Stock Warrants Warrants through of BREY B. U. Ranch #1
October, 2002 Common Stock Partnership
Series G 600,000 November, 2000 $3.00 for 1 share Exchange for proved
Stock Warrants Warrants through of BREY properties from
October, 2002 Common Stock Cumberland Gap 10
Partnership
Series G 368,300 November, 2000 $3.00 for 1 share Exchange for proved
Stock Warrants Warrants through of BREY properties from
October, 2002 Common Stock Harlan Cnty Ptnshp
Series G 82,500 November, 2000 $3.00 for 1 share Sale of units
Stock Warrants Warrants through of BREY in Mid South
October, 2002 Common Stock Partnership
</TABLE>
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, BR Energy had committed to issue common
stock warrants to these noted partnerships.
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 $627,000 to
$-0-. 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.
F-21
<PAGE> 58
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
12. SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING PROPERTIES
(UNAUDITED)
Costs incurred in oil and gas acquisition, exploration and development
activities:
1999 1998
---------- -----------
Acquisition of properties
-Proved $ 629,052 $ -
-Unproved - 75,000
Exploration costs - -
Development costs 294,260 225,350
Company's share of equity method investee costs of
property acquisition exploration and development 57,970 192,350
---------- -----------
$ 981,282 $ 492,700
========== ===========
Results of Operations for Oil and Gas Producing Activities for the Years ended
December 31, 1999 and 1998:
(UNAUDITED)
1999 1998
----------- -----------
Oil and gas sales $ 60,226 $ 27,501
Gain on sale of oil and gas leases - 75,000
Production costs (17,741) (27,225)
Exploration expenses (142,571) (16,817)
Depreciation, depletion, and amortization
and valuation provision ( 9,272) (343,405)
------------ -----------
(109,358) (284,946)
Income tax credit 37,182 96,882
------------ ----------
Results of operations for oil and gas
producing activities (excluding
corporate overhead and financing cost) $ (72,176) $ (188,064)
=========== ==========
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.
F-22
<PAGE> 59
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
<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 3,564 226,861
Extensions -- 303,843
Production (2,552) (4,115)
----------- -----------
Reserves-December 31, 1999 21,574 544,589
=========== ===========
Proved Developed Reserves
December 31, 1998 34,959 30,850
----------- -----------
December 31, 1999 21,574 544,589
----------- -----------
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:
December 31, December 31,
1999 1998
----------- -----------
Future cash inflows $ 2,216,249 $ 414,648
Future development costs (19,663) --
Future production costs (750,272) (122,981)
Future income taxes (189,529) (8,419)
----------- -----------
Future net cash flows 1,256,785 283,248
10% annual discount for estimated timing of cash flow (609,961) (102,836)
----------- -----------
Standardized measure of discounted future net cash flows $ 646,824 $ 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 207,716 (26,832)
Revisions of previous quantity estimates (89,388) (1,546)
Change in future income taxes (181,110) (4,548)
Accretion of discount (507,125) (96,349)
Extensions and discoveries less related costs 812,656 180,157
Purchases and sales of minerals in place 266,148 111,668
----------- -----------
Standardized measure of discounted future net
cash flows (ending) $ 646,824 $ 180,412
=========== ===========
</TABLE>
F-23
<PAGE> 60
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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.
F-24
<PAGE> 61
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
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:
December 31, December 31,
1999 1998
------------ ------------
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
=========== ===========
F-25
<PAGE> 62
REPORT OF REVIEW BY INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Blue Ridge Energy, Inc.
Bowling Green, KY
We have reviewed the accompanying condensed balance sheet of Blue Ridge
Energy, Inc. as of June 30, 2000 and the related condensed statements of income
for each of the three month and six month periods ended June 30, 2000 and 1999
and the condensed statements of cash flows for the six month period ended June
30, 2000 and 1999. Such condensed interim financial statements and related
disclosures have been prepared in accordance with the required format and
disclosures prescribed by the SEC. These interim financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying condensed interim financial statements for
them to be in conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing
standards, the Blue Ridge Energy, Inc. balance sheet as of December 31, 1999,
and the related statements of income, stockholders' equity, and cash flows for
the year then ended (not presented herein), and in our report dated March 24,
2000 we expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed balance sheet
as of December 31, 1999, is fairly stated in all material respects, in relation
to the balance sheet from which it has been derived.
Looney, Samson & Associates, P.L.L.C.
Dallas, Texas
August 11, 2000
F-26
<PAGE> 63
BLUE RIDGE ENERGY, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
JUNE 30, DECEMBER 31,
2000 1999
-------------- ------------
ASSETS
CURRENT ASSETS:
Cash $ 204,729 $ 131,465
Accounts Receivable:
Managed Limited Partnerships 412,828 337,276
Trade and Other 136,511 74,275
Advances to Related Parties 82,545 627,304
-------------- ------------
TOTAL CURRENT ASSETS 836,613 1,170,320
PROPERTY AND EQUIPMENT, NET 3,693,861 3,178,606
OTHER ASSETS 20,536 10,810
-------------- -------------
TOTAL ASSETS $ 4,551,010 $ 4,359,736
=========== ===========
The Accountants' Review Report and accompanying notes are an integral part
of these financial statements
F-27
<PAGE> 64
BLUE RIDGE ENERGY, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
LIABILITIES AND
---------------
STOCKHOLDERS' EQUITY
--------------------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts Payable and Accrued Expenses $ 104,259 $ 90,835
Current Portion Long Term Debt 110,231 110,231
------------ ------------
TOTAL CURRENT LIABILITIES 214,490 201,066
LONG TERM DEBT 335,128 418,511
DEFERRED INCOME TAX LIABILITY 238,807 150,139
------------ ------------
TOTAL LIABILITIES 788,425 769,716
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 5,000,000 shares authorized; 697,600 and
636,950 shares issued and outstanding at June 30, 2000
and December 31, 1999, respectively 698 637
Common Stock, $0.005 par value; 20,000,000
shares authorized; 5,810,794 and 5,809,794 shares
issued and outstanding at June 30, 2000
and December 31, 1999, respectively 29,054 29,049
Additional Paid-In Capital 4,398,426 4,208,735
Accumulated Deficit (665,593) (648,401)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 3,762,585 3,590,020
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,551,010 $ 4,359,736
============ ============
</TABLE>
The Accountants' Review Report and accompanying notes are an integral part
of these financial statements
F-28
<PAGE> 65
BLUE RIDGE ENERGY, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
3 MONTHS ENDED 6 MONTHS ENDED
JUNE 30, JUNE 30,
OPERATING REVENUES: 2000 1999 2000 1999
------------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Turnkey Contract Sales $ 836,806 $ 928,800 $ 1,697,418 $ 3,008,400
Management Fees 31,537 60,000 73,232 115,675
Drilling Services Sales 275,921 294,651 578,644 294,651
Oil and Gas Sales 52,191 7,485 121,036 14,190
------------ ------------ ----------- -----------
Total Operating Revenues 1,196,455 1,290,936 2,470,330 3,432,916
OPERATING COSTS AND
-------------------
OTHER EXPENSES:
---------------
Turnkey Contract Costs 665,337 750,500 1,328,815 2,417,000
Drilling Services Costs 175,653 291,112 441,789 291,112
Lease Operating Costs 10,235 3,224 23,760 7,482
Depreciation, Depletion
and Amortization 36,000 17,221 72,000 20,253
Marketing Costs 3,629 56,462 3,629 180,911
General and Administrative Costs 170,171 56,057 307,092 77,787
------------ ------------ ----------- -----------
Total Operating Costs 1,061,025 1,174,576 2,177,085 2,994,545
------------ ------------ ----------- -----------
OPERATING INCOME 135,430 116,360 293,245 438,371
OTHER INCOME (EXPENSE):
-----------------------
Interest Income (Expense) (12,673) (7,841) (22,008) 16,364
------------ ------------ ----------- -----------
Total Other Income (Expense) (12,673) (7,841) (22,008) 16,364
------------ ------------ ----------- -----------
NET INCOME BEFORE TAXES 122,757 108,519 271,237 454,735
Income Tax Provision (39,670) (30,041) (88,668) (144,281)
----------- ------------ ----------- -----------
NET INCOME $ 83,087 $ 78,478 $ 182,569 $ 310,454
=========== =========== =========== ==========
EARNINGS PER
COMMON SHARE:
Basic $ (0.00) $ 0.00 $ (0.00) $ 0.03
=========== =========== =========== ==========
Diluted $ (0.00) $ 0.00 $ (0.00) $ 0.03
=========== =========== =========== ==========
Weighted Average Common
Shares Outstanding 5,810,028 5,166,578 5,809,916 5,167,411
=========== =========== =========== ==========
</TABLE>
The Accountants' Review Report and accompanying notes are an integral part
of these financial statements.
F-29
<PAGE> 66
BLUE RIDGE ENERGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
6 Months Ended
June 30,
OPERATING REVENUES: 2000 1999
------------------- ----------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ 182,569 $ 310,454
Adjustments to Reconcile Net Income to
Net Cash Flows from Operating Activities:
Depreciation, Depletion and Amortization 72,000 20,253
Increase (Decrease) in Deferred Taxes 88,668 144,281
Decrease (Increase) in Accounts Receivable (137,789) 77,790
Increase (Decrease) in Accounts Payable
and Accrued Liabilities 13,424 (280,258)
---------- ----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 218,872 272,520
CASH FLOWS FROM
INVESTING ACTIVITIES:
Decrease (Increase) in Advances to Affiliate 544,759 1,209,156
Decrease (Increase) in Other Assets (9,726) 54,873
Purchase of Drilling Equipment (116,711) (2,089,484)
Purchase of Oil and Gas Properties (470,545) (296,409)
---------- ----------
NET CASH PROVIDED (USED)BY
INVESTING ACTIVITIES (52,223) (1,121,864)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Additions to Notes Payable -- 587,603
Payments of Notes Payable (83,383) (141,000)
Issuance of Preferred Stock 188,577 227,425
Exercise of Common Stock Warrants 1,000 --
Retirement of Common Stock -- (15,000)
Payments of Preferred Stock Dividends (199,579) (147,923)
---------- ----------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (93,385) 511,105
---------- ----------
NET INCREASE (DECREASE) IN CASH 73,264 (338,239)
CASH AT BEGINNING OF PERIOD 131,465 480,952
---------- ----------
CASH AT END OF PERIOD $ 204,729 $ 142,713
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 24,067 $ 5,062
========== ==========
Cash Paid for Income Taxes $ -- $ --
========== ==========
</TABLE>
The Accountants' Review Report and accompanying notes are an
integral part of these financial statements.
F-30
<PAGE> 67
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
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.
PRINCIPLES OF CONSOLIDATION
The accompanying financial statements 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 partnerships in which it participates. All material intercompany
accounts and transactions have been 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.
F-31
<PAGE> 68
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
DRILLING RIG OPERATIONS
The Company follows the completed contract method of accounting for turnkey
drilling arrangements. Under this method, all income under drilling contracts,
expenses under 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.
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.
F-32
<PAGE> 69
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
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.
The costs of drilling exploratory 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 reclassification 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 recognized 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 estimated future cash flows discounted at 10%.
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 3 months ended June 30, 2000 and 1999:
F-33
<PAGE> 70
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
3 Months
Basic Eps Computation B June 30, 2000
----------------------- -------------
Net Income $ 83,087
Less: Preferred Stock Dividends (104,640)
----------
Earnings Available to Common Stockholders $ (21,553)
==========
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
April 1 - June 30 5,809,794 100.0% 5,809,794
June 8 - June 30 1,000 24.4% 244
---------
Weighted Average Shares 5,810,038
=========
3 Months
June 30, 2000
-------------
$ (0.00)
3 Months
Basic EPS Computation B June 30, 1999
--------------------- -------------
Net Income $ 78,478
Less: Preferred Stock Dividends (78,365)
-----------
Earnings Available to Common Stockholders $ 113
===========
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- ---------- --------------
April 1 - June 30 5,166,578 100.0% 5,166,578
---------
Weighted Average Shares 5,166,578
=========
3 Months
June 30, 1999
-------------
Basic EPS $ 0.00
------
The following is a reconciliation of the numerators and denominators used
in the calculation of Basic EPS for the 6 months ended June 30, 2000 and 1999:
6 Months
Basic Eps Computation B June 30, 2000
--------------------- -------------
Net Income $ 182,569
Less: Preferred Stock Dividends (199,579)
---------
Earnings Available to Common Stockholders $ (17,010)
=========
F-34
<PAGE> 71
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
January 1 - June 30 5,809,794 100.0% 5,809,794
June 8 - June 30 1,000 12.2% 122
---------
Weighted Average Shares 5,809,916
=========
6 Months
June 30, 2000
-------------
Basic EPS $ (0.00)
-------
6 Months
BASIC EPS COMPUTATION B June 30, 1999
--------------------- -------------
Net Income $ 310,454
Less: Preferred Stock Dividends (147,923)
---------
Earnings Available to Common Stockholders $ 162,531
=========
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
January 1 - June 30 5,171,578 100.0% 5,171,578
February 1- June 30 (5,000) 83.3% (4,167)
---------
Weighted Average Shares 5,167,411
=========
6 Months
June 30, 1999
-------------
Basic EPS $ 0.03
------
INCOME TAXES
Income taxes are provided based on earnings reported for financial
statement purposes. The provisions for income taxes differ from the amounts
currently payable because of temporary differences (primarily intangible
drilling costs and the Company's net operating loss carryforward) 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. The Company defines cash equivalents as
short-term and highly liquid investments that are both readily convertible to
known amounts of cash and have an original maturity of less than 90 days..
F-35
<PAGE> 72
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
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 $836,806 and
$928,800 during the three months ended June 30, 2000 and 1999, respectively, and
$1,697,418 and $3,008,400 during the six months ended June 30, 2000 and 1999,
respectively. The Company receives a management fee from the partnerships for
its services in connection with the selection of the joint venture prospects and
the initial operations of the joint venture in addition to syndication fees for
funds raised directly by the Company. Management fees and syndication fees
earned during the three months ended June 30, 2000 and 1999 amounted to $31,537
and $60,000, respectively, and $73,232 and $115,675 during the six months ended
June 30, 2000 and 1999, respectively.
In connection with the sponsorship of oil and gas partnerships, the Company
is reimbursed by the partnerships for certain operating and overhead costs
incurred on their behalf, including filing fees, legal fees, accounting fees,
printing costs and other miscellaneous expenses. These reimbursements, which are
offset against marketing and general and administrative costs, totaled $17,991
and $33,600 during the three months ended June 30, 2000 and 1999, respectively,
and $55,951 and $65,415 during the six months ended June 30, 2000 and 1999,
respectively, and are netted against marketing costs in the accompanying
financial statements.
Included in the Company=s financial statements are contributions made to
the various Company sponsored oil and gas partnerships, less the applicable loss
generated by these partnerships relative to the Company's percentage ownership.
The Company has allocated, on a pro-rata basis the amounts associated with these
investments to the appropriate asset, liability, income and expense accounts.
3. RELATED PARTY TRANSACTIONS
--------------------------
STOCK TRANSACTIONS
As of June 30, 2000, there are 5,810,794 shares of common stock issued and
outstanding. A total of 3,126,893 shares are held by Blue Ridge Group, Inc. and
the remainder of 2,683,901 shares are held by approximately 500 shareholders, 40
of which are original stockholders of the Company.
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 June 30,
2000, BR Group owned warrants to purchase an additional 4,000,000 shares of
common stock at $0.05 per share which expire March 31, 2003.
ADVANCES FROM RELATED PARTIES
During 1998, the Company agreed with Blue Ridge Group, Inc. to acquire and
develop oil and gas properties and drilling equipment in the Appalachian Basin
of Kentucky. In order to facilitate the acquisition of these properties the
Company advanced approximately $1,300,000, bearing interest at 12% per annum, to
Blue Ridge Group, Inc. As of June 30, 2000 approximately $98,989 in interest
F-36
<PAGE> 73
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
had been earned under this arrangement and the balance had been paid down to
$82,545 via the drilling of gas wells and the purchase of drilling equipment.
Additionally, Blue Ridge Group, Inc. provides various management,
administrative, accounting and geological services for the Company at a rate of
$20,000 per month which has been determined on a proportional basis because
specific identification of expenses is not practical. Management believes that
this cost allocation method is reasonable and represents the fair value of the
services rendered. The Company also reimbursed Blue Ridge Group for direct costs
paid on its behalf. As of June 30, 2000 and 1999, approximately $0 was due and
payable to Blue Ridge Group under this arrangement.
4. PROPERTY AND EQUIPMENT
----------------------
Property and equipment, stated at cost, consisted of the following at June
30 2000 and December 31,1999:
2000 1999
------------- ----------
Oil and Gas Properties $1,678,719 $1,208,175
Drilling Rigs and Equipment 2,222,485 2,208,175
Furniture and Fixtures 364 364
---------- ----------
3,901,568 3,314,313
Less Accumulated Depreciation 207,707 135,707
---------- ----------
$3,693,861 $3,178,606
Depreciation expense was $36,000 and $17,221 during the three months ended
June 30, 2000 and 1999, respectively, and $72,000 and $20,253 during the six
months ended June 30, 2000 and 1999, respectively.
During the first quarter of 1999 the Company consummated the purchase of an
Ingersoll Rand drilling rig and its ancillary equipment for approximately $1.35
million of which approximately $600 thousand was provided by long term debt. In
June, 1999 the Company consummated the purchase of another Ingersoll Rand
drilling rig from Blue Ridge Group, Inc. for approximately $750 thousand.
5. 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 two years from issuance,
whichever comes first.
The following are the primary properties held by BR Energy as of
October 31, 2000:
Lawrence County, Kentucky: During the second quarter of 2000, BR Energy
committed to the acquisition and development of undeveloped and non-producing
oil and gas leases consisting of a 50% Working Interest in 11 wells to be
drilled in the Boon's Camp Prospect and a 50% Working Interest in 11 wells to be
drilled in the Contrary Creek Prospect in Lawrence County, Kentucky. Drilling in
the Boon's Camp Prospect will begin during the third quarter of 2000 and
drilling of the Contrary Creek Prospect is scheduled to begin during the fourth
quarter of 2000.
F-37
<PAGE> 74
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
Logan County, West Virginia: During the second quarter of 2000, BR
Energy committed to the acquisition and development of undeveloped and
non-producing oil and gas leases consisting of a 50% Working Interest in 5
wells to be drilled in the McDonald Prospect in Logan County, West Virginia.
Drilling in this prospect is scheduled to begin during the fourth quarter of
2000.
Tyler County, Texas: During the second quarter of 2000, BR Energy
committed to the acquisition and development of undeveloped and non-producing
oil and gas leases consisting of a 40% Working Interest in 2 wells to be
drilled in the West Pebble Island Prospect in Tyler County, Texas. Drilling in
this prospect is scheduled to begin during the fourth quarter of 2000.
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.
6. STOCKHOLDERS' EQUITY
--------------------
The Company is authorized to issue two classes of stock that are
designated, respectively, common and preferred stock. As of June 30, 2000, the
Company was authorized to issue 25,000,000 shares of stock, 20,000,000 being
designated as common stock and 5,000,000 shares designated as preferred stock.
COMMON STOCK
The Company was organized in November, 1994, as a Nevada corporation under
the name of Gem Source, Incorporated (Gem Source) with an initial issuance of
1,000,000 shares of Common Stock with a par value of $0.001 per share. In 1995,
Gem Source had an offering of 1,633,000 shares under Rule 504, an exemption
under Regulation D from full registration with the SEC to bring the total
outstanding shares of common stock to 2,633,000.
F-38
<PAGE> 75
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
In connection with the sale of the Company's Series D. Preferred Stock, the
Company issued one Series D Warrant, for the purchase of one share of the
Company's Common Stock, with each share of Series D Preferred Stock sold. As of
June 30, 2000 and December 31, 1999, there were 696,600 and 636,950 Series D
Warrants issued and outstanding, respectively, 1,000 shares of which had been
exercised in June, 2000.
As of June 30, 2000, BR Group owned warrants to purchase 4,000,000 shares of
the Company's common stock at $0.05 per share. These warrants expire March 31,
2003.
The Company has issued, or agreed to issue, several series of Warrants to
purchase the Company's Common Stock, at terms expiring from 2001 through 2004
and prices ranging from $1.00 to $3.00, in connection with the sale of units in
some of its limited partnerships and with the acquisition of some proved oil
and gas properties. As of June 30, 2000 and December 31, 1999, there were
2,978,131 such Common Warrants outstanding, respectively.
SERIES D PREFERRED STOCK
During 1998, the Company authorized the issuance and sale of 1,000,000
shares of Series D Preferred Stock ("Series D Stock") which has a par value of
$0.001 per share at $5.00 per share. The Series D Stock bears a 12% per annum
dividend payable monthly. In addition, the Company will issue one Common Stock
Warrant exercisable to purchase one share of the Company's Common Stock for
$1.00 with each share of Series D Stock sold. Each share of the Series D Stock
shall be converted automatically into one (1) share of Common Stock effective
when a registration statement for the Common Stock is filed with the SEC or two
years from issuance, whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series D Stock shall be
entitled to receive, prior and in preference to any distribution of any assets
or surplus funds of the Company, the amount of $5.00 per share plus all unpaid
dividends on such share of each share of Series D Stock then held by the
shareholder. At June 30, 2000 and December 31, 1999 there were 697,600 and
636,950 shares of Series D Stock issued and outstanding, respectively.
F-39
<PAGE> 76
EXHIBIT
NUMBER DESCRIPTION
(3)(i) Articles of Incorporation of Blue Ridge Energy, Inc.
(3)(ii) Bylaws of Blue Ridge Energy, Inc.
10.1 Turnkey drilling contract - Blue Ridge Energy Production Fund
dated August 1, 1996
10.2 Turnkey drilling contract - Smackover/Woodbine I Joint Venture
dated October 1, 1996
10.3 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue
Ridge Group, Inc. dated October 1, 1996
10.4 Turnkey drilling contract - Paluxy Joint Venture, Ltd. dated
February 24, 1997
10.5 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue
Ridge Group, Inc. dated February 24, 1997
10.6 Turnkey drilling contract - Home Stake Joint Venture Ltd.
dated May 21, 1997
10.7 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue
Ridge Group, Inc. dated May 21, 1997
10.8 Turnkey drilling contract - Sherman/Moore #1 Joint Venture,
Ltd. dated September 26, 1997
10.9 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue
Ridge Group, Inc. dated September 26, 1997
10.10 Turnkey drilling contract - Phillips/Blue Ridge Joint Venture
#1, Ltd. dated February 10, 1998
10.11 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue
Ridge Group, Inc. dated February 10, 1998)Tj
10.12 Turnkey drilling contract - 1998 Year End Drilling Programs,
Ltd. dated December 1, 1998)Tj
10.13 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue
Ridge Group, Inc. dated December 1, 1998
10.14 Turnkey drilling contract - Harlan County Limited Partnership,
Ltd. dated March 4, 1999)Tj
10.15 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue
Ridge Group, Inc. dated March 4, 1999
10.16 Turnkey drilling contract - Cumberland Gap 10 Limited
Partnership, Ltd. dated April 13, 1999
10.17 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue
Ridge Group, Inc. dated April 13, 1999
10.18 Purchase contract for Ingersoll-Rand RD-20 drilling rig - from Noland
Company dated February 6, 1998
10.19 Bill of Sale of Ingersoll-Rand T-4 drilling rig - Blue Ridge
Group, Inc. to Blue Ridge Energy, Inc. dated June 30, 1999
10.20 Promissory Note for $126,000 from Blue Ridge Energy, Inc. to
Blue Ridge Group, Inc. dated June 30, 1996
10.21 Letter agreement and line of credit for $1,500,000 between
Blue Ridge Group, Inc. and Blue Ridge Energy, Inc. for the
acquisition by Energy of a 75% W.I. in 50 oil & gas wells in
Appalachian Basin dated August 31, 1998
F-40
<PAGE> 77
10.22 Management Services contract between Blue Ridge Energy, Inc.
and Blue Ridge Group dated September 30, 1996
10.23 Common Stock Purchases Warrant between Blue Ridge Energy, Inc.
and Blue Ridge Group for purchase of 2,000,000 shares of Blue
Ridge Energy, Inc. common stock - dated June 30, 1996
10.24 Common Stock Purchase Warrant between Blue Ridge Energy, Inc.
and Blue Ridge Group, Inc. for purchase of 5,000,000 of Blue
Ridge Energy, Inc.
10.39 Limited Partnership Agreement of Home Stake Joint Venture,
Ltd. BR Energy's other limited partnership agreements are
substantially similar in contents to the Homestake Joint
Venture.
11 Computation of per share earnings - included in Part F/S
13 Quarterly report on Form 10-QSB for the period ended September
30, 1999. Incorporated by reference to part F/S of the Form
10-SB, previously filed on November 10, 1999
27.1 Financial Data Schedule
27.2 Financial Data Schedule
27.3 Financial Data Schedule
27.4 Financial Data Schedule
EXHIBITS PREVIOUSLY FILED WITH AMENDMENT NUMBER 2
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Blue Ridge Energy, Inc. Registrant
Date: December 21, 2000 By: /s/ JAMES T. COOK, JR.
---------------------------------------
James T. Cook, Jr.
Director, Senior Vice President-Finance
and Chief Financial Officer
F-41
