NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2013
NOTE A – BUSINESS DESCRIPTION AND PRESENTATION
The Company, through its wholly owned subsidiaries Mountaineer State Energy, Inc. and Mountaineer State Operations, LLC. operates oil and gas wells and mineral leases in Athens and Meigs Counties in Ohio and in Calhoun, Jackson and Roane Counties in West Virginia. As of December 31, 2013 the Company has 152 producing oil & gas wells, 31 non-producing wells and related equipment and mineral leases covering approximately 20,000 acres.
The company has drilled 8 wells during 2011 and one well in 2013 which will be completed in 2014. The balance of the wells in West Virginia and Ohio were, for the most part, drilled in the 1970’s and 1980’s.
The Company engaged the firm of independent oil and gas engineers Lee Keeling & Associates, Inc. to estimate the net oil and gas reserves. On the basis of their study, the estimates of future net revenues using a present value discount of 10% were estimated to be $11.3 million at December 31, 2013.
NCE also leases and operates a retirement community in King City Oregon, with a capacity of 114 residents.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows:
Principles of Consolidation
The consolidated financial statements include the accounts of New Concept Energy, Inc. and its majority-owned subsidiaries (collectively, the “Company”, New Concept or “NCE”) and are prepared on the basis of accounting principles generally accepted in the United States of America. All significant intercompany transactions and accounts have been eliminated.
Depreciation and Amortization
Depreciation is provided for in amounts sufficient to relate the cost of property and equipment to operations over their estimated service lives, ranging from 3 to 40 years. Depreciation is computed by the straight-line method.
Depreciation and amortization expense, which is included in operations, was $188,000, $165,000 and $122,000 for 2013, 2012 and 2011 respectively.
Depreciation, Depletion and Amortization of Producing Oil & Gas Properties
Depreciation, depletion and amortization (“DD&A”) of producing properties is computed on the unit-of-production method based on estimated proved oil and gas reserves. While total DD&A expense for the life of a property is limited to the property’s total cost, proved reserve revisions result in a change in timing of when DD&A expense is recognized.
The Company recorded depletion of mineral rights of $650,000, $ 614,000 and $294,000 in 2013, 2012 and 2011 respectively.
Segments
The Company operates two primary business segments; oil and gas operations and retirement facilities. Segment data is provided in “Note N” to these consolidated financial statements.
Major Purchaser
The Company sells most of its natural gas production to one purchaser and all of its oil production to one purchaser. While there is an available market for crude oil and natural gas production, we cannot be assured that the loss of this purchaser would not have a material impact on the Company.
Oil and Gas Reserves
Our proved oil and gas reserves are estimated by independent petroleum engineers. Reserve engineering is a subjective process that is dependent upon the quality of available data and the interpretation thereof, including evaluations and extrapolations of well flow rates and reservoir pressure. Estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, as well as economic factors such as changes in product prices, may justify revision of such estimates. Because proved reserves are required to be estimated using recent prices of the evaluation, estimated reserve quantities can be significantly impacted by changes in product prices.
The standardized measure of discounted future net cash flows and changes in such cash flows are prepared using assumptions required by the Financial Accounting Standards Board and the Securities and Exchange Commission. Such assumptions include using recent oil and gas prices and year-end costs for estimated future development and production expenditures. Discounted future net cash flows are calculated using a 10% rate. Changes in any of these assumptions could have a significant impact on the standardized measure. Accordingly, the standardized measure does not represent management’s estimated current market value of proved reserves. At December 31, 2013, the Company’s net book value of oil and natural gas properties exceeded the ceiling amount based on the unweighted arithmetic average of the first day of each month for the 12-month period ended December 31, 2013.
Full cost accounting
The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and natural gas properties (including such costs as leasehold acquisition costs, geological expenditures, dry hole costs, tangible and intangible development costs and direct internal costs) are capitalized as the cost of oil and natural gas properties when incurred.
The full cost method requires the Company to calculate quarterly, by cost center, a “ceiling,” or limitation on the amount of properties that can be capitalized on the balance sheet. To the extent capitalized costs of oil and natural gas properties, less accumulated depletion and related deferred taxes exceed the sum of the discounted future net revenues of proved oil and natural gas reserves, the lower of cost or estimated fair value of unproved properties subject to amortization, the cost of properties not being amortized, and the related tax amounts, such excess capitalized costs are charged to expense. Beginning December 31, 2009, full cost companies use the unweighted arithmetic average first day of the month price for oil and natural gas for the 12-month period preceding the calculation date to calculate the future net revenues of proved reserves. Prior to December 31, 2009, companies used the price in effect at the calculation date and had the option, under certain circumstances, to elect to use subsequent commodity prices if they increased after the calculation date.
The Company assesses any unproved oil and gas properties on an annual basis for possible impairment or reduction in value. The Company assesses properties on an individual basis or as a group if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment of unproved properties not subject to amortization, the associated costs incurred to date for such properties are then included in unproved properties subject to amortization.
Gas gathering assets
Gas gathering assets are capitalized as part of the depletable pool and ratably charged to earnings along with other capitalized exploration, drilling and development costs.
Office and field equipment
Office and field equipment are capitalized at cost and depreciated on a straight line basis over their estimated useful lives. Office and field equipment useful lives range from 5 to 30 years.
Revenue recognition and gas imbalances
We use the sales method of accounting for oil and natural gas revenues. Under the sales method, revenues are recognized based on actual volumes of oil and natural gas sold to purchasers. Gas imbalances at December 31, 2013 were not significant. New Concept also follows the sales method of accounting for natural gas production imbalances and would recognize a liability if the existing proved reserves were not adequate to cover an imbalance.
Accounting for Leases
Leases of property, plant and equipment where the Company assumes substantially all the benefits and risks of ownership are classified as finance leases. Finance leases are capitalized at the estimated present value of the underlying lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other long-term payables. The interest element of the finance charge is charged to the income statement over the lease period. Property, plant and equipment acquired under finance leasing contracts are depreciated over the useful life of the asset.
Leases of assets under which all the risks and benefits of ownership are effectively retained by the lessor are classified as operating leases. Payments made under operating leases are charged to the income statement on a straight-line basis over the period of the lease. When an operating lease is terminated before the lease period has expired, any payment required to be made to the lessor by way of penalty is recognized as an expense in the period in which termination takes place.
Revenue Recognition
Rental income for residential property leases is recorded when due from residents and is recognized monthly as it is earned, which is not materially different than on a straight-line basis as lease terms are generally for periods of one year or less.
Revenues are recognized when products are shipped or services are provided to customers, title is transferred, the sales price is fixed or determinable and collectability is reasonably assured. Costs associated with revenues are recorded in cost of revenues. Production volumes of natural gas are sold immediately and transported via pipeline. Royalties on the production of natural gas either paid in cash or settled through the delivery of volumes. New Concept includes royalties in its revenues and cost of revenues when settlement of the royalties is paid in cash, while royalties settled by the delivery of volumes are excluded from revenues and cost of revenues.
New Concept follows the sales method of accounting for natural gas production imbalances and would recognize a liability if the existing proved reserves were not adequate to cover an imbalance.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all short-term deposits and money market investments with a maturity of less than three months to be cash equivalents.
Other Intangible Assets
The cost of acquired patents, trademarks and licenses is capitalized and amortized using the straight-line method over their useful lives. The carrying amount of each intangible asset is reviewed annually and adjusted for permanent impairment where it is considered necessary.
Impairment of Notes Receivable
Notes receivable are identified as impaired when it is probable that interest and principal will not be collected according to the contractual terms of the note agreements. The accrual of interest is discontinued on such notes, and no income is recognized until all past due amounts of principal and interest are recovered in full.
Impairment of Long-Lived Assets
The Company reviews its long-lived assets and certain identifiable intangibles for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. In reviewing recoverability, the Company estimates the future cash flows expected to result from use of the assets and eventually disposing of them. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount of the asset, an impairment loss is recognized based on the asset’s fair value.
The Company determines the fair value of assets to be disposed of and records the asset at the lower of fair value less disposal costs or carrying value. Assets are not depreciated while held for disposal.
Sales of Real Estate
Gains on sales of real estate are recognized to the extent permitted by Accounting Standards Codification Topic 360-20, “Real Estate Sales – Real Estate Sales”, (“ASC 360-20”). Until the requirements of ASC 360-20 have been met for full profit recognition, sales are accounted for by the installment or cost recovery method, whichever is appropriate.
Real Estate Held for Sale
Accounting Standards Codification Topic 360, “Property, Plant, & Equipment” (“ASC 360”)requires that properties held for sale be reported at the lower of carrying amount or fair value less costs of sale. If a reduction in a held for sale property’s carrying amount to fair value less costs of sale is required, a provision for loss is recognized by a charge against earnings. Subsequent revisions, either upward or downward, to a held for sale property’s estimated fair value less costs of sale are recorded as an adjustment to the property’s carrying amount, but not in excess of the property’s carrying amount when originally classified as held for sale. A corresponding charge against or credit to earnings is recognized. Properties held for sale are not depreciated.
Asset Retirement Obligation
The Company records an asset retirement obligation liability on the consolidated balance sheets and capitalizes a portion of the cost in “Oil and natural gas properties” during the period in which the obligation is incurred. The asset retirement obligation is further described in Note Q.
Income Tax
The Company accounts for income taxes in accordance with Accounting Standards Codification, ("ASC") No. 740, "Accounting for Income Taxes". ASC 740 requires an asset and liability approach to financial accounting for income taxes. In the event differences between the financial reporting basis and the tax basis of the Company's assets and liabilities result in deferred tax assets, ASC 740 requires an evaluation of the probability of being able to realize the future benefits indicated by such assets. A valuation allowance is provided for a portion or all of the deferred tax assets when there is an uncertainty regarding the Company's ability to recognize the benefits of the assets in future years. Recognition of the benefits of deferred tax assets will require the Company to generate future taxable income. There is no assurance that the Company will generate earnings in future years. Since management could not determine the likelihood that the benefit of the deferred tax asset would be realized no deferred tax asset was recognized by the Company.
Recent Accounting Pronouncements
There were no recent accounting pronouncements that our company has not implemented that materially affect our financial statements.
NOTE C – RECEIVABLES – PAYABLES – RELATED PARTIES
Prime Income Asset Management, Inc. (“PIAMI”) is a real estate management company that also invests in real estate for its own account. Pillar Income Asset Management, Inc. (“Pillar”) is a real estate management company. Both PIAMI and Pillar are indirectly owned by a private trust. URC Energy, Inc. (“URC”) is and has been a significant investor in the Company. URC is indirectly owned by a private trust. While the trusts for PIAMI and Pillar and URC are separate they have similar trustees and beneficiaries and therefore the Company has noted PIAMI and Pillar as related parties.
Eurenergy Resources, Inc. (“ERC”) is an oil & gas company that owned and operated oil and gas wells. Beginning in 2006 the Company made loans to PIAMI and ERC at interest rates higher than the Company believes it could have gotten elsewhere. In July 2006, the Company made an unsecured $1.4 million loan to ERC at an annual interest rate of 8%. In June of 2008, the Company entered into a letter of credit agreement with ERC. The terms of the agreement called for interest at the prime rate plus two percent. At May 21, 2009, the balance of the two notes and accrued interest thereon was $3,970,897.
On November 20, 2007, the Company made a $630,000 loan PIAMI. In 2008, the Company made additional net advances on the loan totaling approximately $6.3 million. The initial loan and the additional advances were combined into a new loan with interest at the prime rate plus two percent. On May 21, 2009, PIAMI acquired both Eurenergy notes receivable at face value plus accrued interest totaling $3,970,897. Effective May 21, 2009 the Company and PIAMI entered into a new note combing all of the above loans into one note. The loan calls for interest at the prime rate plus 2% with principal and interest payable within 30 days after demand, and if not sooner demanded, on January 31, 2013.
At December 31, 2009, the balance due including accrued interest on the note receivable from PIAMI was $11.1 million. During 2010 the note was paid down whereby as of December 31, 2010 the outstanding principal and interest totaled $10.4 million.
During the first three quarters of 2011 the Company accrued interest of $360,000 and received $715,000 in payments from PIAMI. In the fourth quarter of 2011 the Company determined that the financial condition of PIAMI had deteriorated and there could be no assurance that the amount owed would or could be collected. The company has recorded a reserve of $10 million (the full balance) for the combined note.
Beginning in 2011 the Company conducted business with Pillar whereby Pillar provided the Company with services including processing payroll, acquiring insurance and other administrative matters (rent). The Company believes that by purchasing these services through certain large entities it can get lower costs and better service. In addition, Pillar loaned the Company $225,000 which was used to settle a lawsuit. Pillar does not charge the Company a fee for providing these services.
While separate companies, both PIAMI and Pillar are both owned by Realty Advisors, Inc. (“RAI”). During 2011 and 2012 the Company incurred obligations to Pillar totaling approximately $1.7 million. In a joint agreement among Pillar, PIAMI and the Company, Pillar agreed to relieve the Company of its obligation to pay $1.7 million and the Company agreed to reduce the amount owed by Prime by a like amount. In the third quarter of 2012 the Company recorded a $1.7 million recovery on the transaction. In the fourth quarter of 2012 Pillar incurred expenses on behalf of the Company of $376,000 and agreed to forego payment in exchange for a reduction in the PIAMI obligation. The Company recorded an additional $376,000 recovery.
During 2013 the Company incurred obligations to Pillar totaling approximately $1.6 million. In a joint agreement among Pillar, PIAMI and the Company, Pillar agreed to relieve the Company of its obligation to pay $1.6 million and the Company agreed to reduce the amount owed by Prime by a like amount.
During 2012 the Company and several other defendants settled a lawsuit for $225,000. The Company paid the entire amount and has a note receivable from one of the other defendants (a subsidiary of Arcadian Energy, Inc) for $112,500 representing its share of the settlement. In addition the company paid $48,800 to a consultant and was reimbursed by Arcadian for a portion of his services. Arcadian is a significant shareholder of the Company and is therefore considered a related party.
NOTE D
–
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate values.
Cash and cash equivalents
- The carrying amount approximates fair value because of the short maturity of these instruments.
Long-term debt
- The fair value of the Company’s long-term debt is estimated based on market rates for the same or similar issues. The carrying value of long-term debt approximates its fair value.
Notes receivable
– The fair value of the note receivable from an affiliate partnership is estimated to approximate fair value based on its short maturity. It is not practical to estimate the fair value of notes receivable from sale of properties because no quoted market exists and there are no comparable debt instruments to provide a basis for valuation.
NOTE E – NOTES PAYABLE
Notes Payable is comprised of the following (in thousands):
|
|
2013
|
|
|
2012
|
|
|
|
|
|
|
|
|
Notes payable from the acquisition of Mountaineer State Energy, Inc.
|
|
$
|
1,499
|
|
|
$
|
1,507
|
|
Bank Debt
|
|
$
|
881
|
|
|
$
|
859
|
|
|
|
$
|
2,380
|
|
|
$
|
2,366
|
|
Aggregate annual principal maturities of long-term debt at December 31, 2013 are as follows (in thousands):
2013
|
|
|
185
|
|
2014
|
|
|
903
|
|
2015
|
|
|
248
|
|
2016
|
|
|
247
|
|
2017
|
|
|
238
|
|
Thereafter
|
|
|
559
|
|
|
|
|
|
|
|
|
$
|
2,380
|
|
NOTE F – OPERATING LEASES
The Company leases a retirement community under an operating lease which expires January 31, 2017, with an option to renew for an additional five-year period. The Company also has operating leases for equipment and office space. The leases generally provide that the Company pay property taxes, insurance and maintenance.
Future minimum payments for the primary lease following December 31, 2013 are as follows (in thousands):
|
|
$
|
961
|
|
|
|
|
980
|
|
|
|
|
1,000
|
|
|
|
|
83
|
|
|
|
|
|
|
|
|
$
|
3,024
|
|
Lease expense in 2013, 2012 and 2011 was $942,000, $924,000 and $906,000 respectively.
NOTE G - EARNINGS PER SHARE
The following table sets forth the computations of basic and diluted earnings per share (in thousands, except per share data):
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Basic Earnings Per Share:
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net income from continuing operations
|
|
$
|
426
|
|
|
$
|
168
|
|
|
$
|
(11,793
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
1,947
|
|
|
|
1,947
|
|
|
|
1,947
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations
|
|
|
0.22
|
|
|
|
0.09
|
|
|
|
(6.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from discounted operations
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
NOTE H – INCOME TAXES
At December 31, 2013, the Company had net operating loss carry forwards of approximately $7.4 million, which expire between 2014 and 2027.
The following table presents the principal reasons for the difference between the Company's effective tax rate and the
United States statutory income tax rate.
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Federal income tax at statutory rate per books
|
|
|
149
|
|
|
|
59
|
|
|
|
(4128
|
)
|
Change in valuation allowance
|
|
|
-
|
|
|
|
-
|
|
|
|
4128
|
|
Net operating loss
|
|
|
(149
|
)
|
|
|
(59
|
)
|
|
|
-
|
|
Federal income tax per tax return
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Forms 1120,
U.S, Corporation Income Tax Returns,
for the years ending December 31, 2013, 2012, 2011 are subject to examination, by the IRS, generally for three years after they are filed.
NOTE I – STOCKHOLDERS’ EQUITY
Outstanding Preferred Stock
|
|
|
|
|
|
|
|
Preferred stock consists of the following (amounts in thousands):
|
|
|
|
|
Year Ended
|
|
December 31,
|
|
2013
|
|
2012
|
Series B convertible preferred stock, $10 par value, liquidation value of
$100, authorized 100 shares, issued and outstanding one share
|
|
|
|
The Series B preferred stock has a liquidation value of $100 per share. The right to convert expired April 30, 2003. Dividends at a rate of 6% are payable in cash or preferred shares at the option of the Company.
NOTE J – OTHER INCOME (EXPENSE)
Other income (expense) consists of the following: (amounts in thousands)
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Litigation costs for the Chesapeake matter
|
|
$
|
(382
|
)
|
|
|
-
|
|
|
|
-
|
|
Income for gas held by Chesapeake
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
(7
|
)
|
|
|
122
|
|
|
|
(155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(189
|
)
|
|
$
|
122
|
|
|
$
|
(155
|
)
|
Carlton Energy Group, LLC
In December 2006, Carlton Energy Group, LLC (“Carlton”) instituted litigation against an individual, Eurenergy Resources Corporation (“Eurenergy”) and several other entities including New Concept Energy, Inc., which was then known as CabelTel International Corporation (the “Company”) alleging tortuous conduct, breach of contract and other matters and as to the Company that it was the alter ego of Eurenergy. The Carlton claims were based upon an alleged tortuous interference with a contract by the individual and Eurenergy related to the right to explore a coal bed methane concession in Bulgaria which had never (and has not to this day) produced any hydrocarbons. At no time during the pendency of this project or since did the company or any of its officers or directors have any interest whatsoever in the success or failure of the so-called “Bulgaria Project”. However, in the litigation, Carlton alleged that the Company was the alter-ego of certain of the other Defendants including Eurenergy.
Following a jury trial in 2009, the Trial Court (295
th
District Court of Harris County, Texas) reduced the actual damages found by the jury of $66.5 million and entered judgment against EurEnergy and The individual jointly and severally for $31.16 million in actual damages on its tortuous-interference claim and the Court further assessed exemplary damages against The individual and EurEnergy in the amount of $8.5 million each. The Court granted a judgment for the Company that it was not the alter ego of any of the other parties and thereby would not incur any damages.
Cross appeals were filed by Carlton, The individual and EurEnergy to the Court of Appeals for the First District of Texas (the “Court of Appeals”) which rendered its opinion on February 14, 2012. The Court of Appeals opinion, among other things, reinstated the jury award of actual damages jointly and severely against The individual and EurEnergy in the amount of $66.5 million and overturned the Trial Court’s ruling favorable to the Company rendering a judgment for that amount plus exemplary damages against the Company as the “alter ego” of Eurenergy.
The Company and the other defendants, filed a Petition for Review of the Court of Appeals Opinion with the Supreme Court of the State of Texas. After requesting a response from the Plaintiff the Supreme Court requested full briefing on the merits. In March 2013 the Court granted the Petition for Review and in September 2013 the Court heard oral arguments. The parties are awaiting a ruling.
The Company vigorously denies that it is the “alter ego” of any other entity; further the Company strongly believes that the Court of Appeals opinion is erroneous in concluding that the Company is an “alter ego” of any other entity which is contrary to Nevada substantive law. There are also questions regarding the underlying liability of EurEnergy and if Eurenergy is successful in its petition for review or, even if unsuccessful if the Company is successful on its positions described above, the Trial Court’s judgment could be reinstated and the Company would have no liability on this claim.
Chesapeake Exploration Limited Partnership and Chesapeake Operating, Inc. (“Chesapeake”)
In January 2006, the Company entered into a joint operating agreement evidencing its acquisition of a 5% interest in two gas wells being drilled and ultimately operated by Chesapeake. The Company relied on the cost projections provided by Chesapeake to make its investment decision. Subsequent to its investment, the Company received an invoice from Chesapeake for $556,217 which, according to Chesapeake, represents the Company’s 5% share of additional costs incurred by Chesapeake in drilling the wells. The Company believes that these additional costs far exceed any reasonable expense that should have been incurred in drilling the two wells and were incurred without notifying the Company of such expenses. The Company has requested an accounting of the additional expenses and a reconciliation of the final costs to the cost estimates previously presented. In April 2007, Chesapeake filed a lawsuit against the Company and others in District Court of Tarrant County, Texas.
In March 2011, Chesapeake received a summary judgment award including prejudgment interest for $686,874 plus $65,000 in legal fees. Further the judgment awarded Chesapeake additional legal fees of $30,000 should the Company file unsuccessful appeals to the Court of Appeals and the Texas Supreme Court. Chesapeake would also receive to post judgment interest.
The judgment did however acknowledge that the plaintiff did not pay the company for it’s pro rata share of the gas produced by the two wells during the entire period in question.
The Company has appealed the judgment to the Court of Appeals which reduced the judgment by $22,000 but otherwise affirmed the lower court ruling. The company filed an appeal with the Texas Supreme Court however on February 15, 2013 the Texas Supreme Court denied the petition.
Following the ruling in March 2011 the Company arranged for a bond to the benefit of Chesapeake from a third party bonding Company for approximately $791,960. In February 2014 the Company paid the bonding company $791,960 who in turn paid Chesapeake.
There still remains the matter of the gas that is owed to the Company for it’s pro rata share of the gas produced and withheld by Chesapeake. The company has estimated that there is approximately 70,000 MCF of gas for which the Company needs to be paid or receive in kind which would then be sold. The Company intends to pursue its rights to be compensated for its interest.
Yazoo Pipeline Company, LP and Sterling Exploration and Production Company (“Sterling”)
Sterling Exploration and Production Company was an oil and gas exploration and Production Company with offshore production and Yazoo Pipeline Company transported Sterling’s and others oil and gas to shore for delivery to purchasers. On December 23, 2008 Sterling filed for Chapter 11 bankruptcy relief.
In 2009 the Company attempted to acquire Sterling and invested a total of approximately $400,000 including debtor in possession financing paid to Sterling and other expenses. In 2009 we wrote off $50,000 of our investment. In 2010 the potential acquisition was abandoned and in the second quarter of 2010 we wrote off the balance of our investment. The bankruptcy of Sterling was ultimately converted to Chapter Seven.
In December, 2010 the bankruptcy trustee filed a lawsuit against a number of parties including New Concept Energy, Inc with a variety of allegations including that the Company conspired with other defendants or aided and abetted others in a breach of fiduciary duty owed to the debtor Sterling.
In April 2012 this matter was settled and the Company’s share was payment of $112,500.
Other
The Company has been named as a defendant in other lawsuits in the ordinary course of business. Management is of the opinion that these lawsuits will not have a material effect on the financial condition, results of operations or cash flows of the Company.
NOTE L – OPERATING SEGMENTS
The following table reconciles the segment information to the corresponding amounts in the Consolidated Statements of Operations and total assets:
Year ended December 31, 2013
|
|
Oil and Gas
Operations
|
|
Retirement
Facility
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
1,477
|
|
|
$
|
2,745
|
|
|
$
|
-
|
|
|
$
|
4,222
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,213
|
|
|
|
2,436
|
|
|
|
498
|
|
|
$
|
4,147
|
|
Depreciation, depletion and amortization
|
|
|
654
|
|
|
|
61
|
|
|
|
2
|
|
|
$
|
717
|
|
Impairment of oil and gas properties
|
|
|
200
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
200
|
|
Total Operating Expenses
|
|
|
2,067
|
|
|
|
2,497
|
|
|
|
500
|
|
|
|
5,064
|
|
Interest expense
|
|
|
114
|
|
|
|
-
|
|
|
|
-
|
|
|
$
|
114
|
|
Other income
|
|
|
29
|
|
|
|
-
|
|
|
|
1,344
|
|
|
$
|
1,373
|
|
Interest income
|
|
|
-
|
|
|
|
|
|
|
|
9
|
|
|
|
9
|
|
Segment operating income
|
|
$
|
(675
|
)
|
|
$
|
248
|
|
|
$
|
853
|
|
|
$
|
426
|
|
Assets
|
|
$
|
11,859
|
|
|
$
|
842
|
|
|
$
|
607
|
|
|
$
|
13,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012
|
|
Oil and Gas
Operations
|
|
Retirement
Facility
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
1,182
|
|
|
$
|
2,762
|
|
|
$
|
-
|
|
|
$
|
3,944
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,130
|
|
|
|
2,339
|
|
|
|
575
|
|
|
|
4,044
|
|
Depreciation, Depletion and Amortization
|
|
|
690
|
|
|
|
50
|
|
|
|
2
|
|
|
|
742
|
|
Accretion of Asset Retirement Obligation
|
|
|
68
|
|
|
|
-
|
|
|
|
-
|
|
|
|
68
|
|
Impairment of oil and gas properties
|
|
|
912
|
|
|
|
-
|
|
|
|
|
|
|
|
912
|
|
Total Operating Expenses
|
|
|
2,800
|
|
|
|
2,389
|
|
|
|
577
|
|
|
|
5,766
|
|
Interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(208
|
)
|
|
|
(208
|
)
|
Other income
|
|
|
-
|
|
|
|
-
|
|
|
|
2,198
|
|
|
|
2,198
|
|
Segment operating income
|
|
$
|
(1,618
|
)
|
|
$
|
373
|
|
|
$
|
1,413
|
|
|
$
|
168
|
|
Assets
|
|
$
|
11,199
|
|
|
$
|
611
|
|
|
$
|
674
|
|
|
$
|
12,484
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
Oil and Gas
Operations
|
|
Retirement
Facility
|
|
Corporate
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
1,020
|
|
|
$
|
2,881
|
|
|
$
|
-
|
|
|
$
|
3,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
1,095
|
|
|
|
2,274
|
|
|
|
577
|
|
|
|
3,946
|
|
Depreciation, Depletion and Amortization
|
|
|
335
|
|
|
|
42
|
|
|
|
2
|
|
|
|
379
|
|
Accretion of Asset Retirement Obligation
|
|
|
129
|
|
|
|
-
|
|
|
|
-
|
|
|
|
129
|
|
Impairment of oil and gas properties
|
|
|
1,428
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,428
|
|
Total Operating Expenses
|
|
|
2,987
|
|
|
|
2,316
|
|
|
|
579
|
|
|
|
5,882
|
|
Interest expense
|
|
|
|
|
|
|
-
|
|
|
|
(131
|
)
|
|
|
(131
|
)
|
Other income
|
|
|
-
|
|
|
|
|
|
|
|
(10,161
|
)
|
|
|
(10,161
|
)
|
Interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
360
|
|
|
|
360
|
|
Segment operating income
|
|
$
|
(1,967
|
)
|
|
$
|
565
|
|
|
$
|
(10,511
|
)
|
|
$
|
(11,913
|
)
|
Assets
|
|
$
|
12,376
|
|
|
$
|
254
|
|
|
$
|
820
|
|
|
$
|
13,450
|
|
NOTE M - QUARTERLY DATA (UNAUDITED)
The table below reflects the Company’s selected quarterly information for the years ended December 31, 2013, 2011 and 2010. Amounts shown are in thousands except per share amounts.
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Year ended December 31, 2013
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,020
|
|
|
$
|
1,050
|
|
|
$
|
1,018
|
|
|
$
|
1,134
|
|
Operating (expense)
|
|
|
(1,078
|
)
|
|
|
(1,112
|
)
|
|
|
(1,102
|
)
|
|
|
(1,072
|
)
|
Corporate general and administrative expense
|
|
|
(173
|
)
|
|
|
(170
|
)
|
|
|
(170
|
)
|
|
|
(129
|
)
|
Impairment of natural gas and oil properties
|
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
Other income (expense) net
|
|
|
262
|
|
|
|
370
|
|
|
|
387
|
|
|
|
391
|
|
Net income (loss) from continuing operations
|
|
|
31
|
|
|
|
138
|
|
|
|
133
|
|
|
|
124
|
|
Income (loss) allocable to common shareholders
|
|
$
|
31
|
|
|
$
|
138
|
|
|
$
|
133
|
|
|
$
|
124
|
|
Income (loss) per common share – basic
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Year ended December 31, 2012
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
964
|
|
|
$
|
988
|
|
|
$
|
976
|
|
|
$
|
1,016
|
|
Operating (expense)
|
|
|
(1,102
|
)
|
|
|
(1,071
|
)
|
|
|
(1,022
|
)
|
|
|
(1,082
|
)
|
Corporate general and administrative expense
|
|
|
(159
|
)
|
|
|
(134
|
)
|
|
|
(108
|
)
|
|
|
(176
|
)
|
Impairment of natural gas and oil properties
|
|
|
(912
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other income (expense) net
|
|
|
(58
|
)
|
|
|
48
|
|
|
|
1,674
|
|
|
|
534
|
|
Net income (loss) from continuing operations
|
|
|
(1,267
|
)
|
|
|
(169
|
)
|
|
|
1,520
|
|
|
|
84
|
|
Income (loss) allocable to common shareholders
|
|
$
|
(1,267
|
)
|
|
$
|
(169
|
)
|
|
$
|
1,520
|
|
|
$
|
84
|
|
Income (loss) per common share – basic
|
|
$
|
(0.65
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
0.78
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
Year ended December 31, 2011
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
1,009
|
|
|
$
|
1,013
|
|
|
$
|
1,003
|
|
|
$
|
876
|
|
Operating (expense)
|
|
|
(948
|
)
|
|
|
(911
|
)
|
|
|
(990
|
)
|
|
|
(2,334
|
)
|
Corporate general and administrative expense
|
|
|
(124
|
)
|
|
|
(126
|
)
|
|
|
(101
|
)
|
|
|
(228
|
)
|
Impairment of natural gas and oil properties
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Other income (expense) net
|
|
|
160
|
|
|
|
90
|
|
|
|
30
|
|
|
|
(10,212
|
)
|
Net income (loss) from continuing operations
|
|
|
97
|
|
|
|
66
|
|
|
|
(57
|
)
|
|
|
(11,899
|
)
|
Income (loss) allocable to common shareholders
|
|
$
|
97
|
|
|
$
|
66
|
|
|
$
|
(57
|
)
|
|
$
|
(11,899
|
)
|
Income (loss) per common share – basic
|
|
$
|
0.05
|
|
|
$
|
0.03
|
|
|
$
|
(0.03
|
)
|
|
$
|
(6.10
|
)
|
NOTE N - SUPPLEMENTARY FINANCIAL INFORMATION ON OIL AND NATURAL GAS EXPLORATION, DEVELOPMENT AND PRODUCTION ACTIVITIES (UNAUDITED)
The Company’s net ownership interests in estimated quantities of proved oil and natural gas reserves and changes in net proved reserves, all of which are located in the continental United States, are summarized below:
|
|
|
2013
|
|
|
|
Gas
|
|
Oil
|
|
|
|
(MMCF)
|
|
(MBBLS)
|
Proved developed and undeveloped reserves -
|
|
|
|
|
|
January 1, 2013
|
|
|
2,849
|
|
103
|
Purchase of oil and natural gas properties in place
|
|
|
0
|
|
0
|
Discoveries and exclusions
|
|
|
0
|
|
0
|
Revisions
|
|
|
232
|
|
82
|
Sales of oil and gas properties in place
|
|
|
0
|
|
0
|
Production
|
|
|
(194)
|
|
(12)
|
December 31, 2013
|
|
|
2,887
|
|
173
|
|
|
|
|
|
|
Proved developed at beginning of year
|
|
|
593
|
|
35
|
|
|
|
|
|
|
Proved developed reserves at end of year
|
|
|
719
|
|
105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
Gas
|
|
Oil
|
|
|
|
(MMCF)
|
|
(MBBLS)
|
Proved developed and undeveloped reserves -
|
|
|
|
|
|
January 1, 2012
|
|
|
2,551
|
|
103
|
Purchase of oil and natural gas properties in place
|
|
|
0
|
|
0
|
Discoveries and exclusions
|
|
|
809
|
|
22
|
Revisions
|
|
|
(333)
|
|
(14)
|
Sales of oil and gas properties in place
|
|
|
0
|
|
0
|
Production
|
|
|
(178)
|
|
(8)
|
December 31, 2012
|
|
|
2,849
|
|
103
|
|
|
|
|
|
|
Proved developed at beginning of year
|
|
|
1,105
|
|
56
|
|
|
|
|
|
|
Proved developed reserves at end of year
|
|
|
593
|
|
35
|
The following table presents the changes in our total proved undeveloped reserves.