<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended SEPTEMBER 30, 2000
--------------------
Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from ____________ to ______________
Commission File No. 0-277443
BLUE RIDGE ENERGY, INC.
-------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
NEVADA 61-1306702
------------------------------- -------------------
(State or Other Jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
632 ADAMS STREET, SUITE 710, BOWLING GREEN, KY 42101
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(270) 842-2421
----------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
N/A
---------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes __X__ No ____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 6,077,044
---------------------------
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
(a) FINANCIAL STATEMENTS OF REGISTRANT
INDEX NUMBER
Condensed Balance Sheets (Unaudited) as of September 30, 2000
and December 31, 1999. 2-3
Condensed Statements of Income (Unaudited) for the three
months and nine months ended September 30, 2000 and 1999. 4
Condensed Statements of Cash Flows (Unaudited) for the
nine months ended September 30, 2000 and 1999. 5
Notes to Condensed Financial Statements (Unaudited) 6-14
Report on Review by Independent Accountants 15
The condensed financial statements of the Registrant 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, the Registrant 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 financial statements and the notes thereto included in the Form 10- KSB of
the Registrant for its fiscal year ended December 31, 1999.
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.
b) MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS 16-20
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 2. CHANGES IN SECURITIES 20
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 20
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 5. OTHER INFORMATION 21
ITEM 6. EXHIBITS AND REPORTS OF FORM 8-K 21
1
<PAGE> 3
BLUE RIDGE ENERGY, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2000 1999
---------- ----------
ASSETS
CURRENT ASSETS:
Cash $ 55,621 $ 131,465
Accounts Receivable:
Managed Limited Partnerships 729,425 337,276
Trade and Other 96,342 74,275
Advances to Related Parties 165,723 627,304
Prepaid Expenses 73,001 --
---------- ----------
TOTAL CURRENT ASSETS 1,120,112 1,170,320
PROPERTY AND EQUIPMENT, NET 3,577,255 3,178,606
OTHER ASSETS 490 10,810
---------- ----------
TOTAL ASSETS $4,697,857 $4,359,736
========== ==========
The accompanying notes are an integral part
of these financial statements
2
<PAGE> 4
BLUE RIDGE ENERGY, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------- -----------
LIABILITIES AND
---------------
STOCKHOLDERS' EQUITY
--------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $ 227,155 $ 90,835
Current Portion Long Term Debt 149,305 110,231
----------- -----------
TOTAL CURRENT LIABILITIES 376,460 201,066
LONG TERM DEBT 337,207 418,511
DEFERRED INCOME TAX LIABILITY 260,778 150,139
----------- -----------
TOTAL LIABILITIES 974,445 769,716
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 5,000,000
shares authorized; 437,350 and 636,950 shares
issued and outstanding at September 30, 2000
and December 31, 1999, respectively 437 637
Common Stock, $0.005 par value; 20,000,000
shares authorized; 6,077,044 and 5,809,794 shares
issued and outstanding at September 30, 2000
and December 31, 1999, respectively 30,385 29,049
Additional Paid-In Capital 4,402,357 4,208,735
Accumulated Deficit (709,767) (648,401)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 3,723,412 3,590,020
----------- -----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,697,857 $ 4,359,736
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
3
<PAGE> 5
BLUE RIDGE ENERGY, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
3 MONTHS ENDED 9 MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
OPERATING REVENUES: 2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Turnkey Contract Sales $ 966,303 $ 1,113,979 $ 2,663,721 $ 4,122,379
Management Fees 14,249 70,523 87,481 186,198
Drilling Services Sales 358,075 179,350 936,719 474,002
Oil and Gas Sales 27,081 30,500 148,117 44,690
----------- ----------- ----------- -----------
Total Operating Revenues 1,365,708 1,394,352 3,836,038 4,827,269
OPERATING COSTS AND
OTHER EXPENSES:
Turnkey Contract Costs 613,961 902,500 1,942,776 3,319,500
Drilling Services Costs 317,415 197,671 759,204 488,783
Lease Operating Costs 39,433 25,000 63,193 32,482
Depreciation, Depletion
and Amortization 36,046 51,000 108,046 71,253
Marketing Costs 22,992 35,161 31,621 216,073
General and Administrative Costs 236,864 65,207 543,956 147,168
----------- ----------- ----------- -----------
Total Operating Costs 1,271,711 1,276,539 3,448,796 4,275,259
----------- ----------- ----------- -----------
OPERATING INCOME 93,997 117,813 387,242 552,010
OTHER INCOME (EXPENSE):
Interest Income (Expense) (26,176) (6,847) (48,184) 13,689
----------- ----------- ----------- -----------
Total Other Income (26,176) (6,847) (48,184) 13,689
----------- ----------- ----------- -----------
INCOME BEFORE TAXES 67,821 110,966 339,058 565,699
Income Tax Provision (22,380) (42,400) (111,048) (186,681)
----------- ----------- ----------- -----------
NET INCOME $ 45,441 $ 68,566 $ 228,010 $ 379,018
=========== =========== ========= ===========
EARNINGS PER
COMMON SHARE:
Basic $ (0.01) $ (0.00) $ (0.01) $ 0.03
=========== =========== ========= ===========
Diluted $ (0.01) $ (0.00) $ (0.01) $ 0.03
=========== =========== ========= ===========
Weighted Average Common
Shares Outstanding 5,942,907 5,581,729 5,854,960 5,305,309
=========== =========== ========= ===========
</TABLE>
The accompanying notes are an integral
part of these financial statements.
4
<PAGE> 6
BLUE RIDGE ENERGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
9 MONTHS ENDED
SEPTEMBER 30,
OPERATING REVENUES: 20000 1999
--------------------- ----------- -----------
CASH FLOWS FROM
OPERATING ACTIVITIES:
<S> <C> <C>
Net Income (Loss) $ 228,010 $ 379,018
Adjustments to Reconcile Net Income to
Net Cash Flows from Operating Activities:
Depreciation, Depletion and Amortization 108,046 71,253
Increase (Decrease) in Deferred Taxes 110,639 186,681
(Decrease) in Drilling Advances --- (284,074)
Decrease (Increase) in Accounts Receivable (414,216) (528,126)
Increase (Decrease) in Accounts Payable
and Accrued Liabilities 136,320 24,309
----------- -----------
NET CASH PROVIDED (USED) BY
OPERATING ACTIVITIES 168,799 (150,939)
CASH FLOWS FROM
INVESTING ACTIVITIES:
Decrease (Increase) in Advances to Affiliate 461,581 1,168,016
Decrease (Increase) in Other Assets (62,681) 71,696
Purchase of Drilling Equipment (107,087) (2,101,484)
Purchase of Oil and Gas Properties (399,711) (325,665)
----------- -----------
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES (107,898) (1,187,437)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Additions to Notes Payable 75,000 587,603
Payments of Notes Payable (117,230) (181,039)
Issuance of Preferred Stock 187,758 738,036
Exercise of Common Stock Warrants 7,000 12,500
Retirement of Common Stock --- (15,000)
Payments of Preferred Stock Dividends (289,273) (226,579)
----------- -----------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (136,745) 915,521
----------- -----------
NET INCREASE (DECREASE) IN CASH (75,844) (422,855)
CASH AT BEGINNING OF PERIOD 131,465 500,877
=========== ===========
CASH AT END OF PERIOD $ 55,621 $ 78,022
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $48,184 $ 13,414
=========== ===========
Cash Paid for Income Taxes $ 409 $ ---
=========== ===========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
5
<PAGE> 7
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 inter company
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.
6
<PAGE> 8
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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.
7
<PAGE> 9
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 September 30, 2000 and
1999:
8
<PAGE> 10
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
3 Months
Basic EPS computation B September 30, 2000
--------------------- ------------------
Net Income $ 45,441
Less: Preferred Stock Dividends (89,694)
----------
Earnings Available to Common Stockholders $ (44,253)
==========
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
April 1 - September 30 5,809,794 100.0% 5,809,794
June 8 - September 3 2,000 24.4% 488
August 15 - September 30 265,500 50.0% 132,625
---------- ----------
Weighted Average Shares 6,077,294 5,942,907
==========
3 Months
September 30, 2000
------------------
Basic EPS $ (0.01)
----------
3 Months
Basic EPS computation B September 30, 1999
--------------------- ------------------
Net Income $ 68,566
Less: Preferred Stock Dividends (78,656)
----------
Earnings Available to Common Stockholders $ (10,090)
==========
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
July 1 - September 30 5,166,578 100.0% 5,166,578
August 1 - September 30 622,416 66.7% 415,151
--------- ----------
Weighted Average Shares 5,788,994 5,581,729
3 Months
September 30, 1999
------------------
Basic EPS $ (0.00)
----------
9
<PAGE> 11
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
The following is a reconciliation of the numerators and denominators used
in the calculation of Basic EPS for the 9 months ended September 30, 2000 and
1999:
9 Months
Basic EPS computation B September 30, 2000
--------------------- ------------------
Net Income $ 228,010
Less: Preferred Stock Dividends (289,273)
----------
Earnings Available to Common Stockholders $ (61,263)
==========
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
January 1 - September 30 5,809,794 100.0% 5,809,794
June 8 - September 30 2,000 41.4% 828
August 15 - September 30 265,500 16.7% 44,338
--------- ----------
Weighted Average Shares 6,077,294 5,854,960
==========
9 Months
September 30, 2000
------------------
Basic EPS $ (0.01)
------------
9 Months
Basic EPS computation B September 30, 1999
--------------------- ------------------
Net Income $ 379,018
Less: Preferred Stock Dividends (226,579)
----------
Earnings Available to Common Stockholders $ 152,439
==========
Dates Shares Fraction Weighted
Outstanding Outstanding of Period Average Shares
----------- ----------- --------- --------------
January 1 - September 30 5,171,578 100.0% 5,171,578
February 1- September 30 (5,000) 83.3% (4,445)
August 1 - September 30 622,416 22.2% 138,176
----------- -----------
Weighted Average Shares 5,785,994 5,305,309
9 Months
September 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.
10
<PAGE> 12
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
Cash Equivalents
----------------
For purposes of reporting cash flows, cash includes cash on hand and cash on
deposit.
2. AFFILIATED OIL AND GAS PARTNERSHIPS
-----------------------------------
The Company provides turnkey drilling services for the various oil and gas
partnerships which it sponsors. Fees earned for these drilling services,
including the sale of leases to the partnerships, amounted to $966,303 and
$1,113,979 during the three months ended September 30, 2000 and 1999,
respectively, and $2,663,721 and $4,122,379 during the nine months ended
September 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
September 30, 2000 and 1999 amounted to $14,249 and $70,523, respectively, and
$87,481 and $186,198 during the nine months ended September 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 $8,142
and $40,300 during the three months ended September 30, 2000 and 1999,
respectively, and $64,093 and $105,715 during the nine months ended September
30, 2000 and 1999, respectively.
Included in the Company's financial statements are contributions made to the
various Company sponsored oil and gas partnerships, less the applicable loss
generated by these partnerships relative to the Company's percentage ownership.
The Company has allocated, on a pro-rata basis the amounts associated with these
investments to the appropriate asset, liability, income and expense accounts.
3. RELATED PARTY TRANSACTIONS
--------------------------
Stock Transactions
------------------
As of September 30, 2000, there are 6,077,044 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 2,945,051 shares are held by approximately 550
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 December
31, 1999, BR Group owned warrants to purchase an additional 4,000,000 shares of
common stock at $0.05 per share.
Advances from Related Parties
-----------------------------
11
<PAGE> 13
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
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 September 30, 2000 approximately $98,989 in
interest had been earned under this arrangement and the entire balance had been
repaid via the drilling of 10 gas wells and the purchase of drilling equipment.
Additionally, Blue Ridge Group, Inc. provides various management,
administrative, accounting and geological services for the Company at a rate of
$20,000 per month 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 September 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
September 30, 2000 and December 31,1999:
2000 1999
----------- -----------
Oil and Gas Properties $1,607,886 $ 1,208,175
Drilling Rigs and Equipment 2,212,861 2,105,774
Furniture and Fixtures --- 364
----------- -----------
3,820,747 3,314,313
Less Accumulated Depreciation 243,492 135,707
----------- -----------
$ 3,577,255 $ 3,178,606
=========== ===========
Depreciation expense was $36,046 and $51,000 during the three months ended
September 30, 2000 and 1999, respectively, and $108,046 and $71,253 during the
nine months ended September 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.
At September 30, 2000, the Company had committed to the following drilling
and development activities:
12
<PAGE> 14
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
During the second quarter of 2000, the Company committed to the acquisition
and development of a 50% Working Interest in 11 wells in the Boon's Camp
Prospect and a 50% Working Interest in 11 wells in the Contrary Creek Prospect
in Lawrence County, Kentucky. Drilling in the Boon's Camp Prospect began during
the third quarter of 2000 and drilling of the Contrary Creek Prospect is
scheduled to begin during the fourth quarter of 2000.
During the second quarter of 2000, the Company committed to the acquisition
and development of a 50% Working Interest in 5 wells in the McDonald Prospect in
Logan County, West Virginia. Drilling in this prospect is scheduled to begin
during the fourth quarter of 2000.
During the second quarter of 2000, the Company committed to the acquisition
and development of a 40% Working Interest in 2 wells in the West Pebble Island
Prospect in Tyler County, Texas. Drilling in this prospect is scheduled to begin
during the fourth quarter of 2000.
At the end of 1999, the Company 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.
All of the costs associated with the development of these projects are to be
borne by various Limited Partnerships sponsored by the Company.
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 September 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.
13
<PAGE> 15
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000
During the third quarter of 2000, 260,500 shares of the Company's Series D
Preferred Stock was converted into 260,500 shares of the Company's Common stock.
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
September 30, 2000 and 1999, there were 690,600 and 45,485 Series D Warrants
issued and outstanding, respectively, 7,000 shares of which had been exercised
in 2000.
The Company has issued, or agreed to issue, several series of Warrants to
purchase the Company's Common Stock, at varying terms and prices, in connection
with the sale of units in some of its limited partnerships and in connection
with the acquisition of some proved oil and gas properties. As of September 30,
2000 and December 31, 1999, there were 2,978,131 such 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 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, 260,250 shares
of the Company's Series D Preferred Stock was converted into 260,250 shares of
the Company's Common stock. At September 30, 2000 and December 31, 1999 there
were 437,350 and 636,950 shares of Series D Stock issued and outstanding,
respectively.
14
<PAGE> 16
REPORT OF REVIEW BY INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of Blue Ridge Energy, Inc.
We have reviewed the accompanying condensed balance sheet of Blue Ridge
Energy, Inc. as of September 30, 2000 and the related condensed statements of
income for each of the three month and nine month periods ended September 30,
2000 and 1999 and the condensed statements of cash flows for the six month
period ended September 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 for Form 10-QSB. 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.
15
<PAGE> 17
Looney, Samson & Associates, P.L.L.C.
Dallas, Texas
November 13, 2000
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
FINANCIAL OVERVIEW:
-------------------
Blue Ridge Energy, Inc. ("the Company") is an oil and gas exploration
company incorporated in the state of Nevada with its home office in the
Commonwealth of Kentucky and presently conducting operations in Texas,
New Mexico, West Virginia and Kentucky. During March of 1996, Blue Ridge Group,
Inc. ("Group") acquired a majority interest in the Common Stock of the Company
with the express intent to develop it into a successful oil and gas exploration
and development company. The Company's Common Stock is traded "over-the-counter"
with "BREY" as its stock symbol.
The Company is engaged in the exploration and development of oil and gas
leases located primarily in Texas, Kentucky, West Virginia and New Mexico
through one or more of the following activities: (i) acquisition of oil and gas
leases, (ii) investment in partnerships sponsored by itself or affiliates; (iii)
purchase of producing oil and gas properties and (iv) providing drilling
services. Wells drilled and developed by the Company include both exploratory
and development wells located primarily in Texas and Kentucky. 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, a provider of drilling services and as an independent
producer of oil and gas wells.
As of September 30, 2000, the Company has participated, either
directly or indirectly through its sponsored limited partnerships, in 51 wells,
of which 29 are presently productive. These wells are located in Kentucky,
Texas, West Virginia and New Mexico. During the first three quarters of 2000,
the Company participated in 15 wells: 8 wells in Kentucky, 6 wells in West
Virginia and 1 well in Texas
The following are the primary properties held by The Company as of
September 30, 2000:
LAWRENCE AND JOHNSON COUNTIES, KENTUCKY: During the second quarter of
2000, the Company committed to the acquisition and development of a 50% Working
Interest in 11 wells in the Boon's Camp Prospect and a 50% Working Interest in
11 wells in the Contrary Creek Prospect in Lawrence County, Kentucky. Drilling
in the Boon's Camp Prospect began 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, the
Company committed to the acquisition and development of a 50% Working Interest
in 5 wells in the
16
<PAGE> 18
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, the Company
committed to the acquisition and development of a 40% Working Interest in 2
wells 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, the Company 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, the
Company acquired an interest in five (5) development wells in Mingo and Wyoming
Counties, West Virginia. Drilling activities for these wells began in December,
1999. During the first quarter of 2000, the Company 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, the Company 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 411 MCFG/D but water broke in 4
days later. A recompletion attempt has failed and management decide to plug and
abandon the well in October, 2000.
HARLAN / BIG SANDY PROSPECTS: Since December 31, 1998, the Company has
embarked on an Appalachian Basin development well drilling program in Bell, Knox
and Harlan counties of Kentucky. As of June 30, 1999, 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 is a dry hole.
HOME STAKE #1: The Home Stake #1 oil well is a development well
located in Lea County, New Mexico. The Company 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.
AMEND #1: The Amend #1 well is a development well located in Sherman
County, Texas.
DRILLING RIGS: During 1999, the Company acquired two drilling rigs and
ancillary equipment. Rig #4 is a 1999 Ingersoll Rand RD-20 which is capable of
drilling 5,000 feet and Rig #2 which is an Ingersoll Rand TR-4 acquired from BR
Group which is capable of drilling 3,000 feet. The drilling rigs are managed by
BR Group on behalf of the Company and are used to drill wells for oil and gas
partnerships sponsored by the Company as well as on a contract basis for other
third parties.
By September 30, 2000, the Company had total assets of $4.7 million, total
liabilities of $1.0 million and shareholders' equity of $3.8 million. The
Company's net income decreased to $258 thousand during the first nine months of
2000 as compared to $379 thousand for the same period in 1999, Earnings per
common share, which take into account cash dividends paid on preferred
17
<PAGE> 19
stock, decreased to $(0.01) per share during the first nine months of 2000 as
compared to $0.03 during the same period in 1999. All per share data in this
report has been adjusted to give effect to applicable stock issues and
conversions.
RECENT DEVELOPMENTS:
On March 1, 2000, Mr. Edward L. Stillie was appointed President and Chief
Executive Officer of The Company and Mr. Robert Burr resigned those two
positions while continuing as Chairman of the Board of Directors. Additionally,
on April 4, 2000, the Board of Directors was expanded to include six (6) members
and Mr Stillie along with Mr. Russell L. Vera and Mr. Harry J. Peters were
elected to the Board of Directors. On August 8, 2000, the Company's Annual
Meeting of Shareholders was held and all six of the previously mentioned
directors were re-elected for a term of one year.
INCOME STATEMENT REVIEW:
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999:
The Company's net income decreased to $228 thousand during the first three
quarters of 2000 as compared to $379 thousand for the same period in 1999.
Earnings per common share, which take into account cash dividends paid on
preferred stock decreased to $(0.01) per share during the first three quarters
of 2000 as compared to $0.03 during the same period in 1999.
Operating Revenues:
------------------
Operating revenues totaled $3.8 million during the nine months ended
September 30, 2000 as compared to the $4.8 million recorded during the nine
months ended September 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 $2.8 million during the nine months ended
September 30, 2000, as compared to the $3.8 million 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.
Other Operating Expenses:
------------------------
Marketing expenses decreased to $32 thousand during the first nine months
of 2000 from the $216 thousand experienced during this period in 1999 due to the
decreased activity in sponsoring Limited Partnerships previously discussed.
General and Administrative expenses increased 270% to $544 thousand during the
first three quarters of 2000 as compared to $147 thousand 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 442% to $(48) thousand in the first three
quarters of 2000 from $14 thousand due to increases in interest expense for
funds utilized in the purchase of two drilling rigs and development of oil and
gas properties.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999:
-----------------------------------------------
18
<PAGE> 20
The Company's net income decreased to $45 thousand during the second
quarter of 2000 as compared to $68 thousand for the same period in 1999, Earning
per common share, which take into account cash dividends paid on preferred stock
decreased to $(0.01) per share during the third quarter of 2000 as compared to
$(0.00) during the same period in 1999.
Operating Revenues:
------------------
Operating revenues remained $1.4 million during the three months ended
September 30, 2000 as compared to the $1.4 million recorded during the three
months ended September 30, 1999, The decrease in turnkey sales was offset by an
increased activity level in the operation of the Company's drilling rigs.
Direct Operating Costs:
----------------------
Direct operating costs totaled $1.0 million during the three months ended
September 30, 2000, as compared to the $1.1 million 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 $28 thousand during the third quarter of
2000 from the $35 thousand experienced during this period in 1999 due to the
decreased activity in sponsoring Limited Partnerships previously discussed.
General and Administrative expenses increased 264% to $237 thousand during the
third quarter of 2000 as compared to $65 thousand 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 271% to $(26) thousand in the third
quarter of 2000 from $(7) thousand due to increases in interest expense for
funds utilized in the purchase of two drilling rigs and development of oil and
gas properties.
BALANCE SHEET REVIEW:
---------------------
ASSETS:
-------
The Company's current assets remained decreased to $1.1 million at
September 30, 2000 as compared to $1.2 million at December 31, 1999 primarily
due to the utilization of Advances to Affiliates in purchasing and developing
oil and gas properties. The Company's operations were the primary source of the
fluctuations in accounts receivable and in cash. Property and equipment
increased 13% to $3.6 million at September 30, 2000 as compared to $3.2 million
at December 31, 1999 due to the purchase and development of oil and gas
properties as previously discussed.
LIABILITIES:
------------
The Company's current liabilities increased 88% to $377 thousand at
September 30, 2000 from $201 thousand at December 31, 1999 as a result of normal
fluctuations caused by ongoing
19
<PAGE> 21
operations. The Company has reduced its long term debt 22% to $412 thousand at
September 30, 2000 from $529 thousand at December 31, 1999 as result of
fulfilling its normal payment obligations.
Effective January 1, 1996, the Company 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
September 30, 2000 and December 31, 1999 the Company had recognized deferred
income tax liabilities of $261 thousand and $150 thousand, respectively as a
result of this methodology.
STOCKHOLDERS' EQUITY:
Total capital invested in the Company for Common and Preferred Stock
increased 5% to $4.4 million at September 30, 2000 from $4.2 million 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 $228 thousand, the Company's retained
earnings declined $62 thousand to an accumulated deficit of $710 thousand at
September 30, 2000 from an accumulated deficit of $648 thousand at December 31,
1999 as the result of payment of approximately $289 thousand of cash dividends
to the Company's Preferred Shareholders during the first three quarters of 2000.
CAPITAL RESOURCES AND LIQUIDITY:
As a result of the Company's equity transactions and increased operating
functions, at September 30, 2000 the current ratio was 2.98 to 1, a decrease of
49% 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.
The Company's primary source of cash in 1999 and 2000 was derived from
the sale of oil and gas limited partnerships, equity and the operation of oil
and gas properties. Without these sources of cash, the Company would not have
adequate sources of cash for its operations. While the company expects that its
sources of cash will not significantly change for the remainder of 2000, the
Company 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 September 30, 2000, the Company had sufficient cash to satisfy its
operating needs for a period of ninety (90) days or longer, considering the
funds receivable from its managed limited partnerships. The Company plans to
continue funding its operating needs by sponsoring limited partnership oil and
gas drilling programs.
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings pending against Blue Ridge Energy, Inc.
ITEM 2. CHANGES IN SECURITIES
20
<PAGE> 22
During the first quarter of 2000, the Company issued 60,650 shares of
Series D Preferred Stock for a net consideration of $188,577 (net of brokerage
commissions and legal expenses of approximately $114,673).These Preferred
Securities were sold to accredited investors using Regulation D, Rule 506 as an
exemption from registration. See the notes to the accompanying condensed
financial statements for a description of the terms of conversion or exercise of
the securities and warrants.
During the third quarter of 2000, 260,250 shares of the Company's
Series D Preferred Stock were converted into 260,250 shares of the Company's
Common Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual meeting of stockholders was held on
August 8, 2000.
(b) The directors elected at the meeting were:
<TABLE>
<CAPTION>
For Against Abstain
<S> <C> <C> <C>
Robert D. Burr 3,645,091 490 2,165,213
Edward L. Stillie 3,645,091 490 2,165,213
James T. Cook, Jr. 3,641,661 3,920 2,165,213
Gregory B. Shea 3,642,661 2,920 2,165,213
Harry J. Peters 3,642,661 2,920 2,165,213
Russell L. Vera 3,640,101 5,480 2,165,213
</TABLE>
(c) No other matters were voted on at the meeting.
The forgoing matters are described in detail in the Company's
proxy statement dated July 24, 2000 for the 2000 Annual Meeting of
Stockholders
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 2000.
21
<PAGE> 23
SIGNATURES
----------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BLUE RIDGE ENERGY, INC.
Date: November 14, 2000 By /s/ James T. Cook, Jr.
----------------- ------------------------
James T. Cook, Jr.
Sr. Vice President-Finance & CFO
22
