SEC Company Response from BLUE RIDGE ENERGY INC (CIK 0001050957) — Jul 1, 2005
BLUE RIDGE ENERGY INC (CIK 0001050957)
Date: July 1, 2005 · CIK: 0001050957 · Accession: 0000950152-05-005728
AI Filing Summary & Sentiment
File numbers found in text: 000-27443
Show Raw Text
<DOCUMENT>
<TYPE>CORRESP
<SEQUENCE>1
<FILENAME>filename1.txt
<TEXT>
<PAGE>
Bayou City Exploration, Inc.
Formally, Blue Ridge Energy, Inc.
10777 Westheimer, Suite 170
Houston, Texas 77042
June 30, 2005
Securities and Exchange Commission
Division of Corporate Finance, Mail Stop 7010
Washington, D.C. 20549-7010
Re: Blue Ridge Energy, Inc.
Form 10-KSB for Fiscal Year Ended December 31, 2004 Filed March 30, 2005
Form 10-QSB for Fiscal Quarter Ended March 31, 2005 Filed May 16, 2005
File No. 000-27443
Gentlemen:
Please reference the SEC June 20, 2005 letter, File No. 000-27443,
concerning Blue Ridge Energy, Inc.'s Form 10-KSB December 31, 2004 and Form
10-QSB March 31, 2005 filings. Listed below are the questions raised in the
letter with responses following the question.
Note 1, question 1.
"We note that you acquired a 35% interest in Channel LLC in March 2002,
and later transferred this investment to Blue Ridge Group in May 2003. Please
disclose the principal terms of the initial acquisition, including the amount
and form of consideration paid, and the manner of valuing any non-cash
components. Also describe your relationship with the counter party."
Reply: The initial acquisition was funded by a $455,000 cash payment at
closing and future obligations of $1,832,429. There were no non-cash components
to value. Channel LLC is an unrelated party. Blue Ridge Group, Inc. is a related
party.
Note 1, question 2.
"With regard to your May 2003 transfer of seismic information
associated with the Channel LLC acquisition to Blue Ridge Group, disclose the
terms under which you will be '...carried at no cost for 25% of any future
interests acquired and developed by BR Group through the utilization of this
data.' Describe the nature of costs that will likely be incurred in acquiring
and developing such interests, the provisions of operating arrangements
governing these activities, and any fees, profits or other consideration to
which BR Group or any other related parties will be entitled prior to releasing
funds for your benefit. It should be clear how your 25 percent interest would be
calculated, and how it relates to any cash flows that may ultimately be derived
from the interests.
"Additionally, we note your disclosure explaining that when BR Group
has recouped 100% of expenditures for the seismic information and the
acquisition and
<PAGE>
development of oil and gas properties, you will have the right, but not the
obligation, to reverse your position with BR Group and receive 75% of the
interest in future oil and gas properties, while carrying BR Group for 25% of
the interest. Please expand your disclosure to clarify whether these terms
relate only to properties that you chose to acquire and develop after electing
to 'reverse your position,' as opposed to all properties acquired and developed
up to that point in time. Specify the terms governing the ownership and
operation of interests established prior to any such election date. It should
also be clear how properties associated with the seismic information transferred
to BR Group will be differentiated from any other properties with which that
entity becomes involved.
"Tell us why BR Group offered to carry you at no cost for 25%, and
granted you the option to 'reverse your position,' after expending all of the
funds necessary to first acquire Channel LLC and the seismic information, and
then to acquire and develop property interests using that data; the economic
incentives for the arrangement are unclear."
Reply: BR Energy requested that it retain a 25% carried working
interest (proportionate to the working interest which BR Group elects to
acquire) in all wells in which BR Group elects to participate. The net revenue
interest for the carried working interest is approximately 75% of the 25%.
BR Group agreed to pay all costs associated with acquiring the prospect
leasehold acreage and all drilling and completion well costs. BR Energy's
carried working interest will become effective after each well starts
production.
The operating arrangements governing the drilling activity is the Joint
Operating Agreement attached to the Channel LLC sale agreement.
There are no fees, profits or other consideration payable to BR Group
or any other related party before BR Energy receives its net revenue interest.
If BR Energy elects to reverse its position with BR Group, whereby BR
Energy would receive 75% of the interest in future oil and gas properties and
"carry" BR Group for 25% of the interest, there is no consideration to be paid
by either party if this reversal occurs. The reversed 75% interest would apply
to all new properties acquired after the election by BR Energy which are
identified from the Channel LLC seismic data. For any properties developed
before the election, BR Group would retain its 75% interest. It was agreed by
the two companies that this carried working interest and the right to reverse
the position only applies to the prospects and wells identified from the Channel
LLC seismic data.
In the negotiation of the sale, BR Energy requested and BR Group agreed
with the 25% carried working interest and the reversal of position for the 75%
working interest. The economic incentive for BR Energy was to be able to resume
the operations in the program after BR Group recouped its investment and BR
Group's incentive was to keep the program going.
Note 3, question 3.
"After disclosing that BR Group provides you with various 'management,
administrative, accounting and geological services.' and incurs other costs on
your behalf, you explain that BR Group reimbursed you $140,000 for costs
incurred by you on
<PAGE>
behalf of BR Group. The arrangement that you describe would seem more likely to
require cash reimbursement from you to BR Group, than the other way around.
Further, it is unclear how the arrangement is related to the cash advanced form
BR Group, for which you issued a $500,000 promissory note at September 30, 2004.
"Please expand your disclosure to describe the nature of the $140,000
in costs incurred by you on behalf of BR Group, and to explain the reason for
the $500,000 cash advance. State the terms of any ongoing funding arrangements
that are in place, and provide disclosure necessary to comply with paragraph 4
of SFAS 57."
Reply: At the end of the third quarter of 2004, BR Group had advanced
BR Energy approximately $640,000 over the past 18 months to fund the on going
business of BR Energy. In April 2003, BR Energy moved into new office space
containing areas for expansion. Pending this expansion, BR Energy allowed BR
Group to house some of their engineering and landman consultants in the excess
space. During September 2004 BR Energy reviewed its records over these past 18
months to determine expenditures incurred in the Houston office by BR Energy on
behalf of BR Group. The analysis showed that for this time period 50% of the
office rent, telephone and office supplies and 100% of a contract administrative
assistant costs were chargeable to BR Group resulting in approximately $140,000
billable to them. Both companies agreed to settle the outstanding cash advances
and the office costs by applying the $140,000 against the $640,000 and
establishing a $500,000 promissory note bearing interest at 7.95% for a term of
eight years, with monthly payments of $7,056 for principal and interest. This
note is secured by any and all oil and gas production income that BR Energy
holds, now and future until the note has been paid in full.
Attached to this letter are the proposed amended disclosures for Notes
1 and 3 for the Form 10-KSB December 31, 2004 and for Note 3 for the Form 10-QSB
March 31, 2005.
The Company acknowledges that it is responsible for the adequacy and
accuracy of the disclosures in the filings, staff comments or changes to
disclosures in response to staff comments do not foreclose the Commission from
taking any action with respect to the filings, and the Company may not assert
staff comments as a defense in any proceeding initiated by the Commission or any
person under the federal security laws of the United States.
I trust the above explanations adequately answer the questions raised
in the June 20, 2005 letter. Bayou City Exploration, Inc. (formally Blue Ridge
Energy, Inc.) is prepared to file the necessary amendments after your
notification that the proposed disclosures are satisfactory. Continue to direct
all correspondence to my attention.
Sincerely,
\s\ Norman G. Haisler, Jr.
--------------------------
Norman G. Haisler, Jr.
Sr. VP-Finance and CFO
<PAGE>
Proposed Amended Disclosure 12-31-04 10-KSB Note 1
On March 11, 2002, BR Energy purchased, with an acquisition price of $2,287,429,
a 35% interest in Channel LLC, an unrelated party, resulting in a 17.5% working
interest in a large ongoing Texas onshore exploration program consisting of
48,000 miles of seismic data in the Texas Gulf Coast area and the oil and gas
properties acquired through the utilization of this data. The funding consisted
of $455,000 cash payment at closing and future obligations of $1,832,429.
Subsequently, BR Energy sold the Channel LLC interest to Blue Ridge Group, Inc.
(a related party more fully explained in Note 2) on May 23, 2003 and Blue Ridge
Group sold the interest to Texas H.R. LLC, an unrelated party, on July 14, 2004.
The centerpiece of this program utilized a large onshore Texas seismic database
comprising approximately 48,000 miles and covering 100+ counties of the Texas
Gulf Coast, East Texas and South Texas. The great majority of this data has
never been put into the "public domain" and was acquired by a major oil company
thought to be primarily exploring for large deep targets. The acquisition of
this interest and development of the oil and gas properties acquired through the
utilization of this data was to have been funded with the proceeds from the sale
of 500,000 shares of Series E Preferred Stock for $5,000,000 out of a 2002
private offering for 750,000 shares of Series E Preferred Stock under Regulation
D of Section 506 of the Securities Act of 1933.
In order to facilitate the purchase of this interest, BR Energy's majority
shareholder, Blue Ridge Group, Inc. (BR Group), committed to extending BR Energy
a $1,500,000 line of credit with a term of one year, bearing interest at 9% per
annum on all unpaid balances which was secured by all of BR Energy's interests
in the exploration program. This $1,500,000 balance was paid in full on
September 30, 2002 via the sale of 150,000 shares of BR Energy's Series E
Preferred Stock to BR Group for $1,500,000. At this time BR Group also committed
to purchase an additional 100,000 shares for $1,000,000 to be paid in four
quarterly installments. Two of these installments were paid by BR Group in
December 2002 and March 2003, thereby bringing BR Group's total investment in BR
Energy's Series E Preferred Stock to $2,000,000 as of March 31, 2003.
As a result of BR Energy not selling the remaining shares of Series E Preferred
Stock by the closing of the offering on December 31, 2002 to achieve the
$5,000,000 needed, and not having the required capital available to acquire and
develop the 100+ oil and gas prospects identified to date, BR Energy entered
into a Purchase and Sale Agreement with BR Group on May 23, 2003. BR Group
agreed to 1) retire its 200,000 shares of Series E Preferred Stock which it had
received for the $2,000,000 paid to BR Energy to date, 2) cancel its
subscription agreement for the remaining 50,000 shares of Series E Preferred
Stock, 3) assume the remaining $474,636 in BR Energy debt associated with the
acquisition of the seismic information and 4) commit to provide all funds
required by this interest in the acquisition and development of oil and gas
properties identified. BR Energy had originally recorded the acquisition cost of
$2,287,429 as an asset which was being amortized over four years and had a
balance of $1,718,677 as of May 2003 when this agreement with BR Group was
reached.
Under the terms of the Purchase and Sale Agreement, BR Energy agreed to repay
$187,000 of the funds received from the sale of the Series E Preferred Stock,
cancelled the remaining subscription receivable for 50,000 shares of Series E
Preferred Stock and transferred to BR Group all of its interest in the seismic
information (which had a book value of $1,718,677 when the agreement was
reached) and any future oil and gas prospects identified by the seismic data.
The net effect of the transaction was BR Energy recorded $568,752 as an increase
to Additional Paid-In Capital from BR Group. BR Energy retained all of its
interest in any oil and gas properties previously acquired and developed under
the Channel LLC purchase. Additionally, BR Energy requested that it retain a 25%
carried working interest (proportionate to the working interest which BR Group
elects to acquire) in all wells in which BR Group elects to participate. The net
revenue interest for the carried working interest is approximately 75% of the
25%. BR Group agreed to pay all costs associated with acquiring the prospect
leasehold acreage and all drilling and completion well costs. BR Energy's
carried working interest will become effective after each well starts
production. BR Energy requested that after BR Group has recouped from oil and
gas net revenues (revenue less severance taxes and royalty) 100% of the monies
expended for the $2,287,429 seismic
<PAGE>
acquisition, all prospect leasehold costs and all well drilling and completion
cost incurred after May 23, 2003, BR Energy shall have the right, but not the
obligation, to reverse its position with BR Group, whereby BR Energy would
receive 75% of the interest in future oil and gas properties and "carry" BR
Group for 25% of the interest. There is no consideration to be paid by either
party if this reversal occurs. If this election was made by BR Energy, the
reversed 75% interest would apply to all new properties acquired after the
election by BR Energy which are identified from the Channel LLC seismic data.
For any properties developed before the election, BR Group would retain its 75%
interest. It was agreed by the two companies that this carried working interest
and the right to reverse the position only applies to the prospects and wells
identified from the Channel LLC seismic data. During the second quarter of 2004
BR Group made a decision that they would no longer participate in projects
identified by the seismic data since the success of the wells was only marginal
and they felt it was unlikely that the program as a whole would be profitable.
On July 14, 2004 BR Group sold, with no reported gain, its 35% interest in
Channel LLC to Texas H.R. LLC, an unrelated party, and no longer had any rights
to use the 2D seismic data or participate in any new prospects from this data.
As a carried working interest owner, BR Energy had no decision making power to
sell the interest in Channel LLC, nor did it receive any consideration from the
sale, however, BR Energy was in agreement with BR Group's assessment of the
program and the sale. Under the July 14, 2004 sale agreement, BR Energy and
BR Group retained their ownership in the producing wells and reserved the right
to develop any prospects within the existing Area of Mutual Interest (AMI)
around the twenty prospects that had been drilled over the past two years. Only
one such wel