<PAGE>
As filed with the Securities and Exchange Commission on September 30, 1997.
Registration No. 333-04964C
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
POST-EFFECTIVE AMENDMENT NO. 1
to
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
________________
BLUE RIDGE ENERGY FUND 1996/1997
(Name of Small Business Issuer in Its Charter)
_______________
<TABLE>
<S> <C> <C>
Kentucky 1381 61-1310934
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
632 Adams Street, Suite 700
Bowling Green, Kentucky 42101
(800) 798-3389
(Address and Telephone Number of Principal Executive Offices and Principal Place
of Business)
_______________
James T. Cook, Jr.
Vice President-Finance, and Chief Financial Officer
Blue Ridge Group, Inc.
632 Adams Street, Suite 700
Bowling Green, Kentucky 42101
(800) 798-3389
(Name, Address and Telephone Number of Agent for Service)
Copies of communications to:
IVAN M. DIAMOND, ESQ.
Greenebaum Doll & McDonald PLLC
3300 National City Tower
Louisville, Kentucky 40202-3197
(502) 589-4200
Approximate Date of Proposed Sale to the Public: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
_______________
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
PROSPECTUS
BLUE RIDGE ENERGY FUND 1996/1997
$1,000,000 Minimum Subscriptions
Per Partnership Minimum Offering Amount $1,000,000
(1,000 Units at $1,000 Per Unit) Minimum Purchase: 5 Units ($5,000)
Blue Ridge Energy Fund 1996/1997 (the "Program") is a series of up to ten
limited partnerships which will be formed to purchase, drill, own and operate
oil and gas wells primarily in Texas, Oklahoma and Kentucky. See "Proposed
Activities." Interests in the Program have been offered over a period
which commenced September 24, 1996. Interests in the partnerships designated
"Blue Ridge Energy Fund 1997--Limited Partnership" will be offered during 1997.
Interest not sold during 1997 may be offered in 1998 and designated "Blue Ridge
Energy Fund 1998--Limited Partnership". The primary purpose of the partnerships
will be to generate revenue from oil and gas sales and distribute the proceeds
to the partners. The economic benefits of the investment are expected to include
deductions in 1997 (with respect to the partnerships designated "Blue Ridge
Energy Fund 1997--Limited Partnership") and in 1998 (with respect to the
partnerships designated "Blue Ridge Energy Fund 1998--Limited Partnership") for
intangible drilling costs and when wells are in production for depletion. See
"Summary of the Offering--Terms of the Offering." Although $10,000,000 of units
of partnership interest are available for sale, the program has limited the
maximum capitalization of any individual partnership to $2,000,000.
. Units of general and limited partnership interests ("Units") in oil and
gas development limited partnerships are being offered to potential
investors in accordance with this prospectus.
. The managing general partner anticipates that, if the minimum offering
of $1,000,000 is achieved, approximately 85% of the total capital
contributions will be utilized for oil and gas well drilling and
completion activities. See "Source of Funds and Use of Proceeds."
. Investors who purchase general partnership interests will be subject to
unlimited liability.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF
RISK. See "Risk Factors" beginning on page 8.
--------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE GOVERNMENTAL AGENCY OR
STATE SECURITIES COMMISSION, NOR HAS THE COMMISSION OR ANY
STATE GOVERNMENTAL AGENCY OR STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------
NEITHER THE ATTORNEY GENERAL OF THE STATE OF NEW YORK NOR THE
ATTORNEY GENERAL OF THE STATE OF NEW JERSEY NOR THE BUREAU
OF SECURITIES OF THE STATE OF NEW JERSEY HAS PASSED ON
OR ENDORSED THE MERITS OF THIS OFFERING. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
=====================================================================================
Underwriting Discounts Proceeds to each
Price to Public and Commissions(1) Partnerships(2)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Unit $ 1,000 $ 100 (10%) $ 900 (90%)
- -------------------------------------------------------------------------------------
Total Minimum $ 1,000,000 $ 100,000 (10%) $ 900,000 (90%)
- -------------------------------------------------------------------------------------
Total Maximum $10,000,000 $1,000,000 (10%) $9,000,000 (90%)
=====================================================================================
</TABLE>
(1) Includes a 2% reimbursement for due diligence expenses and marketing
support fees which is payable to the Dealer-Manager.
(2) Before deducting expenses payable by each Partnership estimated at $25,000
if the minimum number of Units are sold to $50,000 if the maximum number of
Units are sold, including legal, accounting, printing and filing and
registration fees. The aggregate maximum expenses for this offering to be
paid collectively by all of the Partnerships will not exceed $250,000.
Dealer-Manager--Ridgemont Securities, Inc.
(800) 586-8764
A Member of the National Association of Securities Dealers, Inc. and
Securities Investor Protection Corporation
The date of this Prospectus is ____________________, 1997.
<PAGE>
. The drilling of oil and gas wells is highly risky and includes the
possibility of a total loss of one's investment.
. Total reliance is on the Managing General Partner for management and
control of each partnership.
. No prospects for oil and gas drilling have yet been selected and therefore
no investor will have an opportunity to evaluate any of the prospects
before investing in the partnership.
. Investors who purchase general partnership interests will be subject to
unlimited liability. All general partnership interests, other than the
general partnership interest held by the Managing General Partner, will be
converted into limited partnership interests upon completion of drilling.
. Revenues of each partnership are directly related to oil and gas prices
which cannot be predicted.
. An investment in the Program is illiquid--investors may not be able to sell
their partnership interests.
. Investment is suitable only for investors having substantial financial
resources and who desire a long-term investment.
. Significant tax considerations are involved in an investment, including but
not limited to: possible modification or elimination of tax benefits;
possible loss of partnership classification; limited partners must have
substantial current taxable income from passive trade or business
activities to benefit from tax losses arising from the particular
partnership; and possible recognition of taxable income by an Investor
Partner with no corresponding cash distribution by the partnership.
. The partnerships are subject to various conflicts of interest arising out
of their relationship with the Managing General Partner. See "Management--
Conflicts of Interest."
. Substantial compensation and fees are payable by the Partnership to the
Managing General Partner and affiliates upon formation and throughout the
life of the partnership.
. Ridgemont Securities, Inc., the Dealer-Manager, may be deemed to be an
affiliate of the Managing General Partner.
The minimum capital for each partnership to be raised from investors is
$1,000,000, while the maximum capital is $2,000,000. The Managing General
Partner has complete discretion as to when the offering of a particular
partnership terminates at any point after the minimum subscription is reached.
Nevertheless, it is the intention of the Managing General Partner to terminate
the offering of each partnership (assuming the minimum subscription has been
reached) at or near the time of the respective targeted closing dates for each
partnership. No offering of a partnership designated "Blue Ridge Energy Fund
1997--Limited Partnership" may extend beyond December 31, 1997, and no offering
of a partnership designated "Blue Ridge Energy Fund 1998--Limited Partnership"
may extend beyond December 31, 1998. See "Terms of the Offering--General." No
particular partnership will be funded if the minimum subscription is not
attained. Moreover, no Units in a Partnership will be offered or sold after the
closing of the offering of that Partnership.
Subscription proceeds of each Partnership will be held in a separate
interest-bearing escrow account at South Central Bank of Bowling Green, Inc.
(the "Escrow Agent"). In the event that the minimum required subscription is not
realized with respect to a Partnership, that Partnership will not be funded, and
the Escrow Agent will promptly return all subscription proceeds to the
respective subscribers in full with any interest earned thereon and without any
deduction therefrom. See "Terms of the Offering--General."
Units are being offered at a price of $1,000 per Unit. The minimum
subscription is 5 Units ($5,000). Units will not be sold to tax-exempt investors
or to foreign investors.
Each partnership intends to furnish to investors annual reports containing
audited financial statements, a report thereon by its independent certified
public accountants, and a semi-annual report containing unaudited financial
information for the first six months of each year.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
SUMMARY OF THE OFFERING...................................................................... 1
Terms of the Offering...................................................................... 1
Special Risks of the Partnerships.......................................................... 3
Risks Pertaining to Oil and Gas Investments................................................ 4
Tax Risks.................................................................................. 4
Compensation of the Managing General Partner............................................... 5
Participation in Costs and Revenues........................................................ 5
Application of Proceeds.................................................................... 6
Tax Considerations; Opinion of Counsel..................................................... 6
Rights of the Investor Partners............................................................ 7
RISK FACTORS................................................................................. 8
Special Risks of the Partnerships.......................................................... 8
Risks Pertaining to Oil and Gas Investments................................................ 13
Tax Risks.................................................................................. 15
TERMS OF THE OFFERING........................................................................ 18
General.................................................................................... 18
Activation of the Partnerships............................................................. 20
Types of Units............................................................................. 21
Conversion of Units by Additional General Partners......................................... 22
Unit Repurchase Program.................................................................... 23
Investor Suitability....................................................................... 24
ASSESSMENTS AND FINANCING.................................................................... 26
SOURCE OF FUNDS AND USE OF PROCEEDS.......................................................... 27
Source of Funds............................................................................ 27
Use of Proceeds............................................................................ 27
Subsequent Source of Funds................................................................. 28
PARTICIPATION IN COSTS AND REVENUES.......................................................... 28
Revenues................................................................................... 29
Costs...................................................................................... 29
Allocations Among Investor Partners; Deficit Capital Account
Balances................................................................................. 32
Cash Distribution Policy................................................................... 32
Termination................................................................................ 33
Amendment of Partnership Allocation Provisions............................................. 33
COMPENSATION TO THE MANAGING GENERAL PARTNER AND AFFILIATES.................................. 34
PROPOSED ACTIVITIES.......................................................................... 36
Introduction............................................................................... 36
Investment Objectives...................................................................... 37
Development Policies....................................................................... 37
Drilling Policy............................................................................ 37
Acquisition of Undeveloped Prospects....................................................... 38
Evaluation of Prospects.................................................................... 40
Title to Properties........................................................................ 40
Oil and Gas Prospects...................................................................... 41
Geology.................................................................................... 41
Drilling and Completion Phase.............................................................. 44
Drilling and Operating Agreement........................................................... 45
Production Phase of Operations............................................................. 46
Interests of Parties....................................................................... 47
Insurance.................................................................................. 47
The Managing General Partner's Policy Regarding Roll-Up and
Other Significant Transactions........................................................... 49
COMPETITION, MARKETS AND REGULATIONS......................................................... 51
Competition and Markets.................................................................... 51
Regulation................................................................................. 52
Gas Pricing................................................................................ 52
Proposed Regulation........................................................................ 52
MANAGEMENT................................................................................... 53
General Management......................................................................... 53
Experience and Capabilities as Driller/Operator............................................ 53
Managing General Partner................................................................... 54
Certain Shareholders of the Managing General Partner....................................... 55
Remuneration............................................................................... 56
Legal Proceedings.......................................................................... 56
Certain Transactions....................................................................... 57
Conflicts of Interest...................................................................... 57
FIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNER..................................... 62
PRIOR ACTIVITIES............................................................................. 63
Prior Partnerships......................................................................... 63
Previous Drilling Activities............................................................... 65
Payout and Net Cash Tables................................................................. 67
Tax Deductions and Tax Credits of Participants in Previous
Partnerships............................................................................. 71
TAX CONSIDERATIONS........................................................................... 73
Classification as Partnership.............................................................. 73
Taxation of Partners....................................................................... 74
Basis and At Risk Limitations.............................................................. 74
Passive Loss Limitations................................................................... 75
A. General.............................................................................. 75
B. General Partner Interests............................................................ 75
C. Limited Partner Interests............................................................ 76
Allocations of Profits and Losses.......................................................... 76
Intangible Drilling and Development Costs.................................................. 77
A. Classification of Costs.............................................................. 77
B. Timing of Deductions................................................................. 77
C. Recapture of IDC..................................................................... 78
Leasehold Acquisition Costs and Abandonment................................................ 78
Depletion Deductions....................................................................... 78
Depreciation Deductions.................................................................... 79
Interest Deductions........................................................................ 79
Transaction Fees........................................................................... 79
Conversion of Interests.................................................................... 80
Alternative Minimum Tax.................................................................... 80
Disposition of Property of the Partnership................................................. 81
Installment Sales.......................................................................... 81
Sales and Other Disposition of Units....................................................... 82
Partnership Distributions.................................................................. 82
Profit Motive.............................................................................. 82
Administrative Matters..................................................................... 83
Accounting Methods and Periods............................................................. 84
Social Security Benefits; Self-employment Tax.............................................. 84
State and Local Taxes...................................................................... 84
Individual Tax Advice Should be Sought..................................................... 84
SUMMARY OF THE PARTNERSHIP AGREEMENT......................................................... 85
Responsibility of Managing General Partner................................................. 85
Liabilities of General Partners, Including Additional General
Partners................................................................................. 85
Liability of Limited Partners.............................................................. 85
Allocations and Distributions.............................................................. 86
Voting Rights.............................................................................. 86
Retirement and Removal of the Managing General Partner..................................... 86
Term and Dissolution....................................................................... 87
Indemnification............................................................................ 87
Reports to Partners........................................................................ 88
Power of Attorney.......................................................................... 88
Other Provisions........................................................................... 88
TRANSFERABILITY OF UNITS..................................................................... 88
PLAN OF DISTRIBUTION......................................................................... 89
SALES LITERATURE............................................................................. 90
LEGAL OPINIONS............................................................................... 91
EXPERTS...................................................................................... 91
ADDITIONAL INFORMATION....................................................................... 91
GLOSSARY OF TERMS............................................................................ 92
FINANCIAL STATEMENTS.........................................................................F-1
APPENDICES:
A. Form of Limited Partnership Agreement................................................A-1
B. Subscription Agreements..............................................................B-1
C. Special Subscription Instructions....................................................C-1
D. Opinion of Counsel--Tax Considerations...............................................D-1
</TABLE>
i
<PAGE>
SUMMARY OF THE OFFERING
This summary is qualified in its entirety by the more detailed information
appearing elsewhere in this Prospectus. Prospective investors are directed to
the "Glossary of Terms" at the end of this Prospectus, which defines certain of
the capitalized terms appearing throughout the Prospectus.
Terms of the Offering
The Program. Blue Ridge Energy Fund 1996/1997 (the "Program") is a series of
up to ten limited partnerships (each hereinafter referred to as a "Partnership"
or where the context so provides as the "Partnerships") to be formed under and
governed by the Kentucky Revised Uniform Limited Partnership Act. Units have
been offered over a period which commenced September 24, 1996. Units in the
Partnerships designated "Blue Ridge Energy Fund 1997--Limited Partnership" will
be offered during 1997. Units not sold during 1997 may be offered in 1998 and
designated "Blue Ridge Energy Fund 1998--Limited Partnership". The rights and
obligations of the Partners of each Partnership will be governed by a Limited
Partnership Agreement (the "Partnership Agreement"), the form of which is
attached to the Prospectus as Appendix A. For a description of the principal
terms of the Partnership Agreement, see "Summary of Partnership Agreement." The
Managing General Partner of each Partnership will be Blue Ridge Group, Inc., a
Nevada corporation (hereinafter referred to as the "Managing General Partner").
The subscription periods for all Partnerships designated "Blue Ridge Energy Fund
1997--Limited Partnership" and those designated "Blue Ridge Energy Fund 1998--
Limited Partnership" will terminate on December 31, 1997 and December 31, 1998,
respectively, unless earlier terminated or withdrawn by the Managing General
Partner.
Each Partnership will be a separate entity and will invest separately in
various Prospects. The Managing General Partner on behalf of each such
Partnership may acquire Prospects prior to the completion of the offering of
Units in each such Partnership. If Prospects are selected prior to such
completion of an offering, the Managing General Partner will issue a Prospectus
Supplement or Amendment specifically for that Partnership which identifies such
Prospects.
A total of 10,000 Units at $1,000 per Unit, aggregating $10,000,000, is being
offered. "Unit" means a Partnership interest of a Limited Partner or of an
Additional General Partner purchased by an Investor Partner for an investment of
$1,000. This interest is the right and obligation to share a proportional part
of the Investor Partners' share of Partnership income, expense, assets and
liabilities. The fractional interest purchased by a one unit investment in the
Investor Partners' interest in the Partnership income, expense, assets, or
liabilities (see the table under "Summary of the Offering--Participation in
Costs and Revenues") is the ratio of one unit to the total number of units sold.
Investors may choose to purchase units of general partnership interest or units
of limited partnership interest. The Managing General Partner will convert all
units of general partnership interest other than the general partnership
interest held by the Managing General Partner, into units of limited partnership
interest upon completion of all drilling and completion activities. Units will
not be sold to tax-exempt investors or to foreign investors. The minimum
investment by an investor is $5,000.
The minimum number of Units which must be sold to allow a Partnership to be
funded is 1,000 Units, or $1,000,000. The maximum subscription for any
Partnership is $2,000,000 (2,000 Units). The Managing General Partner has
complete discretion as to when the offering of a particular Partnership
terminates at any point after the minimum subscription is reached. However, the
Managing General Partner will not delay the funding of any Partnership
designated "Blue Ridge Energy Fund 1997--Limited Partnership" or "Blue Ridge
Energy Fund 1997--Limited Partnership" beyond December 31, 1997 or December 31,
1998, respectively. No Units in a Partnership will be offered or sold after the
close of its offering period.
All subscriptions are payable in cash upon subscription. The execution of
the Subscription Agreement by a subscriber constitutes a binding offer to buy
Units in a Partnership. Once an investor subscribes for Units, that investor
will not be able to revoke such investor's Subscription. Escrowed Subscriptions
will be promptly returned to the respective subscriber of the particular
Partnership if the Partnership is not closed by the sixtieth day following
1
<PAGE>
the anticipated offering termination date with respect to each respective
Partnership. Subscription proceeds of each Partnership will be held in a
separate interest-bearing escrow account at South Central Bank of Bowling Green,
Inc., Bowling Green, Kentucky (the "Escrow Agent"). In the event that the
minimum required subscription of $1,000,000 is not realized in the offering of
Units of any particular Partnership, that Partnership will not be funded, and
the Escrow Agent will promptly return all subscription proceeds with respect to
the particular Partnership to the respective subscribers in full with any
interest earned thereon and without any deduction therefrom. For a full
discussion of the various terms of the offering, see "Terms of the Offering"
below.
In the event a Partnership closes for the minimum amount of subscription
units, the relative degree of risk of an investment of the Partnership may
increase in view of a lesser degree of diversification of drilling by that
Partnership. Thus, a Partnership subscribed at the minimum level may be able to
participate in fewer Prospects, thereby increasing the effect of the results
from each individual well upon the Investor Partners' investment.
As the Partnership size increases, the number of wells drilled may increase,
thereby increasing the diversification of the Partnership and decreasing the
effect upon the Investor Partners' investment as a result of an unsuccessful
well.
The Partnerships are being formed to purchase, drill, own and operate oil and
gas wells in Texas, Oklahoma and Kentucky and to produce and sell oil and gas
from these wells. The Managing General Partner may also determine to drill, own
and operate wells in Louisiana, New Mexico and such other places which the
Managing General Partner may select in its sole discretion. See "Proposed
Activities." Of the offering proceeds available for drilling operations, the
Managing General Partner plans to utilize all such proceeds in the drilling of
development wells but may utilize up to 25% on one or more exploratory wells.
See "Proposed Activities" and "Glossary of Terms" for the definitions of
"Development Well," "Exploratory Well," and other terms which are used in this
Prospectus.
The address and telephone number of the Partnerships and the Managing General
Partner are 632 Adams Street, Suite 700, Bowling Green, Kentucky 42101 and (800)
798-3389, respectively.
Conversion of Units by Additional General Partners. Additional General
Partners (those investors who purchase Units of general partnership interest) of
a particular Partnership will have the right to convert their Units into Units
of limited partnership interest and thereafter become limited partners of that
Partnership. Moreover, the Managing General Partner will convert all Units of
general partnership interest, other than the general partnership interest held
by the Managing General Partner, of a particular partnership into Units of
limited partnership interest upon completion of drilling of that Partnership.
See "Tax Considerations--Conversion of Interests," "Terms of the Offering--
Conversion of Units by Additional General Partners," and "Proposed Activities--
Insurance."
Unit Repurchase Program. Beginning with the third anniversary of the date of
the first cash distribution of the particular Partnership, Investor Partners
(those persons who invest in a Partnership, either as Additional General
Partners or as Limited Partners) of that Partnership may offer their Units to
the Managing General Partner for repurchase. Repurchase of Units is subject to
certain conditions, including the financial ability of the Managing General
Partner to purchase the Units and certain opinions of Counsel. Subject to such
financial condition and certain opinions of Counsel, the Managing General
Partner will offer annually to repurchase for cash a maximum of 10% of the Units
originally subscribed to in the Partnership. Subject to such conditions, the
Managing General Partner is obligated to purchase all Units presented to it by
investors, up to the 10% ceiling as stated above. The repurchase price will be
based upon a minimum of three times cash distributions during the 12 months
preceding receipt of the request for repurchase or some greater amount which is
solely in the discretion of the Managing General Partner. Such repurchase price
will not necessarily represent the fair market value of the Units. See "Terms
of the Offering--Unit Repurchase Program" and "Tax Considerations--Conversion of
Interests."
2
<PAGE>
Suitability Standards--Long-Term Investment. The Managing General Partner
has instituted strict suitability standards for investment in the Partnerships.
The high degree of investment risk together with the restrictions on the sale of
Units, lack of a market for the Units, and the tax consequences of the sale of
Units makes investment in the Partnerships suitable only for persons who are
able to hold their Units on a long-term investment basis. See "Terms of the
Offering--Investor Suitability."
Risk Factors. This offering involves numerous risks, including the risks of
oil and gas drilling, the risks associated with investments in oil and gas
drilling programs, and significant tax considerations. See "Risk Factors" and
"Tax Considerations." Each prospective investor should carefully consider a
number of significant risk factors inherent in and affecting the businesses of
the Partnerships and this offering, including the following:
Special Risks of the Partnerships:
. The drilling and completion operations to be undertaken by each Partnership
for the development of oil and gas reserves involve the possibility of a
total loss of an investment in a Partnership.
. The Managing General Partner will have the exclusive management and control
of all aspects of the business of each Partnership. No investor will be
permitted to take part in the management or in the decision-making of the
Partnership.
. Prospects may not be selected for acquisition by a particular Partnership
until after activation of that Partnership. Therefore, an investor may not
have an opportunity to evaluate any of the Prospects before investing in a
Partnership. Because all subscriptions are irrevocable, because the offering
period for a particular Partnership can extend over a number of months, and
because Prospects may not be acquired until activation of a Partnership,
delays in the investment of proceeds from the initial subscription date are
likely.
. Investors who invest as Additional General Partners will have unlimited
liability for all obligations and liabilities of creditors and claimants
arising during such time that they were Additional General Partners from the
conduct of Partnership operations if such liabilities exceed the
Partnership's assets and insurance and the assets of the Managing General
Partner (which has agreed to indemnify the Additional General Partners).
. There will be no market for the Units. Investors in a Partnership must
assume the risks of an illiquid investment. Investors may be unable to sell
their Partnership interests.
. The Partnerships are subject to various conflicts of interest arising out of
their relationship with the Managing General Partner, including: the
Managing General Partner currently manages oil and gas drilling programs
similar to the Partnerships; the Managing General Partner decides which
Prospects each Partnership will acquire; the Managing General Partner will
act as operator and will furnish drilling and completion services to the
Partnerships; the Managing General Partner is general partner of numerous
other partnerships and owes duties of good-faith dealing to such other
partnerships; and the dealer manager will receive sales commissions as a
result of sales of Units.
. The Managing General Partner and Affiliates will receive fees and
compensation throughout the life of each Partnership. If and to the extent
these fees and compensation create conflicts between the best interests of
the investors and the best interests of the Managing General Partner, the
Managing General Partner may have incentives to act in a manner not in the
best interest of the Partners.
. It is possible that some or all of the insurance coverage which the
Partnership has available may become unavailable or prohibitively expensive.
In such event, the investors could be subject to greater risk of loss of
their investment since less insurance would be available to protect against
casualty losses.
. The Managing General Partner and Affiliates may also purchase Units, the
effect of which may be to assure that the minimum aggregate subscription
amount is reached.
3
<PAGE>
. The Partnership is permitted to drill one or more Exploratory Wells.
Drilling Exploratory Wells involves greater risks of Dry Holes and loss of
the Partnership's investment.
Risks Pertaining to Oil and Gas Investments:
. Oil and gas drilling is a highly speculative activity. There is a
possibility that wells drilled may not produce oil and gas. Even wells which
are productive may not produce oil and gas in sufficient quantities to return
all or a significant portion of the investment.
. Future oil and gas prices are unpredictable. If oil and gas prices go down,
investor returns will go down.
. Access to markets for gas produced by wells may be restricted as a result of
many factors, including distances to existing pipelines, an oversupply of
crude oil and gas, changing demand from weather conditions, and regulations
set by federal and state governmental authorities, thus impeding or delaying
revenues to the Partnerships.
Tax Risks:
. No ruling has been obtained from the Internal Revenue Service (the "Service")
as to partnership status of the Partnerships.
. Investment as an Additional General Partner may not be advisable for a person
whose taxable income from all sources is not recurring or is not subject to
high marginal federal income tax rates.
. Investment as a Limited Partner may be less advisable for a person who does
not have substantial current taxable income from passive trade or business
activities.
. Federal income tax payable by an Investor Partner by reason of his
distributive share of Partnership income for any year may exceed the cash
distributed to such Partner by the Partnership.
. Even though the Partnerships will not register with the Service as "tax
shelters," there still remains a likelihood of an audit of the Partnerships'
returns by the Service.
. Of the total program proceeds, the 10% utilized for syndication costs,
offering costs, due diligence and commissions is nondeductible for the life
of the Partnership, and 5% is utilized for the management fee, some or all of
which may not be deductible and some of which may be deductible only over a
60-month period.
. No assurance can be given that prepaid drilling expenses will be deductible
in the year paid.
4
<PAGE>
Compensation of the Managing General Partner
The following is a tabular presentation of the items of compensation respecting
the Managing General Partner:
<TABLE>
<CAPTION>
Recipient Form of Compensation Amount
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<S> <C> <C>
Managing General Partner Partnership interest 20% interest(1)
Managing General Partner Management Fee 5% of Subscriptions (non-recurring
fee)(2)
Managing General Partner Sale of Leases to Partnerships Cost, or fair market value if
materially less than Cost(3)
Managing General Partner Contract drilling rates Competitive industry rates(3)
Managing General Partner Operator's Per-Well Charges $350 per well per month(3)
Managing General Partner Direct Costs Cost(3)
Managing General Partner Payment for equipment, supplies Competitive prices(3)
and Affiliates and other services
</TABLE>
- ---------------
(1) The Managing General Partner will contribute to the Partnerships an amount
equal to at least 5% of the aggregate contributions of the Investor
Partners.
(2) The one-time fee will range from $50,000 if the minimum number of Units is
sold, to $500,000 if the maximum number of Units is sold.
(3) Cannot be quantified until Partnership is conducting business.
Participation in Costs and Revenues
Partnership profits and income will be allocated 80% to the Investor Partners
and 20% to the Managing General Partner throughout the term of each Partnership.
The table below summarizes the participation in the costs and revenue of the
Partnerships by the Managing General Partner and the Investor Partners, taking
into account the Managing General Partner's contribution to the capital of the
Partnerships. The table is reproduced in full, with footnotes, under
"Participation in Costs and Revenues."
<TABLE>
<CAPTION>
Managing
Investor General
Partnership Costs Partner Partner
- ----------------- ------- -------
<S> <C> <C>
Broker-Dealer Commissions and Expenses....................... 100% 0%
Management Fee............................................... 100% 0%
Lease Costs.................................................. 95% 5%
Tangible Equipment........................................... 95% 5%
Drilling and Completion Costs................................ 95% 5%
Intangible Drilling and Development Costs.................... 95% 5%
Operating Costs.............................................. 80% 20%
Direct Costs................................................. 95% 5%
Administrative Costs......................................... 0% 100%
Partnership Revenues
- --------------------
Sale of Oil and Gas Production............................... 80% 20%
Sale of Productive Properties................................ 80% 20%
Sale of Undeveloped Leases................................... 80% 20%
Interest Income.............................................. 80% 20%
</TABLE>
5
<PAGE>
Application of Proceeds
The Managing General Partner estimates that the proceeds from the aggregate
contributions to the capital of a partnership by the Investor Partners and the
Managing General Partner will be applied as follows, assuming the minimum number
of Units is sold. For a more extensive presentation of the use of proceeds, see
"Source of Funds and Use of Proceeds" later in the Prospectus.
<TABLE>
<CAPTION>
Percentage of Total
Activity Capital Contributions
- -------- ---------------------
<S> <C>
Organization and Offering Costs......................... 10%
Management Fee.......................................... 5%
Drilling and Completion Costs........................... 85%
----
Total................................................... 100%
====
</TABLE>
Tax Considerations; Opinion of Counsel
The Managing General Partner has received an opinion from its counsel,
Greenebaum Doll & McDonald PLLC, Louisville, Kentucky, concerning all material
Federal income tax issues applicable to an investment in the Partnerships. See
"Tax Considerations." To be fully understood, the complete discussion of these
matters set forth herein should be read by each prospective Investor Partner.
Based upon current laws, regulations, interpretations and court decisions, and
the representations of the Managing General Partner, Greenebaum Doll & McDonald
PLLC, has rendered its opinion that (i) the material Federal income tax benefits
in the aggregate from an investment in the Partnership will be realized; (ii)
each Partnership will be treated as a partnership for Federal income tax
purposes and not as an association taxable as a corporation, (iii) neither the
at risk nor the adjusted basis rules will limit the deductibility of losses
generated from the Partnership; (iv) the interests of persons who invest as
Additional General Partners will not be considered a passive activity within the
meaning of Code (S) 469 and losses generated while such general partner
interests are so held will not be limited by the passive activity provisions;
(v) the Partnership's operations as to Investor Partners owning Limited Partner
interests (other than those held by Additional General Partners who converted
their interests into Limited Partner interests) will be considered a passive
activity within the meaning of Code (S) 469 and losses generated therefrom will
be limited by the passive activity provisions; (vi) the Partnership will not be
terminated solely as the result of the conversion of Partnership interests;
(vii) to the extent provided herein, the Partners' distributive shares of
Partnership tax items will be determined and allocated substantially in
accordance with the terms of the Partnership Agreement; and (viii) each Partner
will be entitled to his distributive share of the Partnership's cost recovery
deduction.
Due to the lack of authority, or the essentially factual nature of the
question, counsel expresses no opinion on the following; (i) the impact of an
investment in the Partnership on an Investor Partner's alternative minimum tax,
due to the factual nature of the issue; (ii) whether, under Code (S) 183, the
losses of the Partnership will be treated as derived from "activities not
engaged in for profit," and therefore nondeductible from other gross income, due
to the inherently factual nature of a Partner's interest and motive in engaging
in the transaction; (iii) whether prepaid drilling expenses will be deductible
in the year prepaid, due to the inherently factual nature of the issue; (iv)
whether any of the Partnership's properties will be considered "proven" for
purposes of depletion deductions, due to the factual nature of the issue; (v)
whether any interest incurred by a Partner with respect to any borrowings will
be deductible or subject to limitations on deductibility, due to the factual
nature of the issue; and (vi) whether the fees to be paid to the Managing
General Partner and to third parties will be deductible, due to the factual
nature of the issue. See "Tax Considerations."
6
<PAGE>
Rights of the Investor Partners
The rights of the Investor Partners will be governed by the Partnership
Agreement, which is attached to this Prospectus as Appendix A. The following is
a summary of the more significant of their rights.
. The Managing General Partner will have the exclusive right to manage and
control all aspects of the business of the Partnership. No investor will have
any voice in the day-to-day business operations of the Partnership.
. Profits and losses are to be allocated and cash is to be distributed in the
manner discussed in the section entitled "Participation in Costs and
Revenues."
. Investors owning 10% or more of the then outstanding Units have the right to
ask the Managing General Partner to call a meeting of the Investor Partners.
Each Unit is entitled to one vote on all matters. A vote of a majority of the
then outstanding Units is required to approve any sale of all or
substantially all of the Partnership's assets; the removal of the Managing
General Partner and the election of a new Managing General Partner; the
dissolution of the Partnership; any non-ministerial amendment to the
Partnership Agreement; and the cancellation of contracts for services with
the Managing General Partner.
. The Managing General Partner has agreed to indemnify each investor who owns
Units of general partnership interest for obligations, losses, or judgments
of the Partnership or the Managing General Partner which exceed the amount of
applicable insurance coverage and amounts which would become available from
the sale of all Partnership assets.
. The Managing General Partner is obligated to furnish investors with semi-
annual and annual reports. The reports will contain financial statements
(audited in the annual reports), information regarding transactions between
the Managing General Partner and the Partnership, reserve information
prepared by an independent petroleum engineer and information regarding the
Partnership's activities.
. Investors may sell, transfer, or assign their Units, subject to the consent
of the Managing General Partner and provided that the transferee satisfies
all applicable suitability requirements.
. Investors have the right to inspect the Partnership's books and records at
any reasonable time.
7
<PAGE>
RISK FACTORS
Investment in the Partnerships involves a high degree of risk and is suitable
only for investors of substantial financial means who have no need of liquidity
in their investments. In analyzing this offering, investors should carefully
consider the following risk factors.
Special Risks of the Partnerships
Speculative Nature of Investment; Investment Suitable Only for Financially
Able. The drilling and completion operations to be undertaken by each of the
Partnerships for the development of oil or gas reserves involve the possibility
of a total loss of an investment in a partnership. Drilling activities may be
unprofitable, not only from non-productive wells, but also from wells which do
not produce oil or gas in sufficient quantities or quality to return a profit on
the amounts expended. Investment is suitable only for individuals who are
financially able to withstand a total loss of their investment. See "Terms of
the Offering--Investor Suitability."
Exclusive Reliance Upon Managing General Partner for Management of
Partnerships; Investor Partners May Not Manage. The Managing General Partner
will exclusively manage and control all aspects of the business of the
Partnership and will make all decisions respecting the business of the
Partnership. The Investor Partners will not take part in the management of the
Partnership. See Article VI and Section 7.1 of the Partnership Agreement.
Prospects Not Yet Identified or Selected; No Opportunity for Investors to
Evaluate Prospects. The Managing General Partner has not selected any Prospect
for acquisition by the Partnerships and may not select Prospects for a
particular Partnership until after the activation of that Partnership. A
Prospect may be acquired directly by a Partnership from third parties. In many
cases, however, a Prospect may be acquired initially by the Managing General
Partner. The Managing General Partner will transfer such Prospects to a
Partnership as set forth in "Proposed Activities--Evaluation of Prospects."
Investor Partners may not have an opportunity before purchasing Units to
evaluate for themselves the relevant geophysical, geological, economic or other
information regarding the Prospects to be selected. Delays in the investment of
proceeds from the initial subscription date are likely because (i) the offering
period for a particular Partnership may extend over a number of months and (ii)
no Prospect will be acquired until after activation of the Partnership.
Unlimited Liability of Additional General Partners. Under Kentucky law, the
state in which each Partnership is to be formed, general partners of a
partnership have unlimited liability with respect to that partnership, therefore
the Additional General Partners will be liable individually and as a group for
all obligations and liabilities of creditors and claimants, whether arising out
of contract or tort, in the conduct of Partnership operations. Additionally,
General Partners may be subjected to liability for amounts in excess of their
Subscriptions, the assets of the Partnership, including insurance coverage, and
the assets of the Managing General Partner, which has agreed to indemnify the
Additional General Partners.
Compensation Payable to the Managing General Partner and Affiliates; Possible
Conflicts of Interest. The Managing General Partner and Affiliates will receive
compensation throughout the life of the Partnership. The Managing General
Partner will contribute to the Partnerships an amount equal to not less than 5%
of the Capital Contributions of the Investor Partners. The Managing General
Partner's share of operating profits in each Partnership will be 20%. The
Partnership at closing of the Partnership will pay to the Managing General
Partner a one-time Management Fee equal to 5% of total Subscriptions. The
Partnership will enter into a Drilling Contract, based upon competitive rates as
charged by unaffiliated contractors in the same geographic region, with the
Managing General Partner to drill, test, complete and equip its portion of each
Partnership well. If the Managing General Partner finds that, in order to
fulfill its contract with the Partnership, material adjustments must be made to
costs as stated in the Drilling Contract, such changes will be made. During the
production phase of operations, the Managing General Partner as operator will
receive a monthly fee of $300 per well for operations and field supervision and
$50 per well for accounting, engineering, management and general and
administrative expenses for producing wells. The Managing General Partner's fees
for services as an Operator will be adjusted annually in
8
<PAGE>
accordance with guidelines set by the Council of Petroleum Accountants Societies
of North America. The Partnership will reimburse the Managing General Partner
for all documented out-of-pocket expenses incurred on behalf of the Partnership.
The Managing General Partner and its Affiliates may enter into transactions
with the Partnership for services, supplies and equipment and will be entitled
to compensation at competitive prices and terms as determined by reference to
charges of unaffiliated companies providing similar services, supplies and
equipment. Ridgemont Securities, Inc. will receive a fee as Dealer-Manager
("Dealer-Manager") equal to 10% of the subscription proceeds (ranging from
$100,000 if the minimum number of Units is sold to $1,000,000 if the maximum
number of Units is sold) for sales commissions and reimbursement of bona fide
due diligence expenses. Dealer-Manager may reallow such sales commissions and
expenses in whole or in part to NASD-licensed broker-dealers for sale of the
Units. See "Compensation to the Managing General Partner and Affiliates."
If and to the extent these fees and compensation create conflicts between the
best interests of the Investor Partners and the best interests of the Managing
General Partner, the Managing General Partner may have incentives to act in a
manner not in the best interest of the Investor Partners. For example, the
Managing General Partner could have an incentive to continue to operate wells
which were no longer economic to the Partnership, in order to continue to
receive the operating fees. In view of the fact that the Managing General
Partner has a fiduciary duty to act in furtherance of the best interests of the
Investor Partners (see "Fiduciary Responsibility of the Managing General
Partner"), the Managing General Partner will resolve such conflicts in favor of
the interests of the Investor Partners.
Irrevocable Subscriptions; Escrow of Subscription Funds. The execution of the
Subscription Agreement by a subscriber constitutes a binding offer to buy Units
in a Partnership. Once an investor subscribes for Units, that investor will not
be able to revoke his Subscription. Subscription proceeds of each Partnership
will be held in a separate interest-bearing escrow account with the Escrow
Agent. In the event that the offering of Units in a particular Partnership has
not closed by the sixtieth day following the anticipated offering termination
date, the Managing General Partner will cause all escrowed funds to be promptly
returned to the respective investors of the particular Partnership which has not
closed with any interest earned thereon and without any deduction therefrom.
Speculative Nature of Prospect Acquisitions; No Assurance of Oil and Gas
Production. The selection of Prospects for oil and gas drilling is inherently
speculative. The Managing General Partner cannot predict whether any Prospect
will produce oil, gas or commercial quantities of oil or gas. Any oil and gas
investment involves significant risks. The Partnerships may purchase interests
in Producing Properties; profitable operation of such Producing Properties
cannot be assured. See "Proposed Activities."
Illiquid Investment; Restrictions on Transferability of Units. Investors in
any Partnership must assume the risks of an illiquid investment. Investors may
not be able to sell their Partnership interests. There will be no market for the
Units. While Units of the Partnership are transferable, the ability of the
transferee to become a substitute Partner is limited, requiring among other
things the consent of the Managing General Partner. See "Transferability of
Units."
Possibility of Reduction or Unavailability of Insurance; Possible Greater Risk
of Loss to Investors. It is possible that some or all of the insurance coverage
which the Partnership has available may become unavailable or prohibitively
expensive. In such case, the Managing General Partner may elect to change the
insurance coverage. Upon such change, Additional General Partners could become
Limited Partners. See "Proposed Activities--Insurance." Additional General
Partners who elect to remain Additional General Partners could be exposed to
additional financial risk due to the reduced insurance coverage and due to the
fact that Additional General Partners would continue to be individually liable
for all obligations and liabilities of the Partnership. However, Additional
General Partners who elected to become Limited Partners could lose or suffer
deferral of some or all of the available tax deductions and credits and thereby
be subject to passive activity treatment for Partnership
9
<PAGE>
deductions and credits. See "Tax Considerations--Passive Loss Limitations." All
Investor Partners could be subject to greater risk of loss of their investment
since less insurance would be available to protect from casualty losses.
Less Diversification of Risks If Less Subscription Proceeds; Greater Risk of
Loss to Investors. The Managing General Partner intends to spread the risk of
oil and gas drilling by participating in the drilling of wells on a number of
different Prospects. A Partnership subscribed at the minimum level may be able
to participate in fewer Prospects, thereby increasing the risk to the Investor
Partner. As the Partnership size increases, the number of wells may increase,
thereby increasing the diversification of the Partnership.
Conflicts of Interest Between Managing General Partner and Partnerships. The
continued active participation by the Managing General Partner and its
Affiliates in oil and gas activities for their own accounts and on behalf of
other partnerships organized or to be organized by them, their sale of Leases to
and other transactions with the Partnerships and the manner in which Partnership
revenues are allocated creates conflicts of interest with the Partnerships. In
this regard, specific conflicts include the following: the Managing General
Partner manages other oil and gas drilling programs similar to the Program, the
effect of which is that the Managing General Partner owes a duty of good faith
to each of the partnerships which it manages and actions taken with regard to
other partnerships may not be advantageous to the Partnership. Conflicts may
arise in conducting such transactions among the Partnerships. The Managing
General Partner decides which Prospects each Partnership will acquire, the
effect of which is that the Managing General Partner could benefit, as a result
of cost savings or reduction of risk, for instance, by assigning or not
assigning and by retaining particular Prospects to the Partnership. The Managing
General Partner will act as operator and will provide drilling and completion
services to the Partnerships, for which the Managing General Partner will be
compensated (at rates competitive with the rates charged by unaffiliated persons
for similar services). The Managing General Partner or its Affiliate may acquire
an interest in a Prospect in which a Partnership possesses an interest; the
Dealer Manager will receive commissions on the basis of the amount of proceeds
raised in the offering (some of which the Dealer Manager will reallow to the
broker-dealers which effected the actual sales of Units). See "Management--
Conflicts of Interest."
Inside Board of Directors and Other Family Relationships. Robert D. Burr
serves as the President, CEO and Chairman of the Board of the Managing General
Partner. Gregory B. Shea, a son-in-law of Robert D. Burr, serves as an officer
and director of the Managing General Partner. James T. Cook, Jr., Vice
President-Finance, CFO and director of the Managing General Partner, and Don L.
Ferrari, Senior Vice President--Sales and director of the Managing General
Partner, are not related to the other officers of the Managing General Partner.
The Managing General Partner does not have a director who is not either a full-
time employee or a family relation of Robert D. Burr. Therefore, the activities
of the Managing General Partner should not be considered as being subject to the
review and scrutiny of an independent Board of Directors. Russell Vera, a
son-in-law of Robert D. Burr, is a controlling shareholder of the Managing
General Partner and is the husband of Melissa Vera, the majority shareholder of
the Dealer-Manager. The Dealer-Manager may be deemed to be an affiliate of the
Managing General Partner. See "Management" and "Plan of Distribution."
Unpredictable Producing Life of Wells; Uncertainty of Production. The Managing
General Partner cannot predict the life and production of any well. The actual
lives could differ from those anticipated. Sufficient oil or gas may not be
produced for investors to receive a profit or even to recover their initial
investment.
Joint Activities with Others--Potential Partnership Liability. The
Partnerships will usually acquire less than the full Working Interest in
Prospects and, as a result, will engage in joint activities with other Working
Interest owners. A Partnership could be held liable for the joint activity
obligations of the other Working Interest owners, such as nonpayment of costs
and liabilities arising from the actions of the Working Interest owners. Full
development of the Prospects may be jeopardized in the event of the inability of
other Working Interest owners to pay their respective shares of Drilling and
Completion Costs. See "Proposed Activities--Drilling and Completion Phase" and
"Proposed Activities--Drilling and Operating Agreement."
Shortage of Working Capital. The Partnership intends to utilize substantially
all available capital from this offering for the purchase, drilling and
completion of wells and will have only nominal funds available for
10
<PAGE>
Partnership purposes prior to such time as there is production from Partnership
well operations. The Managing General Partner may advance funds to the
Partnership or the Partnership may borrow funds for the continuation of the
Partnership's operations. The Managing General Partner may advance funds from
its own equity or generated from its general operations. The lending of funds by
the Managing General Partner to a partnership may limit the amount of money the
Managing General partner has available to lend to another Partnership and
consequently a conflict of interest between the Managing General Partner and the
Partnership would exist. The Managing General Partner will not borrow funds on
behalf of a Partnership until all Additional General Partners have been
converted into Limited Partners. Any interest charged on an advance of funds
from the Managing General Partner must be at the lesser of the rates at which
the Managing General Partner or the Partnership may borrow funds from a third
party lender. Such advances will be repaid to the Managing General Partner from
future production revenues. Therefore, any future requirement for additional
funding will have to come, if at all, from the Partnership's production or
borrowings. There is no assurance that production or borrowings will be
sufficient to provide the Partnership with necessary additional funding. There
can also be no assurance that the Managing General Partner will have or will
make available sufficient funds to the Partnership. See "Management--Conflicts
of Interest," "Source of Funds and Use of Proceeds--Subsequent Source of Funds,"
"Proposed Activities--Production Phase of Operations--Expenditure of Production
Revenues and "Blue Ridge Group, Inc. Consolidated Financial Statements."
Other Partnerships Sponsored by Managing General Partner; Possible Competition
for Prospects, Equipment, Contractors, and Personnel. During 1997 and
thereafter, the Managing General Partner and its Affiliates plan to offer
interests in other partnerships to be formed for substantially the same purposes
as those of the Partnerships. Therefore, a number of partnerships with
unexpended capital funds, including those partnerships to be formed before and
after the Partnerships, may exist at the same time. Partnerships previously
organized by the Managing General Partner and its Affiliates may be purchasing
Prospects at the same time as another partnership is attempting to purchase
Prospects. This will create competition among partnerships for suitable
Prospects and may make more difficult the completion of Prospect acquisition
activities by a Partnership. See "Conflicts of Interest--Conflicts with Other
Programs."
Limitation on Purchases of Units by Managing General Partner and its
Affiliates to Assure Minimum Aggregate Subscription. The Managing General
Partner and its Affiliates may also purchase Units, the effect of which may be
to assure that the minimum aggregate Subscription amount is obtained for any
Partnership; however, the Managing General Partner and its Affiliates are not
obligated to purchase any Units and the required minimum Subscription amount
might not be obtained in any Partnership. The Managing General Partner and/or
its Affiliates are permitted to purchase no more than 10% of the Units
subscribed by the Investor Partners in any Partnership. Nevertheless, not more
than $100,000 of the Units purchased by the Managing General Partner and/or its
Affiliates are permitted to be applied to satisfying the $1,000,000 minimum
requirement for any Partnership. The effect of this provision is that at least
90% of the minimum subscription proceeds must be raised from persons
unaffiliated with the Managing General Partner, if a particular Partnership is
to satisfy the requirements to close a Partnership. Any purchases made by the
Managing General Partner and/or its Affiliates will be purchased for investment
purposes and not for resale.
Exploratory and Development Drilling; Different Degrees of Risk. Each
Partnership may drill one or more Exploratory Wells (see Glossary for
definition) which exploratory drilling may constitute up to 25% of its total
activities. Drilling Exploratory Wells involves greater risks of Dry Holes and
loss of the Investor Partners' investment. Drilling Developmental Wells (see
Glossary for definition) generally involves less risk of Dry Holes but
developmental acreage is more expensive and subject to greater royalties and
other burdens on production. All drilling activities involve a high degree of
risk, with Exploratory Wells presenting a higher degree of risk than
Developmental Wells. The number and type of wells to be drilled by the
Partnerships will vary according to the amount of funds raised, the costs of
each well, and the size of the fractional working interest selected in each
well. See "Proposed Activities."
11
<PAGE>
Past Experience Not Indicative of These Partnerships. Information concerning
the prior drilling experience of previous partnerships sponsored by the Managing
General Partner and its Affiliates, presented under the caption "Prior
Activities," is not indicative of the results to be expected by these
Partnerships.
Sharing of Risks of Nonproductive Operations. Under the cost and revenue
sharing provisions of the Partnership Agreement, the Investor Partners and the
Managing General Partner may share in costs disproportionate to their sharing of
revenues. Because the Investor Partners will bear the substantial amount of
costs of acquiring, drilling and developing the Prospects, the Investor Partners
will bear the substantial amount of costs and risks of drilling Dry Holes and
marginally productive wells.
Restrictions Upon Activities of the Investor Partners. The Investor Partners
are not authorized to participate in the management of the Partnership business.
The Partnership Agreement forbids the Investor Partners from acting in a manner
harmful to the business of the Partnership. If an Investor Partner acts in
contravention of the terms of the Partnership Agreement, such Partner may have
to pay for such losses and such Partner may have to pay other Partners for all
damages resulting from his breach of the Partnership Agreement.
Indemnification of Additional General Partners by Managing General Partner;
Risk of Loss of Investment. The Managing General Partner has agreed to indemnify
each of the Additional General Partners for obligations related to casualty
losses and losses from the operation of the Partnership's business which exceed
available insurance coverage and Partnership assets. Any successful claim of
indemnification will reduce the value of the Partnership. The value of the
investment interest of the Investor Partners would be reduced. In such event,
the Investor Partners could lose their entire investment in the Partnership. The
Managing General Partner will have no liability to the Partnership or to any
Investor Partner for any loss suffered by the Partnership if the Managing
General Partner in good faith determined that its action was in the best
interest of the Partnership and that such action did not constitute negligence
or misconduct of the Managing General Partner. See "Summary of Partnership
Agreement--Indemnification."
Limitation of Acts Allowed by Limited Partners. Under the Kentucky Revised
Uniform Limited Partnership Act (the "Act"), a Limited Partner will not be
liable for the obligations of a Partnership unless such person takes part in the
control of the business of the Partnership. The Partnership Agreement states
that a Limited Partner is not permitted to participate in the control of the
business of the Partnership.
Risk of Return of Limited Partner Distributions. If Limited Partners receive a
return of any part of their Capital Contributions to a Partnership, without
violation of the Partnership Agreement or the Act, such Limited Partners will be
liable to the Partnership for a period of one year thereafter for the amount of
the returned contributions. If the return is in violation of the Partnership
Agreement or the Act, the Limited Partners will be liable to the Partnership for
a period of six years thereafter for the amount of the contribution wrongfully
returned.
Financial Capability of the Managing General Partner as General Partner of
Several Partnerships; Significant Loss by Managing General Partner Could
Adversely Affect Partnership. As a result of its commitments as general partner
of several partnerships and because of the unlimited liability of a general
partner to third parties, the net worth of the Managing General Partner is at
risk of reduction. Because the Managing General Partner is primarily responsible
for the conduct of the Partnership's affairs, a significant adverse financial
reversal for the Managing General Partner could have an adverse effect on the
Partnership and the value of the Units therein.
No Allocations or Distributions of Capital Account Deficit. The Partnership
Agreement generally prohibits the Investor Partners from receiving allocations
to the extent such would create or increase deficits in their Capital Accounts.
See "Participation in Costs and Revenues--Allocations Among Investor Partners;
Deficit Capital Account Balances."
12
<PAGE>
Risks Pertaining to Oil and Gas Investments
Speculative Nature of Oil and Gas Activities. Oil and gas drilling is a highly
speculative activity marked by many unsuccessful efforts. Investors must
recognize the possibility that the wells drilled may not be productive. Even
those wells which are completed may not produce enough oil or gas to show a
profit. Delays and added expenses may also be caused by poor weather conditions
affecting, among other things, the ability to lay pipelines and install
production equipment. In addition, ground water, various clays, lack of porosity
and permeability may hinder, restrict or even make production impractical or
impossible. Up to 25% of the Partnership's activities may involve Exploratory
Wells. The likelihood of failing to find commercial quantities of oil or gas is
relatively high in exploratory wells. See "Proposed Activities--Oil and Gas
Prospects."
Oil and Gas Well Drilling and Production Risks. All drilling activities
involve a high degree of risk with Exploratory Wells presenting a higher degree
of risk than Development Wells. During the drilling and completion of wells, a
Partnership could encounter hazards such as unusual or unexpected formations,
pressures or other conditions, blow-outs, fires, failure of equipment, downhole
collapses, and other hazards (whether similar or dissimilar to those
enumerated). Although each Partnership will maintain the insurance described in
"Proposed Activities--Insurance," the related Drilling Program may suffer losses
due to hazards against which it cannot insure or against which it may elect not
to insure. Such liabilities could result in personal liability for Additional
General Partners and the Managing General Partner. The Managing General Partner
in its capacity as operator will carry blowout, loss of well control, pollution,
public liability, and workers' compensation insurance, but such insurance may
not be sufficient to cover all liabilities. See "Proposed Activities--
Insurance."
Prices of Oil and Gas Quite Unstable. Global economic conditions, political
conditions, and energy conservation have created unstable prices. The prices for
domestic oil and gas production have materially declined at times in the past
and could possibly decline in the future which would adversely affect the
Partnerships and the Investor Partners.
Competition, Markets and Regulation. A large number of companies and
individuals engage in drilling for oil and gas and there is competition for the
most desirable Leases. Also, international developments and the possible
improved economics of domestic oil and gas exploration may influence major oil
companies to increase their domestic oil and gas exploration. The major oil
companies have significantly greater technical expertise and financial resources
than the Managing General Partner. The sale of any oil or gas found and produced
by the Partnerships will be affected by fluctuating market conditions and
regulations, including environmental standards, set by state and federal
agencies. See "Competition, Markets and Regulation."
Environmental Hazards and Liabilities. There are numerous natural hazards in
the drilling of wells, including unexpected or unusual formations, pressure,
blowouts involving possible damages to property and third parties, surface
damages, bodily injuries, damage to and loss of equipment, reservoir damage and
loss of reserves. Uninsured liabilities would reduce the funds available to a
Partnership, may result in the loss of Partnership properties and may create
liability for Additional General Partners. A Partnership may be subject to
liability for pollution, abuses of the environment and other similar damages.
Although the Partnerships will maintain insurance coverage in amounts the
Managing General Partner deems appropriate, it is possible that insurance
coverage may be insufficient. In that event, Partnership assets would be
utilized to pay personal injury and property damage claims and the costs of
controlling blowouts or replacing destroyed equipment rather than for additional
drilling activities.
Increases in Drilling Costs. Current economic conditions indicate that the
costs of exploration and development are increasing gradually; however, the oil
and gas industry historically has experienced periods of rapid cost increases
from time to time and within short periods of time. Increases in the cost of
exploration and development would affect the ability of the Partnerships to
acquire additional Leases, oil and gas equipment and supplies.
Availability of Rigs and Prospects. A substantial increase in drilling
operations in the United States could result in the decreased availability of
drilling rigs and gas field tubular goods. Those factors may adversely affect
the
13
<PAGE>
operations of the Partnerships. Increased drilling activity could lead to
shortages of equipment and material which would make timely drilling and
completion of wells impossible.
Titles to Properties. Prior to the drilling of any partnership well, the
Managing General Partner will assign an interest in the Lease to the
Partnership. Leases acquired by each Partnership may initially and temporarily
be held in the name of the Managing General Partner, as nominee, to facilitate
joint-owner operations and the acquisition of properties. The existence of the
unrecorded assignments from the record owner will indicate that the Leases are
being held for the benefit of each particular Partnership and that the Leases
are not subject to the debts, obligations or liabilities of the record owner;
however, such unrecorded assignments may not fully protect the Partnerships from
the claims of creditors of the Managing General Partner.
Investor Partners must rely on the Managing General Partner to use its best
judgment to obtain appropriate title to Leases. Provisions of the Partnership
Agreement relieve the Managing General Partner from any mistakes of judgment
with respect to the waiver of title defects. The Managing General Partner will
take such steps as it deems necessary to assure that title to Leases is
acceptable for purposes of the Partnerships. The Managing General Partner is
free, however, to use its own judgement in waiving title requirements and will
not be liable for any failure of title to Leases transferred to the
Partnerships. Further, neither the Managing General Partner nor its Affiliates
will make any warranties as the validity or merchantability of titles to any
Leases to be acquired by the Partnerships.
Financial Conditions of Subcontractors. Although the Managing General Partner
will endeavor to ascertain the financial condition of nonaffiliated
subcontractors, if subcontractors fail to timely pay for materials and services,
the wells of the Partnerships could be subject to materialmen's and workmen's
liens. In that event, the Partnerships could incur excess costs in discharging
such liens.
Shut-in Wells; Delays in Production and Seasonality. Production from wells
drilled in areas remote from marketing facilities may be delayed until
sufficient reserves are established to justify construction of necessary
pipelines and production facilities. In addition, production from wells may be
reduced or delayed due to marketing demands which tend to be seasonal. Wells
drilled for the Partnerships may have access to only one potential market. Local
conditions including but not limited to closing businesses, conservation,
shifting population, pipeline maximum operating pressure constraints, and
development of local oversupply or deliverability problems could halt sales from
Partnership wells.
Delay in Distributions of Revenue. Distribution of revenue may be delayed for
substantial periods of time after discovery of oil or gas due to unavailability
of, or delay in obtaining, necessary material for completion of a well; payment
of operating and/or development costs from revenue proceeds; repayment of loans
obtained by the Partnerships (see "Assessments and Financing" and "Source of
Funds and Use of Proceeds--Subsequent Source of Funds"); reduced takes by
purchasers of oil or gas due to market conditions; delays in obtaining
satisfactory purchase contracts and connections for gas wells; delays in title
opinions and obtaining division orders; and other circumstances.
Dependence on Future Prices, Supply and Demand for Oil and Gas. The revenues
generated from the activities of each Partnership will be highly dependent upon
the future prices and demand for oil and gas. Factors which may affect prices
and demand include the world-wide supply of oil and gas, the price of foreign
imports, the levels of consumer demand, price and availability of alternative
fuels and changes in existing and proposed federal regulation and taxation.
Members of the Organization of Petroleum Exporting Countries establish prices
and production quotas for petroleum products from time to time with the intent
of reducing the current global oversupply and maintaining or increasing certain
price levels. The Managing General Partner is unable to predict what, if any,
effect such actions will have on the amount of or the prices received for oil
and gas produced and sold from the Partnerships' wells.
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The United States' average daily production of oil has declined from the mid
1980s to the present. The reduced production level is in part the result of
decreased drilling activity in the United States. Another factor contributing to
the reduction of United States oil production is the plugging and abandoning of
wells which are uneconomical due to the significant decrease in the price of
oil.
Tax Risks
It is possible that the tax treatment currently available with respect to oil
and gas exploration and production will be modified or eliminated on a
retroactive or prospective basis by additional legislative, judicial, or
administrative actions. The limited tax benefits associated with oil and gas
exploration do not eliminate the inherent attendant risks. See "Tax
Considerations."
Partnership Classification; No IRS Ruling Sought. Tax Counsel has rendered its
opinion that each Partnership will be classified as a partnership for Federal
income tax purposes and not as an association taxable as a corporation or as a
"publicly traded partnership." Such opinion is not binding on the Service or the
courts and the Managing General Partner will not request a ruling from the
Service confirming the opinion of the counsel. The Service could assert that a
Partnership should be classified as an association taxable as a corporation or
as a "publicly traded partnership." If a Partnership is so classified, any
income, gain, loss, deduction, or credit of the Partnership will remain at the
entity level and not flow through to the Investor Partners, the income of the
Partnership will be subject to corporate tax rates at the entity level and
distributions to the Investor Partners may be considered dividend distributions
subject to Federal income tax at the Investor Partners' level. See "Tax
Considerations--Classification as Partnership."
Tax Shelter Registration. Although an investment in a Partnership may generate
certain tax benefits, the Partnerships should not be considered a "tax shelter"
as that term is used in the Code. The Managing General Partner will not apply to
the Service for a "tax shelter" registration number with respect to any
Partnership. See "Tax Considerations--Administrative Matters--Registration of
Tax Shelters."
Timing of Tax Deductions. The Managing General Partner will use reasonable
efforts to expend or contract for the expenditure of the Capital Contributions
of each Partnership in the year such contributions are received. Some of the
expenses may be incurred, however, prior to the actual drilling of the oil and
gas wells. Although the Partnerships intend to take the position that such
expenses will be deductible in the year in which the expenses are incurred,
there can be no assurance that any expenses incurred in a year prior to the year
of the actual drilling of the oil and gas wells will be deductible in the year
incurred. In addition, Partnerships in which Investor Partners are admitted near
the end of a calendar year might not expend or contract for the expenditure of a
substantial portion of their Capital Contribution in that year, in which event
no substantial tax deductions would be available therefrom in that year.
Some drilling cost expenditures may be made as prepayments during 1997 (with
respect to Partnerships designated as "Blue Ridge Energy Fund 1997--Limited
Partnership") and during 1998 (with respect to Partnerships designed as "Blue
Ridge Energy Fund 1998--Limited Partnership") for drilling and completion
operations which in large part may be performed during 1998 and 1999,
respectively. All or a portion of such prepayments may be deductible in the year
of prepayment if (i) the well to which the prepayment relates is spudded within
90 days after December 31, 1997 or 1998, respectively; (ii) the payment is not a
mere deposit; and (iii) the payment serves a business purpose or otherwise
satisfies the clear reflection of income rule. A Partnership may not be
successful in defending the deductibility of such prepayments if such deduction
is challenged by the Service. If such a challenge were successful, such prepaid
expenses would be deductible in the tax year in which the services under the
drilling contracts are actually performed. See "Tax Considerations--Intangible
Drilling and Development Costs."
General Partner Interests Versus Limited Partner Interests. An investment as
an Additional General Partner in a Partnership may not be advisable for a person
whose taxable income from all sources is not recurring or is not normally
subject to the higher marginal Federal income tax rates.
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An investment as a Limited Partner may not be advisable for a person who does
not anticipate having substantial current taxable income from passive trade or
business activities. Such a person cannot utilize any passive losses generated
by the Partnerships until the person is in receipt of passive income.
The Additional General Partners will have the right to convert their interests
into Limited Partner interests, subject to certain limitations. The Managing
General Partner will convert all Additional General Partner Units into Limited
Partner Units upon completion of drilling. Upon the conversion, gain will be
recognized to the extent that any liabilities of which the Investor Partner is
considered relieved due to the conversion exceed such Investor Partner's
adjusted basis in such Investor Partner's Partnership interest.
Partnership income, losses, gains, and deductions allocable to any Limited
Partners will be subject to the passive activity rules, whereas those allocable
to an Additional General Partner will generally not be subject to the passive
activity rules. Upon conversion of an Additional General Partner's interest to
that of a Limited Partner interest, subsequently allocable income and gains will
be treated as nonpassive, while losses and deductions will be subject to
limitations under the passive loss rules. See "Tax Considerations--Passive Loss
Limitations."
Tax Liabilities in Excess of Cash Distributions. Federal income tax payable by
an Investor Partner by reason of the Investor Partner's distributive share of
Partnership taxable income for any year may exceed the cash distributed to such
Investor Partner by the Partnership. An Investor Partner must include in the
Investor Partner's own return for a taxable year the Investor Partner's share of
the items of the Partnership's income, gain, profit, loss, and deductions for
the year, whether or not cash proceeds are actually distributed to the Investor
Partner. For example, income from the Partnership's sale of oil and gas
production will be taxable to Investor Partners as ordinary income whether or
not it is actually distributed, for example, where such income is used to repay
Partnership indebtedness.
Chance of Audits. Although the Partnerships will not be registered with the
Service as "tax shelters," it is quite possible that the Service will audit the
Partnerships' returns. If such audits occur, tax adjustments might be made that
would increase the amount of taxes due or increase the risk of audit of Investor
Partners' individual tax returns. In addition, costs and expenses may be
incurred by a Partnership in contesting such adjustments. The cost of responding
to audits of Investor Partners' tax returns will be borne solely by the Investor
Partners whose returns are audited. See "Tax Considerations--Administrative
Matters."
Items Not Covered by the Tax Opinion. Due to the lack of authority, or the
essentially factual nature of the question, tax counsel to the Managing General
Partner, Greenebaum Doll & McDonald PLLC ("Tax Counsel"), has not expressed an
opinion as to the following: (i) whether the losses of a Partnership will be
treated as derived from "activities not engaged in for profit," and, therefore,
nondeductible from other gross income, (ii) the deductibility in a given year of
any intangible drilling or development cost ("IDC") incurred in a year prior to
drilling of the wells to which such costs relate (discussed above), (iii) the
availability or extent of percentage depletion deductions to the Partners, (iv)
the amount, if any, of the Management Fee, the Dealer-Manager's Fee and various
other fees paid to third parties, the Managing General Partner, the Operator, or
their Affiliates that will be deductible or amortizable, and (v) whether an
investment in the Partnership may subject an Investor Partner to the alternative
minimum tax, or increase an Investor Partner's alternative minimum tax.
Various of the above-referenced matters are factual in nature, and the facts
are unknown at this time. Therefore, Tax Counsel is unable to render an opinion
at this time as to the tax consequences and burdens a taxpayer will likely
experience with respect to these matters as a result of an investment in a
Partnership. The facts when they become known with respect to the various
matters referred to above will vary from taxpayer to taxpayer and will result in
different tax consequences and burdens for individual taxpayers.
Prospective investors should recognize that an opinion of counsel merely
represents such counsel's reasonable legal judgment under existing statutes,
judicial decisions, and administrative regulations and interpretations. There
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can be no assurance, however, that some of the deductions claimed by a
Partnership will not be challenged successfully by the Service.
Working Interest Exception to the Passive Loss Limitations. Tax Counsel has
rendered its opinion that interests in the Partnerships held by the Additional
General Partners will not be subject to the passive activity rules. Losses
arising after a conversion of an Additional General Partner's interest to a
Limited Partner interest, however, will be treated as passive and, consequently,
will only be available to offset passive income of the Limited Partner. Losses
allocable to the Limited Partners will be subject to the passive loss rules,
while income so allocable will be passive except to the extent characterized as
portfolio income.
Material Portion of Subscription Proceeds Not Currently Deductible. A material
portion of the Subscription proceeds of a Partnership will be expended for cost
and expense items which will not be currently deductible for Federal income tax
purposes. See "Tax Considerations--Transaction Fees."
Changes in Federal and State Income Tax Laws. Significant and fundamental
changes in the nation's Federal income tax laws and certain states have been
made in recent years and additional changes are likely. Any such change may
affect the Partnerships and the Investor Partners. Moreover, judicial
decisions, regulations or administrative pronouncements could unfavorably affect
the tax consequences of an investment in a Partnership.
Significance of Tax Aspects. The Units are being offered to parties who may
avail themselves of the benefits presently allowed oil and gas activities under
Federal income tax laws and certain state income tax laws. There is no
assurance that money invested in a Partnership will be recovered, that any
Capital Contributions to a Partnership will be expended and result in any tax
deductions in the year such Capital Contributions are received by the
Partnership, that Federal and state income tax laws or the present
interpretation thereof will not be changed or that any position taken by a
Partnership on its Federal or state income tax returns will not be challenged by
the Service. In addition, certain Federal and state income tax provisions may
limit deductions, trigger or increase an Investor Partner's liability for the
alternative minimum tax, increase tax liability on the disposition of Units, or
otherwise increase the Federal income tax liability of an Investor Partner. It
is suggested that prospective investors obtain professional guidance from their
tax advisor in evaluating the tax risks involved in investing in a Partnership.
See "Tax Considerations."
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TERMS OF THE OFFERING
General
. Up to ten limited partnerships (approximately six in 1997 and four six in
1998).
. Units of general partnership interests and units of limited partnership
interests are being offered.
. $1,000 Units.
. Minimum subscription--$5,000.
. Minimum partnership--$1,000,000 in subscriptions.
. Maximum partnership--$2,000,000 in subscriptions.
. Maximum aggregate subscriptions for ten partnerships--$10,000,000.
. Subscription proceeds will be placed in escrow until Partnership funded.
An aggregate of $10,000,000 of preformation interests in a series of up to ten
limited partnerships to be formed ("Blue Ridge Energy Fund 1996/1997") is being
offered in 10,000 Units of $1,000 per Unit to prospective investors who meet the
suitability standards set forth below. Interests in the Program have been
offered over a period which commenced September 24, 1996. Units in the
partnerships designated "Blue Ridge Energy Fund 1997--Limited Partnership" will
be offered during 1997, and Units in the partnerships designated "Blue Ridge
Energy Fund 1998--Limited Partnership" will be offered during 1998. The minimum
subscription is 5 Units ($5,000). In the event an investor purchases Units on
more than one occasion during the offering period of a Partnership, the minimum
purchase on each occasion is $5,000 (5 Units). Units will not be sold to tax-
exempt investors or to foreign investors. Upon the sale of at least the minimum
number of Units in a Partnership (1,000 Units aggregating $1,000,000) and upon
termination of the offering of Units in that Partnership, the Managing General
Partner will form a limited partnership under the laws of the Commonwealth of
Kentucky. At that time the units of preformation general partnership interest
and preformation limited partnership interest will become Units of general
partnership interest and Units of limited partnership interest, respectively, in
the particular Partnership. There is no restriction on the composition of the
type of partnership interests with respect to any Partnership.
If the minimum required aggregate subscription amount of $1,000,000 is not
realized in the offering of Units of any Partnership, that Partnership will not
be funded, and the Escrow Agent will promptly return all subscription proceeds
with respect to that Partnership to the respective subscribers in full with any
interest earned thereon and without any deduction therefrom. The Managing
General Partner may not complete a sale of Units to any investor until at least
five business days after the date the investor has received a final prospectus.
In addition, the Managing General Partner will send to each investor a
confirmation of the purchase.
Subscribers may elect to purchase Units as an Additional General Partner or as
a Limited Partner. Additionally, a subscriber may purchase Units of general
partnership interest and Units of limited partnership interest.
The Partnerships will be designated as Blue Ridge Energy Fund 1997-A Limited
Partnership, Blue Ridge Energy Fund 1997-B Limited Partnership, Blue Ridge
Energy Fund 1997-C Limited Partnership, Blue Ridge Energy Fund 1997-D Limited
Partnership and Blue Ridge Energy Fund 1997-E Limited Partnership and Blue Ridge
Energy Fund 1997-F Limited Partnership with respect to the Partnerships to be
offered during 1997 and Blue Ridge Energy Fund 1998-A Limited Partnership, Blue
Ridge Energy Fund 1998-B Limited Partnership, Blue Ridge Energy Fund 1998-C
Limited Partnership and Blue Ridge Energy Fund 1998-D Limited Partnership with
respect to the Partnerships to be offered during 1998. The maximum Subscription
of any Partnership will be the lesser of $2,000,000 or the remaining unsold
units based on the $10,000,000 aggregate registration.
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The Subscription period for all Partnerships designated "Blue Ridge Energy
Fund 1997--Limited Partnership" will terminate on December 31, 1997, whereas the
Subscription period for all Partnerships designated "Blue Ridge Energy Fund
1998--Limited Partnership" will terminate on December 31, 1998, unless earlier
terminated or withdrawn by the Managing General Partner. The Managing General
Partner will set an anticipated termination date based on its reasonable best
judgment as to when the Partnership can be sufficiently subscribed. The offering
of any particular Partnership may extend beyond its anticipated termination date
by not more than sixty days or be terminated earlier; however, no offering of
Partnerships designated "Blue Ridge Energy Fund 1997--Limited Partnership" or
Partnerships designated "Blue Ridge Energy Fund 1998--Limited Partnership" may
extend beyond December 31, 1997 or December 31, 1998, respectively. Except as
otherwise stated below, the offering of Units in subsequent Partnerships will
not commence until the Subscription of Units in the two prior Partnerships
(e.g., Blue Ridge Energy Fund 1997-A Limited Partnership and Blue Ridge Energy
Fund 1997-B Limited Partnership) has reached the minimum of at least $1,000,000
or that prior offering has terminated. Once the offering with respect to a
particular Partnership has been closed, no additional Units will be offered or
sold with respect to that Partnership. The Managing General Partner may
determine to terminate the offering of Units with respect to any particular
Partnership at any time before or after the minimum Subscriptions have been
obtained. No operations by a particular Partnership will commence until
termination of its offering period.
Each Partnership will be funded promptly following the termination of its
respective offering period, provided that such Partnership has Subscriptions
aggregating at least $1,000,000 (1,000 Units). The Managing General Partner has
complete discretion as to when the offering of a particular Partnership
terminates at any point after the minimum subscription is reached. However, the
Managing General Partner will not delay the funding of any Partnership beyond
December 31, 1997 or December 31, 1998, with respect to Partnerships designated
"Blue Ridge Energy Fund 1997--Limited Partnership" or "Blue Ridge Energy Fund
1998--Limited Partnership," respectively. No Units in a Partnership will be
offered or sold after the close of its offering period. As its Capital
Contribution, the Managing General Partner will invest an amount equal to not
less than 5% of the aggregate contributions by the Investor Partners.
The Managing General Partner and/or its Affiliates may, in their sole and
absolute discretion, purchase Units at a price equal to the offering price set
forth herein, net of commissions. In such event the Managing General Partner
and/or its Affiliates will be entitled to the same ratable interest in the
Partnership as other Investors. The purchase of Units by the Managing General
Partner and/or its Affiliates may permit the Partnership to satisfy its
requirements to sell the minimum number of Units in order close the offering.
The Managing General Partner and/or its Affiliates have no present intention to
purchase any Units; the Managing General Partner and/or its Affiliates are not
permitted to purchase more than 10% of the Units subscribed by the Investor
Partners in any Partnership; and not more than $100,000 of any Units purchased
by the Managing General Partner and/or its Affiliates will be applied to
satisfying the $1,000,000 minimum. The Managing General Partner and/or its
Affiliates will be prohibited from voting with respect to any Unit so purchased.
Subscriptions for Units are payable $1,000 in cash per Unit purchased upon
subscription. Subscription proceeds of each Partnership will be held in a
separate interest-bearing escrow account of the Escrow Agent, during the
offering period of such Partnership. The Escrow Agent is required by the escrow
agreement to invest escrowed funds upon receipt and is forbidden to disburse
funds except upon deposit of checks representing at least the minimum
subscriptions and upon written instructions from the Managing General Partner.
At that time the Escrow Agent will disburse in accordance with such
instructions. In the event that the minimum subscriptions have not been
collected, the Escrow Agent will promptly return the escrowed funds to the
subscribers.
As disclosed under "Risk Factors--Special Risks of the Partnerships--
Irrevocable Subscriptions; Escrow of Subscription Funds," if the respective
offering of Units in Blue Ridge Energy Fund 1997-A Limited Partnership, Blue
Ridge Energy Fund 1997-B Limited Partnership, Blue Ridge Energy Fund 1997-C
Limited Partnership, Blue Ridge Energy Fund 1997-D Limited Partnership, Blue
Ridge Energy Fund 1997-E Limited Partnership, Blue Ridge Energy Fund 1997-F
Limited Partnership, Blue Ridge Energy Fund 1998-A Limited Partnership, Blue
Ridge Energy Fund 1998-B Limited Partnership, Blue Ridge Energy Fund 1998-C
Limited Partnership or Blue Ridge Energy Fund
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1998-D Limited Partnership has not closed on or before December 31, 1997, for
the 1997 funds, or on or before December 31, 1998, for the 1998 funds, the
escrowed funds of that particular Partnership will be promptly returned to those
investors. Subscriptions will not be commingled with the funds of the Managing
General Partner or its Affiliates, nor will Subscriptions be subject to the
claims of their creditors. Subscription proceeds will be invested during the
offering period in interest bearing bank deposit accounts or certificates of
deposit. The interest rate on the escrow account is variable and was 4.65% as of
September 5, 1997. Checks for Units should be made payable to "South Central
Bank of Bowling Green, Inc., as Escrow Agent for Blue Ridge Energy Fund 1997--
Limited Partnership" or "Blue Ridge Energy Fund 1998--Limited Partnership," as
the case may be, and should be given to the subscriber's broker for submission
to the Dealer-Manager and Escrow Agent.
The execution of the Subscription Agreement by a subscriber or in the case of
fiduciary accounts by his authorized representative constitutes a binding offer
to buy Unit(s) in a Partnership and an agreement to hold the offer open until
the Subscription is accepted or rejected by the Managing General Partner. Once
an investor subscribes for Units, he or she will not have any revocation rights,
unless otherwise provided by state law. The Managing General Partner may refuse
to accept any Subscription without liability to the subscriber. The Managing
General Partner may reject a Subscription if, for example, the prospective
investor does not satisfy the suitability standards or if the Subscription is
received after the offering period has terminated. The execution of the
Subscription Agreement and its acceptance by the Managing General Partner also
constitute the execution of the Partnership Agreement and an agreement to be
bound by the terms thereof as a Partner, including the granting of a special
power of attorney to the Managing General Partner appointing it as the Partner's
lawful representative to make, execute, sign, swear to and file a Certificate of
Limited Partnership and any amendment thereof, governmental reports,
certifications, contracts and other matters.
Activation of the Partnerships
. Each Partnership will be funded following termination of offering period.
. Each Partnership is a separate business and economic entity from each other
Partnership.
. Partnerships will be formed under Kentucky law.
Each Partnership will be formed pursuant to the Act and funded promptly
following the termination of its offering period. However, a Partnership will
not be funded with less than the minimum aggregate Subscriptions of $1,000,000.
The Partnerships will not have any substantial assets or liabilities. No
Partnership will commence any drilling operations until after its respective
funding and the offering of Units in that Partnership has been terminated.
Each Partnership is and will be a separate and distinct business and economic
entity from each other Partnership. Thus, the Investor Partners in one
Partnership will be Partners only of that Partnership in which they specifically
subscribe and will not have any interest in any of the other Partnerships.
Therefore, they should consider and rely solely upon the operations and success
(or lack thereof) of their own Partnership in assessing the quality of their
investment. The performance of one Partnership will not be attributable to the
performance of other Partnerships.
Upon funding of a Partnership, the Managing General Partner will deposit the
Subscription funds in interest bearing bank deposit accounts or invest such
funds in short-term highly-liquid securities where there is appropriate safety
of principal, in that Partnership's name until the funds are required for
Partnership purposes. Interest earned on amounts so deposited or invested will
be credited to the accounts of the respective Partnership whose funds earned the
interest. All interest accrued on Subscription funds in escrow prior to the
funding of a Partnership will be paid to the respective Subscriber after
closing.
The Managing General Partner anticipates that within 12 months following the
formation of a Partnership all Subscriptions will have been expended or
committed for Partnership operations. Any unexpended and/or uncommitted
Subscriptions at the end of such 12-month period will be returned pro rata to
the Investor Partners and
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the Managing General Partner will reimburse such Partners for Organization and
Offering Costs and the Management Fee allocable to the return of capital. The
term "uncommitted capital" shall be exclusive of any amounts set aside for
necessary operating capital reserves.
The Managing General Partner will file a Certificate of Limited Partnership
and any other documents required to form the Partnerships with the Commonwealth
of Kentucky and will elect for the Partnerships to be governed by the Act. The
Managing General Partner will also take all other actions necessary to qualify
the Partnerships to do business as limited partnerships or cause the limited
partnership status of the Partnerships to be recognized in any other
jurisdiction where the Partnerships conduct business.
Types of Units
. Investor may choose to be a Limited Partner or an Additional General Partner.
An Investor Partner may purchase Units in a Partnership as a Limited Partner
or as an Additional General Partner. Although income, gains, losses, deductions
and cash distributions allocable to the Investor Partners are generally shared
pro rata based upon the amount of their Subscriptions, there are material
differences in the Federal income tax effects and the liability associated with
these different types of Units. Any income, gain, loss or deduction attributable
to Partnership borrowing, if any, will generally be allocable to the Partners
who bear the economic risk of loss with respect to such borrowing. Further,
Additional General Partners will generally be permitted to offset Partnership
losses and deductions against income from any source. Limited Partners will
generally be allowed to offset Partnership losses and deductions only against
passive income.
Units of partnership interest may be transferred or assigned in accordance
with Section 7.3 of the Partnership Agreement. Transferees seeking to become
substituted Partners must also meet the suitability requirements set forth in
this Prospectus. A substituted Additional General Partner will have the same
rights and responsibilities, including unlimited liability, in the Partnership
as every other Additional General Partner. See "Tax Considerations" and "Risk
Factors--Special Risks of the Partnerships--Unlimited Liability of Additional
General Partners."
An investor must indicate on the Investor Signature Page the number of limited
partnership Units or general partnership Units subscribed to and fill in the
appropriate line on the Subscription Agreement. If a subscriber fails to
indicate on the Subscription Agreement a choice between investing as a Limited
Partner or as an Additional General Partner, the Managing General Partner will
not accept the Subscription but will promptly return the Subscription Agreement
and the tendered subscription funds to the purported Subscriber.
Limited Partners. The Limited Partners will consist of the Initial Limited
Partner, an officer or director of the Managing General Partner, until such time
as additional limited partners become Partners, and each investor who purchases
one or more Units being offered hereby. The liability of a Limited Partner of
the Partnership for the Partnership's debts and obligations will be limited to
that Partner's Capital Contributions, such Partner's share of Partnership assets
and the return of any part of his Capital Contribution (a) for a period of one
year thereafter for the amount of his returned contribution (if a Limited
Partner has received the return of any part of his contribution without
violation of the Partnership Agreement or the Act), but only to the extent
necessary to discharge the Limited Partner's liabilities to creditors who
extended credit to the Partnership during the period the contribution was held
by the Partnership and (b) for a period of six years thereafter for the amount
of the contribution wrongfully returned (if a Limited Partner has received the
return of any part of his contribution in violation of the Partnership Agreement
or the Act).
General Partners. The General Partners will consist of the Managing General
Partner and each investor purchasing one or more Units of general partnership
interest (referred to herein as "Additional General Partners"). As a general
partner of a Partnership, each Additional General Partner will be fully liable
for the debts, obligations and liabilities of the Partnership individually and
as a group with all other general partners as provided by the Act to the extent
liabilities are not satisfied from the proceeds of insurance, from the
indemnification by the Managing
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General Partner, or from the sale of Partnership assets. See "Risk Factors."
While the activities of the Partnership are covered by substantial insurance
policies and indemnification by the Managing General Partner which are discussed
herein, it is possible that the Additional General Partners will incur personal
liability (not covered by insurance, Partnership assets, or indemnification)
over and above their initial contribution as a result of the activities of the
Partnership.
Conversion of Units by Additional General Partners
. Additional General Partners may convert to become Limited Partners after the
earlier of one year or when all wells are placed into production.
. The Managing General Partner will convert all Units of general partnership
interest, other than the general partnership interest held by the Managing
General Partner, into Units of limited partnership interest upon completion
of drilling.
. If there is a material change in a Partnership's insurance coverages,
Additional General Partners may convert prior to such change.
. Liability for Investors will be limited after conversion.
Upon written notice to the Managing General Partner, and except as provided
below and in the Partnership Agreement, Additional General Partners of a
Partnership have the right to convert their interests into limited partnership
interests of that Partnership at any time after the earlier of one year
following the closing of the offering of that Partnership and the disbursement
to that Partnership the proceeds of the offering or when all wells are placed
into production. In this regard "production" refers to the commencement of
commercial marketing of oil and gas, but does not include any spot sales of oil
and gas as a result of testing procedures. In addition, the Managing General
Partner will convert all Units of general partnership interest, other than the
general partnership interests held by the Managing General Partner, of a
particular Partnership into Units of limited partnership interest upon
completion of drilling of that Partnership. Upon conversion they will become
Limited Partners of that Partnership. Additional General Partners may also
convert their interests into limited partnership interests at any time within
the thirty day period prior to any material change in the amount of the
Partnership's insurance coverage. Effecting conversion is subject to the express
requirements that the conversion will not cause a termination of the Partnership
for Federal income tax purposes and that the Additional General Partner provides
written notice to the Managing General Partner of such intent to convert.
Conversion of an Additional General Partner to a Limited Partner in a
particular Partnership will be effective upon the Managing General Partner's
filing an amendment to its Certificate of Limited Partnership (the
"Certificate"). The Managing General Partner is obligated to file an amendment
to its Certificate at any time during the full calendar month after receipt by
the Managing General Partner of the required notice of the Additional General
Partner, provided that the conversion will not constitute a termination of the
Partnership for tax purposes. A conversion made in response to a material change
in that Partnership's insurance coverage will be made effective prior to the
effective date of the change in insurance coverage. After the conversion of his
general partnership interest to that of a Limited Partner, each converting
Additional General Partner will continue to have unlimited liability regarding
Partnership liabilities arising prior to the effective date of such conversion,
but will have limited liability to the same extent as Limited Partners after the
conversion to Limited Partner status is effected.
The Managing General Partner is not entitled to convert its interests into
limited partnership interests. Limited Partners do not have any right to convert
their Units into Units of general partnership interest. In the event Additional
General Partners desire to convert to Limited Partners due to a material change
in the amount of insurance coverage, and such conversions would be permitted
because it would not result in termination of the Partnership for tax purposes,
the Partnership will cease drilling activities until all desired conversions can
be made.
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Unit Repurchase Program
. Investors may tender Units for repurchase at any time beginning with the
third anniversary of the first cash distribution of the particular
Partnership.
. Investors may, at their election, sell their Units to the Managing General
Partner for not less than three times the most recent twelve months' cash
flow.
. The Managing General Partner is obligated to purchase in any calendar year
such Units which aggregate up to 10% of the initial Subscriptions, subject to
its financial ability to do so and certain opinions of Counsel.
Beginning with the third anniversary of the date of the first cash
distribution of the particular Partnership, Investor Partners may tender their
Units to the Managing General Partner for repurchase. Investor Partners are
required to provide the Managing General Partner with written notification of
their intention to avail themselves of the repurchase program. Subject to its
financial ability to effect repurchases and the opinion of Counsel referred to
below, each year the Managing General Partner will offer to repurchase for cash
a maximum of 10% of the Units originally subscribed to in the particular
Partnership. The Managing General Partner's offers to purchase Units will,
however, be conditioned upon the receipt of an opinion of its Counsel that the
consummation of such offer will not cause the Partnership to be treated as a
"publicly-traded partnership" for purposes of Code (S)(S) 469 and 7704 and on
its determination that the repurchases of a particular Investor Partner's Units
will not result in termination of the Partnership for Federal income tax
purposes (the "Repurchase Opinion"). There can be no assurances that any Units
will be repurchased. Such program will only be initiated upon the third
anniversary of the first cash distribution. The repurchases will also be subject
to financial ability of the Managing General Partner to effect such repurchases
and the receipt of the Repurchase Opinion.
The Managing General Partner will not favor one particular Partnership over
another in the repurchase of Units. Such offer will not be extended equally to
all interest holders participating in an individual Partnership excluding
interests held by the Managing General Partner. Notwithstanding the preceding
sentence, if more than 10% of the Units from a Partnership or more Units than
the Managing General Partner is able to purchase are tendered, Units will be
purchased on a "first-come, first-served" basis based on date of receipt by the
Managing General Partner of a letter of acceptance of the repurchase offer from
the Investor Partner. To the extent that the Managing General Partner is unable
to repurchase all Units tendered, due to its financial condition or because of
limitations imposed by the Code or any loan banking agreement(s) to which the
Managing General Partner may be a party, a tendering Investor Partner will be
entitled to have his Units repurchased on a "first-come, first served" basis,
regardless of Partnership, provided that the repurchase of a particular Investor
Partner's Units will not have the effect of causing the termination of his
Partnership for tax purposes or of causing the Partnership to be treated as a
"publicly-traded partnership."
In order to initiate the process whereby the Managing General Partner will
repurchase the Units of Investor Partners, the Investor Partner is required to
provide the Managing General Partner with written notification of such Partner's
intention to have the Managing General Partner purchase his Units. The Managing
General Partner is required to establish a purchase price not more often than
quarterly as of March 31, June 30, September 30, and December 31 of each year.
The Managing General Partner will provide the Investor Partner a written offer
of the established price for repurchase of the particular Units within 30 days
of the Managing General Partner's receipt of the written notification.
The minimum offer which the Managing General Partner may make will be a cash
amount equal to not less than three times cash distributions from production of
that particular Partnership for the 12 months ending on the semi-annual
determination date immediately preceding the date upon which the Managing
General Partner has received the written notification referred to above. The
Managing General Partner may, in its sole and absolute discretion, increase the
offer for interests tendered for sale.
23
<PAGE>
Any offering price established by the Managing General Partner will not
necessarily represent the fair market value of the Units. In setting the
offering price, the Managing General Partner will consider its available funds
and its desire to acquire production as represented by the Unit and will take
into account what it perceives to be its own best interests (as a publicly-owned
company) and its shareholders. Nevertheless, each Investor Partner is free to
accept or not to accept any offering price from the Managing General Partner; no
Investor Partner is in any way obligated to accept the Managing General
Partner's offer. The Managing General Partner will provide Investor Partners
with detailed information as to how the offer was calculated. The Managing
General Partner will also provide each interest holder with a calculation of the
valuation of his interest, based on the most recent reserve evaluation prepared
by an independent expert in accordance with SEC Regulation S-X, Article 4, Rule
4-10. This calculation will take into account the Managing General Partner's
best estimate of anticipated production declines or increases, known price
increases or decreases, operating, recompletion and plugging costs, and other
relevant factors. See "Management--Conflicts of Interest--Conflict in
Establishing Unit Repurchase Price."
Investor Suitability
. Investment in the Units involves a high degree of risk.
. Only qualified investors may purchase Units.
. Investment is suitable only for investors having substantial financial
resources who understand the long-term nature, tax consequences and risk
factors associated with this investment.
. Minimum requirements are $150,000 net worth, or a net worth of $45,000 and
taxable income of $45,000.
. Some states have more stringent requirements which are set forth below. Such
requirements are subject to change.
. Transferees of Units must meet the suitability requirements set forth herein.
. Units of General Partnership Interest are not available in all states.
It is the obligation of the Managing General Partner and persons selling Units
to make every reasonable effort to assure that the Units are suitable for
investors, based on the investor's investment objectives and financial
situation, regardless of the investor's income or net worth.
Units, including fractional Units, will be sold only to an investor who shall
have a minimum net worth of $150,000 or a minimum net worth of $45,000 and had
during the last tax year or estimates that he will have during the current tax
year "taxable income" as defined in Section 63 of the Code of at least $45,000
without regard to an investment in Units. Net worth shall be determined
exclusive of home, home furnishings and automobiles. In addition, Units will be
sold only to an investor who makes a written representation that he is the sole
and true party in interest and that he is not purchasing for the benefit of any
other person (or that he is purchasing for another person who meets all of the
conditions set forth herein).
Additional suitability requirements are applicable to residents of certain
states where the offer and sale of Units are being made as set forth below.
Additional representations and warranties required of Investor Partners are set
forth in the Subscription Agreement and Special Subscription instructions
attached as Appendices C and D to this Prospectus.
California residents generally may not transfer Units without the consent of
the California Commissioner of Corporations.
24
<PAGE>
Michigan, Ohio and Pennsylvania investors are not permitted to make an
investment if the dollar amount of the investment is equal to more than 10% of
their net worth, exclusive of home, furnishings and automobiles.
Purchasers of Limited Partnership Interest. A resident of California who
subscribes for Units of limited partnership interest must (i) have net worth of
not less than $250,000 (exclusive of home, furnishings and automobiles) and
expect to have gross income of $65,000 or more in 1997 (with respect to
investments in Partnerships designated "Blue Ridge Energy Fund 1997--Limited
Partnership") or in 1998 (with respect to Partnerships designated "Blue Ridge
Energy Fund 1998--Limited Partnership"), or (ii) have net worth of not less than
$500,000 (exclusive of home, furnishings and automobiles), or (iii) have net
worth of not less than $1,000,000, or (iv) expect to have gross income of not
less than $200,000 in 1997 (with respect to investments in Partnerships
designated "Blue Ridge Energy Fund 1997--Limited Partnership") or in 1998 (with
respect to Partnerships designated "Blue Ridge Energy Fund 1998--Limited
Partnership").
A resident of New Jersey who subscribes for Units of limited partnership
interest must (i) have a net worth of not less than $150,000 (exclusive of home,
furnishings and automobiles), or (ii) have a minimum net worth of $60,000
(exclusive of home, furnishings and automobiles) and had during the last tax
year or estimates that he will have during the current tax year "taxable income"
as defined by Section 63 of the Code of at least $60,000 without regard to an
investment in Units.
A resident of Arizona, Minnesota, Michigan, North Carolina or Pennsylvania who
subscribes for Units of limited partnership interest must (i) have a net worth
of not less than $225,000 (exclusive of home, furnishings and automobiles), or
(ii) have a minimum net worth of $60,000 (exclusive of home, furnishings and
automobiles) and had during the last tax year or estimates that he will have
during the current tax year "taxable income" as defined by Section 63 of the
Code of at least $60,000 without regard to an investment in Units.
Purchasers of General Partnership Interest. A resident of Colorado, Florida,
Illinois, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Nevada, New Jersey, New York, North Carolina, Ohio, Pennsylvania,
South Carolina, Tennessee, Utah, Virginia or Washington who subscribes for Units
of general partnership interest must represent that he (i) has an individual or
joint minimum net worth (exclusive of home, furnishings and automobiles) with
his or her spouse of $225,000 or more, without regard to the investment in the
Program and a combined minimum gross income of $100,000 or more for the current
year and for the two previous years; or (ii) has an individual or joint minimum
net worth with his or her spouse in excess of $1,000,000 (inclusive of home,
furnishings and automobiles); or (iii) has an individual or joint minimum net
worth with his or her spouse in excess of $500,000 (exclusive of home,
furnishings and automobiles); or (iv) has a combined minimum gross income in
excess of $200,000 in the current year and the two previous years.
A resident of California who subscribes for Units of general partnership
interest must (i) have net worth of not less than $250,000 (exclusive of home,
furnishing and automobiles) and expect to have gross income of $120,000 or more
in 1997 (with respect to investments in the Partnerships designated "Blue Ridge
Energy Fund 1997--Limited Partnership") or in 1998 (with respect to Partnerships
designated "Blue Ridge Energy Fund 1998--Limited Partnership"), or (ii) have net
worth of not less than $500,000 (exclusive of home, furnishings and
automobiles), or (iii) have net worth of not less than $1,000,000, or (iv)
expect to have gross income of not less than $200,000 in 1997 (with respect to
investments in Partnerships designated "Blue Ridge Energy Fund 1997--Limited
Partnership") or in 1998 (with respect to Partnerships designated "Blue Ridge
Energy Fund 1998--Limited Partnership").
Miscellaneous. Transferees of Units seeking to become substituted Partners
must also meet the suitability requirements discussed above, as well as the
requirements imposed by the Partnership Agreement, including transfers of Units
by a Partner to a dependent or to a trust for the benefit of a dependent or
transfers by will, gift or by the laws of descent and distribution.
25
<PAGE>
Where any Units are purchased by an investor in a fiduciary capacity for any
other person (or for any entity in which such investor is deemed to be a
"purchaser" of the subject Units) all of the suitability standards set forth
above will be applicable to such other person.
Investors are required to execute their own Subscription Agreements. The
Managing General Partner will not accept any Subscription Agreement that has
been executed by someone other than the investor or in the case of fiduciary
accounts someone who does not have the legal power of attorney to sign on the
investor's behalf.
ASSESSMENTS AND FINANCING
. The Units of the Partnerships are not subject to assessments.
. The Partnership is allowed to borrow funds on behalf of the Partnership or
for Partnership activities provided that all Additional General Partners have
been converted into Limited Partners.
. Operations for the drilling of wells by the particular Partnerships are
expected to be funded through Subscription proceeds and capital contributed
to the Partnerships by the Managing General Partner. Over the term of a
Partnership, additional funds may be required when, in the opinion of the
Managing General Partner, such funds are deemed necessary to complete that
Partnership's activities.
The Managing General Partner intends to develop particular Partnership
interests in its Prospects only with the proceeds of Subscriptions and its
Capital Contributions. However, such funds may not be sufficient to fund all
such costs and it may be necessary for a Partnership to retain Partnership
revenues for the payment of such costs or for the Managing General Partner to
advance the necessary funds to a Partnership. No wells beyond the initial wells
will be drilled. Additional development refers to work necessary or desirable to
enhance production from existing wells. Payment for such development work will
be retained from Partnership proceeds in one of two methods:
(a) An AFE ("authority for expenditures") estimate will be prepared by the
Managing General Partner for the Partnership. The development work will be
competed by the Operator at which time the Partnership will be billed for
the work performed; or
(b) An AFE estimate will be prepared by the Managing General Partner for the
Partnership. The Partnership will retain revenues from operations until
sufficient funds have been accumulated to pay for the development work, at
which time the work will be commenced by the Operator, and the Operator will
be paid as the work is performed.
The choice of which option to use will be at the discretion of the Managing
General Partner, based on the amount of the anticipated expenditure and the
urgency of the necessary work. Generally the Managing General Partner will elect
option (a) for emergency and expenditures of less than $10,000 and option (b)
for expenditures of $10,000 and greater.
Revenues allocated to the Investor Partners and applied to the payment of
capitalized costs may result in taxable income to the Investor Partners to the
extent not otherwise offset by Partnership losses and deductions. To the extent
not so offset, such revenues may result in the Investor Partners being required
to report taxable income without having received cash distributions with which
to pay the resulting tax liability. See "Tax Considerations."
26
<PAGE>
SOURCE OF FUNDS AND USE OF PROCEEDS
Source of Funds
Upon completion of the offering, the sole funds available to the Partnerships
will be the contributions of the Investor Partners ($1,000,000 ranging to
$10,000,000) and the contributions of the Managing General Partner in cash
($50,000 ranging to $500,000) for a total amount of $1,050,000 if 1,000 Units
are sold ranging to $10,500,000 if 10,000 Units are sold.
Use of Proceeds
A total of 10,000 Units is being offered to fund up to ten Partnerships over a
two-year period. In order to fund any particular Partnership, a minimum of 1,000
Units ($1,000,000) must be sold with respect to that Partnership. The following
table presents information respecting the financing of a Partnership in two
different circumstances: (1) if 2,000 Units ($2,000,000) are sold, the maximum
number of Units which can be sold for any Partnership, and (2) if the minimum
1,000 Units ($1,000,000) are sold. It is anticipated that substantially all of
the funds available to the Partnership will be disbursed for the following
purposes and in the following manner:
<TABLE>
<CAPTION>
Entity Receiving Payment Nature of Payment Units Sold %(1) Units Sold %(1)
- ------------------------ ----------------- ---------- ---- ---------- ----
<S> <C> <C> <C> <C> <C>
Total Partnership Capital $2,100,000 100% $1,050,000 100%
LESS: Public Offering Expenses: Dealer-Manager's 200,000 9.5% 100,000 9.5%
Dealer-Manager fee and sales
commission(2)(3)
LESS: Management Fee: Management Fee 100,000 4.8% 50,000 4.8%
Managing General Partner ---------- ---- ---------- ----
Amount Available For Investment:
Operator (the Managing General Partner) Capital available for $1,800,000 85.7% $ 900,000 85.7%
operations(4)
- ---------------
</TABLE>
(1) The percentage is based upon total Investor Partners' Capital Contributions
and the Managing General Partner's Capital Contribution.
(2) Dealer-Manager may reallow in whole or in part up to $1,000,000 (if the
maximum number of Units are sold) ranging to $100,000 (if the minimum number
of units are sold) for sales commissions, reimbursement of due diligence
expenses, marketing support fees and other compensation payable to other
NASD-licensed broker-dealers in connection with the sale of the Units. Such
payments will be made in cash solely on the amount of initial Subscriptions.
(3) Organization and Offering Costs in excess of 10% of Subscriptions will be
paid by the Managing General Partner, without recourse to the Partnership.
(4) Included herein is the Cost to the Partnerships of acquiring Prospects,
which may include Prospects acquired from the Managing General Partner.
Total lease costs of the Prospects acquired from the Managing General
Partner and unaffiliated persons will not exceed 20% of capital available
for operations.
In the event a Partnership closes for the minimum amount of subscription
units, the relative degree of risk of an investment of the Partnership may
increase in view of a lesser degree of diversification of drilling by that
Partnership. Thus, a Partnership subscribed at the minimum level may be able to
participate in fewer Prospects, thereby increasing the effect upon the Investor
Partners' investment as a result of an unsuccessful well.
27
<PAGE>
As the Partnership size increases, the number of wells drilled may increase,
thereby increasing the diversification of the Partnership and decreasing the
effect upon the Investor Partners' investment of an unsuccessful well.
Subsequent Source of Funds
As indicated above, it is anticipated that substantially all of the
Partnership's initial capital will be committed or expended following the
offering. The Partnership Agreement does permit the Partnership to borrow funds
for its activities after the Additional General Partners have been converted to
Limited Partners. See "Risk Factors--Special Risks of the Partnerships--Shortage
of Working Capital."
The actual costs of the proposed drilling activities of a Partnership may
exceed the estimated costs of such activities and it is possible that funds in
addition to the initial contributions of the Investor Partners in that
Partnership may be required to complete such drilling activities, to further
develop Prospects and to pay for certain other Partnership operations. The
Partnership Agreement does not provide for any additional assessments, either
mandatory or voluntary of any Investor. Thus, it is anticipated that a
Partnership's share of such additional expenditures will be financed by
Partnership borrowings, Partnership revenues or the proceeds of sale of
Partnership Prospects. There can be no assurance that such additional funds can
be obtained, and if they cannot be obtained, a Partnership might have to forego
further drilling activities or development of Prospects. Also, the terms of
certain Prospects may bind the Partnerships to a specified drilling schedule and
the inability of a Partnership to fund its portion of the cost of such
additional specified drilling on a timely basis could result in the forfeiture
of the Partnership's interest in such Prospects. Further, the inability to
finance additional activities could result in the sale of undeveloped acreage or
Farm-outs to independent parties or to Affiliates of the Managing General
Partner including Affiliated Partnerships under which circumstances a
Partnership may not realize the full value of its properties.
Each Partnership Agreement authorizes the Managing General Partner and
Affiliates thereof to make loans to a Partnership for purposes permitted by the
Partnership Agreement. Interest charged by the Managing General Partner or any
Affiliate thereof on advances made by the Managing General Partner or such
Affiliate to a Partnership will be at a rate not in excess of the effective rate
then being paid by the Managing General Partner or such Affiliate for similar
type borrowings, and in no event at a rate in excess of the amount which would
be charged to the Partnership by independent third parties for the same purpose.
The Managing General Partner or an Affiliate thereof may not receive points or
other financing charges or fees on advances made by it to a Partnership. In
addition, a Partnership will not make loans to the Managing General Partner or
any Affiliate thereof. The Managing General Partner may pledge its interest in
Partnership revenues but may not pledge Partnership assets for its own benefit.
There can be no assurance that the Managing General Partner will have or will
make available sufficient funds to the Partnership.
PARTICIPATION IN COSTS AND REVENUES
Except as provided below, Profits and Losses of a particular Partnership will
be allocated between the Managing General Partner and Investor Partners, as
follows:
<TABLE>
<CAPTION>
Managing
Investor Partners(1) General Partner
-------------------- ---------------
<S> <C> <C>
Throughout term of Partnership....... 80% 20%
</TABLE>
- ---------------
(1) The foregoing allocation of profits and losses is an allocation of each item
of income, gain, loss and deduction which, in the aggregate, constitute a profit
or a loss.
28
<PAGE>
Revenues
Oil and Gas Revenues; Sales Proceeds. Revenues from oil and gas production
and gain or loss from the sale or other disposition of productive wells, leases
and equipment will be allocated 80% to the Investor Partners and 20% to the
Managing General Partner except that recapture of IDC will be allocated 95% to
the Investor Partners and 5% to the Managing General Partner.
Interest Income. Any interest earned on the deposit of Subscription funds
prior to the closing of the offering and funding of the respective Partnership
will be credited 100% to the Investor Partners. Interest earned on the deposit
of operating revenues from any other sources shall be allocated and credited in
the same percentages that oil and gas revenues are then being allocated to the
Investor Partners and the Managing General Partner.
Costs
Organization and Offering Costs. Organization and Offering Costs, net of the
Dealer-Manager commissions, discounts and due diligence expenses, of the
Partnerships will be paid by the Managing General Partner and not out of
Partnership funds. The Managing General Partner will pay all legal, accounting,
printing and filing fees associated with the organization of the Partnerships
and the offerings of Units. The Investor Partners will pay all Dealer-Manager
commissions, discounts and due diligence reimbursement and will be allocated
100% of these costs. However, Organization and Offering Costs in excess of 10%
of Subscriptions will be allocated and charged 100% to the Managing General
Partner.
Management Fee. The Management Fee will be allocated 100% to the Investor
Partners and 0% to the Managing General Partner.
Lease, Drilling, Completion and Tangible Equipment Costs. The costs of
Leases, Drilling and Completion Costs and Tangible Equipment Costs will be
allocated 95% to the Investor Partners and 5% to the Managing General Partner.
IDC. IDCs will be allocated 95% to the Investor Partners and 5% to the
Managing General Partner.
Operating Costs. Operating Costs of Partnership wells will be allocated and
charged 80% to the Investor Partners and 20% to the Managing General Partner.
Direct Costs. Direct Costs of the Partnerships will be allocated and charged
95% to the Investor Partners and 5% to the Managing General Partner.
Administrative Costs. The Administrative Costs of the Partnerships will be
borne by and allocated 100% to the Managing General Partner.
29
<PAGE>
The table below summarizes the participation of the Managing General Partner
and the Investor Partners, taking account of the Managing General Partner's
Capital Contribution, in the costs and revenues of the Partnerships. See
"Glossary of Terms," and the Partnership Agreement, Exhibit A hereto.
<TABLE>
<CAPTION>
Managing
Investor General
Partnership Costs Partners Partner
- ----------------- -------- -------
<S> <C> <C>
Broker-Dealer Commissions and Expenses(1)............. 100% 0%
Management Fee........................................ 100% 0%
Lease Costs........................................... 95% 5%
Drilling and Completion Costs......................... 95% 5%
Tangible Equipment.................................... 95% 5%
Intangible Drilling and Development Costs............. 95% 5%
Operating Costs(2).................................... 80% 20%
Direct Costs(3)....................................... 95% 5%
Administrative Costs.................................. 0% 100%
Partnership Revenues
- --------------------
Sale of Oil and Gas Production........................ 80% 20%
Sale of Productive Properties(4)...................... 80% 20%
Sale of Undeveloped Leases............................ 80% 20%
Interest Income....................................... 80% 20%
- ---------------
</TABLE>
(1) Organization and Offering Costs, including commissions, in excess of 10% of
Subscriptions will be paid by the Managing General Partner, without recourse
to the Partnerships.
(2) Represents Operating Costs incurred after the completion of productive
wells, including monthly per-well charges paid to the Managing General
Partner.
(3) The Managing General Partner will receive monthly reimbursement from the
Partnerships for their Direct Costs incurred by the Managing General Partner
on behalf of the Partnerships.
(4) In the event of the sale or other disposition of a productive well, a lease
upon which such well is situated, or any equipment related to any such lease
or well, the gain from such sale or disposition shall be allocated and
credited to the Partners as oil and gas revenues are allocated except that
recapture of IDC will be allocated 95% to the Investor Partners and 5% to
the Managing General Partner. The term "gain" above does not include
revenues from a royalty, overriding royalty, lease interest reserved, or
other promotional consideration reserved by a Partnership in connection with
any sale or disposition, which revenues shall be allocated to the Investor
Partners and the Managing General Partner in the same percentages that oil
and gas revenues are allocated.
30
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
The Managing General Partner estimates that Direct Costs allocable to the
Investor Partners of each Partnership for the initial 12 months of their
operations will be approximately $20,000 if minimum Subscriptions ($1,000,000)
are received (representing 2% of aggregate Partnership capital); and
approximately $40,000 if maximum Subscriptions ($2,000,000) are received
(representing 2% of aggregate Partnership capital). The following table sets
forth the components of these estimated charges to the Investor Partners during
the first year after a Partnership is formed, assuming the minimum and maximum
Subscriptions are obtained:
<TABLE>
<CAPTION>
Minimum Maximum
Subscriptions Subscriptions
(1,000 Units) (2,000 Units)
------------- -------------
<S> <C> <C>
Administrative Costs(1)................... $ -0- $ -0-
------- -------
Total Administrative Costs............ $ -0- $ -0-
======= =======
Direct Costs:
Audit and Tax Preparation............... $10,000 $20,000
Independent Engineering Reports......... 5,000 10,000
Materials, Supplies and Other........... 5,000 10,000
------- -------
Total Direct Costs.................... $20,000 $40,000
.l ======= =======
- ---------------
</TABLE>
(1) The Managing General Partner will bear all Administrative Costs of the
Partnerships; however, the financial statements of the Partnerships will
reflect these costs, since generally accepted accounting principles require
that all costs of doing business be included in the historical financial
statements.
The following table presents for each partnership formed by the Managing
General Partner and its Affiliates in the last three years the dollar amount of
Direct Costs incurred by the particular partnership in each year and the
percentage of subscriptions raised reflected thereby.
<TABLE>
<CAPTION>
Direct Costs
1994 1995 1996
------------ ------------ -------------
% of % of % of
Partnership Name Amount Subscriptions Amount Subscriptions Amount Subscriptions
- ---------------- ------ ------------- ------ ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ken-Tex Joint Venture................. $ 2,000 0.4 $ 1,500 0.3 - -
Frio Trend Joint Venture.............. 67,535 0.1 2,500 0.2 - -
Bridge-Meek Joint Venture............. 17,062 0.8 1,500 0.2 - -
Gulf Coast I Joint Venture............ 22,500 5.3 2,000 0.4 - -
Stephens/Clear Creek Joint
Venture............................... 16,650 3.0 1,500 0.3 - -
Elliott I/Clear Creek Joint
Venture............................... - - 19,580 2.4 -
Nebo West Joint Venture............... - - 82,252 1.4 - -
Green River Joint Venture............. - - 19,212 2.6 - -
North Lick Creek Joint
Venture............................... - - 19,475 3.0 - -
MIC-TLE #7 Joint Venture.............. - - 30,150 2.8 - -
Ruth Joint Venture #3................. - - 48,317 3.0 - -
Otter Creek Joint Venture............. - - 15,963 2.8 - -
Helen Buck Joint Venture #1........... - - 23,650 2.8 - -
Blue Ridge Energy Production
Fund(1)............................... - - - - 37,935 2.8
Smackover/Woodbine I(1)............... - - - - 33,760 2.8
- ------------
</TABLE>
(1) Sponsored by the Managing General Partner's Affiliate, Blue Ridge Energy,
Inc.
31
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
The following table presents for each partnership formed by the Managing
General Partner and its Affiliates in the last three years the dollar amount of
Administrative Costs incurred by the Managing General Partner or its Affiliates
for the benefit of the particular partnership in each year and the percentage of
subscriptions raised reflected thereby.
<TABLE>
<CAPTION>
Administrative Costs
1994 1995 1996
----------- ----------- -----------
% of % of % of
Partnership Name Amount Subscriptions Amount Subscriptions Amount Subscriptions
- ---------------- ------ ------------- ------- ------------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Ken-Tex Joint Venture $6,000 1.3 $ 6,000 1.3 2,000 0.4
Frio Trend Joint Venture 9,000 0.6 7,500 0.5 1,500 0.1
Bridge-Meek Joint Venture 7,500 0.8 5,000 0.5 - -
Gulf Coast I Joint Venture 6,000 1.2 5,000 1.0 - -
Stephens/Clear Creek Joint Venture 1,500 0.3 7,500 1.3 1,500 0.2
Elliott I/Clear Creek Joint Venture - - 9,000 1.4 1,500 0.3
Nebo West Joint Venture - - 10,000 1.3 1,500 0.2
Green River Joint Venture - - 4,000 0.8 - -
North Lick Creek Joint Venture - - 5,000 0.9 - -
MIC-TLE #7 Joint Venture - - 12,000 1.3 2,500 0.3
Ruth Joint Venture #3 - - 4,000 0.9 2,000 0.4
Otter Creek Joint Venture - - 1,000 0.1 - -
Helen Buck Joint Venture #1 - - - - 6,000 0.9
Blue Ridge Energy Production Fund(1) - - - - - -
Smackover/Woodbine I(1) - - - - - -
- ---------------
</TABLE>
(1) Sponsored by the Managing General Partner's Affiliate, Blue Ridge Energy,
Inc.
Allocations Among Investor Partners; Deficit Capital Account Balances
The revenues and costs of a Partnership allocated to the Investor Partners
will be allocated among them in the proportion in which the number of Units
owned by each Investor Partner bears to the aggregate number of Units
outstanding.
To avoid the requirement of restoring a deficit Capital Account balance, no
losses will be allocated to an Investor Partner to the extent such allocations
would create or increase a deficit in the Investor Partners' Capital Account
(adjusted for certain liabilities, as provided in the Partnership Agreement).
Losses which are not allocated to Investor Partners whose adjusted Capital
Account balances are zero will be reallocated to the Investor Partners not
having a deficit in their adjusted Capital Accounts in the proportion that the
positive adjusted Capital Account balance of each such Investor Partner bears to
the aggregate adjusted Capital Account balances of all such Investor Partners,
with any remaining losses or deductions allocated to the Managing General
Partner. See "Form of Limited Partnership Agreement Section 3.2(b)."
Cash Distribution Policy
. Distributions of Distributable Cash are planned to be made on a monthly
basis, but will be made no less often than quarterly, to the extent there is
any Distributable Cash. See "Glossary of Terms - Distributable Cash."
. Cash distributions, other than distributions made in liquidation of the
Partnership, will be made 80% to the Investor Partners and 20% to the
Managing General Partner throughout the term of the Partnership.
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. The level or amounts of cash distributions from the Program cannot presently
be predicted.
The Managing General Partner intends to distribute substantially all of the
Partnerships' available cash flow on a monthly basis; however, the Managing
General Partner will review the accounts of each Partnership at least quarterly
for the purpose of determining the Distributable Cash available for
distribution. The ability of the Partnerships to make or sustain a constant
level of cash distributions will depend upon numerous factors. No assurance can
be given that any level of cash distributions to the Investor Partners will be
attained, that cash distributions will equal or approximate cash distributions
made to investors in prior drilling programs sponsored by the Managing General
Partner or its Affiliates, or that any level of cash distributions can be
maintained. See "Prior Activities."
In general, the volume of production from producing properties declines with
the passage of time. The cash flow generated by each Partnership's activities
and the amounts available for distribution to a Partnership's respective
Partners will, therefore, decline in the absence of significant increases in
the prices that the Partnerships receive for their respective oil and gas
production, or significant increases in the production of oil and gas from
Prospects resulting from successful additional development of such Prospects.
In general, cash distributions will be made 80% to the Investor Partners and
20% to the Managing General Partner throughout the term of the Partnership. Cash
will be distributed to the Managing General Partner and Investor Partners as a
return on capital in the same proportion as their interest in the net income of
the Partnership. However, no Investor Partner will receive distributions to the
extent such would create or increase a deficit in that Partner's Capital
Account.
For a fuller discussion of Capital Accounts and tax allocations, see "Tax
Considerations--Allocations of Profits and Losses."
Termination
Upon termination and final liquidation of a Partnership, the assets of the
Partnership will be distributed to the Partners based upon their Capital Account
balances. If the Managing General Partner has a deficit in its Capital Account,
it will be required to restore such deficit. No Investor Partner, however, will
be obligated to restore a deficit in the Investor Partner's Capital Account, if
any.
Amendment of Partnership Allocation Provisions
The Managing General Partner is authorized to amend the Partnership Agreement,
if, in its sole discretion based upon advice from its legal counsel or
accountants, an amendment is required for partnership allocations to be
recognized for federal income tax purposes because of new developments in the
tax law. Any new allocation provisions provided by an amendment are required to
be made in a manner that would result in the most favorable aggregate
consequences to the Investor Partners as nearly as possible consistent with the
original allocations described herein. See Section 11.9 of the Partnership
Agreement.
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COMPENSATION TO THE MANAGING GENERAL PARTNER AND AFFILIATES
The following is a tabular presentation of the items of compensation discussed
more fully below:
<TABLE>
<CAPTION>
Recipient Form of Compensation Amount
- --------- -------------------- ------
<S> <C> <C>
Managing General Partner Partnership interest 20% interest(1)
Managing General Partner Management fee 5% of Subscriptions (nonrecurring fee)(2)
Managing General Partner Sale of Leases to Partnerships Cost, or fair market value if materially less
than Cost(3)
Managing General Partner Drilling Contracts Competitive industry rates(3)
Managing General Partner Operator's Per-Well Charges $350 per well per month
Managing General Partner Direct Costs Cost(3)
Managing General Partner Payment for equipment,
and Affiliates supplies and other services Competitive industry rates(3)
- ---------------
</TABLE>
(1) The Managing General Partner will contribute to each Partnership an amount
equal to at least 5% of the aggregate contributions of the Investor
Partners. The Managing General Partner's share of operating profits in each
Partnership will be 20%. The interests of the Managing General Partner and
the Investor Partners may vary in view of the Investor Performance
Supplement, discussed below.
(2) The one-time fee for each Partnership will range from $50,000 if the minimum
number of Units is sold to $100,000 if the maximum number of Units is sold.
(3) Cannot be quantified at the present time.
For a tabular presentation of payments to the Managing General Partner and
Affiliates made by previous partnerships sponsored by the Managing General
Partner, see "Management--Certain Transactions," below. The categories of
compensation set forth above are comparable to the corresponding categories of
compensation for other partnerships sponsored by the Managing General Partner
disclosed in the "Certain Transactions" table below.
Upon completion of the offering with respect to each Partnership and upon
funding of that Partnership, the Managing General Partner will receive a one-
time Management Fee of 5% of total contributions of the Investor Partners to the
Partnership. The Managing General Partner will receive Management Fees ranging
from $50,000, if the minimum number of Units is sold to $100,000 if the maximum
number of Units is sold in each Partnership. Since a maximum of $10,000,000 of
Units can be sold in the entire Program, the maximum amount of the Management
Fee received by the Managing General Partner would be $500,000.
The Managing General Partner will be reimbursed for all documented out-of-
pocket expenses incurred on behalf of the Partnership for which it is not
practicable to bill the Partnership directly; however, there will be no
reimbursement of Administrative Costs.
The Managing General Partner will sell (at the lower of fair market value on
the date of purchase or the Managing General Partner's Cost of such Prospects)
sufficient undeveloped Prospects to the Partnership to drill the Partnership's
wells. Fair market value for Leases and Prospects transferred from the Managing
General Partner's inventory will be based on the Cost at which similarly
situated Leases and Prospects are available or traded from or between other
unaffiliated companies operating in the same geographic area. The Cost of the
Prospects will include a portion of the Managing General Partner's reasonable,
necessary and actual expenses for geological, geophysical, engineering, interest
expense, drafting, legal and other like services allocated to the Partnership's
properties. The Cost of the Prospects will be subject to an independent review
during the Partnership's annual
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independent audit. The Managing General Partner will not retain any overriding
royalty for itself from such Prospects. See "Proposed Activities--Acquisition of
Undeveloped Prospects."
The Partnership will pay the Managing General Partner, as Operator for
drilling and completing the Partnership's wells, for each well completed and
placed into production a fee based upon the Managing General Partner's best
estimate as to the cost of drilling and completing the well. In the event that
the competitive industry rates in the area and the costs of the Managing General
Partner in providing these drilling and completion services are materially
greater than or less than the Managing General Partner's contract drilling and
completion rates, the Managing General Partner will be allowed to adjust its
rates accordingly. The Managing General Partner reviews on an ongoing basis the
rates of unaffiliated driller/operators to determine competitive rates in the
geographic area. Rates will be adjusted at the commencement of drilling
operations of each Partnership formed, but no less frequently than semi-
annually. Such rates will be determined based on the following sources:
offering memoranda or prospectuses for private or public drilling programs,
quoted rates, or competitive bids. In utilizing outside contractors for drilling
and completion operations (rather than performing these services itself), the
Managing General Partner will receive an overhead payment for services as
defined in the COPAS Accounting Procedure--Joint Operations, and actual cost for
any direct costs associated with drilling and completion operations. That
monthly overhead rate will be $3,500 per well per month for wells up to 7,000
feet in depth and $5,000 per well per month for wells 7,000 feet and deeper in
depth. The total cost per well, for wells drilled by unaffiliated operators,
including direct and overhead charges, may exceed the footage rates listed in
the prospectus.
During the production phase of operations, the Operator will receive a monthly
fee of $300 per well for operations and field supervision and $50 per well for
accounting, engineering, management and general and administrative expenses for
producing wells. The Managing General Partner's fees for services as an operator
will be adjusted annually in accordance with guidelines set by the Council of
Petroleum Accountants Societies of North America. Non-routine operations will be
billed to the Partnership at their Costs. See "Proposed Activities--Drilling and
Completion Phase" and "Proposed Activities--Drilling and Operating Agreement."
The Partnerships will reimburse the Managing General Partner for Direct Costs
incurred by the Managing General Partner on behalf of the Partnerships.
The Managing General Partner and its Affiliates may enter into other
transactions with the Partnerships for services, supplies and equipment and will
be entitled to compensation at competitive prices and terms as determined by
reference to charges of unaffiliated companies providing similar services,
supplies and equipment. See "Management--Conflicts of Interest."
The Dealer-Manager will receive as sales commissions and for reimbursement of
due diligence and marketing support expenses $1,000,000 if the maximum number of
Units is sold ranging to $100,000 if the minimum number of Units is sold.
Dealer-Manager may reallow such sales commissions and due diligence and
marketing support expenses in whole or in part to NASD-licensed broker-dealers
for sale of the Units, reimbursement of due diligence and marketing support
expenses and other compensation.
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<PAGE>
PROPOSED ACTIVITIES
Introduction
. The primary purpose of the Partnerships will be drilling, completing and
producing oil and gas from development wells, as well as the purchase of
producing wells.
. Exploratory activities may constitute up to 25% of the total activity.
. Partnerships will typically acquire between 51% and 100% of the Working
Interest of each Prospect, subject to royalty interests.
. Each Partnership will be a separate business entity.
. Investors in one Partnership may or may not have interest in any of the other
Partnerships.
The Partnerships will be formed to drill, complete, own and operate oil and
gas wells in Texas, Oklahoma and Kentucky. The Managing General Partner may
conduct Partnership operations in other states it may deem advisable. The
Partnerships intend to apply all of the Capital Contributions available for
participation in drilling and completion activities to comparatively lower risk
Development Wells as well as the purchase of producing wells. It may apply up to
25% to comparatively higher risk Exploratory Wells. Risks will be spread to a
limited extent by participating in drilling operations on a number of different
Prospects. Until the amount of funds to be available is determined, the precise
number of Prospects cannot be determined and the drilling budget cannot be
formulated. The Managing General Partner has no authority to engage in any Roll-
Up transaction or any other transaction involving the acquisition, merger,
conversion, or consolidation of the Partnership with or into another
partnership, corporation or other entity and the issuance of securities to
Investor Partners as a result of the transaction (hereinafter, "Significant
Transaction") without the approval of 80% in interest of the Investor Partners.
See "Glossary of Terms" for the definition of "Roll-Up" and Section 5.07(m) of
the Partnership Agreement.
Various activities and policies of the Partnership discussed throughout this
section and elsewhere in the Prospectus are defined in and governed by the
Partnership Agreement (the amendment of which requires the affirmative vote of a
majority of the then outstanding Units), including the requirements relating to
the acquisition of Prospects and the payment of royalties; the amount of the
Managing General Partner's Capital Contribution to the Partnership; the
guidelines with respect to well pricing and the cost of services furnished by
the Managing General Partner and/or Affiliates; the states where the
Partnership's wells will be drilled; assessment and borrowing policies; voting
rights of Investor Partners; the term of the Partnership; and compensation of
the Managing General Partner. Other policies and restrictions upon the
activities of the Managing General Partner and the Partnership are not set forth
in the Partnership Agreement, but instead reflect the current intention of the
Managing General Partner and thus are subject to change at its discretion. For
these later activities, the Managing General Partner in making a change, will
utilize its reasonable business judgment as manager of the Partnership and will
exercise its judgment consistent with its obligations as a fiduciary in the
Investor Partners.
Upon successful completion of the offering, the Partnership will effect the
following transactions, each of which is more fully described below:
(a) The Partnership will typically acquire between 51% and 100% of the Working
Interest in the Prospects, subject to royalty interests of unaffiliated
parties with the remainder of the Working Interest being held by the
Managing General Partner and/or by unaffiliated third parties; and
(b) The Partnership will enter into a Drilling Contract and an Operating
Agreement with the Managing General Partner or with unaffiliated persons as
Operator, providing (i) for the drilling and completion of Partnership
wells, and (ii) for the subsequent supervision of field operations with
respect to each producing well.
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<PAGE>
Investment Objectives
Each Partnership will participate in a Drilling Program, to be managed by the
Managing General Partner in its capacity as Managing General Partner, consisting
of the acquisition and development of oil and gas prospects. The primary
investment objective of each Partnership is to conduct oil and gas drilling and
development activities on Prospects in an attempt to establish long-life oil and
gas reserves. In addition, the Drilling Program's structure is intended to
result in certain tax benefits, consisting principally of deductions for
intangible drilling costs, depletion and depreciation. To the extent that the
operations of a Partnership and its related Drilling Program result in a net
loss for a taxable period, General Partners will be able to claim their
respective shares of the deductions giving rise to such loss in the current
year, but Limited Partners will not be able to claim their shares of the
deductions comprising such loss in the current year except to the extent they
have net passive income from other sources. See "Proposed Activities" and "Tax
Considerations."
Development Policies
Pursuant to the Partnership Agreement, the activities of each Partnership will
focus upon the acquisition of Leases, the drilling of Development Wells, the
development of Prospects, and the production and operation of the resulting
properties. In addition to Development Wells, at the discretion of the Managing
General Partner, up to 25% of a Partnership's Capital Contributions may be
expended in connection with activities relating to Exploratory Wells. All
drilling activities involve a high degree of risk, with Exploratory Wells
presenting a higher degree of risk than Development Wells. The number and type
of wells to be drilled by the Partnerships will vary according to the amount of
funds raised, the costs of each well, and the size of the fractional working
interests selected in each well.
Decisions as to the number and location of the Prospects in which a
Partnership will invest and as to the amounts spent on drilling will be made
solely by the Managing General Partner for the Partnership and by the Program
Manager on behalf of the Drilling Program.
The Managing General Partner will designate in writing the area comprising a
Prospect in which a Partnership is to acquire an interest pursuant to the
related Program Agreement at or prior to the date on which a well is spudded
(i.e. drilling is commenced) on such Prospect. The Prospect area may be enlarged
or contracted from time to time by the Managing General Partner on the basis of
subsequently acquired geological and engineering data to define or redefine the
productive limits of the original area of the Prospect. Notwithstanding the
foregoing, with respect to any large, continuous known stratigraphic trend which
could be defined as a continuous reservoir, the Managing General Partner, acting
in good faith, shall be permitted to limit or reduce the area of a Prospect to
the extent permitted by the definition of the term "Prospect." See "Glossary of
Terms."
The Managing General Partner intends to cause the Partnerships to acquire an
interest in as many Prospects as practicable in order to best diversify the
risks associated with drilling for oil and gas. The number of subscriptions
received and accepted from investors will necessarily affect the number of
Prospects in which the Partnerships can participate.
Drilling Policy
Each Partnership will invest in a number of Prospects, consistent with the
objective of maintaining a meaningful interest in the wells to be drilled or
purchased or acquired as producing wells. Most wells to be drilled by the
Partnerships will be direct offsets to producing wells ("proved undeveloped
prospects"). It is possible that a well on a Prospect will have the effect of
proving up any additional acreage outside of the Prospect. The Partnerships are
expected to acquire spacing units on which wells are to be drilled but may also
acquire surrounding acreage. If drilling on a Partnership Prospect proves up an
adjoining spacing unit owned by the Managing General Partner, or if there is
reliable evidence that there would be material drainage of a Partnership
Prospect by an adjoining
37
<PAGE>
spacing unit in which the Managing General Partner owns an interest, the
Managing General Partner will assign to the Partnership a proportionate interest
in such spacing unit.
Acquisition of Undeveloped Prospects
. The Managing General Partner will select undeveloped Prospects.
. No Prospects have yet been selected for any of the Partnerships.
. Selection of Prospects for a Partnership will occur after that Partnership
has been funded.
. At least 50% of the Prospects will be Development Wells, with possibly 25% of
the Prospects being producing wells and possibly 25% of the Prospects being
exploratory wells.
. Prospects will be acquired by the Partnerships at the lesser of Cost or fair
market value.
. Average royalty and overriding royalty payable to unaffiliated third parties
will not exceed 25%.
. The Managing General Partner will not retain overriding royalty interests.
The Managing General Partner will select undeveloped Prospects sufficient to
drill the Partnership wells. No Prospects have been pre-selected by the Managing
General Partner. Most Prospects to be selected for the Partnerships are expected
to be single-well proved undeveloped prospects, as well as the purchase of
existing producing wells. A Prospect may be generally defined as a contiguous
oil and gas leasehold estate, or lesser interest therein, upon which drilling
operations may be conducted.
Depending on its attributes, a Prospect may be characterized as an
"exploratory" or "development" site. Generally speaking, exploratory drilling
involves the conduct of drilling operations in search of a new and yet
undiscovered pool of oil and gas (or, alternatively, drilling within a
discovered pool with the hope of greatly extending the limits of such pool),
whereas development drilling involves drilling to a known producing formation in
a previously discovered field. Both developmental and exploratory drilling are
highly speculative and may not be profitable.
The Partnership intends to conduct exploration and development of oil and gas
leases in Texas, Oklahoma and Kentucky as well as possibly purchase producing
oil and gas wells. Wells drilled by the Partnership or the Managing General
Partner include both exploratory and development wells. The Managing General
Partner reserves the right to conduct Partnership Operations in those states
mentioned above or such other states as it may, in its sole and absolute
discretion, deem advisable.
The Managing General Partner anticipates that all of a Partnership's funds
available for drilling activities will be expended in the Austin Chalk Trend
(located in Central Texas), the Bend Arch and Eastern Shelf (located in North
Central Texas), and the Illinois Basin (located in Southern Illinois and
Kentucky). However, if the Managing General Partner determines that it is in the
best interest of a Drilling Program to conduct additional drilling activities in
other onshore geographic areas of the United States, the Drilling Program and
the related Partnership may expend available funds in such areas. At the present
time, no Partnership is committed to any specific drilling sites.
The Austin Chalk, a cream to gravy colored amorphous limestone, some 125-150
million years of age in Geologic time has been explored by oil venturers in
Texas since the early 1920's. This division of the Cretaceous System on the
Geologic age scale outcrops from Kennedy County on the southwest border of
Texas, and extends eastward to Bexar County and north northeast to Grayson
County on the northeast Red River border. It is, because of its sub-surface
physical properties, productive along the entire length of the trend. The Austin
Chalk formation ranges in depths from 2000 feet to over 10,000 feet.
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<PAGE>
The Bend Arch and Eastern Shelf lie in north central Texas between the East
North Basin and Permian Basin. These areas have been actively explored by
independent oil companies for over 70 years. The majors were actively involved
until they decided to explore overseas. The departure of these companies has
left a significant void in developing the potential of this area which can, and
should be, exploited by organizations such as the Partnerships.
Both of these areas provide structural and stratigraphic trapping mechanisms
for oil and gas reserves. Some fields in the area have produced as much as 35 to
40 million barrels of oil to date. Subsurface geological interpretation of the
over 17 productive horizons ranging from depths of 300 feet to the basement of
7,500 feet has been extremely effective. Multiple pay zone wells are very common
in the region and new discoveries are continuously being reported.
The Illinois Basin is a shallow depression characterized by rock layers that
dip gently inward from the crests of surrounding arches. During most of
Paleozoic time, sediments accumulated in the slowly subsiding basin. The
Paleozoic depositional basin differs from today's structural basin in that it
was open to the south, in the area now occupied by the Pascola Arch. The
principal producing formation of the Illinois Basin is the O'Hara Limestone,
which is located in the Chesterian Series.
The Illinois Basin has produced approximately 4,625,000,000 barrels of oil
from its discovery in 1918, through 1995.
The Managing General Partner also owns and operates a drilling rig, a
cementing business, and an acidizing business, and provides such services to its
affiliates and investment partnerships as well as to third parties. The Managing
General Partner intends to provide such services to the Partnership and to
continue providing such services to the oil and gas industry and will actively
pursue the acquisition of other service operations which complement its ongoing
philosophy of vertically integrating such services.
The Prospects will be acquired pursuant to an arrangement whereby the
Partnership will typically acquire between 51% and 100% of the Working Interest,
subject to landowners' royalty interests and other royalty interests payable to
unaffiliated third parties in varying amounts, provided that the weighted
average for all Prospects of a particular Partnership will not exceed 25%. In
its discretion the Partnership may acquire less than 51% of the Working Interest
in the Prospects. The Partnership Agreement forbids the Managing General Partner
or any Affiliate from acquiring or retaining any overriding royalty interest in
the Partnership's interest in the Prospects. The Partnerships may acquire less
than 100% of the Working Interest in each Prospect in which they participate. In
order to comply with certain conditions for the treatment of Additional General
Partners' interests in the Partnership as not passive activities, (and thereby
not subjecting the Additional General Partners to limitations on the deduction
of Partnership losses attributable to such Additional General Partners to income
from passive activities), the Managing General Partner has represented that the
Partnerships will acquire and hold only operating mineral interests and that
none of the Partnership's revenues will be from non-working interests. The
Managing General Partner based on its internal corporate objectives primarily
related to cash flow and income tax considerations may sell or otherwise dispose
of Prospect interests not acquired by the Partnerships or may retain a Working
Interest in such Prospects and participate in the drilling development of the
Prospect on the same basis as the Partnerships, for the Managing General
Partner's sole benefit. The Managing General Partner intends to retain such
Working Interest only in the event that it would be economically unfeasible for
the Partnership to purchase all available Working Interests.
The Partnership may acquire less than the full Working Interest in Prospects
and, as a result, may engage in joint activities with other Working Interest
owners. A Partnership could be held liable for the joint activity obligations of
the other Working Interest owners, such as nonpayment of costs and liabilities
arising from the actions of the Working Interest owners. Full development of the
Prospects may be jeopardized in the event of the inability of other Working
Interest owners to pay their respective shares of Drilling and Completion Costs.
See "Risk Factors --Special Risks of the Partnerships--Joint Activities with
Others," and "--Potential Partnership Liability."
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<PAGE>
In acquiring interests in Prospects, the Partnerships may pay such
consideration and make such contractual commitments and agreements as the
Managing General Partner deems fair, reasonable and appropriate. While it is
expected that a substantial portion of the Prospects and interests therein to be
developed by the Partnerships may be acquired by assignment from the Managing
General Partner, the Partnerships will also purchase Prospects directly from
unaffiliated third parties. All Prospects which are transferred to the
Partnerships from the Managing General Partner will be transferred at its Cost,
unless the Managing General Partner has reason to believe that Cost is more than
the fair market value of such property in which case the price will not exceed
the fair market value of such property. In such case, the Managing General
Partner will obtain a written appraisal from a qualified independent expert with
respect to sales of properties of the Managing General Partner and its
Affiliates to the Partnerships. Upon written request of an Investor Partner to
the Managing General Partner, a copy of such written appraisal will be made
available for review by such Investor. Total lease costs of Prospects acquired
from the Managing General Partner and unaffiliated persons will not exceed 20%
of the total capital available for operations.
The actual number, identity and percentage of Working Interest or other
interests in Prospects to be acquired by Partnerships will depend upon, among
other things, the total amount of Capital Contributions to a Partnership, the
latest geological and geophysical data, potential title or spacing problems,
availability and price of drilling services, tubular goods and services,
approvals by federal and state departments or agencies, agreements with other
Working Interest owners in the Prospects, farm-ins and continuing review of
other Prospects that may be available.
Evaluation of Prospects
All Prospects acquired by the Partnerships will be located and evaluated by
the Managing General Partner. In evaluating Prospects prior to purchase, the
Managing General Partner will assess many factors, including estimated reserves,
anticipated cash flow from production, future prices and costs, and various
factors affecting the marketing of production from such properties. The economic
success of the Partnerships' operations depends upon the ability of the Managing
General Partner to identify and acquire Prospects on a favorable economic basis.
In the regular course of its business, the Managing General Partner receives
both verbal and written notices of oil and gas properties available for
acquisition. Such notices come from property owners, brokers, investment
advisers and business contacts, and will often contain summary information on
the subject properties. The notices received by the Managing General Partner
usually pertain to "packages" of properties, typically including from 1 to 100
leases and/or wells, often located in a number of different fields and states.
In some cases an acquisition proposal will pertain to an entire oil and gas
company and its assets. The properties included in a package may be developed,
partially developed or undeveloped. Properties presented to the Managing General
Partner are most frequently owned by small, independent oil and gas companies or
independent operators, though owners range from holders of small fractional
working interests to major oil companies with majority interests in hundreds of
wells.
Appropriate members of the Managing General Partner's staff conduct initial
reviews of properties to determine whether they are suitable for acquisition by
the Partnerships. If a property appears to be generally suitable, further
information is obtained from the party which submitted the property. Such
information is reviewed by a property acquisition team which in many cases will
be assisted by local consulting geologists and geological engineers possessing a
specialized knowledge of the region where the Prospect is located. The property
acquisition team submits an analysis of each property package, together with a
recommended bid price, to a property acquisition review committee comprised of
senior members of management, which makes the final determination as to whether
and at what price the package will be purchased. A conflict of interest may
develop between each Partnership and the Managing General Partner regarding
which Partnership will acquire a particular Prospect. See "Conflicts of
Interest."
Title to Properties
. Record title to Leases will be held in the name of the Partnership.
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Prior to the drilling of any partnership well, the Managing General Partner
will assign the Partnership an interest in the Lease to the Partnership. Leases
acquired by each Partnership may initially and temporarily be held in the name
of the Managing General Partner, as nominee, to facilitate joint-owner
operations and the acquisition of properties. The existence of the unrecorded
assignments from such record owner to the Partnership will indicate that the
Leases are being held for the benefit of each particular Partnership and that
the Leases are not subject to the debts, obligations or liabilities of the
record owner; however, such unrecorded assignments may not fully protect the
Partnerships from the claims of creditors of the Managing General Partner.
Investor Partners must rely on the Managing General Partner to use its best
judgment to obtain appropriate title to Leases. Provisions of the Partnership
Agreement relieve the Managing General Partner from any mistakes of judgment
with respect to the waiver of title defects. The Managing General Partner will
take such steps as it deems necessary to assure that title to Leases is
acceptable for purposes of the Partnerships. The Managing General Partner is
free, however, to use its own judgement in waiving title requirements and will
not be liable for any failure of title to Lease transferred to the Partnerships.
Further, neither the Managing General Partner nor its Affiliates will make any
warranties as to the validity or merchantability of titles to any Leases to be
acquired by the Partnerships.
Oil and Gas Prospects
Oil and gas drilling is a highly speculative activity. It is anticipated that
all Prospects will be evaluated by the Managing General Partner's staff and
consulting geologists who will be specialists in the geographic area of the
Prospect. These geologists will utilize data provided by a multitude of
professional resources which are available, production records from wells, and
such other information as may be available and useful. Specific criteria for
Prospect selection will vary depending upon well depth and estimated cost;
however, generally Prospects are selected which the geologists estimate will
generate after-tax payback to investors in a three- to six-year time period
based on historical production from similar formations. However, there can be no
assurances that Prospects will be able to generate such after tax payback to
investors. See "Risk Factors--Special Risks of the Partnerships--Speculative
Nature of Prospects Acquisitions; No Assurance of Oil and Gas Production" and
"Risk Factors--Risks Pertaining to Oil and Gas Investments--Speculative Nature
of Oil and Gas Activities." The stratigraphic nature of the Prospects in the
area is best developed by subsurface mapping based on data from surrounding
wells. As a result, whenever possible wells drilled by the Partnership will be
direct offsets to existing producing wells, at the state minimum spacing
distance as is appropriate. Where multiple pay zone potential exists, as it
frequently does in the proposed area of operations, the geologists will attempt
to optimize well locations to create wells with two or more productive horizons.
The Managing General Partner expects to acquire acreage on an ongoing basis
throughout 1997 and beyond for the Program and future partnerships.
Geology
Texas and Oklahoma. The Austin Chalk, a cream to gravy colored amorphous
limestone, some 125-150 million years of age in Geologic time has been explored
by oil venturers in Texas since the early 1920's. This division of the
Cretaceous System on the Geologic age scale outcrops from Kennedy County on the
southwest border of Texas, and extends eastward to Bexar County and north
northeast to Grayson County on the northeast Red River border. It is, because of
its sub-surface physical properties, productive along the entire length of the
trend. The Austin Chalk formation ranges in depths from 2000 feet to over 10,000
feet.
The Austin Chalk is a complex series of fossiliferous limestone beds composed
of dead macro and micro skeletons interbedded with shale and volcanic deposits
of ash, bentonite, and glauconite. During deposition of this limestone in the
quiet sea waters, calcium skeletons of algal remains drifted to the sea floor to
be covered by additional remains of sea life and plant life. These limestone
beds, ranging from 250 feet to 750 feet in thickness, are interspersed with gray
to black bentonitic shale beds, ranging from less than 1 inch to 25 feet in
thickness. During these periods of shale deposition there was a high percentage
of ash and glauconite deposited. The upper
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100 feet to 150 feet of the Chalk appears to contain the largest percentage of
ash and glauconite; however, these volcanic deposits occur throughout the Chalk
in varying amounts. These beds isolate the different productive intervals within
the Chalk, contrary to the belief of the early explorationist. When fracturing
occurred, it did not, in most cases, penetrate these "plastic" ash and shale
intervals. Therefore, in order to successfully drill and produce horizontal
wells, it is necessary to target these individually isolated fractured
productive horizons.
As in all limestones, the porosity of the rock varies from 2% to 18% but most
generally averages from 6% to 12%. This porosity, to be effective commercially,
has to have connecting fractures. In order to properly locate these intervals,
it is necessary to apply the best geological and geophysical techniques.
In the early periods of development prior to horizontal drilling, vertical
production, on 40 acre to 80 acre spacing, ranged from 30,000 barrels of oil to
150,000 barrels of oil from the Pearsall Field, Frio County, Texas. Since the
advent of horizontal drilling technology introduced by Oryx over four years ago
in the Pearsall Field, recoveries have been estimated, by Oryx's technical
studies, to range from an additional 100,000 barrels of oil to 150,000 barrels
of oil per 1000 feet of drain hole.
In the rush to gain a position in the early boom, the greatest number of wells
were drilled with little or no regard of where to start or extend the drain
hole. Any random horizontal drain hole was believed able to encounter several
fractures which would recover all the oil from these separate beds. This belief
held by oil explorationists at that time has been shown to be incorrect. To have
significant recovery of reserves in the Chalk, the drain hole must be drilled in
the best porosity of these brittle zones. These primary fracture zones are
considered a "target interval". The major or primary fractures creates the space
for the accumulation of oil and gas. The minor or secondary fractures, as well
as related porosity, provide greater potential for oil and gas reserves, and
long-term production.
Information from horizontal drain hole plots of directional survey records has
shown that in most cases the drain hole was out of the ideal target interval
over 50% of the time. In some cases drain holes were maintained in an ideal
target interval for only a fraction of the whole well. Recently there have been
a number of horizontal wells re-entered and drilled properly the second time. In
some cases this involved changing the target interval as little as 20 feet
vertically. Because the ideal formation characteristics only exist with certain
intervals, there must be a precise drilling program planned and applied.
The Bend Arch and Eastern Shelf lie in north central Texas between the East
North Basin and Permian Basin. These areas have been actively explored by
independent oil companies for over 70 years. Major oil companies were also
actively involved in this area until they decided in the recent past to move the
majority of their exploration activities overseas. The departure of these
companies has left a significant void in developing the potential of this area
which can, and should be, exploited by organizations such as the Partnerships.
Both of these areas provide structural and stratigraphic trapping mechanisms
for oil and gas reserves. Some fields in the area have produced as much as 35 to
40 million barrels of oil to date. Subsurface geological interpretation of the
over 17 productive horizons ranging from depths of 300 feet to the basement of
7,500 feet has been extremely effective. Multiple pay zone wells are very common
in the region and new discoveries are continuously being reported.
Seismology has also been an exceptionally effective tool of exploration in the
past and, with the recent introduction of 3D seismic and improved technological
advances, promises to be even more effective in the future. It is the Managing
General Partner's opinion, as well as that of other parties in the area, that
the use of these techniques will lead to the discovery of many other previously
overlooked significant productive fields.
Many of the lower zones in these areas are reef in nature, and a majority of
the structures are approximately 40 to 80 acres in size. Due to the relatively
small size of these anomalies, the reefs were very difficult and expensive to
locate prior to seismic technology. Seismic data through the 1960's and 70's had
not been sufficiently developed to accurately locate the structures, therefore,
a number of past wells were drilled on the flank, or very
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near to the reef. Presently, due to advanced and enhanced seismic data, dipmeter
logs and geological interpretations, locating the structures and properly
defining them has resulted in success rates exceeding 75%.
Oil occurs both indigenous to the reef due to the abundant animal and plant
life that surround these reef environments as well as from the carbonaceous
Barnett Shale which encases and surrounds the reef. Porosity occurs primarily
due to reef-building organisms and secondarily due to the leaching acidic waters
and tectonic movements that affected the brittle reef limestones. The tectonic
movement of the underlying formations and the intensity of such movement is the
factor most affecting the permeability of the reef. The majority of Eastern
Shelf and Bend Arch reefs are gas solution and expansion drive; however, in this
area due to the deep-seated movements, fracturing has occurred in the reef, as
in the deeper beds.
The Bend Conglomerates are Atokan in age and were deposited during
Pennsylvanian time. The various components of these conglomerates originated in
the Quachita Mountains, but were eroded and transported to this area. In the
Bend Arch area they were deposited regionally and formed traps on the sides and
tops of the underlying Mississippian structures.
The Caddo Limestone of the Strawn series is reefing in nature in some areas
and, in other areas, it is present in the structure due to draping over the
underlying reef. These structures have porosity present due to subaerial
exposure and dissolution of organisms. The Caddo will have an average porosity
of 10% with good permeability where a structure is present. There exists as many
as three productive intervals in the Caddo.
The Strawn Sands of the Bend Arch are one of the most sought after, and one of
the most productive shallow reservoirs in Texas. These sands were deposited in
the Pennsylvanian time period and are deltaic in nature. When found in
conjunction with the proper trapping mechanisms, a Strawn Sand field can produce
upwards of 200,000 barrels of oil.
The shallow productive zones are present from 400 feet to 2,000 feet, and
occur due to structural and stratigraphic trapping because of depositional
cycles and deep-seated structures. When located, the shallow fields cover areas
as large as 500 acres. The shallow zone will be monitored while drilling to
determine the need for a drill stem test and evaluated with logs.
The Managing General Partner believes that available prospects have economics
comparable and in many cases superior to that of the average well in Texas. In
addition to the areas outlined above, the Managing General Partner is currently
in the initial stages of evaluating potential prospects in Oklahoma and other
states. If, in the opinion of the Managing General Partner, these prospects
warrant development, they may be included in 1996 and 1997 partnerships.
Kentucky. Historically, drilling in the Illinois Basin, and more specifically
in Kentucky, has been much less regulated than in other major producing states
and a complete history of existing wells has not been centralized. The Managing
General Partner intends to continue evaluating promising acreage and
developmental drilling locations in the Illinois Basin for acquisition. The
Managing General Partner also believes that there are excellent opportunities in
the area for the purchase of existing production and will search out and
endeavor to acquire such reserves.
The Illinois basin is a shallow depression characterized by rock layers that
dip gently inward from the crests of surrounding arches. During most of
Paleozoic time, sediments accumulated in the slowly subsiding basin. The
Paleozoic depositional basis differed from today's structural basin in that it
was open to the south, in the area now occupied by the Pascola Arch. The
principal producing formation of the Illinois Basin is the O'Hara Limestone,
which is located in the Chesterian Series.
The Illinois Basin has produced approximately 4,625,000,000 barrels of oil
from its discovery in 1918 through 1995.
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The O'Hara Limestone, of Mississippian age, produces from several hundred
fields in the Illinois Basin. The O'Hara Limestone is predominately an "oolitic
limestone" or is often referred to as an "oolitic sand." The O'Hara is
depositionally a high energy shallow marine environment, much like a sandstone
bar type environment. These oolitic bars are typically elongated and are
perpendicular to basin strike. The O'Hara is most often a well rounded, medium
grain, tan to white oolitic limestone. The O'Hara will average from 8 feet to as
much as 30 feet in thickness, with excellent primary porosity of 8%-20% and
reservoir permeability from 80-4000 millidarcies. These reservoir parameters
make the O'Hara a very prolific producer of oil in the Illinois Basin.
The Jackson Sandstone, Mississippian in age, produces from several hundred
fields in the Illinois Basin. The Jackson is predominately a shale and sandstone
that was deposited in tidal dominated deltaic river systems where tidal currents
reworked the coarse grain sediments into sand ridges, or bars. These bars form
the elongated marine sandstone bodies of the Jackson Sand. The sand developments
trend down slope from northeast to southwest in the shelf area of the east and
southeast portions of the Illinois Basin. Geological analysis indicates the sand
has retained much of the good reservoir parameters necessary to permit it to
produce significant quantities of oil without excessive stimulation or
fracturing.
The Jackson is primarily a medium to fine grain, rounded to sub-angular,
sandstone. The sand has average 10-20% primary matrix porosity and 8-100
millidarcies of permeability. This is excellent porosity and permeability for
reservoir production and management.
Drilling and Completion Phase
. Partnership wells which are Developmental Wells are expected to be 2,000 feet
to 12,000 feet deep.
. Whenever possible, Partnership wells will be drilled near pipelines,
gathering systems, or end users.
. The Partnership will sell production on a competitive basis at the best
available price.
General: It is anticipated that most wells will be drilled to the 2,000 to
12,000 foot depth to target hydrocarbon production. Some shallower or deeper
development Prospects may be drilled. Thereafter, the Operator will complete
each well deemed by the Operator to be capable of production of oil or gas in
commercial quantities. Exploratory Wells may be drilled to depths exceeding the
proposed Developmental Wells depth indicated above. In the event the funds
allocated for exploratory wells are not used to drill Exploratory Wells, such
funds together with unexpended completion funds will be used to drill additional
Developmental Wells.
The Operator, in its sole and absolute discretion, will determine the depth to
which a particular well is drilled based on geologic and other information
available to it. No representations are given herein as to the depths and
formations to be encountered in each Partnership's wells except that it is
anticipated that most wells will be drilled at least to a depth of approximately
2,000 feet per well. The Managing General Partner may substitute another
operator or operators to perform the duties of the Operator, on terms and
conditions substantially the same as those discussed herein. The Managing
General Partner will supervise the operations of non-affiliated drilling
contractors and subcontractors. In such case, the cost of drilling to the
Partnership will be the actual cost of third-party drilling, plus the Managing
General Partner's costs of supervision, engineering, geology, accounting and
other services provided as well as monthly overhead specified in "Compensation
to the Managing General Partner and Affiliates" above.
The Managing General Partner will represent each Partnership in all operations
matters, including the drilling, testing, completion and equipping of wells and
the sale of each Partnership's oil and gas production from wells of which it is
the Operator. The Managing General Partner expects to be the Operator of all
wells in which the Partnerships own an interest.
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The Managing General Partner and its Affiliates will, in some cases, provide
equipment and supplies and will perform salt water disposal services and other
services for the Partnership, provided that all such transactions will be at
competitive prices and upon competitive terms.
Drilling and Operating Agreement
. The Managing General Partner will be the Operator of and have full control
over the Partnerships' wells.
. The Operator must commence drilling wells within 180 days after funding of
the Partnership, but not later than March 31, 1998 and 1999 for Partnerships
designated "Blue Ridge Energy Fund 1997--Limited Partnership" and "Blue Ridge
Energy Fund 1998--Limited Partnership," respectively.
. The Partnership will enter into a Drilling and Completion Contract, based
upon competitive rates as charged by unaffiliated contractors in the same
geographic region, with the Managing General Partner to drill, test, complete
and equip its portion of each Partnership well. If the Managing General
Partner finds that in order to fulfill its contract with the Partnership
material adjustments must be made to the costs as stated in the Drilling
Contract, such changes will be made.
. The operator will charge the Partnerships $300 per well per month for
production operations on completed wells and $50 per well per month for
accounting, engineering, management, and general and administrative expenses.
The Managing General Partner's fees for services as an operator will be
adjusted annually in accordance with guidelines set by the Council of
Petroleum Accountants Societies of North America.
Upon funding of each Partnership, the particular Partnership will enter into
the Drilling and Operating Agreement (herein, the "Agreement") with the Managing
General Partner as operator (herein, the "Operator"). The Agreement (filed as
Exhibit 10.1 to the Registration Statement) provides that the Operator will
conduct and direct and have full control of all operations on the Partnership's
Prospects. The Operator will have no liability as operator to the Partnership
for losses sustained or liabilities incurred, except as may result from the
Operator's negligence or misconduct.
The Partnership will pay a proportionate share of lease, development and
operating costs, and will be entitled to receive a proportionate share of
production subject only to royalties and overriding royalties. Each Partnership
will be responsible only for its obligations and will be liable only for its
proportionate share of the costs of developing and operating the Prospects; and,
in the event of the default of another party, the Managing General Partner has
agreed to indemnify the Partnership and its Partners for the obligations of such
party. If any party fails or is unable to pay its share of expense within 60
days after rendition of a statement therefor by the Managing General Partner,
the Managing General Partner will pay the unpaid amount in the proportion that
the interest of each such party bears to the interest of all such parties.
In the event not all participants in a well wish to participate in a
completion attempt, the parties desiring to do so may pay all costs of the
completion attempt including the cost of necessary well equipment and a
gathering pipeline, and such parties will receive all income and pay all
operating costs from the well until they have received an amount equal to 300%
of the completion and connection costs, after which time the non-consenting
parties will have the right to receive their original interest in further
revenues and expenses.
The Operator is obligated to commence drilling the wells on each Prospect
within 180 days of the date of the funding of the Partnership, but in no case
later than March 31, 1998 for Partnerships designated "Blue Ridge Energy Fund
1997--Limited Partnership" and March 31, 1999 for Partnerships designated "Blue
Ridge Energy Fund 1998--Limited Partnership." The Operator's duties include
testing formations during drilling and completing the wells by installing such
surface and well equipment, gathering pipelines, heaters, separators, etc., as
are necessary and normal in the area in which the Prospect is located. The
Managing General Partner will pay the drilling and completion costs of the
Operator as incurred, except that the Managing General Partner is permitted
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to make advance payments to itself as the Operator where necessary to secure tax
benefits of prepaid drilling costs and a valid business reason exists. In order
to comply with conditions to securing tax benefits of prepaid drilling costs,
the Operator under the terms of the Agreement will not refund any portion of
amounts paid in the event actual costs are less than amounts paid but will apply
any such amounts solely for payment of additional drilling services to the
Partnership. If the Operator determines that the well is not likely to produce
oil and/or gas in commercial quantities, the Operator will plug and abandon the
well in accordance with applicable regulations.
Each Partnership will bear its proportionate share of the cost of drilling and
completing or drilling and abandoning its wells as follows:
1. The Cost of the Prospect.
2. For intangible and tangible well Costs, the Partnership will enter into a
Drilling Contract, based upon competitive rates as charged by unaffiliated
contractors in the same geographic region, with the Managing General Partner
to drill, test, complete and equip its portion of each Partnership well. If
the Managing General Partner finds that in order to fulfill its contract with
the Partnership at less than the Partnership's stated cost, material
adjustments must be made to the costs as stated in the Drilling Contract,
such changes will be made.
3. The tangible Costs of gathering pipelines and systems necessary to connect
the well to the nearest appropriate sales point or delivery point.
To the extent that a Partnership acquires less than 100% of a Prospect, its
Drilling and Completion Costs of that Prospect will be proportionately
decreased.
The Agreement provides that the Partnership will pay the Operator the Prospect
Cost and the Dry Hole Cost for each planned well prior to the Spud date, and the
balance of the completed well Costs will be paid when the well is ready to be
completed.
Production Phase of Operations
General. Once the Partnership's wells are "completed" (i.e., all surface
equipment necessary to control the flow of, or to shut down, a well has been
installed, including the gathering pipeline), production operations will
commence.
The Operator will provide all necessary labor, vehicles, supervision,
management, accounting and overhead services for normal production operations,
and will deduct from Partnership revenues a monthly charge of $300 per well for
operations and field supervision and a monthly charge of $50 per well for
accounting, engineering, management and general administrative expenses. Non-
routine operations will be billed to the Partnership at their Cost.
The Partnership will have the right to take in kind and separately dispose of
its share of all oil and gas produced from its Prospects, excluding its
proportionate share of production required for lease operations and production
unavoidably lost. The Managing General Partner will market such production and
the Managing General Partner may enter into and bind the Partnership in such
agreements as it deems in the best interest of the Partnership for the sale of
such oil and/or gas. If pipelines which have been built by the Managing General
Partner are used in the delivery of gas to market, the Operator may charge a
gathering fee not to exceed that which would be charged by a non-affiliated
third party for a similar service.
The production and accounting charges may be adjusted annually beginning
January 1, 1999 with respect to Partnerships designated "Blue Ridge Energy Fund
1997--Limited Partnership" and January 1, 2000 for Partnerships designated "Blue
Ridge Energy Fund 1998--Limited Partnership," in accordance with the guidelines
set by the
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Council of Petroleum Accountants Societies of North America, provided that the
charge may not exceed the rate which would be charged by the comparable
operators in the area of operations.
The Agreement will continue in force so long as any such well or wells
produce, or are capable of production and for an additional period of 180 days
from cessation of all production.
Expenditure of Production Revenues. The Partnership's share of production
revenue from a given well will be burdened by and/or subject to royalties and
overriding royalties, monthly operating charges and other operating costs.
The above items of expenditure involve amounts payable solely out of, or
expenses incurred solely by reason of, production operations. The Partnership's
only source of revenues will be from production operations, although the
Partnership is permitted to borrow funds it may require to meet operational
expenditures (See "Risk Factors--Special Risks of the Partnerships--Shortage of
Working Capital" and "Source of Funds and Use of Proceeds--Subsequent Source of
Funds"). It is the practice of the Managing General Partner to deduct operating
expenses from the production revenue for the corresponding period.
Interests of Parties
The Managing General Partner, Investor Partners and unaffiliated third parties
(including landowners) share revenues from production of gas from wells in which
the Partnership has an interest. The following chart expresses such interest of
gross revenues derived from the wells. For the purpose of this chart, "gross
revenues" is defined as the "price" paid by the oil and/or gas purchaser. In
the event the Partnership acquires less than a 100% Working Interest, the
percentages available to the Partnership will decrease proportionately.
PROGRAM REVENUE SHARING
<TABLE>
<CAPTION>
Third Partnership
Party Working Interest
Entity Interest Royalties: If 51% If 100%
- ------ -------- ---------- ------ -------
<S> <C> <C> <C> <C>
Managing General Partner 20% Partnership Interest 25% 7.65% 15.00%
Investor Partners 80% Partnership Interest 25% 30.60% 60.00%
Third Parties Landowners and Overriding 0% 12.75% 25.00%
Royalties(1) ----- ------
51.00% 100.00%
===== ======
- ---------------------
</TABLE>
(1) Landowner and other royalty interests payable to unaffiliated third parties
may vary, provided that the weighted average for all Prospects of a
Partnership shall not exceed 25%.
Insurance
. The Managing General Partner will carry public liability insurance of not
less than $10,000,000 during drilling operations and will maintain other
insurance as appropriate.
. The Managing General Partner has a good-faith duty to provide insurance
coverage, sufficient, in its judgment, to protect the Investors against the
foreseeable risks of drilling.
. Increasing cost of insurance could reduce Partnership funds available for
drilling.
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The Managing General Partner, in its capacity as operator, will carry blowout,
loss of well control, pollution, public liability and workers' compensation
insurance, but such insurance may not be sufficient to cover all liabilities.
Each Unit held by the Additional General Partners represents an open-ended
security for unforeseen events such as blowouts, lost circulation, stuck drill
pipe, etc., which may result in unanticipated additional liability materially in
excess of the per Unit Subscription amount.
The Managing General Partner has obtained various insurance policies, as
described below, and intends to maintain such policies subject to its analysis
of their premium costs, coverage and other factors. The Managing General
Partner may, in its sole discretion, increase and decrease the policy limits
and types of insurance from time to time as it deems appropriate under the
circumstances, which may vary materially. The following types and amounts of
insurance have been obtained and are expected to be maintained. The Managing
General Partner is the beneficiary under each policy and pays the premiums for
each policy. All of the following insurance coverages will be in effect
throughout all of the drilling, completion and production phases of the
Partnerships' activities.
1. Workers' compensation insurance in full compliance with the laws for the
States of Texas and Oklahoma, and the Commonwealth of Kentucky; this
insurance will be obtained for any other jurisdictions where a Partnership
conducts its business;
2. Operator's bodily injury liability and property damage liability insurance,
each with a limit of $1,000,000;
3. Employer's liability insurance with a limit of not less than $1,000,000;
4. Automobile public liability insurance with a limit of not less than
$1,000,000 per occurrence, covering all automobile equipment;
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5. Operator's umbrella liability insurance with a limit of $10,000,000; and
6. Environmental liability insurance with a limit of not less than $1,000,000.
The Managing General Partner and Operator, has determined in good faith, in
the exercise of its fiduciary duty as Managing General Partner and as Operator,
that adequate insurance has been obtained on behalf of the Partnerships to
provide the Partnership with such coverage as the Managing General Partner
believes is sufficient to protect the Investor Partners against the foreseeable
risks of drilling and ongoing production activities. The Managing General
Partner will obtain and maintain public liability insurance, including umbrella
liability insurance, of at least the Partnership's capitalization, but in no
event less than $10,000,000 during drilling operations. The Managing General
Partner will maintain such insurance coverage during such drilling activities.
The Managing General Partner will review the Partnership insurance coverage
prior to commencing drilling operations and periodically evaluate the
sufficiency of insurance. The Managing General Partner will obtain and maintain
such insurance coverage as it determines to be commensurate with the level of
risk involved. In more than three years of operations, drilling more than 150
wells in Kentucky, Texas, Tennessee and Indiana, the Managing General Partner's
largest insurance claim has been less than $1,000.
The annual cost of such insurance to the Partnership is estimated to be
approximately $2,000 per well in the year that it is drilled and approximately
$500 per each producing well for the Partnership liability and other insurance
coverages. The costs of insurance have increased significantly in recent years
and have currently stabilized, although insurance premiums may materially
increase in the future. The primary effect of increasing premiums cost is to
reduce funds otherwise available for Partnership drilling operations.
The Managing General Partner will notify all Additional General Partners at
least 30 days prior to any material change in the amount of such insurance
coverage. Within this 30-day period and otherwise after the expiration of one
year following the closing of the offering with respect to a particular
Partnership, Additional General Partners have the right to convert their Units
into Units of limited partnership interest by giving written notice to the
Managing General Partner and will have limited liability for any Partnership
operations conducted after the conversion date as a Limited Partner effective
upon the filing of an amendment to the Certificate of Limited Partnership of a
Partnership. At any time during this 30-day period, upon receipt of the required
written notice from the Additional General Partner of his intent to convert, the
Managing General Partner will amend the Partnership Agreement and will file such
amendment with the Commonwealth of Kentucky prior to the effective date of the
change in insurance coverage and thereby effectuate the conversion of the
interest of the former Additional General Partner to that of a Limited Partner.
Effecting conversion is subject to the express requirement that the conversion
will not cause a termination of the Partnership for Federal income tax purposes.
However, even after an election of conversion, an Additional General Partner
will continue to have unlimited liability regarding Partnership activities
arising prior to the effective date of such conversion. See "Terms of the
Offering."
Upon completion of drilling, the Managing General Partner will convert all
Units of general partnership interest, other than the general partnership
interest held by the Managing General Partner, into Units of limited partnership
interest.
The Managing General Partner's Policy Regarding Roll-Up and Other Significant
Transactions
Although the Managing General Partner has no intention of engaging the
Partnership in a "roll-up" transaction or Significant Transaction, it is
possible at some indeterminate time in the future that the Partnership will
become so involved. The complete definitions of "Significant Transaction" and
"Roll-Up" are set forth below in "Glossary of Terms." In general, a roll-up
means a transaction involving the acquisition, merger, conversion, or
consolidation of the Partnership with or into another partnership, corporation
or other entity (the "Roll-Up Entity") and the issuance of securities by the
Roll-Up Entity to Investor Partners in cases where there is also a significant
adverse change in the voting rights of the Partnership, the term of existence of
the Partnership, the compensation of the Managing General Partner, or the
investment objectives of the Partnership. The determination of "significant
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<PAGE>
adverse change" will be made solely by the Managing General Partner in the
exercise of its reasonable business judgment as manager of the Partnership and
consistent with its obligations as a fiduciary to the Investor Partners.
The Partnership Agreement provides various policies in the event that a Roll-
Up or a Significant Transaction should occur in the future. These policies
include:
(1) An appraisal of all Partnership assets will be obtained from a competent
independent expert, and a summary of the appraisal will be included in a
report to the Investor Partners in connection with a proposed Roll-Up or
Significant Transaction.
(2) Any participant who votes "no" on the proposal will be offered a choice
of:
(a) accepting the securities of the Roll-Up Entity or Surviving Entity
(the entity which survives a Significant Transaction) offered in the
proposed Roll-Up or Significant Transaction;
(b) remaining an Investor Partner in the Partnership and preserving his
interests in the Partnership on the same terms and conditions as
existed previously; or
(c) receiving cash in an amount equal to his pro-rata share of the
appraised value of the Partnership's net assets.
(3) The Partnership will not participate in a proposed Roll-Up or Significant
Transaction (a) which would result in the diminishment of an Investor
Partner's voting rights under the Roll-Up Entity's or Surviving Entity's
chartering agreement; (b) in which the Investor Partners' right of access
to the records of the Roll-Up Entity or Surviving Entity would be less
than those provided by the Partnership Agreement; or (c) in which any of
the costs of the transaction would be borne by the Partnership if the
proposed Roll-Up or Significant Transaction is not approved by the
Investor Partners.
The Partnership Agreement further provides that the Partnership will not
participate in a Roll-Up Transaction or Significant Transaction unless the Roll-
Up Transaction or Significant Transaction is approved by 80% in interest of the
Investor Partners. See Section 5.7(m) of the Partnership Agreement.
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COMPETITION, MARKETS AND REGULATIONS
. Competition is intense in all phases of the oil and gas industry, including
the acquisition of Prospects, the purchase of production and the sale of
production.
. Competition for equipment and services is keen and can adversely affect
drilling costs and the timing of drilling.
. Future oil and gas prices are unpredictable. If oil and gas prices go down,
Investor return will go down.
. The Partnership expects to sell its oil and gas subject to market-sensitive
contracts, whereby the price of oil and gas sold will vary as a result of
market forces.
Competition and Markets
Competition is keen among persons and companies involved in the exploration
for and production of oil and gas. The Partnership will encounter strong
competition at every phase of its business including acquiring properties
suitable for exploration and development and marketing of oil and gas. It will
compete with entities having financial resources and staffs substantially larger
than those available to the Partnership. There are thousands of oil and gas
companies in the United States. The national supply of gas is widely
diversified, with no one entity controlling over 5%. As a result of this
competition and Federal Energy Regulatory Commission ("FERC") and Congressional
deregulation of the gas industry and gas prices, prices tend to be determined by
competitive forces. There will also be competition among operators for drilling
equipment, tubular goods and drilling crews. Such competition may affect the
ability of each Partnership to acquire Leases suitable for development by the
Partnerships and to develop expeditiously such Leases once they are acquired.
The marketing of any oil and gas produced by the Partnership will be affected
by a number of factors which are beyond the Partnership's control and whose
exact effect cannot be accurately predicted. These factors include crude oil
imports, the availability and cost of adequate pipeline and other transportation
facilities, the marketing of competitive fuels (such as coal and nuclear
energy), and other matters affecting the availability of a ready market, such as
fluctuating supply and demand. Moreover, in 1992 FERC issued Order No. 636
which requires pipelines to separate their storage, sales and transportation
functions. Order No. 636 established an industry-wide structure for "open-
access" transportation service under which pipelines must provide third parties
non-discriminatory access to transportation service on their systems. The
effect of Order No. 636 has been to restructure the gas industry and increase
its competitiveness. In recent years, crude oil and gas prices declined due,
among several factors, to an oversupply in the world markets. Oil and gas
prices have also been affected, in part, by decreased demand. Legislation which
may be considered by Congress in some respects emphasizes decreasing demand for,
rather than increasing the supply of, oil and gas. Such legislation could
decrease the demand for the Partnerships' production in the future. See "Risk
Factors--Risks Pertaining to Oil and Gas Investments--Competition, Markets and
Regulation." The free trade agreement between Canada and the United States has
eased restrictions on imports of Canadian gas to the United States.
Additionally, the passage in November 1993 of the North American Free Trade
Agreement ("NAFTA") will have some impact on the American gas industry, by
eliminating trade and investment barriers in the United States, Canada and
Mexico. In addition, a number of new pipeline projects has been proposed to
FERC which could substantially increase the availability of Canadian gas to
certain U.S. markets. Such imports could have an adverse effect on both the
price and volume of gas sales from Partnership wells.
The accelerating deregulation of gas and electricity transmission has caused,
and will continue to cause, a convergency of the gas and electric industries.
Demand for gas by the electric power sector is expected to increase modestly
through the next decade. Increased competition in the electric industry,
coupled with the enforcement of stringent environmental regulations, may lead to
an increased reliance on gas by the electric industry.
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<PAGE>
Members of the Organization of Petroleum Exporting Countries establish prices
and production quotas for petroleum products from time to time with the intent
of reducing the current global oversupply and maintaining or increasing certain
price levels. The Managing General Partner is unable to predict what, if any,
effect such actions will have on the amount of or the prices received for oil
and gas produced and sold from the Partnerships' wells.
Regulation
. Federal and state laws and regulations have a significant impact on drilling
and production operations.
. Environmental protection regulations may necessitate significant capital
outlays by the Partnership.
Production of Partnership oil and gas will also be affected by federal and
state regulations. In most areas of operations the production of oil is
regulated by conservation laws and regulations, which set allowable rates of
production and otherwise control the conduct of oil operations.
The Partnership's drilling and production operations will also be subject to
environmental protection regulations established by federal, state and local
agencies, which in turn may necessitate significant capital outlays which would
materially affect the financial position and business operations of the
Partnership. See "Risk Factors--Risks Pertaining to Oil and Gas Investments--
Environmental Hazards and Liabilities".
Certain states control production through regulations establishing the spacing
of wells, limiting the number of days in a given month during which a well can
produce and otherwise limiting the rate of allowable production. Through
regulations enacted to protect against waste, conserve natural resources and
prevent pollution, local, state and federal environmental controls will also
affect Partnership operations and could necessitate spending funds on
environmental protection measures, rather than on drilling operations. If any
penalties or prohibitions were imposed on a Partnership for violating such
regulations, that Partnership's operations could be adversely affected.
In prior programs, expenses associated with compliance with environmental
regulations have represented approximately 5% of the cost of drilling and
completing wells, and it is expected that similar costs will be incurred in this
program. These costs are included in the Drilling Contracts described at
"Proposed Activities--Drilling and Operating Agreement" above.
Gas Pricing
Sale of gas by the Partnerships will be subject to regulation of production,
transportation and pricing by governmental regulatory agencies. Generally, the
regulatory agency in the state where a producing gas well is located supervises
production activities and, in addition, the transportation of gas sold into
intrastate markets. FERC regulates the rates for interstate transportation of
gas but, pursuant to the Wellhead Decontrol Act of 1989, FERC may not regulate
the price of gas. Such deregulated gas production may be sold at market prices
determined by supply, demand, BTU content, pressure, location of wells and other
factors.
The Managing General Partner anticipates that all of the gas produced by
Partnership wells will be considered price decontrolled gas and that the
Partnerships' gas will be sold at fair market value.
Proposed Regulation
Various legislative proposals are being considered in Congress and in the
legislatures of various states, which, if enacted, may significantly and
adversely affect the petroleum and gas industries. Such proposals involve,
among other things, the imposition of price controls on all categories of gas
production, the imposition of land use controls (such as prohibiting drilling
activities on certain federal and state lands in roadless wilderness areas) and
other measures. At the present time, it is impossible to predict what
proposals, if any, will actually be enacted by
52
<PAGE>
Congress or the various state legislatures and what effect, if any, such
proposals will have on the Partnerships' operations.
MANAGEMENT
General Management
The Managing General Partner is a Kentucky corporation organized in 1993.
Since 1993, the Managing General Partner has been engaged in the business of
exploring for, developing and producing oil and gas primarily in Texas and
Kentucky. As of September 15, 1997, the Managing General Partner had
approximately 60 full-time equivalent employees. The Managing General Partner
will make available to Investor Partners, upon request, audited financial
statements of the Managing General Partner for the most recent fiscal year and
unaudited financial statements for interim periods.
The Managing General Partner will actively manage and conduct the business of
the Partnerships, devoting such time and talents to such management as it shall
deem reasonably necessary. The Managing General Partner will have the full and
complete power to do any and all things necessary and incident to the management
and conduct of each Partnership's business. The Managing General Partner will
be responsible for maintaining Partnership bank accounts, collecting Partnership
revenues, making distributions to the Partners, delivering reports to the
Partners and supervising the drilling, completion and operation of the
Partnerships' gas wells. See "Risk Factors--Special Risks of the Partnerships--
Inside Board of Directors and Other Family Relationships."
Experience and Capabilities as Driller/Operator
The Managing General Partner will act as driller/operator for the Program
wells. Since 1993, the Managing General Partner has drilled over 170 wells in
Kentucky and participated in over 55 wells in Texas. The Managing General
Partner currently produces from approximately over 25 wells.
The Managing General Partner employs one geologist and several consulting
geologists who develop Prospects for drilling by the Company and who help
oversee the drilling process. In addition, the Company has engineering
consultants who are responsible for well completions and production operations.
The Managing General Partner employs a drilling subcontractor, a completion
subcontractor and a variety of other subcontractors in the performance of the
work of drilling contract wells. In addition to technical management, the
Company may provide services, at competitive rates, from the Company-owned
drilling rig, cement trucks, acidizing trucks, roustabouts and other assorted
small equipment. The Managing General Partner may lay short gathering lines, or
may subcontract all or part of the work where it is more cost effective for a
Partnership. The Managing General Partner employs contract pumpers and
supervisors to operate its wells. In addition, engineering consultants will
evaluate reserves of all wells at least annually and review well performance
against expectations. All services provided by the Managing General Partner are
provided at rates less than or equal to prevailing rates for similar services
provided by unaffiliated persons in the area. All of the aforementioned
consultants and contractors are not affiliated with Managing General Partner.
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<PAGE>
Managing General Partner
The executive officers, directors and key technical personnel of the Managing
General Partner, their principal occupations for the past five years and
additional information are set forth below:
<TABLE>
<CAPTION>
Positions and Held Current
Name Age Offices Held Position Since
- ---- --- ------------- --------------
<S> <C> <C> <C>
Robert D. Burr 51 Chairman of the Board, President and CEO August, 1993
Don L. Ferrari 60 Senior Vice President-Sales and Director December, 1996
James T. Cook, Jr. 44 Vice President-Finance, Director and CFO June, 1995
Gregory B. Shea 34 Vice President-Development and Director September, 1994
</TABLE>
Robert D. Burr is the President, a founder and a director of the Managing
General Partner since 1993. A native of Port Arthur, Texas, Mr. Burr attended
McNeese State College, Lake Charles, Louisiana. He has been active for over 20
years in the oil and gas business. During that time, he has drilled or operated
over 350 wells in Texas, Kentucky, Oklahoma, Utah and West Virginia. From 1989
to the present, he has been the Owner and President of Pacific Capital Energy,
Ltd., and Blue Ridge Group, Inc., Bowling Green, Kentucky. From 1986 through
1988, he was involved in the exploration of oil and gas as President of Falcon
Energy Corp., Chicago, Illinois. Mr. Burr is the father-in-law of Mr. Shea.
Don L. Ferrari was named Senior Vice President-Sales on December 3, 1996 and a
director of the Managing General Partner on August 5, 1997. Mr. Ferrari attended
the University of California at Berkeley and has been active in the marketing of
financial products and services for over 30 years. Between 1994 and 1997 he was
Director of Marketing for Berther Fisher & Co., a public mezzanine financing
fund. From 1988 to 1994 he was Vice President, Marketing for Ridgewood Power
Corporation which was involved in the oil, gas and electric power industries.
From 1972 to 1988, Mr. Ferrari was President and CEO of Amador Financial Group,
a financial services marketing firm.
James T. Cook, Jr. was named Vice President-Finance and a director of the
Managing General Partner on June 1, 1995. He is an accountant by training, and a
graduate of Stephen F. Austin State University, Nacogdoches, Texas. He has 18
years experience in various phases of the financial side of the oil and gas
industry. Between 1990 and 1995, he served in various financial capacities as
the Chief Financial Officer, Vice President of Finance, and Treasurer for The
Wharf Corporation, the parent of a group of international companies with
interests in Caribbean resorts, stores and the manufacture of bath products.
From 1983 to 1989, he was Vice President, Finance and Treasurer of the Shanley
Corp., Dallas, Texas, a publicly-owned oil and gas exploration company with
retail gas stations and public drilling funds.
Gregory B. Shea has been Vice President-Development of the Managing General
Partner and President of Blue Ridge Builders, Inc., a residential/commercial
builder in Bowling Green, Warren County, Kentucky, a majority-owned subsidiary
of Blue Ridge Group, Inc., since November, 1994. He was elected a director of
the Managing General Partner in February, 1995. Between 1988 and 1994, he was
sales manager of the largest Infiniti car dealer in the United States in Tustin,
California. In 1994, he restructured the sales, management and operations of a
Ford dealer in Warrensburg, Missouri. Between 1981 and 1986, he attended the
University of North Texas. Mr. Shea is the son-in-law of Mr. Burr.
54
<PAGE>
Certain Shareholders of the Managing General Partner
The following tables set forth information as of June 30, 1997, with respect
to the common stock and preferred stock of the Managing General Partner which is
owned by each person who owns beneficially 5% or more of the outstanding voting
common stock, by all directors individually, and by all directors and officers
as a group.
Common Stock(1)
<TABLE>
<CAPTION>
Amount Beneficially Percent
Name Owned(2) of Class
- ---- ------------------- --------
<S> <C> <C>
Robert D. Burr 2,000,000(3) 36.76%
Russell L. Vera 2,000,000(3) 36.76%
Fred L. Tanner 502,400(4) 9.23%
Robert G. Buck 325,000(5) 5.97%
All Directors and Officers as a Group 2,000,000(6) 36.76%
- ---------------
</TABLE>
(1) There are 5,441,131 shares of Common Stock issued and outstanding as of the
date of this Prospectus.
(2) The nature of the beneficial ownership for all the shares is sole voting and
investment power.
(3) Includes options expiring on July 1, 1998, to purchase 250,000 shares
exercisable at any time. Russell L. Vera is a son-in-law of Robert D. Burr.
(4) Includes 502,400 shares to be received upon conversion of 251,200 shares of
Preferred Series A stock, which can be exercised at any time. The Preferred
Series A stock has full voting rights equivalent to the number of Common
Shares to be received at conversion.
(5) Includes 125,000 shares to be received upon conversion of 125,000 shares of
Preferred Series B stock, which can be exercised at any time. The Preferred
Series B stock has full voting rights equivalent to the number of Common
Shares to be received at Conversion.
(6) Includes options expiring on July 1, 1998, to purchase 250,000 shares
exercisable at any time. Until exercised, these options cannot be voted.
The following tables set forth information as of June 30, 1997, with respect
to the various classes of preferred stock of the Managing General Partner owned
by each person who owns beneficially 5% or more of the outstanding stock for
each class of preferred stock.
<TABLE>
<CAPTION>
Preferred Series A Stock(1)
Amount Beneficially Percent
Name Owned(2) of Class
- ---- ------------------- --------
<S> <C> <C>
Fred L. Tanner 251,200 47.33%
</TABLE>
- ------------
(1) Each share of Preferred Series A Stock may be converted into two shares of
Common Stock at anytime. The Preferred Series A Stock has full voting
rights equivalent to the number of shares of Common Stock to be received at
conversion. There are 530,700 shares of Preferred Series A Stock issued and
outstanding as of the date of the Prospectus. In the event of any
liquidation, dissolution or winding up of the Managing General Partner,
either voluntary or involuntary, the holders of Series A Stock shall be
entitled to receive, prior to and in preference to any distribution of any
assets or surplus funds of the Managing General Partner to the holders of
Common Stock, the amount of $1.00 per share plus all unpaid dividends on
such share of each share of Series A Stock then held by them.
(2) The nature of the beneficial ownership for all the shares is sole voting
and investment power.
<TABLE>
<CAPTION>
Preferred Series B Stock(1)
Amount Beneficially Percent
Name Owned(2) of Class
- ---- ------------------- --------
<S> <C> <C>
Robert G. Buck 125,000 100%
</TABLE>
- -------
(1) Each share of Preferred Series B Stock may be converted into one share of
Common Stock. The Preferred Series B Stock has full voting rights equivalent
to the number of shares of Common Stock to be received at conversion. There
are 125,000 shares of Series B Stock issued and outstanding as of the date
of this Prospectus. In the event of any liquidation, dissolution or winding
up of the Managing General Partner, either voluntary or involuntary, the
holders of Series B Stock shall be entitled to receive, prior and in
preference to any distribution of any assets or surplus funds of the
Managing General Partner to the holders of Common Stock, but subordinate to
the liquidation preference of the Series A Preferred Stock, the amount of
$1.00 per share plus all unpaid dividends on each share for each share of
Series B Stock held by them.
(2) The nature of the beneficial ownership for all the shares is sole voting and
investment power.
55
<PAGE>
Preferred Series C Stock(1)
<TABLE>
<CAPTION>
Amount Beneficially Percent
Name Owned(2) of Class
- ---- ------- --------
<S> <C> <C>
Carl D. Yeakey................. 3,333 100%
</TABLE>
- ---------------
(1) Each share of Preferred Series C Stock may be converted into one share of
Common Stock at anytime. The Preferred Series C Stock has full voting rights
equivalent to the number of shares of Common Stock to be received at
conversion. There are 3,333 shares of Preferred Series C Stock issued and
outstanding as of the date of this Prospectus. In the event of any
liquidation, dissolution or winding up of the Managing General Partner,
either voluntary or involuntary, the holders of the Series C Stock shall be
entitled to receive, prior and in preference to any distribution of any
assets or surplus funds to the holders of the Common Stock, but subordinate
to the liquidation preference of the Series A and Series B Preferred Stock,
the amount of $3.00 per share plus all unpaid dividends on such share for
each share of series C Stock held by them.
(2) The nature of the beneficial ownership for all the shares is sole voting and
investment power.
The Managing General Partner has outstanding 12% Convertible Bonds due April
1, 2004, in an aggregate principal amount of $2,255,000 (the "Bonds"). The Bonds
are convertible at any time into a maximum aggregate of 550,000 shares of Common
Stock of the Managing General Partner.
Remuneration
No officer or director of the Managing General Partner will receive any direct
remuneration or other compensation from the Partnerships. Such persons will
receive compensation solely from the Managing General Partner.
Legal Proceedings
The Managing General Partner as driller/operator is subject to certain legal
proceedings arising in the ordinary course of business. Such legal proceedings
are not considered material to the operations of the Managing General Partner or
the Partnership.
In May 1984, in connection with the sale of oil and gas securities, Robert D.
Burr, along with eight other individuals or entities, consented to an entry of a
permanent injunction in Caldwell County, Texas, forbidding future violations of
the securities and broker-dealer registration and anti-fraud provisions of the
Texas Securities Act. In connection with the events leading to the entry of the
permanent injunction, Lincoln Drilling, Inc., a corporation of which Robert D.
Burr was President, paid a fine of $500,000.
Russell Vera is the subject of a cease and desist order issued by the New
Mexico Securities Division on March 15, 1995 alleging violation in 1990 and 1991
of the securities and broker dealer registration and anti-fraud provisions of
the New Mexico Securities Act in connection with the sale of oil and gas
securities.
56
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
Certain Transactions
As of June 30, 1997, previous limited partnerships sponsored as private
placements by the Managing General Partner and its Affiliates had made payments
to the Managing General Partner or its Affiliates as follows:
<TABLE>
<CAPTION>
General and
Administrative
Non-recurring Sales Drilling and Expense
Name of Partnership Management Fee of Leases Completion Fees Reimbursement
- ------------------ -------------- --------- --------------- -------------
<S> <C> <C> <C> <C>
Ken-Tex Joint Venture $ 35,800 $262,000 $ 47,000 $44,000
Frio Trend Joint Venture 183,900 225,000 781,375 70,035
Bridge-Meek Joint Venture 86,172 125,000 557,321 18,562
Gulf Coast I Joint Venture 64,680 69,879 245,810 24,500
Stephens/Clear Creek Joint Venture 28,946 21,667 416,504 18,150
Elliott I/Clear Creek Joint Venture 17,100 21,130 481,277 19,580
Nebo West Joint Venture 118,625 40,000 457,651 82,252
Green River Joint Venture 23,000 25,000 341,743 19,212
North Lick Creek Joint Venture 27,500 20,640 369,042 19,475
MIC-TLE #7 Joint Venture 68,000 35,000 557,505 30,150
Otter Creek Joint Venture 23,125 30,000 329,586 15,963
Ruth Joint Venture #3 34,520 383,625 134,620 48,317
Helen Buck Joint Venture 41,820 469,400 201,832 23,900
Blue Ridge Production Fund (1) 66,380 753,220 295,325 37,935
Smackover/Woodbine I (1) 59,080 79,575 567,123 33,760
Paluxy Joint Venture (1) 40,100 20,000 613,900 22,950
</TABLE>
- ---------------
(1) Sponsored by the Managing General Partner's Affiliate, Blue Ridge Energy,
Inc.
Conflicts of Interest
. The Managing General Partner currently manages other oil and gas drilling
programs and owns oil and gas properties for its account, and in the future
expects to sponsor and manage other oil and gas drilling programs similar to
the Partnerships and continue to purchase and own oil and gas properties for
itself.
. The Managing General Partner decides which Prospects each Partnership will
acquire.
. The Managing General Partner will act as operator of the Partnerships; the
terms of the drilling and operating agreement have not been negotiated by
non-affiliated persons.
. The Managing General Partner will furnish drilling and completion services
with respect to Partnership wells.
. The Managing General Partner is general partner of numerous other
partnerships, and owes duties of good-faith dealing to such other
partnerships.
57
<PAGE>
. The Managing General Partner and Affiliates engage in significant drilling,
operating and producing activities for other partnerships and itself.
The Partnerships are subject to various conflicts of interest arising out of
their relationship with the Managing General Partner. These conflicts include,
but are not limited to, the following:
Future Programs by Managing General Partner and Affiliates. The Managing
General Partner has the right and expects to continue, to organize and manage
oil and gas drilling programs in the future similar to the subject Partnerships,
and to conduct operations now and in the future jointly or separately, on its
own behalf or for other private or public investors. Affiliates of the Managing
General Partner also intend to conduct such activities on their own behalf.
Officers, directors and employees of the Managing General Partner have
participated, and will participate in the future, at cost, in working interests
in wells in which the Managing General Partner and its partnerships participate.
To the extent Affiliates of the Managing General Partner invest in the
Partnerships or other partnerships sponsored by the Managing General Partner,
conflicts of interest will arise.
Fiduciary Responsibility of the Managing General Partner. The Managing
General Partner is accountable to the Partnership as fiduciary and consequently
has a duty to exercise good faith and to deal fairly with the investors in
handling the affairs of the Partnership. While the Managing General Partner will
endeavor to avoid conflicts of interest to the extent possible, such conflicts
nevertheless may occur and, in such event, the actions of the Managing General
Partner may not be the most advantageous to the Partnership and could fall short
of the full exercise of such fiduciary duty. In the event the Managing General
Partner should breach its fiduciary responsibilities, an Investor Partner would
be entitled to an accounting and to recover any economic losses caused by such
breach.
Independent Representation in Indemnification Proceeding. Counsel represents
the Managing General Partner. However, in the event of an indemnification
proceeding or lawsuit between the Managing General Partner and an Investor
Partner, the Managing General Partner upon advice of legal counsel may cause the
Partnership to retain separate and independent counsel to represent the
Partnership in such proceeding.
Managing General Partner's Interest . Although the Managing General Partner
believes that its interest in Partnership profits, losses and cash distributions
is equitable (See "Participation in Costs and Revenues"), such interest was not
determined by arm's-length negotiation.
Transactions between the Partnership and Operator. The Managing General
Partner will also act as Operator. Accordingly, although the Managing General
Partner believes the terms of the Drilling and Operating Agreement will be
equitable, it will not be the subject of arm's length negotiation. Furthermore,
the Managing General Partner may be confronted with a continuing conflict of
interest with respect to the exercise and enforcement of the rights of the
Partnership under such Operating Agreement.
Conflicting Drilling Activities. The Managing General Partner and its
Affiliates have engaged in significant drilling and producing activities for the
accounts of affiliated partnerships and themselves related to previous drilling
programs. In addition, the Managing General Partner and its Affiliates manage
and operate oil and gas properties for investors in such other drilling
programs. Although the Partnership Agreement attempts to minimize any potential
conflicts, the Managing General Partner will be in a position to decide whether
an oil and gas property will be retained or acquired for the account of the
Partnership, other drilling programs or itself which the Managing General
Partner or its Affiliates may presently operate or operate in the future, or
own.
Conflicts with Other Programs. The Managing General Partner realizes that its
conduct and the conduct of its Affiliates in connection with the other drilling
programs could give rise to a conflict of interest between the position of the
Managing General Partner as the managing general partner and the position of the
Managing General Partner or one of its Affiliates as general partner or sponsor
of such additional programs. In resolving any such conflicts, each Partnership
will be treated equitably with such other partnerships on a basis consistent
with the funds available to the partnerships and the time limitations on the
investment of funds. However, no provision has been made for
58
<PAGE>
an independent review of conflicts of interest. The Managing General Partner
believes that the possibility of conflicts of interest between the Partnership
and prior programs is minimized by the fact that substantially all the funds
available to prior drilling programs in which the Managing General Partner or an
Affiliate serves as general partner have been committed to a specific drilling
program.
The Managing General Partner follows a policy of developing next what it
judges to be the best available Prospect. Acquisition of new Leases and
information derived from wells already drilled result in a constant change in
this assessment. Only one investor-financed partnership may participate in each
well, except for the first and final partnership well if funds with respect to
the last well do not exist for the purchase of a majority working interest. The
Managing General Partner anticipates that generally only one Partnership will be
actively engaged in drilling at any time. However, in the event more than one
Partnership has funds available for drilling, the Partnerships will alternate
drilling of wells based on the "reasonably best available prospect" format. The
determination of the "best available Prospect" is based on the Managing General
Partner's assessment of the economic potential of a Prospect and its suitability
to a particular partnership, and considers various factors including estimated
reserves, target geological formations, gas markets, geological and gas market
diversification within the partnership, royalties and overrides on the Prospect,
estimated lease and well costs and limitations imposed by the prospectus and/or
partnership agreements.
The Partnership Agreement authorizes the Managing General Partner to cause the
Partnership to acquire undivided interests in oil and/or gas properties, and to
participate with other parties, including other drilling programs heretofore or
hereafter conducted by the Managing General Partner or its Affiliates, in the
conduct of exploration and drilling operations thereon. Because the Managing
General Partner must deal fairly with the investors in all of its drilling
programs, if conflicts between the interest of the Partnership and such other
drilling programs do arise, they may not in every instance be resolved to the
maximum advantage of the Partnership.
From time to time, the Managing General Partner may cause Partnership
Prospects to be enlarged or contracted on the basis of geological data to define
the productive limits of any pool discovered. The Partnership is not required to
expend additional funds for the acquisition of property unless such acquisition
can be made from the Capital Contributions. In the event such property is not
acquired by the Partnership, the Partnership may lose a promising Prospect.
Except as otherwise provided by the Partnership Agreement, such Prospect might
be acquired by the Managing Partner or an Affiliate thereof or other drilling
programs conducted by them.
In addition, subject to the restrictions set forth below, the Managing General
Partner in its sole discretion decides which Prospects and what interest therein
to transfer to the Partnership. This may result in another drilling program
sponsored by the Managing General Partner acquiring property adjacent to
Partnership property. Such other program could gain an advantage over the
Partnership by reason of the knowledge gained through the Partnership's prior
experience in the area or if such other drilling program were the first to
discover or develop a productive pool of oil or gas.
Acquisition of Prospects. The Managing General Partner has discretion in
selecting leases to be acquired by the Partnership from the Managing General
Partner or its Affiliates or third parties and the location and type of
operations which the Partnership will conduct on such leases. Certain of such
leases may be part of the Managing General Partner's existing inventory,
although no leases have been designated for inclusion in the Partnership at the
present time. Neither the Managing General Partner nor any Affiliate will retain
undeveloped acreage adjoining a Partnership Prospect in order to use Partnership
funds to "prove up" the acreage owned for its own account.
Whenever the Managing General Partner sells, transfers or conveys an interest
in a Prospect to a particular Partnership, it must, at the same time, sell to
the Partnership an equal proportionate interest in all of its Leases in the same
Prospect (except any interest in producing wells). If the Managing General
Partner or an Affiliate (except another affiliated limited partnership in which
the interest of the Managing General Partner or its Affiliates is identical or
less than their interest in the Partnerships) subsequently proposes to acquire
an interest in a Prospect in which a Partnership possesses an interest or in a
Prospect abandoned by the Partnership within one year preceding
59
<PAGE>
such Prospect acquisition, the Managing General Partner or such Affiliate will
offer an equivalent interest therein to the Partnership. See "Risk Factors--
Special Risks of the Partnerships--Conflicts of Interest Between Managing
General Partner and Partnerships." The term "abandon" means the termination,
either voluntarily or by operation of the Lease or otherwise, of all of a
Partnership's interest in the Prospect. These limitations will not apply after
the lapse of five years from the date of formation of a Partnership.
A sale, transfer or conveyance to the Partnership of less than all of the
Managing General Partner's or its Affiliates' interest in any Prospect is
prohibited unless the interest retained by the Managing General Partner or its
Affiliates is a proportionate Working Interest, the respective obligations of
the Partnership and the Managing General Partner or its Affiliates are
substantially the same immediately after the sale of the interest, and the
Managing General Partner's or its Affiliates' interest in revenues does not
exceed an amount proportionate to the retained Working Interest. Neither the
Managing General Partner nor its Affiliates will retain any Overriding Royalty
Interests or other burdens on the Lease interests conveyed to the Partnerships,
and will not enter into any Farmout arrangements with respect to its retained
interest, except to nonaffiliated third parties.
The Partnerships will acquire only those Leases reasonably expected to meet
the stated purposes of the Partnerships. The Partnerships will not acquire any
Lease for the purpose of a subsequent sale or farmout unless the acquisition is
made after a well has been drilled to a depth sufficient to indicate that such
an acquisition would be in the Partnerships' reasonable best interest. The
Managing General Partner expects that the Partnership will develop substantially
all of its Leases and will farm out few, if any, Leases. The Partnerships will
not farm out, sell or otherwise dispose of Leases unless the Managing General
Partner, exercising the standard of a prudent operator, determines that: (a) a
Partnership lacks sufficient funds to drill on the Lease and cannot obtain
suitable alternative financing; (b) downgrading subsequent to a Partnership's
acquisition has rendered drilling undesirable; (c) drilling would concentrate
excessive funds in one location creating undue risk to a Partnership; or (d) the
best interest of a Partnership, based on the standard of a prudent operator,
would be served by such disposition. In the event of a farmout, the Managing
General Partner will retain for the Partnerships such economic interests and
concessions as a reasonably prudent operator would retain under the
circumstances. The Managing General Partner will not farmout a Lease for the
primary purpose of avoiding payments of its Partnership share of costs of
drilling thereon. However, the decision with respect to making farmouts and the
terms thereof involve conflicts of interest because the Managing General Partner
may benefit from cost savings and reduction of risk, and in the event of a
farmout to an affiliated limited partnership or other Affiliate, the Managing
General Partner or its Affiliates will represent both related entities.
Transactions with the Managing General Partner or Affiliates Thereof. The
Managing General Partner will furnish drilling and completion services with
respect to all of the Partnership wells. In addition, the Managing General
Partner will act as operator for the producing wells of the Partnership. The
prices to be charged the Partnership for such supplies and services will be
competitive with the prices of other unaffiliated persons in the same geographic
area engaged in similar businesses. There will be a review by the Managing
General Partner's independent accountants of the charges to the Partnerships by
the Managing General Partner and its Affiliates for services and supplies.
Neither the Managing General Partner nor any Affiliate thereof will render to
the Partnership any oil or gas field, equipage or other services nor sell or
lease to the Partnership any equipment or related supplies unless such person is
engaged, independently of the Partnership and as an ordinary and ongoing
business, in the business of rendering such services or selling or leasing such
equipment and supplies to a substantial extent to other persons in the gas
industry in addition to partnerships in which the Managing General Partner or
its Affiliate has an interest, or, if such person is not engaged in such a
business then such compensation, price or rental will be the cost of such
services, equipment or supplies to such person or the competitive rate which
could be obtained in the area, whichever is less. Notwithstanding any provision
to the contrary the Managing General Partner and its Affiliates may not profit
by drilling in contravention of their fiduciary obligations to the Investor
Partners. Any services not otherwise described in this Prospectus for which the
Managing General Partner or any of its Affiliates are to be compensated will be
60
<PAGE>
embodied in a written contract which precisely describes the services to be
rendered and the compensation to be paid.
All benefits from marketing arrangements or other relationships affecting the
property of the Managing General Partner or its Affiliates and the Partnerships
will be fairly and equitably apportioned according to the respective interest of
each.
Partnership funds will not be commingled with those of any other entity.
No loans may be made by the Partnership to the Managing General Partner or any
Affiliate thereof. The Managing General Partner will not loan funds to its
Directors and Officers on terms other than those which it believes could be
obtained from a third party.
The Managing General Partner or any Affiliate, other than other programs
sponsored by the Managing General Partner or its Affiliates, may not purchase
the Partnerships' producing properties.
Conflict in Establishing Unit Repurchase Price. Under the Managing General
Partner's Unit Repurchase Program (See "Terms of the Offering--Unit Repurchase
Program" above), the Managing General Partner, once it has received a request
from an Investor Partner that the Managing General Partner repurchase the
Partner's Units, will establish an offering price. An offering price established
by the Managing General Partner will be arbitrarily determined by the Managing
General Partner and will not necessarily represent the fair market value of the
Units. The Managing General Partner in setting the price will consider its
available funds and its desire to acquire production as represented by the
Units. A conflict will arise in that the price to be set will be that which the
Managing General Partner considers to be in its own best reasonable interest
(and thereby keep the repurchase price as low as possible) and not necessarily
in the best interest of the Investor Partner who is presenting the Units for
repurchase.
Transactions with the Dealer-Manager. The Managing General Partner subsidizes
certain aspects of the operation of the Dealer-Manager, including telephone,
postage and delivery services costs. Such payments may be considered as
additional compensation to the Dealer-Manager. Melissa Vera, the majority owner
of Ridgemont Securities, Inc., is the daughter of Robert D. Burr, the President
of the Managing General Partner.
61
<PAGE>
FIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNER
. The Managing General Partner is accountable to the Partnerships as a
fiduciary and must exercise good faith respecting the Partnerships.
. The Partnership Agreement includes provisions indemnifying the Managing
General Partner against liability for losses suffered by the Partnership
resulting from actions by the Managing General Partner.
The Managing General Partner is accountable to the Partnerships as a fiduciary
and consequently must exercise good faith and integrity in handling Partnership
affairs. Under Kentucky law, the Managing General Partner will owe the Investor
Partners a duty of good faith, fairness and loyalty. In this regard, the
Managing General Partner is required to supervise and direct the activities of
the Partnership prudently and with that degree of care, including acting on an
informed basis, which an ordinarily prudent person in a like position would use
under similar circumstances. Moreover, the Managing General Partner must act at
all times in the reasonable best interests of the Partnership and the Investor
Partners. Since the law in this area is rapidly developing and changing,
investors who have questions concerning the responsibilities of the Managing
General Partner should consult their own counsel. Where the question has arisen,
courts have held that a limited partner may institute legal action on behalf of
himself and all other similarly situated limited partners (a class action) to
recover damages for a breach by a general partner of his fiduciary duty, or on
behalf of the partnership (a partnership derivative action) to recover damages
from third parties. In addition, limited partners may have the right, subject to
procedural and jurisdictional requirements, to bring partnership class actions
in federal courts to enforce their rights under the federal securities laws.
Further, limited partners who have suffered losses in connection with the
purchase or sale of their interests in a partnership may be able to recover such
losses from a general partner where the losses result from a violation by the
general partner of the antifraud provisions of the federal securities laws. The
burden of proving such a breach, and all or a portion of the expense of such
lawsuit, would have to be borne by the limited partner bringing such action. In
the event of a lawsuit for a breach of its fiduciary duty to the Partnership
and/or the Investor Partners, the Managing General Partner, depending upon the
particular circumstances involved, might be able to avail itself under Kentucky
law of various defenses to the lawsuit, including statute of limitations,
estoppel, laches, and doctrine such as the "clean hands" doctrine.
The Partnership Agreement provides for indemnification of the Managing General
Partner against liability for losses arising from the action or inaction of the
Managing General Partner, if the Managing General Partner, in good faith,
determined that such course of conduct was in the reasonable best interests of
the Partnership and such course of conduct did not constitute negligence or
misconduct of the Managing General Partner. The Managing General Partner may not
be indemnified for any such liability arising out of a breach of its duty to the
Partnership or the negligence, fraud, bad faith or misconduct of the Managing
General Partner in the performance of its fiduciary duty. The Partnership
Agreement provides for indemnification of the Managing General Partner by the
Partnership for any losses, judgments, liabilities, expenses and amounts paid in
settlement of any claims sustained by it in connection with the Partnership,
provided that the same were not the result of negligence or misconduct on the
part of the Managing General Partner. Nevertheless, the Managing General Partner
shall not be indemnified for liabilities arising under federal and state
securities laws unless (1) there has been a successful adjudication on the
merits of each count involving securities law violations or (2) such claims have
been dismissed with prejudice on the merits by a court of competent jurisdiction
or (3) a court of competent jurisdiction approves a settlement of such claims
against a particular indemnitee and finds that indemnification of the settlement
and the related costs should be made, and the court considering the request for
indemnification has been advised of the position of the Securities and Exchange
Commission and of the position of any state securities regulatory authority in
which securities of the Partnership were offered or sold as to indemnification
for violations of securities laws; provided, however, the court need only be
advised of the positions of the securities regulatory authorities of those
states (i) which are specifically set forth in the Prospectus and (ii) in which
plaintiffs claim they were offered or sold Partnership Units. A successful claim
for indemnification would deplete Partnership assets by the amount paid.
62
<PAGE>
As a result of such indemnification provisions, a purchaser of Units may have a
more limited right of legal action than he would have if such provision were not
included in the Partnership Agreement. To the extent that the indemnification
provisions purport to include indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act"), in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable.
The Partnership Agreement also provides that the Partnership shall not incur
the cost of the portion of any insurance which insures any party against any
liability as to which such party is prohibited from being indemnified.
PRIOR ACTIVITIES
Prior Partnerships
The Managing General Partner and its Affilates have previously sponsored 16
private programs with which it has raised a total of approximately $12,500,000.
The Program is the first public drilling program sponsored by the Managing
General Partner.
Each of the prior programs has had as its objective the drilling, completion
and production of oil and gas from exploratory and development wells. All funds
raised for previous partnerships were spent according to plans as described in
the private placement memorandum. Eight of the partnerships continue in
operation, with monthly cash distributions to investors in six programs
continuing. All of the previous programs realized the anticipated tax benefits,
and to date the Service has neither audited any partnership nor challenged any
deductions or credits claimed by investors, to the best of the Managing General
Partner's knowledge.
FOR SEVERAL REASONS, INCLUDING THE UNPREDICTABILITY OF OIL AND GAS DEVELOPMENT
AND PRICING AND DIFFERENCES IN PROPERTY LOCATIONS, PROGRAM SIZE, AND ECONOMIC
CONDITIONS, OPERATING RESULTS OBTAINED BY THESE PRIOR PARTNERSHIPS SHOULD NOT BE
CONSIDERED AS INDICATIVE OF THE OPERATING RESULTS OBTAINABLE BY THE
PARTNERSHIPS. IT SHOULD NOT BE ASSUMED THAT INVESTOR PARTNERS IN THE OFFERING
COVERED BY THIS PROSPECTUS WILL EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE
EXPERIENCED BY INVESTORS IN PRIOR PROGRAMS.
63
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
The following table is presented to indicate certain sale characteristics
concerning previous oil and gas limited partnerships sponsored by the Managing
General Partner and its Affiliates.
<TABLE>
<CAPTION>
Date of Date of First Number Price Subscriptions
Partnership Revenue of Units Per From Previous
Partnership Formation Distribution Sold Unit Participants Assessment
- ----------- ----------- ------------- -------- ------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ken-Tex Joint Venture 10/22/93 06/08/94 41.50 $10,000 $ 415,000 $ 43,700
Frio Trend Joint Venture 01/21/94 09/19/94(1) 73.86 10,000 738,600 715,525
Bridge-Meek Joint Venture 04/26/94 01/27/94(1) 76.25 10,000 762,500 206,760
Gulf Coast I Joint Venture 09/22/94 12/06/95(1) 43.00 9,800 421,400 45,850
Stephens/Clear Creek Joint Venture 11/07/94 None 44.87 9,800 439,700 139,500
Elliott I/Clear Creek Joint Venture 01/03/95 05/10/96 59.00 9,800 578,200 43,250
Nebo West Joint Venture 02/17/95 01/24/96 49.50 12,000 594,000 198,000
Green River Joint Venture 05/05/95 None(1) 47.50 10,000 475,000 -
North Lick Creek Joint Venture 06/28/95 None(1) 59.42 7,500 445,625 83,621
MIC-TLE #7 Joint Venture 08/30/95 05/10/96 76.00 10,000 760,000 148,750
Otter Creek Joint Venture 09/18/95 None(2) 44.50 10,500 467,250 -
Ruth Joint Venture #3 12/04/95 01/09/96 34.88 20,000 697,500 -
Helen Buck Joint Venture #1 01/16/96 05/10/96 42.25 20,000 845,000 -
Blue Ridge Energy Production Fund(3) 08/20/96 11/10/96 111.75 10,000 1,117,500 223,500
Smackover/Woodbine I(3) 10/17/96 None 118.50 10,000 1,185,000 -
Paluxy Joint Venture (3) 2/24/97 None 80.75 10,000 807,500 -
</TABLE>
- ---------------
(1) Partnership was terminated as of December 31, 1995.
(2) Partnership was terminated as of December 31, 1996.
(3) Sponsored by the Managing General Partner's Affiliate, Blue Ridge Energy,
Inc.
64
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
Previous Drilling Activities
The following table reflects the drilling activity of previous limited
partnerships sponsored by the Managing General Partner and its Affiliates as of
June 30, 1997.
<TABLE>
<CAPTION>
Productive Well Table
Gross Wells(1)
--------------
Exploratory Developmental
Number
Partnership of Wells Oil Gas Dry Oil Gas Dry
- ----------- -------- --- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C> <C>
Ken-Tex Joint Venture 3 1 1 - 1 - -
Frio Trend Joint Venture 5 - 3 2 - - -
Bridge-Meek Joint Venture 5 - - - 3 2 -
Gulf Coast I Joint Venture 7 1 - 5 1 - -
Stephens/Clear Creek Joint Venture 11 - - 11 - - -
Elliott I/Clear Creek Joint Venture 8 - - - 8 - -
Nebo West Joint Venture 6 2cf - 1 3 - -
Green River Joint Venture 3 - - 3 - - -
North Lick Creek Joint Venture 3 - - 3 - - -
MIC-TLE #7 Joint Venture 8 - - - 8 - -
Otter Creek Joint Venture 3 - - 2 - 1 -
Ruth Joint Venture #3 3 - - - 3 - -
Helen Buck Joint Venture #1 6 - - - 6 - -
Blue Ridge Energy Production Fund(3) 8 - - - 8 - -
Smackover/Woodbine I(3) 1 - - 1 - - -
Paluxy Joint Venture (3) 1 - - - 1 - -
cf = Completion Failure
Net Wells(2)
------------
Ken-Tex Joint Venture 2.13 0.75 0.63 - 0.75 - -
Frio Trend Joint Venture 2.50 - 1.50 1.00 - - -
Bridge-Meek Joint Venture 2.50 - - - - 1.50 1.00
Gulf Coast I Joint Venture 6.30 0.90 - 4.50 0.90 - -
Stephens/Clear Creek Joint Venture 9.45 - - 9.45 - - -
Elliott I/Clear Creek Joint Venture 2.62 - - - 2.62 - -
Nebo West Joint Venture 0.60 0.20cf - 0.10 0.30 - -
Green River Joint Venture 1.80 - - 1.80 - - -
North Lick Creek Joint Venture 1.80 - - 1.80 - - -
MIC-TLE #7 Joint Venture 3.40 - - - 3.40 - -
Otter Creek Joint Venture 1.80 - - 1.20 - 0.60 -
Ruth Joint Venture #3 1.86 - - - 1.86 - -
Helen Buck Joint Venture #1 3.59 - - - 3.59 - -
Blue Ridge Energy Production Fund (3) 6.40 - - - 6.40 - -
Smackover /Woodbine I(3) 0.75 - - 0.75 - - -
Paluxy Joint Venture (3) 0.72 - - - 0.72 - -
cf = Completion Failure
</TABLE>
- ---------
(1) Gross wells include all wells in which the partnerships owned a Working
Interest.
(2) Net wells are the number of gross wells multiplied by the percentage Working
Interest owned by the partnerships in the gross wells.
(3) Sponsored by the Managing General Partner's Affiliate, Blue Ridge Energy,
Inc.
65
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
Location of Previous Drilling Activities
The following table summarizes the location of the aforementioned oil and gas
exploration activities of the previously sponsored partnerships of the Managing
General Partner and its Affiliates sold through private placements as of June
30, 1997.
<TABLE>
<CAPTION>
Partnership Number --- Located In---
- ----------- of Wells Counties States
-------- -------- ------
<S> <C> <C> <C>
Ken-Tex Joint Venture 3 Victoria & Jackson TX
Frio Trend Joint Venture 5 Victoria, Jackson & Goliad TX
Bridge-Meek Joint Venture 5 Victoria TX
Clinton KY
Gulf Coast I Joint Venture 7 Live Oak TX
Clinton KY
Stephens/Clear Creek Joint 11 Elliott, Todd, Logan & Christian
Venture KY
Elliott I/Clear Creek 8 Frio TX
Joint Venture Hopkins KY
Nebo West Joint Venture 6 Frio TX
Hopkins KY
Green River Joint Venture 3 McLean KY
North Lick Creek Joint 3 Henderson KY
Venture
MIC-TLE #7 Joint Venture 8 Frio TX
Hopkins KY
Otter Creek Joint Venture 3 Hopkins KY
Ruth Joint Venture #3 3 Frio TX
Helen Buck Joint Venture #1 6 Frio TX
Blue Ridge Energy 8 Fayette TX
Production Fund(1)
Smackover/Woodbine I(1) 1 Navarro TX
Paluxy Joint Venture(1) 1 Smith TX
</TABLE>
- -------
(1) Sponsored by the Affiliate of the Managing General Partner, Blue Ridge
Energy, Inc.
66
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
Payout and Net Cash Tables
The following tables provide information concerning the operating results of
previous limited partnerships sponsored by the Managing General Partner and its
Affiliates as of June 30, 1997.
Participants' Payout Table
<TABLE>
<CAPTION>
Revenues Before Deducting
Operating Costs(3)
------------------
Total
Expenditures
Investors' Including During Six
Funds Operating Total As of Months Ended
Partnership Invested(1) Costs(2) June 30, 1997 June 30, 1997
----------- ----------- ---------- -------------- --------------
<S> <C> <C> <C> <C>
Ken-Tex Joint Venture 309,000 492,672 95,288 0
Frio Trend Joint Venture 1,006,375 1,496,071 110,124 --(8)
Bridge-Meek Joint Venture 682,321 992,185 45,226 --(8)
Gulf Coast I Joint Venture 315,689 481,925 916 --(8)
Stephens/Clear Creek Joint Venture 438,171 579,200 0 0
Elliott I/Clear Creek Joint Venture(4) 502,407 623,297 55,743 6,495
Nebo West Joint Venture(4) 497,651 804,836 37,632 3,462
Green River Joint Venture 366,743 475,000 0 --(8)
North Lick Creek Joint Venture 389,682 529,245 0 --(8)
MIC-TLE #7 Joint Venture(5) 592,505 910,946 64,680 7,558
Otter Creek Joint Venture 359,586 467,250 0 --(11)
Ruth Joint Venture #3(6) 518,245 709,953 202,822 20,139
Helen Buck Joint Venture #1(7) 671,232 881,478 141,577 53,466
Blue Ridge Production
Fund(9)(10) 1,048,545 1,505,972 202,840 110,188
Smackover/Woodbine I(10) 646,698 919,243 0 0
Paluxy Joint Venture(10)(12) 633,980 811,030
</TABLE>
(1) Total Subscriptions applied toward drilling and related activites (less
commissions, management fee and offering costs).
(2) Includes total of subscriptions, assessments, inclusive of operating costs.
Funds advanced include the 1% Managing Partner interest along with Funds
advanced to purchase additional partnership units in order to complete the
offering. None of the partnerships has borrowed any funds.
(3) Represents accrued gross revenues credited to the participants from oil and
gas revenues net of royalties to landowners, Overriding Royalty Interest
and other burdens, excluding interest income.
(4) Partnership funded in February, 1995; wells drilled in the third and fourth
quarters of 1995; first revenue distribution commenced in January or May,
1996.
(5) Partnership funded in September, 1995; wells were drilled in the third and
fourth quarters of 1995; first revenue distribution commenced in May, 1996.
(6) Partnership funded in December, 1995; wells were drilled in the fourth
quarter of 1995 and first quarter of 1996; first revenue distribution
commenced in January, 1996.
(7) Partnership funded in January, 1996; wells were drilled in first quarter of
1996; first revenue distribution commenced in May, 1996.
(8) Partnership terminated as of December 31, 1995.
(9) Partnership funded in September, 1996; first revenue distribution in
November, 1996.
(10) Sponsored by the Managing General Partner's Affiliate Blue Ridge Energy,
Inc.
(11) Partnership terminated as of December 31, 1996.
(12) Partnership formed in February, 1997, drilling and completion activities in
progress.
67
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
Participants' Net Cash Table
June 30, 1997
<TABLE>
<CAPTION>
Total Revenues
After Deducting Cash
Operating Costs(3) Distributions(4)
------------------ ----------------
Total Total Six Total Six
Expenditures As of Months As of Months
Investors' Net of December Ended December Ended
Funds Operating 31, June 30, 31, June 30,
Partnership Invested(1) Costs(2) 1996 1997 1996 1997
- ----------- ----------- -------- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ken-Tex Joint Venture $ 309,000 $ 458,700 $ 61,316 $ 0 $ 61,316 $ 0
Frio Trend Joint Venture 1,006,375 1,454,125 68,178 --(6) 68,178 --(6)
Bridge-Meek Joint Venture 682,321 969,260 22,301 --(6) 22,301 --(6)
Gulf Coast I Joint Venture 315,689 467,250 916 --(6) 916 --(6)
Stephens/Clear Creek Joint Venture 438,171 579,200 0 0 0 0
Elliott I/Clear Creek Joint Venture 502,407 621,450 30,553 4,887 30,553 4,887
Nebo West Joint Venture 497,651 792,000 27,252 2,764 27,252 2,764
Green River Joint Venture 366,743 475,000 0 --(6) 0 --(6)
North Lick Creek Joint Venture 389,682 529,245 0 --(6) 0 --(6)
MIC-TLE #7 Joint Venture 592,505 908,750 29,467 4,713 29,467 4,713
Otter Creek Joint Venture 359,586 467,250 0 --(9) 0 --(9)
Ruth Joint Venture #3 518,245 697,500 171,477 18,892 171,477 18,892
Helen Buck Joint Venture #1(5) 671,232 864,112 89,072 35,139 89,023 35,139
Blue Ridge Energy 1,048,545 1,410,549 49,256 50,291 49,256 50,291
Production Fund(7)(8)
Smackover/Woodbine I (8) 646,698 919,243 0 0 0 0
Paluxy(8)(10) 633,980 811,030 0 0 0 0
</TABLE>
- ------------------
(1) Total Subscriptions, less commissions, management fee and offering costs.
(2) Includes the total of the subscriptions, assessments, exclusive of
operating costs. Funds advanced include the 1% Managing Partner interest
along with Funds advanced to purchase additional partnership units in order
to complete the offering. None of the partnerships has borrowed any funds.
(3) Represents the accrued gross revenues credited from oil and gas production,
less operating costs, Landowners' Royalty Interests, Overriding Royalty
Interest and other burdens.
(4) Represents the net cash distributed to the partnerships. All cash
distributions to the partners were made from operations and constituted
ordinary income.
(5) Partnership funded in January, 1996; wells were drilled in the first
quarter of 1996; first revenue distribution commenced in May, 1996.
(6) Partnership terminated as of December 31, 1995.
(7) Partnership funded in September, 1996; first revenue distribution in
November, 1996.
(8) Sponsored by the Managing General Partner's Affiliate, Blue Ridge Energy,
Inc.
(9) Partnership terminated as of December 31, 1996.
(10) Partnership formed in February, 1997, drilling and completion activities in
progress.
68
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
Managing General Partner's Payout Table
June 30, 1997
<TABLE>
<CAPTION>
Revenues Before Deducting
Operating Costs(2)
------------------
Total Expenditures During Six
Including Total As of Months Ended
Partnership Operating Costs(1) December 31, 1996 June 30, 1997
- ----------- ------------------ ----------------- --------------
<S> <C> <C> <C>
Ken-Tex Joint Venture $120,440 952 0
Frio Trend Joint Venture 311,545 1,101 --(7)
Bridge-Meek Joint Venture 121,819 452 --(7)
Gulf Coast I Joint Venture 41,495 9 --(7)
Stephens/Clear Creek Joint Venture 7,105 0 0
Elliott I/Clear Creek Joint Venture(3) 10,749 557 65
Nebo West Joint Venture(3) 8,048 376 35
Green River Joint Venture 14,850 0 --(7)
North Lick Creek Joint Venture 15,946 0 --(7)
MIC-TLE #7 Joint Venture(4) 31,488 646 76
Otter Creek Joint Venture 4,673 0 --(10)
Ruth Joint Venture #3(5) 7,107 2,028 201
Helen Buck Joint Venture #1(6) 19,357 3,524 1,712
Blue Ridge Energy 15,934 2,028 1,102
Production Fund(8)(9)
Smackover/Woodbine I(9) 20,688 0 0
Paluxy Joint Venture(9)(11) 8,110 0 0
</TABLE>
- ----------------
(1) Includes total of funds advanced by the Managing General Partner to the
general or limited partnerships inclusive of operating costs for its
interests. Funds advanced include the 1% Managing Partner interest along
with Funds advanced to purchase additional partnership units in order to
complete the offering.
(2) Represents accrued gross revenues credited to the Managing General Partner
from oil and gas revenues net of royalties to landowners, Overriding
Royalty Interest and other burdens, excluding interest income.
(3) Partnership funded in February, 1995; wells drilled in the third and fourth
quarters of 1995; first revenue distribution commenced in May, 1996.
(4) Partnership funded in September, 1995; wells were drilled in the third and
fourth quarters of 1995; first revenue distribution commenced in May, 1996.
(5) Partnership funded in December, 1995; wells were drilled in the fourth
quarter of 1995 and first quarter of 1996; first revenue distribution
commenced in January, 1996.
(6) Partnership funded in January, 1996; wells were drilled in first quarter of
1996; first revenue distribution commenced in May, 1996.
(7) Partnership terminated as of December 31, 1995.
(8) Partnership funded in September, 1996; first revenue distribution in
November, 1996.
(9) Sponsored by the Managing General Partner's Affiliate, Blue Ridge Energy,
Inc.
(10) Partnership terminated as of December 31, 1996.
(11) Partnership formed in February, 1997, drilling and completion activities in
progress.
69
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
Managing General Partner's Net Cash Table
June 30, 1997
<TABLE>
<CAPTION>
Total Revenues
After Deducting Cash
Operating Costs(2) Distributions(3)
------------------ ---------------
Total
Expenditures
Net of Total As of Six Total As of Six
Operating December 31, Months Ended December 31, Months Ended
Partnership Costs(1) 1996 June 30, 1997 1996 June 30, 1997
- ----------- ------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Ken-Tex Joint Venture $120,100 $ 613 $ 0 $ 613 $ 0
Frio Trend Joint Venture 311,125 682 --(5) 682 --(5)
Bridge-Meek Joint Venture 121,590 223 --(5) 223 --(5)
Gulf Coast I Joint Venture 41,495 9 --(5) 9 --(5)
Stephens/Clear Creek Joint 7,105 0 0 0 0
Venture
Elliott I/Clear Creek 10,498 306 49 306 49
Joint Venture
Nebo West Joint Venture 7,945 273 28 273 28
Green River Joint Venture 14,850 0 --(5) 0 --(5)
North Lick Creek Joint 15,946 0 --(5) 0 --(5)
Venture
MIC-TLE #7 Joint Venture 31,137 295 47 295 47
Otter Creek Joint Venture 4,673 0 --(8) 0 --(8)
Ruth Joint Venture #3 6,794 1,715 189 1,715 189
Helen Buck Joint Venture 18,450 2,912 1,417 2,912 1,417
#1(4)
Blue Ridge Energy 13,800 493 503 493 503
Production Fund(6)(7)
Smackover/Woodbine I(7) 20,688 0 0 0 0
Paluxy Joint Venture(7)(9) 8,110 0 0 0 0
</TABLE>
(1) Includes the total funds advanced by the Managing General Partner to the
general or limited partnerships, net of operating costs. Funds advanced
include the 1% Managing Partner interest along with Funds advanced to
purchase additional partnership units in order to complete the offering.
(2) Represents the accrued gross revenues credited from oil and gas production,
excluding operating costs, Landowners' Royalty Interests, Overriding Royalty
Interest and other burdens.
(3) Represents the net cash distributed to the Managing General Partner. All
cash distributions to the Managing General Partner were made from operations
and constituted ordinary income.
(4) Partnership funded in January, 1996; wells were drilled in the first quarter
of 1996; first revenue distribution commenced in May, 1996.
(5) Partnership was terminated as of December 31, 1995.
(6) Partnership funded in September, 1996; first revenue distribution in
November, 1996.
(7) Sponsored by the Managing General Partner's Affiliate, Blue Ridge Energy,
Inc.
(8) Partnership terminated as of December 31, 1996.
(9) Partnership formed in February, 1997, drilling and completion activities in
progress.
70
<PAGE>
PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
Tax Deductions and Tax Credits of Participants in Previous Partnerships
The following table reflects the participants' share of the previous
partnerships' available tax deductions that were reported in the partnerships'
tax returns and such share of tax deductions as a percentage of their
subscriptions. The following percentages do not reflect the effect of the
revenues from the partnerships' operations and are subject to audit adjustments
by the Service. The following table is based on past experience and should not
be considered as necessarily indicative of the results that may be expected in
these partnerships. It is suggested that prospective subscribers consult with
their tax advisors concerning their specific tax circumstances and the tax
benefits available to them individually, which may materially vary in various
circumstances.
<TABLE>
<CAPTION>
First Year Aggregate Estimated
Tax Deductions Federal Tax
Partnership Deductions Thereafter Savings(1)
- ----------- ------------ ---------- -----------
<S> <C> <C> <C>
Ken-Tex Joint Venture $ 232,214 $226,486 $181,645
Frio Trend Joint Venture 1,248,187 205,938 575,833(3)
Bridge-Meek Joint Venture 530,728 438,532 383,827(3)
Gulf Coast #1 Joint Venture 333,314 148,611 190,842(3)
Stephens/Clear Creek Joint Venture 313,314 169,487 191,189
Elliott I/Clear Creek Joint Venture 489,861 10,459 198,126
Nebo West Joint Venture 544,698 65,389 241,594
Green River Joint Venture 475,000 0 188,100(3)
North Lick Creek Joint Venture 529,245 0 209,581(3)
MIC-TLE #7 Joint Venture 591,578 136,122 288,169
Otter Creek Joint Venture 387,920 79,330 185,031(5)
Ruth Joint Venture #3 127,228 83,077 83,281
Helen Buck Joint Venture #1(2) 301,150 0 119,255
Blue Ridge Energy Production Fund(4) 442,417 0 175,197
Smackover/Woodbine I(4) 626,258 0 247,998
</TABLE>
- ---------------
(1) The Estimated Federal Tax Savings column reflects the savings in taxes which
would have been paid by an investor had he not had the use of the various
deductions and credits available to a Partner in the Program and it assumes
full use of deductions and tax credits at maximum federal tax rates of 39.6%
in 1994, 1995 and 1996.
(2) Partnership was funded and began operations in the first quarter of 1996.
Therefore, no tax returns have been filed.
(3) Partnership was terminated as of December 31, 1995.
(4) Sponsored by the Managing General Partner's Affiliate, Blue Ridge Energy,
Inc.
(5) Partnership was terminated as of December 31, 1996.
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PRIOR HISTORY NOT INDICATIVE OF FUTURE RESULTS
Percentage of Return on Subscriptions
From Cash Distributions, Tax Savings from Deductions
and Tax Credits(1)
Through June 30, 1997
<TABLE>
<CAPTION>
Total Returns
Percentage Cash Tax of Cash, Tax
Partnership Distributions to Deductions, Deductions and Years in
- ----------- Date(2) Tax Effected(3) Credits(4) Production
--------------- --------------- --------------- ----------
<S> <C> <C> <C> <C>
Ken-Tex Joint Venture 13.36% 39.60% 52.96% 3
Frio Trend Joint Venture 4.69 39.60 44.29 2(6)
Bridge-Meek Joint Venture 2.30 39.60 41.90 2(6)
Gulf Coast I Joint Venture 0.19 39.60 39.79 1(6)
Stephens/Clear Creek Joint 0 34.16 34.16 0
Venture
Elliott I/Clear Creek 5.70 31.88 37.58 1
Joint Venture
Nebo West Joint Venture 3.79 30.50 34.29 2
Green River Joint Venture 0 39.60 39.60 0(6)
North Lick Creek Joint Venture 0 39.60 39.60 0(6)
MIC-TLE #7 Joint Venture 3.76 31.71 35.47 1
Otter Creek Joint Venture 0 39.60 39.60 0
Ruth Joint Venture #3 27.29 11.94 39.23 2
Helen Buck Joint Venture #1(5) 14.70 14.11 28.81 1
Blue Ridge Energy 7.42 13.06 20.48 1
Production Fund(7)(8)
Smackover/Woodbine I (7)(8) 0 20.93 20.93 0
</TABLE>
(1) This table assumes investors were able to fully utilize all tax benefits at
the maximum marginal federal rate.
(2) Cash distributions to investors divided by investors' initial investment.
(3) Federal tax savings from deductions assuming investor is in the highest
marginal bracket. Rates used were 36% in 1993 and 39.6% in 1994, 1995 and
1996.
(4) This column represents the sum of the percentage amounts set forth in the
first three columns of this table.
(5) Partnership funded in January 1996; and wells were drilled during the first
quarter of 1996.
(6) Partnership was terminated as of December 31, 1995.
(7) Partnership funded in September, 1996; first revenue distribution in
November, 1996.
(8) Sponsored by the Managing General Partner's affiliate, Blue Ridge Energy,
Inc.
PARTNERSHIP PROVED RESERVES AND FUTURE NET REVENUES
The following table presents as of December 31, 1996, the estimated proved oil
and gas reserves and the estimated future net revenues of the active drilling
programs sponsored by the Managing General Partner and its Affiliates.
<TABLE>
<CAPTION>
Reserves Future Net Present Value
Partnership (BBL's) Revenues Discounted @ 10%
- ----------- -------- ---------- ----------------
<S> <C> <C> <C>
Ken-Tex Joint Venture -- $ -- $ --
Stephens/Clear Creek Joint Venture -- -- --
Elliot I/Clear Creek Joint Venture 3,162 20,306 18,826
Nebo West Joint Venture 3,002 18,429 15,687
MIC-TLE #7 Joint Venture 3,642 23,226 21,636
Ruth Joint Venture #3 19,274 118,321 100,716
Helen Buck Joint Venture #3 16,749 71,936 60,088
Blue Ridge Energy Production Fund(1) 111,361 2,112,243 1,413,064
</TABLE>
- --------
(1) Sponsored by the Managing General Partner's Affiliate, Blue Ridge Energy,
Inc.
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<PAGE>
TAX CONSIDERATIONS
The following is a summary prepared by Greenebaum Doll & McDonald PLLC,
Louisville, Kentucky, tax counsel to the Managing General Partner ("Tax
Counsel"), of the material Federal income tax considerations which may affect a
Partnership and the Investor Partners. Tax Counsel has advised that in its
opinion the description of the likely outcome of each material tax issue
appearing in this section is correct. Tax Counsel has also advised that in its
opinion it is more likely than not that those tax benefits potentially available
to an Investor Partner which are material in nature will, in the aggregate, be
realized, although not necessarily in the year in which the Partnerships intend
to claim certain deductions. Tax Counsel's opinion reflects Tax Counsel's best
judgment as to probable outcomes and are not binding on the Service or on any
court. Moreover, the opinions of Tax Counsel are subject to the accuracy of the
underlying or inherent factual assumptions and representations, as to which no
opinions are expressed by Tax Counsel. The opinion of Tax Counsel is attached to
the Prospectus as Appendix B.
This summary is intended to be general in nature and is not a substitute for
careful tax planning by an Investor Partner. The income tax consequences
resulting from an investment in a Partnership will not be the same for all
Investor Partners. Therefore, each potential investor is urged to consult with
its own tax advisor to determine the tax impact of an investment in a
Partnership in light of its particular tax situation. This summary is based upon
the Code, applicable regulations, administrative rulings and judicial decisions,
any of which could be changed at any time. Any such changes may affect the
opinions given and the statements made in this section in a material and adverse
manner. Even if such changes take place after the formation of a Partnership or
the completion of a transaction by a Partnership, they may be retroactive in
effect and may adversely affect the Investor Partners.
It should be noted that there is uncertainty concerning various tax
consequences resulting from investments in oil and gas limited partnerships, and
the applicable authorities are under constant review by the Service. The
Partnerships have not requested, nor do they intend to request, an advance
ruling from the Service with respect to any of the tax consequences discussed in
this section, and no assurance can be given that a favorable ruling would be
issued it if were requested.
Classification as Partnership
Tax Counsel is of the opinion that, at the time of its formation, each of the
Partnerships will be treated as a partnership for Federal income tax purposes,
and not as an association taxable as a corporation unless the Partnership
affirmatively elect otherwise, which they do not intend to do. The opinion is
based upon regulations adopted by the Service.
Certain publicly traded partnerships are treated as a corporation under the
Code. There is an exception, however, for publicly traded partnerships if 90% or
more of their gross income consists of certain types of income, including, among
other things, income and gains derived from the exploration, development, mining
or production, processing, refining, transportation or marketing of any mineral
or natural resources. Based upon a representation of the Managing General
Partner that at least 90% of the Partnership's gross income in all years will
consist of such type of income, Tax Counsel has opined that even if the
Partnership is a publicly traded partnership in any year, it will not be treated
as a corporation by reason thereof under current law. There can be no assurance,
however, that in the future new legislation will not be enacted which will
adversely affect the ability of the Partnerships to qualify as partnerships for
Federal income tax purposes.
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<PAGE>
Taxation of Partners
Under the Code, a partnership is not a taxable entity and, accordingly, incurs
no Federal income tax liability. Rather, a partnership is a "pass-through"
entity which is required to file an information return with the Service. In
general, the character of a partner's share of each item of income, gain, loss,
deduction and credit is determined at the partnership level. Each partner is
allocated a distributive share of such items in accordance with the partnership
agreement and is required to take such items into account in determining the
partner's income. Each partner includes such amounts in income for any taxable
year of the partnership ending within or with the taxable year of the partner,
without regard to whether the partner has received or will receive any cash
distributions from the partnership.
Basis and At Risk Limitations
An Investor Partner may, subject to the at risk and passive loss provisions
discussed below, deduct the Investor Partner's allocable share of Partnership
losses in computing the Investor Partner's taxable income to the extent of the
Investor Partner's basis for its interest in the Partnership. An Investor
Partner's basis for its interest in the Partnership is also used to compute the
Investor Partner's gain or loss resulting from Partnership distributions and
partial or complete sales of its interest. An Investor Partner's basis for its
interest in the Partnership will initially be equal to the amount the Investor
Partner paid for the interests. An Investor Partner's basis will be reduced (but
not below zero) by the amounts of any distributions made to the Investor Partner
and by the Investor Partner's share of Partnership Losses and expenses, and will
be increased by any additional capital contributions made by the Investor
Partner, by the Investor Partner's share of Partnership Profits, and by the
Investor Partner's share of Partnership liabilities. A subsequent decrease in an
Investor Partner's share of Partnership liabilities (resulting either from a
reduction in a Partnership's liabilities or from a reduction in such Investor
Partner's share of Profits) will be treated for tax purposes as if it were a
cash distribution to the Investor Partner with the effects described below.
For Federal income tax purposes, cash distributed to an Investor Partner by a
Partnership will constitute a return of capital to the extent that the amount of
cash does not exceed such Investor Partner's basis for its interest in the
Partnership. A return of capital does not constitute taxable income to the
recipient, but it is applied to reduce the basis of an Investor Partner's
Partnership interest. Any amounts distributed in excess of the Investor
Partner's tax basis will be taxable to the Investor Partner. Such amounts will
be treated as if they were proceeds of the sale of the Investor Partner's
interest in the Partnership. For analysis of the manner in which such proceeds
will be taxed to the recipient, see "Tax Considerations--Sales and Other
Disposition of Units."
An Investor Partner's share of a Partnership's Losses will be allowed only to
the extent of the aggregate amount with respect to which the taxpayer is "at
risk" for such activity at the close of the taxable year. Any such Losses
disallowed by the "at risk" limitation will be treated as a deduction allocable
to the activity in the first succeeding taxable year.
The Code provides that a taxpayer must recognize taxable income to the extent
that the taxpayer's "at risk" amount is reduced below zero. This recapture
income is limited to the sum of the loss deductions previously allowed to the
taxpayer, less any amounts previously recaptured. A taxpayer may be allowed a
deduction for the recaptured amounts included in the taxpayer's taxable income
if and when the taxpayer increases the taxpayer's amount "at risk" in a
subsequent taxable year.
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<PAGE>
The Investor Partners will purchase Units by tendering cash to the
Partnership. To the extent the cash contributed constitutes the "personal funds"
of the Investor Partners, the Investor Partners will be considered at risk with
respect to those amounts. Even if a loss is not disallowed by reason of the at
risk provisions, it may nevertheless be disallowed by the passive loss
provisions discussed below. An Investor Partner's amount at risk will be
increased by the Investor Partner's distributive share of the Partnership's
Profits and reduced by its distributive share of the Partnership's Losses and
any cash or other property distributed to the Investor Partner by the
Partnership. Notwithstanding the foregoing, a taxpayer is not considered at risk
with respect to amounts protected against loss through nonrecourse financing,
guarantees, stop-loss agreements or other similar arrangements.
Passive Loss Limitations
A. General
The deductibility of losses generated from passive activities will be limited
for certain taxpayers. The passive activity loss limitation applies to
individuals, estates, trusts and personal service corporations as well as, to a
lesser extent, closely-held C corporations.
The definition of a "passive activity" generally encompasses all rental
activities as well as all activities with respect to which the taxpayer does not
"materially participate." Notwithstanding this general rule, however, the term
"passive activity" does not include "any working interest in any oil or gas
property which the taxpayer holds directly or through an entity which does not
limit the liability of the taxpayer with respect to such interest." A taxpayer
will be considered as materially participating in a venture only if the taxpayer
is involved in the operations of the activity on a "regular, continuous and
substantial" basis. In addition, a limited partner interest generally will be
treated as an interest with respect to which a taxpayer does not materially
participate.
A passive activity loss is the amount by which the aggregate losses from all
passive activities for the taxable year exceed the aggregate income from all
passive activities for such year. Individuals and personal service corporations
are entitled to deduct passive activity losses only to the extent of their
passive income, whereas closely-held C corporations (other than personal service
corporations) can offset passive activity losses against both passive and net
active income, but not against portfolio income. In calculating passive income
and loss, however, all activities of the taxpayer are aggregated. Passive
activity losses disallowed as a result of the above rules will be suspended and
can be carried forward indefinitely to offset future passive (or passive and
active, in the case of a closely held C corporation) income.
Upon the disposition of an entire interest in a passive activity in a fully
taxable transaction not involving a related party, any passive activity loss
that was suspended by the provisions of the passive activity rules is deductible
from either passive or non-passive income. The deduction must be reduced,
however, by the amount of income or gain realized from the activity in previous
years.
B. General Partner Interests
An Additional General Partner's interest in the Partnership will not be
considered a passive activity, and losses generated while such Additional
General Partner interest is held will not be limited by the passive activity
provisions, unless a Partnership has income or losses from non-Working
Interests.
Notwithstanding this general rule, however, the economic performance rules are
applied in a different manner from that described below in "Tax Considerations--
Intangible Drilling and Development Costs." Economic performance under the
passive loss rules is defined as economic performance, without regard to the
spudding rule. Accordingly, if an Additional General Partner's interest is
converted to a Limited Partner interest after the end of the year in which
economic performance is deemed to occur under the general rules, but prior to
the spudding date, any post-conversion losses will be passive, notwithstanding
the availability of such losses in a year in which the taxpayer held the
interest in an entity that did not limit the taxpayer's liability. The "spudding
rule" and "spudding date" refer to the date that drilling commences.
If an Additional General Partner converts its Additional General Partner
interest into a Limited Partner interest, the character of a subsequently
generated tax attribute will be dependent upon, among other things, the nature
of
75
<PAGE>
the tax attribute and whether there arose, prior to conversion, losses to
which the working interest exception applied. Accordingly, any loss arising
therefrom should be treated as a passive activity loss with the benefits thereof
limited as described above. If, however, a taxpayer has any loss from any
taxable year from a Working Interest in any oil or gas property that is treated
as a non-passive loss, then any net income from such property for any succeeding
taxable year is treated as income that is not from a passive activity.
Consequently, assuming that a converting Additional General Partner has losses
from Working Interests which are treated as non-passive, income from that
Working Interest allocable to the Investor Partner after conversion would be
treated as income that is not from a passive activity.
C. Limited Partner Interests
If an Investor Partner invests in a Partnership as a Limited Partner, such
Limited Partner's distributive share of the Partnership's Losses will be treated
as passive activity losses, the availability of which will be limited to the
Investor Partner's passive income. If the Investor Partner does not have
sufficient passive income to utilize the passive activity loss, the disallowed
passive activity loss will be suspended and may be carried forward to be
deducted against passive income arising in future years. Further, upon the total
disposition of the Investor Partner's interest in the activity to an unrelated
party in a fully taxable transaction, such suspended losses will be deductible
as described above.
Limited Partners should generally be entitled to offset their distributive
shares of passive income, but not portfolio income, from the Partnerships with
deductions from other passive activities.
Allocations of Profits and Losses
Under the Code, an Investor Partner's interest in a Partnership's items of
income, gain, loss, deduction and credit are determined in accordance with the
applicable partnership agreement unless the allocation in the agreement does not
have substantial economic effect. Where an allocation set forth in a partnership
agreement lacks substantial economic effect, the allocation is determined by the
partners' interests in the partnership, taking into account all the facts and
circumstances.
The Service may attempt to disregard the allocations set forth in the
Partnership Agreement if it determines that the allocations set forth therein do
not have substantial economic effect (i.e., if they will not actually and
substantially affect the dollar amount of the Investor Partner's shares of the
total Partnership income or loss independently of tax consequences).
According to the applicable regulations, in order for an allocation to have
substantial economic effect, the allocation must have economic effect and such
economic effect must be substantial. In order for there to be economic effect,
the regulations require that, throughout the term of the partnership, the
partnership agreement must provide (i) for the determination and maintenance of
the partners' capital accounts in accordance with the specific provisions of the
regulations, (ii) that upon liquidation of the partnership and any partner's
interest in the partnership, liquidating distributions must be made in
accordance with the positive capital account balances of the partners, and (iii)
that if a partner has a deficit balance in the partner's capital account
following the liquidation of the partner's interest in the partnership, such
partner must be unconditionally obligated to restore the amount of such deficit
balance to the partnership by the end of such taxable year, or 90 days after the
date of such liquidation, if later.
The Partnership Agreement meets tests (i) and (ii) referred to above, but does
not meet the test referred to in (iii) above because the Investor Partners are
not obligated to restore deficit Capital Accounts.
The regulations further provide, however, that if a partnership agreement
contains a "qualified income offset" provision, then to the extent a partner
does not have a deficit capital account at the end of a taxable year (in excess
of the amount such partner is required, or deemed required, to restore), after
taking into account, insofar as here relevant, (i) distributions that as of the
end of the year are reasonably expected to be made to the partner, to the extent
they exceed offsetting increases to the partners' capital accounts that are
reasonably expected to occur during or prior to partnership years in which such
distributions reasonably are expected to be made, and (ii) adjustment for
simulated depletion, then the allocations will be deemed to have economic
effect. The Partnership Agreement contains a "qualified income offset"
provision.
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<PAGE>
The regulations contain special provisions dealing with the allocation of
deductions attributable to nonrecourse debt. Under the regulations, allocations
of nonrecourse deductions will be deemed made in accordance with the partners'
interests in the partnership if four tests are met. These tests are as follows:
(i) that capital accounts be maintained in accordance with the regulations and
that liquidating distributions be made to the partners in accordance with their
capital accounts; (ii) that the allocation of nonrecourse deductions among the
partners be in a manner that is reasonably consistent with allocations, which
have substantial economic effect, of some other significant item attributable to
the property subject to the nonrecourse debt; (iii) that either the partnership
agreement requires the restoration of deficit capital accounts or the
partnership agreement contains a "minimum gain chargeback" provision; and (iv)
all of the material allocations and capital account adjustments under the
partnership agreement are recognized under the regulations. The regulations
further provide that the amount of a partner's share of minimum gain is treated
as an amount which such partner is obligated to restore with respect to any
deficit balance in such partner's capital account. The Partnership Agreement
contains such a minimum gain chargeback provision.
Based upon the foregoing, Tax Counsel is of the opinion that it is more likely
than not that the allocations contained in the Partnership Agreement will be
deemed to have economic effect to the extent an Investor Partner's Capital
Account, increased by such Investor Partner's share of the Partnership's minimum
gain, and decreased by contemplated distributions in excess of contemplated
income and simulated depletion, is positive at the close of the taxable year.
Intangible Drilling and Development Costs
A. Classification of Costs
In general, IDC consists of those costs which in and of themselves have no
salvage value. A Partnership's classification of a cost as IDC is not binding on
the Service, which might reclassify an item characterized as IDC as a cost which
must be capitalized. To the extent not deductible, such amounts will be included
in the Partnership's basis in mineral property and in the Partners' bases of
their interests in the Partnership.
B. Timing of Deductions
Although the Partnerships will elect to deduct IDC, each Investor Partner will
have an option of deducting IDC, or capitalizing all or a part of the IDC and
amortizing it on a straight-line basis over a 60-month period beginning with the
month in which the expenditure is made. In addition to the effect of this change
on regular taxable income, the two methods have different treatment under the
alternative minimum tax (See "Tax Considerations--Alternative Minimum Tax").
In order for the IDC to qualify for deduction in December 1997 and December
1998, the wells for Partnerships designated "Blue Ridge Energy Fund 1997--
Limited Partnership" must be spudded by March 31, 1998, and the wells for
Partnerships designated "Blue Ridge Energy Fund 1998--Limited Partnership" must
be spudded by March 31, 1999, and certain other requirements must be met,
including that the deduction be limited to an Investor Partner's cash basis in a
Partnership. For this purpose, an Investor Partner's "cash basis" in a
Partnership means such Partner's adjusted basis without regard to (i) any
liability of the Partnership or (ii) any amount borrowed by the Investor Partner
with respect to a Partnership which (a) was arranged by the Partnership or by
any person who participated in the organization, sale or management of the
Partnership (or any person related to such person), or (b) was secured by any
asset of the Partnership.
ALTHOUGH THE MANAGING GENERAL PARTNER WILL ATTEMPT TO SATISFY EACH REQUIREMENT
OF THE CODE, THE SERVICE AND JUDICIAL AUTHORITY FOR DEDUCTIBILITY OF IDC IN 1997
FOR PARTNERSHIPS DESIGNATED "BLUE RIDGE ENERGY FUND 1997--LIMITED PARTNERSHIP,"
AND IN 1998 FOR PARTNERSHIPS DESIGNATED "BLUE RIDGE ENERGY FUND 1998--LIMITED
PARTNERSHIP," NO ASSURANCE CAN BE GIVEN THAT THE SERVICE WILL NOT SUCCESSFULLY
CONTEND THAT THE IDC OF A WELL WHICH IS NOT DRILLED UNTIL 1998 OR 1999,
RESPECTIVELY, ARE NOT DEDUCTIBLE IN WHOLE OR IN PART UNTIL 1998 OR 1999,
RESPECTIVELY.
Further, to the extent drilling of the Partnership's wells does not commence
by March 31, 1998 or March 31, 1999, as applicable, the deductibility of the IDC
will be deferred.
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<PAGE>
Due to the inherently factual nature of the issue of the deductibility of
prepaid IDC, Tax Counsel has not rendered an opinion as to whether the IDC will
be deductible in the year of the prepayment.
C. Recapture of IDC
IDC previously deducted that is allocable to the property (directly or through
the ownership of an interest in a partnership) and which would have been
included in the adjusted basis of the property if not currently deducted is
recaptured to the extent of any gain realized upon the disposition of the
property. The regulations provide that recapture is determined at the partner
level (subject to certain anti-abuse provisions). Where only a portion of
recapture property is disposed of, any IDC related to the entire property is
recaptured to the extent of the gain realized on the portion of the property
sold. In the case of a disposition of an undivided interest in a property (as
opposed to the disposition of a portion of the property), a proportionate part
of the IDC with respect to the property is treated as allocable to the
transferred undivided interest to the extent of any realized gain.
Leasehold Acquisition Costs and Abandonment
The cost of acquiring oil and gas leasehold interests or other similar oil and
gas property interests is a capital expenditure and may not be deducted in the
year paid or incurred. In the case of a productive well, these costs are
recovered through depletion. If a lease is proved to be worthless by drilling or
abandonment, however, the cost of such lease (less any recovery thereof through
the depletion deduction) constitutes an ordinary loss which may be deducted in
the year in which the leasehold becomes worthless.
Depletion Deductions
The owner of an economic interest in an oil and gas property is entitled to
claim the greater of percentage depletion or cost depletion with respect to oil
and gas properties which qualify for such depletion methods. In the case of
partnerships, the depletion allowance must be computed separately by each
partner and not by the partnership. Depletion deductions, to the extent they
reduce the basis of an oil and gas property, are subject to recapture upon
disposition of the property.
Cost depletion for any year is determined by multiplying the number of units
(e.g., barrels of oil or Mcf of gas) sold during the year by a fraction, the
numerator of which is the cost or other basis of the mineral interest and the
denominator of which is total reserves available at the beginning of the period.
In no event can the cost depletion exceed the adjusted basis of the property to
which it relates.
Percentage depletion is a statutory allowance pursuant to which a deduction
currently equal to 15% of the taxpayer's gross income from each property is
allowed in any taxable year, generally not to exceed 100% of the taxpayer's
taxable income from the property (computed without the allowance for depletion)
with the aggregate deduction limited to 65% of the taxpayer's taxable income for
the year (computed without regard to percentage depletion and net operating loss
and capital loss carrybacks). The percentage depletion deduction rate will vary
with the price of oil, but the rate will not be less than 15%. A percentage
depletion deduction that is disallowed in a year due to the 65% of taxable
income limitation may be carried forward and allowed as a deduction for the
following year, subject to the 65% limitation in that subsequent year.
Percentage depletion deductions reduce the taxpayer's adjusted basis in the
property. Unlike cost depletion, however, deductions under percentage depletion
are not limited to the adjusted basis of the property; the percentage depletion
amount continues to be allowable as a deduction after the adjusted basis has
been reduced to zero.
The availability of depletion, whether cost or percentage, will be determined
separately by each Investor Partner. Each Investor Partner must separately keep
records of the Investor Partner's share of the adjusted basis of an oil or gas
property, adjust such share of the adjusted basis for any depletion taken on
such property, and use such adjusted basis each year in the computation of the
Investor Partner's cost depletion or in the computation of the Investor
Partner's gain or loss on the disposition of such property. These requirements
may place an administrative burden on an Investor Partner.
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<PAGE>
Depreciation Deductions
The Partnership will claim depreciation, cost recovery, and amortization
deductions with respect to its basis in Partnership property as permitted by the
Code. For most tangible personal property, the "modified accelerated cost
recovery system" ("MACRS") must be used in calculating the cost recovery
deductions. The cost of equipment such as casing, tubing, tanks and pumping
units, and the cost of oil or gas pipelines cannot be deducted currently, but
must be capitalized and recovered under MACRS. The cost recovery deduction for
most equipment used in domestic oil and gas exploration and production, and for
most tangible personal property used in gas gathering systems, is calculated
using the 200% declining balance method switching to the straight-line method, a
seven-year recovery period, and a half-year convention.
If an accelerated depreciation method is used, a portion of the depreciation
will be an adjustment for alternative minimum tax purposes.
All depreciation claimed on personal property will be subject to recapture
(and thereby treated as ordinary income) upon the sale or other disposition of
the personal property to the extent of the gain realized. The cost recovery
(depreciation) recapture rules require that sellers of property include the
entire amount of recapture in income in the year of sale even in the case of an
installment sale.
Interest Deductions
The Investor Partners will acquire their interests in the Partnerships by
contributing cash in the amount of $1,000 per Unit to the Partnerships. In no
event will the Partnerships accept notes in exchange for Partnership interests.
Nevertheless, without any assistance from the Managing General Partner or any of
its Affiliates, some Investor Partners may choose to borrow the funds necessary
to acquire a Unit and may incur interest expense in connection with those loans.
The deductibility of any interest expense incurred by an Investor Partner in
purchasing Units is dependent upon whether such interest expense is attributable
to a passive activity or to an activity which is not a passive activity. As
indicated above, by virtue of the special rule applicable to Working Interests
in oil and gas properties owned indirectly through entities which do not limit a
taxpayer's liability, an Investor Partner's investment as an Additional General
Partner will not be considered a passive activity. Accordingly, any interest
expense incurred by such an Investor Partner in purchasing Units, except to the
extent attributable to the Partnership's portfolio income, if any) will be
treated as trade or business interest, not subject to any specific limitation on
the deductibility of interest. To the extent any of such interest is
attributable to the Partnership's portfolio income, it will be subject to the
investment interest limitation. In general, non-corporate taxpayers may only
deduct investment interest in any year to the extent of their net investment
income.
In the case of an Investor Partner who is a Limited Partner, the interest
expense incurred in purchasing a Unit will be treated as a passive expense,
deductible only to the extent the Investor Partner's passive activity losses are
otherwise deductible as set forth above.
Based upon the purely factual nature of any such loans, Tax Counsel is unable
to express an opinion with respect to the deductibility of any interest paid or
incurred thereon.
Transaction Fees
The Partnership may classify a portion of the fees to be paid to third parties
and to the Managing General Partner or to the Operator and its Affiliates (as
described in the Prospectus under "Source of Funds and Use of Proceeds") as
expenses which are deductible as organizational expenses or otherwise. There is
no assurance that the Service will allow the deductibility of such expenses and
Tax Counsel expresses no opinion with respect to the allocation of the Fees to
deductible and nondeductible items.
Generally, expenditures made in connection with the creation of, and with
sales of interests in, a partnership will fit within one of several categories.
A partnership may elect to amortize and deduct its organizational expenses
ratably over a period of not less than 60 months commencing with the month the
partnership begins business. Examples of organizational expenses are legal fees
for services incident to the organization of the partnership, such as
negotiation and preparation of a partnership agreement, accounting fees for
services incident to the organization of the Partnership, and filing fees.
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<PAGE>
No deduction is allowable, however, for "syndication expenses," examples of
which include brokerage fees, registration fees, legal fees of the underwriter
or placement agent and the issuer (general partners or the partnership) for
securities advice and for advice pertaining to the adequacy of tax disclosures
in the prospectus or private placement memorandum for securities law purposes,
printing costs and other selling or promotional material. These costs must be
capitalized. Payments for services performed in connection with the acquisition
of capital assets must be amortized over the useful life of such assets.
No deduction is allowable with respect to "start-up expenditures," although
such expenditures may be capitalized and amortized over a period of not less
than 60 months if an appropriate election is made.
The Partnership intends to make payments to the Managing General Partner, as
described in greater detail elsewhere in this Prospectus. To be deductible,
compensation paid to a general partner must be for services rendered by the
general partner other than in the general partner's capacity as a partner or for
compensation determined without regard to partnership income. Fees paid to a
general partner which are not deductible because they fail to meet this test may
be treated as special allocations of income to the recipient partner and thereby
decrease the net loss, or increase the net income, among all Partners. If the
Service were to successfully challenge the deductibility of payments made to the
Managing General Partner, an Investor Partner's taxable income could be
increased, thereby resulting in increased taxes and in liability for interest
and penalties.
Conversion of Interests
In the opinion of Tax Counsel, the Partnership will not be terminated solely
as a result of the conversion by Additional General Partners of their Partner
interests into Limited Partner interests. Further, no gain or loss will be
recognized by such a converting Investor Partner unless the Investor Partner's
share of the Partnership's liabilities is reduced and the deemed cash
distribution resulting therefrom exceeds such Investor Partner's basis for the
Partnership interest at that time. For a discussion of the conversion feature of
the Program, see "Terms of the Offering--Conversion of Units by Additional
General Partners."
Alternative Minimum Tax
The alternative minimum tax on noncorporate taxpayers is equal to the excess
of (a)(i) 26% of the first $175,000 ($87,500 in the case of a married taxpayer
filing a separate return) by which the taxpayer's alternative minimum taxable
income exceeds an exemption of $33,750 ($45,000 for a joint return and $22,500
for a married individual filing a separate return) plus (ii) 28% of any
additional alternative minimum taxable income, over (b) the taxpayer's regular
tax. The exemption amount is phased out by an amount equal to 25% of the
taxpayer's alternative minimum taxable income in excess of $112,500 in the case
of a single taxpayer and $150,000 in the case of married couples filing joint
returns ($75,000 for married couples filing separate returns). Alternative
minimum taxable income is generally taxable income, computed with certain
modifications provided for in sections 56 and 58 of the Code, and increased by
the taxpayer's items of tax preference.
While in prior years there were adjustments and items of tax preference
resulting from investments in oil and gas, in the case of taxpayers which are
not integrated oil companies, these adjustments and items of tax preference have
largely been eliminated. The elimination of the tax preference for "excess IDC"
is limited, however, to 40% of the taxpayer's alternative minimum taxable income
(determined without the alternative minimum tax net operating loss deduction).
"Excess IDC" generally means the excess of (i) the excess of (A) the IDC allowed
for the taxable year over (B) the amount which would have been allowed had the
IDC been capitalized and amortized over 10 years, over (ii) 65% of the
taxpayer's net income from oil and gas for the taxable year. Thus, in the case
of Investor Partners who are not integrated oil companies, the only adjustment
to taxable income under sections 56 and 58 of the Code which is likely to arise
from the Partnerships is that in computing depreciation, the alternative system
of depreciation must be used, rather than the method used for regular tax
purposes. This requires that property be depreciated using its class life (under
the former asset depreciation range system), which is generally a longer useful
life, and the 150% declining balance method, switching to the straight-line
method to maximize the deduction. This adjustment requiring the use of a longer
useful life (but not the use of a different method) will cease to be applicable
for property placed in service after December 31, 1998.
The alternative minimum tax will not be imposed on the Partnerships as such,
but each Investor Partner will be required to include in the computation of such
Investor Partner's liability for the alternative minimum tax an allocable share
of the Partnership's items which require special treatment for alternative
minimum tax purposes.
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To the extent that a taxpayer pays an alternative minimum tax in any year,
such taxpayer will be entitled to a credit in future years against such
taxpayer's regular tax (but not the alternative minimum tax). The minimum tax
credit is only applicable to the extent the minimum tax liability is
attributable to deferral preferences and adjustments (i.e., preferences and
adjustments other than those that result in permanent exclusion for regular tax
purposes). The minimum tax credit may be carried forward indefinitely.
The effects of the alternative minimum tax on a particular Investor Partner
are contingent upon a number of factors and vary depending upon each Investor
Partner's personal tax and financial position. If an Investor Partner is liable
for the alternative minimum tax, the net effect may be that all of the tax
losses, if any, being generated by an investment in the Partnership will result
in a tax reduction of at most 28% of such losses (i.e., the maximum alternative
minimum tax rate), while the income generated from such investment eventually
may be subject to higher marginal tax rates. Accordingly, each potential
investor should consult with such potential investor's personal tax advisor on
the likely effect of the alternative minimum tax on such potential investor.
Disposition of Property of the Partnership
A Partnership will realize gain from the sale or other disposition of any of
its assets to the extent that the amount realized exceeds the Partnership's
adjusted tax basis for such properties. A Partnership will realize a loss to the
extent that its adjusted tax basis exceeds the amount realized upon a sale. The
amount realized includes any cash received, the fair market value of any
property received other than cash and the face amount of any debt which the
transferee assumes or to which such property is subject at the time of
disposition (unless a portion of such debt creates original issue discount, in
which event a portion might be treated as interest income rather than as sales
proceeds).
Upon the sale of any oil and gas property of a Partnership, the Partnership
will realize gain or loss equal to the difference between the Partnership's
basis for such asset at the time of the disposition and the amount realized by
the Partnership. An Investor Partner's share of the gain will generally be taxed
as long-term capital gain, assuming the Partnership is not a dealer with respect
to the property and has held it for one year, unless the gain is attributable to
recapture of IDC (discussed above) or recapture of depletion. Any loss will
generally be treated as an ordinary loss.
Upon the sale or disposition of the Partnership's personal property, any gain
attributable to depreciation deductions previously taken will be recaptured as
ordinary income.
Under certain circumstances, the Federal income taxes incurred by an Investor
Partner in connection with a sale or other disposition of a Partnership's assets
could exceed the net proceeds distributable to the Investor Partner. Such
circumstances might include (i) a foreclosure or other sale of the property when
the adjusted tax basis is significantly less than the outstanding indebtedness
which encumbers the property, (ii) a sale at a time when it is necessary to
retain all or a portion of the sales proceeds for reserves or for ongoing
Partnership operations, and (iii) a sale in connection with which the
Partnership receives proceeds in the form of non-liquid assets (although the
impact may be reduced if the non-liquid assets include promissory notes of the
purchaser which qualify for installment reporting or gain).
Installment Sales
If the Partnership sells an asset in a transaction in which all or a portion
of the purchase price is represented by an evidence of indebtedness of the
purchaser, unless the Partnership elects otherwise, the sale will be required to
be reported on the installment method. Generally, in the case of an installment
sale, the gain recognized in any year equals the payments received multiplied by
a fraction, the numerator of which is the gross profit, and the denominator of
which is the contract price (selling price less mortgages assumed or to which
the transferred property is subject). This provision generally enables taxpayers
to avoid paying tax on gain before they receive the cash payments. If any of the
gain represents recapture of depreciation, however, such recapture is recognized
in the year of sale without regard to whether any payment is received in such
year.
If the Partnership holds any asset for sale to customers in the ordinary
course of its business, the installment method will not be available.
Furthermore, if a taxpayer sells property for a sales price in excess of
$150,000 and the face amount of all such installment obligations arising in any
year and which are outstanding at the end of such
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year exceed $5,000,000, then interest is required to be paid on a portion of the
deferred tax liability. In determining the $5,000,000 amount, each partner is
treated as owning their pro rata share of the installment obligations of the
partnership. The interest rate is the interest rate applicable to underpayments
of tax. In addition, if any such installment obligations are pledged as security
for any indebtedness, the net proceeds of the secured indebtedness are treated
as a payment received on the installment obligation.
Sales and Other Disposition of Units
In general, gain realized on the sale of the Units of an Investor Partner who
is not a "dealer," and who has held their Units for longer than the applicable
holding period for long-term capital gain (which currently is generally 18
months), is treated as long-term capital gain. However, to the extent that any
portion of such gain is attributable to such Investor Partner's share of the
Partnership's unrealized receivables and appreciated inventory, the gain will be
ordinary income. Potential depreciation recapture income, excess IDC and
potential depletion recapture are treated as "unrealized receivables" for this
purpose. In computing the gain or loss on a sale of a Unit, the selling Investor
Partner's share of the Partnership's liabilities, if any, is included as if the
amount thereof were received by the Investor Partner in cash. For this reason,
an Investor Partner's tax liability could exceed the cash proceeds received by
the Investor Partner on the sale of the Investor Partner's Units.
Any partner who sells or exchanges interests in a partnership must generally
notify the partnership in writing within 30 days of such transaction and must
attach a statement to such partner's tax return reflecting certain facts
regarding the sale and exchange. The notice must include the names, addresses
and taxpayer identification numbers (if known) of the transferor and transferee
and the date of the exchange. Once so notified, the Partnerships will also be
required to file an information return with the Service if any portion of the
gain realized is treated as ordinary income by virtue of the Partnership having
appreciated inventory or unrealized receivables. The Partnerships will be
required to provide copies of the information it provides to the Service to the
transferor and the transferee.
Any Investor Partner who is required to notify the Partnership of a transfer
of the Investor Partner's Partnership interest and who fails to do so may be
subject to a fine. Similarly, the Partnership may be fined for failure to report
the transfer.
The tax consequences to an assignee purchaser of a Unit from an Investor
Partner are not described herein. Any assignor of a Unit should advise the
assignee to consult the assignee's own tax advisor regarding the tax
consequences of such assignment.
Partnership Distributions
Under the Code, any increase in a partner's share of partnership liabilities,
or any increase in such partner's individual liabilities by reason of an
assumption by such partner of partnership liabilities, is considered to be a
contribution of money by the partner to the partnership. Similarly, any decrease
in a partner's share of partnership liabilities or any decrease in such
partner's individual liabilities by reason of the partnership's assumption of
such individual liabilities, will be considered as a distribution of money to
the partner by the partnership.
To the extent that actual or constructive distributions of cash by the
Partnership are in excess of an Investor Partner's adjusted basis for the
Investor Partner's Partnership interest (after adjustment for the Investor
Partner's share of income and losses of the Partnership for such year), that
excess will generally be treated as gain from the sale of a capital asset. In
addition, gain could be recognized to a distributee partner upon the
disproportionate distribution to a partner of unrealized receivables or
substantially appreciated inventory. The Partnership Agreement prohibits
distributions to any Investor Partner to the extent such would create or
increase a deficit in the Partner's Capital Account.
Profit Motive
Where an activity entered into by an individual is not engaged in for profit,
the individual's deductions with respect to that activity are limited to the sum
of (i) those not dependent upon the nature of the activity (e.g., interest and
taxes), plus (ii) other deductions to the extent that gross income from the
activity for the year exceeds the amount referred to in (i) above. The Code
generally provides for a presumption that an activity is entered into for
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profit where gross income from the activity exceeds the deductions attributable
to such activity for three or more of the five consecutive taxable years ending
with the taxable year in question. At the taxpayer's election, such presumption
can relate to three or more of the taxable years in the 5-year period beginning
with the taxable year in which the taxpayer first engages in the activity.
The Service has ruled that the "not-for-profit" test is to be applied at the
partnership level, rather than at the level of each partner. Because of the
nature of the Partnership's proposed activities, the Managing General Partner
believes that the Partnership will be able to satisfy the profit motive
requirement. Nevertheless, because the Service may attempt to rebut the three-
out-of-five year presumption (if the Partnership met this test), and because the
test is based upon the facts and circumstances as they may exist in the future,
no assurance can be given that the Partnership will be deemed to be engaged in
an activity for profit.
Due to the inherently factual nature of the issue, Tax Counsel has not
expressed an opinion as to the ultimate resolution of this issue in the event of
a challenge by the Service.
Administrative Matters
Returns and Audits. While no Federal income tax is required to be paid by an
organization classified as a partnership for Federal income tax purposes, a
partnership must file Federal income tax information returns, which are subject
to audit by the Service. Any such audit may lead to adjustments, in which event
the Investor Partners may be required to pay additional Federal income tax. Any
such audit may also lead to an audit of an Investor Partner's individual tax
return and adjustments to items unrelated to an investment in Units.
For purposes of reporting, audit, and assessment of additional Federal income
tax, the tax treatment of "partnership items" is determined at the partnership
level. Partnership items include those items that are more appropriately
determined at the partnership level than the partner level. The Service
generally cannot initiate deficiency proceedings against an individual partner
with respect to partnership items without first conducting an administrative
proceeding at the partnership level as to the correctness of the partnership's
treatment of the item. An individual partner may not file suit for a credit or a
refund arising out of a partnership item without first filing a request for an
administrative proceeding by the Service at the partnership level. Individual
partners are entitled to notice of such administrative proceedings and decisions
therein, except in the case of partners with less than a 1% profits interest in
a partnership having more than 100 partners. If a group of partners having an
aggregate profits interest of 5% or more in such a partnership so requests,
however, the Service also must mail notice to a partner appointed by that group
to receive notice. All partners, whether or not entitled to notice, are entitled
to participate in the administrative proceedings at the partnership level,
although the Partnership Agreement provides for waiver of certain of these
rights by the Investor Partners. All Investor Partners, including those not
entitled to notice, may be bound by a settlement reached by the Partnership's
"tax matters partner," which will be the Managing General Partner. If a proposed
tax deficiency is contested in any court by any Partner of a Partnership or by
the Managing General Partner, all Partners of that Partnership may be deemed
parties to such litigation and bound by the result reached therein.
Consistency Requirements. An Investor Partner must generally treat Partnership
items on the Investor Partner's Federal income tax returns consistently with the
treatment of such items on the Partnership information return unless the
Investor Partner files a statement with the Service identifying the
inconsistency or otherwise satisfies the requirements for waiver of the
consistency requirement. Failure to satisfy this requirement will result in an
adjustment to conform the Investor Partner's treatment of the item with the
treatment of the item on the Partnership return. Intentional or negligent
disregard of the consistency requirement may subject an Investor Partner to
substantial penalties.
Compliance Provisions. Taxpayers are subject to several penalties and other
provisions that encourage compliance with the Federal income tax laws, including
an accuracy-related penalty in an amount equal to 20% of the portion of an
underpayment of tax caused by negligence, intentional disregard of rules or
regulations or any "substantial understatement" of income tax. A "substantial
understatement" of tax is an understatement of income tax that exceeds the
greater of (a) 10% of the tax required to be shown on the return (the correct
tax), or (b) $5,000 ($10,000 in the case of a corporation other than an S
corporation or personal holding corporation).
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Except in the case of understatements attributable to "tax shelter" items, an
item of understatement may not give rise to the penalty if (a) there is or was
"substantial authority" for the taxpayer's treatment of the item or (b) all
facts relevant to the tax treatment of the item are disclosed on the return or
on a statement attached to the return, and there is a reasonable basis for the
tax treatment of such item by the taxpayer. In the case of partnerships, the
disclosure is to be made on the return of the partnership. Under the applicable
Regulations, however, an individual partner may make adequate disclosure with
respect to partnership items if certain conditions are met.
In the case of understatements attributable to "tax shelter" items, the
substantial understatement penalty may be avoided only if the taxpayer
establishes that, in addition to having substantial authority for the taxpayer's
position, the taxpayer reasonably believed the treatment claimed was more likely
than not the proper treatment of the item. A "tax shelter" item is one that
arises from a partnership (or other form of investment) the principal purpose of
which is the avoidance or evasion of Federal income tax. A corporation is
generally held to a higher standard to avoid the substantial understatement
penalty.
Registration of Tax Shelters. The Code requires that a tax shelter organizer
register any tax shelter with the Service not later than the day of the first
offering for sale of interests in the tax shelter. For registration purposes, a
"tax shelter" is defined as (a) any investment with respect to which any person
could infer that the tax shelter ratio (the ratio which the aggregate of the
deductions (without income) and 350% of the tax credits bears to the amount of
money and adjusted basis of other property contributed by the investors, as
adjusted) is greater than 2 to 1 for any of the first five years ending after
the offering date, and (b) (i) which is required to be registered under Federal
or state securities laws, (ii) is sold pursuant to an exemption from such
registration or (iii) which represents aggregate investments of in excess of
$250,000 and is expected to have five or more investors. Although it is likely
that the Partnership will produce tax benefits, the Managing General Partner
believes that the Partnerships will not meet this definition of a tax shelter
and, therefore, has not registered the Partnerships as a tax shelter.
Accounting Methods and Periods
The Partnership will use the accrual method of accounting and will select the
calendar year as its taxable year.
Social Security Benefits; Self-employment Tax
A general partner's share of any income or loss attributable to Units will
constitute "net earnings from self-employment" for both social security and
self-employment tax purposes, while a limited partner's share of such items
generally will not constitute "net earnings from self-employment." Thus, no
quarters of coverage or increased benefits under the Social Security Act will
generally be earned by limited partners. If an Additional General Partner is
receiving Social Security benefits, such Additional General Partner's taxable
income attributable to the investment in the Units must be taken into account in
determining any reduction in benefits because of "excess earnings." The
definition of who is a "limited partner" for purposes of the applicable
provisions of the Code is unclear at this time and it is possible that the
limited partner of a partnership may not be a "limited partner" for this
purpose.
State and Local Taxes
The opinions expressed herein are limited to issues of Federal income tax law
and do not address issues of state or local law. Potential investors are urged
to consult their own tax advisors regarding the impact of state and local laws
on an investment in the Units.
Individual Tax Advice Should be Sought
The foregoing is only a summary of the material tax considerations that may
affect a potential investor's decision regarding the purchase of Units. The tax
considerations attendant to an investment in a Partnership are complex, vary
with individual circumstances, and depend in some instances upon whether the
potential investor acquires an Additional General Partner interest or Limited
Partner interest. Each prospective investor should review such tax consequences
with their own tax advisor and their own legal counsel.
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SUMMARY OF THE PARTNERSHIP AGREEMENT
The rights and obligations of the Partners will be governed by the Limited
Partnership Agreement ("Partnership Agreement") in the form attached to this
Prospectus as Appendix A. Each prospective investor, together with their
personal advisers, should carefully study the Partnership Agreement in its
entirety before submitting a subscription. The following statements concerning
the Partnership Agreement are merely an outline, do not purport to be complete
and in no way amend or modify the Partnership Agreement. References to sections
below refer to sections of the Partnership Agreement.
Responsibility of Managing General Partner
The Managing General Partner shall have the exclusive management and control
of all aspects of the business of the Partnership (Sections 5.1 and 6.1). No
Investor Partner shall have any voice in the day-to-day business operations of
the Partnership (Section 7.1). The Managing General Partner is authorized to
delegate and subcontract its duties under the Partnership Agreement to others,
including entities related to it (Section 5.2).
Liabilities of General Partners, Including Additional General Partners
General Partners, including Additional General Partners, will not be protected
by limited liability for Partnership activities. Under the Act, the Additional
General Partners will be jointly and severally liable for all obligations and
liabilities to creditors and claimants, whether arising out of contract or tort,
in the conduct of Partnership operations (Section 7.12).
The Managing General Partner, as Operator, maintains general liability
insurance. In addition, the Managing General Partner has agreed to indemnify
each of the Additional General Partners for obligations related to casualty and
business losses which exceed available insurance coverage and Partnership assets
(Section 7.2). There can be no assurance, however, that the Managing General
Partner will have sufficient assets to meet its indemnification obligations.
The Additional General Partners, by execution of the Partnership Agreement,
grant to the Managing General Partner the exclusive authority to manage the
Partnership business in its sole discretion and to thereby bind the Partnership
and all Partners in its conduct of the Partnership business. The Additional
General Partners will not be authorized to participate in the management of the
Partnership business; and the Partnership Agreement prohibits the Additional
General Partners from acting in a manner harmful to the assets or the business
of the Partnership or to do any other act which would make it impossible to
carry on the ordinary business of the Partnership. If an Additional General
Partner acts in contravention of the terms of the Partnership Agreement, losses
caused by such Additional General Partner's actions will be borne by such
Additional General Partner alone and such Additional General Partner may be
liable to other Partners for all damages resulting from such Additional General
Partner's breach of the Partnership Agreement (Section 7.1). Additional General
Partners who choose to assign their Units in the future may only do so as
provided in the Partnership Agreement and liability of Additional General
Partners who have assigned their Units may continue after such assignment unless
a formal assumption and release of liability is effected (Section 7.3).
Liability of Limited Partners
The Partnerships will be governed by the Act under which a Limited Partner's
liability for the obligations of the Partnership will be limited to the Limited
Partners' Capital Contribution, the Limited Partners' share of Partnership
assets and for the return of any part of Partnership Capital Contributions for a
period of one year after such return (or six years in the event such return is
in violation of the Partnership Agreement), but only to the extent necessary to
discharge the Partnership's liabilities to creditors who extended credit to the
Partnership prior to such return. A Limited Partner will not otherwise be liable
for the obligations of the Partnership unless, in addition to the exercise of
the Limited Partner's rights and powers as a Limited Partner, such person takes
part in the control of the business of the Partnership.
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Allocations and Distributions
General: Profits and losses are to be allocated and cash is to be distributed
in the manner described in the section entitled "Allocation of Profits and
Losses." See Articles 3 and 4 of the Partnership Agreement.
Time of Distributions: Distributable Cash will be distributed by the Managing
General Partner not less frequently than quarterly (Section 4.1). The Managing
General Partner may, at its discretion, make distributions monthly.
Notwithstanding any other provision of the Partnership Agreement to the
contrary, no Partner will receive any distribution to the extent such
distribution will create or increase a deficit in that Partner's Capital Account
(as increased by certain items described in Section 3.2(b)) (Section 4.3).
Liquidating Distributions: Liquidating distributions (after the payment of all
Partnership debts and liabilities) will be made to the Partners in accordance
with their respective Capital Accounts (Section 9.3).
Voting Rights
Investor Partners owning 10% or more of the then outstanding Units entitled to
vote have the right to require the Managing General Partner to call a meeting of
the Partners (Section 7.7).
Investor Partners will be entitled to vote with respect to certain Partnership
matters. Each Unit is entitled to one vote on all matters; each fractional Unit
is entitled to that fraction of one vote equal to the fractional interest in the
Unit. Except as otherwise provided in the Partnership Agreement, at any meeting
of Investor Partners, a vote of a majority of Units represented at such meeting,
in person or by proxy, with respect to matters considered at the meeting at
which a quorum is present will be required for approval of any such matters. A
vote of a majority of the then outstanding Units entitled to vote will be
required to approve any of the following matters:
(a) The approval or disapproval of the sale of all, or substantially all, of the
assets of the Partnership;
(b) Removal of the Managing General Partner and election of a new Managing
General Partner;
(c) Dissolution of the Partnership;
(d) An amendment to the Partnership Agreement;
(e) Cancellation of contracts for services with the Managing General Partner or
Affiliates; or
(f) The appointment of a liquidator in the event the Partnership is to be
dissolved and there is no Managing General Partner.
Additionally, the Partnership is not permitted to participate in a Roll-Up or
Significant Transaction unless the Roll-Up or Significant Transaction has been
approved by Investor Partners owning at least 80% of the Units (Sections 7.8 and
9.2). In the event that the Managing General Partner and/or its Affiliates
purchase Units in a Partnership, the Managing General Partner and/or Affiliate
will not be entitled to vote the Units so purchased (Sections 6.3(j) and 7.8).
Investor Partners have the right to review the Partnership's books and records
and list of Investor Partners at any reasonable time and have a copy of the list
of Investor Partners mailed to the requesting Investor Partner at the latter's
expense. Investor Partners have the right to submit proposals to the Managing
General Partner for inclusion in the voting materials for the next meeting of
Investor Partners for consideration and approval by the Investor Partners.
Retirement and Removal of the Managing General Partner
In the event that the Managing General Partner desires to withdraw from the
Partnership for whatever reason, it may do so only upon 120 days prior written
notice and with the written consent of Investor Partners owning a majority of
the then outstanding Units (Section 6.3(k)).
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In the event that Investor Partners desire to remove the Managing General
Partner, they may do so at any time upon 90 days written notice, with the
consent of Investor Partners owning a majority of the then outstanding Units,
and upon the selection by such Investor Partners of a successor Managing General
Partner within such 90-day period (Section 7.6).
Term and Dissolution
The Partnership will continue for a maximum period ending December 31, 2047
(2048 in the case of a Partnership designated Blue Ridge Energy Fund 1998--
Limited Partnership) unless earlier dissolved upon the occurrence of any of the
following:
(a) the written consent of the Investor Partners owning a majority of the then
outstanding Units;
(b) the retirement, bankruptcy, adjudication of insanity or incapacity,
withdrawal, removal, or death (or, in the case of a corporate Managing
General Partner, the retirement, withdrawal, removal, dissolution,
liquidation, or bankruptcy) of a Managing General Partner, unless a
successor Managing General Partner is selected by Investor Partners owning
a majority of the then outstanding Units within 90 days after such event;
(c) the sale, forfeiture, or abandonment of all, or substantially all, of the
Partnership's property and the sale and/or collection of any evidences of
indebtedness received in connection therewith; or
(d) the occurrence of any event causing dissolution of the Partnership under
the Act (Section 9.1).
Indemnification
The Managing General Partner has agreed to indemnify each of the Additional
General Partners for obligations related to casualty losses which exceed
available insurance coverage and Partnership assets (Section 7.2).
If obligations incurred by the Partnership are the result of the negligence or
misconduct of an Additional General Partner, or the contravention of the terms
of the Partnership Agreement by the Additional General Partner, then the
foregoing indemnification by the Managing General Partner will be unenforceable
as to such Additional General Partner and such Additional General Partner will
be liable to all other Partners for damages and obligations resulting therefrom
(Section 7.2).
The Managing General Partner will be entitled to reimbursement and
indemnification for all expenditures made (including amounts paid in settlement
of claims) or losses or judgments suffered by it in the ordinary and proper
course of the Partnership's business, provided that the Managing General Partner
has determined in good faith that the course of conduct which caused the loss or
liability was in the reasonable best interest of the Partnership, that the
Managing General Partner was acting on behalf of or performing services for the
Partnership, and that the same were not the result of the negligence or wilful
misconduct on the part of the Managing General Partner (Section 6.4). The
Managing General Partner will have no liability to the Partnership or to any
Partner for any loss suffered by the Partnership which arises out of any action
or inaction of the Managing General Partner if the Managing General Partner, in
good faith, determined that such course of conduct was in the reasonable best
interest of the Partnership and such course of conduct did not constitute
negligence or misconduct of the Managing General Partner. The Managing General
Partner will be indemnified by the Partnership to the limit of the insurance
proceeds and tangible net assets of the Partnership against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
sustained by it in connection with the Partnership, provided that the same were
not the result of gross negligence or wilful misconduct on the part of the
Managing General Partner.
Notwithstanding the above, the Managing General Partner will not be
indemnified for liabilities arising under Federal and state securities laws
unless (1) there has been a successful adjudication on the merits of each count
involving securities law violations; or (2) such claims have been dismissed with
prejudice on their merits by a court of competent jurisdiction; or (3) a court
of competent jurisdiction approves a settlement of such claims against a
particular indemnitee and finds that indemnification of the settlement and the
related costs should be made, and the court considering the request for
indemnification has been advised of the position of the Securities and Exchange
Commission and of the position of any state securities regulatory authority in
which securities of the Partnership were offered or sold as to indemnification
for violations of securities laws; provided, however, the court need only
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be advised of the positions of the securities regulatory authorities of those
states (i) which are specifically set forth in the Prospectus and (ii) in which
plaintiffs claim they were offered or sold Units.
In any claim for indemnification for Federal and state securities laws
violations, the party seeking indemnification must place before the court the
position of the Securities and Exchange Commission and the Massachusetts
Securities Division or respective state securities division, as the case may be,
with respect to the issue of indemnification for securities laws violations.
The Partnership will not incur the cost of the portion of any insurance which
insures any party against any liability as to which such party is prohibited
from being indemnified (Section 6.4).
Reports to Partners
The Managing General Partner will furnish to the Investor Partners certain
semi-annual and annual reports which will contain financial statements
(including a balance sheet and statements of income, Partners' equity and cash
flows), which statements at fiscal year end will be audited by an independent
accounting firm and will include a reconciliation of such statements with
information provided to the Investor Partners for Federal income tax purposes.
Financial statements furnished in a Partnership's semi-annual reports will not
be audited. Semi-annually, all Investor Partners will also receive a summary
itemization of the transactions between the Managing General Partner or any
Affiliate thereof and the Partnership showing all items of compensation received
by the Managing General Partner and its Affiliates. Annually beginning with the
fiscal year ended December 31, 1997 with respect to Partnerships designated
"Blue Ridge Energy Fund 1997--Limited Partnership," and December 31, 1998 with
respect to Partnerships designated "Blue Ridge Energy Fund 1998--Limited
Partnership," oil and gas reserve estimates prepared by an independent petroleum
engineer will also be furnished to the Investor Partners. Annual reports will be
provided to the Investor Partners within 120 days after the close of each
Partnership fiscal year, and semi-annual reports will be provided within 75 days
after the close of the first six months of each Partnership fiscal year. In
addition, the Investor Partners will receive on a monthly basis while the
Partnership is participating in the drilling and completion of wells, reports
containing a description of the Partnerships' acquisition of interests in
Prospects, including farm-ins and farm-outs, and the drilling, completion, and
abandonment of wells thereon. All Investor Partners will receive a report
containing information necessary for the preparation of their Federal income tax
returns and any required state income tax returns by March 15 of each calendar
year. Investor Partners will also receive in such monthly reports a summary of
the status of wells drilled by the Partnership, the amount of oil or gas from
each well and the drilling schedule for proposed wells, if known. The Managing
General Partner may provide such other reports and financial statements as it
deems necessary or desirable (Section 8.2).
Power of Attorney
Each Investor Partner will grant to the Managing General Partner a power of
attorney to execute certain documents deemed by the Managing General Partner to
be necessary or convenient to the Partnership's business or required in
connection with the qualification and continuance of the Partnership (Section
10.1).
Other Provisions
Other provisions of the Partnership Agreement are summarized in this
Prospectus under the headings "Terms of the Offering," "Source of Funds and Use
of Proceeds," Participation in Costs and Revenues," "Management," "Fiduciary
Responsibility of the Managing General Partner," and "Transferability of Units."
The attention of prospective investors is directed to these sections.
TRANSFERABILITY OF UNITS
. The sale of Units by Investor Partners is limited; no market for the Units
will develop.
. Purchasers of Units from Investor Partners must satisfy the suitability
requirements of this offering and as imposed by law.
No market for the Units will develop. An investment in the Partnerships should
be considered an illiquid investment. Investors may not be able to sell their
Units. In addition, as a basis of counsel's opinion that the
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Partnerships will not be treated as "publicly-traded partnerships," the Managing
General Partner has represented that the Units will not be traded on an
established securities market.
While Units of the Partnership are transferable, the ability of the transferee
to become a substitute partner is limited, requiring among other things the
consent of the Managing General Partner (Section 7.3). Transfers of fractional
Units are prohibited, unless the Investor Partner owns less than a whole Unit,
in which case the Investor Partner's entire fractional interest must be
transferred. Units may be assigned only to a person otherwise qualified to
become an Investor Partner, including the satisfaction of any relevant
suitability requirements, as imposed by law or the Partnership. In no event may
any assignment be made which, in the opinion of counsel to the Partnership,
would result in the Partnership being considered to have been terminated for
purposes of Code (S) 708, unless the Managing General Partner consents to such
an assignment, or which, in the opinion of counsel to the Partnership, may not
be effected without registration under the Securities Act of 1933, as amended,
or would result in the violation of any applicable state securities laws. A
substitute Additional General Partner will have the same rights and
responsibilities, including unlimited liability, in the Partnership as every
other Additional General Partner. Upon receipt of notice of a purported transfer
or assignment of an Additional General Partner interest, the Managing General
Partner, after having determined that the purported transferee satisfies the
suitability standards of an Additional General Partner and other conditions
established by the Partnership Agreement, will promptly notify the purported
transferee of same and will include with the notice a copy of the Partnership
Agreement, together with a signature page. In such notification, the Managing
General Partner will advise the transferee that the transferee will have the
same rights and responsibilities, including unlimited liability, as every other
Additional General Partner and that the transferee will not become a Partner of
record until the transferee returns the executed signature page to the Managing
General Partner. A Partnership will not be required to recognize any assignment
until the instrument of assignment has been delivered to the Managing General
Partner. An assignee of an interest in a Partnership has certain rights of
ownership, but may become a Substitute Investor Partner, and thus be entitled to
all of the rights of an Additional General Partner or Limited Partner, as
applicable, only upon meeting certain conditions, including (i) obtaining the
consent of the Managing General Partner to such substitution, (ii) paying all
costs and expenses incurred in connection with such substitution, (iii) making
certain representations to the Managing General Partner and (iv) executing
appropriate documents to evidence its agreement to be bound by all of the terms
and provisions of the applicable Partnership Agreement.
Conversion of Units by Additional General Partners. Upon written notice to the
Managing General Partner, Additional General Partners will have the right to
convert their interests into Limited Partner interests. See "Terms of the
Offering--Conversion of Units by Additional General Partners." Moreover, upon
completion of drilling by a Partnership, the Managing General Partner will
convert all of the Additional General Partner interests of that Partnership into
Limited Partner interests of that Partnership.
Unit Repurchase Program. Beginning with the third anniversary of the date of
the first cash distribution of each Partnership, Investor Partners may tender
their Units to the Managing General Partner for repurchase, subject to certain
conditions. See "Terms of the Offering--Unit Repurchase Program."
PLAN OF DISTRIBUTION
. Sales will be made on a "minimum-maximum best efforts" basis through NASD-
licensed broker-dealers.
. The Dealer-Manager will receive an amount equal to 10% of the subscription
proceeds as sales commissions and expenses.
. Purchase of Units by the Managing General Partner and/or Affiliates may allow
the offering to satisfy the minimum sales requirements and thereby allow the
offering to close and a partnership to be funded.
Units of limited and general partnership interest are being offered for sale
through the Dealer-Manager, as principal distributor, and through other NASD-
licensed broker-dealers with whom the Dealer-Manager may contract pursuant to
the Selling Dealers Agreement on a "minimum-maximum best efforts" basis for each
Partnership (the "Selling Dealers"), to a select group of investors who meet the
suitability standards set forth under "Terms of the Offering--Investor
Suitability." Units will not be sold to tax-exempt investors or to foreign
investors. "Minimum-maximum best efforts" means (1) that the various broker-
dealers which will sell the Units (a) will not be obligated
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to sell or to purchase any amount of Units but (b) will be obligated to make a
reasonable and diligent effort (that is, their "best efforts") to sell as many
Units as possible and (2) that the offering will not close unless the minimum
number of Units (1,000 Units aggregating $1,000,000) is sold within the offering
period. The term "maximum" refers to the maximum proceeds ($2,000,000) that can
be raised with respect to any Partnership.
The Dealer-Manager, an NASD member, will receive a sales commission equal to
8% of the Investor Partners' Subscriptions and reimbursement of due diligence
expenses, marketing support fees and other compensation equal to 2% of the
Investor Partners' Subscriptions, for an aggregate of $1,000,000 ($100,000 if
the minimum number of 1,000 Units is sold). The Dealer-Manager may reallow the
8% sales commission, in whole or in part, to NASD-licensed broker-dealers for
sale of the Units. Any such commissions and other remuneration will be paid in
cash solely on the amount of initial Subscriptions and only as permitted under
federal and state securities laws and applicable rules and regulations. As
provided in the soliciting dealers agreements between Dealer-Manager and the
various Selling Dealers, the Managing General Partner, prior to the time that
$1,000,000 or more of subscription funds have been received and cleared from
subscribers that the Managing General Partner deems suitable to be Investor
Partners in the Partnership in which Units are then being offered, may advance
to the various NASD-licensed broker-dealers from the Managing General Partner's
own funds the sales commissions and due diligence expenses which would otherwise
be payable in connection with subscription funds received and cleared from
subscribers that the Managing General Partner deems suitable to be Investor
Partners prior to the close and funding of the Partnership. In the event that
the minimum sale of 1,000 Units has not occurred as of such time as the
particular offering terminates or the Managing General Partner determines not to
organize and fund the Partnership for any reason, such broker-dealers which have
been advanced commissions and due diligence expenses by the Managing General
Partner with respect to the sale of Units in that Partnership are required by
the soliciting-dealers agreements to return such commissions and due diligence
expenses to the Managing General Partner promptly.
No sales commissions will be paid on sales of Units to officers, directors,
employees, or registered representatives of a soliciting dealer if such
soliciting dealer, in its discretion, has elected to waive such sales
commissions. Any Units so purchased will be held for investment and not for
resale.
The Managing General Partner, the Dealer-Manager and Selling Dealers have
agreed to indemnify one another against certain civil liabilities, including
liability under the Securities Act of 1933, as amended. Members of the selling
group may be deemed to be "underwriters" as defined under the Securities Act of
1933, as amended, and their commissions and other payments may be deemed to be
underwriting compensation.
The Dealer-Manager may offer the Units and receive commissions in connection
with the sale of Units only in those states in which it is lawfully qualified to
do so.
The Managing General Partner and its Affiliates may elect to purchase Units in
the offering on the same terms and conditions as other investors, net of
commissions. The purchase of Units by the Managing General Partner and/or its
Affiliates may have the effect of allowing the offering to be subscribed to the
minimum, thereby satisfying an express condition of the offering, and thus allow
the offering to close. The Managing General Partner and/or its Affiliates will
not purchase more than 10% of the Units subscribed by the Investor Partners in
any Partnership. Additionally, not more than $100,000 of Units purchased by the
Managing General Partner and Affiliates are permitted to be applied to
satisfying the $1,000,000 minimum requirement. Any Units purchased by the
Managing General Partner and/or its Affiliates will be held for investment and
not for resale. Melissa Vera, the majority owner of the Dealer-Manager, is the
daughter of Robert D. Burr, the President of the Managing General Partner. Ms.
Vera's husband, Russell Vera, beneficially owns 2,000,000 shares (46.12%) of the
Managing General Partner. See "Management--Certain Shareholders of the Managing
General Partner." Accordingly, the Dealer-Manager may be deemed an affiliate of
the Managing General Partner.
SALES LITERATURE
In connection with the offering, the NASD-registered broker-dealers may
utilize various sales literature which discusses certain aspects of the Program.
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Such sales material will not contain any material information which is not also
set forth in the Prospectus. The offering of Units will be made only by means of
this Prospectus.
LEGAL OPINIONS
The validity of the Units offered hereby and certain Federal income tax
matters discussed under "Tax Considerations" and in the tax opinion set forth in
Appendix B to the Prospectus have been passed upon by Greenebaum Doll & McDonald
PLLC, 3300 National City Tower, 101 South Fifth Street, Louisville, Kentucky
40202-3197, counsel to the Managing General Partner.
EXPERTS
The consolidated financial statements of Blue Ridge Group, Inc. and
subsidiaries as of December 31, 1996, 1995, 1994 and in the Registration
Statement have been included herein and in the Registration Statement in
reliance upon the reports of Samson, Robbins & Associates PLLC, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form SB-2 (Reg. No. 333-04964C) with respect to
the Units offered hereby has been filed on behalf of the Partnerships with the
Securities and Exchange Commission, Washington, D.C. 20549, under the Securities
Act of 1933, as amended. This Prospectus does not contain all of the information
set forth in the Registration Statement, certain portions of which have been
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Reference is made to such Registration Statement, including
exhibits, for further information. Reference is hereby made to the copy of
documents filed as exhibits to the Registration Statement for full statements of
the provisions thereof, and each such statement in this Prospectus is qualified
in all respects by this reference. Copies of any materials filed as a part of
the Registration Statement may be obtained from the Securities and Exchange
Commission by payment of the requisite fees therefor or may be examined in the
offices of the Commission without charge. The Registration Statement and
exhibits thereto may also be inspected, without charge, at the following
regional offices: Northeast Regional Office, World Trade Center, Suite 1300, New
York, New York 10048 and Midwest Regional Office, Citicorp Center, 500 W.
Madison, Suite 1400, Chicago, Illinois 60661.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 (the "Act") may be permitted to directors, officers and controlling persons
of the small business issuer pursuant to the foregoing provisions, or otherwise,
the small business issuer has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
small business issuer of expenses incurred or paid by a director, officer or
controlling person of the small business issuer in the successful defense of any
action, suite, or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the small
business issuer will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
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GLOSSARY OF TERMS
The following terms used in this Prospectus shall (unless the context
otherwise requires) have the following respective meanings:
Act: Kentucky Revised Uniform Limited Partnership Act.
Additional General Partners: Those Investor Partners who purchase Units as
Additional General Partners, and such Additional General Partners' transferees
and assigns who are admitted as Substitute Investor Partners. The term
"Additional General Partners" shall not include such Investor Partner who
converts such Investor Partner's interest in the Partnership into a Limited
Partner interest pursuant to Section 7.10.
Administrative Costs: All customary and routine expenses incurred internally
by the Managing General Partner for the conduct of program administration,
including legal, finance, accounting, secretarial, travel, office rent,
telephone, data processing and other items of a similar nature which does not
include costs which are directly incurred for the benefit of the Partnership.
Administrative Costs shall not include third party costs associated with audits,
tax preparation or independent engineering and geological reviews.
Administrative Costs also shall not include overhead costs associated with the
actual drilling, completing or production of oil and gas wells.
Affiliate: An affiliate of a specified person means (a) any person directly or
indirectly owning, controlling, or holding with power to vote 10 percent or more
of the outstanding voting securities of such specified person; (b) any person 10
percent or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by such specified
person; (c) any person directly or indirectly controlling, controlled by, or
under common control with such specified person; (d) any officer, director,
trustee or partner of such specified person; and (e) if such specified person is
an officer, director, trustee or partner, any person for which such person acts
in any such capacity.
BRG: Blue Ridge Group, Inc., a Nevada corporation organized in 1993.
Capital Accounts: The accounts to be maintained for each Partner on the books
and records of the Partnership pursuant to Section 3.1 of the Partnership
Agreement.
Capital Contribution: The total contributions made by a Partner to the capital
of the Partnership pursuant to Article 2.
Capital Expenditures: Those costs associated with property acquisition and the
drilling and completion of oil and gas wells which are generally accepted as
capital expenditures pursuant to the provisions of the Internal Revenue Code.
Carried Interest: An equity interest in a program issued to a person without
consideration, in the form of cash or tangible property, in an amount
proportionately equivalent to that received from the participants.
Code: The Internal Revenue Code of 1986, as amended.
Cost: When used with respect to the sale of property to the Partnership, means
(a) the sum of the prices paid by the seller to an unaffiliated person for such
property, including bonuses; (b) title insurance or examination costs, brokers'
commissions, filing fees, recording costs, transfer taxes, if any, and like
charges in connection with the acquisition of such property; (c) a pro rata
portion of the seller's actual necessary and reasonable expenses for seismic and
geophysical services; and (d) rentals and ad valorem taxes paid by the seller
with respect to such property to the date of its transfer to the buyer, interest
and points actually incurred on funds used to acquire or maintain such property,
and such portion of the seller's reasonable, necessary and actual expenses for
geological, engineering, drafting, accounting, legal and other like services
allocated to the property cost in conformity with generally accepted accounting
principles and industry standards, except for expenses in connection with the
past drilling of wells which are not producers of sufficient quantities of oil
or gas to make commercially reasonable their continued operations, and provided
that the expenses enumerated in this subsection (d) hereof shall have been
incurred not more than 36 months prior to the purchase by the Partnership;
provided that such period may be extended, at the discretion of the state
securities administrator, upon proper justification. When used with respect
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to services, "cost" means the reasonable, necessary and actual expense incurred
by the seller on behalf of the Partnership in providing such services,
determined in accordance with generally accepted accounting principles. As used
elsewhere, "cost" means the price paid by the seller in an arm's-length
transaction.
Dealer-Manager: Ridgemont Securities, Inc.
Depreciation: For each fiscal year or other period, an amount equal to the
depreciation, amortization, or other cost recovery deduction allowable with
respect to an asset for such year or other period, except that if the Gross
Asset Value of an asset differs from its adjusted basis for Federal income tax
purposes, Depreciation shall be an amount which bears the same ratio to such
beginning Gross Asset Value as the Federal income tax depreciation,
amortization, or other cost recovery deduction for such year or other period
bears to such beginning adjusted tax basis; provided, however, that if the
Federal income tax depreciation, amortization, or other cost recovery deduction
for such year is zero, Depreciation shall be determined with reference to such
beginning Gross Asset Value using any reasonable method selected by the Managing
General Partner.
Development Well: A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
Direct Costs: All actual and necessary costs directly incurred for the benefit
of a Partnership and generally attributable to the goods and services provided
to the Partnership by parties other than the Managing General Partner or its
Affiliates such as audits, tax preparation, legal expenses, independent
engineering reports and materials and supplies; provided, however, that Direct
Costs shall not include any cost otherwise classified as Organization and
Offering Costs, Administrative Costs or Operating Costs. Direct Costs may
include the cost of services provided by the Managing General Partner or its
Affiliates if such services are provided pursuant to written contracts and in
compliance with Section 5.7(e) of the Partnership Agreement.
Distributable Cash: Cash remaining for distribution to the Managing General
Partner and the Investor Partners after the payment of all Partnership
obligations, including debt service and the establishment of contingency
reserves for anticipated future costs as determined by the Managing General
Partner.
Drilling and Completion Costs: All costs, excluding Operating Costs, of
drilling, completing, testing, equipping and bringing a well into production or
plugging and abandoning it, including all labor and other construction and
installation costs incident thereto, location and surface damages, cementing,
drilling mud and chemicals, drill stem tests and core analysis, engineering and
well site geological expenses, electric logs, costs of plugging back, deepening,
rework operations, repairing or performing remedial work of any type, costs of
plugging and abandoning any well participated in by the Partnership, and
reimbursements and compensation to well operators, including charges paid to the
Managing General Partner as unit operator during the drilling and completion
phase of a well, plus the cost of the gathering systems and of acquiring
leasehold interests.
Dry Hole: Any well abandoned without having produced oil or gas in commercial
quantities.
Escrow Agent: South Central Bank of Bowling Green, Inc., Bowling Green,
Kentucky, or its successor.
Exploratory Well: A well drilled to find commercially productive hydrocarbons
in an unproved area, to find a new commercially productive horizon in a field
previously found to be productive of hydrocarbons at another horizon, or to
significantly extend a known prospect.
Farm-in: An agreement whereby the purchaser of a leasehold or Working Interest
agrees to be assigned an interest in certain specific acreage by the assignors,
giving an interest such as an Overriding Royalty Interest, an oil and gas
payment, offset acreage or other type of interest, subject to the drilling of
one or more specific wells or other performance as a condition of the
assignment.
Farm-out: An agreement whereby the owner of a leasehold or Working Interest
agrees to assign an interest in certain specific acreage to the assignees,
retaining an interest such as an Overriding Royalty Interest, an oil and gas
payment, offset acreage or other type of interest, subject to the drilling of
one or more specific wells or other performance as a condition of the
assignment.
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General Partners: The Additional General Partners and the Managing General
Partner.
Gross Asset Value: With respect to any asset, the asset's adjusted basis for
Federal income tax purposes, except as follows:
(1) The initial Gross Asset Value of any asset contributed by a Partner to
the Partnership shall be the gross fair market value of such asset, as
determined by the contributing Partner and the Partnership;
(2) The Gross Asset Value of all Partnership assets shall be adjusted to
equal their respective gross fair market values, as determined by the Managing
General Partner, as of the following times: (a) the acquisition of an additional
interest in the Partnership by any new or existing Partner in exchange for more
than a de minimis Capital Contribution; (b) the distribution by the Partnership
of property in consideration for an interest in the Partnership; and (c) the
liquidation of the Partnership within the meaning of Treas. Reg. (S) 1.704-
1(b)(2)(ii)(g); provided, however, that the adjustments pursuant to clauses (a)
and (b) above shall be made only if the Managing General Partner reasonably
determines that such adjustments are necessary or appropriate to reflect the
relative economic interests of the Partners in the Partnership;
(3) The Gross Asset Value of any Partnership asset distributed to any Partner
shall be the gross fair market value of such asset on the date of distribution;
and
(4) The Gross Asset Value of Partnership assets shall be increased (or
decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code (S)(S) 734(b) or 743(b), but only to the extent that such
adjustments are taken into account in determining Capital Accounts pursuant to
Treas. Reg. (S) 1.704-1(b)(2)(iv)(m) and Section 3.2(g) of the Partnership
Agreement; provided, however, that Gross Asset Value shall not be adjusted
pursuant to Section 1.1(q)(iv) of the Partnership Agreement to the extent the
Managing General Partner determines that an adjustment pursuant to Section
1.1(q)(ii) of the Partnership Agreement is necessary or appropriate in
connection with a transaction that would otherwise result in an adjustment
pursuant to Section 1.1(q)(iv) of the Partnership Agreement.
If the Gross Asset Value of an asset has been determined or adjusted pursuant
to Sections 1.1(q)(i), 1.1(q)(ii), or 1.1(q)(iv), such Gross Asset Value shall
thereafter be adjusted by the Depreciation taken into account with respect to
such asset for purposes of computing Profits and Losses.
Horizon: A zone of a particular formation; that part of a formation of
sufficient porosity and permeability to form a petroleum reservoir.
IDC: Intangible drilling and development costs.
Independent Expert: A person with no material relationship to the Managing
General Partner who is qualified and who is in the business of rendering
opinions regarding the value of oil and gas properties based upon the evaluation
of all pertinent economic, financial, geologic and engineering information
available to the Managing General Partner.
Initial Limited Partner: Robert D. Burr or any successor to his interest.
Investor Partner: Any investor participating in the Partnership as an
Additional General Partner or a Limited Partner, but excluding the Managing
General Partner and Initial Limited Partner.
Landowners' Royalty Interest: An interest in production, or the proceeds
therefrom, to be received free and clear of all costs of development, operation,
or maintenance, reserved by a landowner upon the creation of an oil and gas
lease.
Lease: Full or partial interests in: (i) undeveloped oil and gas leases; (ii)
oil and gas mineral rights; (iii) licenses; (iv) concessions; (v) contracts;
(vi) fee rights; or (vii) other rights authorizing the owner thereof to drill
for, reduce to possession and produce oil and gas.
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Limited Partners: Those Investor Partners who purchase Units as Limited
Partners, transferees or assignees who become Limited Partners, or Additional
General Partners who convert their interests to limited partnership interests
pursuant to the provisions of the Partnership Agreement.
Loss: Tax loss with adjustments as provided in the Partnership Agreement.
Management Fee: The fee to which the Managing General Partner is entitled
pursuant to Section 6.6 of the Partnership Agreement.
Managing General Partner: Blue Ridge Group, Inc. or its successors.
Mcf: One thousand cubic feet of gas measured at the standard temperature of
60/o/ Fahrenheit and pressure of 14.65 psi.
Net Subscriptions: An amount equal to total Subscriptions of the Investor
Partners less the amount of Organization and Offering Costs of the Partnership.
Net Well: The sum of fractional working interests owned and drilled by the
Partnership.
Non-capital Expenditures: Those expenditures associated with property
acquisition and the drilling and completion of oil and gas wells that under
present law are generally accepted as fully deductible currently for federal
income tax purposes.
Nonrecourse Liability: Shall have the meaning set forth in Treas Reg. (S)(S)
1.704-2(b)(3) and 1.752-1(a)(2).
Offering Termination Date: December 31, 1997 with respect to Partnerships
designated "Blue Ridge Energy Fund 1997--Limited Partnership" and December 31,
1998 with respect to Partnerships designated "Blue Ridge Energy Fund 1998--
Limited Partnership" or such earlier date as the Managing General Partner, in
its sole and absolute discretion, shall select.
Oil and Gas Interest: Any oil or gas royalty or lease, or fractional interest
therein, or certificate of interest or participation or investment contract
relative to such royalties, leases or fractional interests, or any other
interest or right which permits the exploration of, drilling for, or production
of oil and gas or other related hydrocarbons or the receipt of such production
or the proceeds thereof.
Operating Costs: Expenditures made and costs incurred in producing and
marketing oil or gas from completed wells, including, in addition to labor,
fuel, repairs, hauling, materials, supplies, utility charges and other costs
incident to or therefrom, ad valorem and severance taxes, insurance and casualty
loss expense, and compensation to well operators or others for services rendered
in conducting such operations.
Organization and Offering Costs: All costs of organizing and selling the
offering including, but not limited to, total underwriting and brokerage
discounts and commissions (including fees of the underwriters' attorneys),
expenses for printing, engraving, mailing, salaries of employees while engaged
in sales activity, charges of transfer agents, registrars, trustees, escrow
holders, depositaries, engineers and other experts, expenses of qualification of
the sale of the securities under federal and state law, including taxes and
fees, accountants' and attorneys' fees and other front-end fees.
Overriding Royalty Interest: An interest in the oil and gas produced pursuant
to a specified oil and gas lease or leases, or the proceeds from the sale
thereof, carved out of the working interest, to be received free and clear of
all costs of development, operation, or maintenance.
Participant: The purchaser of a Unit in a Program.
Participant List: An alphabetical list of the names, addresses and business
telephone numbers of the Investor Partners, along with the number of Units held
by each of them.
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Partner Minimum Gain: Partner nonrecourse debt minimum gain within the meaning
of Treas. Reg. (S) 1.704-2(i)(3).
Partner Nonrecourse Debt: Shall have the meaning set forth in Treas. Reg. (S)
1.704-2(b)(4).
Partner Nonrecourse Deductions: Shall have the meaning set forth in Treas.
Reg. (S) 1.704-2(i)(2).
Partners: The Managing General Partner, the Additional General Partners other
than the Managing General Partner, and the Limited Partners. Reference to a
"Partner" shall mean any one of the Partners.
Partnership or Partnerships: One or all of the limited partnerships to be
formed in the Blue Ridge Energy Fund 1996-1997 Drilling Program comprised of a
series of up to ten limited partnerships to be designated as the Blue Ridge
Energy Fund 1997-A Limited Partnership, the Blue Ridge Energy Fund 1997-B
Limited Partnership, the Blue Ridge Energy Fund 1997-C Limited Partnership, Blue
Ridge Energy Fund 1997-D Limited Partnership, Blue Ridge Energy Fund 1997-E
Limited Partnership, Blue Ridge Energy Fund 1997-F Limited Partnership, Blue
Ridge Energy Fund 1998-A Limited Partnership, Blue Ridge Energy Fund 1998-B
Limited Partnership, Blue Ridge Energy Fund 1998-C Limited Partnership and Blue
Ridge Energy Fund 1998-D Limited Partnership. The Partnerships will be governed
by the Kentucky Revised Uniform Limited Partnership Act. Together the
Partnerships, for purposes of this offering, are referred to as the Blue Ridge
Energy Fund 1996/1997 Drilling Program or sometimes as the Program.
Partnership Agreement: The Limited Partnership Agreement as it may be amended
from time to time, the form of which is attached to the Prospectus as Appendix
A.
Partnership Minimum Gain: Partnership Minimum Gain as defined in Treas. Reg.
(S) 1.704-2(d)(1).
Permitted Transfer: Shall mean any transfer of Units satisfying the provisions
of Section 7.3 and 7.4 of the Partnership Agreement.
Producing Properties: Properties or interests in properties producing oil and
gas in commercial quantities, or containing shut-in wells capable of such
production, or properties which are acquired as an incidental part of the
acquisition of such properties. Producing Properties shall include associated
well machinery and equipment, gathering systems, storage facilities or
processing installations or other equipment and property associated with the
production and field processing of oil or gas. Interests in properties may
include Working Interests, production payments, Royalty Interests, Overriding
Royalty Interests, Net Profits Interests and other nonoperating interests.
Producing Properties may include gas gathering lines or pipelines. Interests in
Producing Properties may be held indirectly through ownership of general or
limited partnership interests, beneficial interests, interest in trusts, common
or preferred stock, or other interests in entities, provided that the Managing
General Partner determines that such means of ownership would not cause a
Partnership to be subject to the provisions of the Investment Company Act of
1940. The geographical limits of a Producing Property may be enlarged or
contracted on the basis of subsequently acquired geological data to define the
productive limits of a reservoir, or as a result of action by a regulatory
agency employing such criteria as the regulatory agency may determine.
Profit: Taxable income with adjustments as provided in Partnership Agreement.
Program: One or more limited partnerships formed, or to be formed, for the
primary purpose of exploring oil or gas. Herein, Blue Ridge Energy Fund
1996/1997.
Prospect: A contiguous oil and gas leasehold estate, or lesser interest
therein, upon which drilling operations may be conducted. In general, a Prospect
is an area in which a Partnership owns or intends to own one or more oil and gas
interests, which is geographically defined on the basis of geological data by
the Managing General Partner and which is reasonably anticipated by the Managing
General Partner to contain at least one reservoir. An area covering lands which
are believed by the Managing General Partner to contain subsurface structural or
stratigraphic conditions making it susceptible to the accumulations of
hydrocarbons in commercially productive quantities at one or more horizons. The
area, which may be different for different horizons, shall be designated by the
Managing General Partner in writing prior to the conduct of program operations
and shall be enlarged or contracted from time to time on the basis of
subsequently acquired information to define the anticipated limits of
96
<PAGE>
the associated hydrocarbon reserves and to include all acreage encompassed
therein. A "prospect" with respect to a particular horizon may be limited to the
minimum area permitted by state law or local practice, whichever is applicable,
to protect against drainage from adjacent wells if the well to be drilled by the
Partnership is to a horizon containing proved reserves.
Prospectus: The Partnership's Prospectus, including a preliminary prospectus,
of which the Partnership Agreement is a part, pursuant to which the Units are
being offered and sold.
Proved Developed Oil and Gas Reserves: Proved developed oil and gas reserves
are reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods. Additional oil and gas expected to be
obtained through the application of fluid injection or other improved recovery
techniques for supplementing the natural forces and mechanisms of primary
recovery should be included as "proved developed reservoirs" only after testing
by a pilot project or after the operation of an installed program has confirmed
through production response that increased recovery will be achieved.
Proved Oil and Gas Reserves: Proved oil and gas reserves are the estimated
quantities of oil, gas and natural gas liquids which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions, i.e.,
prices and costs as of the date the estimate is made. Prices include
consideration of changes in existing prices provided only by contractual
arrangements, but not on escalations based upon future conditions.
(i) Reservoirs are considered proved if economic productibility is supported
by either actual production or conclusive formation test. The area of a
reservoir considered proved includes (A) that portion delineated by
drilling and defined by gas-oil and/or oil-water contacts, if any, and
(B) the immediately adjoining portions not yet drilled, but which can be
reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid
contacts, the lowest known structural occurrence of hydrocarbons controls
the lower proved limit of the reservoir.
(ii) Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in
the "proved" classification when successful testing by a pilot project,
or the operation of an installed program in the reservoir, provides
support for the engineering analysis on which the project or program was
based.
(iii) Estimates or proved reserves do not include the following: (A) oil that
may become available from known reservoirs but is classified separately
as indicated additional reserves; (B) crude oil, natural gas, and natural
gas liquids, the recovery of which is subject to reasonable doubt because
of uncertainty as to geology, reservoir characteristics, or economic
factors; (C) crude oil, gas, and natural gas liquids, that may occur in
undrilled prospects; and (D) crude oil, natural gas liquids, that may be
recovered from oil shales, coal, gilsonite and other such sources.
Proved Undeveloped Reserves: Proved undeveloped oil and gas reserves are
reserves that are expected to be recovered from new wells on undrilled acreage,
or from existing wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage shall be limited to those drilling
units offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where it
can be demonstrated with certainty that there is continuity of production from
the existing productive formation. Under no circumstances should estimates for
proved undeveloped reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual tests
in the area and in the same reservoir.
Reservoir: A separate structural or stratigraphic trap containing an
accumulation of oil or gas.
Roll-Up: A transaction involving the acquisition, merger, conversion, or
consolidation, either directly or indirectly, of the Partnership and the
issuance of securities of a roll-up entity. Such term does not include:
(i) a transaction involving securities of the Partnership that have been listed
for at least 12 months on a national exchange or traded through the
National Association of Securities Dealers Automated Quotation National
Market System; or
97
<PAGE>
(ii) a transaction involving the conversion to corporate, trust or association
form of only the Partnership if, as a consequence of the transaction, there
will be no significant adverse change in any of the following:
(a) voting rights;
(b) the term of existence of the Partnership;
(c) sponsor compensation; or
(d) the Partnership's investment objectives.
Roll-Up Entity: A partnership, trust, corporation or other entity that would
be created or survive after the successful completion of a proposed roll-up
transaction.
Royalty: A fractional undivided interest in the production of oil and gas
wells, or the proceeds therefrom to be received free and clear of all costs of
development, operations or maintenance. Royalties may be reserved by landowners
upon the creation of an oil and gas lease ("landowner's royalty") or
subsequently carved out of a working interest ("overriding royalty").
Securities Act: Securities Act of 1933, as amended.
Significant Transaction: Any transaction, other than a Roll-Up, which involves
the acquisition, merger, conversion, or consolidation of the Partnership with or
into another partnership, corporation or other entity and the issuance of
securities to Investor Partners as a result of the transaction.
Sponsor: Any person directly or indirectly instrumental in organizing, wholly
or in part, a program or any person who will manage or is entitled to manage or
participate in the management or control of a program. "Sponsor" includes the
managing and controlling general partner(s) and any other person who actually
controls or selects the person who controls 25% or more of the exploratory,
developmental or producing activities of the Partnership, or any segment
thereof, even if that person has not entered into a contract at the time of
formation of the Partnership. "Sponsor" does not include wholly independent
third parties such as attorneys, accountants, and underwriters whose only
compensation is for professional services rendered in connection with the
offering of Units. Whenever the context of these guidelines so requires, the
term "sponsor" shall be deemed to include its affiliates.
Spudding Rule and Spudding Date: The date that drilling commences.
Subscription Agreement: The agreement attached to the Prospectus as Appendix
C, pursuant to which an investor subscribes to Units in the Partnership.
Subscriptions: The Subscription Agreement(s) or the amount indicated on the
Subscriptions Agreements that the Additional General Partners and the Limited
Partners have agreed to pay to a Partnership.
Substitute Investor Partner: Any Person admitted to the Partnership as an
Investor Partner pursuant to Section 7.3 of the Partnership Agreement.
Surviving Entity: The entity which survives a Significant Transaction.
Tangible Costs: Those costs which are generally accepted as capital
expenditures pursuant to the provisions of the Code.
TMP: The tax matters partner of the Partnership for purposes of Code (S)(S)
6621 through 6233.
Treas. Reg.: A regulation promulgated by the Treasury Department under Title
26 of the United States Code.
Unit: An undivided interest of the Investor Partners in the aggregate interest
in the capital and profits of the Partnership.
98
<PAGE>
Well Head Gas Price: The price paid by a gas purchaser for gas produced from
Partnership wells excluding any tax reimbursements or transportation allowances.
Working Interest: An interest in an oil and gas leasehold which is subject to
some portion of the costs of development, operation, or maintenance.
99
<PAGE>
BLUE RIDGE GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Period Ended
December 31, 1996, 1995 and 1994
(With Independent Auditors' Report Thereon)
and June 30, 1997
<PAGE>
BLUE RIDGE GROUP, INC.
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995, AND 1996
(With Independent Auditors' Report Thereon)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
INDEPENDENT AUDITORS' REPORT............................................... F-1
CONSOLIDATED BALANCE SHEETS................................................ F-2
CONSOLIDATED STATEMENTS OF INCOME.......................................... F-3
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY.................................................. F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS...................................... F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS......................... F-6 to F-22
</TABLE>
<PAGE>
Independent Auditors' Report
- ----------------------------
To the Board of Directors and
Stockholders of Blue Ridge Group, Inc.
Bowling Green, Kentucky
We have audited the accompanying consolidated balance sheets of Blue Ridge
Group, Inc. as of December 31, 1996 and 1995, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the two
years ended December 31, 1996, 1995 and 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Blue Ridge Group,
Inc. as of December 31, 1996, 1995 and 1994, and the results of its operations
and cash flows for the years then ended in conformity with generally accepted
accounting principles.
Samson, Robbins & Associates, P.L.L.C.
Dallas, Texas
April 21, 1997
<PAGE>
<TABLE>
<CAPTION>
Consolidated Balance Sheet
December 31, 1996 1995
- ------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash (Notes 7 & 10) $2,036,083 $1,413,985
Short Term Investments (Note 2) 86,135 88,695
Accounts Receivable:
Managed Limited Partnerships and Joint Ventures (Notes 3 & 4) 287,335 174,817
Real Estate Sales Contracts 127,754 247,780
Trade 84,000 10,114
Oil & Gas Sales --- 4,799
Subscriptions Receivable (Note 11) --- 10,000
Inventory:
Real Estate 333,399 493,805
Other 64,955 45,108
Advances to Related Parties (Note 5) 11,843 127,572
Notes Receivable Related Parties Short Term Portion (Note 5) 92,041 192,934
Prepaid Expenses 88,392 50,000
- ------------------------------------------------------------------------------------------------------
Total Current Assets 3,211,937 2,859,609
INVESTMENTS
Interests in Limited Partnerships & Joint Ventures (Notes 3 & 4) 95,671 40,450
Minority Interest in Subsidiary (Notes 1 & 5) --- 64,792
PROPERTY AND EQUIPMENT, net (Note 6) 2,107,671 803,844
OTHER ASSETS
Notes Receivable Related Parties, net of Current Portion (Note 96,735 126,463
5)
Excess of Investment over Assets Acquired, net (Note 5) 98,520 ---
Public Drilling Fund Formation and Marketing Costs (Note 1) 446,688 ---
Deferred Charges (Note 1) 482,232 9,195
- ------------------------------------------------------------------------------------------------------
TOTAL ASSETS $6,539,454 $3,904,353
======================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $ 342,445 $ 319,903
Drilling Advances (Notes 7 and 10) --- 707,382
Current Portion of Long Term Debt (Note 8) 331,657 529,147
Income Taxes Payable (Note 12) 45,560 ---
- ------------------------------------------------------------------------------------------------------
Total Current Liabilities 719,662 1,556,432
MINORITY INTEREST SUBSIDIARIES (Notes 1 & 5) 610,429 ---
DEFERRED INCOME TAX LIABILITY (Note 12) 64,615 34,565
LONG TERM DEBT (Note 8) 3,118,123 53,498
- ------------------------------------------------------------------------------------------------------
Total Liabilities 4,512,829 1,644,495
COMMITMENTS AND CONTINGENCIES (Notes 9, 10, & 13) --- ---
STOCKHOLDERS' EQUITY (Notes 10 & 11)
Preferred Stock, $0.001 par value; 3,000,000 shares authorized;
659,033 shares and 1,132,233 issued and outstanding at December
31, 1996, 1995 and 1994, respectively 659 1,132
Common Stock, $0.001 par value; 20,000,000 shares authorized;
4,441,131 shares and 3,586,825 issued and outstanding at December
31, 1996, 1995 and 1994, respectively 4,441 3,587
Additional Paid-In Capital 2,347,955 2,528,044
Retained Deficit (326,430) (272,905)
- ------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 2,026,625 2,259,858
- ------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $6,539,454 $3,904,353
- ------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Years Ended 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING REVENUES (Note 1):
Turnkey Contract Sales $3,448,221 $3,149,600 $2,285,241
Drilling and Well Services 573,728 696,565 276,269
Management Fees 238,571 269,880 308,899
Syndication Fees 24,585 260,876 256,695
Reimbursed Costs 95,873 351,482 182,500
Oil and Gas Sales 205,017 10,201 45,669
Real Estate Sales and Other 1,737,890 1,144,331 16,575
- ---------------------------------------------------------------------------------------
Total Operating Revenues 6,323,885 5,882,935 3,371,848
OPERATING COSTS AND OTHER EXPENSES (Note 1):
Turnkey Contract Costs 2,258,139 1,632,393 1,497,101
Drilling and Well Services Costs 60,871 449,754 178,380
Lease Operating and Production Costs 71,906 4,095 13,440
Construction Costs 1,660,899 997,264 ---
Share of Partnerships' Losses (Note 4) 72,802 417,357 156,066
Depreciation, Depletion and Amortization 149,611 157,694 89,791
Marketing Costs 298,231 611,443 472,538
General and Administrative Costs 1,419,651 1,175,262 901,897
- ---------------------------------------------------------------------------------------
Total Operating Costs 5,992,110 5,445,262 3,309,213
- ---------------------------------------------------------------------------------------
OPERATING INCOME 331,775 437,673 62,635
OTHER INCOME (EXPENSE):
Interest Expense (178,162) (93,705) (49,298)
Minority Interest in Subsidiaries (Notes 1 and 5) (58,270) 8,072 ---
Other, net 128,532 20,582 2,860
- ---------------------------------------------------------------------------------------
Total Other Income (Expense) (107,900) (65,051) (46,438)
- ---------------------------------------------------------------------------------------
INCOME BEFORE TAXES 223,875 372,622 16,197
Income Taxes (Note 12) 77,098 105,154 2,100
- ---------------------------------------------------------------------------------------
NET INCOME $ 146,777 $ 267,468 $ 14,097
=======================================================================================
EARNINGS PER SHARE (Note 1):
Primary $ 0.04 $ 0.07 $ 0.00
- ---------------------------------------------------------------------------------------
Fully Diluted $ 0.04 $ 0.07 $ 0.00
- ---------------------------------------------------------------------------------------
Weighted Average Common Shares Outstanding 4,202,589 3,569,035 3,287,668
- ---------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
--------------------- -------------------- ADDITIONAL RETAINED
NO. OF NO. OF PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1993 523,700 $ 524 2,500,000 $ 2,500 $ 523,176 $(247,382) $ 278,818
Sale of Stock:
Common Stock 278,875 279 222,821 223,100
Preferred Stock
Series A 374,500 374 324,326 324,700
Series B 125,000 125 84,875 85,000
Series C
Issued 114,833 115 298,810 298,925
Subscribed 313,667 314 897,686 898,000
Net Income 14,097 14,097
Dividends Paid (81,344) (81,344)
- ----------------------------------------------------------------------------------------------------------------
Balance December 31, 1994 1,451,700 $ 1,452 2,778,875 $ 2,779 $2,351,694 $(314,629) $2,041,296
Sale of Stock:
Common Stock 29,594 30 69,970 70,000
Preferred Stock
Series A 56,200 56 56,144 56,200
Series C
Issued 327,178 327 239,625 239,952
Subscribed (313,667) (314) (189,000) (189,314)
Conv. of Series C to Common (389,178) (389) 778,356 778 (389) ---
Net Income 267,468 267,468
Dividends Paid (225,744) (225,744)
- ----------------------------------------------------------------------------------------------------------------
Balance December 31, 1995 1,132,233 1,132 3,586,825 3,587 2,528,044 (272,905) 2,259,858
- ----------------------------------------------------------------------------------------------------------------
Prior Period Adjustment 5,000 5 (26,713) (35,705) (62,413)
Conv. of Series A to Common (428,700) (428) 857,400 857 (429)
Conv. of Series C to Bonds (49,500) (50) (149,950) (150,000)
Retirement of Stock (3,094) (3) (2,997) (3,000)
Net Income 146,777 146,777
Dividends Paid (164,597) (164,597)
- ----------------------------------------------------------------------------------------------------------------
Balance December 31, 1996 659,033 $ 659 4,441,131 $ 4,441 $2,347,955 $(326,430) $2,026,625
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31, 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 146,777 $ 267,468 $ 14,097
Adjustments to Reconcile Net Income to Net Cash Flow
from Operating Activities:
Depreciation, Depletion and Amortization 149,611 157,694 89,791
Increase in Income Taxes Payable 45,560 --- ---
Net Loss on Investment in Partnerships 72,802 350,268 ---
Prior Period Adjustment (62,413) --- ---
Net (Gain) on Sale of Assets (66,633) (1,981) (1,260)
(Increase) Decrease in Accounts Receivable 64,150 (210,585) (225,575)
(Increase) in Prepaid Expenses and Deposits (38,392) (38,624) (18,526)
Increase in Accounts Payable & Accrued Liabilities 22,542 120,232 174,938
(Increase) in Inventory (19,847) --- 119,741
Increase (Decrease) in Drilling Advances (707,382) 232,608 474,774
Increase in Deferred Taxes 30,050 34,565 ---
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (363,175) 911,645 (1,098,267)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Limited Partnerships/Joint Ventures (130,363) (12,419) (534,365)
Investment in Subsidiary 576,701 (64,792) ---
Investment in Real Estate 160,406 (538,913) ---
(Purchase) Sale of Certificates of Deposit 22,485 (28,695) (60,000)
Net (Increase) Decrease in Advances/Notes Rec.-Related Parties 130,621 (78,438) (259,324)
Purchase of Property and Equipment (1,384,465) (258,854) (82,078)
Purchase of Short Term Investment (19,925) --- ---
- -----------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (644,540) (982,111) (1,098,267)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Debt (977,506) (706,409) (121,928)
New Borrowings 1,589,641 912,757 ---
Sale of Convertible Bonds 2,255,000 --- ---
Deferred Registration and Bond Offering Costs (919,725) --- ---
Issuance (Retirement) of Stock (153,000) 365,838 931,725
Proceeds Received on Stock Subscriptions --- 543,167 155,833
Dividends Paid (164,597) (225,744) (81,334)
- -----------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,629,813 889,609 884,296
- -----------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH 622,098 819,143 414,009
- -----------------------------------------------------------------------------------------------------------
CASH AT BEGINNING OF PERIOD 1,413,985 594,842 180,833
- -----------------------------------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 2,036,083 $1,413,985 $ 594,842
- -----------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 184,135 $ 93,705 $ 79,986
- -----------------------------------------------------------------------------------------------------------
Cash Paid for Federal Income Taxes $ 40,035 $ 24,243 $ ---
- -----------------------------------------------------------------------------------------------------------
</TABLE>
F-5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying notes are an integral part of these consolidated
financial statements.
1. OPERATIONS AND SUMMARY OF
-------------------------
SIGNIFICANT ACCOUNTING POLICIES
-------------------------------
General
- -------
Blue Ridge Group, Inc., (the Company), a Nevada corporation, was organized
in August, 1993, as the successor to Blue Ridge Drilling and Operating, Inc., a
Kentucky corporation, which was organized in December, 1992. The Company has
offices at 632 Adams Street, Suite 700, Bowling Green, Kentucky, 42101.
The Company is engaged in the exploration and development of oil and gas
leases primarily in Texas and Kentucky 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) acquisition of oil and gas companies which own
properties and/or production. Wells drilled by the Company include both
exploratory and development wells.
The Company also owns and operates a drilling rig, a cementing business,
and an acidizing business, and provides such services to its affiliates and
investment partnerships as well as to third parties. The Company intends to
continue providing such services to the oil and gas industry and will actively
pursue the acquisition of other service operations which complement its ongoing
philosophy of vertically integrating such services.
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.
Blue Ridge Builders, Inc. ("Builders"), a Nevada corporation and a 66.7%
majority owned subsidiary of the Company, was organized in September, 1994 and
is involved in the development and construction of real estate properties in the
Bowling Green, Kentucky area. The 1/3 minority interest in Builders is owned by
an officer and director of the Company. To date, Builders has constructed and
sold residential homes and lots. Builders intends to continue this activity as
well as pursue the purchase, development and construction of residential
subdivisions and commercial office parks. During 1996, Builders also remodeled
the building purchased by the Company that will serve as the office complex for
the Company.
Blue Ridge Energy, Inc., ("Energy"), a Nevada corporation, and 78.6% owned
subsidiary of the Company, was organized in November, 1994 as Gem Source,
Incorporated, and subsequently changed its name to Blue Ridge Energy, Inc. in
May, 1996. Energy also has offices at 632 Adams Street, Suite 710, Bowling
Green, Kentucky, 42101, and 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 consolidated financial statements include the accounts of Blue Ridge
Group, Inc., and its 66.7% owned subsidiary, Blue Ridge Builders, Inc., and its
78.6% owned subsidiary, Blue Ridge Energy, Inc. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
- ----------------
The presentation 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
F-6
<PAGE>
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
Drilling Operations
- -------------------
The Company follows the percentage-of-completion method of accounting for
day work and footage drilling arrangements. Under this method, all drilling
revenues, direct costs and appropriate portions of indirect costs, related to
the contracts in progress, are recognized as the contract drilling services are
performed.
The Company follows the completed contract method of accounting for turnkey
drilling arrangements. Under this method, all drilling advances, 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 completed. This accounting method has been utilized by the Company
based on the short term nature of the drilling contracts, i.e. 4-5 days.
Working Interests
- -----------------
Revenues from working interests the Company owns are recognized when the
natural gas and oil are produced.
Managed Limited Partnerships
- ----------------------------------------
The Company sponsors privately offered joint venture general and limited
partnerships for which it serves as the joint venture manager. The purpose of
these joint ventures is to acquire and develop oil and gas leases. The joint
ventures 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. Additionally, the Company earns a carried working
interest to the tanks and pays only its pro rata share of well operating costs,
while the joint ventures pay 100% of the costs of this carried working interest.
The Company utilizes the equity method of accounting for its investment in
these partnerships. Under this method, initial investments are recorded as an
asset and the Company's share of income or loss is recorded as an increase or
decrease to the investment account and appears as a single amount on the income
statement.
Initial Public Offering
- -----------------------
During 1996, the Company began efforts to form a public drilling fund.
Costs of syndication, registration, and qualification of the public drilling
fund incurred by the Company have been deferred.
A Form SB-2 Registration Statement was filed with the Securities and
Exchange Commission, was approved and became effective September 24, 1996. The
drilling fund, Blue Ridge Energy Fund 1996/1997, is a series of up to ten
limited partnerships which will be formed to purchase, drill, own and operate
oil and gas wells primarily in Texas, Oklahoma and Kentucky. A total of
$10,000,000 of units of the partnership interest will be available for sale,
however, the program has limited the maximum capitalization of an individual
partnership to $2,000,000. At December 31, 1996, fifteen (15) units of Blue
Ridge Energy Fund 1996/1997 had been sold.
Deferred Charges
- ----------------
Legal and accounting fees, underwriting fees, printing costs, and other
direct expenses associated with the issuance of the Company's Convertible Bonds
during 1996 have been capitalized and are being amortized over the life of the
bonds, which mature on April 1, 2004. The balance at December 31, 1996 is net of
accumulated amortization of $34,895.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
- ----------------------
Property and equipment (other than oil and gas) are stated at cost.
Depreciation is recognized on the straight line method over the estimated useful
lives of the assets as follows:
Lives (years)
-------------
Drilling Rig 10
Machinery and Equipment 10
Autos and Trucks 5
Furniture and Fixtures 10
Building 40
The Company follows the successful efforts method of accounting for oil and
gas properties, using the lease as its accumulation center for capitalized
costs. Under the successful efforts method of accounting, costs which relate
directly to the discovery of oil and gas reserves and all development costs are
capitalized.
Exploration costs which do not result directly in the discovery of oil and
gas reserves are charged to expense as incurred. The capitalized costs,
consisting of lease and well equipment, lease acquisition costs and intangible
development costs are depreciated, depleted and amortized on the unit-of-
production method, based on estimates of recoverable proved developed oil and
gas reserves of each respective lease.
The costs of acquiring undeveloped properties are capitalized as incurred
and carried until the property is capitalized as a producing oil and gas
property, or is surrendered or otherwise disposed of, at which time the full
amount is charged to operations. Maintenance and repairs are charged against
operations as incurred. Renewals and betterments which extend the life or
improve existing properties are capitalized.
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.
During 1996, the Company revised the useful lives utilized to depreciate
the drilling rig and certain types of machinery and equipment from eight (8)
years to ten (10) years. Additionally, estimated salvage values were revised to
reflect 20% of original cost for the drilling rig and certain machinery and
equipment.
Impairment of Long-Lived Assets
- -------------------------------
The Company follows the provisions of SFAS 121 -- "Accounting for the
Impairment of 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 is indicated if the sum of the expected
future cash flows is less than the carrying amount of the assets. No significant
impairment was determined to exist during the twelve months ended December 31,
1996.
Real Estate Operations
- ----------------------
Revenues from construction contracts are recognized on the completed-
contract method. This method is used because the typical contract is completed
in three months or less and financial position and results of operations do not
vary significantly from those which would result from use of the percentage-of-
completion method. A contract is considered complete when all costs except
insignificant items have been
F-8
<PAGE>
incurred and has been accepted by the customer.
Construction costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. General and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined.
Inventories
- -----------
Inventories of houses under construction and developed lots are stated at
cost using a specific identification method. The carrying value of homes under
construction and developed lots is reduced to realizable value when such values
are less than cost.
Earnings Per Share
- ------------------
The Company's earnings per share is based on the weighted average number of
common shares including stock options, which are considered common stock
equivalents. The convertible preferred stock is considered anti-dilutive and
therefore, excluded from the earnings per share calculations.
Income Taxes
- ------------
Income taxes are provided based on earnings reported for financial
statement purposes. The provision for income taxes differ from the amounts
currently payable because of temporary differences (primarily depreciation) in
the recognition of certain income and expense items for financial reporting and
tax reporting purposes.
Cash Equivalents
- ----------------
For purposes of reporting cash flows, cash includes cash on hand and cash
on deposit.
2. SHORT TERM INVESTMENTS
----------------------
At December 31, 1996, the Company's short term investments were comprised
of a certificate of deposit in the amount of $66,210 and precious metals at a
cost of $19,925. The certificate of deposit which matures on November 18, 1997
and earns interest at a rate of 5.00%, has been pledged as collateral for the
Company's subsidiary, Blue Ridge Builders, Inc. to obtain construction loans.
3. 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 $3,448,221
$3,149,600, and $2,285,241 during 1996, 1995 and 1994, 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 earned during the year ended December 31, 1996,
1995 and 1994 amounted to $238,571 $269,880, and $260,876 respectively, and
syndication fees during the year ended December 31, 1996, 1995 and 1994 amounted
to $24,585, $308,899 and $256,695, respectively.
F-9
<PAGE>
Notes to Consolidated Financial Statements
In connection with the sponsorship of oil and gas partnerships, the Company
is reimbursed by the partnerships for certain operating and overhead costs
incurred on their behalf, including filing fees, legal fees, accounting fees,
printing costs and other miscellaneous expenses. These reimbursements totaled
$95,873, $351,482, and $182,500 during the years ended December 31, 1996, 1995,
and 1994, respectively.
4. INVESTMENTS
Included in the Company's investments 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
in the amounts of $95,671 and $40,450 at December 31, 1996 and 1995,
respectively. The following table reflects the net investment and allocated loss
by year for each individual partnership that the Company sponsored during 1996
and 1995.
<TABLE>
<CAPTION>
Partnership Partnership Partnership December 31,
Joint Total (Loss) for (Loss) for (Loss) for 1996 Net
Venture Contribution 1994 1995 1996 Distributions Investment
- -------------------- ------------ ----------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
BRE Production Fund $ 13,410 $ --- $ --- $ (2,406) $ (463) $10,541
Bridge Meek 91,690 (5,294) (86,396) --- --- ---
Elliott Clear Creek 72,768 --- (5,006) (50,725) (436) 16,601
Frio Trend 287,875 (134,376) (153,499) --- --- ---
Green River 14,850 --- (14,850) --- --- ---
Gulf Coast 29,000 (13,159) (15,841) --- --- ---
Helen Buck 18,500 --- --- (3,131) --- 15,369
Ken-Tex 120,100 (2,322) (89,747) (2,695) --- 25,336
MIC-TLE 7 21,105 --- (11,486) (2,767) (634) 6,218
Nebo/West Broussard 10,473 --- (5,447) (1,080) (218) 3,728
North Lick Creek 15,946 --- (15,946) --- --- ---
Otter Creek 4,673 --- (3,881) (137) (655) ---
Ruth #3 6,975 --- (1,265) 1,005 (812) 5,903
Smackover/Woodbine I 20,688 --- --- (10,773) --- 9,915
Stephens Clear Creek 17,061 (915) (13,993) (93) --- 2,060
-------- --------- --------- -------- ------- -------
Totals: $745,114 $(156,066) $(417,357) $(72,802) $(3,218) $95,671
======== ========= ========= ======== ======= =======
</TABLE>
At December 31, 1996 and 1995, the various joint venture partnerships owed
the Company $287,335, $174,817, and $735,516, respectively, for amounts due the
Company for turnkey drilling services, syndication fees and reimbursement of
fees and expenses incurred on behalf of the joint venture. Additionally, the
partnerships had advanced certain amounts at year end 1996 and 1995 as
prepayment of drilling fees for services to be performed by the Company during
1996 and 1995. See Note 7 for additional information relative to these advances.
5. RELATED PARTY TRANSACTIONS
Notes Receivable From Related Parties
On October 24, 1994, the Company loaned $200,000 to the President of the
Company. The note bears interest at the rate of 5.48% per annum on the unpaid
balance and is to be repaid quarterly over five
F-10
<PAGE>
Notes to Consolidated Financial Statements
years. As of year end 1996 the note is current. The unpaid balance at December
31, 1996 is $136,098, and additional short-term advances recorded in 1995 and
due in 1996 totaling $26,510 were cleared in 1996.
On May 10, 1995, the Company loaned $98,654 to an officer of the Company as
interim financing for the purchase of a home. The note bears interest at the
rate of 8.00% per annum, payable quarterly. All interest payments due and the
principal balance were paid in full during 1996.
On October 3, 1995, the Company loaned $30,000 to the Chief Financial
Officer of the Company as interim financing for his relocation costs. During
1996 the Company extended the term of this note. The note bears interest at
8.00% per annum and is to be repaid in full on October 31, 1997. All interest
due was paid in 1996 and the balance of the note at December 31, 1996 is
$29,778.
On December 31, 1994, the Company loaned $86,000 to Blue Ridge Builders,
Inc. ("Builders"). The note bore interest at the rate of 12.0% per annum on the
unpaid balance and was due and payable on December 31, 1995. During 1995 the
Company exercised an option to acquire 2/3 of the stock of Builders effective
January 1, 1995. In order to exercise this option, the Company converted the
$86,000 note into the equity of Builders. Additionally, the Company contributed
lots, at a cost of $178,000 and cash of $27,500 to Builder's equity. Builders
has repaid $26,707 to yield a total investment in Builders of $264,793.
Advances to Related Parties
During 1996 and 1995, the Company advanced funds to two related parties for
working capital requirements and as advance payment for certain services to be
provided.
A total of $88,833 was outstanding at year end 1995 for advance payments
made to Fortune Exploration of Kentucky, Inc. (Fortune) to be applied against
future purchases of leases for the benefit of joint venture activities. Fortune
is 100% owned by the trustee for The Argyle Trust, a principle shareholder of
the Company. Fortune is a contract operator of oil and gas properties in Texas.
The Company contracts through Fortune to have oil and gas properties drilled,
completed and produced for itself and the joint venture partnerships which it
manages. During 1996, Fortune performed significant duties as operator for
various projects owned by the Company. Accordingly, a total of $71,340 was
outstanding at year end 1996 and included with Accrued Liabilities on the
accompanying financial statements.
Ridgemont Securities, Inc. (Ridgemont), a registered Broker/Dealer, is
based in Bowling Green and has been primarily responsible for the distribution
of the Company's joint venture offerings. Ridgemont also offers other public oil
and gas programs for sale. As of January 1, 1995, the Company agreed to
reimburse Ridgemont for its pro rata share of actual expenditures incurred on
behalf of the Company.
During 1996, the Company advanced $126,000 to Blue Ridge Energy, Inc. for
the purchase of a working interest in a well in Louisiana. The advance was
repaid during 1997.
During December, 1996, the Company entered into an agreement with two
individuals to form a new corporation to conduct directional drilling services.
The Nevada corporation called Blue Ridge Directional Services, Inc.
(Directional), will be capitalized and 100% initially owned by the Company. The
agreement requires the Company to fund $500,000 to Directional
F-11
<PAGE>
Notes to Consolidated Financial Statements
as a loan, to be repaid with proceeds from the sale of preferred stock during
1997. The Company anticipates that the sale of the preferred stock will take
approximately six months from the initial offer date. Directional will enter
into employment contracts with the two individuals responsible for the
management of daily operations and will set aside 49% of its common stock shares
to be earned by these individuals over a five year period. At December 31, 1996,
the Company has advanced approximately $77,200 to Directional for deposits on
equipment purchases, office costs and related overhead items. These amounts have
been included in the consolidated financial statements of the Company at
December 31, 1996.
The Company had miscellaneous advances of $5,264, $38,739, and $3,500
outstanding to certain employees at December 31, 1996, 1995 and 1994,
respectively. The balance at December 31, 1996 is scheduled to be repaid by the
employees during 1997.
Stock Transactions
During March, 1996, the Company gained control of a Nevada corporation
under the name of Gem Source, Incorporated (Gem Source) when it acquired
1,000,000 shares of restricted stock at $0.10 a share, or $100,000.
In May 1996, the 2,633,000 outstanding common shares at that time were the
subject of a 5 to 1 reverse split and the name was changed from Gem Source,
Incorporated, to Blue Ridge Energy, Inc. In June 1996, the Company acquired
another 1,000,000 of restricted common stock from the company treasury for $0.05
a share, or $50,000.
At present, there are 1,526,600 shares of common stock issued and
outstanding. A total of 1,200,000 shares, or 78.6%, is held by the Company and
the remainder of 326,600 shares is held by 40 shareholders, almost all original
stockholders of Gem Source.
At the time the Company acquired control of Gem Source for $100,000, the
net assets acquired amounted to approximately $1,480. This resulted in an excess
of $98,520 of investment over assets acquired and is reflected as such in the
accompanying consolidated financial statements. During 1996, Blue Ridge Energy,
Inc. had total revenues of approximately $1,911,000, net income of approximately
$172,000, and total stockholders' equity of approximately $800,000.
6. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consisted of the following at
December 31, 1996 and 1995:
F-12
<PAGE>
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Drilling Rig $ 539,035 $ 539,035
Oil and Gas Properties 354,589 33,853
Acidizing Equipment and Machinery 105,060 106,060
Cement Equipment and Machinery 114,477 94,519
Autos and Trucks 71,771 103,637
Other Equipment and Machinery 28,372 26,343
Office Building and Land 952,808 ---
Leasehold Improvements 23,991 23,535
Data Processing Equipment 54,327 43,108
Furniture and Fixtures 232,209 130,777
---------- ----------
2,476,639 1,100,867
Less Accumulated Depreciation,
Depletion and Amortization (368,968) (297,023)
---------- ----------
$2,107,671 $ 803,844
========== ==========
</TABLE>
Depreciation and depletion expense relative to fixed assets was $114,716,
$157,694 and $89,781 during 1996, 1995 and 1994, respectively.
- --------------------------------------------------------------------------------
During 1996, the Company acquired approximately $154,810 in non-producing
leasehold interests from Target Leasing, Ltd. I in exchange for preferred stock
issued by Blue Ridge Energy, Inc. The Company evaluated the non-producing
leasehold transferred from Target Leasing, Ltd. I when initially acquired. The
value assigned the acreage was based upon management's intention to utilize
these properties for future drilling efforts. These leases have an average term
of two to three years and will be evaluated annually to determine the
appropriate carrying value.
During 1996 the Company purchased and renovated a building located on
approximately 2.5 acres in Bowling Green, Kentucky, for the purpose of utilizing
the building for the Company corporate headquarters and to lease office and
warehouse space to third parties. The total cost to acquire and renovate this
property was approximately $953,000 at December 31, 1996. Blue Ridge Builders,
Inc., a subsidiary of the Company, contracted with the Company to complete the
required renovations. Profits attributable to these activities have been
eliminated from the consolidated financial statements, and the resulting impact
on the cost of the building has also been eliminated in consolidation.
7. DRILLING ADVANCES
During 1995 and 1994, the Company was advanced funds by several joint
venture partnerships to prepay drilling costs, and management fees associated
with various wells to be drilled in 1996 and 1995. The Company recorded such
amounts of $707,382 and $474,774 as of December 31, 1995 and 1994, as current
liabilities and recorded the appropriate fees earned as the work was completed
during 1996 and 1995. Advances are held by the Company in a segregated bank
account and are available to the Company as drilling progresses on related joint
venture programs.
F-13
<PAGE>
Notes to Consolidated Financial Statements
8. NOTES PAYABLE
-------------
<TABLE>
<CAPTION>
Notes payable consisted of the following at year end 1996, 1995 and 1994: 1996 1995
---------- ----------
<S> <C> <C>
Note payable entered into during November, 1992, in the original
amount of $383,477 to Concord Commercial Corporation; monthly
payments of $10,000 (including interest at 9% on the unpaid
balance); collateralized by the Company's drilling rig; matured
August, 1996. $ --- $ 93,245
Note payable entered into during November, 1992, in the original
amount of $125,000 plus interest of $62,500 to an individual;
originally scheduled monthly payments of $7,812 (including
interest); on November 29, 1995 the individual agreed to schedule
monthly payments for the remaining balance at $1,000 (including
interest at 6% on the unpaid balance) for 60 months. 41,002 51,725
Note payable entered into during June, 1996 in the original amount of
$920,000 to TransFinancial Bank; monthly payments of $8,600
(including interest at 9.5% on the unpaid balance); collateralized
by the Company's corporate headquarters, land and building; matures
June, 2012. 808,079 ---
Bonds payable issued in April, 1996 in the aggregate principal amount
of $2,255,000 to various investors; monthly payments of interest
only at 12% on the unpaid balance; convertible into shares of the
Company's common stock; matures April 1, 2004. 2,255,000 ---
Various interim construction loans with varying interest rates
ranging from 8.00% to 9.00% at two banks in Bowling Green, Kentucky
as short term financing for new home construction. These notes are
collateralized by the applicable homes under construction and are
repaid upon sale of the homes. 268,656 379,301
Notes payable entered into during 1996 to reimburse various
investors: $27,450 to be repaid during 1997 with balance of $3,000
to be repaid 1998. 30,450 ---
Various installment obligations for the purchase of autos and trucks. 46,593 58,374
---------- ---------
3,449,780 582,645
Less current maturities (331,657) (529,147)
---------- ---------
$3,118,123 $ 53,498
========== =========
</TABLE>
Scheduled maturities of notes and bonds payable for the five years subsequent to
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1997 $ 331,657
1998 43,882
1999 44,576
2000 37,325
2001 26,850
Thereafter 2,965,490
----------
$3,449,780
==========
</TABLE>
During 1996, the Company initiated and completed a private offering of
convertible bonds to
F-14
<PAGE>
further finance expansion of its operations. The offering, which raised
$2,255,000, was comprised of individual eight year $10,000 convertible bonds
dated April 1, 1996. These bonds, which mature April 1, 2004, bear interest at
the rate of 12% per year payable monthly beginning May 1, 1996.
The bondholders whose subscriptions were accepted by the Company prior to
April 15, 1996 are eligible to convert each $10,000 bond into 2,500 shares of
Blue Ridge Common Stock. The bondholders whose subscriptions were accepted by
the Company after April 15, 1996 and prior to May 15, 1996 are eligible to
convert each $10,000 bond into 2,000 shares of Blue Ridge Common Stock. The
bondholders whose subscriptions were accepted by the Company after May 15, 1996
are eligible to convert each $10,000 bond into 1,600 shares of Blue Ridge Common
Stock. At maturity on April 1, 2004, the bondholder may (a) redeem the bond at
face value, or (b) convert the bond into shares of Blue Ridge Common Stock per
each bondholder's conversion eligibility status.
The bonds may be redeemed by the Company at face value at anytime after
issuance for cash ($10,000) or, at the option of the bondholder, for Blue Ridge
Common Stock based upon the bondholder's conversion eligibility status.
Additionally, during 1996, the Company negotiated a long term note payable
to finance the acquisition and construction of an office complex in Bowling
Green, Kentucky. The Company bought and renovated a warehouse to house its
offices, the offices of related entities and to lease a significant portion to a
third party. The amount drawn under this note at December 31, 1996, totaled
$810,000 reduced for one scheduled payment in December. This note bears interest
at a rate fixed at 9.5% for the first 36 months with a one year adjustable rate
equal to the highest New York prime rate plus 1.0% for the remaining term of the
loan. The term of the note is for 20 years. Interest only was initially due
under the payment terms of this note with the first principal payment due in
December, 1996.
Subsequent to year end, the Company has drawn approximately $110,000
additional funds under this note to complete the renovation of the building.
9. LEASE COMMITMENTS
-----------------
In December 1995, the Company leased an auto for 24 months. The following
is a schedule of the Company's remaining future rental requirements under these
leases:
1997 $12,612
1998 ---
1999 ---
-------
$12,612
=======
10. COMMITMENTS AND CONTINGENCIES
-----------------------------
Commitments
- -----------
During 1995 and 1994, the Company had contracted to purchase and drill
several wells in Texas and Kentucky on the behalf of the joint venture
partnerships for which $707,382 and $474,774, respectively, had been advanced.
All of these leaseholds were purchased and drilled during 1995 and 1996. These
commitments have now been satisfied in full by the Company.
The Company had guaranteed construction loans of up to $500,000 for its
subsidiary, Blue Ridge Builders, Inc. The Company was released from these
guarantees during 1996.
F-15
<PAGE>
Notes to Consolidated Financial Statements
The Company has agreed to automatically convert all shares of preferred
stock outstanding effective as of the first day the Company's common stock is
publicly traded on any exchange or over-the counter, or three years from the
date of issuance, whichever comes first.
The Company has agreed to maintain in force one or more policies of life
insurance on the lives of the President of the Company and a related party
sufficient to purchase each outstanding share of preferred stock at its
conversion price.
The Company has agreed to advance up to $500,000 to a newly formed
subsidiary, Blue Ridge Directional Services, Inc. At December 31, 1996, a total
of approximately $77,200 was advanced relative to this commitment (See Notes 5
and 13).
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 $10 million limited to $1 million per occurrence. The Company also
maintains $1 million pollution liability insurance coverage. The Company
believes it is adequately insured for public liability and property damage to
others with respect to its operations. However, such insurance may not be
sufficient to protect the Company against liability for all consequences of well
disasters, extensive fire damage, or damage to the environment. The Company has
never been fined or incurred liability for pollution or other environmental
damage in connection with its operations.
As of December 31, 1996, the Company had no significant customers or
suppliers which could, individually, have a significant adverse effect on the
Company's operations.
The Company conducts its banking relations with two local financial
institutions and does not anticipate any significant problems with future credit
extensions. A significant amount of the Company's operating funds are maintained
in one local bank insured by the FDIC.
11. STOCKHOLDERS' EQUITY
--------------------
The Company is authorized to issue two classes of stock that are
designated, respectively, common and preferred stock. The total number of shares
of stock which the company initially had the authority to issue was 21,000,000
shares; 20,000,000 shares being designated as common stock, and 1,000,000 being
designated as preferred stock. As of December 31, 1996, 1995 and 1994 the
Company was authorized to issue 23,000,000 shares of stock -20,000,000 being
designated as common stock and 3,000,000 shares designated as preferred stock.
Common Stock
- ------------
The Company is the successor to Blue Ridge Drilling and Operating, Inc., a
Kentucky corporation organized in December, 1992. When the Company merged with
this entity in September, 1993, 2,500,000 shares of common stock of the Company
were issued to the previous shareholders in exchange for the outstanding stock
of the predecessor company at a value of $2,500.
In addition, shareholders of Series A Preferred Stock who exercised
warrants obtained when they purchased the Series A Preferred Stock purchased
278,875 shares of common stock at the rate of $0.80 per share during 1994. Total
proceeds collected were
F-16
<PAGE>
Notes to Consolidated Financial Statements
$223,100.
During 1995, the Company issued 29,594 shares of Common Stock for cash and
services rendered. Total proceeds collected were $70,000. On December 1, 1995,
shareholders of the Company's Series C Preferred Stock elected to convert to
Common Stock at a 1 for 2 rate and 778,356 shares of Common Stock were issued.
During 1996, shareholders of the Company's Series A Preferred Stock elected to
convert to Common Stock at the rate of 1 for 2, and 857,400 shares of common
stock were issued. 3,333 shares of Series C Preferred Stock remain outstanding
and will be converted to Common Stock on December 15, 1997 at a 1 for 1 rate.
Other shares of common stock are the subject of stock options previously
issued by the Company. 1,500,000 shares of common stock are subject to stock
options held by management of the Company. This option expires on July 1, 1998
at the option price of $0.25 per share. At December 31, 1996, 1995 and 1994,
none of these options had been exercised.
At December 31, 1996, 1995 and 1994, there were 4,441,131, 3,586,825, and
2,778,875 respectively, shares of common stock issued and outstanding.
Series A Preferred Stock
- ------------------------
In September, 1993, the Company authorized 500,000 shares of preferred
stock as Series A Preferred Stock (Series A Stock). Subsequently, in November
1994, the Company increased this authorization to 1,200,000 shares of Series A
Stock. This stock, which has a par value of $0.001 per share, was sold at a
price of $1.00 per share together with warrants each to purchase one (1) share
of Common Stock for $0.80 per share. These warrants expired on October 30, 1994
if not exercised as previously discussed. Series A Stock bears a 12% per annum
dividend payable monthly and is convertible at the rate of one (1) share of
Series A Stock for two (2) shares of Common Stock at the option of the
shareholder. However, each share of Series A Stock shall automatically be
converted into two (2) shares of Common Stock effective as of the first day the
Company's Common Stock is publicly traded on any exchange or over-the-counter,
or three years from date of issuance, whichever comes first. In the event of any
liquidation, dissolution or winding up of the Company, either voluntary or
involuntary, the holders of Series A Stock shall be entitled to receive, prior
and in preference to any distribution of any assets of surplus funds of the
Company to the holders of Common Stock, the amount of $1.00 per share plus all
unpaid dividends on such share of each share of Series A Stock then held by the
shareholder. The holder of each share of Series A Stock shall be entitled to the
number of votes equal to the number of shares of Common Stock into which such
share of Series A Stock could be converted and shall have voting rights and
powers equal to the voting rights and powers of Common Stock.
During 1996, many of the Series A Stock shareholders elected to convert to
Common Stock at a rate of 1 for 2, and accordingly 428,700 shares of Series A
Stock were retired resulting in 530,700 shares of Series A Stock remaining.
At December 31, 1996, 1995 and 1994, there were 530,700, 954,400, and
828,200 respectively, shares of Series A Stock issued and outstanding.
Series B Preferred Stock
- ------------------------
F-17
<PAGE>
Notes to Consolidated Financial Statements
In August, 1994, the Company authorized 150,000 shares of preferred stock
as Series B Preferred Stock (Series B Stock). This stock which has a par value
of $0.001 per share was sold at a price of $0.80 per share. Series B Stock bears
a 12% per annum dividend payable monthly and is convertible at the rate of one
(1) share of Series B Stock for one (1) share of Common Stock at the option of
the shareholder. However, each share of Series B Stock shall automatically be
converted into one (1) share of Common Stock effective as of the first day that
the Company's Common Stock is publicly traded, or three years from date of
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 B Stock shall be entitled to receive, prior and in preference to any
distribution of any assets or surplus funds of the Company to the holders of the
Common Stock, but subordinate to the liquidation preference of the Series A
Preferred Stock, the amount of $1.00 per share plus all unpaid dividends on each
share for each share of Series B Stock held by them. The holder of each share of
Series B Stock shall be entitled to the number of votes equal to the number of
shares of Common Stock into which such shares of Series B Stock could be
converted and shall have voting rights and powers equal to those of the Common
Stock.
At December 31, 1996, 1995 and 1994, there were 125,000 shares of Series B
Stock issued and outstanding.
Series C Preferred Stock
- ------------------------
In November, 1994, the Company authorized 1,000,000 shares of preferred
stock as Series C Preferred Stock (Series C Stock). This stock, which has a par
value of $0.001 per share, was sold at $3.00 per share. The Series C Stock bears
a 12% per annum dividend payable monthly and is convertible at the option of the
shareholder, at the rate of one (1) share of Series C Stock for two (2) shares
of Common Stock until December 1995; thereafter, convertible into one (1) fully
paid share of Common Stock. However, each share of the Series C Stock shall be
converted automatically into one (1) share of Common Stock effective as of the
first day the Company's Common Stock is publicly traded, or December 15, 1996,
whichever occurs first. During 1996, the Company allowed the one remaining
shareholder of the Series C stock to elect to convert to Common stock on
December 15, 1997, corresponding to the two year period allowed to convert from
the date the stock was purchased. In the event of any liquidation, dissolution
or winding up of the Company, either voluntary or involuntary, the holders of
the Series C Stock shall be entitled to receive, prior and in preference to any
distribution of any assets or surplus funds to the holders of the Common Stock,
but subordinate to the liquidation preference of the Series A and Series B
Preferred Stock, the amount of $3.00 per share plus all unpaid dividends on such
share for each share of Series C Stock held by them. The holder of each share of
Series C Stock shall be entitled to the number of votes equal to the number of
shares of Common Stock into which such shares of Series C Stock would be
converted and shall have voting rights and powers equal to those of the Common
Stock.
The Company allowed individuals to pay for their subscribed amounts of
Series C Stock in three installments. A total of 428,500 shares were subscribed
to at December 31, 1994, resulting in total proceeds to be received of
$1,285,500. However, discounts of $66,500 were given to certain investors
resulting in net cash receipts of $1,219,000. $476,833 had been collected at
December 31, 1994, of which $321,000 (including discounts) represented fully
paid
F-18
<PAGE>
subscriptions. Accordingly, 114,833 shares of Series C Stock were issued and
outstanding at December 31, 1994, with the remaining 313,667 shares to be issued
during 1995 as shareholders paid the balance remaining on their subscription.
The amount of subscribed but unpaid shares of Series C Stock resulted in a
receivable of $742,167 at December 31, 1994. As of December 31, 1995, the
Company had collected $543,167 and had forgiven $189,000 of these receivables
resulting in a remaining balance of $10,000. This balance was collected during
the first quarter of 1996.
On December 1, 1995, many of the Series C Stock shareholders elected to
convert to Common Stock at a rate of 1 for 2, and accordingly 389,178 shares of
the Series C Stock were retired resulting in 52,833 shares of Series C Stock
remaining. During 1996, 49,500 shares of the remaining Series C Stock were
converted to Blue Ridge Group convertible bonds. At December 31, 1996, 3,333
shares of Series C Stock were outstanding and will be converted to common stock
on December 15, 1997, at a rate of 1 for 1.
See summary on page 24 for a schedule of the various classes of stock.
12. INCOME TAXES
------------
Effective January 1, 1994, the Company adopted the provisions of SFAS 109,
which requires the use of the liability method under which deferred tax assets
and liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. The tax effects
of significant temporary differences representing the net deferred tax liability
at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Tax Depreciation in Excess of Book $(52,500) $(49,500)
Intangible Drilling Costs (34,000) ---
Other 21,885 14,935
--------- ---------
Net Deferred Tax (Liability) $(64,615) $(34,565)
========= =========
Income Tax Expense consists of the following components:
1996 1995
---------- ---------
Currently Payable
Federal Income Tax $ 27,000 $ 41,936
State Income Tax 18,560 4,410
---------- --------
45,560 46,346
Prior Year Taxes Paid 1,488 24,243
Deferred Provision 30,050 34,565
---------- --------
Total Tax Expense $ 77,098 $105,154
========== ========
</TABLE>
During 1995, the Company concluded audits by the Internal Revenue Service
for tax years 1992 and 1993. These audits resulted in additional tax of $24,243
and penalties and interest of $19,776 which have been reflected as expenses in
the 1995 consolidated financial statements.
13. SUBSEQUENT EVENTS
-----------------
In January of 1997, the Company purchased the assets of Relliford
Cementing, Inc., for $100,000.
F-19
<PAGE>
Notes to Consolidated Financial Statements
These assets consisted of assorted trucks and cementing equipment. Additionally,
the Company purchased a piece of property near Columbia, Kentucky for $15,000 in
order to construct a yard and shop facility for its well service operations. In
February of 1997, the Company contracted with Blue Ridge Builders, Inc. to
construct the aforementioned facility for approximately $135,000. The Company
entered into a loan agreement with Beaver Dam Deposit Bank in the amount of
$108,000 to finance the construction of this facility.
During the first quarter of 1997, the Company advanced approximately
$400,000 to Blue Ridge Directional Services, Inc. (Directional) in order to fund
equipment purchases, start-up costs and working capital requirements.
Directional is now in full operation and had sales of approximately $200,000
during the month of April.
In March of 1997, the Company purchased a rotary drilling rig from Mustang
Exploration, Inc., for approximately $250,000. The Company will base this rig
out of Victoria, Texas, and has committed an additional $100,000 to refurbish
the rig. In order to accomplish these actions, the Company has entered into a
loan agreement secured by the drilling rig in the amount of $350,000 with Target
Leasing, Ltd. II, a joint venture of a related party. It is anticipated that
this rig will be in full operation by the end of May, 1997.
In March of 1997, the Company also purchased an air-powered drilling rig
from William Jewell for approximately $115,000. The Company will base this rig
out of Columbia, Kentucky, and has committed an additional $60,000 to refurbish
the rig. In order to accomplish these actions, the Company has entered into a
loan agreement secured by the drilling rig in the amount of $175,000, with
Target Leasing, Ltd. II, a joint venture of a related party. It is anticipated
that this rig will be in full operation by the end of May, 1997.
Also in March of 1997, the Company entered into an agreement with Posten
and Posten Drilling Corporation and High Frontier, Inc. to acquire a 50% working
interest and operate approximately 130 wells to be drilled in Clay, Owsley and
Perry Counties, Kentucky. It is anticipated that the Company will pay for the
acquisition of these working interests through the exchange of its drilling and
well services at standard industry rates to be negotiated. It is also
anticipated that the Company will sell these interest to the Company's public
drilling fund. The Company has also entered into a contract with North American
Energy Corporation for the sale of all gas produced from these wells.
F-20
<PAGE>
14. CAPITAL STRUCTURE
A summary of the Common and Preferred Stock account of the Company at December
31, 1996 is as follows:
<TABLE>
<CAPTION>
Shares Par Value Excess Net
Shares Issued/ ($0.001/ Paid-in Commissions Paid-In
Authorized Subscribed share) Capital Paid Capital
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Common 20,000,000 4,441,131 $ 4,441 $1,404,287 $(37,075) $1,367,212
Series A Preferred 1,200,000 530,700 531 953,017 (49,800) 903,217
Series B Preferred 150,000 125,000 125 99,875 (15,000) 84,875
Series C Preferred 1,000,000 3,333 3 8,496 (15,845) (7,349)
SUMMARY:
COMMON 20,000,000 4,441,131 $ 4,441 $1,404,207 $(37,075) $1,367,212
- --------------------------------------------------------------------------------------------------------
PREFERRED 2,350,000 659,033 $ 659 $1,061,388 $(80,645) $ 980,743
- --------------------------------------------------------------------------------------------------------
</TABLE>
15. SEGMENT INFORMATION
A. Year Ended December 31, 1996
<TABLE>
<CAPTION>
Real Estate
Sponsor of Oil Field Development Adjustments &
Joint Ventures Services & Construction Eliminations Consolidated
-------------- --------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Sales to Unaffiliated Customers $3,994,824 $573,728 $1,755,333 $ 0 $ 6,323,885
Inter-segment Sales 759,905 12,863 34,155 (806,923) 0
---------- -------- ---------- --------- -----------
Total Revenue $4,754,729 $586,591 1,789,488 (806,923) $ 6,323,885
========== ======== ========== ========= ===========
Operating Profit $1,233,821 $134,455 $ 42,623 $ (47,018) $ 1,363,881
========== ======== ========== ========= ===========
General Corporate Expenses (1,032,106)
Interest Expense (178,162)
Interest & Miscellaneous Income 128,532
Minority Interest in Subsidiary (58,270)
-----------
Income from Continuing Operations
Before Income Taxes $ 223,875
===========
Identifiable Assets at
December 31, 1996 $1,824,494 $685,157 $ 537,076 $ 0 $ 3,046,727
========== ======== ========== =========
Corporate Assets 3,394,207
Excess of Investment over Assets Acquired 98,520
-----------
Total Assets at December 31, 1996 $ 6,539,454
===========
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
Notes to Consolidated Financial Statements
16. SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING PROPERTIES (UNAUDITED)
---------------------------------------------------------------------------
Costs incurred in oil and gas acquisition, exploration and development
activities:
Year Ended
December 31, 1996
-----------------
<S> <C>
Acquisition of proved properties $ 22,484
Acquisition of unproved properties 172,252
Development Costs 126,000
--------
$320,736
========
</TABLE>
Reserve Quantities
- ------------------
The following tables present estimates of the Company's proved oil and gas
reserves. The Company emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, the estimates are expected to
change as future information becomes available. The estimates are primarily
based on the report of an independent petroleum engineer.
<TABLE>
<CAPTION>
Oil (BBLS) Gas (MCF)
---------- ---------
<S> <C> <C>
Reserves -- January 1, 1996 --- ---
Purchases of minerals in place 12,601 42
Extensions --- 40,000
Production (11,299) (34)
------- ------
Reserves -- December 31, 1996 1,302 40,008
======= ======
Proved Developed Reserves
January 1, 1996 --- ---
December 31, 1996 1,302 40,008
======= ======
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows
- --------------------------------------------------------
The following table presents the standardized measure of discounted future net
cash flows relating to proved oil and gas reserves in accordance with SFAS 69:
<TABLE>
<CAPTION>
As of
December 31, 1996
-----------------
<S> <C>
Future cash inflows $ 148,898
Future production costs (19,875)
Future income taxes (12,864)
---------
Future net cash flows 116,159
10% annual discount for estimated timing of cash flows (37,393)
---------
Standardized measure of discounted future net cash flows $ 78,766
=========
Changes in Standardized Measure of Discounted Future Net Cash Flows:
Year Ended
December 31, 1996
-----------------
Standardized measure of discounted future net cash flows (beginning) $ ---
Sales of oil and gas, net of production costs (136,475)
Net changes in price and production costs ---
Change in future income taxes ---
Accretion of discount ---
Purchases and extensions of reserves in place 215,241
---------
Standardized measure of discounted future net cash flows (ending) $ 78,766
=========
</TABLE>
F-22
<PAGE>
BLUE RIDGE GROUP, INC.
CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE QUARTER
ENDED JUNE 30, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
CONSOLIDATED BALANCE SHEETS..................................... F-25 to F-26
CONSOLIDATED STATEMENTS OF INCOME............................... F-27
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY....................................... F-28
CONSOLIDATED STATEMENTS OF CASH FLOWS........................... F-29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................... F-30 to F-35
</TABLE>
<PAGE>
BLUE RIDGE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS
Cash $ 542,936 $2,036,083
Short-term Investments 86,135 86,135
Accounts Receivable:
Managed Limited Partnerships and
Joint Ventures 366,628 287,335
Real Estate Sales Contracts 206,277 127,754
Trade and Other 890,186 84,000
Inventory:
Real Estate 152,659 333,399
Other 73,951 64,955
Advances to Related Parties 407,296 11,843
Notes Receivable Related Parties
Short Term Portion 72,418 92,041
Prepaid Expenses 100,015 88,392
---------- ----------
Total Current Assets 2,898,501 3,211,937
INVESTMENTS
Interests in Limited Partnerships and
Joint Ventures 130,078 95,671
PROPERTY AND EQUIPMENT
Net (Note 2) 4,222,049 2,107,671
OTHER ASSETS
Note Receivable Related Party, Net of
Current Portion 75,080 96,735
Excess of Investment over Assets Acquired 98,520 98,520
Public Drilling Fund Formation and Marketing Costs 713,718 446,688
Deferred Charges 481,992 482,232
---------- ----------
TOTAL ASSETS $8,619,938 $6,539,454
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-25
<PAGE>
BLUE RIDGE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
LIABILITIES AND
- ---------------
STOCKHOLDERS' EQUITY
- --------------------
CURRENT LIABILITIES
Accounts Payable and Accrued Liabilities $1,050,513 $ 342,445
Income Taxes Payable 31,056 45,560
Short Term Notes Payable 855,689 ---
Current Portion of Long Term Debt 34,473 331,657
---------- ----------
Total Current Liabilities 1,971,731 719,662
DEFERRED TAX LIABILITY --- 64,615
MINORITY INTEREST IN SUBSIDIARY 1,117,753 610,429
LONG TERM DEBT 3,434,934 3,118,123
---------- ----------
Total Liabilities 6,524,418 4,512,829
COMMITMENTS AND CONTINGENCIES
(Note 3) --- ---
STOCKHOLDERS' EQUITY
Preferred Stock, $0.001 par value; 3,000,000
shares authorized; 659,033 shares issued
and outstanding at December 31, 1996
and March 31, 1997 659 659
Common stock, $0.001 par value; 20,000,000
shares authorized; 4,441,131 shares
issued and outstanding at December 31, 1996
and March 31, 1997 5,441 4,441
Additional Paid-In Capital 2,596,955 2,347,955
Retained Deficit (507,535) (326,430)
---------- ----------
Total Stockholders' Equity 2,095,520 2,026,625
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $8,619,938 $6,539,454
========== ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-26
<PAGE>
BLUE RIDGE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
6 Months 6 Months
Ended June 30, Ended June 30,
1997 1996
-------------- --------------
<S> <C> <C>
OPERATING REVENUES:
- -------------------
Turnkey Contract Sales $1,342,470 $1,809,577
Drilling and Well Services 1,291,012 225,278
Oil and Gas Sales 25,174 46,389
Real Estate Sales and Other 993,290 888,111
---------- ----------
Total Operating Revenues 3,651,946 2,969,355
OPERATING COSTS AND
- -------------------
OTHER EXPENSES:
- ---------------
Turnkey Contract Costs 892,934 1,014,881
Drilling and Well Services Costs 701,549 162,348
Lease Operating and Production Costs 8,754 13,311
Construction Costs 827,913 670,000
Share of Partnership Losses 10,773 --
Depreciation, Depletion and Amortization 127,077 67,059
General and Administrative Costs 1,075,060 732,297
---------- ----------
Total Operating Costs 3,644,060 2,659,896
---------- ----------
OPERATING INCOME (LOSS) 7,886 309,459
OTHER INCOME (EXPENSE):
Interest Expense (198,508) (27,990)
Minority Interest in Subsidiary (29,935) (29,272)
---------- ----------
Total Other Income (Expense) (228,443) (57,262)
---------- ----------
INCOME (LOSS) BEFORE TAXES (220,557) 252,197
Income Taxes (74,989) 63,050
---------- ----------
NET INCOME (LOSS) $ (145,568) $ 189,147
========== ==========
EARNINGS PER SHARE:
- -------------------
Primary $ (0.03) $ 0.05
---------- ----------
Fully Diluted $ (0.03) $ 0.05
---------- ----------
Weighted Average Common Shares
Outstanding 4,457,615 3,586,825
---------- ----------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-27
<PAGE>
BLUE RIDGE GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------- -------------------- ADDITIONAL RETAINED
NO. OF NO. OF PAID-IN EARNINGS
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) TOTAL
--------- ------ --------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1995 1,132,233 $1,132 3,586,825 $ 3,587 $2,528,044 $(272,905) $2,259,858
========= ====== ========= ======= ========== ========= ==========
Prior Period Adjustment 5,000 5 (26,713) (35,705) (62,413)
Conv. of Series A to Common (428,700) (428) 857,400 857 (429)
Conv. of Series C to Bonds (49,500) (50) (149,950) (150,000)
Retirement of Stock (3,094) (3) (2,997) (3,000)
Net Income 146,777 146,777
Dividends Paid (164,597) (164,597)
--------- ------ --------- ------- ---------- --------- ----------
Balance December 31, 1996 659,033 $ 659 4,441,131 $ 4,441 $2,347,955 $(326,430) $2,026,625
========= ====== ========= ======= ========== ========= ==========
Exercise of Stock Options 1,000,000 1,000 249,000 250,000
Net (Loss) (145,569) (145,569)
Dividends Paid (35,537) (35,537)
--------- ------ --------- ------- ---------- --------- ----------
Balance June 30, 1997 659,033 $ 659 5,441,131 $ 5,441 $2,596,955 $(507,535) $2,095,520
========= ====== ========= ======= ========== ========= ==========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
F-28
<PAGE>
BLUE RIDGE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
6 Months 6 Months
Ended June 30, Ended June 30,
1997 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ (145,568) $ 189,147
Adjustments to Reconcile Net Income to
Net Cash Flow from Operating Activities:
Depreciation, Depletion and Amortization 127,077 67,059
(Increase) in Accounts Receivable (964,002) (675,621)
(Increase) in Prepaid Expenses and Deposits (11,623) (156,922)
Increase in Accounts Payable and Accrued Liabilities 708,068 294,414
(Decrease) in Drilling Advances --- (707,382)
(Increase) Decrease in Inventory 171,744 (210,336)
Increase (Decrease) in Income Taxes (79,119) 63,050
----------- ----------
NET CASH (USED) BY OPERATING ACTIVITIES (193,423) 1,136,591)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Limited Partnerships/Joint Ventures (34,407) (36,690)
Minority Interest in Subsidiary 507,324 (100,000)
Investment in Short-Term Invest. and Real Estate --- (575)
Net (Increase) Decrease in Advances / Notes
Receivable--Related Parties (354,175) 219,802
(Increase) in Public Fund Costs and Deferred Charges (266,790) ---
Purchase of Property and Equipment (2,241,455) (617,116)
----------- ----------
NET CASH (USED) IN INVESTING ACTIVITIES (2,389,503) (534,579)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Debt (303,657) (72,795)
New Borrowings 1,178,973 1,944,772
Capitalized Loan Costs --- (439,278)
Proceeds from Exercise of Stock Options 250,000 10,000
Dividends Paid (35,537) (88,451)
----------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,089,779 1,354,248
----------- ----------
NET (DECREASE) IN CASH (1,493,147) (316,922)
CASH AT BEGINNING OF PERIOD 2,036,083 1,413,985
----------- ----------
CASH AT END OF PERIOD $ 542,936 $1,097,063
=========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ 198,508 $ 27,990
=========== ==========
Cash Paid for Federal Income Taxes $ 4,130 $ ---
=========== ==========
</TABLE>
F-29
<PAGE>
BLUE RIDGE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The accompanying notes are an integral part
of these consolidated financial statements.
1. BASIS OF PRESENTATION
---------------------
Blue Ridge Group, Inc., ("the Company"), a Nevada corporation, was organized in
August, 1993, as the successor to Blue Ridge Drilling and Operating, Inc., a
Kentucky corporation, which was organized in December, 1992. The Company has
offices at 632 Adams Street, Suite 710, Bowling Green, Kentucky, 42101.
The Company owns majority interests in three subsidiaries as follows: 1) Blue
Ridge Builders, Inc. ("Builders"), a Nevada corporation, is a 2/3 majority owned
subsidiary of the Company and was organized in September, 1994. The 1/3 minority
interest in Builders is owned by an officer and director of the Company. 2) Blue
Ridge Energy, Inc., ("Energy"), a Nevada corporation, is a 78.6% majority owned
subsidiary of the Company, was organized in November, 1994 as Gem Service
Incorporated, and subsequently changed its name to Blue Ridge Energy, Inc. in
May, 1996. 3) Blue Ridge Directional Services, Inc. ("Directional"), a Nevada
corporation, is a 90% majority owned subsidiary of the Company and was organized
in December of 1996.
The condensed consolidated financial statements include the accounts of Blue
Ridge Group, Inc., its 66.7% owned subsidiary, Blue Ridge Builders, Inc., its
78.6% owned subsidiary, Blue Ridge Energy, Inc., and its 90% owned subsidiary
Blue Ridge Directional Services, Inc. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements do not include all
of the disclosures normally required by generally accepted accounting
principles. Accordingly these statements should be read in conjunction with the
audited consolidated financial statements of Blue Ridge Group, Inc. for the year
ended December 31, 1996.
The accompanying condensed consolidated financial statements have been prepared
in accordance with the Company's customary accounting practices and have not
been audited. Management believes that the financial information included herein
reflects all adjustments necessary for a fair presentation of interim results
and that all such adjustments are of a normal and recurring nature.
2. COMMITMENTS AND CONTINGENCIES
-----------------------------
Commitments
- -----------
A certificate of deposit in the amount of $66,000 has been pledged as collateral
for construction loans for its subsidiary, Blue Ridge Builders, Inc. (Note 2).
This pledge was released subsequent to June 30, 1997.
The Company has agreed to automatically convert all shares of preferred stock
outstanding effective as of the first day the Company's common stock is
publicly traded on any exchange or over-the-counter, or three years from the
date of issuance, whichever comes first. The Company has agreed to maintain in
force one or more policies of life insurance on the lives of the President of
the Company and a related party sufficient to purchase each outstanding share of
preferred stock at its conversion price.
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 $10 million
limited to $10 million per occurrence. The Company believes it is adequately
insured for public liability and property damage to others with respect to its
operations. However, such insurance may not be sufficient to protect the Company
against liability for all consequences of well disasters, extensive fire damage,
or damage to the environment. The Company has never been fined or incurred
liability for pollution or other environmental damage in connection with its
operations.
As of December 31, 1996 and June 30, 1997, the Company had no significant
customers or suppliers which could, individually, have a significant adverse
effect on the Company's operations.
The Company conducts its banking relations with two local financial institutions
and does not anticipate any significant problems with future credit extensions.
A significant amount of the Company's operating funds are maintained in one
local bank insured by the FDIC.
3. NEW BORROWINGS
--------------
The Company has purchased and is in the process of refurbishing two drilling
rigs. One rig is a rotary powered drilling rig capable of drilling to 12,500
feet and will be based out of Victoria, Texas. The other rig is an air-powered
unit capable of drilling to 3,500 feet and will be based out of Columbia,
Kentucky. As of June 30, 1997, approximately $700,000 and $150,000,
respectively, had been expended on these drilling rigs. This $850,000 has been
funded by $525,000 in short term notes payable to Target Leasing, Ltd. II and by
$325,000 of the Company's working capital. Target Leasing, Ltd. II is a Limited
Partnership whose Managing General Partner is a company wholly owned by a
beneficial shareholder of the Company.
During the six months ended June 30, 1997 the Company increased its investment
in and continued the development and expansion of its majority owned subsidiary,
Blue Ridge Directional, Inc. ("Directional"). The additional investment of
approximately $600,000 was funded from the Company's working capital and was
used to purchase necessary directional drilling equipment. As a result of
Directional's operational activity (primarily during the second quarter of
1997), revenues of approximately $1,000,000 were generated thereby increasing
the Company's trade accounts receivable by approximately $760,000. Directional
has entered into an agreement with Target Leasing, Ltd. II to factor various
accounts receivable as deemed necessary. As of June 30, 1997, $310,689 was
outstanding under this arrangement and has been included in the condensed
consolidated financial statements as a short term note payable.
4. EQUITY TRANSACTIONS
-------------------
On June 27, 1997 the Company's majority shareholders, Argyle Trust and Longhorn
Trust, exercised options to purchase 500,000 shares each of the Company's Common
Stock for $0.25 per share. Both Argyle Trust and Longhorn Trust have remaining
options expiring on July 1, 1998 to purchase another 250,000 shares each of the
Company's Common Stock at $0.25 per share.
During the six months ended June 30, 1997, the Company's subsidiary, Blue Ridge
Energy, Inc., entered into the private placement of its BRE Series C Preferred
Stock, which has a par value of $0.001 per share, at $6.00 per share. The BRE
Series C Preferred Stock bears a 12% per annum dividend, payable monthly, and
shall be converted automatically into two (2) shares of BRE Common Stock
effective when a registration for BRE Common Stock is filed with the SEC on June
30, 1999, whichever occurs first. As of June 30, 1996 approximately $498,000 had
been received from the sale of this stock and had been used by Energy to provide
working capital and purchase oil and gas properties.
5. PROPERTY AND EQUIPMENT
----------------------
Property and equipment, stated at cost, consisted of the following at June 30,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------- ------------
<S> <C> <C>
Drilling Rigs $1,384,018 $ 539,035
Oil and Gas Properties 729,589 354,589
Acidizing Equipment and Machinery 110,328 105,060
Cement Equipment and Machinery 302,034 114,477
Directional Drilling Equipment 557,348 --
Autos and Trucks 193,678 71,771
Other Equipment and Machinery 28,372 28,372
Office Buildings and Land 1,049,698 952,808
Leasehold Improvements -- 23,991
Data Processing Equipment 64,005 54,327
Furniture and Fixtures 242,171 232,209
---------- ----------
4,661,241 2,476,639
Less Accumulated Depreciation,
Depletion and Amortization (439,192) (368,968)
---------- ----------
$4,222,049 $2,107,671
========== ==========
</TABLE>
F-30
<PAGE>
APPENDIX A
----------
FORM OF
LIMITED PARTNERSHIP
AGREEMENT
FOR
BLUE RIDGE ENERGY
FUND 199__-__
LIMITED PARTNERSHIP
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. The Partnership....................................................................................A-1
1.1 Definitions..............................................................................A-1
1.2 Organization.............................................................................A-7
1.3 Partnership Name.........................................................................A-7
1.4 Character of Business....................................................................A-7
1.5 Principal Place of Business..............................................................A-8
1.6 Term of Partnership......................................................................A-8
1.7 Filings..................................................................................A-8
1.8 Independent Activities...................................................................A-8
2. Capitalization.....................................................................................A-8
2.1 Capital Contributions of the Managing General Partner and Initial Limited Partner........A-8
2.2 Capital Contributions of the Investor Partners...........................................A-9
2.3 Additional Contributions.................................................................A-9
3. Capital Accounts and Allocations...................................................................A-9
3.1 Capital Accounts.........................................................................A-9
3.2 Allocation of Profits and Losses........................................................A-10
3.3 Depletion...............................................................................A-12
3.4 Apportionment Among Partners............................................................A-13
4. Distributions.....................................................................................A-13
4.1 Time of Distribution....................................................................A-13
4.2 Distributions...........................................................................A-13
4.3 Capital Account Deficits................................................................A-13
5. Activities........................................................................................A-13
5.1 Management..............................................................................A-13
5.2 Conduct of Operations...................................................................A-13
5.3 Acquisition and Sale of Leases..........................................................A-15
5.4 Title to Leases.........................................................................A-15
5.5 Farmouts................................................................................A-15
5.6 Release, Abandonment, and Sale or Exchange of Properties................................A-16
5.7 Certain Transactions....................................................................A-16
6. Managing General Partner..........................................................................A-19
6.1 Managing General Partner................................................................A-19
6.2 Authority of Managing General Partner...................................................A-19
6.3 Certain Restrictions on Managing General Partner's Power and Authority..................A-21
6.4 Indemnification of Managing General Partner.............................................A-22
6.5 Withdrawal..............................................................................A-23
6.6 Management Fee..........................................................................A-23
6.7 Tax Matters Partner.....................................................................A-23
7. Investor Partners.................................................................................A-24
7.1 Management..............................................................................A-24
7.2 Indemnification of Additional General Partners..........................................A-24
7.3 Assignment of Units.....................................................................A-24
7.4 Prohibited Transfers....................................................................A-25
7.5 Withdrawal by Investor Partners.........................................................A-25
7.6 Removal of Managing General Partner.....................................................A-25
7.7 Calling of Meetings.....................................................................A-26
7.8 Additional Voting Rights................................................................A-26
7.9 Voting by Proxy.........................................................................A-26
</TABLE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
7.10 Conversion of Additional General Partner Interests into Limited Partner Interests.. A-26
7.11 Unit Repurchase Program............................................................ A-27
7.12 Liability of Partners.............................................................. A-28
8. Books and Records.............................................................................. A-28
8.1 Books and Records................................................................... A-28
8.2 Reports............................................................................. A-29
8.3 Bank Accounts....................................................................... A-30
8.4 Federal Income Tax Elections........................................................ A-30
9. Dissolution; Winding-Up........................................................................ A-30
9.1 Dissolution......................................................................... A-30
9.2 Liquidation......................................................................... A-31
9.3 Winding-Up.......................................................................... A-31
10. Power of Attorney............................................................................. A-32
10.1 Managing General Partner as Attorney-in-Fact....................................... A-32
10.2 Nature as Special Power............................................................ A-32
11. Miscellaneous Provisions...................................................................... A-33
11.1 Liability of Parties............................................................... A-33
11.2 Notices............................................................................ A-33
11.3 Paragraph Headings, Section References............................................ A-33
11.4 Severability....................................................................... A-33
11.5 Sole Agreement..................................................................... A-33
11.6 Applicable Law..................................................................... A-33
11.7 Execution in Counterparts.......................................................... A-33
11.8 Waiver of Action for Partition..................................................... A-33
11.9 Amendments......................................................................... A-33
11.10 Substitution of Signature Pages................................................... A-34
11.11 Incorporation by Reference........................................................ A-34
SIGNATURE PAGE..................................................................................... A-35
</TABLE>
<PAGE>
FORM OF
LIMITED PARTNERSHIP AGREEMENT
OF BLUE RIDGE ENERGY FUND 1997 [1998]-____ LIMITED PARTNERSHIP,
THIS LIMITED PARTNERSHIP AGREEMENT is made as of the _____ day of
_______________, 1997 [1998], by and among (i) BLUE RIDGE GROUP, INC., a Nevada
corporation, as the Managing General Partner, (ii) ___________________, as the
Initial Limited Partner, and (iii) the Persons whose names are set forth on
Exhibit A attached hereto, as Additional General Partners or as Limited
Partners.
RECITALS:
- ---------
A. The Managing General Partner and the Initial Limited Partner formed a
Kentucky limited partnership named Blue Ridge Energy Fund 1997 [1998]-___
("Partnership") pursuant to the provisions of the Kentucky Revised Uniform
Limited Partnership Act.
B. On the date hereof, the Additional General Partners and Limited Partners
have been admitted to the Partnership.
C. The parties desire to enter into this Agreement to set forth their mutual
understandings.
AGREEMENT:
- ----------
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. The Partnership.
1.1 Definitions. Capitalized words and phrases used in this Agreement
shall have the following meanings:
(a) "Act" shall mean the Kentucky Revised Uniform Limited Partnership
Act, as amended from time to time (or any corresponding provisions of succeeding
law).
(b) "Additional General Partner" shall mean an Investor Partner who
purchases Units as an additional general partner, and such Additional General
Partner's transferees and assigns who are admitted as a Substitute Investor
Partner. The term "Additional General Partners" shall not include such Investor
Partner who converts such Investor Partner's interest in the Partnership into a
Limited Partner interest pursuant to Section 7.10.
(c) "Administrative Costs" shall mean all customary and routine
expenses incurred internally by the Managing General Partner for the conduct of
program administration, including legal, finance, accounting, secretarial,
travel, office rent, telephone, data processing and other items of a similar
nature which does not include costs which are directly incurred for the benefit
of the Partnership. Administrative Costs shall not include third party costs
associated with audits, tax preparation or independent engineering and
geological reviews. Administrative Costs also shall not include overhead costs
associated with the actual drilling, completing or production of oil and gas
wells.
(d) "Affiliate" of a specified Person shall mean (a) any Person
directly or indirectly owing, controlling, or holding with power to vote 10% or
more of the outstanding voting securities of such specified Person; (b) any
Person 10% or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by such specified
Person; (c) any Person directly or indirectly controlling, controlled by, or
under common control with, such specified Person; (d) any officer, director,
trustee or partner of such specified Person, and (e) if such specified Person is
an officer, director, trustee or partner, any Person for which such Person acts
in any such capacity.
(e) "Agreement" shall mean this Limited Partnership Agreement, as
amended from time to time.
(f) "Capital Account" shall mean, with respect to any Partner, the
capital account maintained for such Partner pursuant to Section 3.1.
<PAGE>
(g) "Capital Contribution" shall mean the total contributions made by
a Partner to the capital of the Partnership pursuant to Article 2.
(h) "Capital Expenditures" shall mean the costs associated with
property acquisition and the drilling and completion of oil and gas wells which
are generally accepted as capital expenditures pursuant to the provisions of the
Internal Revenue Code.
(i) "Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time (or any corresponding provisions of succeeding law).
(j) "Cost," when used with respect to the sale of property to the
Partnership, shall mean (a) the sum of the prices paid by the seller to an
unaffiliated Person for such property, including bonuses; (b) title insurance or
examination costs, brokers' commissions, filing fees, recording costs, transfer
taxes, if any, and like charges in connection with the acquisition of such
property; (c) a pro rata portion of the seller's actual necessary and reasonable
expenses for seismic and geophysical services; and (d) rentals and ad valorem
taxes paid by the seller with respect to such property to the date of its
transfer to the buyer, interest and points actually incurred on funds used to
acquire or maintain such property, and such portion of the seller's reasonable,
necessary and actual expenses for geological, engineering, drafting, accounting,
legal and other like services allocated to the property cost in conformity with
generally accepted accounting principles and industry standards, except for
expenses in connection with the past drilling of wells which are not producers
of sufficient quantities of oil or gas to make commercially reasonable their
continued operations, and provided that the expenses enumerated in this Section
shall have been incurred not more than 36 months prior to the purchase by the
Partnership; provided, however, that such period may be extended, at the
discretion of the state securities administrator, upon proper justification.
When used with respect to services, "Cost" shall mean the reasonable, necessary
and actual expenses incurred by the seller on behalf of the Partnership in
providing such services, determined in accordance with generally accepted
accounting principles. As used elsewhere, "Cost" means the price paid the
seller in an arm's-length transaction.
(k) "Depreciation" shall mean, for each fiscal year or other period,
an amount equal to the depreciation, amortization, or other cost recovery
deduction allowable with respect to an asset for such year or other period,
except that if the Gross Asset Value of an asset differs from its adjusted basis
for Federal income tax purposes, Depreciation shall be an amount which bears the
same ratio to such beginning Gross Asset Value as the Federal income tax
depreciation, amortization, or other cost recovery deduction for such year or
other period bears to such beginning adjusted tax basis; provided, however, that
if the Federal income tax depreciation, amortization, or other cost recovery
deduction for such year is zero, Depreciation shall be determined with reference
to such beginning Gross Asset Value using any reasonable method selected by the
Managing General Partner.
(l) "Development Well" shall mean a well drilled within the proved
area of an oil or gas reservoir to the depth of a stratigraphic horizon known to
be productive.
(m) "Direct Costs" shall mean all actual and necessary costs directly
incurred for the benefit of the Partnership and generally attributable to the
goods and services provided to the Partnership by parties other than the
Managing General Partner or its Affiliates such as audits, tax preparation,
legal expenses, independent engineering reports, materials and supplies;
provided, however, that Direct Costs shall not include any cost otherwise
classified as Organization and Offering Costs, Administrative Costs or Operating
Costs. Direct Costs may include the cost of services provided by the Managing
General Partner or its Affiliates if such services are provided pursuant to
written contracts and in compliance with Section 5.7(e).
(n) "Distributable Cash" shall mean for any period the excess, if any,
of (A) the sum of (i) all gross receipts from any sources (including loan
proceeds) for such period, other than from Capital Contributions, plus (ii) any
funds released by the Managing General Partner from previously established
reserves (referred to in (B)(ii) below), over (B) the sum of (i) all cash
expenditures of the Partnership for such period not funded by capital
contributions or paid out of previously established reserves (referred to in
(B)(ii) below), plus (ii) a reasonable reserve for future expenditures as
determined by the Managing General Partner.
(o) "Drilling and Completion Costs" shall mean all Costs, excluding
Operating Costs, of drilling, completing, testing, equipping and bringing a well
into production or plugging and abandoning it, including all labor and other
construction and installation costs incident thereto, location and surface
damages, cementing, drilling mud and
A-2
<PAGE>
chemicals, drill stem tests and core analysis, engineering and well site
geological expenses, electric logs, costs of plugging back, deepening, rework
operations, repairing or performing remedial work of any type, costs of plugging
and abandoning any well participated in by the Partnership, and reimbursements
and compensation to well operators, including charges paid to the Managing
General Partner as unit operator during the drilling and completion phase of a
well, plus the cost of the gathering system and of acquiring leasehold
interests.
(p) "Farmout" shall mean an agreement whereby the owner of the
leasehold or working interest agrees to assign his interest in certain specific
acreage to the assignees, retaining some interest such as an overriding royalty
interest, an oil and gas payment, offset acreage or other type of interest,
subject to the drilling of one or more specific wells or other performance as a
condition of the assignment.
(q) "General Partners" shall mean the Additional General Partners and
the Managing General Partner.
(r) "Gross Asset Value" shall mean, with respect to any asset, the
asset's adjusted basis for Federal income tax purposes, except as follows:
(1) The initial Gross Asset Value of any asset contributed by a
Partner to the Partnership shall be the gross fair market value of such asset,
as determined by the contributing Partner and the Partnership;
(2) The Gross Asset Value of all Partnership assets shall be
adjusted to equal their respective gross fair market values, as determined by
the Managing General Partner, as of the following times: (a) the acquisition
of an additional interest in the Partnership by any new or existing Partner in
exchange for more than a de minimis Capital Contribution; (b) the distribution
by the Partnership of property in consideration for an interest in the
Partnership; and (c) the liquidation of the Partnership within the meaning of
Treas. Reg. (S) 1.704-1(b)(2)(ii)(g); provided, however, that the adjustments
pursuant to clauses (a) and (b) above shall be made only if the Managing
General Partner reasonably determines that such adjustments are necessary or
appropriate to reflect the relative economic interests of the Partners in the
Partnership;
(3) The Gross Asset Value of any Partnership asset distributed to
any Partner shall be the gross fair market value of such asset on the date of
distribution; and
(4) The Gross Asset Value of Partnership assets shall be increased
(or decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code (S)(S) 734(b) or 743(b), but only to the extent that such
adjustments are taken into account in determining Capital Accounts pursuant to
Treas. Reg. (S) 1.704-1(b)(2)(iv)(m) and Section 3.2(g); provided, however,
that Gross Asset Value shall not be adjusted pursuant to this Section
1.1(q)(iv) to the extent the Managing General Partner determines that an
adjustment pursuant to Section 1.1(q)(ii) is necessary or appropriate in
connection with a transaction that would otherwise result in an adjustment
pursuant to this Section 1.1(q)(iv).
If the Gross Asset Value of an asset has been determined or adjusted pursuant to
Sections 1.1(q)(i), 1.1(q)(ii), or 1.1(q)(iv), such Gross Asset Value shall
thereafter be adjusted by the Depreciation taken into account with respect to
such asset for purposes of computing Profits and Losses.
(s) "Horizon" shall mean a zone of a particular formation; that part
of a formation of sufficient porosity and permeability to form a petroleum
reservoir.
(t) "IDC" shall mean intangible drilling and development costs.
(u) "Independent Expert" shall mean a person with no material
relationship with the Managing General Partner or its Affiliates who is
qualified and who is in the business of rendering opinions regarding the value
of oil and gas properties based upon the evaluation of all pertinent economic,
financial, geologic and engineering information available to the Managing
General Partner or its Affiliates.
(v) "Initial Limited Partner" shall mean __________________ or any
successor to the Initial Limited Partner's interest in the Partnership.
A-3
<PAGE>
(w) "Investor Partner" shall mean any Person other than the Managing
General Partner and Initial Limited Partner (i) whose name is set forth on
Exhibit A attached hereto as an Additional General Partner or as a Limited
Partner, or who has been admitted as an additional or Substitute Investor
Partner pursuant to the terms of this Agreement, and (ii) who is the owner of a
Unit.
(x) "Lease" shall mean full or partial interests in: (i) undeveloped
oil and gas leases; (ii) oil and gas mineral rights; (iii) licenses; (iv)
concessions; (v) contracts; (vi) fee rights; or (vii) other rights authorizing
the owner thereof to drill for, reduce to possession, and produce oil and gas.
(y) "Limited Partner" shall mean an Investor Partner who purchases
Units as a Limited Partner, such Limited Partner's transferee or assignee who is
admitted as a Substitute Investor Partner, and an Additional General Partner who
converts their interest to a Limited Partner interest pursuant to the provisions
of this Agreement.
(z) "Management Fee" shall mean that fee to which the Managing
General Partner is entitled pursuant to Section 6.6.
(aa) "Managing General Partner" shall mean Blue Ridge Group, Inc. or
its successors, in their capacity as the Managing General Partner.
(bb) "Non-Capital Expenditures" shall mean those expenditures
associated with property acquisition and the drilling and completion of oil and
gas wells that under present law are generally accepted as fully deductible
currently for federal income tax purposes.
(cc) "Nonrecourse Liability" shall have the meaning set forth in
Treas Reg. (S)(S) 1.704-2(b)(3) and 1.752-1(a)(2).
(dd) "Oil and Gas Interest" shall mean any oil or gas royalty or
lease, or fractional interest therein, or certificate of interest or
participation or investment contract relative to such royalties, leases, or
fractional interests, or any other interest or right which permits the
exploration of, drilling for, or production of oil and gas or other related
hydrocarbons or the receipt of such production or the proceeds thereof.
(ee) "Operating Costs" shall mean expenditures made and costs
incurred in producing and marketing oil or gas from completed wells, including,
in addition to labor, fuel, repairs, hauling, materials, supplies, utility
charges, and other costs incident to or therefrom, ad valorem and severance
taxes, insurance and casualty loss expense, and compensation to well operators
or others for services rendered in conducting such operations.
(ff) "Organization and Offering Costs" shall mean all costs of
organizing and selling the offering including, but not limited to, total
underwriting and brokerage discounts and commissions (including fees of the
underwriters' attorneys), expenses for printing, engraving, mailing, salaries of
employees while engaged in sales activity, charges of transfer agents,
registrars, trustees, escrow holders, depositaries, engineers and other experts,
expenses of qualification of the sale of the securities under Federal and state
law, including taxes and fees, accountants' and attorneys' fees and other front-
end fees.
(gg) "Overriding Royalty Interest" shall mean an interest in the oil
and gas produced pursuant to a specified oil and gas lease or leases, or the
proceeds from the sale thereof, carved out of the Working Interest, to be
received free and clear of all costs of development, operation, or maintenance.
(hh) "Participant List" shall mean an alphabetical list of the names,
addresses and business telephone numbers of the Investor Partners, along with
the number of Units held by each of them.
(ii) "Partner Minimum Gain" shall mean partner nonrecourse debt
minimum gain within the meaning of Treas. Reg. (S) 1.704-2(i)(3).
(jj) "Partner Nonrecourse Debt" shall have the meaning set forth in
Treas. Reg. (S) 1.704-2(b)(4).
(kk) "Partner Nonrecourse Deductions" shall have the meaning set
forth in Treas. Reg. (S) 1.704-2(i)(2).
A-4
<PAGE>
(ll) "Partners" shall mean the Managing General Partner, the Initial
Limited Partner, and the Investor Partners.
(mm) "Partnership" shall mean the partnership formed by the Partners
pursuant to the Act and governed by this Agreement.
(nn) "Partnership Minimum Gain" shall have the meaning set forth in
Treas. Reg. (S)(S) 1.704-2(b)(2).
(oo) "Permitted Transfer" shall mean any transfer of Units satisfying
the provisions of Section 7.3.
(pp) "Person" shall mean any individual, partnership, corporation,
limited liability company, trust, or other entity.
(qq) "Profits" and "Losses" shall mean, for each fiscal year or other
period, an amount equal to the Partnership's taxable income or loss for such
year or period, determined in accordance with Code (S) 703(a) (for this purpose,
all items of income, gain, loss, or deduction required to be stated separately
pursuant to Code (S) 703(a)(1) shall be included in taxable income or loss),
with the following adjustments:
(1) Any income of the Partnership that is exempt from Federal
income tax and not otherwise taken into account in computing Profits or Losses
pursuant to this Section shall be added to such taxable income or loss;
(2) Any expenditures of the Partnership described in Code (S)
705(a)(2)(B) or treated as Code (S) 705(a)(2)(B) expenditures pursuant to
Treas. Reg. (S) 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in
computing Profits or Losses pursuant to this Section 1.1(qq) shall be
subtracted from such taxable income or loss;
(3) In the event the Gross Asset Value of any Partnership asset is
adjusted pursuant to Sections 1.1(q)(ii) or 1.1(q)(ii), the amount of such
adjustment shall be taken into account as gain or loss from the disposition of
such asset for purpose of computing Profits or Losses;
(4) Gain or loss resulting from any disposition of Partnership
property with respect to which gain or loss is recognized for Federal income
tax purposes shall be computed by reference to the Gross Asset Value of the
property disposed of notwithstanding that the adjusted tax basis of such
property differs from its Gross Asset Value;
(5) In lieu of the depreciation, amortization, and other cost
recovery deductions taken into account in computing such taxable income or
loss, there shall be taken into account Depreciation for such fiscal year or
other period, computed in accordance with Section 1.1(k); and
(6) Notwithstanding any other provisions of this Section 1.1(qq),
any items which are specially allocated pursuant to this Agreement shall not
be taken into account in computing Profits or Losses.
(rr) "Prospect" shall mean a contiguous Oil and Gas Interest, upon
which drilling operations may be conducted. In general, a Prospect is an area
in which the Partnership owns or intends to own one or more Oil and Gas
Interests which is geographically defined on the basis of geological data by the
Managing General Partner and which is reasonably anticipated by the Managing
General Partner to contain at least one reservoir. An area covering lands which
are believed by the Managing General Partner to contain subsurface structural or
stratigraphic conditions making it susceptible to the accumulations of
hydrocarbons in commercially productive quantities at one or more horizons. The
area, which may be different for different horizons, shall be designated by the
Managing General Partner in writing prior to the conduct of operations and shall
be enlarged or contracted from time to time on the basis of subsequently
acquired information to define the anticipated limits of the associated
hydrocarbon reserves and to include all acreage encompassed therein. A
"prospect" with respect to a particular horizon may be limited to the minimum
area permitted by state law or local practice, whichever is applicable, to
protect against drainage from adjacent wells if the well to be drilled by the
Partnership is to a horizon containing proved reserves.
A-5
<PAGE>
(ss) "Prospectus" shall mean that Prospectus (including any
preliminary prospectus), of which a form of this Agreement is a part, pursuant
to which the Units are being offered and sold.
(tt) "Proved Reserves" shall mean those quantities of crude oil,
natural gas, and natural gas liquids which, upon analysis of geologic and
engineering data, appear with reasonable certainty to be recoverable in the
future from known oil and gas reservoirs under existing economic and operating
conditions. Proved reserves are limited to those quantities of oil and gas
which can be expected, with little doubt, to be recoverable commercially at
current prices and costs, under existing regulatory practices and with existing
conventional equipment and operating methods. Depending upon their status of
development, such proved reserves shall be subdivided into the following
classifications:
(1) Proved Developed Reserves. These are proved reserves which can
be expected to be recovered through existing wells with existing equipment and
operating methods. This classification shall include:
(A) Proved Developed Producing Reserves. These are proved
developed reserves which are expected to be produced from existing completion
interval(s) now open for production in existing wells; and
(B) Proved Developed Non-Producing Reserves. These are proved
developed reserves which exist behind the casing of existing wells, or at
minor depths below the present bottom of such wells, which are expected to be
produced through these wells in the predictable future, where the cost of
making such oil and gas available for production should be relatively small
compared to the cost of a new well.
Additional oil and gas expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery should be included as "Proved
Developed Reserves" only after testing by a pilot project or after the operation
of an installed program has confirmed through production response that increased
recovery will be achieved.
(2) Proved Undeveloped Reserves. These are proved reserves which
are expected to be recovered from new wells on undrilled acreage, or from
existing wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage shall be limited to those
drilling units offsetting productive units, which are virtually certain of
production when drilled. Proved reserves for other undrilled units can be
claimed only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir. If
warranted, however, a narrative discussion can be provided to point out those
areas where future drilling or other operations may develop oil and gas
production which at the time of filing is considered too uncertain to be
expressed as numerical estimates for proved reserves.
(uu) "Proved Undeveloped Reserves" shall mean the reserves that are
expected to be recovered from new wells on undrilled acreage, or from existing
wells where a relatively major expenditure is required for recompletion.
Reserves on undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of production when
drilled. Proved reserves for other undrilled units can be claimed only where it
can be demonstrated with certainty that there is continuity of production from
the existing productive formation. Under no circumstances should estimates for
Proved Undeveloped Reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery technique is
contemplated, unless such techniques have been proved effective by actual tests
in the area and in the same Reservoir.
(vv) "Roll-Up" shall mean a transaction involving the acquisition,
merger, conversion, or consolidation, either directly or indirectly, of the
Partnership and the issuance of securities of a Roll-Up Entity. Such term does
not include:
(1) a transaction involving securities of the Partnership that have
been listed for at least 12 months on a national exchange or traded through
the National Association of Securities Dealers Automated Quotation National
Market System, or
A-6
<PAGE>
(2) a transaction involving the conversion to corporate, trust,
limited liability company, or association form of only the Partnership if, as
a consequence of the transaction, there will be no significant adverse change
in any of the following:
(A) voting rights;
(B) the term of existence of the surviving entity;
(C) Sponsor compensation; or
(D) the Partnership's investment objectives.
(ww) "Roll-Up Entity" shall mean a partnership, trust, corporation,
limited liability company, or other entity that would be created or survive
after the successful completion of a proposed Roll-Up transaction.
(xx) "Significant Transaction" shall mean a transaction other than a
Roll-Up involving the acquisition, merger, conversion, or consolidation of the
Partnership with or into another partnership, corporation, limited liability
company or other entity and the issuance of securities to Investor Partners as a
result of such transaction.
(yy) "Sponsor" shall mean any Person directly or indirectly
instrumental in organizing, wholly or in part, a program or any Person who will
manage or is entitled to manage or participate in the management or control of a
program. "Sponsor" includes the managing and controlling general partner(s) and
any other Person who actually controls or selects the Person who controls 25% or
more of the exploratory, developmental, or producing activities of the
Partnership, or any segment thereof, even if that Person has not entered into a
contract at the time of formation of the Partnership. "Sponsor" does not
include wholly independent third parties such as attorneys, accountants, and
underwriters whose only compensation is for professional services rendered in
connection with the offering of Units. Whenever the context of these guidelines
so requires, the term "Sponsor" shall be deemed to include its Affiliates.
(zz) "Subscription Agreement" shall mean the agreement attached to
the Prospectus as Appendix C, pursuant to which an investor subscribes to Units
in the Partnership.
(aaa) "Substitute Investor Partner" shall mean any Person admitted to
the Partnership as an Investor Partner pursuant to Section 7.3(c).
(bbb) "Surviving Entity" shall mean the entity which survives a
Significant Transaction.
(ccc) "TMP" shall mean the tax matters partner of the Partnership
for purposes of Code (S)(S) 6621 through 6233.
(ddd) "Unit" shall mean an interest of an Investor Partner in the
Partnership, each Unit representing a Capital Contribution of $1,000 to the
Partnership.
(eee) "Working Interest" shall mean an interest in an oil and gas
leasehold which is subject to some portion of the costs of development,
operation, or maintenance.
1.2 Organization. The parties hereto do hereby form a limited
partnership pursuant to the provisions of the Act. The Partners hereby agree to
continue the Partnership as a limited partnership pursuant to the provisions of
the Act and upon the terms and conditions set forth in this Agreement.
1.3 Partnership Name. The name of the Partnership shall be Blue Ridge
Energy Fund 1997-____ Limited Partnership, [Blue Ridge Energy Fund 1998-____
Limited Partnership,] and all business of the Partnership shall be conducted in
such name. The Managing General Partner may change the name of the Partnership
upon ten days notice to the Investor Partners. The Partnership shall hold all
of its property in the name of the Partnership and not in the name of any
Partner.
1.4 Character of Business. The principal business of the Partnership
shall be to acquire Leases, drill sites, and other interests in oil and/or gas
properties and to drill for oil, gas, hydrocarbons, and other minerals located
in, on, or
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under such properties, to produce and sell oil, gas, hydrocarbons, and other
minerals from such properties, and to invest and generally engage in any and all
phases of the oil and gas business. Such business purpose shall include,
without limitation, the purchase, sale, acquisition, disposition, exploration,
development, operation, and production of oil and gas properties of any
character. The Partnership shall not acquire property in exchange for Units.
Without limiting the foregoing, Partnership activities may be undertaken as
principal, agent, general partner, syndicate member, joint venturer,
participant, or otherwise.
1.5 Principal Place of Business. The principal place of business of the
Partnership shall be at 632 Adams Street, Suite 700, Bowling Green, Kentucky
42101. The Managing General Partner may change the principal place of business
of the Partnership to any other place within the Commonwealth of Kentucky upon
ten days notice to the Investor Partners.
1.6 Term of Partnership. The Partnership commenced upon the filing of
its Certificate of Limited Partnership, and shall continue until terminated as
provided in Article 9.1.
1.7 Filings.
(a) A Certificate of Limited Partnership has been filed in the office
of the Secretary of State of the Commonwealth of Kentucky in accordance with the
provisions of the Act. The Managing General Partner shall take any and all
other actions reasonably necessary to perfect and maintain the status of the
Partnership as a limited partnership under the laws of Kentucky. The Managing
General Partner shall cause amendments to the Certificate to be filed whenever
required by the Act.
(b) The Managing General Partner shall execute and cause to be filed
all such documents and shall take any and all other actions as may be reasonably
necessary to perfect and maintain the status of the Partnership as a limited
partnership qualified to do business in any other states or jurisdictions in
which the Partnership engages in business.
(c) The agent for service of process on the Partnership shall be Blue
Ridge Group, Inc. or any successor as appointed by the Managing General Partner.
(d) Upon the dissolution of the Partnership, the Managing General
Partner shall promptly execute and cause to be filed a Certificate of
Cancellation in accordance with the Act and all such other documents as may be
necessary for the Partnership to withdraw from any other states or jurisdictions
in which the Partnership has qualified to do business.
1.8 Independent Activities. Each General Partner and each Limited Partner
may, notwithstanding this Agreement, engage in whatever activities they choose,
whether the same are competitive with the Partnership or otherwise, without
having or incurring any obligation to offer any interest in such activities to
the Partnership or any Partner. Except as otherwise provided herein, however,
the Managing General Partner and its Affiliates may pursue business
opportunities that are consistent with the Partnership's investment objectives
for their own account only after they have determined that such opportunity
either cannot be pursued by the Partnership because of insufficient funds or
because it is not appropriate for the Partnership under the existing
circumstances. Neither this Agreement, nor any activity undertaken pursuant
hereto, shall prevent the Managing General Partner from engaging in such
activities, or require the Managing General Partner to permit the Partnership or
any Partner to participate in any such activities, and as a material part of the
consideration for the execution of this Agreement by the Managing General
Partner and the admission of each Investor Partner, each Investor Partner hereby
waives, relinquishes, and renounces any such right or claim of participation.
Notwithstanding the foregoing, the Managing General Partner still has a
fiduciary obligation to the Investor Partners.
2. Capitalization.
2.1 Capital Contributions of the Managing General Partner and Initial
Limited Partner.
(a) On or before the date hereof, the Managing General Partner shall
make a Capital Contribution in cash to the Partnership of an amount equal to not
less than 5% of the aggregate Capital Contributions of the Investor Partners. In
consideration of making such Capital Contribution, becoming a General Partner,
subjecting its assets to the liabilities of the Partnership, and undertaking
other obligations as herein set forth, the Managing General Partner shall
receive the interest in the Partnership provided herein.
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(b) On or before the date hereof, the Initial Limited Partner shall
contribute $100 in cash to the capital of the Partnership. Upon the earlier to
occur of (i) the conversion of an Additional General Partner's interest into a
Limited Partner interest, or (ii) the admission of another Limited Partner to
the Partnership, the Partnership shall redeem in full, without interest or
deduction, the Initial Limited Partner's Capital Contribution, and the Initial
Limited Partner shall cease to be a Partner.
2.2 Capital Contributions of the Investor Partners.
(a) Upon execution of this Agreement, each initial Investor Partner
(whose names and addresses and number of Units for which the Investor Partner
has subscribed are set forth in Exhibit A) shall contribute to the capital of
the Partnership the sum of $1,000 for each Unit purchased. The minimum
subscription by an Investor Partner is five Units ($5,000). The maximum
aggregate number of Units which may be purchased by Investor Partners is 2,000
Units. The contributions of the Investor Partners shall be in cash or by check
subject to collection.
(b) If less than 2,000 Units have been purchased on the date hereof,
the Managing General Partner may continue to sell Units (but not more than 2,000
Units in the aggregate) until such time as the Partnership expends its funds for
reasons other than the payment of Organization and Offering Costs and the
purchase of Prospects.
(c) Except as provided in Section 4.3, any proceeds of the offering of
Units for sale pursuant to the Prospectus not used, committed for use, or
reserved as operating capital in the Partnership's operations within one year
after the closing of such offering shall be distributed pro rata to the Investor
Partners as a return of capital and the Managing General Partner shall reimburse
such Investor Partners for selling expenses, management fees, and offering
expenses allocable to the return of capital.
(d) Until proceeds from the public offering are invested in the
Partnership's operations, such proceeds may be temporarily invested in income
producing short-term, highly liquid investments where there is appropriate
safety of principal, such as U.S. Treasury obligations, certificate of deposits
or money market accounts. Any such income shall be allocated pro rata to the
Investor Partners providing such capital contributions.
2.3 Additional Contributions. Except as otherwise specifically provided
in the Act, no Investor Partner shall be required or obligated (a) to contribute
any capital to the Partnership other than as provided in Section 2.2, or (b) to
lend any funds to the Partnership. No interest shall be paid on any Capital
Contributions and, except as otherwise provided herein, no Partner, other than
the Initial Limited Partner as authorized herein, may withdraw the Partner's
Capital Contribution. The Units are nonassessable; however, General Partners
are liable, in addition to their Capital Contributions, for Partnership
obligations and liabilities represented by their ownership of interests as
General Partners in accordance with Kentucky law.
3. Capital Accounts and Allocations.
3.1 Capital Accounts.
(a) General. A separate Capital Account shall be established and
maintained for each Partner on the books and records of the Partnership. A
Partner shall have a single Capital Account even though the Partner may be both
a General Partner and a Limited Partner. Capital Accounts shall be maintained in
accordance with Treas. Reg. (S) 1.704-1(b) and any inconsistency between the
provisions of this Section 3.1 and such regulation shall be resolved in favor of
such regulation. In the event the Managing General Partner shall determine that
it is prudent to modify the manner in which the Capital Accounts are computed in
order to comply with such regulation, the Managing General Partner may make such
modification provided that it is not likely to have a material effect on the
amounts distributable to any Partner pursuant to Section 9.3 upon the
dissolution of the Partnership. The Managing General Partner also shall (i) make
any adjustments that are necessary or appropriate to maintain equality between
the Capital Accounts of the Partners and the amount of Partnership capital
reflected on the Partnership's balance sheet, as computed for book purposes, in
accordance with Treas. Reg. (S) 1.704-1(b)(2)(iv)(q), and (ii) make any
appropriate modifications in the event unanticipated events might otherwise
cause this Agreement not to comply with Treas. Reg. (S) 1.704-1(b).
(b) Increases in Capital Accounts. Each Partner's Capital Account
shall be credited with (i) the amount of money contributed by such Partner to
the Partnership; (ii) the amount of any Partnership liabilities that are assumed
by
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such Partner (within the meaning of Treas. Reg. (S) 1.704-1(b)(2)(iv)(c)); (iii)
the Gross Asset Value of property contributed by such Partner to the Partnership
(net of liabilities secured by such contributed property that the Partnership is
considered to assume or take subject to under Code (S) 752); and (iv)
allocations to such Partner of Profits (or items thereof), including income and
gain exempt from tax and income and gain described in Treas. Reg. (S) 1.704-
1(b)(2)(iv)(g) (relating to adjustments to reflect book value).
(c) Decreases in Capital Accounts. Each Partner's Capital Account
shall be debited with (i) the amount of money distributed to such Partner by the
Partnership; (ii) the amount of such Partner's individual liabilities that are
assumed by the Partnership (other than liabilities described in Treas. Reg. (S)
1.704-1(b)(2)(iv)(b)(2) that are assumed by the Partnership); (iii) the Gross
Asset Value of property distributed to such Partner by the Partnership (net of
liabilities secured by such distributed property that such Partner is considered
to assume or take subject to under Code (S) 752); (iv) allocations to such
Partner of expenditures of the Partnership not deductible in computing
Partnership taxable income and not properly chargeable to capital account (as
described in Code (S) 705(a)(2)(B)), and (v) allocations to such Partner of
Losses (or item thereof), including Losses and deductions described in Treas.
Reg. (S) 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect book value),
but excluding items described in (iv) above and excluding Losses or deductions
described in Treas. Reg. (S) 1.704-1(b)(4)(iii) (relating to excess percentage
depletion.)
(d) Adjustments to Capital Accounts Related to Depletion.
(1) Solely for purposes of maintaining the Capital Accounts, each
year the Partnership shall compute (in accordance with Treas. Reg. (S) 1.704-
1(b)(2)(iv)(k)) a simulated depletion allowance for each Oil and Gas Interest
using that method, as between the cost depletion method and the percentage
depletion method (without regard to the limitations of Code (S) 613A(c)(3)
which theoretically could apply to any Partner), which results in the greatest
simulated depletion allowance. The simulated depletion allowance with respect
to each Oil and Gas Interest shall reduce the Partners' Capital Accounts in
the same proportion as the Partners were allocated adjusted basis with respect
to such Oil and Gas Interest under Section 3.3(a). In no event shall the
Partnership's aggregate simulated depletion allowance with respect to an Oil
and Gas Interest exceed the Partnership's adjusted basis in the Oil and Gas
Interest (maintained solely for Capital Account purposes).
(2) Upon the taxable disposition of an Oil and Gas Interest by the
Partnership, the Partnership shall determine the simulated (hypothetical) gain
or loss with respect to such Oil and Gas Interest (solely for Capital Account
purposes) by subtracting the Partnership's simulated adjusted basis for the
Oil and Gas Interest sold (maintained solely for Capital Account purposes)
from the amount realized by the Partnership upon such disposition. Simulated
adjusted basis shall be determined by reducing the adjusted basis by the
aggregate simulated depletion charged to the Capital Accounts of all Partners
in accordance with Section 3.1(d)(i). The Capital Accounts of the Partners
shall be adjusted upward by the amount of any simulated gain on such
disposition in proportion to such Partners' allocable share of the portion of
total amount realized from the disposition of such Oil and Gas Interest that
exceeds the Partnership's simulated adjusted basis in such Oil and Gas
Interest. The Capital Accounts of the Partners shall be adjusted downward by
the amount of any simulated loss in proportion to such Partners' allocable
shares of the total amount realized from the disposition of such Oil and Gas
Interest that represents recovery of the Partnership's simulated adjusted
basis in such Oil and Gas Interest.
(e) Restoration of Negative Capital Accounts. Except as otherwise
provided in this Agreement, neither an Investor Partner nor the Initial Limited
Partner shall be obligated to the Partnership or to any other Partner to restore
any negative balance in their Capital Accounts. Upon liquidation of the
Partnership, or the liquidation of the interest of the Managing General Partner
(in each case determined as provided in Treas. Reg. (S) 1.704-1(b)(2)(ii)(g), if
the Managing General Partner has a deficit balance in its Capital Account after
crediting all Profit upon the sale of the Partnership's assets which have been
sold, and after making all allocations provided for herein, then the Managing
General Partner shall be obligated to contribute to the Partnership, on or
before the later to occur of (i) the close of the Partnership's taxable year, or
(ii) 90 days following such liquidation, an amount equal to such deficit balance
for distribution in accordance with the terms of this Agreement.
3.2 Allocation of Profits and Losses.
(a) General. Except as provided in this Section 3.2 or in Section
3.3, Profits and Losses of the Partnership shall be allocated 80% to the
Investor Partners and 20% to the Managing General Partner. The foregoing
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allocation of Profits and Losses is an allocation of each item of income, gain,
loss, and deduction which, in the aggregate, constitute a part of Profits or
Losses. Notwithstanding the above allocations, the following special
allocations shall be employed.
(1) IDC and recapture of IDC shall be allocated 95% to the Investor
Partners and 5% to the Managing General Partner;
(2) Organization and Offering Costs, net of commissions, and due
diligence expenses payable to the dealer manager and the soliciting dealers,
shall be paid by the Managing General Partner; such commissions, and due
diligence expenses payable to the dealer manager and the soliciting dealers
shall be allocated 100% to the Investor Partners; except that Organization and
Offering Costs in excess of 10% of the Investor Partners' Capital
Contributions shall be allocated 100% to the Managing General Partner and 0%
to the Investor Partners;
(3) The Management Fee shall be allocated 100% to the Investor
Partners and 0% to the Managing General Partner;
(4) Costs of Leases and Costs of tangible equipment, including
Depreciation, shall be allocated 95% to the Investor Partners and 5% to the
Managing General Partner;
(5) Drilling and Completion Costs shall be allocated 95% to the
Investor Partners and 5% to the Managing General Partner;
(6) Operating Costs shall be allocated 80% to the Investor Partners
and 20% to the Managing General Partner;
(7) Direct Costs shall be allocated 95% to the Investor Partners
and 5% to the Managing General Partner; and
(8) Administrative Costs shall be allocated 100% to the Managing
General Partner and 0% to the Investor Partners.
(b) Capital Account Deficits. Notwithstanding anything to the contrary
in Section 3.2(a), no Investor Partner shall be allocated any item to the extent
that such allocation would create or increase a deficit in such Investor
Partner's Capital Account. For purposes of this Section 3.2(b), in determining
whether an allocation would create or increase a deficit in an Investor
Partner's Capital Account, such Capital Account shall be reduced for those items
described in Treas. Reg. (S)(S) 1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall
be increased by any amounts which such Partner is obligated to restore in
accordance with Treas. Reg. (S) 1.704-1(b)(2)(ii)(c), or is deemed obligated to
restore pursuant to Treas. Reg. (S)(S) 1.704-2(g)(1) and 1.704-2(i)(5). Any
item, the allocation of which to any Investor Partner is prohibited by this
Section 3.2(b), shall be reallocated to those Investor Partners not having a
deficit in their Capital Accounts (as adjusted as provided in this Section
3.2(b) in the proportion that the positive balance of each such Investor
Partner's adjusted Capital Account bears to the aggregate balance of all such
Investor Partners' adjusted Capital Accounts, with any remaining losses or
deductions being allocated to the Managing General Partner. Notwithstanding the
provisions of Section 3.2(a), to the extent items are allocated to the Partners
by virtue of the preceding provisions of this Section 3.2(b), the Profits
thereafter recognized shall be allocated to such Partners (in proportion to the
items previously allocated to them pursuant to this Section 3.2(b) until such
time as the Profits allocated to them pursuant to this sentence equals the items
allocated to them pursuant to the preceding provisions of this Section 3.2(b).
(c) Qualified Income Offset. In the event any Investor Partner
unexpectedly receives any adjustments, allocations, or distributions described
in Treas. Reg. (S) 1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Partnership
income and gain shall be specifically allocated to such Investor Partner in an
amount and manner sufficient to eliminate (to the extent required by the
regulations) the deficit balance in such Investor Partner's Capital Account (as
adjusted in accordance with the provisions of Section 3.2(b)) as quickly as
possible; provided, however, that an allocation pursuant to this Section shall
be made if and only to the extent that such Investor Partner would have a
deficit Capital Account (as adjusted in Section 3.2(b)) after all other
allocations provided for in Article have been tentatively made as if this
Section 3.2(c) were not in this Agreement. It is the intention of the Partners
that the provisions of this Section 3.2(c) constitute a "qualified income
offset" within the meaning of Treas. Reg. (S) 1.704-1(b)(2)(ii)(d), and such
provisions shall be so construed.
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(d) Minimum Gain Chargeback. Notwithstanding any other provision of
this Section 3.2, if there is a net decrease in Partnership Minimum Gain during
any taxable year, all Partners shall be allocated items of Partnership income
and gain for that year equal to that Partner's share (within the meaning of
Treas. Reg. (S) 1.704-2(g)(2)) of the net decrease in Partnership Minimum Gain.
Notwithstanding the preceding sentence, no such chargeback shall be made to the
extent one or more of the exceptions and/or waivers provided for in Treas. Reg.
(S) 1.704-2(f) applies. This Section 3.2(d) is intended to comply with the
minimum gain chargeback requirement of Treas. Reg. (S) 1.704-2(f) and shall be
interpreted consistently therewith.
(e) Partner Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 3.2, other than Section 3.2(d), if there is a net
decrease in Partner Minimum Gain attributable to Partner Nonrecourse Debt during
any Partnership fiscal year, rules similar to those contained in Section 3.2
shall apply in a manner consistent with Treas. Reg. (S) 1.704-2(i)(4). This
Section 3.2(d) is intended to comply with the minimum gain chargeback
requirement of Treas. Reg. (S) 1.704-2(i)(4) and shall be interpreted
consistently therewith.
(f) Partner Nonrecourse Deductions. Any Partner Nonrecourse
Deductions for any fiscal year or other period shall be specially allocated to
the Partner who bears the economic risk of loss with respect to the Partner
Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable
in accordance with Treas. Reg. (S) 1.704-2(i)(1).
(g) Code (S) 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Code (S)(S) 734(b) or
743(b) is required, pursuant to Treas. Reg. (S) 1.704-1(b)(2)(iv)(m), to be
taken into account in determining Capital Accounts, the amount of such
adjustment to the Capital Accounts shall be treated as an item of gain (if the
adjustment increases the basis of the asset) or loss (if the adjustment
decreases such basis) and such gain or loss shall be specially allocated to the
Partners in a manner consistent with the manner in which their Capital Accounts
are required to be adjusted pursuant to such regulation.
(h) Curative Allocations. Notwithstanding anything in this Section
3.2, if as a result of the regulatory allocations provided for in Sections
3.2(c) through 3.2(f) the Managing General Partner determines that the Capital
Accounts of the Partners do not reflect the economic agreement among the
parties, the Managing General Partner, in its discretion, may adjust the
allocations provided for in Section 3.2(a) so that the Capital Accounts of the
Partners will be equal to the amount they would have been equal to had such
regulatory allocations not been a part of this Agreement.
(i) Agreement to be Bound. The Partners are aware of the income tax
consequences of the allocations made by this Section 3.2 and hereby agree to be
bound by the provisions of this Section 3.2 in reporting their shares of
Partnership income and loss for income tax purposes.
(j) Excess Nonrecourse Liabilities. For purposes of Code (S) 752 and
the regulations thereunder, the excess nonrecourse liabilities of the
Partnership (within the meaning of Treas. Reg. (S) 1.752-3(a)(3)), if any, shall
be allocated 95% to the Investor Partners and 5% to the Managing General
Partner.
3.3 Depletion.
(a) The depletion deduction with respect to each Oil and Gas Interest
of the Partnership shall be computed separately by each Partner in accordance
with Code (S) 613A(c)(7)(D) for Federal income tax purposes. For purposes of
such computation, the adjusted basis of each Oil and Gas Interest shall be
allocated in accordance with the Partners' interests in the capital of the
Partnership.
(b) Upon the taxable disposition of an Oil or Gas Interest by the
Partnership, the amount realized therefrom shall be allocated among the Partners
(for purposes of calculating their individual gain or loss on such disposition
for Federal income tax purposes) as follows:
(1) The portion of the total amount realized upon the taxable
disposition of such property that represents recovery of its simulated
adjusted tax basis therein (as calculated pursuant to Section 3.1(d)) shall be
allocated to the Partners in the same proportion as the aggregate adjusted
basis of such property was allocated to such Partners (or their predecessors
in interest) pursuant to Section 3.3(a); and
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(2) The portion of the total amount realized upon the taxable
disposition of such property that represents the excess over the simulated
adjusted tax basis therein shall be allocated in accordance with the
provisions of Section 3.2 as if such gain constituted an item of Profit.
3.4 Apportionment Among Partners.
(a) Except as otherwise provided in this Agreement, all allocations
and distributions to the Investor Partners shall be apportioned among them pro
rata based upon the number of Units held by each of the Investor Partners.
(b) For purposes of Section 3.4(a), an Investor Partner's pro rata
share in Units shall be calculated as of the end of the taxable year for which
such allocation has been made; provided, however, that if a transferee of a Unit
is admitted as an Investor Partner during the course of the taxable year, the
apportionment of allocations and distributions between the transferor and
transferee of such Unit shall be made in the manner provided in Section 3.4(a).
(c) If, during any taxable year of the Partnership, there is a change
in any Partner's interest in the Partnership, each Partner's allocation of any
item of income, gain, loss, deduction, or credit of the Partnership for such
taxable year shall be determined by taking into account the varying interests of
the Partners pursuant to such method as is permitted by Code (S) 706(d) and the
regulations thereunder.
4. Distributions.
4.1 Time of Distribution. The Managing General Partner shall distribute
the Partnership's Distributable Cash at such time as it shall determine, but
such distributions shall be made not less frequently than quarterly.
4.2 Distributions. Except as provided in Section 4.3, all distributions
(other than those made in connection with the liquidation of the Partnership,
which distributions shall be made in accordance with Section 9.3) shall be made
80% to the Investor Partners and 20% to the Managing General Partner. In no
event shall funds be advanced or borrowed for purposes of distributions if the
amount of such distributions would exceed the Partnership's accrued and received
revenues for the previous four quarters, less paid and accrued operating costs
with respect to such revenues. The determination of such revenues and costs
shall be made in accordance with generally accepted accounting principles,
consistently applied. Cash distributions from the Partnership to the Managing
General Partner shall only be made in conjunction with simultaneous
distributions to Investor Partners.
4.3 Capital Account Deficits. No distributions shall be made to any
Investor Partner to the extent such distribution would create or increase a
deficit in such Investor Partner's Capital Account (as adjusted in Section
3.2(b)). If a distribution is not made to an Investor Partner by reason of the
preceding sentence, then the amount which would have been distributed to such
Investor Partner shall be distributed to the other Partners in the proportion
that the positive Capital Account balance of each Partner bears to the aggregate
positive Capital Account balances of all of the Partners. Any such amount
remaining after reduction of all Capital Accounts to zero shall be distributed
to the Managing General Partner.
5. Activities.
5.1 Management. The Managing General Partner shall conduct, direct, and
exercise full and exclusive control over all activities of the Partnership.
Investor Partners shall have no power over the conduct of the affairs of the
Partnership or otherwise commit or bind the Partnership in any manner. The
Managing General Partner shall manage the affairs of the Partnership in a
prudent and businesslike fashion and shall use its best efforts to carry out the
purposes and character of the business of the Partnership.
5.2 Conduct of Operations.
(a) Program of Operations.
(1) The Managing General Partner shall establish a program of
operations for the Partnership which shall be in conformance with the
following policies: (x) no less than 90% of the Capital Contributions net of
Organization and Offering Costs shall be applied to drilling and completing
Development Wells; (y) the Partnership shall drill all of its wells in the
United States; and (z) the Prospects will be acquired pursuant to an
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arrangement whereby the Partnership will acquire between 51% and 100% of the
Working Interest, subject to landowners' royalty interests and the royalty
interests payable to unaffiliated third parties in varying amounts; provided,
however, that the weighted average for all Prospects of the Partnership shall
not exceed 20%. At its discretion, the Partnership may purchase less than a
51% Working Interest in the Prospects acquired.
(2) The Investor Partners agree to participate in the Partnership's
program of operations as established by the Managing General Partner;
provided, however, that no well drilled to the point of setting casing need be
completed if, in the Partnership's opinion, such well is unlikely to be
productive of oil or gas in quantities sufficient to justify the expenditures
required for well completion. The Partnership may participate with others in
the drilling of wells and it may enter into joint ventures, partnerships, or
other such arrangements.
(b) All transactions between the Partnership and the Managing General
Partner or its Affiliates shall be on terms no less favorable than those terms
which could be obtained between the Partnership and independent third parties
dealing at arm's-length, subject to the provisions of Section 5.7.
(c) The Partnership shall not participate in any joint operations on
any co-owned Lease unless there has been acquired or reserved on behalf of the
Partnership the right to take in kind or separately dispose of its proportionate
share of the oil and gas produced from such Lease, exclusive of production which
may be used in development and production operations on the Lease and production
unavoidably lost, and, if the Managing General Partner is the operator of such
Lease, the Managing General Partner shall enter into written agreements with
every other person or entity owning any working or operating interest reserving
to such person or entity a similar right to take in-kind so as not to result in
the Partnership being treated as a member of an association taxable as a
corporation for Federal income tax purposes.
(d) The relationship of the Partnership and the Managing General
Partner (or an Affiliate retaining or acquiring an interest) as co-owners in
Leases, except to the extent superseded by an operating agreement consistent
with the provisions of Section 5.2(c), and except to the extent inconsistent
with this Agreement, shall be governed by the AAPL Form 610 Model Operating
Agreement-1982, with a provision reserving the right to take production in-kind,
naming the Managing General Partner as operator and the Partnership as a non-
operator, and with the accounting procedure to govern as the accounting
procedures under such operating agreements.
(e) The Managing General Partner is expected to act as the operator
of all Partnership wells, and the Managing General Partner may designate such
other persons as it deems appropriate to conduct the actual drilling and
producing operations of the Partnership.
(f) As operator of Partnership wells, the Managing General Partner or
its Affiliates shall receive per-well charges for each producing well based on
the Working Interest acquired by the Partnership. These per-well charges shall
be subject to annual adjustment beginning January 1, 1997 [1998] [1999] as
provided in the accounting procedures of the operating agreements.
(g) The Managing General Partner shall drill wells pursuant to
drilling contracts with the Partnership based upon competitive prices and terms
in the geographic area of operations, and to the extent that such prices exceed
its Costs, the Managing General Partner shall be deemed to have received
compensation.
(h) The Managing General Partner shall be reimbursed by the
Partnership for Direct Costs. The Managing General Partner shall not be
reimbursed for any Administrative Costs. All other expenses shall be borne by
the Partnership.
(i) The Managing General Partner and its Affiliates may enter into
other transactions (embodied in a written contract) with the Partnership, such
as providing services, supplies, and equipment, and shall be entitled to
compensation for such services at prices and on terms that are competitive in
the geographic area of operations.
(j) The Partnership shall make no loans to the Managing General
Partner or any Affiliate thereof.
(k) The funds of the Partnership shall not be commingled with the
funds of any other Person.
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(l) Notwithstanding any provision herein to the contrary, no creditor
shall receive, as a result of making any loan, a direct or indirect interest in
the Profits, capital, or property of the Partnership other than as a secured
creditor.
(m) The Managing General Partner shall have a fiduciary
responsibility for the safekeeping and use of all funds and assets of the
Partnership, whether or not in the Managing General Partner's possession or
control, and shall not employ or permit another to employ such funds or assets
in any manner except for the exclusive benefit of the Partnership.
5.3 Acquisition and Sale of Leases.
(a) To the extent the Partnership does not acquire a full interest in
a Lease from the Managing General Partner or its Affiliate, the remainder of the
interest in such Lease may be held by the Managing General Partner or such
Affiliate, as applicable, which may retain and exploit it for its own account or
sell or otherwise dispose of all or a part of such remaining interest. Profits
from such exploitation and/or disposition shall be for the benefit of the
Managing General Partner or its Affiliate to the exclusion of the Partnership.
Any Leases acquired by the Partnership from the Managing General Partner or its
Affiliate shall be acquired only at the Managing General Partner's or such
Affiliate's Cost, unless the Managing General Partner shall have reason to
believe that Cost is in excess of the fair market value of such property, in
which case the price shall not exceed the fair market value. The Managing
General Partner shall obtain an appraisal from an Independent Expert with
respect to sales of properties by the Managing General Partner and its
Affiliates to the Partnership. Neither the Managing General Partner nor any
Affiliate shall acquire or retain any carried, reversionary, or Overriding
Royalty Interest on the Lease interests acquired by the Partnership, nor shall
the Managing General Partner or its Affiliates enter into any farmout
arrangements with respect to its retained interest, except as provided in
Section 5.5.
(b) The Partnership shall acquire only Leases reasonably expected to
meet the stated purposes of the Partnership. No Leases shall be acquired for
the purpose of a subsequent sale or farmout unless the acquisition is made after
a well has been drilled to a depth sufficient to indicate that such an
acquisition would be in the Partnership's best interest.
(c) Neither the Managing General Partner nor its Affiliates, except
other partnerships sponsored by them, shall purchase any productive properties
from the Partnership.
5.4 Title to Leases.
(a) Record title to each Lease acquired by the Partnership may be
temporarily held in the name of the Managing General Partner, or in the name of
any nominee designated by the Managing General Partner, as agent for the
Partnership until a productive well is completed on a Lease. Thereafter, record
title to Leases shall be assigned to and placed in the name of the Partnership.
(b) The Managing General Partner shall take the necessary steps in
its best judgment to render title to the Leases to be assigned to the
Partnership acceptable for the purposes of the Partnership. No operation shall
be commenced on any Prospect acquired by the Partnership unless the Managing
General Partner is satisfied that the undertaking of such operation would be in
the best interest of Investor Partners and the Partnership. The Managing
General Partner shall be free, however, to use its own best judgment in waiving
title requirements and shall not be liable to the Partnership or Investor
Partners for any mistakes of judgment unless such mistakes were made in a manner
not in accordance with general industry standards in the geographic area and
such mistakes were not the result of negligence by the Managing General Partner.
Neither the Managing General Partner nor its Affiliates shall be deemed to be
making any warranties or representations, express or implied, as to the validity
or merchantability of the title to any Lease assigned to the Partnership or the
extent of the interest covered thereby.
5.5 Farmouts.
(a) No Partnership Lease shall be farmed out, sold, or otherwise
disposed of unless the Managing General Partner determines that (i) the
Partnership lacks sufficient funds to drill on such Lease and is unable to
obtain suitable financing, (ii) the Leases have been downgraded by events
occurring after assignments to the Partnership, (iii) drilling on the Leases
would result in an excessive concentration of Partnership funds creating, in the
Managing General Partner's opinion, undue risk to the Partnership, or (iv) the
Managing General Partner, exercising the standard of a prudent operator,
determines that the farmout is in the best interests of the Partnership.
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(b) Farmouts between the Partnership and the Managing General Partner
or its Affiliates, including any other affiliated limited partnership, shall be
effected on terms deemed fair by the Managing General Partner. The Managing
General Partner, exercising the standard of a prudent operator, shall determine
that the farmout is in the best interest of the Partnership and the terms of the
farmout are consistent with, and in any case, no less favorable to the
Partnership than, those utilized in the geographic area of operations for
similar arrangements. The respective obligations and revenue sharing of all
affiliated parties to the transactions shall be substantially the same, and the
compensation arrangement or any other interest or right of either the Managing
General Partner or its Affiliates shall be substantially the same in each
participating partnership or, if different, shall be reduced to reflect the
lower compensation arrangement.
5.6 Release, Abandonment, and Sale or Exchange of Properties. Except as
provided elsewhere in this Article 5 and in Section 6.3, the Managing General
Partner shall have full power to dispose of the production and other assets of
the Partnership, including the power to determine which Leases shall be released
or permitted to terminate, those wells to be abandoned, whether any Lease or
well shall be sold or exchanged, and the terms therefor. In the event the
Managing General Partner sells, transfers, or otherwise disposes of nonproducing
property of the Partnership, the sale, transfer, or disposition shall, to the
extent possible, be made at a price which is the higher of the fair market value
of the property on the date of the sale, transfer, or disposition or the Cost of
such property to the Partnership.
5.7 Certain Transactions.
(a) Whenever the Managing General Partner or its Affiliates sell,
transfer, or assign an interest in a Prospect to the Partnership, they shall
assign to the Partnership an equal proportionate interest in each of the Leases
comprising the Prospect. If the Managing General Partner or its Affiliates
(except another affiliated partnership in which the interest of the Managing
General Partner or its Affiliates is identical to or less than their interest in
the Partnership) subsequently propose to acquire an interest in a Prospect in
which the Partnership possesses an interest, or in a Prospect abandoned by the
Partnership, within one year preceding such proposed acquisition, the Managing
General Partner or its Affiliates shall offer an equivalent interest therein to
the Partnership and, if funds, including borrowings, are not available to the
Partnership to enable it to consummate a purchase of an equivalent interest in
such property and pay the development costs thereof, neither the Managing
General Partner nor any of its Affiliates shall acquire such interest or
property. The term "abandoned" shall mean the termination, either voluntarily
or by operation of the Lease or otherwise, of all of the Partnership's interest
in the Prospect. These limitations shall not apply after the lapse of five
years from the date of formation of the Partnership.
(b) The geological limits of a Prospect shall be enlarged or
contracted on the basis of subsequently acquired geological data that further
defines the productive limits of the underlying oil and/or gas reservoir and
shall include all of the acreage determined by such subsequent data to be
encompassed by such reservoir. Further, where the Managing General Partner or
Affiliate owns a separate property interest in such enlarged area, such interest
shall be sold to the Partnership if the activities of the Partnership were
material in establishing the existence of Proved Undeveloped Reserves which are
attributable to such separate property interest; provided, however, that the
Partnership shall not be required to expend additional funds unless they are
available from the initial capitalization of the Partnership or if the Managing
General Partner believes it is prudent to borrow for the purpose of acquiring
such additional acreage.
(c) The Partnership shall not purchase properties from, or sell
properties to, any other affiliated partnership. This prohibition, however,
shall not apply to transactions among affiliated partnerships by which property
is transferred from one to another in exchange for the transferee's obligation
to conduct drilling activities on such property or to joint ventures among such
affiliated partnerships; provided, however, that the respective obligations and
revenue sharing of all parties to the transaction are substantially the same and
the compensation arrangement or any other interest or right of either the
Managing General Partner or its Affiliates is the same in each affiliated
partnership, or, if different, the aggregate compensation of the Managing
General Partner is reduced to reflect the lower compensation arrangement.
(d) During the existence of the Partnership, and before it has ceased
operations, neither the Managing General Partner nor any of its Affiliates
(excluding another partnership where the Managing General Partner's or its
Affiliates' interest in such partnership is identical to or less than their
interest in the Partnership) shall acquire, retain, or drill for their own
account any Oil and Gas Interest in any Prospect in which the Partnership
possesses an interest, except for transactions whereby the Managing General
Partner or such Affiliate acquires or retains a proportionate Working Interest,
the respective obligations of the Managing General Partner or the Affiliate and
the Partnership are substantially the same
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after the sale of the interest to the Partnership, and the Managing General
Partner's or Affiliate's interest in revenues does not exceed the amount
proportionate to its Working Interest.
(e) Any services, equipment, or supplies which the Managing General
Partner or an Affiliate furnishes to the Partnership shall be furnished at the
lesser of the Managing General Partner's or the Affiliate's Cost or a
competitive rate which could be obtained in the geographical area of operations
unless the Managing General Partner or any Affiliate is engaged to a substantial
extent, as an ordinary and ongoing business, in providing such services,
equipment, or supplies to others in the industry, in which event, the services,
supplies, or equipment may be provided by such person to the Partnership at
prices competitive with those charged by others in the geographical area of
operations which would be available to the Partnership. If such entity is not
engaged in the business as set forth above, then such compensation, price or
rental shall be the Cost of such services, equipment or supplies to such entity,
or the competitive rate which could be obtained in the area, whichever is less.
Any drilling services provided by the Managing General Partner or its Affiliates
shall be billed only on a per foot, per day, or per hour rate, or some
combination thereof. No turnkey drilling contracts shall be made between the
Managing General Partner or its Affiliates and the Partnership. Neither the
Managing General Partner nor its Affiliates shall profit by drilling in
contravention of its fiduciary obligations to the Partnership. Any such services
for which the Managing General Partner or an Affiliate is to receive
compensation shall be embodied in a written contract which precisely describes
the services to be rendered and all compensation to be paid.
(f) Advance payments by the Partnership to the Managing General
Partner are prohibited, except where necessary to secure tax benefits of prepaid
drilling costs.
(g) Neither the Managing General Partner nor its Affiliates shall
make any future commitments of the Partnership's production which do not
primarily benefit the Partnership, nor shall the Managing General Partner or any
Affiliate utilize Partnership funds as compensating balances for the benefit of
the Managing General Partner or the Affiliate.
(h) No rebates or give-ups may be received by the Managing General
Partner or any of its Affiliates, nor may the Managing General Partner or any
Affiliate participate in any reciprocal business arrangements which would
circumvent these restrictions.
(1) During a period of five years from the date of formation of the
Partnership, if the Managing General Partner or any of its Affiliates proposes
to acquire from an unaffiliated person an interest in a Prospect in which
the Partnership possesses an interest, or in a Prospect in which the
Partnership's interest has been terminated without compensation within one
year preceding such proposed acquisition, the following conditions shall
apply:
(A) If the Managing General Partner or the Affiliate does not
currently own property in the Prospect separately from the Partnership, then
neither the Managing General Partner nor the Affiliate shall be permitted to
purchase an interest in the Prospect.
(B) If the Managing General Partner or the Affiliate currently
owns a proportionate interest in the prospect, then the interest to be
acquired shall be divided between the Partnership and the Managing General
Partner or the Affiliate in the same proportion as is the other property in
the Prospect; provided however, if cash or financing is not available to the
Partnership to enable it to consummate a purchase of the additional interest
to which it is entitled, then neither the Managing General Partner nor the
Affiliate shall be permitted to purchase any additional interest in the
Prospect.
(i) If the Partnership acquires property pursuant to a farmout or
joint venture from an affiliated program, the Managing General Partner's and/or
its Affiliates' aggregate compensation associated with the property and any
direct and indirect ownership interest in the property may not exceed the lower
of the compensation and ownership interest the Managing General Partner and/or
its Affiliates could receive if the property were separately owned or retained
by either one of the programs.
(j) Neither the Managing General Partner nor any Affiliate, including
affiliated programs, may purchase or acquire any property from the partnership,
nor lend money to the Partnership, directly or indirectly, except pursuant to
transactions that are fair and reasonable to the Investor Partners and then
subject to the following conditions:
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(k) A sale, transfer, or conveyance, including a farmout, of an
undeveloped property from the Partnership to the Managing General Partner or an
Affiliate, other than an affiliated program, must be made at the higher of Cost
or fair market value.
(1) A sale, transfer, or conveyance of a developed property from
the Partnership to the Managing General Partner or an Affiliate, other than an
affiliated drilling program in which the interest of the Managing General
Partner is substantially similar to or less than its interest in the
Partnership, shall not be permitted except in connection with the liquidation
of the Partnership and then only at fair market value.
(2) Except in connection with farmouts or joint ventures made in
compliance with Section 5.7(i), a transfer of an undeveloped property from the
Partnership to an affiliated drilling program must be made at fair market
value if the property has been held for more than two years. Otherwise, if the
Managing General Partner deems it to be in the best interest of the
Partnership, the transfer may be made at Cost.
(3) Except in connection with farmouts or joint ventures made in
compliance with Section 5.7(i), a transfer of any type of property from the
Partnership to an affiliated program must be made at fair market value if the
property has been held for more than six months or there have been significant
expenditures made in connection with the property. Otherwise, if the Managing
General Partner deems it to be in the best interest of the Partnership, the
transfer may be made at Cost as adjusted for intervening operations.
(4) For the purpose of this Section 5.7(b), Fair Market Value shall
be established by appraisal by an independent expert.
(5) In the case of a loan by the Managing General Partner or an
Affiliate to the Partnership, the interest rate will be the lesser of (A) the
rate at which the lender could borrow from an independent third party
financial institution or (B) the rate at which the Partnership could borrow
from an independent third party financial institution, for a similar loan.
(l) If the Partnership participates in other partnerships or joint
ventures (multi-tier arrangements), the terms of any such arrangements shall not
result in the circumvention of any of the requirements or prohibitions contained
in this Agreement, including the following:
(1) there will be no duplication or increase in Organization and
Offering Costs, the Managing General Partner's compensation, Partnership
expenses or other fees and costs;
(2) there will be no substantive alteration in the fiduciary and
contractual relationship between the Managing General Partner and the Investor
Partners; and
(3) there will be no diminishment in the voting rights of the
Investor Partners.
(m) In connection with a proposed Roll-Up or Significant Transaction,
the following shall apply:
(1) An appraisal of all Partnership assets shall be obtained from
an Independent Expert. If the appraisal will be included in a prospectus used
to offer the securities of a Roll-Up Entity, the appraisal shall be filed with
the Securities and Exchange Commission and the appropriate state securities
administrator, as an exhibit to the registration statement for the offering.
The appraisal shall be based upon all relevant information, including current
reserve estimates prepared by an independent petroleum consultant, and shall
indicate the value of the Partnership's assets assuming an orderly liquidation
as of a date immediately prior to the announcement of the proposed Roll-Up
transaction or Significant Transaction. The appraisal shall assume an orderly
liquidation of Partnership assets over a 12-month period. The terms of the
engagement of the Independent Expert shall clearly state that the engagement
is for the benefit of the Partnership and the Investor Partners. A summary of
the independent appraisal, indicating all material assumptions underlying the
appraisal, shall be included in a report to the Investor Partners in
connection with a proposed Roll-Up or a Significant Transaction.
(2) In connection with a proposed Roll-Up or a Significant
Transaction, Investor Partners who vote "no" on the proposal shall be offered
the choice of:
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(A) accepting the securities of the Roll-Up Entity or the
Surviving Entity offered in the proposed Roll-Up or the Significant
Transaction.
(B) remaining as Investor Partners in the Partnership and
preserving their interests therin on the same terms and conditions as existed
previously; or
(C) receiving cash in an amount equal to the Investor Partners'
pro-rata share of the appraised value of the net assets of the Partnership.
(3) The Partnership shall not participate in any proposed Roll-Up
or Significant Transaction which, if approved, would result in the
diminishment of an Investor Partner's voting rights under the Roll-Up Entity's
or Surviving Entity's chartering agreement. In no event shall the democracy
rights of Investor Partners in the Roll-Up Entity or Surviving Entity be
less than those provided for under Sections 7.7 and 7.8. If the Roll-Up Entity
or the Surviving Entity is a corporation, the democracy rights of Investor
Partners shall correspond to the democracy rights provided for in this
Agreement to the greatest extent possible.
(4) The Partnership shall not participate in any proposed Roll-Up
or Significant Transaction which includes provisions which would operate to
materially impede or frustrate the accumulation of shares by any purchaser of
the securities of the Roll-Up Entity or Surviving Entity (except to the
minimum extent necessary to preserve the tax status of the Roll-Up Entity or
Surviving Entity), nor shall the Partnership participate in any proposed Roll-
Up or Significant Transaction which would limit the ability of an Investor
Partner to exercise the voting rights of its securities of the Roll-Up Entity
or Surviving Entity on the basis of the number of Partnership Units held by
that Investor Partner.
(5) The Partnership shall not participate in a Roll-Up or
Significant Transaction in which Investor Partners' rights of access to the
records of the Roll-Up Entity or Surviving Entity will be less than those
provided for under Section 8.1.
(6) The Partnership shall not participate in any proposed Roll-Up
or Significant Transaction in which any of the costs of the transaction would
be borne by the Partnership if less than 80% in interest of the Investor
Partners vote to approve the Roll-Up or Significant Transaction.
(7) The Partnership shall not participate in a Roll-Up or
Significant Transaction unless the Roll-Up or Significant Transaction is
approved by 80% in interest of the investor Partners.
6. Managing General Partner.
6.1 Managing General Partner. The Managing General Partner shall have
the sole and exclusive right and power to manage and control the affairs of and
to operate the Partnership, to do all things necessary to carry on the business
of the Partnership for the purposes described in Section 1.4 and to conduct the
activities of the Partnership as set forth in Article 5. No financial
institution or any other person, firm, or corporation dealing with the Managing
General Partner shall be required to ascertain whether the Managing General
Partner is acting in accordance with this Agreement, but such financial
institution or such other person, firm, or corporation shall be protected in
relying solely upon the deed, transfer, or assurance of, and the execution of
such instrument or instruments by, the Managing General Partner. The Managing
General Partner shall devote so much of its time to the business of the
Partnership as in its judgment the conduct of the Partnership's business shall
reasonably require and shall not be obligated to do or perform any act or thing
in connection with the business of the Partnership not expressly set forth
herein. The Managing General Partner may engage in business ventures of any
nature and description independently or with others and neither the Partnership
nor any of the Investor Partners shall have any rights in and to such
independent ventures or the income or profits derived therefrom. Except as
otherwise provided herein, the Managing General Partner and its Affiliates may
pursue business opportunities that are consistent with the Partnership's
investment objectives for their own account only after they have determined that
such opportunity either cannot be pursued by the Partnership because of
insufficient funds or because it is not appropriate for the Partnership under
the existing circumstances.
6.2 Authority of Managing General Partner. The Managing General Partner
is specifically authorized and empowered, on behalf of the Partnership, and by
consent of the Investor Partners herein given, to do any act, execute any
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document or enter into any contract or any agreement of any nature necessary or
desirable, in the opinion of the Managing General Partner, in pursuance of the
purposes of the Partnership. Without limiting the generality of the foregoing,
in addition to any and all other powers conferred upon the Managing General
Partner pursuant to this Agreement and the Act, and except as otherwise
prohibited by law or hereunder, the Managing General Partner shall have the
power and authority to:
(a) Acquire leases and other Oil and Gas Interests in furtherance of
the Partnership's business;
(b) Enter into and execute pooling agreements, farm out agreements,
operating agreements, unitization agreements, dry and bottom hole and acreage
contribution letters, construction contracts, and any and all documents or
instruments customarily employed in the oil and gas industry in connection with
the acquisition, sale, exploration, development, or operation of Oil and Gas
Interests, and all other instruments deemed by the Managing General Partner to
be necessary or appropriate to the proper operation of Oil or Gas Interests or
to effectively and properly perform its duties or exercise its powers hereunder;
(c) Make expenditures and incur any obligations it deems necessary to
implement the purposes of the Partnership, employ and retain such personnel as
it deems desirable for the conduct of the Partnership's activities, including
employees, consultants, and attorneys and exercise on behalf of the Partnership,
in such manner as the Managing General Partner, in its sole judgment, deems
best, all rights, elections, and obligations granted to or imposed upon the
Partnership;
(d) Manage, operate, and develop any Partnership property, and enter
into operating agreements with respect to properties acquired by the
Partnership, including an operating agreement with the Managing General Partner
as described in the Prospectus, which agreements may contain such terms,
provisions, and conditions as are usual and customary within the industry and as
the Managing General Partner shall approve;
(e) Compromise, sue, or defend any and all claims in favor of or
against the Partnership;
(f) Subject to the provisions of Section 8.4, make or revoke any
election permitted the Partnership by any taxing authority;
(g) Perform any and all acts it deems necessary or appropriate for
the protection and preservation of Partnership assets;
(h) Maintain, at the expense of the Partnership, such insurance
coverage for public liability, fire and casualty, and any and all other
insurance necessary or appropriate to the business of the Partnership in such
amounts and of such types as it shall determine from time to time;
(i) Buy, sell, or lease property or assets on behalf of the
Partnership;
(j) Enter into agreements to hire services of any kind or nature;
(k) Assign interests in properties to the Partnership;
(l) Borrow money on behalf of the Partnership from third parties or
the Managing General Partner or its Affiliates; provided, however, that no such
borrowing shall occur until all of the Additional General Partners have been
converted to Limited Partners.
(m) Enter into soliciting dealer agreements and perform all of the
Partnership's obligations thereunder, to issue and sell Units pursuant to the
terms and conditions of this Agreement, the Subscription Agreements, and the
Prospectus, to accept and execute on behalf of the Partnership Subscription
Agreements, and to admit Investor Partners and Substitute Investor Partners; and
(n) Perform any and all acts, and execute any and all documents, it
deems necessary or appropriate to carry out the purposes of the Partnership.
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6.3 Certain Restrictions on Managing General Partner's Power and
Authority. Notwithstanding any other provisions of this Agreement to the
contrary, neither the Managing General Partner nor any of its Affiliates shall
have the power or authority to, and shall not, do, perform, or authorize any of
the following:
(a) Use any revenues from Partnership operations for the purposes of
acquiring Leases in new or unrelated Prospects or paying any Organization and
Offering Costs; provided, however, that revenues from Partnership operations may
be used for other Partnership operations, including, without limitation, for the
purposes of drilling, completing, maintaining, recompleting, and operating wells
on existing Partnership Prospects and acquiring and developing new Leases to the
extent such Leases are considered by the Managing General Partner, in its sole
discretion, to be a part of a Prospect in which the Partnership then owns a
Lease;
(b) Without having first received the prior consent of the holders of
a majority of the then outstanding Units entitled to vote,
(1) sell all, or substantially all, of the assets of the
Partnership (except upon liquidation of the Partnership pursuant to Article
9), unless cash funds of the Partnership are insufficient to pay the
obligations and other liabilities of the Partnership;
(2) dispose of the good will of the Partnership;
(3) do any other act which would make it impossible to carry on the
ordinary business of the Partnership; or
(4) agree to the terminating or amendment of any operating
agreement to which the Partnership is a party, or waive any rights of the
Partnership thereunder, except for amendments to the operating agreement
which the Managing General Partner believes are necessary or advisable to
ensure that the operating agreement conforms to any changes in or
modifications to the Code or that do not adversely affect the Investor
Partners in any material respect;
(c) Guarantee, in the name or on behalf of the Partnership, the
payment of money or the performance of any contract or other obligation of any
Person other than the Partnership;
(d) Bind or obligate the Partnership with respect to any matter
outside the scope of the Partnership business;
(e) Use the Partnership name, credit, or property for other than
Partnership purposes;
(f) Take any action, or permit any other Person to take any action,
with respect to the assets or property of the Partnership which does not benefit
the Partnership, including, among other things, utilization of funds of the
Partnership as compensating balances for its own benefit or the commitment of
future production;
(g) Benefit from any arrangement for the marketing of oil and gas
production or other relationships affecting the property of the Managing General
Partner and the Partnership, unless such benefits are fairly and equitably
apportioned among the Managing General Partner, its Affiliates, and the
Partnership;
(h) Utilize Partnership funds to invest in the securities of another
Person except in the following instances;
(A) investments in Working Interests or undivided Lease
interests made in the ordinary course of the Partnership's business;
(B) temporary investments made in compliance with Section
2.2(d);
(C) investments involving less than 5% of Partnership capital
which are a necessary and incidental part of a property acquisition
transaction; and
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(D) investments in entities established solely to limit the
Partnership's liabilities associated with the ownership or operation of
property or equipment; provided, however, that in such instances duplicative
fees and expenses shall be prohibited.
(i) Vote with respect to any Unit held by it; or
(j) Sell, transfer, or assign its interest (except for a collateral
assignment which may by granted to a bank or other financial institution) in the
Partnership, or any part thereof, or otherwise withdraw as Managing General
Partner without 120 days prior written notice and the written consent of
Investor Partners owning a majority of the then outstanding Units.
6.4 Indemnification of Managing General Partner.
(a) The Managing General Partner shall have no liability to the
Partnership or to any Investor Partner for any loss suffered by the Partnership
which arises out of any action or inaction of the Managing General Partner if
the Managing General Partner, in good faith, determined that such course of
conduct was in the best interest of the Partnership, that the Managing General
Partner was acting on behalf of or performing services for the Partnership, and
the such course of conduct did not constitute negligence or misconduct of the
Managing General Partner. The Managing General Partner shall be indemnified by
the Partnership against any losses, judgments, liabilities, expenses, and
amounts paid in settlement of any claims sustained by it in connection with the
Partnership, provided that the Managing General Partner has determined, in good
faith, that he course of conduct which caused the loss or liability was in the
best interest of the Partnership, that the Managing General Partner was acting
on behalf of or performing services for the Partnership, and that the same were
not the result of negligence or misconduct on the part of the Managing General
Partner. Indemnification of the Managing General Partner is recoverable only
from the tangible net assets of the Partnership, including the insurance
proceeds from the Partnership's insurance policies and the insurance and
indemnification of the Partnership's subcontractors, and is not recoverable from
the Investor Partners.
(b) Notwithstanding the provisions of Section 6.4(a), the Managing
General Partner and any person acting as a broker-dealer shall not be
indemnified for liabilities arising under Federal and state securities laws
unless (i) there has been a successful adjudication on the merits of each count
involving securities law violations, (ii) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction, or (iii) a court
of competent jurisdiction approves a settlement of such claims against a
particular indemnitee and finds that indemnification of the settlement and the
related costs should be made, and the court considering the request for
indemnification has been advised of the position of the Securities and Exchange
Commission and of any state securities regulatory authority in which securities
of the Partnership were offered or sold as to indemnification for violation of
securities laws; provided however, the court need only be advised of the
positions of the securities regulatory authorities of those states (i) which are
specifically set forth in the program agreement and (ii) in which plaintiffs
claim they were offered or sold Units. In any claim for indemnification for
Federal or state securities laws violations, the party seeking indemnification
shall place before the court the position of the Securities and Exchange
Commission and the Massachusetts Securities Division or respective state
securities division, as the case may be, with respect to the issue of
indemnification for securities laws violations.
(c) The advancement of Partnership funds to a Sponsor or its
Affiliates for legal expenses and other costs incurred as a result of any legal
action for which indemnification is being sought is permissible only if the
Partnership has adequate funds available and the following conditions are
satisfied:
(1) the legal action relates to acts or omissions with respect to
the performance of duties or services on behalf of the Partnership;
(2) the legal action is initiated by a third party who is not
participant, or the legal action is initiated by a participant and a court of
competent jurisdiction specifically approves such advancement; and
(3) the Sponsor or its Affiliates undertake to repay the advanced
funds to the Partnership, together with the applicable legal rate of interest
thereon, in cases in which such party is found not to be entitled to
indemnification.
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(d) The Partnership shall not incur the cost of the portion of any
insurance which insures the Managing General Partner against any liability as to
which the Managing General Partner is herein prohibited from being indemnified.
6.5 Withdrawal.
(a) Notwithstanding the limitations contained in Section 6.30(j), the
Managing General Partner shall have the right, by giving written notice to the
Investor Partners, to substitute in its stead as managing general partner any
successor entity or any entity controlled by the Managing General Partner having
a tangible net worth of at least $5 million, and the Investor Partners, by
execution of this Agreement, hereby expressly consent to such a transfer unless
it would adversely affect the status of the Partnership as a partnership for
Federal income tax purposes.
(b) The Managing General Partner may not voluntarily withdraw from
the Partnership prior to the Partnership's completion of its primary drilling
and/or acquisition activities, and then only after 120 days written notice to
the Investor Partners. The Managing General Partner may not partially withdraw
its property interests held by the Partnership unless such withdrawal is
necessary to satisfy the bona fide request of its creditors or approved by the
vote of a majority-in-interest of the Investor Partners. The Managing General
Partner shall fully indemnify the Partnership against any additional expenses
which may result from a partial withdrawal of property interests and such
withdrawal may not result in a greater amount of Direct Costs or Administrative
Costs being allocated to the Investor Partners. The withdrawing Managing General
Partner shall pay all expense incurred as a result of its withdrawal.
(c) In the event a Managing General Partner withdraws, its interest
in the assets of the Partnership shall be determined by independent appraisal by
a qualified independent petroleum engineering consultant who shall be selected
by mutual agreement of the Managing General Partner and the successor Managing
General Partner. Such appraisal will take into account an appropriate discount
to reflect the risk of recovery of oil and gas reserves, and, at its election,
the removed Managing General Partner's interest in the Partnership assets may be
distributed to or the interest of the Managing General Partner in the
Partnership may be retained by it as a Limited Partner in the reconstituted
limited partnership; provided, however, that if immediate payment to the
withdrawn Managing General Partner would impose financial or operational
hardship upon the Partnership, as determined by the successor Managing General
Partner in the exercise of its fiduciary duties to the Partnership, payment
(plus reasonable interest) to the removed Managing General Partner may be
postponed to that time when, in the determination of the successor Managing
General Partner, such payment will not cause a hardship to the Partnership. The
cost of such appraisal shall be borne by the Partnership. The successor Managing
General Partner shall have the option to purchase at least 20% of the removed
Managing General Partner's interest for the value determined by the independent
appraisal. The removed Managing General Partner, at the time of its removal
shall cause, to the extent it is legally possible, its successor to be
transferred or assigned all its rights, obligations, and interests in contracts
entered into by it on behalf of the Partnership. In any event, the removed
Managing General Partner shall cause its rights, obligations, and interests in
any contract to terminate at the time of its removal.
(d) For the purposes of Sections 6.5(c), 7.6(c), the method of
payment will be a non-interest bearing unsecured promissory note with principal
payable from distributions the Managing General Partner would have received
under this Agreement had the Managing General Partner not withdrawn.
6.6 Management Fee. The Partnership shall pay the Managing General
Partner, on the date hereof, a one-time management fee equal to 5% of the total
Capital Contributions made by the Investor Partners.
6.7 Tax Matters Partner. The Managing General Partner shall serve as the
Tax Matters Partner for purposes of Code (SS)6221 through 6233. The Partnership
may engage its accountants and/or attorneys to assist the Tax Matters Partner
in discharging its duties hereunder.
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7. INVESTOR PARTNERS.
7.1 Management. No Investor Partner shall take part in the control or
management of the business or transact any business for the Partnership, and no
Investor Partner shall have the power to sign for or bind the Partnership, all
of such authority having been given to the Managing General Partner in Article
6. Any action or conduct of Investor Partners on behalf of the Partnership is
hereby expressly prohibited. Any Investor Partner who violates the provisions of
this Section 7.1 shall be liable to the remaining Investor Partners, the
Managing General Partner, and the Partnership for any damages, costs, or
expenses any of them may incur as a result of such violation. Investor Partners
shall have the right to vote only with respect to those matters specifically
provided for in these Articles.
7.2 Indemnification of Additional General Partners. Except as otherwise
provided in this Section 7.2, the Managing General Partner agrees to indemnify
each of the Additional General Partners for the amounts of obligations, risks,
losses, or judgments of the Partnership or the Managing General Partner which
exceed the amount of applicable insurance coverage and amounts which would
become available from the sale of all Partnership assets. Such indemnification
applies to casualty losses and to business losses, such as losses incurred in
connection with the drilling of an unproductive well, to the extent such losses
exceed the Additional General Partners' interest in the undistributed net
assets of the Partnership. If, however, such excess obligations are the result
of the negligence or misconduct of an Additional General Partner, or the
contravention of the terms of this Agreement by the Additional General Partner,
then the foregoing indemnification by the Managing General Partner shall not
apply as to such Additional General Partner and such Additional General Partner
shall be liable to all other Partners for damages and obligations resulting
therefrom.
7.3 Assignment of Units.
(a) An Investor Partner may transfer all or any portion of the
Investor Partner's Units, subject to the following conditions:
(1) Except in the case of a transfer of Units at death, as a result
of adjudication of incompetency or insanity, or involuntarily by operation of
law, the transferor and transferee shall execute and deliver to the Partnership
such documents and instruments of conveyance as may be necessary or appropriate
in the opinion of counsel to the Partnership to effect such transfer;
(2) The transferor and transferee shall furnish the Partnership
with the transferee's taxpayer identification number and sufficient information
to determine the transferee's initial tax basis in the Units transferred; and
(3) The Partnership is reimbursed by the transferor and/or
transferee for all costs and expenses that it reasonably incurs in connection
with such transfer.
(b) A Person who acquires one or more Units but who is not admitted
as a Substitute Investor Partner, shall only be entitled to allocations and
distributions with respect to such Units in accordance with this Agreement, but
shall have no right to any information or accounting of the affairs of the
Partnership, shall not be entitled to inspect the books or records of the
Partnership, and shall not have any of the rights of an Additional General
Partner or a Limited Partner under the Act or this Agreement.
(c) Subject to the other provisions of this Article 7, a transferee
of Units may be admitted to the Partnership as a Substitute Investor Partner
only upon satisfaction of the following conditions;
(1) The Managing General Partner consents to such admission, which
consent can be withheld in its absolute discretion;
(2) The Units with respect to which the transferee is being
admitted were acquired by means of a Permitted Transfer;
(3) The transferee becomes a party to this Agreement as a Partner
and executes such documents and instruments as the Managing General Partner may
reasonably request as may be necessary or appropriate to
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confirm such transferee as a Partner of the Partnership and such transferee's
agreement to be bound by the terms and conditions hereof; and
(4) If the transferee is not an individual of legal majority, the
transferee provides the Partnership with evidence satisfactory to counsel for
the Partnership of the authority of the transferee to become a Partner and to be
bound by the terms and conditions of this Agreement.
(d) In any calendar quarter in which a transfer of a Unit occurs, the
Partnership shall recognize the assignment not later than the last day of the
calendar month following receipt of notice of assignment and required
documentation.
(e) Each Investor Partner hereby covenants and agrees with the
Partnership, for the benefit of the Partnership and all Partners, that (i) the
Investor Partner is not currently making a market in Units and (ii) the Investor
Partner will not transfer any Unit on an established securities market or a
secondary market (or the substantial equivalent thereof) within the meaning of
Code (S) 7704(b) (and any regulations, proposed regulations, revenue rulings, or
other official pronouncements of the Internal Revenue Service that may be
promulgated or published thereunder). Each Investor Partner further agrees that
the Investor Partner will not transfer any Unit to any Person unless such Person
agrees to be bound by the provisions of this Section 7.3 and to transfer such
Units only to Persons who agree to be similarly bound.
7.4 Prohibited Transfers.
(a) Any purported Transfer of Units that is not a Permitted Transfer
shall be null and void and of no effect whatever. If, however, the Partnership
is required by a court of competent jurisdiction to recognize a transfer that is
not a Permitted Transfer (or if the Managing General Partner, in its sole
discretion, elects to recognize a transfer that is not a Permitted Transfer),
the Partnership shall have the right (without limiting any other legal or
equitable rights of the Partnership) to withhold distributions to which such
transferee would otherwise be entitled and apply such distributions to satisfy
the debts, obligations, or liabilities for damages that the transferor or
transferee of such Units may have to the Partnership.
(b) In the case of transfer or attempted transfer of Units that is
not a Permitted Transfer, the parties engaging or attempting to engage in such
transfer shall be liable to indemnify and hold harmless the Partnership and the
other Partners from all cost, liability, and damage that any of such indemnified
Persons may incur (including, without limitation, incremental tax liability and
lawyers fees and expenses) as a result of such transfer or attempted transfer
and efforts to enforce the indemnity granted hereby.
7.5 Withdrawal by Investor Partners. An Investor Partner may not withdraw
from the Partnership, except as otherwise provided in this Agreement.
7.6 Removal of Managing General Partner.
(a) The Managing General Partner may be removed at any time, upon 90
days prior written notice, by the vote of Investor Partners owning a majority of
the then outstanding Units, and upon the selection by such Investor Partners of
a successor Managing General Partner within such 90-day period.
(b) Any successor Managing General Partner may be removed upon the
terms and conditions provided in Section 7.6(a).
(c) In the event a Managing General Partner is removed, its interest
in the assets of the Partnership shall be determined by independent appraisal by
a qualified independent petroleum engineering consultant who shall be selected
by mutual agreement of the Managing General Partner and the successor Managing
General Partner. Such appraisal will take into account an appropriate discount
to reflect the risk of recovery of oil and gas reserves, and, at its election,
the removed Managing General Partner's interest in the Partnership assets may be
distributed to it or the interest of the Managing General Partner in the
Partnership may be retained by it as a Limited Partner in the reconstituted
limited partnership; provided, however, that if immediate payment to the removed
Managing General Partner would impose financial or operational hardship upon the
Partnership, as determined by the successor Managing General Partner in the
exercise of its fiduciary duties to the Partnership, payment (plus reasonable
interest) to the removed Managing General Partner may be
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postponed to that time when, in the determination of the successor Managing
General Partner, such payment will not cause a hardship to the Partnership. The
cost of such appraisal shall be borne by the Partnership. The successor
Managing General Partner shall have the option to purchase at least 20% of the
removed Managing General Partner's interest for the value determined by the
independent appraisal. The removed Managing General Partner, at the time of its
removal shall cause, to the extent it is legally possible, its successor to be
transferred or assigned all its rights, obligations, and interests in contracts
entered into by it on behalf of the Partnership. In any event, the removed
Managing General Partner shall cause its rights, obligations, and interests in
any contract to terminate at the time of its removal.
(d) For the purposes of Section 6.5(c), 7.6(c), the method of payment
will be an interest bearing promissory note coming due in no less than five
years with equal installments each year.
(e) Upon the effectiveness of the removal of the Managing General
Partner, the assets, books, and records of the Partnership shall be surrendered
to the successor Managing General Partner, provided that the successor Managing
General Partner shall have first (i) agreed to accept the responsibilities of
the Managing General Partner, and (ii) made arrangements satisfactory to the
removed Managing General Partner to relieve such Managing General Partner from
personal liability on all Partnership borrowings or, if any Partnership creditor
will not consent to such relief, agreed to indemnify the removed Managing
General Partner for any subsequent liability with respect to such borrowings.
Immediately after the removal of a Managing General Partner, the successor
Managing General Partner shall prepare, execute, and file for recordation such
Certificate of Amendment to the Partnership's Certificate of Limited Partnership
as may be required by the Act.
7.7 Calling of Meetings. Investor Partners owning 10% or more of the then
outstanding Units entitled to vote shall have the right to request that the
Managing General Partner call a meeting of the Partners. The Managing General
Partner shall call such a meeting and shall deposit in the United States mails
within 15 days after receipt of such request written notice to all Investor
Partners of the meeting and the purpose of the meeting, which shall be held on a
date not less than 30, nor more than 60, days after the date of the mailing of
such notice, at a reasonable time and place. Investor Partners shall have the
right to submit proposals to the Managing General Partner for inclusion in the
voting materials for the next meeting of Investor Partners for consideration and
approval by the Investor Partners. Investor Partners shall have the right to
vote in person or by proxy.
7.8 Additional Voting Rights. Investor Partners shall be entitled to all
voting rights granted to them under this Agreement and as specified by the Act.
Each Unit is entitled to one vote on all matters; each fractional Unit is
entitled to that fraction of one vote equal to the fractional interest in the
Unit. Except as otherwise provided herein, at any meeting of Investor Partners,
a vote of a majority of Units represented at such meeting, in person or by
proxy, with respect to matters considered at the meeting at which a quorum is
present shall be required for approval of any such matters. In addition, except
as otherwise provided in this Section 7.8 and in Section 5.7(m), holders of a
majority of the then outstanding Units may, without the concurrence of the
Managing General Partner, vote to (a) approve or disapprove the sale of all, or
substantially all, of the assets of the Partnership, (b) dissolve the
Partnership, (c) remove the Managing General Partner and elect a new Managing
General Partner, (d) amend this Agreement, (e) elect a new Managing General
Partner if the Managing General Partner elects to withdraw from the Partnership,
and (f) cancel any contract for services with the Managing General Partner or
any Affiliates without penalty upon 60 days' notice. The Partnership shall not
participate in a Roll-Up or Significant Transaction unless the Roll-Up or
Significant Transaction is approved by Investor Partners owning at least 80% of
the Units. A majority in interest of the then outstanding Units entitled to vote
shall constitute a quorum. In determining the requisite percentage in interest
of Units necessary to approve a matter on which the Managing General Partner and
its Affiliates may not vote or consent, any Units owned by the Managing General
Partner and its Affiliates shall not be included.
7.9 Voting by Proxy. The Investor Partners may vote either in person or
by proxy.
7.10 Conversion of Additional General Partner Interests into Limited
Partner Interests.
(a) As provided herein, Additional General Partners may elect to
convert, transfer, and exchange their Additional General Partner interests for
Limited Partner interests upon receipt by the Managing General Partner of
written notice of such election. An Additional General Partner may request
conversion of all, but not less than all of such Additional General Partner's
interests for Limited Partner interests at any time after the earlier of (i) one
year following the closing of
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the securities offering which relates to the Partnership and the disbursement to
the Partnership of the proceeds of such securities offering or (ii) when all
wells have been placed into production.
(b) The Managing General Partner shall notify all Additional General
Partners at least 30 days prior to any material change in the amount of the
Partnership's insurance coverage. Within this 30-day period, and notwithstanding
the provisions of Section 7.10(a), Additional General Partners shall have the
right to immediately convert their Additional General Partner interests into
Limited Partner interests by giving written notice to the Managing General
Partner.
(c) The Managing General Partner shall convert the interests of all
Additional General Partners into Limited Partner interests upon completion of
drilling by the Partnership.
(d) The Managing General Partner shall cause the conversion of
Additional General Partner interests into Limited Partner interests to be
effected as promptly as possible as prudent business judgment dictates.
Conversion of an Additional General Partner interest to a Limited Partner
interest shall be conditioned upon a finding by the Managing General Partner
that such conversion will not cause a termination of the Partnership for Federal
income tax purposes, and will be effective upon the Managing General Partner's
filing an amendment to its Certificate of Limited Partnership reflecting such
conversion. The Managing General Partner is obligated to file an amendment to
its Certificate of Limited Partnership during the full calendar month after
receipt of the required notice from the Additional General Partner and a
determination by the Managing General Partner that the conversion will not
constitute a termination of the Partnership for Federal income tax purposes. The
effecting of the conversion is subject to the satisfaction of the condition
that the electing Additional General Partner provide written notice to the
Managing General Partner of such intent to covert. Upon such conversion, such
Additional General Partner shall become a Limited Partner but such Additional
General Partner shall remain liable to the Partnership for any additional
Capital Contribution(s) required and such Additional General Partner's
proportionate share of any Partnership obligation or liability arising prior to
the conversion.
(e) Limited Partners may not convert and/or exchange their interests
for Additional General Partner interests.
7.11 Unit Repurchase Program.
(a) Beginning with the third anniversary of the date of the first cash
distribution of the Partnership, Investor Partners may tender their Units to the
Managing General Partner for repurchase, subject to the Managing General
Partner's financial ability to repurchase and the Managing General Partner's
receipt of an opinion of counsel that the Managing General Partner's repurchase
of Units pursuant to this Section 7.11 will not cause the Partnership to be
treated as a "publicly traded partnership" for purposes of Code (S)(S) 469 and
7704. Failure to receive such opinion shall preclude the Managing General
Partner from making any offers to repurchase Units. Subject to such financial
condition and legal opinion, the Managing General Partner shall offer to
annually repurchase for cash a maximum of 10% of the total interests in
Partnership Capital or Profits.
(b) The Unit Repurchase Program shall be subject to the following
conditions:
(1) The Managing General Partner must receive written notification
from the particular Investor Partner of such Investor Partner's intention to
exercise the repurchase right not less than 60 calendar days before the
repurchase date;
(2) The repurchase price is established by the Managing General
Partner not more often than quarterly as of March 31, June 30, September 30, and
December 31 of each year; and
(3) The sum of the Units transferred during the taxable year of the
Partnership does not exceed 10% of the total interests in Partnership Capital or
Profit.
(c) The Managing General Partner shall not favor one partnership of
which it is a Managing General Partner over another in the repurchase of units
of such partnerships. Each such partnership shall stand on equal footing before
the Managing General Partner. To the extent that the Managing General Partner is
unable, due to its financial condition, limitations imposed by the Code, or the
Managing General Partner's loan agreement(s) with banks, to repurchase
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all such units tendered, each Person tendering such units shall be entitled to
have such Person's units repurchased on a "first come-first served" basis,
regardless of which partnership is involved, provided that the Managing General
Partner determines that the repurchase of a particular Person's units will not
result in the termination of the particular partnership involved for Federal
income tax purposes and in such partnership being treated as a "publicly traded
partnership" within the meaning of Code (S) 7704. If more than 10% of the total
interests in Partnership Capital or Profits are tendered during the
Partnership's taxable year, Units shall be purchased on a "first come-first
served" basis.
(d) The offer price for Units shall make shall be a cash amount equal
to three times that cash distributions attributable to the tendered Unit from
production for the 12 month period ending on the semi-annual determination date
immediately preceding the date on which the above-referenced written
notification is actually received by the Managing General Partner at its
corporate offices. The Managing General Partner may, in its sole and absolute
discretion, increase the offer price for interest tendered for sale. The
Managing General Partner shall provide the Investor Partners a written offer of
a specified price for purchase of the particular Units within 30 days after the
Managing General Partner's receipt of written notification.
(e) Upon any repurchase, the Managing General Partner shall hold such
purchased Units for its own use and not for resale and it shall not create a
market in the Units.
7.12 Liability of Partners. Except as otherwise provided in this Agreement
or the Act, each General Partner shall be jointly and severally liable for the
debts and obligations of the Partnership. In addition, each Additional General
Partner shall be jointly and severally liable for any wrongful acts or omissions
of the Managing General Partner and/or the misapplication of money or property
of a third party by the Managing General Partner acting within the scope of its
apparent authority to the extent such acts or omissions are chargeable to the
Partnership.
8. Books and Records.
8.1 Books and Records.
(a) For accounting and income tax purposes, the Partnership shall
operate on a calendar year.
(b) The Managing General Partner shall keep just and true records and
books of account with respect to the operations of the Partnership and shall
maintain and preserve during the term of the Partnership and for four years
thereafter all such records, books of account, and other relevant Partnership
documents. The Managing General Partner shall maintain for at least six years
all records necessary to substantiate the fact that Units were sold only to
purchasers for whom such Units were suitable. Such books shall be maintained at
the principal place of business of the Partnership and shall be kept on the
accrual method of accounting.
(c) The Managing General Partner shall keep or cause to be kept
complete and accurate books and records with respect to the Partnership's
business, which books and records shall at all times be kept at the principal
office of the Partnership. Any records maintained by the Partnership in the
regular course of its business, including the names and addresses of Investor
Partners, books of account, and records of Partnership proceedings, may be kept
on or be in the form of RAM disks, magnetic tape, photographs, micrographics, or
any other information storage device; provided, however, that the records so
kept are convertible into clearly legible written form within a reasonable
period of time. The books and records of the Partnership shall be made available
for review by any Investor Partner or the Investor Partner's representative at
any reasonable time.
(d)
(1) The Participant List shall be maintained as a part of the books
and records of the Partnership and shall be available for the inspection by any
Investor Partner's designated agent at the principal office of the Partnership
upon the request of any Investor Partner.
(2) The Participant List shall be updated at least quarterly to
reflect changes in the information contained therein.
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(3) A copy of the Participant List shall be mailed to any Investor
Partner requesting the Participant List within ten days of the request. The
copy of the Participant List shall be printed in alphabetical order, on white
paper, and in a readily readable type size (in no event smaller than 10-point
type). A reasonable charge for copy work may be charged by the Partnership.
(4) The purposes for which an Investor Partner may request a copy of
the Participant List include, without limitation, matters relating to voting
rights under this Agreement and the exercise of Investor Partners' rights under
federal proxy laws.
(5) If the Managing General Partner neglects or refuses to exhibit,
produce, or mail a copy of the Participant List as requested, the Managing
General Partner shall be liable to any Investor Partner requesting the
Participant List of the costs, including attorneys fees, incurred by that
Investor Partner for compelling the production of the Participant List, and for
actual damages suffered by any Investor Partner by reason of such refusal or
neglect. It shall be a defense that the actual purpose and reason for the
requests for inspection or for a copy of the Participant List is to secure the
Participant List of Investor Partners or other information for the purpose of
selling such Participant List or information or copies thereof, or of using the
same for a commercial purpose other than in the interest of the Investor Partner
relative to the affairs of the Partnership. The Managing General Partner may
require the Investor Partner requesting the Participant List to represent that
the Participant List is not requested for a commercial purpose unrelated to the
Investor Partner's interest in the Partnership. The remedies provided hereunder
to Investor Partners requesting copies of the Participant List are in addition
to, and shall not in any way limit, other remedies available to Investor
Partners under federal law, or the laws of any state.
8.2 Reports. The Managing General Partner shall deliver to each Investor
Partner the following financial statements and reports at the times indicated
below:
(a) Within 75 days after the end of the first six months of each
fiscal year, and within 120 days after the end of fiscal year, financial
statements, including a balance sheet and statements of income, Partners'
equity, and cash flows, all of which shall be prepared in accordance with
generally accepted accounting principles. The annual financial statements shall
be accompanied by (i) a report of an independent certified public accountant
designated by the Managing General Partner stating that an audit of such
financial statements has been made in accordance with generally accepted
auditing standards and that in its opinion such financial statements present
fairly the financial condition, results of operations, and cash flow of the
Partnership in accordance with generally accepted accounting principles and (ii)
a reconciliation of such financial statements with the information furnished to
the Investor Partners for Federal income tax reporting purposes.
(b) By March 15 of each year, a report containing such information as
to enable each Investor Partner to prepare and file such Investor Partner's
Federal income tax return and any required state income tax return.
(c) Within 120 days after the end of each fiscal year beginning with
the fiscal year ending December 31, 1997 [1998], (i) a summary of the
computations of the total estimated proved oil and gas reserves of the
Partnership as of the end of such fiscal year and the dollar value thereof at
then existing prices and a computation of each Investor Partner's interest in
such value, such reserve computations to be based upon engineering reports
prepared by qualified independent petroleum engineers, (ii) an estimate of the
time required for the extraction of such proved reserves and the present worth
thereof (discounted at a rate generally accepted in the oil and gas industry and
undiscounted), and (iii) a statement that because of the time period required to
extract such reserves, the present value of revenues to be obtained in the
future is less than if such revenues were immediately receivable. Each such
report shall be prepared in accordance with customary and generally accepted
standards and practices for petroleum engineers and shall be prepared by a
recognized independent petroleum engineer selected from time to time by the
Managing General Partner. No later than 90 days following the occurrence of an
event resulting in a reduction in an amount of 10% or more of the estimated
value of the proved oil and gas reserves as last reported to the Investor
Partners, other than a reduction resulting from production, a new summary
conforming to the requirements set forth above in this Section 8.2(c) shall be
delivered to the Investor Partners.
(d) Within 75 days after the end of the first six months of each
fiscal year, and within 120 days after the end of each fiscal year, (i) a
summary itemization, by type and/or classification, of any transaction of the
Partnership since the date of the last such report with the Managing General
Partner or any Affiliate thereof and the total fees, compensation, and
reimbursement paid by the Partnership (or indirectly on behalf of the
Partnership) to the Managing General Partner and its Affiliates, and (ii) a
schedule reflecting (A) the total Costs of the Partnership (and, where
applicable,
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the Costs pertaining to each Lease) and the Costs paid by the Managing General
Partner and by the Investor Partners and (B) the total revenues of the
Partnership and the revenues of the Partnership and the revenues received by or
credited to the accounts of the Managing General Partner and the Investor
Partners. Each semi-annual report delivered by the Managing General Partner may
contain summary estimates of the information described in subdivision (i) of
Section 8.2(c).
(e) Independent certified public accountants shall provide written
attestation annually that the method used to allocate Costs was consistent with
the method described in the Prospectus and that the total amount of Costs did
not materially exceed the amounts actually incurred by the Managing General
Partner. Such attestation shall be included in a report issued within 120 days
after the end of each fiscal year.
(f) Within 15 days after the end of each calendar month while the
Partnership is participating in the drilling and completion of wells in which it
has an interest until the end of such activity, and thereafter for a period of
three years within 75 days after the end of the first six months of each fiscal
year and within 120 days after the end of each fiscal year, (i) a description of
each Prospect or field in which the Partnership owns Leases, including the Cost,
location, number of acres under lease, and the interest owned therein by the
Partnership (provided that after the initial description of each such Prospect
or field has been provided to the Investor Partners, only material changes, if
any, with respect to such Prospect or field need be described), (ii) a
description of all farmins and farmouts of the Partnership made since the date
of the last such report, including the reason therefor, the location and timing
thereof, the Person to whom made and terms thereof, and (iii) a summary of the
wells drilled by the Partnership, indicating whether each of such wells has been
completed, a statement of the Cost of each well completed or abandoned and the
reason for abandoning any well after commencement of production. Each report
delivered by the Managing General Partner may contain summary estimates of the
information described in subdivision (iii).
(g) Such other reports and financial statements as the Managing
General Partner shall determine from time to time.
(h) Concurrently with their transmittal to Investor Partners and as
required, the Managing General Partner shall file a copy of each such report
with the California Commissioner of Corporations and with the securities
divisions of other states.
8.3 Bank Accounts. All funds of the Partnership shall be deposited in
such separate bank account or accounts, short term obligations of the U.S.
Government or its agencies, or other interest-bearing investments and money
market or liquid asset mutual funds as shall be determined by the Managing
General Partner. All withdrawals therefrom shall be made upon checks signed by
the Managing General Partner or any person authorized to do so by the Managing
General Partner.
8.4 Federal Income Tax Elections.
(a) Except as otherwise provided in this Section 8.4, all elections
required or permitted to be made by the Partnership under the Code shall be
made by the Managing General Partner in its sole discretion. Each Partner
agrees to provide the Partnership with all information necessary to give effect
to any election to be made by the Partnership.
(b) The Partnership shall elect to currently deduct IDC as an expense
for income tax purposes and shall require any partnership, joint venture, or
other arrangement in which it is a party to make such an election.
9. DISSOLUTION; WINDING-UP.
9.1 Dissolution.
(a) Except as otherwise provided herein, the retirement, withdrawal,
removal, death, insanity, incapacity, dissolution, or bankruptcy of any Investor
Partner shall not dissolve the Partnership. The successor to the rights of such
Investor Partner shall have all the rights of an Investor Partner for the
purpose of settling or administering the estate or affairs of such Investor
Partner; provided, however, that no successor shall become a Substitute Investor
Partner except in accordance with Article 7; and provided further that upon the
occurrence of any of the events referred to in the first sentence of this
Section 9.1(a) with respect to an Additional General Partner, the Partnership
shall be dissolved and wound up unless at that time there is at least one other
General Partner, in which event the business of the Partnership shall continue
to carried on. Neither the expulsion of any Investor Partner, nor the admission
or substitution of an Investor Partner.
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shall work a dissolution of the Partnership. The estate of a deceased, insane,
incompetent, or bankrupt Investor Partnership shall be liable for all his
liabilities as an Investor Partner.
(b) The Partnership shall be dissolved upon the earliest to occur of,
(i) the written consent of the Investor Partners owning a majority of the then
outstanding Units to dissolve and wind up the affairs of the Partnership; (ii)
subject to the provisions of Section 9.1(c), the retirement, withdrawal,
removal, death, adjudication of insanity or incapacity, or bankruptcy (or, in
the case of a corporate Managing General Partner, the withdrawal, removal,
filing of a certificate of dissolution, liquidation, or bankruptcy) of the
Managing General Partner; (iii) the sale, forfeiture, or abandonment of all, or
substantially all, of the Partnership's property and the sale and/or collection
of any evidences of indebtedness received in connection therewith; (iv) December
31, 2046 [2047]; (v) a dissolution event described in Section 9.1(a); or (vi)
any event causing dissolution of the Partnership under the Act.
(c) In the case of any event described in Section 9.1(b)(ii), if a
successor Managing General Partner is selected by Investor Partners owning a
majority of the then outstanding Units within 90 days after such event, and if
such Investor Partners agree within such 90 day period to continue the business
of the Partnership, then the Partnership shall not be dissolved.
(d) If the retirement, withdrawal, removal, death, insanity,
incapacity, dissolution, liquidation, or bankruptcy of any Partner, or the
assignment of a Partner's interest in the Partnership, or the substitution or
admission of a new Partner, shall be deemed under the Act to cause a dissolution
of the Partnership, then, except as provided in Section 9.1(c), the remaining
Partners may, in accordance with the Act, continue the Partnership business as a
new partnership and all such remaning Partners agree to be bound by the
provisions of this Agreement.
9.2 Liquidation. Upon a dissolution of the Partnership, the Managing
General Partner, or in the event there is no Managing General Partner, any other
Person selected by the Investor Partners to act as the liquidator, shall cause
the affairs of the Partnership to be wound up and shall take account of the
Partnership's assets (including Capital Contributions, if any, of the Managing
General Partner pursuant to Section 3.1(e) subject to the provisions of Section
9.3(a)(4), be liquidated as promptly as is consistent with obtaining the fair
market value thereof, and the proceeds therefrom (which dissolution and
liquidation may be accomplished over a period spanning one or more tax years in
the sole discretion of the Managing General Partner or the liquidator), to the
extent sufficient therefor, shall be applied and distributed in accordance with
Section 9.3.
9.3 Winding-Up.
(a) Upon the dissolution of the Partnership and winding up of its
affairs, the assets of the Partnership shall be distributed as follows:
(1) all of the Partnership's debts and liabilities to Persons other
than the Managing General Partner shall be paid and discharged;
(2) all outstanding debts and liabilities to the Managing General
Partner shall be paid and discharged;
(3) to the establishment of any cash reserves which the Managing
General Partner or liquidator determines to create in their sole discretion
for unmatured and/or contingent liabilities or obligations of the
Partnerships; and
(4) to the Partners, in accordance with their respective Capital
Accounts; provided, however, that if the Managing General Partner or
liquidator establishes any reserves in accordance with the provisions of
Section 9.3(a)(iii) (including distribution of any released reserves), then
the distributions pursuant to this Section 9.3(a)(iv) shall be pro rata in
accordance with the balances of the Partners' Capital Accounts.
(b) Distributions pursuant to this Section 9.3 shall be made in cash
or in kind to the Partners, at the election of the Managing General Partner.
Notwithstanding the provision of this Section 9.3(a)(4), in no event shall the
Partners reserve the right to take in kind and separately dispose of their share
of production.
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(c) Any in kind property distributions to the Investor Partners shall
be made to a liquidating trust or similar entity for the benefit of the Investor
Partners, unless at the time of the distribution:
(1) the Managing General Partner shall offer the individual Investor
Partners the election of receiving in kind property distributions and the
Investor Partners accept such offer after being advised of the risks
associated with such direct ownership; or
(2) there are alternative arrangements in place which assure the
Investor Partners that they will not, at any time, be responsible for the
operation or disposition of Partnership properties.
10. POWER OF ATTORNEY.
10.1 Managing General Partner as Attorney-in-Fact. Each Investor Partner
makes, constitutes, and appoints the Managing General Partner their true and
lawful attorney-in-fact, with full power of substitution, in the name, place,
and stead of the Investor Partner, from time to time to make, execute, sign,
acknowledge, and file:
(a) Any notices or certificates as may be required under the Act and
under the laws of any other state or jurisdiction in which the Partnership shall
engage, or seek to engage, to do business and to do such other acts as are
required to constitute the Partnership as a limited partnership under such laws.
(b) Any amendment to the Agreement pursuant to and which complies with
Section 11.9.
(c) Such certificates, instruments, and documents as may be required
by, or may be appropriate under the laws of any state or other jurisdiction in
which the Partnership is doing or intends to do business.
(d) Such certificates, instruments, and documents as may be required
by, or as may be appropriate for the Investor Partner to comply with, the laws
of any state or other jurisdiction to reflect a change of name or address of the
Investor Partner.
(e) Such certificates, instruments, and documents as may be required
to be filed with the Department of Interior (including any bureau, office or
other unit thereof, whether in Washington, D.C. or in the field, or any officer
or employee thereof), as well as with any other federal or state agencies,
departments, bureaus, offices, or authorities and pertaining to (i) any and all
offers to lease, Leases (including amendments, modifications, supplements,
renewals, and exchanges thereof) of, or with respect to, any lands under the
jurisdiction of the United States or any state including, without limitation,
lands within the public domain, and acquired lands, and provides for the leasing
thereof, (ii) all statements of interest and holdings on behalf of the
Partnership or the Investor Partner; (iii) any other statements, notices, or
communications required or permitted to be filed or which may hereafter be
required or permitted to be filed under any law, rule, or regulation of the
United States, or any state relating to the leasing of lands for oil or gas
exploration or development, (iv) any request for approval of assignments or
transfers of oil and gas Leases, any unitization or pooling agreements and any
other documents relating to lands under the jurisdiction of the United States or
any state; and (v) any other documents or instruments which said attorney-in-
fact, in its sole discretion, shall determine should be filed.
(f) Any further document, including furnishing verified copies of this
Agreement and/or excerpts therefrom, which said attorney-in-fact shall consider
necessary or convenient in connection with any of the foregoing, hereby giving
said attorney-in-fact full power and authority to do and perform each and every
act and thing whatsoever requisite and necessary to be done in and about the
foregoing as fully as the undersigned might and could do if personally present,
and hereby ratifying and confirming all that said attorney-in-fact shall
lawfully do to cause to be done by virtue hereof.
10.2 Nature as Special Power. The foregoing grant of authority:
(a) is a special power of attorney coupled with an interest, is
irrevocable, and shall survive the death or incompetency of the Investor Partner
granting it;
(b) shall survive the delivery of any assignment by the Investor
Partner of the whole or any portion of the Investor Partner's Units; except that
where the assignee thereof has been approved by the Managing General Partner for
admission to the Partnership as a Substitute Investor Partner, the power of
attorney shall survive the delivery of such
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assignment for the sole purpose of enabling said attorney-in-fact to execute,
acknowledge, and file any instrument necessary to effect such substitution; and
(c) may be exercised by said attorney-in-fact by a listing of all of
the Partners executing any instrument with a single signature of said
attorney-in-fact.
11. MISCELLANEOUS PROVISIONS.
11.1 Liability of Parties. By entering into this Agreement, no party shall
become liable for any other party's obligations relating to any activities
beyond the scope of this Agreement, except as provided by the Act. If any party
suffers, or is held liable for, any loss or liability of the Partnership which
is in excess of that agreed upon herein, such party shall be indemnified by the
other parties, to the extent of their respective interests in the Partnership,
as provided herein.
11.2 Notices. Any notice, payment, demand, or communication required or
permitted to be given by any provision of this Agreement shall be deemed to have
been sufficiently given or served for all purposes if delivered personally to
the party or to an officer of the party to whom the same is directed or sent by
registered or certified mail, postage and charges prepaid, addressed as follows
(or to such other address as the party shall have furnished in writing in
accordance with the provisions of this Section):
(a) If to the Managing General Partner, 632 Adams Street, Suite 700,
Bowling Green, Kentucky 42101.
(b) If to an Investor Partner, at such Investor Partner's address for
purposes of notice which is set forth on Exhibit A attached hereto. Unless
otherwise expressly set forth in this Agreement to the contrary, any such notice
shall be deemed to be given on the date on which the same was deposited in a
regularly maintained receptacle for the deposit of United States mail, addressed
and sent as aforesaid.
11.3 Paragraph Headings, Section References. The headings in the Agreement
are inserted for convenience and identification only and are in no way intended
to describe, interpret, define, or limit the scope, extent, or intent of this
Agreement or any provision hereof. All references herein to Sections shall refer
to Sections of this Agreement unless the context clearly requires otherwise.
11.4 Severability. Every portion of this Agreement is intended to be
severable. If any term or provision hereof is illegal or invalid for any reason
whatsoever, such illegality or invalidity shall not affect the validity of the
remainder of this Agreement.
11.5 Sole Agreement. This Agreement constitutes the entire understanding of
the parties hereto with respect to the subject matter hereof and no amendment,
modification, or alteration of the terms hereof shall be binding unless the same
be in writing, dated subsequent to the date hereof and duly approved and
executed by the Managing General Partner and such percentage of Investor
Partners as provided in Section 11.9.
11.6 Applicable Law. This Agreement, shall be governed by, and construed in
accordance with, the laws of the Commonwealth of Kentucky without regard to its
conflict of law rules.
11.7 Execution of in Counterparts. This Agreement may be executed in any
number of counterparts with the same effect as if all parties hereto had all
signed the same document. All counterparts shall be construed together and shall
constitute one agreement.
11.8 Waiver of Action for Partition. Each Partner irrevocably waives,
during the term of the Partnership, any right that such Partner may have to
maintain any action for partition with respect to the Partnership and the
property of the Partnership.
11.9 Amendments.
(a) Unless otherwise specifically herein provided, this Agreement
shall not be amended without the consent of Investor Partners owning a majority
of the then outstanding Units entitled to vote.
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<PAGE>
(b) The Managing General Partner may, without Notice to, or consent
of, any Investor Partner, amend any provisions of this Agreement, or consent to
and execute any amendment to this Agreement, to reflect:
(1) A change in the name or location of the principal place of
business of the Partnership;
(2) the admission of Substitute Investor Partners or additional
Investor Partners in accordance with this Agreement;
(3) A reduction in, return of, all or a portion of any Investor
Partner's Capital Contribution;
(4) A correction of any typographical error or omission;
(5) A change which is necessary in order to qualify the Partnership
as a limited partnership under the laws of any other state or which is
necessary or advisable, in the opinion of the Managing General Partner, to
ensure that the Partnership will be treated as a partnership and not as an
association taxable as a corporation for Federal income tax purposes;
(6) A change in the allocation provisions, in accordance with the
provisions of Section ?, in a manner that, in the sole opinion of the Managing
General Partner (which opinion shall be determinative), would result in the
most favorable aggregate consequences to the Investor Partners as nearly as
possible consistent with the allocations contained herein, for such
allocations to be recognized for Federal income tax purposes due to
developments in the Federal income tax laws or otherwise; or
(7) Any other amendment similar to the foregoing;
provided however, that the Managing General Partner shall have no authority,
right, or power under this Section 11.9(b) to amend the voting rights of the
Investor Partners.
11.10 Substitution of Signature Pages. This Agreement has been executed
in duplicate by the Investor Partners and one executed copy of the signature
page is attached to the Investor Partner's copy of this Agreement. It is agreed
that the other executed copy of such signature page may be attached to an
identical copy of this Agreement together with the signature pages from
counterpart Agreements which may be executed by other Investor Partners.
11.11 Incorporation by Reference. Every exhibit, schedule, and other
appendix attached to this Agreement and referred to herein is hereby
incorporated in this Agreement by reference.
* * * * *
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<PAGE>
SIGNATURE PAGE
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
day and year first written above.
MANAGING GENERAL PARTNER: INITIAL LIMITED PARTNER:
Blue Ridge Group, Inc.
632 Adams Street, Suite 700 ____________________________________
Bowling Green, Kentucky 42101 Name: ____________________
Address: ____________________
____________________
By:______________________________
Robert D. Burr, President
and Chief Executive Officer Phone Number: ____________________
INVESTOR PARTNERS
________________________________________________________________________________
COMPLETE TO INVEST AS AN ADDITIONAL GENERAL PARTNER
ADDITIONAL GENERAL PARTNER(S):
NUMBER OF UNITS Name:__________________________
PURCHASED (Print Name)
________________________ _______________________________
(Signature)
SUBSCRIPTION PRICE Address: _____________________
_____________________
_____________________
$_______________________ Phone Number: _____________________
________________________________________________________________________________
COMPLETE TO INVEST AS A LIMITED PARTNER
LIMITED PARTNER(S):
Name:__________________________
NUMBER OF UNITS PURCHASED (Print Name)
________________________ _______________________________
(Signature)
SUBSCRIPTION PRICE Address: _____________________
_____________________
_____________________
$_______________________ Phone Number: _____________________
A-35
<PAGE>
EXHIBIT A
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
Blue Ridge Energy Fund 1997-___ Limited Partnership,
[Blue Ridge Energy Fund 1998-___ Limited Partnership,]
A Kentucky Limited Partnership
Number of
Names and Addresses of Investors Nature of Interest Units
- -------------------------------- ------------------ -----
A-36
<PAGE>
APPENDIX B
----------
[LETTERHEAD OF GREENEBAUM DOLL & McDONALD PLLC]
May 31, 1996
Blue Ridge Group, Inc.
1953 Scottsville Road
Suite 201
Bowling Green, Kentucky 42104
Ladies and Gentlemen:
We have acted as counsel for Blue Ridge Group, Inc., the corporation which
will act as the Managing General Partner/1/ of the Partnerships, in connection
with the formation and financing of the Partnerships. In that connection, you
have requested our opinion concerning the treatment of the Partnerships as
partnerships for Federal income tax purposes and certain Federal income tax
consequences to investors who contribute capital to, and become Investor
Partners of, the Partnerships.
We have examined the form of the Agreement of Limited Partnership of the
Partnerships attached as an Exhibit to the Prospectus. You have also furnished
us with various representations and statements of the parties to the
transactions as set forth herein. Our opinion is based upon the premise that
the transactions will be consummated in accordance with the documents furnished
to us and that such representations and statements are correct.
- ------------------
/1/All defined terms used herein which are not defined herein shall have
the same meaning as those terms have in the Prospectus.
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GREENEBAUM DOLL
& McDONALD PLLC
Blue Ridge Group, Inc.
May 31, 1996
Page -2-
REPRESENTATIONS
---------------
You have represented to us, and asked us to assume, the following:
1. The Partnerships will be engaging in their oil and gas business with a
view to seeking an economic profit therefrom without regard to tax benefits.
2. No election will be made by a Partnership to be excluded from the
application of Subchapter K of the Code.
3. The Units will not be traded on an established securities market, will
not be readily tradeable on a secondary market or the substantial equivalent
thereof, nor will the Managing General Partner create a market for the Units.
4. The Managing General Partner will at all times act independently of
the Investor Partners, will not act as agent of the Investor Partners and there
are no agreements or arrangements which could be so construed.
5. At no time will a Partnership have more than 500 Partners. For this
purpose, the owners of Investor Partners which are partnerships, S corporations
and trusts will be treated as partners of the Partnership.
6. The Limited Partners will not own, directly or indirectly, more than
5% of the outstanding stock of the Managing General Partner, taking into account
the attribution rules of section 318 of the Code.
7. The Managing General Partner has, and will continue to have at all
times during the existence of a Partnership, a net worth in excess of $2,000,000
(excluding its interests in the Partnerships and all other limited partnerships
of which it is a general partner).
8. None of the Partnerships' oil and gas income will be from non-Working
Interests.
9. The fees payable to the Managing General Partner for drilling
Partnership wells pursuant to the Drilling and Completion Contracts
("Contracts") are reasonable in amount and reflect the level of services which
is anticipated to be rendered to the Partnerships.
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GREENEBAUM DOLL
& McDONALD PLLC
May 31, 1996
Page -3-
10. The Partnerships will elect to currently deduct IDC.
11. All Partnership wells will be spudded no later than March 31, 1997
with respect to Partnerships designated "Blue Ridge Energy Fund 1996-__ Limited
Partnership," and March 31, 1998 with respect to Partnerships designated "Blue
Ridge Energy Fund 1997-__ Limited Partnership."
12. At least 90% of the gross income of each of the Partnerships will
constitute income derived from the exploration, development, production and
marketing of oil and gas.
13. It is not anticipated that the sum of (i) the aggregate deductions
and (ii) 350% of the aggregate credits of any Partnership as of the close of any
of the first five years ending after the sale of Units with respect to that
Partnership, will exceed 200% of the cash invested by the Partners of such
Partnership as of such dates.
14. None of the Investor Partners will be tax-exempt entities, nonresident
aliens or foreign corporations.
15. It is expected that all Investor Partners will be in substantially
the same marginal Federal income tax bracket (before taking into account their
distributive shares of the Partnerships' Profits, Losses and items thereof).
DISCUSSION
----------
A. Treatment of the Partnership as a Partnership.
---------------------------------------------
Under current regulations, a limited partnership will be subject to Federal
income tax as an association taxable as a corporation when its corporate
characteristics exceed its noncorporate characteristics. Treas. Reg.
(S) 301.7701-2(a)(3). Treas. Reg. (S) 301.7701-2(a)(2) indicates that the
relevant major characteristics to be considered are (i) continuity of life, (ii)
free transferability of interests, (iii) centralization of management, and (iv)
limited liability. These regulations are binding upon the Service. See, Larson
v. Commissioner, 66 T.C. 159 (1976), appeal dismissed (9th Cir. 1978); Zuckman
v. United States, 524 F.2d 729 (Ct. Cl. 1975); Rev. Rul. 79-106, 1979-1 C.B.
448.
The regulations provide that an organization lacks the corporate
characteristic of continuity of life if it is a limited partnership subject to a
statute corresponding to the uniform
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GREENBAUM DOLL
& McDONALD PLLC
Blue Ridge Group, Inc.
May 31, 1996
Page -4-
limited partnership act ("ULPA"). Treas. Reg. (S) 301.7701-2(b) (3). Treas. Reg.
(S) 301.7701-2(a)(5) provides that references to the ULPA includes both the
original ULPA adopted in 1916 as well as the revised ULPA adopted in 1976. The
Partnerships will be subject to the Act which is the 1985 version of the revised
ULPA. We have examined the Act and the 1976 version of the revised ULPA. Because
the differences between the two versions of the revised ULPA are not significant
in terms of the nature of the limited partnership and the rights and obligations
of the partners, and because the Service has ruled that other states which have
adopted the 1985 version of the revised ULPA have statutes which correspond to
the ULPA (see, e.g., Rev. Rul. 89-38, 1989-1 C.B. 318; Rev. Rul. 88-23, 1988-1
C.B. 404), we are of the opinion that references to the ULPA in Treas. Reg.
(S) 301.7701-2 include the 1985 version of the revised ULPA as well.
In Rev. Proc. 89-12, 1989-1 C.B. 798, the Service indicated that in order
for the Service to issue an advance ruling to the effect that a limited
partnership formed in a state with a statute corresponding to the ULPA lacks
continuity of life, in the case of the removal of a general partner, "the
partnership agreement may not permit less than a majority-in-interest of limited
partners to elect a new general partner to continue the partnership ...." Under
the Partnership Agreement, if the Investor Partners remove the Managing General
Partner, such Investor Partners, by vote of the holders of a majority of the
Units, may elect a successor Managing General Partner. Such an event could occur
at a time when the Investor Partners are Additional General Partners, with the
result that this requirement of Rev. Proc. 89-12 will not be met because the
removal of the Managing General Partner and selection of a successor Managing
General Partner could be approved by less than a majority in interest of the
Limited Partners. We do not believe, however, that Rev. Proc. 89-12 contemplated
a situation such as here presented.
In Rev. Proc 92-35, 1992-1 C.B. 790, the Service stated that if the
bankruptcy or removal of a general partner causes a dissolution of the
partnership unless the partnership is continued with the consent of the
remaining general partners or at least a majority in interest of the limited
partners, the Service will not take the position that the partnership has the
corporate characteristic of continuity of life. In Rev. Proc. 94-46, 1994-2 C.B.
688, the Service defined what the term "majority in interest" means for purposes
of Rev. Proc. 92-35 and Treas. Reg. (S) 301.7701-2(b)(1). Under the Partnership
Agreement, upon the bankruptcy or removal of the Managing General Partner, the
Partnership will dissolve unless Investor Partners owning a majority of the
Units
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& McDONALD PLLC
Blue Ridge Group, Inc.
May 31, 1996
Page -5-
consent to its continuation and select a successor Managing General Partner
within 90 days of the occurrence of such event.
While the provisions of the Partnership Agreement do not exactly conform
with the provisions of the Revenue Procedures referred to above, and since
those Revenue Procedures merely set forth the Service's advance ruling position,
rather than statements of the law, it is our opinion that under Treas. Reg.
(S) 301.7701-2(b)(3), the Partnership will lack the corporate characteristic of
continuity of life.
In order for the corporate characteristic of free transferability of
interests to exist, the regulations require that the members of the partnership
have the power, without the consent of the other members of the partnership, to
substitute a person who is not a member of the partnership in their place.
Treas. Reg. (S) 301.7701-2(e)(1). Under the Partnership Agreement, while
Investor Partners may assign, transfer or convey their Units to another party,
they may not have such other party become a substitute Investor Partner without
the Managing General Partner's consent, which consent may be withheld by the
General Partner for any reason whatsoever. The mere ability of partners to
assign their interests without the ability to have the transferee admitted to
the partnership as a substitute partner without first obtaining consent from
other partners does not constitute the corporate characteristic of free
transferability. Treas. Reg. (S) 301.7701-2(e)(1). Accordingly, the Partnership
will lack the corporate characteristic of free transferability of interest.
The regulations indicate that a limited partnership subject to a statute
corresponding to the ULPA generally does not have the corporate characteristic
of centralized management, but that such centralized management does exist in
such a limited partnership "if substantially all of the interests in the
partnership are owned by the limited partners." Treas. Reg. (S) 301.7701-
2(c)(4). In Rev. Proc. 89-12, supra, the Service indicated that it will require
that the limited partners not own more than 80% of the total interests in the
limited partnership in order to rule that a limited partnership lacks
centralized management. Given the amount the Managing General Partner intends to
invest in the Partnership, while such test may be met initially if a sufficient
number of Investor Partners invest as Additional General Partners, such test
will not be met once the Additional General Partners' interests have been
converted to Limited Partner interests. Because the term "substantial" as used
in the above quoted regulation is not defined therein or in any rulings or
pronouncements of the Service (the 80% test referred to above is merely for
advance ruling purposes, and
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GREENEBAUM DOLL
& McDONALD PLLC
Blue Ridge Group, Inc.
May 31, 1996
Page -6-
not the position of the Service as a matter of substantive law), we are unable
to express an opinion as to whether centralization of management will exist
throughout the life of the Partnerships.
The regulations provide, in effect, that a limited partnership will have
the corporate characteristic of limited liability if the general partner of the
limited partnership has no substantial assets (other than its interest in the
partnership) which could be reached by a creditor of the organization and when
it is merely a "dummy" acting as the agent of the limited partners. Treas. Reg.
(S) 301.7701-2(d)(2). That the general partner must both lack substantial
assets and be a dummy was made clear in both Larson v. Commissioner, supra at
1890, and Zuckman v. United States, supra at 741.
Rev. Proc. 89-12, supra, provides that a limited partnership will generally
be deemed to lack limited liability if the corporate general partner has a net
worth (excluding its interest in limited partnerships of which it is a general
partner) at the time of the ruling request equal to at least 10% of the total
contributions to the limited partnership and is expected to continue to have a
net worth (excluding its interest in limited partnerships of which it is a
general partner) equal to at least 10% of the total contributions to the limited
partnership throughout the life of the limited partnership. Based upon the
representations set forth herein, the Managing General Partner will meet this
net worth requirement.
In Larson v. Commissioner, supra at 181, the Tax Court indicated that a
general partner is a "dummy" when it is under the control of the limited
partners. In Zuckman v. United States, supra at 741, the Court of Claims
indicated that a general partner is a "dummy" when it acts as agent of the
limited partners. Based upon the representations set forth herein, in our
opinion the Managing General Partner should not be considered a mere dummy
acting as agent of the Limited Partners. Given the net worth of the Managing
General Partner as represented herein, and our opinion that the Managing General
Partner should not be considered a mere dummy acting as agent of the Limited
Partners, we are of the opinion that the corporate characteristic of limited
liability, as that term is defined in the above cited regulation, will not be
present.
Since in our opinion the Partnerships will lack the corporate
characteristics of free transferability of interests, continuity of life and
limited liability, its major corporate characteristics will not exceed its major
noncorporate characteristics within the
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& McDONALD PLLC
Blue Ridge Group, Inc.
May 31, 1996
Page -7-
meaning of Treas. Reg. (S) 301.7701-2(a)(3). Therefore, we are of the opinion
that the Partnership will be taxable as a partnership for Federal income tax
purposes, and not as an association taxable as a corporation. Larson v.
Commissioner, supra; Zuckman v. United States, supra.
Under recently released proposed regulations, an unincorporated entity
(such as the Partnerships) will be treated as partnerships for Federal income
tax purposes unless they elect to be treated as associations taxable as
corporations. These regulations, however, will not become effective until they
have been finalized. The preamble to the proposed regulations provide that the
Service will not challenge the classification of an existing unincorporated
entity if the entity has a reasonable basis for its claimed classification and
claimed such classification in all prior years. 61 Fed. Reg. 21989, 21991 (May
13, 1996).
Section 7704(a) of the Code generally provides that a "publicly traded
partnership" will be treated as a corporation. Section 7704(b) of the Code
defines the term "publicly traded partnership" to mean any partnership if "(1)
interests in such partnership are traded on an established securities market, or
(2) interests in such partnership are readily tradeable on a secondary market
(or a substantial equivalent thereof)." Section 7704(c) of the Code provides
that a publicly traded partnership will not be treated as a corporation if 90%
of its income is from certain types of income, including income from the
exploration, development, production or marketing of natural resources. Based
upon the provisions of the Partnership Agreement and the representations set
forth herein, section 7704 of the Code will not cause the Partnerships to be
treated as corporations for Federal income tax purposes.
B. Effect of Allocations in Partnership Agreement.
----------------------------------------------
Section 704(b)(2) of the Code provides that a partner's distributive share
of a partnership's income, gain, loss, deduction or credit is to be determined
in accordance with a partner's interest in the partnership (determined by taking
into account all facts and circumstances) if the allocations provided for in the
partnership agreement do not have substantial economic effect. Under Treas. Reg.
(S) 1.704-1(b)(2)(i), in order for an allocation to have substantial economic
effect, the allocation must have economic effect and such economic effect must
be substantial. In order for there to be economic effect, Treas. Reg.
(S) 1.704-1(b)(2)(ii)(b) requires that, throughout the term of the partnership
agreement, the partnership agreement must provide (A) for the determination and
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GREENEBAUM DOLL
& McDONALD PLLC
Blue Ridge Group, Inc.
May 31, 1996
Page - 8 -
maintenance of the partners' capital accounts in accordance with the rules of
Treas. Reg. (S) 1.704-1(b)(2)(iv), (B) that upon liquidation of the
partnership and any partner's interest in the partnership, liquidating
distributions must be made in accordance with the positive capital account
balances of the partners and (C) that if a partner has a deficit balance in the
partner's capital account following the liquidation of such partner's interest
in the partnership, such partner must be unconditionally obligated to restore
the amount of such deficit balance to the partnership by the end of such taxable
year or 90 days after the date of such liquidation, if later.
The Partnership Agreement meets tests (A) and (B) referred to above, but
does not meet the test referred to in (C) above because while the Managing
General Partner has an obligation to restore a deficit Capital Account, the
Investor Partners are not obligated to restore deficit Capital Accounts. Where a
partnership agreement meets the tests referred to in (A) and (B) above, but does
not meet the test referred to in (C) above, Treas. Reg. (S) 1.704-1(b)(2)(ii)(d)
provides an alternate economic effect test which applies if the partnership
agreement contains a "qualified income offset" provision. Under this alternate
economic effect test, the allocations in the partnership agreement will be
considered to have economic effect to the extent that the allocations do not
cause or increase a deficit balance in a partner's capital account at the end of
the year in excess of any limited dollar amount such partner is obligated (or
deemed obligated) to restore. The Partnership Agreement contains a qualified
income offset provision.
In determining a partner's capital account for such purpose, the partner's
capital account must be reduced by the items referred to in Treas. Reg. (S)
1.704-1(b)(2)(ii)(d)(4), (5) and (6). Treas. Reg. (S) 1.704-1(b)(2)(ii)(d)(4)
deals with adjustments for simulated depletion required under Treas. Reg.
(S) 1.704-1(b)(2)(iv)(k), while Treas. Reg. (S) 1.704-1(b)(2)(ii)(d)(6)
generally requires that an adjustment be made for distributions that as of the
end of the year are reasonably expected to be made to the partner, to the extent
they exceed offsetting increases to the partner's capital account that are
reasonably expected to occur during or prior to the partnership years in which
such distributions are reasonably expected to be made.
The Partnership Agreement generally provides that losses are not allocated
to the Investor Partners if such losses would cause a deficit in the Investor
Partner's Capital Account, modified to take into account the adjustments
provided for in Treas. Reg. (S)
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Blue Ridge Group, Inc.
May 31, 1996
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1.704-1(b)(2)(ii)(d)(4) and (6) and for amounts the Investor Partner is
obligated (or deemed obligated) to restore under the regulations.
Treas. Reg. (S) 1.704-2(b)(1) provides that there can never be economic
effect to an allocation of a loss or deduction attributable to nonrecourse
liabilities. Treas. Reg. (S) 1.704-2(e) provides that allocation of nonrecourse
deductions will be deemed made in accordance with the partners' interests in the
partnership if four tests are met. These tests are generally as follows: (i)
that the tests referred to in (A) and (B) above are met and either the test
referred to in (C) above is met, or the partnership agreement contains a
"qualified income offset" provision, (ii) that the partnership agreement
allocate nonrecourse deductions in a manner which is reasonably consistent with
allocations, which have substantial economic effect, of some significant
partnership item attributable to the property secured by the nonrecourse debt,
(iii) that the partnership agreement contains a "minimum gain chargeback"
provision (within the meaning of Treas. Reg. (S) 1.704-2(f)) and (iv) all other
material allocations and capital account adjustments under the partnership
agreement are recognized under the regulations. The Partnership Agreement
contains a "minimum gain chargeback" provision and otherwise meets the tests
referred to above.
Based upon the foregoing, we are of the opinion that the allocations
contained in the Partnership Agreement will be deemed to have economic effect
under the alternate economic effect test to the extent an Investor Partner is
obligated (or deemed obligated) to restore, and decreased by contemplated
distributions in excess of contemplated income (within the meaning of
Treas. Reg. (S) 1.704-1(b)(2)(ii)(d)(6)) and simulated depletion deductions,
is positive at the close of a taxable year.
Treas. Reg. (S) 1.704-1(b)(2)(iii)(b) provides that the economic effect of
an allocation is not substantial if there is a strong likelihood that (A) the
net increases and decreases that will be recorded in the partners' capital
accounts will not differ substantially from what they would have been if the
allocation was not in the partnership agreement and (B) the total tax
liabilities of the partners will be less than they would have been had the
allocation not been in the partnership agreement. In our opinion, the
Partnership Agreement does not contain any allocations which result in such
shifting tax consequences.
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Blue Ridge Group, Inc.
May 31, 1996
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Treas. Reg. (S) 1.704-1(b)(2)(iii)(c) provides that the economic effect
of an allocation is not substantial if such allocation will be largely offset by
one or more other allocations, and at the time such allocations became part of
the partnership agreement there is a strong likelihood that (A) the net
increases and decreases that will be recorded in the partners' capital accounts
for the years to which the allocations relate will not be substantially
different from what they would have been if the original allocation and the
offsetting allocation(s) were not in the partnership agreement and (B) the
total tax liabilities of the partners will be less than if the allocations were
not in the partnership agreement. Treas. Reg. (S) 1.704-1(b)(2)(iii)(c)
further provides that there cannot be a strong likelihood that the economic
effect of an allocation will be offset by an allocation of gain or loss from the
disposition of partnership property. In our opinion, the Partnership Agreement
does not contain any allocations which result in transitory allocations of the
type described in Treas. Reg. (S) 1.704-1(b)(2)(iii)(c).
Treas. Reg. (S) 1.704-1(b)(2)(iii)(a), however, provides that an
allocation may be insubstantial under its general rule, even though it does not
result in shifting tax consequences, and is not a transitory allocation. Treas.
Reg. (S) 1.704-1(b)(2)(iii)(a) provides, in relevant part, as follows:
"Notwithstanding the preceding sentence, the economic
effect of an allocation (or allocations) is not
substantial if, at the time the allocation becomes part
of the partnership agreement, (1) the after-tax economic
consequences of at least one partner may, in present
value terms, be enhanced compared to such consequences
if the allocation (or allocations) were not contained
in the partnership agreement, and (2) there is a strong
likelihood that the after-tax economic consequences of no
partner will, in present value terms, be substantially
diminished compared to such consequences if the
allocation (or allocations) were not contained in the
partnership agreement."
In making this determination, a partner's tax attributes which are unrelated to
the partnership will be taken into account. While it is obviously impossible for
us to determine all of the tax attributes of each Investor partner (particularly
when the identities of the Investor partners are not presently known), we are
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May 31, 1996
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of the opinion that if the Service were to successfully contend that the
allocations in the Partnership Agreement were insubstantial under the general
rule referred to above, it is more likely than not that the allocations of
Profits and Loss (and items thereof) to the Investor Partners would not be
substantially modified from that set forth in the Partnership Agreement.
C. Applicability of Passive Loss Rules
Section 469(a) of the Code generally prohibits a taxpayer from deducting
passive losses against any income other than passive income. Section 469(c)(1)
of the Code provides that the term "passive activity" means any activity which
involves the conduct of a trade or business and in which the taxpayer does not
materially participate. Section 469(c)(3) of the Code, however, contains a
special rule for oil and gas activities. Under this special rule, a working
interest in an oil and gas property which the taxpayer holds directly or through
an entity which does not limit the liability of the taxpayer is not considered a
passive activity. Thus, if a Partnership is not considered an entity which
limits the liability of the Investor Partners, the investor Partners'
distributive shares of the Partnership's losses from its oil and gas activities
will not be subject to the passive loss limitation.
Under the Partner Agreement, the Additional General Partners are generally
indemnified by the Managing General Partner for liabilities they may incur by
reason of being General Partner for liabilities they may incur by reason of
being General Partners. Temp. Treas. Reg. (S) 1.469-IT(e)(4)(v) and the
examples contained therein make clear that if the taxpayer is a general partner,
and under state law is jointly and severally liable for all of the partnership's
liabilities, the taxpayer will be considered to hold a working interest through
an entity which does not limit the taxpayer's liability, even if there are
indemnification, stop loss arrangements, insurance or similar arrangements and
even though other partners of the partnership may have limited liability. Since
the Partnership will be subject to the Act, the Investor Partners who are
Additional General Partners will be jointly and severally liable for all of the
Partnership's liabilities with the result that such Investor Partners will be
entitled to deduct their distributive shares of the Partnership's Losses (and
items thereof) from its oil and gas activities without regard to the passive
loss rules.
Temp. Treas. Reg. (S) 1.469-IT(e)(4)(ii), however, provides that if a
taxpayer holds a working interest through an entity which does not limit the
taxpayer's liability and the taxpayer does not materially participate in the
drilling activity, then the
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May 31, 1996
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taxpayer's "disqualified deductions" are nevertheless treated as deductions
attributable to a passive activity. The term "disqualified deductions" means
deductions with respect to which economic performance occurs at a time when the
taxpayer's interest in the working interest is held through an entity that does
limit the taxpayer's liability. Therefore, if an Additional general Partner's
interest were to be converted into a Limited Partner interest, and economic
performance [within the meaning of section 461(h) of the Code, but without
regard to section 461(i)(2) of the Code (the special rule discussed in detail
below which treats economic performance as occurring during the taxable year
with respect to amounts paid to a driller in the taxable year if the well is
spud before the close of the 90th day after the taxable year)], occurs at the
time when an Investor Partner holds the working interest through an entity which
does limit the Investor Partner's liability, the deductions will be considered
attributable to a passive activity. Thus, if an Additional General Partner's
interest is converted into a Limited Partner interest and economic performance
with respect to any deductible item occurs after the conversion, such deduction
will be considered attributable to a passive activity, even though the amount is
deductible in a year in which the Investor Partner was an Additional General
Partner.
D. IDC
Under Section 263(c) of the Code, the Service is to promulgate regulations
providing for an election by a taxpayer to currently deduct IDC in the case of
oil and gas wells. Treas. Reg. (S)1.612-4(a) provides that the owner of a
working interest may deduct IDC rather than capitalizing them. The Partnerships
intend to make such an election.
A taxpayer's classification of a cost as IDC is not binding on the Service,
which might reclassify an item classified by the taxpayer as IDC as a cost which
must be capitalized. In Bernuth v. Commissioner 57 T.C. 225 (1971), aff'd 470
F.2d 710 (2nd Cir. 1972), the Tax Court denied the taxpayer a deduction for that
portion of a turnkey drilling contract price that was in excess of a reasonable
cost for drilling the wells in question, holding that the amount specified in
the turnkey contract was not controlling. Similarly, the Service, in Rev. Rul.
73-211, 1973-1 C.B. 303, concluded that excessive turnkey costs are not
deductible as IDc.
To the extent the amount paid by the Partnerships to the Managing General
Partner pursuant to the Contract meets the reasonable price standards imposed by
the Bernuth case and Rev. Rul. 73-211, and to the extent such amounts are not
allocable to
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tangible property, leasehold costs or other amount which must be capitalized,
such amounts should qualify as IDC.
Because of the inherently factual nature of the inquiry, we are unable to
express an opinion regarding the reasonableness or proper characterization of
the payments to be made by the Partnerships to the Managing General Partner
under the Contracts.
The Partnerships will use the accrual method of accounting. Under the
accrual method of accounting, an expense is generally deductible when all the
events have occurred that establish the liability and the amount of the
liability can be determined with reasonable accuracy. Treas. Reg. (S) 1.461-1(a)
(2). In addition, the economic performance test of Section 461(h) of the Code
must be met. Section 461(h)(2)(A) of the Code provides that where the liability
relates to the providing of services to the taxpayer by another person, economic
performance occurs as such person provides the services. Under the Contract, it
is expected that the Partnerships will pay the Managing General Partner for
drilling some of the Partnerships' wells in a taxable year prior to the taxable
year in which the Managing General Partner actually performs the drilling
services.
Section 461(i)(2) of the Code provides a special rule in the case of oil
and gas wells. That section provides that in the case of a tax shelter, economic
performance with respect to amounts paid for drilling an oil and gas well are
treated as having occurred within the taxable year in which paid if drilling of
the well commences before the close of the 90th day after the close of the
taxable year. For purposes of Section 461(i) of the Code, the term "tax shelter"
includes any enterprise (other than a C corporation) if interests in the
enterprise have been offered for sale in an offering required to be registered
with a Federal or state agency regulating the offering of securities. Since the
Units will be sold pursuant to a required registration statement filed with the
Securities and Exchange Commission, for purposes of Section 461(i) of the Code,
the Partnerships will be considered tax shelters. Thus, the Partnerships will
not be prohibited from deducting the prepaid drilling expenses they incur by
reason of the economic performance rule if the drilling of the wells in fact
commences before the close of the 90th day after the close of the year in which
the prepayment is made.
Under the special rule of Section 461(i)(2) of the Code, in lieu of the
general basis limitation on deductibility by a partner of a partnership's
losses, the losses are limited to the partner's "cash basis." Section 461(i) (2)
(B) (i) of the Code. The term "cash
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basis" generally means the partner's adjusted basis or the partner's partnership
interest determined without regard to (i) any liability of the partnership and
(ii) any amount borrowed by the partner with respect to the partnership which
was arranged by the partnership or by any person who participated in the
organization, sale or management of the partnership, or which is secured by an
asset of the partnership. Section 461(i)(2)(C) of the Code. Since the
Partnerships will not borrow money to pay for the drilling to be performed under
the Contract, and neither the Partnerships nor related parties will be involved
in arranging loans for the Investor Partners, this limitation will not present
an issue.
Thus, if the Partnerships prepay IDC and the drilling of the wells is
commenced on or before 90 days following the close of the taxable year in which
the prepayment occurred, the Investor Partners will not be prevented from
deducting the prepaid drilling expenses in the year incurred by virtue of the
economic performance test. This does not mean, however, that the Partnerships
will necessarily be permitted to deduct the prepaid drilling expenses in the
year of prepayment. There is authority in the prepayment of expense area
(including prepayment of IDC) which stands for the proposition that prepaid
expenses will only be deductible in the year paid if (i) the expenditure is a
payment and not merely a deposit, (ii) the payment is made for a business
purpose and (iii) the deduction of the prepaid expense does not result in a
material distortion of income. See, Keller v. Commissioner, 79 T.C. 7 (1982),
aff'd 725 F.2d 1173 (8th Cir. 1984); and Jolley v. Commissioner, 47 T.C.M. 1082
(1984).
Under the Contract, the Partnerships will be required to pay for the
drilling services (but not the completion services) at the time the Contract is
entered into by the parties. The amount to be prepaid is equal to a per footage
cost multiplied by the depth to which the particular well is to be drilled. The
Partnerships will have the right, however, to direct that the drilling be ceased
at any time prior to reaching the specified depth. If the Partnership so
directs, the unused portion of the prepayment (as described in the Contract)
will not be refunded, but may be applied by the Partnership the drilling of
other wells. This provision raises an issue as to whether the payments to be
made by the Partnerships are payments or deposits. In the Keller case, the Tax
Court stated the following:
"The key to this question (of deposit vs. payment) is
refundability. (citation omitted) Similarly, for
purposes of advanced payments of IDC, the application
of the drilling
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May 31, 1996
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partnership's prepaid amounts for cancelled wells
to different wells does not change our conclusion
that the prepayments on turnkey drilling contracts
properly are classified as payments instead of as
deposits." 79 T.C. at 47.
The Tax Court reached its conclusion on this issue notwithstanding that the
Service specifically argued that the ability to apply prepaid amounts for
cancelled wells to different wells implied that the prepayments were deposits.
Although the above-quoted language related to turnkey drilling contracts,
rather than footage contracts, we do not believe that this difference changes
the result. Nor does the fact that the Court in Keller also considered footage
contracts and held that the payments there involved were merely deposits, since
under those contracts if the wells were not drilled to the specified depth, the
taxpayer was entitled to a refund.
The business purpose test and material distortion of income test are
factual in nature. In Rev. Rul. 80-71, 1980-1 C.B. 106, a limited partnership
made a prepayment to an affiliate of the general partner. In distinguishing
earlier authorities which had allowed the deductibility of prepaid IDC, the
Ruling holds that in light of all the factors presented, the prepaid IDC
resulted in a substantial distortion of the limited partnership's income, with
the result that they were not deductible in the year prepaid. Rather, they were
deductible when the affiliate of the general partner paid an independent
drilling contractor for the drilling services.
The fact that the prepayment is made to a general partner or its affiliates
should not automatically result in a finding of nondeductibility of prepaid IDC.
In Dillingham v. United States, 81-2 USTC (P)9601 at 88,013 (W.D. Okla.),
the court stated the following:
"The fact that the owner and contractor is the general
partner of the partnership-owner, does not change this
result where, as here, the Plaintiffs have shown that
prepayment was required for a legitimate business
purpose and the transaction was not a sham to merely
permit Plaintiffs to control the timing of the deduction."
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May 31, 1996
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See also, Cheroff v. Commissioner, 40 T.C.M. 183 (1980).
Typically, the business purpose proffered to support the deductibility of
prepaid IDC is that by making the prepayment the taxpayer has locked in a fixed
price and has shifted the drilling risk to the owner. See Keller, supra at 47;
Jolley, supra at 1086. While the contracts involved in successful prepaid IDC
cases have typically been turnkey contracts, as opposed to footage contracts,
since the Contracts provide for a fixed price per foot drilled, regardless of
the expense of drilling, the Partnerships will have effectively locked in the
price of the wells.
As indicate above, in order for the Partnerships to be entitled to deduct
the prepaid IDC in the year of prepayment, it will be necessary for the
Partnerships to substantiate that there was a business purpose requiring the
prepayment and that the deductibility of the prepayment in the year of
prepayment does not result in a material distortion of income. Where the Service
takes the position that there is a material distortion of income, the taxpayer
has a strong burden to overcome to the Service's position. See, e.g.
Ansley-Sheppard-Burgess Company v. Commissioner, 104 T.C. 367, 370 (1995). Due
to the inherently factual nature of the inquiry, we are unable to express an
opinion as to whether the Partnerships will be entitled to deduct the prepaid
IDC in the year of prepayment. If such deduction is not allowed in the year of
prepayment, then we are of the opinion that the prepaid IDC will be deductible
in the year in which the drilling services are performed.
SCOPE OF OPINION
----------------
This opinion represents our views as to the interpretation of existing law
and cannot be taken as an assurance of how the law will subsequently develop.
Accordingly, no assurance can be given that the Service will not alter its
present views, either prospectively or retroactively, or adopt new views with
regard to any of the matters upon which we are rendering an opinion, nor can any
assurance be given that the Service will not audit or question the treatment
given to various items on a Partnership's Federal partnership tax return.
We have reviewed the "Tax Considerations" section of the Prospectus and are
satisfied that all material tax issues are considered therein. While there are
certain issues on which a lack of authority or the inherently factual nature of
the inquiry prevents us from expressing a firm conclusion on the probable
outcome in the event of litigation, it is our opinion that, in the aggregate,
the
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tax benefits which are a significant feature of an investment in the Partnership
will be realized, although not necessarily in the year in which the Partnerships
intend to claim such tax benefits.
We hereby consent to the use of our name in the Prospectus under the
heading "Tax Considerations" and to the filing of this opinion with such state
securities administrators or commissioners as may be necessary or appropriate.
This opinion should not be relied upon by anyone other than the Partnerships and
their Partners.
Very truly yours,
GREENEBAUM DOLL & MCDONALD PLLC
By: /s/ Charles Fassler
--------------------------------------
Charles Fassler, Member
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<PAGE>
APPENDIX C TO PROSPECTUS
------------------------
SUBSCRIPTION AGREEMENT
----------------------
Blue Ridge Energy Fund 1997 [1998]-____ Limited Partnership
I hereby agree to purchase _____ Unit(s) in the Blue Ridge Energy Fund 1997
[1998]-____ Limited Partnership (the "Partnership") at $1,000 per Unit.
Enclosed please find my check in the amount of $________________. My completion
and execution of this Subscription Agreement also constitutes my execution of
the Limited Partnership Agreement and the Certificate of Limited Partnership of
the Partnership. If this Subscription is accepted, I agree to be bound and
governed by the provisions of the Limited Partnership Agreement of the
Partnership. With respect to this purchase, being aware that a broker may sell
to me only if I qualify according to the express standards stated herein and in
the Prospectus, I represent that:
(a) I have received a copy of the Prospectus for the Partnership. _______
Initial
(b) I have a net worth of not less than $150,000 (exclusive of home,
furnishings and automobiles); or I have a net worth of not less than
$45,000 (exclusive of home, furnishings and automobiles) and had
during my last tax year or estimate that I will have 1997 [1998]
taxable income as defined in Section 63 of the Internal Revenue Code
of 1986 of at least $45,000, without regard to an investment in the
Partnership. _______
Initial
(c) If a resident of Alabama, Arizona, California, Colorado, Florida,
Georgia, Illinois, Indiana, Kentucky, Louisiana, Maryland,
Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Jersey,
New York, North Carolina, Ohio, Pennsylvania, South Carolina,
Tennessee, Utah, Virginia or Washington, I am aware of and satisfy the
additional suitability and other requirements stated in Appendix D to
the Prospectus. I am aware that Appendix D is subject to change, and
I have consulted my broker on the additional suitability and other
requirements of my state of residence. _______
Initial
(d) If a resident of California, I acknowledge and understand that the
offering may not comply with __ all the rules set forth in Title 10 of
the California Administrative Code; the following are some, but not
necessarily all, of the possible deviations from the California rules:
Program selling expenses may exceed the established limit; and the
compensation formula varies from the California rules. Even in light
of such non-compliance, I affirmatively state that I still want to
invest in the Partnership. _______
Initial
(e) Except as set forth in (f) below, I am purchasing Units for my own
account. _______
Initial
(f) If a fiduciary, I am purchasing for a person or entity having the
appropriate income and/or net __ worth specified in (c) or (d) above.
_______
Initial
(g) I certify that the number shown as my Social Security or Taxpayer
Identification Number on the __ signature page is correct. _______
Initial
<PAGE>
The above representations do not constitute a waiver of any rights
that I may have under the Acts administered by the Securities and
Exchange Commission or by any state regulatory agency administering
statutes bearing on the sale of securities.
(i) The purchase of Units as an Additional General Partner involves a
risk of unlimited liability to the extent that the Partnership's
liabilities exceed its insurance proceeds, the Partnerships
assets, and indemnification by the Managing General Partner, as
described in "Risk Factors" in the Prospectus.
(ii) The NASD requires the Soliciting Dealer or registered
representative to inform potential investors of all pertinent
facts relating to the liquidity and marketability of the Units,
including the following:
(aa) The risks involved in the offering, including the
speculative nature of the investment and the speculative
nature of drilling for oil and gas;
(bb) the financial hazards involved in the offering, including
the risk of losing my entire investment;
(cc) the lack of liquidity of this investment;
(dd) the restrictions of transferability of the Units; and
(ee) the tax consequences of the investment.
Investors are required to execute their own subscription agreements. The
Managing General Partner will not accept any subscription agreement that has
been executed by someone other than the investor or in the case of fiduciary
accounts by someone who does not have the legal power of attorney to sign on the
investor's behalf.
The Managing General Partner may not complete a sale of Units to an
investor until at least five business days after the date the investor receives
a final prospectus. In addition, the Managing General Partner will send each
investor a confirmation of purchase.
Signature and Power of Attorney
-------------------------------
I hereby appoint Blue Ridge Group, Inc., with full power of substitution,
my true and lawful attorney to execute, file, swear to and record any
Certificate(s) of Limited Partnership or amendments thereto (including but not
limited to any amendments filed for the purpose of the admission of any
substituted Partners) or cancellation thereof, including any other instruments
which may be required by law in any jurisdiction to permit qualification of the
Partnership as a limited partnership or for any other purpose necessary to
implement the Limited Partnership Agreement, and as more fully described in
Article X of the Limited Partnership Agreement.
If a resident of California, I am aware of and satisfy the additional
suitability requirements stated in Appendix D to the Prospectus and acknowledge
the receipt of California Rule 260.141.11 at pages D-2, D-3, D-4 and D-5 of
Appendix D to the Prospectus.
Date: ________________, 199__.
_____________________________ _______________________________
Signature Signature
C-2
<PAGE>
____________________________ ________________________________
Please Print Name Please Print Name
____________________________ ________________________________
Social Security or Tax Social Security or Tax
Identification Number Identification Number
I utilize the calendar year as my Federal income tax year, unless indicated
otherwise as follows:
_______________________________________________________________________________.
Mailing Address: _____________________________________________
_____________________________________________
Street
________________________, _______, __________
City State Zip Code
Address for Distributions and Notices, if different from above:
_________________________________________________________________
Street
____________________________, ___________, __________
City State Zip Code
Account or Reference No. ____________________________
Business Telephone No. (___)__________
Home Telephone No. (___) __________
Type of Units Purchased: [ ] Units as an Additional
General Partner
IF NO SELECTION IS MADE, THE
THE PARTNERSHIP CANNOT ACCEPT [ ] Units as a Limited
YOUR SUBSCRIPTION AND WILL Partner
HAVE TO RETURN THIS
SUBSCRIPTION AGREEMENT AND YOUR
MONEY TO YOU.
Title to Units to be held: [ ] Individual Ownership
[ ] Joint Tenants with Right of
Survivorship (both persons
must sign)
[ ] Tenants in Common (both persons must
sign)
[ ] Other ___________________
C-3
<PAGE>
TO BE COMPLETED BY BLUE RIDGE GROUP, INC.
Blue Ridge Group, Inc., as the Managing General Partner of the Partnership,
hereby accepts this Subscription and agrees to hold and invest the same pursuant
to the terms and conditions of the Limited Partnership Agreement of the
Partnership.
ATTEST: BLUE RIDGE GROUP, INC.
By: _______________________________ By: ________________________________
James T. Cook, Jr. Its: ________________________________
Secretary
Date: _____________________________
* * * *
TO BE COMPLETED BY REGISTERED REPRESENTATIVE
(For Commission and Other Purposes)
I hereby represent that I have discharged my affirmative obligations under
Rule 2810(b)(2)(B) and (3)(D) of the NASD's Conduct Rules and specifically have
obtained information from the above-named subscriber concerning his/her net
worth, annual income, federal income tax bracket, investment portfolio and other
financial information and have determined that an investment in the Partnership
is suitable for such subscriber, that such subscriber is or will be in a
financial position to realize the benefits of this investment, and that such
subscriber has a fair market net worth sufficient to sustain the risks for this
investment. I have also informed the subscriber of all pertinent facts relating
to the liquidity and marketability of an investment in the Partnership, of the
risks of unlimited liability regarding an investment as an Additional General
Partner, and of the passive loss limitations for tax purposes of an investment
as a Limited Partner.
______________________________ ______________________________
Name of Brokerage Firm Office Number
______________________________ ______________________________
Registered Representative Office Address
______________________________
City State Zip Code
______________________________ ______________________________
Name (Please Print) Social Security Number
______________________________ ______________________________
Area Code Telephone Number Signature
______________________________
Date
C-4
<PAGE>
APPENDIX D TO PROSPECTUS
BLUE RIDGE ENERGY FUND 1996/1997
--------------------------------
SPECIAL SUBSCRIPTION INSTRUCTIONS
---------------------------------
Checks for Units should be made payable to South Central Bank, as Escrow
Agent for Blue Ridge Energy Fund 1997-[1998] Limited Partnership and should be
given to the subscriber's broker for submission to the Dealer Manager and Escrow
Agent. The minimum subscription is $5,000. Subscriptions are payable only in
cash upon subscription. In the event that a subscriber purchases Units in a
particular Partnership on more than one occasion during an offering period, the
minimum purchase on each occasion is $5,000 (5 Units).
Signature Requirement.
- - Investors are required to execute their own subscription agreements. The
Managing General Partner will not accept any subscription agreement that
has been executed by someone other than the investor or in the case of
fiduciary accounts someone who does not have the legal power of attorney to
sign on the investor's behalf.
Limited Partner Subscribers:
- - If a resident of New Jersey, I
(1) Have a net worth of not less than $150,000 (exclusive of home,
furnishings and automobiles), or
(2) Have a minimum net worth of $60,000 (exclusive of home, furnishings
and automobiles) and Had during the last tax year or estimates that he
will have during the current tax year taxable income as defined by
Section 63 of the Code of at least $60,000 without regard to any
investment in Units.
- - If a resident of Arizona, Minnesota, Michigan, North Carolina or
Pennsylvania, I
(1) Have a net worth of not less than $225,000 (exclusive of home,
furnishings and automobiles), or
(2) Have a minimum net worth of $60,000 (exclusive of home, furnishings
and automobiles) and had during the last tax year or estimates that he
will have during the current tax year taxable income as defined by
Section 63 of the Code of at least $60,000 without regard to any
investment in Units.
- - If I am a Michigan, Ohio or Pennsylvania resident, my investment in the
Partnership will not be equal to more than 10% of my net worth, exclusive
of home, furnishings and automobiles.
Additional General Partner Subscribers:
- - If a resident of Alabama, California, Colorado, Florida, Georgia, Illinois,
Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Nevada, New Jersey, New York, North Carolina, Ohio,
Pennsylvania, South Carolina, Tennessee, Utah, Virginia or Washington, I
(1) Have an individual or joint minimum net worth with my spouse of
$225,000 or more, without regard to the investment in the Program,
(exclusive of home, home furnishings and automobiles) and a combined
minimum gross income of $100,000 or more for the current year and for
the two previous years; or
(2) Have an individual or joint minimum net worth with my spouse in excess
of $1,000,000, inclusive of home, home furnishings and automobiles; or
<PAGE>
(3) Have an individual or joint minimum net worth with my spouse in excess
of $500,000, exclusive of home, home furnishings and automobiles; or
(4) Have a combined minimum gross income in excess of $200,000 in the
current year and the two previous years.
- - If I am a Michigan, Ohio or Pennsylvania resident, my investment in the
Partnership will not be equal to more than 10% of my net worth, exclusive
of home, furnishings and automobiles.
ATTENTION CALIFORNIA INVESTORS
- - A resident of California who subscribes for Units of general partnership
interest must represent that he:
(1) Has a net worth of not less than $250,000 (exclusive of home,
furnishings and automobiles) and expects to have gross income in 1997
(with respect to investments in Partnerships designated Blue Ridge
Energy Fund 1997 Limited Partnership ) or in 1998 (with respect to
investments in Partnerships designated Blue Ridge Energy Fund 1998
Limited Partnership) of $65,000 or more, or
(2) Has a net worth of not less than $500,000 (exclusive of home,
furnishings and automobiles), or
(3) Has a net worth of not less than $1,000,000, or
(4) Expects to have gross income in 1997 (with respect to Partnerships
designated Blue Ridge Energy Fund 1997 Limited Partnership ) and in
1998 (with respect to Partnerships designated Blue Ridge Energy Fund
1998 Limited Partnership ) of not less than $200,000.
- - A resident of California who subscribes for Units of limited partnership
interest must represent that he
(1) Has a net worth of not less than $250,000 (exclusive of home,
furnishings and automobiles) and expects to have gross income in 1997
for Partnership designated Blue Ridge Energy Fund 1997 Limited
Partnership and 1998 for Partnerships designated Blue Ridge Energy
Fund 1998 Limited Partnership of $65,000 or more, or
(2) Has net worth of not less than $500,000 (exclusive of home,
furnishings and automobiles), or
(3) Has a net worth of not less than $1,000,000, or
(4) Expects to have gross income in 1997 (with respect to investments in
Partnerships designated Blue Ridge Energy Fund 1997 Limited
Partnership) or in 1998 (with respect to investments in Partnerships
designated Blue Ridge Energy Fund 1998 Limited Partnership of not
less than $200,000.
- - If a resident of California, I am aware that:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR ANY
INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT THE PRIOR
WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA,
EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
D-2
<PAGE>
As a condition of qualification of the Units for sale in the State of
California, the following rule is hereby delivered to each California purchaser.
California Administrative Code, Title 10, CH. 3, Rule 260.141.11.
Restriction on transfer.
(a) The issuer of a security upon which a restriction on transfer has been
imposed pursuant to Sections 260.102.6, 260.102.141.10, and 260.534.10
shall cause a copy of this Section to be delivered to each issue or
transferee of such security at the time the certificate evidencing the
security is delivered to the issues or transferee.
(b) It is unlawful for the holder of any such security to consummate a
sale or transfer of such security, or any interest therein, without
the prior written consent of the Commissioner (until this condition is
removed pursuant to Section 260.141.12 of these rules), except:
(1) to the issuer;
(2) pursuant to the order or process of any court;
(3) to any person described in Subdivision (i) of Section 25102 of
the Code or Section 260.105.14 of these rules;
(4) to the transferor's ancestors, descendants or spouse, or any
custodian or trustee for the account of the transferor's
ancestors, descendants, or spouse; or to a transferee by a
trustee or custodian for the account of the transferee or the
transferee's ancestors, descendants or spouse;
(5) to the holders of securities of the same class of the same
issuer;
(6) by way of gift or donation inter vivos or on death;
(7) by or through a broker-dealer licensed under the Code (either
acting as such or as a finder) to a resident of a foreign state,
territory or country who is neither domiciled in this state to
the knowledge of the broker-dealer, nor actually present in this
state if the sale of such securities is not in violation of any
securities law of the foreign state, territory or country
concerned;
(8) to a broker-dealer licensed under the Code in a principal
transaction, or as an underwriter or member of an underwriting
syndicate or selling group;
(9) if the interest sold or transferred is a pledge or other lien
given by the purchaser to the seller upon a sale of the security
for which the Commissioner's written consent is obtained or under
this rule not required;
(10) by way of a sale qualified under Section 25111, 25112, 25113 or
25121 of the Code, of the securities to be transferred, provided
that no order under Section 25140 or Subdivision (a) of Section
25143 is in effect with respect to such qualification;
(11) by a corporation to a wholly-owned subsidiary of such
corporation, or by a wholly-owned subsidiary of a corporation to
such corporation;
D-3
<PAGE>
(12) by way of an exchange qualified under Section 25111, 25112 or
25113 of the Code, provided that no order under Section 25140 or
Subdivision (a) of Section 25143 is in effect with respect to
such qualifications;
(13) between residents of foreign states, territories or countries who
are neither domiciled nor actually present in this state;
(14) to the State Controller pursuant to the Unclaimed Property Law or
to the administrator of the unclaimed property law of another
state;
(15) by the State Controller pursuant to the Unclaimed Property Law or
by the administrator of the unclaimed property law of another
state if, in either such case, such person
(i) discloses to potential purchasers at the sale that transfer
of the securities is restricted under this rule,
(ii) delivers to each purchaser a copy of this rule, and
(iii) advises the Commissioner of the name of each purchaser; or
(16) by a trustee to a successor trustee when such transfer does not
involve a change in the beneficial ownership of the securities;
provided that any such transfer is on the condition that any
certificate evidencing the security issued to such transferee
shall contain the legend required by this section.
(c) The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any
transfer thereof, shall bear on their face a legend, prominently
stamped or printed thereon in capital letters of not less than
10-point size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS
SECURITY, OR ANY INTEREST THEREIN, OR TO RECEIVE ANY
CONSIDERATION THEREFOR, WITHOUT THE PRIOR WRITTEN CONSENT OF THE
COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA, EXCEPT
AS PERMITTED IN THE COMMISSIONER'S RULES."
As a condition of qualification of the Units for sale in the State of
California, each California subscriber through the execution of the Subscription
Agreement acknowledges his understanding that the California Department of
Corporations has adopted certain regulations and guidelines which apply to oil
and gas interests offered to the public in the State of California.
D-4
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus and, if given or made, such information or representations must not
be relied upon as having been authorized by the Program or the Managing General
Partner. This Prospectus does not constitute an offer to sell or a solicitation
of an offer to buy any securities in any jurisdiction in which such offer or
solicitation is not authorized, or in which the person making such offer or
solicitation is not qualified to do so or to any person to whom it is unlawful
to make such offer or solicitation, nor does it constitute an offer to sell or
solicitation of an offer to buy any security other than the Units offered
hereby. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Summary of Offering........................................... 1
Risk Factors.................................................. 8
Terms of the Offering......................................... 18
Assessments and Financing..................................... 26
Source of Funds and Use of Proceeds........................... 27
Participation in Costs and Revenues........................... 28
Compensation of the Managing
General Partner and Affiliates.............................. 34
Proposed Activities........................................... 36
Investment Objectives......................................... 37
Development Policies.......................................... 37
Competition, Markets and Regulations.......................... 51
Management.................................................... 53
Conflicts of Interest......................................... 57
Fiduciary Responsibility of the
Managing General Partner.................................... 62
Prior Activities.............................................. 63
Tax Considerations............................................ 73
Summary of Partnership Agreement.............................. 85
Transferability of Units...................................... 88
Plan of Distribution.......................................... 89
Sales Literature.............................................. 90
Legal Opinions................................................ 91
Experts....................................................... 91
Additional Information........................................ 91
Glossary of Terms............................................. 92
Financial Statements.......................................... F-1
Appendices.................................................... A-1
</TABLE>
All dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
================================================================================
================================================================================
10,000 Units of General
and Limited Partnership Interest
BLUE RIDGE
ENERGY FUND 1996/1997
$10,000,000
Aggregate Subscription
----------
PROSPECTUS
Dated ________, 1997
Ridgemont Securities, Inc.
Dealer-Manager
(800) 586-8764
================================================================================
<PAGE>
PART II - Information Not Required in Prospectus
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Item 24. Indemnification of Directors and Officers....................... II-2
Item 25. Other Expenses of Issuance and Distribution..................... II-3
Item 26. Recent Sales of Unregistered Securities......................... II-4
Item 27. Index to Exhibits............................................... II-6
Item 28. Undertakings.................................................... II-7
Signatures................................................................ II-8
</TABLE>
<PAGE>
PART II - Information Not Required in Prospectus
Item 24. Indemnification of Directors and Officers.
A. Indemnification of Managing General Partner.
The Managing General Partner shall have no liability to the Partnership or to
any Investor Partner for any loss suffered by the Partnership which arises out
of any action or inaction of the Managing General Partner if the Managing
General Partner, in good faith, determined that such course of conduct was in
the best interest of the Partnership, that the Managing General Partner was
acting on behalf of or performing services for the Partnership, and that such
course of conduct did not constitute negligence or misconduct of the Managing
General Partner. The Managing General Partner shall be indemnified by the
Partnership against any losses, judgments, liabilities, expenses, and amounts
paid in settlement of any claims sustained by it in connection with the
Partnership, provided that the Managing General Partner has determined in good
faith that the course of conduct which caused the loss or liability was in the
best interests of the Partnership, that the Managing General Partner was acting
on behalf of or performing services for the Partnership, and that the same were
not the result of negligence or misconduct on the part of the Managing General
Partner. Indemnification of the Managing General Partner is recoverable only
from the tangible net assets of the Partnership, including the insurance
proceeds from the Partnership's insurance policies and the insurance and
indemnification of the Partnership's subcontractors, and is not recoverable from
the Investor Partners.
Notwithstanding the above, the Managing General Partner and any person acting
as a broker-dealer shall not be indemnified for liabilities arising under
federal and state securities laws unless:
(1) There has been a successful adjudication on the merits of each count
involving securities law violations,
(2) Such claims have been dismissed with prejudice on the merits by a court of
competent jurisdiction, or
(3) A court of competent jurisdiction approves a settlement of such claims
against a particular indemnitee and finds that indemnification of the
settlement and the related costs should be made, and the court considering
the request for indemnification has been advised of the position of the
Securities and Exchange Commission and of any state securities regulatory
authority in which securities of the Partnership were offered or sold as
to indemnification for violation of securities laws; provided however, the
court need only be advised of the positions of the securities regulatory
authorities of those states
(i) which are specifically set forth in the program agreement, and
(ii) in which plaintiffs claim they were offered or sold program units.
In any claim for indemnification for federal or state securities laws
violations, the party seeking indemnification shall place before the court the
position of the Securities and Exchange Commission and the Massachusetts
Securities Division or respective state securities division, as the case may be,
with respect to the issue of indemnification for securities law violations.
The advancement of Partnership funds to a sponsor or its affiliates for legal
expenses and other costs incurred as a result of any legal action for which
indemnification is being sought is permissible only if the Partnership has
adequate funds available and the following conditions are satisfied:
(1) The legal action relates to acts or omissions with respect to the
performance of duties or services on behalf of the Partnership, and
II-2
<PAGE>
(2) The legal action is initiated by a third party who is not a participant,
or the legal action is initiated by a participant and a court of competent
jurisdiction specifically approves such advancement, and
(3) The sponsor or its affiliates undertake to repay the advanced funds to the
Partnership, together with the applicable legal rate of interest thereon,
in cases in which such party is found not to be entitled to
indemnification.
The Partnership shall not incur the cost of the portion of any insurance which
insures the Managing General Partner against any liability as to which the
Managing General Partner is herein prohibited from being indemnified.
B. Indemnification of Additional General Partners.
Except as otherwise provided below, the Managing General Partner agrees to
indemnify each of the Additional General Partners for the amounts of
obligations, risks, losses, or judgments of the Partnership or the Managing
General Partner which exceed the amount of applicable insurance coverage and
amounts which would become available from the sale of all Partnership assets.
Such indemnification applies to casualty losses and to business losses, such as
losses incurred in connection with the drilling of an unproductive well, to the
extent such losses exceed the Additional General Partners' interest in the
undistributed net assets of the Partnership. If, however, such excess
obligations are the result of the negligence or misconduct of an Additional
General Partner, or the contravention of the terms of the Partnership Agreement
by the Additional General Partner, then the foregoing indemnification by the
Managing General Partner shall not apply as to such Additional General Partner
and such Additional General Partner shall be liable to all other Partners for
damages and obligations resulting therefrom.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated costs and expenses to be borne by
the Partnership in connection with the offering described in the Registration
Statement.
<TABLE>
<CAPTION>
<S> <C>
Registration Fee................................................. $ 3,449
Legal Fees and Expenses.......................................... 150,000
Accounting Fees and Expenses..................................... 25,000
Printing and Engraving Expenses.................................. 50,000
Blue Sky Fees and Expenses....................................... 10,000
Transfer Agent's and Registrar's Fees............................ -0-
Miscellaneous Expenses........................................... 5,000
--------
Total............................................................ $243,449
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Item 26. Recent Sales of Unregistered Securities(1)
Title of Class of Number of Approximate Price Per Units Total Dollar Commissions and
Security Investor Investors Date Sold Unit Sold Amount Sold Discounts Paid
- -------- -------- --------- ----------- --------- ------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Ken-Tex Joint Venture Accredited 22 10/93 $10,000 30.50 $305,000 $ 47,250
Non-Accredited 8 10/93 10,000 11.00 110,000 16,500
--- ------- -------- --------
Total 30 41.50 $415,000 $ 63,750
Frio Trend Joint Venture Accredited 72 01/94 10,000 55.86 $558,600 $ 88,500
Non-Accredited 29 01/94 10,000 18.00 180,000 27,000
--- ------- -------- --------
Total 101 73.86 $738,600 $115,500
Bridge-Meek Joint Venture Accredited 51 04/94 10,000 60.00 $600,000 $ 90,000
Non-Accredited 24 04/94 10,000 16.25 162,500 24,375
--- ------- -------- --------
Total 75 76.25 $762,500 $114,375
Gulf Coast I Joint Venture Accredited 29 09/94 9,800 27.00 $264,600 $ 38,220
Non-Accredited 20 09/94 9,800 16.00 156,800 23,520
--- ------- -------- --------
Total 49 43.00 $421,400 $ 61,740
Stephens/Clear Creek Joint Venture Accredited 38 11/94 9,800 32.37 $317,226 $ 47,040
Non-Accredited 21 11/94 9,800 12.50 122,500 18,375
--- ------- -------- --------
Total 49 44.87 $439,726 $ 65,415
Elliott I/Clear Creek Joint Venture Accredited 38 11/95 9,800 44.50 $436,100 $ 63,945
Non-Accredited 30 11/95 9,800 14.50 142,100 21,315
--- ------- -------- --------
Total 68 59.00 $578,200 $ 85,260
Nebo West Joint Venture Accredited 44 02/95 12,000 37.50 $450,000 $ 67,500
Non-Accredited 17 02/95 12,000 12.00 144,000 21,600
--- ------- -------- --------
Total 61 49.50 $594,000 $ 89,100
Green River Joint Venture Accredited 38 05/95 10,000 34.00 $340,000 $ 51,000
Non-Accredited 30 05/95 10,000 13.50 135,000 20,250
--- ------- -------- --------
Total 68 47.50 $475,000 $ 71,250
North Lick Creek Joint Venture Accredited 39 06/95 7,500 42.00 $315,000 $ 47,250
Non-Accredited 34 06/95 7,500 17.42 130,650 19,598
--- ------- -------- --------
Total 73 59.42 $445,650 $ 66,848
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Title of Class of Number of Approximate Price Per Units Total Dollar Commissions and
Security Investor Investors Date Sold Unit Sold Amount Sold Discounts Paid
- -------- -------- --------- ----------- --------- ------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
MIC-TLE #7/Joint Venture Accredited 47 08/95 10,000 55.75 $ 557,500 $ 83,625
Non-Accredited 29 08/95 10,000 20.25 202,500 30,375
Total --- ------- ---------- --------
76 76.00 $ 760,000 $114,000
Otter Creek Joint Venture Accredited 28 09/95 10,500 39.00 $ 409,500 $ 61,425
Non-Accredited 12 09/95 10,500 5.50 57,750 8,663
Total --- ------- ---------- --------
40 44.50 $ 467,250 $ 70,088
Ruth Joint Venture #3 Accredited 31 12/95 20,000 27.50 $ 550,000 $ 82,500
Non-Accredited 14 12/95 20,000 7.33 147,600 22,140
Total --- ------- ---------- --------
45 34.88 $ 697,600 $104,640
Helen Buck Joint Venture #1 Accredited 36 01/96 20,000 33.00 $ 660,000 $ 99,000
Non-Accredited 22 01/96 20,000 9.25 185,000 27,750
Total --- ------- ---------- --------
58 42.25 $ 845,000 $126,750
Blue Ridge Group, Inc. Accredited 48 10/93 1.00 941,900 $ 941,900 $ 94,190
Series A Preferred Stock Non-Accredited 5 10/93 1.00 12,500 12,500 1,250
--- ------- ---------- --------
Total 53 954,400 $ 954,400 $ 95,440
Blue Ridge Group, Inc. Accredited 1 08/94 0.80 125,000 $ 100,000 $ 10,000
Series B Preferred Stock Non-Accredited 0 08/94 0.80 0 0 0
--- ------- ---------- --------
Total 1 125,000 $ 100,000 $ 10,000
Blue Ridge Group, Inc. Accredited 76 12/94 3.00 282,011 $ 846,033 $126,905
Series C Preferred Stock Non-Accredited 24 12/94 3.00 160,000 480,000 72,000
--- ------- ---------- --------
Total 100 442,011 $1,326,033 $198,905
Blue Ridge Group, Inc. Accredited 29 04/96 10,000 148 $1,480,000 $185,000
Convertible Bonds Non-Accredited 26 04/96 10,000 52 520,000 65,000
--- ------- ---------- --------
Total 55 200 $2,000,000 $250,000
</TABLE>
- ---------------
(1) Each of the Recent Sales of Unregistered Securities was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act of
1933 and Regulation D, Rule 506, promulgated by the Securities and Exchange
Commission thereunder.
II-5
<PAGE>
Items 27. Exhibits
Index to and Description of Exhibits
<TABLE>
<CAPTION>
Number Description
------ -----------
<S> <C>
1.1 * Dealer-Manager Agreement
1.2 * Selling Dealers Agreement
3.1 Form of Limited Partnership Agreement (included as Appendix A
to the prospectus, which is filed as a part of this
Registration Statement)
3.2 * Articles of Incorporation of Blue Ridge Group, Inc.
3.3 * Bylaws of Blue Ridge Group, Inc.
5.1 * Opinion of Greenebaum Doll & McDonald PLLC as to legality of
the securities being registered
5.2 Opinion of Greenebaum Doll & McDonald PLLC as to various tax
matters discussed in the prospectus (included as Appendix D
to the prospectus, filed as a part of this Registration
Statement)
10.1 * Form of Drilling and Operating Agreement
10.2 * Form of Drilling and Completion Contract
10.3 * Form of Escrow Agreement with South Central Bank of Bowling
Green, Inc.
23.1 * Consent of Greenebaum Doll & McDonald PLLC (included in
Exhibit 5.1)
23.2 Consent of Samson, Robbins & Associates PLLC
</TABLE>
- ---------------
* Previously filed
II-6
<PAGE>
Item 28. Undertakings
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933 (the "Act");
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and
(c) To include any additional or changed material information on the plan
of distribution.
(2) That, for the purpose of determining any liability under the Act, each
such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
(4) Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid
by a director, officer or controlling person of the small business issuer
in the successful defense of any action, suite, or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered, the small business issuer will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and authorized this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned, in the City of Bowling Green, Commonwealth of Kentucky, on
September 30, 1997.
Blue Ridge Energy Fund 1996/1997
By: Blue Ridge Group, Inc., a Nevada
Corporation, Managing General Partner
By: /s/ Robert D. Burr
-------------------------------------
Robert D. Burr
President and Chief Executive Officer
of the Managing General Partner
In accordance with the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed by the following persons
in the capacities and on the date stated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert D. Burr
- ------------------------------ Chairman of the Board, Chief September 30, 1997
Robert D. Burr Executive Officer and Director of
the Managing General Partner
/s/ James T. Cook, Jr.
- ------------------------------ Director, Vice President-Finance September 30, 1997
James T. Cook, Jr. and Chief Financial Officer of the
Managing General Partner, (Chief
Financial and Accounting Officer)
/s/ Gregory B. Shea
- ------------------------------ Director and Vice President-Development September 30, 1997
Gregory B. Shea of the Managing General Partner
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS'
-----------------------------------
We consent to the use in the registration statement of Blue Ridge Energy Fund
1996/1997 on Form SB-2 of our report dated April 21, 1997, relating to the
consolidated balance sheets of Blue Ridge Group, Inc. as of December 31, 1996
and 1995, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the years ended December 31, 1996, 1995 and
1994. We also consent to the reference to our firm under the caption "Experts"
in the aforementioned registration statement.
/s/ Samson, Robbins & Associates, P.L.L.C.
Samson, Robbins & Associates, P.L.L.C.
Dallas, Texas
September 30, 1997
