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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment Number 2
to
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES
OF SMALL BUSINESS ISSUERS UNDER SECTION 12(b)
OR 12(g) OF THE SECURITIES ACT OF 1934
BLUE RIDGE ENERGY, INC
(Name of Small Business Issuer in Its Charter)
NEVADA 61-1306702
(State of Organization) (I.R.S. Employer Identification No.)
632 ADAMS STREET, SUITE 710, BOWLING GREEN, KY 42101
(270) 842-2421
(Address and telephone number of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock par
value $.005 per value.
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TABLE OF CONTENTS
Form 10-SB
BLUE RIDGE ENERGY, INC.
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PART I
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Item 1. Business 3
Item 2. Management's Discussion and Financial Analysis 6
Item 3. Properties 12
Item 4. Securities Ownership of Certain Beneficial Owners and Management 15
Item 5. Directors, Executive Officers, Promoters and Control Persons 16
Item 6. Executive Compensation 17
Item 7. Certain Relationships and Related Transactions 17
Item 8. Description of Securities 18
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity and
Other Shareholder Matters 19
Item 2. Legal Proceedings 20
Item 3. Changes in and Disagreements with Accountants 20
Item 4. Recent Sales of Unregistered Securities 20
Item 5. Indemnification of Directors and Officers 22
PART F/S
Financial Statements F-1
PART III
Index to Exhibits 23
OTHER
Signatures 25
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PART I
ITEM 1. BUSINESS
GENERAL DESCRIPTION
Blue Ridge Energy, Inc. ("BR Energy"), a Nevada corporation, was organized
in November, 1994, as Gem Source, Incorporated ("Gem Source"), and subsequently
changed the name of the company to Blue Ridge Energy, Inc. in May 1996. BR
Energy has offices at 632 Adams Street, Suite 710, Bowling Green, KY 42101.
BR Energy is engaged in the oil and gas business primarily in Texas,
Kentucky, New Mexico and West Virginia. BR Energy sponsors oil & gas drilling
partnerships through which it raises funds for the drilling of oil and gas wells
and participates for a 1% partnership interest as the managing general partner
of the partnerships. BR Energy also owns two drilling rigs. These rigs are used
to drill oil and gas wells for the sponsored oil and gas drilling partnerships
and also other non-affiliated oil and gas companies. The rigs are operated on
behalf of BR Energy by an affiliate, Blue Ridge Group, Inc. ("BR Group").
BR Energy also acquires direct working interest participation in oil and gas
properties. The working interest participations include exploratory and
development wells and include both operated and non-operated working interest
participations. These acquisitions are funded by a combination of the profits
earned from sponsoring oil and gas drilling programs, the profit earned from
contract drilling and from the proceeds of several private offerings of BR
Energy preferred stock.
The sponsored oil and gas drilling partnerships are governed by limited
partnership agreements which include provisions regarding capital contributions,
allocation of profits and losses, distributions to the partners, and management
of the partnership by BR Energy. Partners may be assessed for additional capital
requirements of the partnership by BR Energy. Partners failing to contribute
their pro rata share of the additional capital are subject to a 300% penalty of
the amount which the partner failed to contribute. Such penalty may be offset
against any distributions otherwise due such partner. Limited partners are not
subject to liability beyond their initial capital contributions but failure to
contribute may subject them to the 300% penalty. Additional General Partners are
subject to the debts and liabilities of the partnership, but if any Additional
General Partner is held liable for any loss or liability of the partnership,
such party shall be indemnified by the other partners to the extent of their
respective interests in the partnership.
The turnkey drilling contracts entered into by BR Energy with the sponsored
oil and gas drilling partnerships cover the drilling, completing and equipping
of the partnership wells. The material provisions of the turnkey drilling
contracts include the identification of the specific wells to be drilled, the
turnkey price, the depth of the wells to be drilled, the time of payment, the
plan for completion of the well, the responsibility of BR Energy for a sound
drilling location, and the right of the partnership to direct the stoppage of
drilling at any time prior to reaching the contract total depth to be drilled.
BR Energy intends to maintain an active role in the oil and gas industry as
an operator of oil and gas wells, a sponsor of oil and gas drilling programs, a
participant in oil and gas programs and as an independent producer of oil and
gas. A discussion of BR Energy historical development over the past three years
can be found in Item 2, Management's Discussion and Financial Analysis.
COMPETITION, MARKETS AND REGULATIONS
COMPETITION
The oil and gas industry is highly competitive in all its phases. BR Energy
encounters strong competition from other independent oil and gas producers. Many
of its competitors possess substantially greater financial resources, which they
can use to acquire economically desirable oil and gas properties. BR Energy does
not consider itself a significant factor in the domestic oil and gas industry
nor in that segment of the oil and gas industry located in Kentucky, Texas, New
Mexico or West Virginia.
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MARKETS
The price obtainable for oil and gas production from BR Energy properties is
affected by market factors beyond the control of the Company. Such factors
include the extent of domestic production, the level of imports of foreign oil
and gas, the general level of market demand on a regional, national and
worldwide basis, domestic and foreign economic conditions that determine levels
of industrial production, political events in foreign oil-producing regions, and
variations in governmental regulations and tax laws and the imposition of new
governmental requirements upon the oil and gas industry. There can be no
assurance that oil and gas prices will not decrease in the future, thereby
decreasing net revenues from BR Energy properties.
From time to time, there may exist a surplus of gas or oil supplies, the
effect of which may be to reduce the amount of hydrocarbons that BR Energy may
produce and sell, while such oversupply exists. In recent years, initial steps
have been taken to provide additional gas pipelines from Canada to the United
States. If additional Canadian gas is brought to the United States market, it
could create downward pressure on United States gas prices.
REGULATIONS
Environmental Regulation
The federal government and various state and local governments have adopted
laws and regulations regarding the control of contamination of the environment
by the oil and gas industry. These laws and regulations may require the
acquisition of permits by oil and gas operators before drilling commences,
prohibit drilling activities on certain lands lying within wilderness areas or
where pollution arises and impose substantial liabilities for pollution
resulting from operations, particularly operations near or in onshore and
offshore waters or on submerged lands. These laws and regulations may also
increase the costs of routine drilling and operation of wells. Because these
laws and regulations change frequently, the costs to BR Energy of compliance
with existing and future environmental regulations cannot be predicted.
Federal Regulation of Natural Gas
The transportation and sale of natural gas in interstate commerce is heavily
regulated by agencies of the federal government. The following discussion is
intended only as a summary of the principal statutes, regulations and orders
that may affect the production and sale of natural gas from BR Energy
properties.
FERC Orders
Several major regulatory changes have been implemented by the Federal Energy
Regulatory Commission ("FERC") from 1985 to the present that affect the
economics of natural gas production, transportation and sales. In addition, the
FERC continues to promulgate revisions to various aspects of the rules and
regulations affecting those segments of the natural gas industry that remain
subject to the FERC's jurisdiction. In April 1992, the FERC issued Order No. 636
pertaining to pipeline restructuring. This rule requires interstate pipelines to
unbundled transportation and sales services by separately stating the price of
each service and by providing customers only the particular service desired,
without regard to the source for purchase of the gas. The rule also requires
pipelines to (i) provide nondiscriminatory "no-notice" service allowing firm
commitment shippers to receive delivery of gas on demand up to certain limits
without penalties, (ii) establish a basis for release and reallocation of firm
upstream pipeline capacity and (iii) provide non-discriminatory access to
capacity by firm transportation shippers on a downstream pipeline. The rule
requires interstate pipelines to use a straight fixed variable rate design. The
rule imposes these same requirements upon storage facilities.
FERC Order No. 500 affects the transportation and marketability of natural
gas. Traditionally, natural gas has been sold by producers to pipeline
companies, which then resell the gas to end-users. FERC Order No. 500 alters
this market structure by requiring interstate pipelines that transport gas for
others to provide transportation service to producers, distributors and all
other shippers of natural gas on a nondiscriminatory, "first-come, first-served"
basis ("open access transportation"), so that producers and other shippers can
sell natural gas directly to end-users. FERC Order No. 500 contains additional
provisions intended to promote greater competition in natural gas markets.
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It is not anticipated that the marketability of and price obtainable for
natural gas production from BR Energy's properties will be significantly
affected by FERC Order No. 500. Gas produced from BR Energy's properties
normally will be sold to intermediaries who have entered into transportation
arrangements with pipeline companies. These intermediaries will accumulate gas
purchased from a number of producers and sell the gas to end-users through open
access pipeline transportation.
State Regulations
Production of any oil and gas from BR Energy's properties is affected by
state regulations. States in which BR Energy operates have statutory provisions
regulating the production and sale of oil and gas, including provisions
regarding deliverability. Such statutes, and the regulations promulgated in
connection therewith, are generally intended to prevent waste of oil and gas and
to protect correlative rights to produce oil and gas between owners of a common
reservoir. State regulatory authorities also regulate the amount of oil and gas
produced by assigning allowable rates of production to each well or proration
unit.
Employees
BR Energy has no employees. BR Energy's majority shareholder, BR Group
however, has a staff of geologists, petroleum engineers, drilling and accounting
personnel who administer the operations of BR Group and the BR Energy. As of
September 30, 1999, BR Group had 60 employees of which approximately 15 are
geological and administrative personnel. The remainder are employed in oil and
gas drilling and service activities. BR Energy pays a $20,000 per month
management fee to BR Group for administrative and overhead expenses. This
management fee is intended to cover only the expenses attributable to the 15
geological and administrative personnel, which are applicable to BR Energy's
operations. The fee has been determined on a proportional basis because specific
identification of expenses is not practicable. Management believes that this
cost allocation method of expenses is reasonable.
Annually, the Board of Directors will determine if any of the executive
officers of BR Energy (discussed on page 17) are eligible for a performance
bonus. During 1998, Robert D. Burr was paid a performance bonus of $25,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND FINANCIAL ANALYSIS
FINANCIAL OVERVIEW
During March 1996, BR Group, acquired a majority of the common stock of BR
Energy with the intent to develop it as an oil and gas exploration and
development company. In May 1996, (1) a new Board of Directors and Executive
Officers were elected, (2) the name of the company was changed from Gem Source,
Incorporated to Blue Ridge Energy, Inc., and (3) the capitalization of BR Energy
was restructured. The restructuring included a 1 for 5 reverse stock split of BR
Energy's Common Stock effective May 6, 1996, which reduced the total number
shares of common stock issued and outstanding to 526,000 shares. Additionally,
5,000,000 shares of BR Energy preferred stock were authorized at that time.
Also, in 1996, after the 1 for 5 reverse split, BR Group loaned BR Energy
$126,000 and BR Group purchased an additional 1,000,000 shares of BR Energy
Common Stock for $50,000 ($0.05 per share) bringing BR Group's its total
ownership of BR Energy at December 31, 1996 to 1,200,000 shares out of a total
of 1,526,600 shares and BR Energy common stock. The $126,000 loan was repaid in
March, 1997.
BR Energy has continued to increase its equity from 1996 through 1999 with a
series of four preferred stock private placements.
In May 1996, BR Energy authorized the issuance and sale of 300,000 shares of
Series A Preferred Stock which had a par value of $0.001 per share at a price of
$3.00 per share. In July 1996 the BR Energy acquired the assets (primarily
accounts receivable and undeveloped oil and gas leases in eastern Kentucky) of
Target Leasing, Ltd. I ("Target"), a Kentucky limited partnership by the
issuance and exchange of 265,746 shares of BR Energy's Series A Preferred Stock
based upon an agreed value of $189,190 for the assets acquired. Legal fees paid
related to the issuance of these securities of $7,500 resulted in a net value of
assets received of $181,690, which equated to a value of $.71 per share before
expenses for the Series A Preferred Stock issued. At the time of its issuance,
there was no established market for the Series A Preferred Stock. The exchange
price was arbitrarily determined by the management of BR Energy. For financial
statement purposes, the value of the Series A Preferred Stock issued and the
assets acquired were recorded at the estimated fair market value of the assets
acquired, which was considered the value more clearly determinable. The
difference between the par value of the shares issued and the value of the
property received, plus the associated expenses related to the issuance of these
securities, were recorded as additional paid in capital of BR Energy. In 1997,
BR Energy issued an additional 32,000 share of Series A Preferred Stock at a
cash price of $3.00 per share. The Series A Preferred Stock bore a 12% annual
dividend and each share was converted into one (1) share of BR Energy Common
Stock as of September 30, 1998. In total, 297,746 shares of Series A Preferred
Stock were issued by BR Energy.
In conjunction with the Target exchange offer BR Energy also authorized the
issuance and sale of up to 300,000 shares of BR Energy's Series B Preferred
Stock for $3.00 per share, cash. The Series B Preferred Stock bore a 12% annual
dividend and was convertible into two (2) shares of BR Energy Common Stock.
During 1996 and 1997, 202,374 shares of BR Energy Series B Preferred Stock were
sold for approximately $596,000 (net of expenses). In 1998 approximately 175,000
shares of the issued Series B Preferred Stock were converted into 347,232 shares
of BR Energy Common Stock.
During 1997, BR Energy authorized the issuance and sale of up to 400,000
shares of its Series C Preferred Stock for $6.00 per share, cash, and sold
169,450 shares of Series C Preferred Stock for approximately $1,016,700. The BR
Energy Series C Preferred Stock bore a 12% annual dividend and was automatically
convertible into two (2) shares of BR Energy's Common Stock effective when a
registration statement is filed with the SEC or 2 years, whichever occurs first.
At September 30, 1999 a total of 151,312 Series C shares had been converted into
302,624 shares of BR Energy common stock. As of September 30, 1999 a total of
18,138 BR Energy Series C Preferred shares remained outstanding.
In 1998, BR Energy authorized the issuance and sale of 1,000,000 shares of
BR Energy's non-voting Series D Preferred Stock for $5.00 per share, cash. In
addition, BR Energy issued one Common Stock Warrant exercisable to purchase one
share of BR Energy Common Stock for $1.00 with each share of Series D Preferred
Stock sold. The BR Energy Series D Preferred Stock bears a 12 % annual dividend
and is automatically convertible into one (1) share of BR Energy Common Stock
effective when a registration statement for BR Energy Common Stock is filed with
the SEC or two years from issuance, whichever occurs first. As of December 31,
1998, 286,450 shares of Series D Preferred Stock had been sold for approximately
$1,342,250 to 36 shareholders and 286,450 Common Stock Warrants were
outstanding. By September 30, 1999, 534,000 Shares of Series D Preferred Stock
had been sold for approximately $2,670,000 and 534,000 Common Stock Warrants
were outstanding. None of the Series D Preferred Shares have been converted into
BR Energy Common Stock.
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BR Energy has derived cash flow from the above issuance of preferred stock,
the exercise 1998 by BR Group of Warrants to purchase 2,800,000 shares of BR
Energy Common Stock at $0.05 per share for $140,000, the profits earned by BR
Energy from the sponsoring of oil and gas drilling partnerships, and the
revenues earned from the turnkey drilling contracts in the drilling of
partnership wells. This has enabled BR Energy to fund its 1% partnership
interest in the oil and gas drilling partnerships, advance funds related to the
purchase two drilling rigs, pay its operating costs and other expenses, and
participate as a direct working interest partner in thirteen (13) wells. Of the
Warrants exercised by BR Group, 1,800,000 shares were the Warrants remaining
from the 2,000,000 issued by BR Energy to BR Group in June, 1996. The remaining
1,000,000 Warrants exercised related to the 5,000,000 Warrants issued by BR
Energy to BR Group in February, 1998 exercisable at $0.05 a share.
As of December 31, 1998, BR Energy had sponsored and invested in the private
placement of seven (7) Limited Partnerships with subscriptions of approximately
$9,224,810. These Limited Partnerships sponsored by BR Energy participated in
the drilling of twenty eight (28) oil and gas wells of which ten (10) are
producing oil wells; fourteen (14) are producing gas wells; and four (4) are dry
holes. In addition to the indirect working interest owned through the Limited
Partnerships, BR Energy also participated with additional direct working
interest ownership in twelve (12) of these twenty eight (28) wells. Of the
twelve (12) wells where BR Energy participation for additional direct working
interest, one (1) is an oil well, ten (10) are gas wells, and one (1) is a dry
hole. BR Energy's total participation in these twenty eight (28) wells resulted
in five (5) and 32/100 (5.32) net wells owned by BR Energy.
In 1996, BR Energy acquired a direct working interest participation in the
drilling of a gas well in Vermilion Parish, Louisiana for $126,000. Although
initial results were promising, the operator of the well, Mescalero Energy,
Inc., filed for bankruptcy in 1997. Various contractors filed liens on the well.
The well is involved in various legal matters regarding the contractor liens as
well as the bankruptcy of the operator. Because of these legal actions, BR
Energy has been unable to determine the productive capabilities of the well, if
any, or the legal status of any production resulting from the well. Due to these
uncertainties, BR Energy recorded, in 1997, an impairment loss for the entire
amount ($126,000) invested in this project. These circumstances caused the
significant revisions to the Company's gas reserves during 1997.
BR Energy's management reviews its proved and unproved oil and gas
properties for impairment at least annually, or whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. Unproved properties normally represent the ownership of leasehold
interest in mineral properties where management intends to explore for oil and
gas by the drilling of oil and gas wells. These leasehold interests are
considered valid for the period of time as per the terms of an oil and gas
lease. This period of time is commonly referred to as the "primary term" which
is the period of time allowed for the lessee to commence drilling of a well with
the intent to establish commercial production. Unproved oil and gas properties
are periodically assessed for impairment of value, and a loss is recognized at
the time of impairment. An unproved property would likely be impaired, for
example, if a dry hole has been drilled on it and the Company has no firm plans
to continue drilling. Also, the likelihood of partial or total impairment of a
property increases as the expiration of the primary lease term approaches if
drilling activity has not commenced on the property or on nearby properties.
Impairment of individual unproved properties whose acquisition costs are
relatively significant are assessed on a property-by-property basis.
BR Energy has directly participated in the acquisition and development of
undeveloped oil and gas leases over the past three years. As previously
discussed, BR Energy acquired approximately 35,000 acres of undeveloped
leasehold interests in 1996 from Target. This acquisition accounted for
approximately 217,457 of the total of 265,746 shares of BR Energy Series A
Preferred Stock issued. These leases had an average term of two to three years.
Because of the significant decline in oil prices by early 1998, it was not
economically feasible to develop the leases. The prices continued to be
depressed even into 1999 and the leases eventually expired. Because of the
depressed oil prices BR Energy evaluated these interests held and recorded an
impairment loss of $77,405 in both 1997 and 1998 that reduced the $154,810
carrying value of the assets to zero. As of December 31, 1998, BR Energy had no
cost basis in undeveloped oil and gas leases.
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Properties are considered proved if proved reserves can be assigned to the
property. Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids that geological and engineering data
demonstrate with reasonable certainty can be recovered in future years from
known reservoirs under existing economic and operating conditions. Reservoirs
are considered to contain proved reserves if the reserves can be produced
economically and such economic production is supported by either actual
production or a conclusive formation test. Proved developed reserves are
reserves that can be expected to be recovered through existing wells with
existing equipment and operating methods. Proved undeveloped reserves are
reserves that are expected to be recovered from new wells on undrilled acreage
or from existing wells where a relative major expenditure is required for
recompletion.
Proved properties are evaluated annually for possible impairment. Impairment
is evaluated by comparing the estimated future cash flows of proved reserves to
the cost basis of the proved oil and gas properties. If the sum of the expected
future cash flows (undiscounted) is less than the carrying amount of the asset,
an impairment loss is recognized.
BR Energy uses the following assumptions regarding changing production
levels and prices to evaluate the estimated future cash flows from proved
properties. Initial production rates are based on the current rates for those
reservoirs now on production. If a decline trend was established, this trend is
used as the basis for estimating future rates. The oil and gas prices used in
calculating the expected future cash flows of the Company's proved reserves for
purposed of the impairment test calculations are based upon each specific
properties year-end prices which are held constant for future periods. BR
Energy's year end prices as of December 31, 1998 ranged from $10.07 to $12.89
for oil and from $1.58 to $1.64 for gas.
During 1998, BR Energy drilled the Homestake #1 well in Lea County, New
Mexico. BR Energy owns a 89.2% working interest in this well. This property
accounts for approximately 74% of BR Energy's proved developed reserves as of
December 31, 1998.
The end of 1997 and the beginning of 1998 saw a drastic decline in oil
prices, thereby affecting the valuation of BR Energy's oil properties per its
reserve reports at December 31, 1998. Because of the decline in oil prices, BR
Energy determined that the carrying value of some of its proved oil and gas
properties was impaired. The Company evaluated its investment of $392,380 in the
Homestake #1 re-entry well. This projection is calculated using the future
estimated reserves report with prices held constant at the December 31, 1998
year end oil price of $10.07 per barrel. This calculates to an impairment
regarding the Homestake #1 well of $205,954. Management elected to provide for a
additional impairment regarding the Homestake #1 property to allow for the
potential of a decline in production at a faster rate than as projected.
Accordingly, an impairment loss of $250,000 as related to the Homestake #1 well
was reflected in the December 31, 1998 financial statements. The total
impairment loss for 1998 was $327,405, including the $77,405 impairment loss
recognized as related to the Target undeveloped leases. The total cost of proved
oil and gas properties plus support equipment and facilities as of December 31,
1998, was $555,899.
In the latter half of 1998, BR Energy entered into an agreement with its
majority shareholder, BR Group, to acquire and develop oil and gas wells in the
Appalachian Basin of Kentucky and acquire drilling equipment. Participation in
the oil and gas wells was to be through sponsored oil and gas limited
partnerships and through direct working interest participation.
By December 31, 1998, BR Energy had total assets of approximately
$3,000,000, total liabilities of approximately $600,000 and shareholders' equity
of approximately $2,400,000. BR Energy's net income increased 154% in 1998 to
$48,000 from a net loss of $89,000 in 1997. Earnings per common share, which
take into account cash dividends paid on preferred stock, increased 55% to a
loss of $0.09 per share in 1998 from a loss of $0.20 per share in 1997. All per
share data in this report utilized the weighted average number of common shares
outstanding during the respective years as more fully described in footnote #1
to the Company's audited financial statement.
During the first half of 1999, BR Energy expanded its activities with the
purchase of two Ingersoll Rand drilling rigs and ancillary equipment for
approximately $2,100,000. Approximately 50% of these rig and equipment purchases
were from BR Group and were made at cost. These purchases were funded by
proceeds from BR Energy's Series D Preferred Stock offering and approximately
$600,000 in long-term debt to an unaffiliated entity.
During the first nine (9) months of 1999, BR Energy sponsored and invested
in the private placement of two (2) additional Limited Partnerships with
subscriptions of approximately $2,335,500. These Limited Partnerships sponsored
by BR Energy participated in the drilling of fifteen (15) oil and gas wells in
Harlan County, Kentucky, located in the Appalachian Basin. Five (5) of the wells
are producing gas wells; four (4) are gas wells in the completion phase; and six
(6) are drilling or are scheduled to be
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drilled. In addition to the indirect working interest owned through these
Limited Partnerships, BR Energy also participated with additional direct working
interest ownership in five (5) of these fifteen (15) wells. Of the five (5)
wells where BR Energy participated for additional direct working interest, all
five (5) are producing gas wells. BR Energy's total participation in these
fifteen (15) wells resulted in the addition of three (3) and 45/100 (3.45) net
wells owned by the Company. The four (4) gas wells in the completion phase and
the six (6) wells drilling or scheduled to be drilled are in an area in Harlan
County, Kentucky where a gas pipeline has not been completed as scheduled by the
gas purchaser. The date on which gas sales are anticipated from these ten (10)
wells is uncertain.
INCOME STATEMENT REVIEW
Net income was $48,000 in 1998, compared to a net loss of $89,000 in 1997.
On a per share basis, which takes into account cash dividends paid on preferred
stock, BR Energy had a net loss of $0.09 per share in 1998 as compared to a net
loss of $0.20 per share in 1997.
OPERATING REVENUES
Operating revenues totaled $2,100,000 in 1998; a 29.7% decrease from the
$3,000,000 recorded in 1997. Turnkey drilling contract sales included in
operating revenues were $1,743,200 in 1998 as compared to $2,616,843 for 1997.
Oil and gas sales included in operating revenues were $27,501 for 1998 as
compared to $28,277 for 1997. Operating revenues also includes fees earned from
the sponsoring of oil and gas drilling partnership in the form of management
fees, syndication fees, and other reimbursed costs. These fees included in
operating revenues totaled $ $316,978 for 1998 as compared to $325,791 for 1997.
The decrease in operating revenues in 1998 from 1997 was directly related to
lower sales of BR Energy's sponsored oil and gas drilling partnerships during
1998. In the opinion of BR Energy, the sale of oil and gas drilling partnership
interests was hampered by low prices for oil and gas during much of 1998.
Increased production from BR Energy's oil and gas activities was negated by
a sharp decline in oil prices in the early portion of 1998 thereby causing oil
and gas revenues to remain essentially unchanged.
DIRECT OPERATING COSTS
Direct operating costs totaled $1,400,000 in 1998, a 35.1% decrease from the
$2,200,000 incurred in 1997. Direct operating costs are the turnkey drilling
contract costs for the drilling, completion, and equipping of oil and gas wells.
The decrease in these costs are a result of the lower oil and gas prices during
1998 that caused a lesser amount of drilling funds to be raised during 1998 and
correspondingly resulted in reduced drilling costs.
OTHER OPERATING EXPENSES
Other operating expenses decreased 23.3% to $655,000 in 1998 from the
$854,000 experienced in 1997 despite an increase of 62.5%, or $127,000, in
impairment losses on oil and gas leases recorded in 1998 as compared to such
losses recorded in 1997. This decrease was accomplished primarily by improved
efficiencies in the marketing of BR Energy's Limited Partnerships which reduced
marketing costs 63.5% to $127,000 in 1998 as compared to $346,000 in 1997.
Additionally, a 43.3% reduction in General and Administrative costs to $166,000
in 1998 from $293,000 was caused by fewer of these costs being associated with
corporate activities and more being directly associated with operating
activities. General and administration costs during 1998 and 1997 consisted
primarily of management fees paid to BR Group and legal and professional fees.
Depreciation, depletion and amortization increased to $17,978 in 1998 from
$118 in 1997. This increase was primarily related to the purchase of oilfield
service equipment in 1998 plus BR Energy's portion of the depreciation as
related to its investment in two sponsored limited partnerships, Blue Ridge
Energy Production Fund Limited Partnership and the Paluxy Limited Partnership.
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OTHER INCOME (EXPENSE)
Other income (expense) increased to $95,000 in 1998 from $3,000 as a result
of interest income generated by the funds received from BR Energy's preferred
stock offering.
INCOME TAXES
BR Energy provided for income tax expense (benefit) of $25,000, $41,000 and
$88,000 in 1998, 1997 and 1996, respectively. These provisions represent
effective tax rates of 33% in each of those years. In 1998, 1997 and 1996, BR
Energy had tax deductions for Intangible Drilling Costs resulting in tax credits
of $100,000, $89,000 and $43,000, respectively. These tax credits were utilized,
whenever possible, in order to reduce the cash impact of the income taxes.
A valuation allowance for BR Energy's deferred tax asset of $35,442 in 1998
and $48,681 in 1997 (see note 8 to the accompanying audited financial
statements) was not provided due to existing taxable temporary differences
sufficient to offset the net operating loss ("NOL") carryforward. During 1998
the Company utilized $39,000 of its NOL to reduce its taxable net income. BR
Energy's net income in the first six months of 1999 has utilized the remaining
NOL carryforward.
BALANCE SHEET REVIEW
ASSETS
BR Energy's current assets increased 153% to $2,300,000 at the end of 1998
from $900,000 at the end of 1997. The increase in 1998 was generated by funds
derived from the sale of BR Energy's preferred stock, as previously discussed.
These funds were the primary source of a 387% increase in advances to BR Group
of $1,470,000 at the end of 1998 as compared to $300,000 at the end of 1997.
These interest bearing, unsecured advances were made to BR Group in order to
facilitate; (1) the acquisition and development of oil and gas properties in the
Appalachian Basin, (2) to purchase a new Ingersoll Rand RD20 rig and a TR4
drilling rig and ancillary equipment and (3) improved interest income from
available funds. BR Energy's operations were the primary source of the 31%
increase in cash to $481,000 and the 52% increase in accounts receivable from
managed limited partnerships, trade and other accounts receivable at the end of
1998 as compared to the end of 1997.
Property and equipment decreased 18% to $540,000 at the end of 1998 as
compared to $657,000 at the end of 1997 due to the recording of impairment
losses on BR Energy's oil and gas lease inventory as previously discussed.
Other assets increased 535% to $147,000 at the end of 1998 from $23,000 at
the end of 1997 primarily as a result of deposits made for the purchase of the
drilling rigs and ancillary equipment previously mentioned.
LIABILITIES
BR Energy's current liabilities increased 88% to $520,000 at year-end 1998
from $53,000 at the end of 1997 as a result of BR Energy's increased operations.
During 1998, the Company received advances from the 1998-Year End Drilling
Program as prepayment of drilling fees for services to be performed during 1999.
The amount of the advanced funds was $284,074.
In connection with the rescission of several limited partners investments in
the Company's sponsored oil and gas drilling programs, BR Energy issued
promissory notes for $205,675 at December 31, 1998.
BR Energy adopted provisions of the Statement of Financial Accounting
Standards No. 109 "Accounting for Income Taxes" (required for fiscal years
beginning after December 15,1992) which requires the use of the "liability"
method under which deferred tax assets and liabilities are recognized for their
estimated future tax consequences. The tax effect of significant temporary
differences representing these net deferred taxes was $24,000 and $3,000 at
December 31, 1998 and December 31, 1997, respectively. For further information
regarding income taxes, see Note 8 of the Financial Statements.
10
<PAGE> 11
BR Energy had no long-term debt in either of the years ended December 31,
1998 and December 31,1997.
STOCKHOLDERS' EQUITY
Total capital invested in BR Energy for Common and Preferred Stock increased
71% to $2,900,000 at year-end 1998 from $1,700,000 at the end of 1997 as a
result of the purchases of Preferred Stock by investors as previously discussed.
Approximately 151,312 shares of Series C Preferred Stock were converted into
302,624 shares of Common Stock during 1998 and the first 9 months of 1999. BR
Energy's majority shareholder, BR Group exercised options to purchase 2,800,000
shares of Common Stock for $140,000 in February 1998. For further information
regarding the capital structure of BR Energy, see Note 7 of the Financial
Statements.
Despite recording net income of $48,000, BR Energy's retained earnings
declined 144% to an accumulated deficit of $488,000 at December 31, 1998 from an
accumulated deficit of $200,000 at December 31, 1997 as the result of the
payment of cash dividends totaling $336,000 to BR Energy's Preferred
Shareholders during the year, 1998.
CAPITAL RESOURCES AND LIQUIDITY
BR Energy's current ratio (current assets / current liabilities) was 4.44 to
1 in 1998 and 17.19 to 1 in 1997. Such calculations includes the accounts
receivable from managed oil and gas drilling partnerships ($248,234 in 1998 and
$143,806 in 1997) and advances to related parties ($1,467,916 in 1998 and
$301,460 in 1997). The change in the current ratio from 1998 to 1997 was due
primarily to an increase in advances to related parties during 1998 of
$1,166,000. Such amount has been repaid in 1999 as more fully discussed in the
six months June 30, 1999 analysis. In connection with the rescission of several
limited partners investments in the Company's oil and gas drilling programs, the
Company issued promissory notes for $205,675 requiring monthly payments. Those
notes contained accelerated payment provisions and were substantially paid off
by June 30, 1999.
During the two years ended December 31, 1998 and December 31, 1997, BR
Energy has relied upon net inflows of cash from the sale of equity, supplemented
by net inflows of cash generated by its operating activities to fund the
purchase of assets and its expansion. Generally speaking, management intends to
fund further growth with similar equity transactions and improved cash flows
from operations.
As of December 31, 1998, the Company had sufficient cash to satisfy its
operating needs for a period of 90 days or longer. The Company plans to continue
to sponsor 3 to 5 limited partnership oil and gas drilling programs a year.
SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
The Company sponsors the formation of limited partnerships for the purpose
of conducting oil and gas exploration, development and production activities.
The Company serves as general partner for the partnerships and earns the
following fees or reimbursements as follows;
(1) Management and Administrative fees
(2) Reimbursement for legal, accounting and printing costs
(3) Estimated Profit from Turnkey Drilling contract
(4) Syndication costs
11
<PAGE> 12
Net Income was $293,000 for the six months ended June 30, 1999, as compared
to $133,000 for the same period in 1998. On a per share basis, which takes into
account cash dividends paid on preferred stock, BR Energy had earnings of $0.03
per share in 1999 as compared to a net loss of $0.01 per share for the same
period in 1998. Operating revenues totaled $3,500,000 during the six months
ended June 30, 1999; a 102% increase over the $1,700,000 recorded during the
same period in 1998. This increase was directly related to increased activities
by BR Energy in the sponsorship of oil and gas drilling programs during 1999 as
compared to 1998. The changes in direct operating costs, other operating
expenses and other income were directly and proportionally related to those
changes in operating revenues.
BR Energy's current assets decreased 43.5% to $667,000 at June 30, 1999, as
compared to $1,200,000 at June 30, 1998, as a result of the purchase of drilling
equipment previously discussed. Total assets increased 8.5% to $3,700,000 as a
result of additions to long-term debt associated with the acquisition of the
drilling equipment and a 45% increase in stockholders' equity to $2,800,000. The
increase in stockholders' equity resulted from the sales of BR Energy's
Preferred Stock as previously discussed.
The Company acquired two Ingersoll Rand drilling rigs and ancillary
equipment for $2,100,000 during the six months ended June 30, 1999. These
drilling rigs were purchased through the reduction of advances to related
parties (BR Group) by $1,135,000 and the issuance of long-term debt for
$600,000. The remainder of the purchase price, $365,000 was paid in cash.
As a result of BR Energy's increased operations, at June 30, 1999 the
current ratios were 6.78 to 1, a decrease of 89% from 56.86 to 1 at June 30,
1998. During the six months ended June 30, 1999 and June 30, 1998, BR Energy has
relied upon net inflows of cash from the sale of Preferred Series D Stock,
supplemented by net inflows of cash generated by its operating activities and
additions to long-term debt to fund the purchase of assets and expansion.
ITEM 3. PROPERTIES
BR Energy sponsors oil and gas drilling partnerships through which it raises
money for the drilling of oil and gas wells and participates for a 1%
partnership interest as the managing general partner. Through this 1% managing
general partner interest the Company indirectly owns 1% of the working interest
in the various wells owned by the Partnerships. BR Energy has also purchased
additional partnership interest above its normal 1% general partner interest in
certain partnerships. BR Energy has also purchased direct working interest
participation in oil and gas wells.
As of December 31, 1998, BR Energy has participated in a total of 28 wells,
of which 10 are producing oil wells, 14 are producing gas wells, and 4 are dry
holes.
PRODUCTIVE WELLS AS OF DECEMBER 31, 1998
<TABLE>
<CAPTION>
Texas Kentucky New Mexico
------- --------- ------------
<S> <C> <C> <C>
Oil Wells:
Gross Wells 9.00 0.00 1.00
Net Wells 0.98 0.00 0.67
Gas Wells:
Gross Wells 3.00 11.00 0.00
Net Wells 0.23 3.13 0.00
</TABLE>
12
<PAGE> 13
BR Energy's most valuable wells, based upon December 31, 1998 estimates of
discounted future net revenues using constant pricing and costs, are described
below.
1. Approximately 74% of total value of the Company's reserves as of December 31,
1998 are from the Homestake #1 oil well in Lea County, New Mexico. The Homestake
#1 produces from the Wilcox Sand formation. The Company owns 89.2% of the
Working Interest in the Homestake #1 which is a 66.9% Net Revenue Interest.
2. The Keegan Gibson #1 oil well is in Smith, County, Texas and produces from
the Frio and Vicksburg Sand formations, accounting for 11% of the value total of
BR Energy's reserves as of December 31, 1998. BR Energy owns 7.01% of the
Working Interest which is a 4.91% Net Revenue Interest. This interest is owned
indirectly through the Company's interest in the Paluxy Limited Partnership.
3. Eight oil wells are in Fayette County, Texas and produce from the Austin
Chalk formation, accounting for 15% of the value. BR Energy owns an average of
11.33% Working Interest which is a 7.93% Net Revenue Interest. This interest is
owned indirectly through BR Energy's interest in the Blue Ridge Energy
Production Fund Limited Partnership.
There are no other wells owned by BR Energy contributing to BR Energy's total
estimated reserve values as of December 31, 1998.
Since December 31, 1998 BR Energy has embarked on an Appalachian Basin fifteen
(15) well drilling program in Bell, Knox and Harlan counties of Kentucky. As of
September 30, 1999, nine (9) wells have been drilled. Of the nine (9), five (5)
are currently in production and selling gas, the remaining four (4) have been
drilled and are in various stages of completion. Six (6) additional wells are
drilling or scheduled to be drilled in Harlan County, Kentucky.
Since December 31, 1998 BR Energy has also sponsored a partnership for the
drilling of one well in Wharton County, Texas which is scheduled to begin
drilling in December, 1999.
The working interest owned by BR Energy either directly or indirectly
through the oil and gas partnerships is owned jointly with other working
interest partners and is subject to various royalty and overriding royalty
interests which generally range in total to between 20% - 30% on each property.
Management does not believe any of these burdens materially detract from the
value of the properties or will materially detract from the value of the
properties or materially interfere with their use.
BR Energy's headquarters are maintained in Bowling Green Kentucky in an office
owned by its affiliate, BR Group. BR Energy has a management agreement with BR
Group for the use of these facilities and the related office equipment. The
Company's books and records are maintained in this office. See Item 1 in the
general business section for a discussion of this management agreement with BR
Group.
During 1999, the Company acquired two drilling rigs. Rig #4 is a 1999 Ingersoll
Rand RD-20 which is capable of drilling 5,000 feet and Rig #2 which is an
Ingersoll Rand TR-4 capable of drilling 3,000 feet. The drilling rigs are
managed by BR Group on behalf of BR Energy and are used to drill wells for oil
and gas partnerships sponsored by BR Energy as well as on a contract basis for
other third parties.
TITLE TO PROPERTIES
Title to substantially all significant producing properties of BR Energy has
been examined. The properties are subject to royalty, overriding royalty and
other interests customary in the industry. The title to the Homestake properties
has been examined by an attorney and reflects BR Energy owns the interest as
used in the calculation of the oil reserves. As a course of normal practice the
operator of each lease has the responsibility of examining the title on behalf
of all working interest partners.
13
<PAGE> 14
PRODUCTION AND SALES PRICE
The following table summarizes the sales volumes of BR Energy's net oil and
gas production expressed in barrels of oil. Equivalent barrels of oil are
obtained by converting gas to oil on the basis of their relative energy content;
Six thousand cubic feet of gas equals one barrel of oil.
<TABLE>
<CAPTION>
NET PRODUCTION NET PRODUCTION
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------
<S> <C> <C>
Net Volumes (Equivalent Barrel) 2,051 1,414
Average Sales Price
per Equivalent Barrel $ 13.41 $ 20.00
Average Production Cost
per Equivalent Barrel
(includes production taxes) $ 13.27 $ 11.72
</TABLE>
The Average Production Costs per Equivalent Barrel represents the Lease
Operating Expenses divided by the Net Volumes in equivalent barrels. Lease
Operating Expenses includes normal operating costs such as pumper fees, operator
overhead fees, electric costs, pump repair costs, chemicals, pulling unit costs,
production taxes, etc. The 1998 amount of $13.41 is higher than the average
costs used in the calculation of the Standardized Measure of Discounted Future
Net Cash Flows because the 1998 year included significant workover costs
(pulling units and pump repairs) related to the Blue Ridge Energy Production
Fund Wells which is not expected to be incurred again in future years. In
addition, the majority of the future production is anticipated to be from the
Homestake #1 well which is anticipated to have lower lease operating costs per
barrel.
NET PROVED OIL AND GAS RESERVES
Presented below are the estimates of BR Energy's proved reserves as of
December 31, 1998 and 1997. All of BR Energy's proved reserves are located in
the United States.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------------------- -----------------------
NATURAL NATURAL
OIL GAS OIL GAS
------- ------- ------- -------
(BBLS) (MMCF) (BBLS) (MMCF)
<S> <C> <C> <C> <C>
Proved developed reserves at end of
year:
Balance at beginning of year 2,236 0 1,005 40
Extensions, discoveries
and other additions 44,067 -- 1,076 --
Revisions of previous estimates -- 4 989 (40)
Purchases of minerals in place 13,452 11 580 --
Production (1,718) (2) (1,414)
------- ------- ------- -------
Balance at end of year 58,037 13 2,236 0
======= ======= =======
</TABLE>
BBLS - Barrels of Oil
MMCF - Million cubic feet of gas
The Company has no reserve estimates for proved undeveloped reserves or
potential reserves.
14
<PAGE> 15
The following table summarizes by acquisition BR Energy's reserves and gross
and net interests in producing oil and gas wells as of December 31, 1998:
Reserves
December 31, 1998
<TABLE>
<CAPTION>
NATURAL
ACQUISITION STATES OIL GAS WELLS
------------------------------ -------- -------- -------- ------------------------
(BBLS) (MMCF) GROSS NET
<S> <C> <C> <C> <C> <C>
Interests in Sponsored
Limited Partnerships:
Blue Ridge Energy
Production Fund LP TX 8,546 13 8.0 0.95934
Paluxy LP TX 6,269 -- 1.0 0.09410
Direct Interest:
Homestake #1 Well NM 43,222 -- 1.0 0.66866
-------- -------- -------- --------
Total Interests 58,037 13 10.0 1.63741
======== ======== ======== ========
</TABLE>
There are numerous uncertainties inherent in estimating quantities of proven
reserves and in projecting the future rates of production, timing and plan of
development. Oil and gas reserve engineering must be recognized as a subjective
process of estimating underground accumulations of oil and gas that cannot be
measured in an exact way, and estimates of other engineers might differ from
those above. The accuracy of any reserve estimate is a function of the quality
of available data and of engineering and geological interpretation and judgment.
Results of drilling, testing and production subsequent to the date of the
estimate may justify revision of such estimate, and, as a general rule, reserve
estimates based upon volumetric analysis are inherently less reliable than those
based on lengthy production history. Accordingly, reserve estimates are often
different from the quantities of oil and gas that are ultimately recovered.
In estimating the oil and natural gas reserves, BR Energy, in accordance
with criteria prescribed by the Securities and Exchange Commission, has used
prices received as of December 31, 1998 without escalation, except in those
instances where fixed and determinable gas price escalations are covered by
contracts, limited to the price BR Energy reasonably expects to receive.
Future prices received for the sale of BR Energy's product may be higher or
lower than the prices used in the evaluation described above; the operating
costs relating to such production may also increase or decrease from existing
levels. The estimates presented above are in accordance with rules adopted by
the Securities and Exchange Commission.
ITEM 4. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth each stockholder who is known to the Company to be
the beneficial owner of more than 5% of the common stock of the Company at
September 30, 1999.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
<TABLE>
<CAPTION>
Title of Class Name and Address of Beneficial Owner Amount and Nature of Beneficial Owner Percent of Class
- ------------------ -------------------------------------- --------------------------------------- --------------------
<S> <C> <C> <C>
Common stock Robert D. Burr 1,104,802 (1) 19.1%
632 Adams Street - Suite 710
Bowling Green, KY 42101
Common stock Russell Vera 1,104,802 (2) 19.1%
632 Adams Street - Suite 110
Bowling Green, KY 42101
</TABLE>
15
<PAGE> 16
(1) Mr. Burr's beneficial ownership is attributable to his trust's ownership of
26.27% of BR Group which owns 72.6% of BR Energy. Included in this table
are warrants held by BR Group to purchase 4,000,000 shares of BR Energy at
$0.05 per share. Said warrants expire March 31, 2003.
(2) Mr. Vera's beneficial ownership is attributable to his trust's ownership of
26.27% of BR Group which owns 72.6% of BR Energy. Included in this table
are warrants held by BR Group to purchase 4,000,000 shares of BR Energy.
Said warrants expire March 31, 2003.
(3) Mr. Burr and Mr. Vera (Mr. Burr's son-in-law) have disclaimed beneficial
interest in each others respective shares.
The table below sets forth the beneficial stock ownership of all directors and
officers of BR Energy as of September 30, 1999.
<TABLE>
<CAPTION>
Title of Class Name and Address of Beneficial Owner Amount and Nature of Beneficial Owner Percent of Class
- ------------------ -------------------------------------- --------------------------------------- --------------------
<S> <C> <C> <C>
Common stock Robert D. Burr, President 1,104,802 (1) 19.1%
Common stock All Directors and Officers as a group 1,104,802 19.1%
(3 persons)
</TABLE>
(1) Mr. Burr's beneficial ownership is attributable to his trust's ownership of
26.27% of BR Group which in turn owns 72.6% of BR Energy. Included in this
table are warrants held by BR Group to purchase and additional 4,000,000
shares of BR Energy at $0.05 a share. Said warrants expire on March 31,
2003.
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Set forth below is certain information as of September 25, 1999 regarding
the directors and executive officers of BR Energy. These individuals are not
employed directly by BR Energy. Their compensation is included under a
management agreement with BR Group as more fully discussed on page 20.
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
POSITION(S) WITH
NAME AGE BR ENERGY AND OTHER COMPANIES
----------------- ----- ------------------------------------------------------
<S> <C> <C>
Robert D. Burr 53 Chairman of the Board of BR Energy,
President and Chief Executive Officer
J. Thomas Cook Jr. 47 Director of BR Energy, Senior Vice President-
Finance and Chief Financial Officer
Gregory B. Shea 37 Director of BR Energy; Senior Vice President-Operations
</TABLE>
ROBERT D. BURR, age 53, Bowling Green, Kentucky, has been Chairman of the Board,
President and Chief Executive Officer of BR Energy since May, 1996. 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 with
a myriad of companies. He has been the Chairman of the Board, President and
Chief Executive Officer of BR Group, since August 1993.
J. THOMAS COOK, JR., age 47, Bowling Green, Kentucky, has been Vice President,
Finance and a Director of BR Energy since May 1996. Mr. Cook also serves as
Secretary and Treasurer of BR Energy. He is an accountant by training, and a
graduate of Stephen F. Austin State University, Nacogdoches, Texas. From 1983 to
1989, he was Vice President, Finance and Treasurer of the Shanley Corp., Dallas,
Texas, a publicly owned oil and gas exploration company. From 1990 through 1994,
he served in various financial capacities for a group of Florida based companies
with interests in Caribbean resorts, stores, and manufacturer of bath products.
Since June 1, 1995, he has been a Director and the Vice-President - Finance and
Chief Financial Officer of BR Group. In 1997, Mr. Cook became the brother-in-law
of Mr. Burr.
GREGORY B. SHEA. age 37, Bowling Green, Kentucky, has been a Director and Senior
Vice President-Operations of BR Energy since August, 1999. Mr. Shea has been
President of Blue Ridge Builders, Inc. a residential/commercial builder in
Bowling Green, Kentucky and a majority-owned subsidiary of BR Group since
November 1994 and he was elected a Director of BR Group in February, 1995. Since
that time, Mr. Shea has managed BR Group's Kentucky drilling and field
operations. He is a native of Plano, Texas. Between 1981 and 1986, he attended
the University of North Texas. Mr. Shea is a son-in-law of Mr. Burr.
16
<PAGE> 17
ITEM 6. EXECUTIVE COMPENSATION
The following compensation was paid directly to the executives of BR Energy
during the years ended December 31, 1998 and 1997:
DECEMBER 31, DECEMBER 31,
1998 1997
------------- --------------
Robert D. Burr - Bonus $ 25,000 $ 0
There was no compensation paid directly to the executives of BR Energy
during the nine (9) months ended September 30, 1999.
See Part I Item 1 (page 5 herein) for additional information regarding BR
Energy's executive officers and their compensation.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
BR Group owns approximately 54.1% of the Common Stock of BR Energy as of
September 30, 1999. BR Energy has entered into several transactions with BR
Group as follows.
STOCK TRANSACTIONS
In March 1996, BR Group acquired 1,000,000 shares of BR Energy's common
stock from BR Energy for $0.10 a share, or $100,000. In June 1996, after a five
to one share reverse stock split BR Group acquired another 1,000,000 shares of
common stock from BR Energy for $0.05 per share, or $50,000 and warrants to
purchase an additional 2,000,000 shares of common stock at $0.05 per share.
During February 1998 BR Energy granted warrants to BR Group to purchase an
additional 5,000,000 shares of restricted common stock at $0.05 per share.
In June 1997, BR Group exercised warrants to purchase 200,000 restricted
shares of BR Energy's common stock. In June 1998, BR Group exercised warrants to
purchase 2,800,000 restricted shares of BR Energy's common stock. At September
30, 1999, BR Group owned warrants to purchase an additional 4,000,000 shares of
common stock at $0.05 per share.
In October, 1996, the Smackover/Woodbine I Joint Venture sponsored by BR
Energy, and the West Currie Joint Venture sponsored by an affiliate, agreed to
purchase 117,500 shares of BR Energy Series B Preferred Stock at $3.00 per
share. As of December 31, 1998, 117,500 shares of Series B Preferred Stock had
been issued under this arrangement. These Series B Preferred shares were
exchanged for 235,000 shares of BR Energy Common shares during 1998.
LOANS FROM BR GROUP
During 1996, BR Group loaned $126,000 to BR Energy for the purchase of a
working interest in a gas well in Vermillion Parish, Louisiana. This loan was
repaid during the first quarter of 1997.
During 1997, BR Energy purchased for $250,000 the JW Harris #1C oil well
Frio County, Texas from two shareholders of BR Group. The shareholders were the
Longhorn Trust and the Argyle Trust, which were Trusts established under
Kentucky law for the benefit of the families of Robert Burr and Russell Vera
respectively. Russell Vera is a son-in-law of Robert Burr. Subsequent to this
purchase, the well's performance deteriorated significantly and the selling
parties agreed to buy the well back from BR Energy of the original purchase
price of $250,000. This $250,000 was paid in March, 1998.
During 1998, BR Energy agreed to acquire drilling equipment and acquire and
develop oil and gas properties in the Appalachian Basin of Kentucky with BR
Group. In order to facilitate the acquisition of these properties and equipment,
BR Energy loaned approximately $1,300,000, bearing interest at 12% per annum, to
BR Group. As of June 30, 1999, approximately $98,989 in interest had been earned
under this arrangement and the entire balance had been repaid via BR Group's
drilling of 10 gas wells located in various counties in eastern Kentucky for BR
Energy and the sale of a drilling rig and ancillary drilling equipment, at cost,
to BR Energy.
17
<PAGE> 18
CONTRACTUAL AGREEMENTS
Since June of 1996, BR Energy has entered into turnkey drilling contracts
with BR Group for the acquisition, drilling, completing and equipping of oil and
gas wells for BR Energy and the nine (9) oil and gas drilling partnerships that
BR Energy has sponsored. A summary of the amounts involved in these contracts is
as follows:
Year Ended December 31, 1996 $ 1,308,070
Year Ended December 31, 1997 $ 2,227,560
Year Ended December 31, 1998 $ 1,428,382
Nine Months Ended September 30, 1999 $ 2,417,000
The terms of the contracts or transactions that the Company entered into
with BR Group were on terms that were no more favorable than those obtained from
unaffiliated parties.
Additionally, BR Group provides various management, administrative,
accounting and geological services for BR Energy for a fee of $20,000 per month.
BR Energy also reimbursed BR Group for direct costs paid on its behalf which
were less than $10,000 in 1998 and less than $10,000 during the first nine (9)
months of 1999.
During 1997 and 1998, the BR Energy had no significant customers or
suppliers, other than its major stockholder, (BR Group) who could individually
have a significant adverse effect on the Company's operations.
ITEM 8. DESCRIPTION OF SECURITIES
BR Energy is authorized to issue two classes of stock that are designated,
respectively, common and preferred stock. The total number of shares of stock,
which BR Energy initially had the authority to issue, was 20,000,000 shares
designated as common stock. As of September 30, 1999 BR Energy was authorized to
issue 25,000,000 shares of stock, 20,000,000 designated as common stock and
5,000,000 designated as preferred stock.
COMMON STOCK
As of September 30, 1999, there were 5,788,994 shares of BR Energy's Common
Stock, which has a par value of $0.005 per share issued and outstanding. Each
holder of the Common Stock shall be entitled to one vote for each share of the
Common Stock standing in his name on the books of BR Energy. Series A and B
Preferred Stock had all been converted to BR Energy common stock by September
30, 1999.
SERIES C PREFERRED STOCK
During 1997, the Company authorized the issuance and sale of 400,000 shares of
Series C preferred stock ("Series C Stock") which has a par value of $0.001 per
share at $6.00 per share. The Series C Stock bears a 12% per annum dividend
payable monthly. Each share of the Series C Stock is to be converted
automatically into two (2) shares of common stock effective when a registration
statement for the common stock is filed with the SEC or two years from issuance,
whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series C Stock are entitled to
receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of common stock, but subordinate to the
liquidation preference of the Series A stock and Series B stock, the amount of
$6.00 per share plus all unpaid dividends on such share of each share of Series
C Stock then held by the shareholder. As of September 30, 1999, there were
18,138 shares of Series C Stock outstanding and 151,312 shares of Series C Stock
had been converted to 302,624 shares of BR Energy common stock.
SERIES D PREFERRED STOCK
During 1998, BR Energy authorized the issuance and sale of 1,000,000 shares
of Series D Preferred Stock ("Series D Stock") which has a par value of $0.001
per share at a price of $5.00 per share. The Series D Stock bears a 12% per
annum dividend payable monthly. Each share of the Series D Stock shall be
converted automatically into one (1) share of Common Stock effective when a
registration statement for the Common Stock is filed with the SEC or two years
from issuance, whichever occurs first.
In the event of any liquidation, dissolution or winding up of BR Energy,
either voluntary or involuntary, the holders of Series D Stock shall be entitled
to receive, prior and in preference to any distribution of any assets or surplus
funds of BR Energy to the holders of Common Stock, the amount of $5.00 per share
plus all unpaid dividends on such share of each share of Series D Stock then
held by the shareholder. At September 30, 1999, there were 533,712 shares of
Series D Stock issued and outstanding.
18
<PAGE> 19
SERIES D COMMON STOCK WARRANTS
During 1998, the Company authorized the issuance and sale of 1,000,000
Series D Common Stock Warrants ("Warrants") exercisable to purchase one share of
the Company's Common Stock for $1.00. One Warrant is to be issued with each
share of Series D Preferred Stock sold. At September 30, 1999, there were
533,712 Series D Warrants issued and outstanding.
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
MARKET INFORMATION
The Common Stock of BR Energy is traded OTC "Pink Sheets" with "BREY" as its
stock symbol. The range of high and low bid information as quoted by
bigcharts.com for each quarter since January 1, 1997 is as follows:
<TABLE>
<CAPTION>
HIGH BID LOW BID
----------- -----------
<S> <C> <C>
March 31, 1997 No Activity No Activity
June 30, 1997 No Activity No Activity
September 30, 1997 No Activity No Activity
December 31, 1997 No Activity No Activity
March 31, 1998 No Activity No Activity
June 30, 1998 $ 1.75 $ .125
September 30, 1998 $ 1.375 $ 1.0625
December 31, 1998 $ 1.0312 $ 0.4062
March 31, 1999 $ 0.50 $ 0.4062
June 30, 1999 $ 3.50 $ 2.25
September 30, 1999 $ 4.00 $ 2.00
</TABLE>
There was no public market activity in the BR Energy common stock from
January 1, 1997 until May 7, 1998. The only common stock transactions during
this period were private purchases of the Company's common stock by BR Group.
See Item 7 STOCK TRANSACTIONS.
These quotations reflect inter dealer prices, without retail mark-up,
markdown or commission, and may not represent actual transactions.
The Preferred Stock of BR Energy is not traded on any exchange and there is
no trading market for the BR Energy Preferred Stock.
DIVIDEND INFORMATION
No cash dividends have been declared or paid on BR Energy's Common Stock
since BR Energy's inception. BR Energy does not plan to pay cash dividends in
the future. BR Energy's dividend policy will be subject to any restrictions
placed on it in connection with any debt offering or significant long-term
borrowing.
SHAREHOLDER INFORMATION
As of September 30, 1999, there are approximately 450 shareholders of BR
Energy's Common Stock.
19
<PAGE> 20
ITEM 2. LEGAL PROCEEDINGS
During the normal course of business, BR Energy receives inquires from
various federal and state regulatory agencies. These inquiries are quite
infrequent and responded to promptly by BR Energy. Occasionally, questions may
occur with regard to misunderstandings or misinterpretations of programs offered
by the Company or promotional material being used by the Company in connection
with the sale of its sponsored oil and gas drilling partnerships. As of
September 30, 1999, management of BR Energy is not aware of any significant
regulatory issues presently outstanding.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
Recent sales of unregistered BR Energy Preferred Stock
<TABLE>
<CAPTION>
TITLE OF CLASS OF NO. OF APPROX. PRICE PER SHARES TOTAL AMT. COMMISSIONS &
SECURITY INVESTOR INVESTORS DATE SOLD SHARE SOLD SOLD DISCOUNTS PAID
--------------- ------------- ------------ ------------ ------------ --------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Series A(1) Accredited 34 7/96 to $ 0.71 198,664 $ 138,437 $ 7,500(4)
Preferred Stock Non-Accredited 27 12/96 67,082 50,753 0
--- -------- ---------- ------------
61 265,746 $ 189,190 $ 7,500
Series A(2) Accredited 4 6/97 to $ 3.00 26,000 78,000 $ 0
Preferred Stock Non-Accredited 2 8/97 6,000 18,000 0
--- -------- ---------- ------------
6 32,000 96,000 $ 0
Series B(3) Accredited 16 8/96 to $ 3.00 181,691 $ 545,073 $ 28,886(5)
Preferred Stock Non-Accredited 9 8/97 20,683 52,049 9,307
--- -------- ---------- ------------
25 202,374 $ 597,122 $ 38,193
Series C Accredited 29 5/97 to $ 6.00 71,750 $ 430,500 $ 116,512(5)
Preferred Stock Non-Accredited 29 12/97 97,700 586,200 143,846
--- -------- ---------- ------------
58 169,450 $1,016,700 $ 260,358
Series D Accredited 108 6/98 to $ 5.00 498,700 $2,493,500 $ 374,025(5)
Preferred Stock Non-Accredited 9 9/99 35,250 176,250 26,437
--- -------- ---------- ------------
117 533,950 $2,669,750 $ 400,462(5)
</TABLE>
(1) Represents exchange for Target Leasing, Ltd. I partnership interests
(2) Sold for Cash
(3) Includes approximately 117,500 of Series B Preferred Stock sold to the
Smackover/Woodbine I Joint Venture sponsored by BR Energy and the West
Currie Joint Venture sponsored by an affiliate. The proceeds received by BR
Energy as related to these two transactions were approximately $352,500.
(4) Represents legal expenses
(5) Substantially all commissions related to the recent sales of unregistered
securities have been paid to Ridgemont Securities, Inc. (an affiliated
broker/dealer of BR Energy). The Company does not utilize the services of
an underwriter in connection with its security offerings.
20
<PAGE> 21
RECENT SALES OF UNREGISTERED BR ENERGY COMMON STOCK.
During the year ended 1998 and nine months ended September 30, 1999, certain
preferred stockholders converted their BR Energy preferred stock, into BR Energy
common stock at various conversion ratios. A detail of such transaction is
contained in the following table and in Part I, item 8 of this registration
statement.
<TABLE>
<CAPTION>
Security No. of Investors Sale year Exchange Year Common Shares Issued Commission or Discount Paid
- ------------------ ----------------- --------- ------------- ----------------------- ---------------------------
<S> <C> <C> <C> <C> <C>
Series A Preferred 67 1996/97 1998 297,746 None
Series B Preferred 177 1996/97 1998 404,748 None
Series C Preferred 58 1997 1999 302,624 None
</TABLE>
During the period March 1996 through September 30, 1999, BR Group acquired a
total of 3,132,575 shares of restricted common stock of BR Energy through cash
purchases and exercise of warrants at varying prices. Such transactions are
explained in more detail in Part I, item 7 of this registration statement and in
the following table.
EXERCISE OF WARRANTS TO PURCHASE BR ENERGY COMMON STOCK
The Board of Directors of BR Energy authorized the issuance of warrants to BR
Group in June 1996 and February 1998 for 2,000,000 and 5,000,000 shares of
common stock. The exercise price was $.05 and they expire, if not exercised, on
June 30, 2001 and March 31, 2003, respectively. There were no trades in the BR
Energy common stock from March 1996, (when BR Group acquired control of BR
Energy) until May 1998. There was only nominal activity in the BR Energy common
stock during May and June 1998 at an average of $.125 shares. Management
determined that a reasonable valuation for the warrants was $.05 per share based
on the restricted nature of the common stock and the lack of any significant
trading volume. The following table discloses the aforementioned warrant
transactions:
<TABLE>
<CAPTION>
Date Warrant Number of Warrants Warrants Issued to Date Warrant Warrant Exercise Number of Common Total
Issued Issued or Exercised by Exercised Price Stock Issued Consideration
- -------------- ------------------- -------------------- -------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
6/96 2,000,000 BR Group $ 0.05
2/98 5,000,000 BR Group 0.05
(200,000) BR Group 6/97 0.05 200,000(1) $ 10,000
(2,800,000) BR Group 6/98 0.05 2,800,000(2) 140,000
---------- -----------------
Warrants 4,000,000 $ 0.05 Expiration Date
Outstanding ========== ================= 3/31/03
at June 30, 1999
</TABLE>
(1) Warrants exercised by BR Group.
(2) Warrants exercised by BR Group.
BR Energy also authorized the issuance of 2,000,000 warrants in May of 1998 for
purchase of its common stock at $1.00. These warrants expire, if not exercised,
May 31, 2003. One million of these warrants were attached to the Series D
Preferred Stock offered by the Company in June 1998.
The B. U. Ranch #1 limited partners (a BR Energy sponsored oil and gas drilling
partnership) received warrants attached to their partnership units to buy
697,500 shares after one year of BR Energy common stock at $3.00 for a period of
two years expiring September 30, 2002. During the one year holding period (Rule
144) the partners will continue to receive their portion of the revenues
generated from the production of the well. Once the holding period is over, the
partner's interest will revert back to managing general partner.
21
<PAGE> 22
In connection with the sponsorship of the 1998 Year End Drilling Program, Ltd.,
BR Energy authorized the issuance of warrants to purchase 500,000 shares of BR
Energy common stock at $3.00. These warrants were issued January 1, 2000. These
warrants will expire on January 1, 2003.
RECENT SALES OF UNREGISTERED SECURITIES SALES OF OIL AND GAS PARTNERSHIP
INTERESTS
<TABLE>
<CAPTION>
COMMISSIONS
CLASS OF NO. OF SALES PRICE PER UNITS TOTAL AMT. & DISCOUNTS
TITLE OF SECURITY INVESTOR INVESTORS PERIOD UNIT SOLD SOLD PAID
- ----------------------- -------------- ------------ -------- ------------ ------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Blue Ridge Energy Accredited 38 8/96 to $ 12,000 68.725 $ 825,000 $ 123,750
Production Fund LP Non-Accredited 33 10/96 36.000 432,000 64,800
--- -------- -------------- ----------
Total 71 101.750 $ 1,257,000 $ 188,550
Smackover/ Accredited 31 10/96 to $ 10,000 79.370 $ 793,750 $ 119,062
Woodbine LP Non-Accredited 19 2/97 35.500 355,000 53,250
--- -------- -------------- ----------
Total 50 114.870 $ 1,148,750 $ 172,312
Paluxy LP Accredited 36 2/97 to $ 12,950 46.050 $ 596,347 $ 89,452
Non-Accredited 33 8/97 31.750 411,163 61,674
--- -------- -------------- ----------
Total 69 77.800 $ 1,007,510 $ 151,126
Home Stake LP Accredited 29 7/97 to $ 14,775 58.250 $ 860,644 $ 129,097
Non-Accredited 30 10/97 29.750 439,556 65,933
--- -------- -------------- ----------
Total 59 89.000 $ 1,300,200 $ 195,030
Sherman/Moore LP Accredited 31 10/97 to $ 18,500 62.250 $ 1,151,625 $ 172,744
Non-Accredited 19 11/97 25.250 467,125 70,069
--- -------- -------------- ----------
Total 50 87.500 $ 1,618,750 $ 242,813
Phillips/ Accredited 45 2/98 to $ 15,000 57.350 $ 860,250 $ 129,037
Blue Ridge LP Non-Accredited 24 4/98 25.000 375,000 56,250
--- -------- -------------- ----------
Total 69 82.350 $ 1,235,000 $ 185,287
1998 Year End LP Accredited 68 12/98 to $ 15,000 113.420 $ 1,701,300 $ 255,195
Non-Accredited 9 3/99 10.420 156,300 23,445
--- -------- -------------- ----------
Total 77 123.840 $ 1,657,600 $ 278,640
Harlan County LP Accredited 63 3/99 to $ 9,000 103.000 $ 927,000 $ 139,050
Non-Accredited 13 4/99 22.000 198,000 29,700
--- -------- -------------- ----------
Total 76 125.000 $ 1,125,000 $ 168,750
Cumberland Gap LP Accredited 85 4/99 to $ 6,000 170.250 $ 1,021,500 $ 153,225
Non-Accredited 17 7/99 31.500 189,000 28,350
--- -------- -------------- ----------
Total 102 201.750 $ 1,210,500 $ 181,575
</TABLE>
The Company claimed exemptions from the registration of the aforementioned
securities (preferred stock, common stock and partnership interest) under
Regulation D, Rule 506 of the Securities Act of 1933.
Registration under the Securities Act of 1933 of the securities issued in
the transactions described above was not required because such securities were
issued in transactions not involving any "public offering" within the meaning of
Section 4(2) of said Act. In the foregoing instances, the shares of the
preferred stock, common stock and units of partnership were issued to a limited
group of purchasers, each of whom was furnished with, or had broad access to,
information concerning the Company, the purchasers acquired the securities for
investment only and not with a view to the distribution thereof. Each of the
certificates, representing the preferred and common shares of BR Energy, has
been stamped with a legend restricting the transfer.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each Director and each Officer of the Registrant has been indemnified,
against certain liabilities which they may incur in their capacities, by BR
Energy pursuant to its Articles of Incorporation.
22
<PAGE> 23
PART F/S
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Audited Financial Statements for December 31, 1998 and 1997 F - 2
Independent Auditors' Report F - 3
Balance Sheets F - 4 - 5
Statements of Income F - 6
Statements of Changes in Stockholders' Equity F - 7
Statements of Cash Flows F - 8
Notes to Financial Statements F - 9
Unaudited Condensed Financial Statements for June 30, 1999 and 1998 F - 22
Balance Sheets F - 23 - 24
Statements of Income F - 25
Statements of Cash Flows F - 26
Notes to Financial Statements F - 27
</TABLE>
Financial statement schedules are not applicable, are not required or
included in financial statements and notes thereto.
The unaudited interim financial statements for the most recent fiscal quarter
are incorporated by reference to BR Energy's Form 10-QSB for the quarter ended
September 30, 1999.
F-1
<PAGE> 24
BLUE RIDGE ENERGY, INC.
FINANCIAL STATEMENTS
DECEMBER 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
F-2
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF BLUE RIDGE ENERGY, INC. BOWLING
GREEN, KENTUCKY
WE HAVE AUDITED THE ACCOMPANYING BALANCE SHEETS OF BLUE RIDGE ENERGY, INC. AS OF
DECEMBER 31, 1998 AND 1997, AND THE RELATED STATEMENTS OF INCOME, STOCKHOLDERS'
EQUITY AND CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997. THESE
FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR
RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON
OUR AUDITS.
WE HAVE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES
ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY
MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT FAIRLY, IN
ALL MATERIAL RESPECTS, THE FINANCIAL POSITION OF BLUE RIDGE ENERGY, INC. AS OF
DECEMBER 31, 1998 AND 1997, AND THE RESULTS OF ITS OPERATIONS AND CASH FLOWS FOR
THE YEARS THEN ENDED IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES.
/s/ SAMSON, ROBBINS & ASSOCIATES, P.L.L.C. SAMSON, ROBBINS & ASSOCIATES,
P.L.L.C. DALLAS, TX MARCH 17, 1999, EXCEPT AS TO NOTE 9, WHICH IS AS OF
SEPTEMBER 23, 1999.
F-3
<PAGE> 26
BLUE RIDGE ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 480,952 $ 367,455
Short Term Investments (Note 3) 19,925 19,925
Accounts Receivable:
Managed Limited Partnerships (Note 2) 248,234 143,806
Trade and Other 91,691 78,952
Advances to Related Parties (Notes 4 and 9) 1,467,916 301,460
------------ ------------
Total Current Assets 2,308,718 911,598
PROPERTY AND EQUIPMENT, NET (Notes 5 and 9) 540,068 657,639
OTHER ASSETS, NET (Note 6) 146,556 23,465
------------ ------------
TOTAL ASSETS
$ 2,995,342 $ 1,592,702
============ ============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-4
<PAGE> 27
BLUE RIDGE ENERGY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 84,952 $ 49,029
Drilling Advances (Note 2) 284,074 --
Notes Payable 150,675 4,000
------------- -------------
TOTAL CURRENT LIABILITIES 519,701 53,029
DEFERRED INCOME TAX LIABILITY (Note 8) 64,232 40,207
------------- -------------
TOTAL LIABILITIES 583,933 93,236
COMMITMENTS AND CONTINGENCIES -- --
(Notes 4, 6 and 9)
STOCKHOLDERS' EQUITY:
Convertible Preferred Stock, $0.001 par value;
5,000,000 shares authorized; 464,308 and 669,570 shares
issued and outstanding at December 31, 1998
and 1997, respectively (Notes 4 and 7) 464 669
(liquidation preferences of 2,440,000 in 1998 and
$2,960,000 in 1997)
Common Stock, $0.005 par value; 20,000,000
shares authorized; 5,171,578 and 1,726,600 shares
issued and outstanding at December 31, 1998
and 1997, respectively (Notes 4 and 7) 25,858 8,633
Additional Paid-In Capital 2,873,341 1,690,021
Accumulated Deficit (488,254) (199,857)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,411,409 1,499,466
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,995,342 $ 1,592,702
============= =============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-5
<PAGE> 28
BLUE RIDGE ENERGY, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
OPERATING REVENUES:
Turnkey Contract Sales $ 1,743,211 $ 2,616,843
Management Fees 182,618 165,667
Syndication Fees 30,006 49,547
Reimbursed Costs 104,354 110,577
Oil and Gas Sales 27,501 28,277
------------- -------------
Total Operating Revenues 2,087,690 2,970,911
OPERATING COSTS AND OTHER EXPENSES:
Turnkey Contract Costs (Note 4) 1,428,382 2,227,560
Lease Operating Costs 27,225 16,578
Depreciation, Depletion and Amortization 17,978 118
Dry Hole Costs 16,817 10,464
Impairment of Oil & Gas Properties (Notes 1 and 5) 327,405 203,413
Marketing Costs 126,588 346,415
General and Administrative Costs (Note 4) 166,104 293,535
------------- -------------
Total Operating Costs 2,110,499 3,098,083
------------- -------------
OPERATING (LOSS) (22,809) (127,172)
OTHER INCOME (EXPENSE):
Interest Income 82,181 7,085
Other, net 13,441 (10,409)
------------- -------------
Total Other Income (Expense) 95,622 (3,324)
------------- -------------
INCOME (LOSS) BEFORE TAXES 72,813 (130,496)
Income Tax Provision (Benefit) (Note 8) 24,762 (41,134)
------------- -------------
NET INCOME (LOSS) $ 48,051 $ (89,362)
============= =============
(LOSS) PER COMMON SHARE (NOTE 1):
Basic $ (0.09) $ (0.20)
Diluted $ (0.09) $ (0.20)
------------- -------------
Weighted Average Common Shares Outstanding 3,062,868 1,576,200
------------- -------------
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-6
<PAGE> 29
BLUE RIDGE ENERGY, INC.
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, 1996 319,933 $ 320 1,526,600 $ 7,633 $ 670,953 $ 120,952 $ 799,858
Stock Warrants Exercised 200,000 1,000 9,000 10,000
Sale of Stock (Notes 4 and 7):
Preferred Stock:
Series A 31,996 32 95,969 96,001
Series B 148,191 148 157,926 158,074
Series C 169,450 169 756,173 756,342
Dividends Paid on
Preferred Stock (Note 7) (231,447) (231,447)
Net (Loss) (89,362) (89,362)
--------- ------ --------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1997 669,570 669 1,726,600 8,633 1,690,021 (199,857) 1,499,466
Stock Warrants Exercised 2,800,000 14,000 126,000 140,000
Sale of Stock (Notes 4 and 7):
Series D Preferred Stock 267,700 268 1,066,102 1,066,370
Conversion of Preferred Stock (471,362) (471) 644,978 3,225 (3,984) (1,230)
Retirement of Preferred Stock (1,600) (2) (4,798) (4,800)
Dividends Paid on
Preferred Stock (Note 7) (336,448) (336,448)
Net Income 48,051 48,051
--------- ------ --------- ------- ---------- ---------- ----------
BALANCE DECEMBER 31, 1998 464,308 $ 464 5,171,578 $25,858 $2,873,341 $ (488,254) $2,411,409
========= ====== ========= ======= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-7
<PAGE> 30
BLUE RIDGE ENERGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $ 48,051 $ (89,362)
Adjustments to Reconcile Net Income (Loss) to
Net Cash Flows from Operating Activities:
Depreciation, Depletion and Amortization 17,978 118
Impairment Loss 344,222 203,413
(Gain) on Sale of Oil and Gas Properties (75,000) --
Increase (Decrease) in Deferred Income Taxes 24,025 (2,633)
Increase (Decrease) in Income Taxes Payable 737 (45,519)
(Increase) in Accounts Receivable (117,167) (1,607)
Increase (Decrease) in Accounts Payable
and Accrued Liabilities 319,260 (237,599)
------------- -------------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES 562,106 (173,189)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) in Advances to Affiliate (1,166,456) (609,008)
(Increase) in Other Assets (125,020) (15,464)
Proceeds from Sale of Oil and Gas Properties 325,000 --
Purchase of Oil and Gas Properties and Equipment (492,700) (549,507)
------------- -------------
NET CASH (USED) IN INVESTING ACTIVITIES (1,459,176) (1,173,979)
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to Notes Payable 205,675 --
Payments of Notes Payable (59,000) --
Proceeds from Exercise of Stock Warrants 140,000 10,000
Issuance of Preferred Stock 1,066,370 1,010,417
Retirement of Preferred Stock (4,800) --
Cost of Conversion of Preferred Stock (1,230) --
Payments of Preferred Stock Dividends (336,448) (231,447)
------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,010,567 788,970
------------- -------------
NET INCREASE (DECREASE) IN CASH 113,497 (558,198)
CASH AT BEGINNING OF PERIOD 367,455 925,653
------------- -------------
CASH AT END OF PERIOD $ 480,952 $ 367,455
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid for Interest $ -- $ --
============= =============
Cash Paid for Income Taxes $ -- $ 45,519
============= =============
</TABLE>
The accompanying notes are an integral part
of these financial statements.
F-8
<PAGE> 31
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Blue Ridge Energy, Inc., (the Company), a Nevada corporation, was organized in
November 1994, as Gem Source, Incorporated (Gem Source), and subsequently
changed the name of the Company to Blue Ridge Energy, Inc. in May 1996. The
Company has offices at 632 Adams Street, Suite 710, Bowling Green, Kentucky,
42101 (See Note 4).
The Company is engaged in the oil and gas business primarily in Texas, Kentucky,
New Mexico and West Virginia. The Company sponsors oil and gas drilling
partnerships through which it raises money for the drilling of oil and gas wells
and participates for a 1% partnership interest as the managing general partner
of the oil and gas exploration partnerships.
The Company also acquires direct working interest participation in oil and gas
properties. The participation includes exploratory and development wells and
includes both operated and non-operated working interest participation. These
acquisitions are funded by a combination of the profits earned from sponsoring
oil and gas drilling programs, the profit earned from contract drilling and from
the proceeds of private offerings of preferred stock.
The Company intends to maintain an active role in the oil and gas industry as an
operator of oil and gas wells, a sponsor of oil and gas drilling programs, a
participant in oil and gas programs, and as an independent producer of oil and
gas.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Drilling Operations
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 complete. 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
Oil and gas revenue from working interests the Company owns is recognized at the
point of sale.
Managed Limited Partnerships
The Company sponsors privately offered limited partnerships for which it serves
as the Managing General Partner. The purpose of these partnerships is to acquire
and develop oil and gas leases. The partnerships enter into turnkey drilling
contracts with the Company to acquire leases, drill, complete and equip, if
warranted, the oil and gas prospects. The Company receives direct compensation,
reimbursement of costs and expenses, and revenues related to turnkey drilling
contracts. The Company normally participates for 1% of the Limited Partnerships
as the managing General Partner.
The Company follows the industry practice of pro rata consolidation of its
investments in these partnerships. Accordingly, the Company records on its
financial statements its pro rata share of the assets, liabilities, revenues and
expenses of each partnership.
In connection with the sponsorship of oil and gas partnerships, the Company
receives a management fee of approximately 5% of the capital contributions. Such
fees are credited to income as earned.
F-9
<PAGE> 32
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
Asset Lives (years)
-------------------------- -------------
<S> <C> <C>
Machinery and Equipment 10
Autos and Trucks 5
Furniture and Fixtures 10
</TABLE>
The Company follows the successful effort 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 are capitalized. These capitalized
costs include;
(1) the costs of acquiring mineral interest in properties,
(2) costs to drill and equip exploratory wells that find proved reserves,
(3) costs to drill and equip development wells and
(4) costs for support equipment and facilities used in oil and gas
producing activities.
These costs are depreciated, depleted or amortized on the unit of productions
method, based on estimates of recoverable proved developed oil and gas reserves.
Costs to drill exploratory wells that do not find proved reserves, geological
and geophysical costs, and costs of carrying and retaining unproved properties
are expensed as dry hole costs.
The costs of acquiring unproved properties are capitalized as incurred and
carried until the property is reclassified as a producing oil and gas property,
or considered impaired. The Company annually assesses its unimproved properties
to determine whether they have been impaired. If the results of this assessment
indicates impairment, a loss is recognized by providing a valuation allowance.
When an unproved property is surrendered, the costs related thereto are charged
to the applicable valuation allowance, if adequate, or charged as a loss to
current operations.
Upon disposition or retirement of property and equipment other than oil and gas
properties, the cost and related accumulated depreciation are removed from the
accounts and the gain or loss thereon, if any, is credited or charged to income.
The Company recognizes the gain or loss on the sale of either a part of a proved
oil and gas property or of an entire proved oil and gas property constituting a
part of a field upon the sale or other disposition of such. The unamortized cost
of the property or group of properties, a part of which was sold or otherwise
disposed of, is apportioned to the interest sold and interest retained on the
basis of the fair value of those interests.
Impairment of Long-Lived Assets
The Company follows the provisions of SFAS 121 -- "Accounting for the Impairment
of Long-Lived Assets 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 effort method of accounting. Whenever events
or circumstances indicate the carrying value of those assets may not be
recoverable, an impairment loss for proved properties and capitalized
exploration and development costs is recognized. In the Company's review, if the
sum of the expected future cash flows is less than the carrying amount of the
assets an impairment loss is recognized. An impairment loss for unproved
properties is recorded when the Company has no future plans for development or
it is near the expiration of the lease terms. At December 31, 1998 and 1997 the
Company determined that the carrying value of some of its oil and gas properties
and leases should be impaired, resulting in impairment losses of $327,405 and
$203,413, respectively. See footnote 5 for further disclosure.
F-10
<PAGE> 33
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Earnings Per Common Share
The Company's basic earnings per common share ("Basic EPS") are based on the
weighted average number of common shares outstanding during the respective
periods. The income available to common shareholders is computed after deducting
dividends on the preferred stock. The convertible preferred stock and
outstanding stock warrants are considered anti-dilutive and therefore excluded
from the earnings per share calculations.
The following is a reconciliation of the numerators and denominators used in the
calculation of Basic EPS for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
BASIC EPS COMPUTATION - 1998
------------------------------------ -----------
<S> <C>
Net Income $ 48,051
Less: Preferred Stock Dividends (336,448)
-----------
Loss Available to Common Stockholders $ (288,397)
===========
</TABLE>
<TABLE>
<CAPTION>
DATES SHARES FRACTION WEIGHTED
OUTSTANDING OUTSTANDING OF PERIOD AVERAGE SHARES
------------------------------------ ------------- ---------- ---------------
<S> <C> <C> <C>
January 1-December 31 1,726,600 100.0% 1,726,600
Stock Warrants Exercised July 31 2,800,000 41.9% 1,173,699
Preferred Stock Converted September 30 644,978 52.2% 162,569
------------- ---------------
5,171,578
Weighted Average Shares 3,062,868
===============
Basic EPS (Loss) $(0.09)
</TABLE>
<TABLE>
<CAPTION>
BASIC EPS COMPUTATION 1997
------------------------------------ -----------
<S> <C>
Net (Loss) $ (89,362)
Less: Preferred Stock Dividends (231,447)
-----------
Loss Available to Common Stockholders $ (320,809)
===========
</TABLE>
<TABLE>
<CAPTION>
DATES SHARES FRACTION WEIGHTED
OUTSTANDING OUTSTANDING OF PERIOD AVERAGE SHARES
------------------------------------ ------------- ---------- ---------------
<S> <C> <C> <C>
January 1 - December 31 1,526,600 100.0% 1,526,600
Stock Warrants Exercised October 1 200,000 24.8% 49,600
------------- ---------------
1,726,600
Weighted Average Shares 1,576,200
===============
Basic EPS (Loss) $ (.20)
</TABLE>
Supplemental Earnings Per Share Data
The following supplemental information presents the Company's pro forma earnings
per share assuming that all preferred stock was converted to common stock as of
December 31, 1998:
<TABLE>
<S> <C>
Net Income $ 48,051
Preferred stock dividends paid (336,448)
Pro forma preferred stock dividends avoided 336,448
------------
Pro forma Net Income available for Common Stockholders $ 48,051
============
Weighted average shares outstanding at 12/31/98 3,062,868
Pro forma conversion of all preferred stock as of the
Beginning of 1998 660,916
------------
Pro forma weighted average shares outstanding assuming
Conversion of all preferred stock 3,723,784
============
Pro forma earnings per common share $ .01
============
</TABLE>
F-11
<PAGE> 34
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
Income taxes are provided based (under the Liability Method) on earnings
reported for financial statement purposes. The provision for income taxes differ
from the amounts currently payable because of temporary differences (primarily
intangible drilling costs) in the recognition of certain income and expense
items for financial reporting and tax reporting purposes.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash on
hand and cash on deposit.
2. AFFILIATED OIL AND GAS PARTNERSHIPS
The Company provides turnkey drilling services for the various oil and gas
partnerships, which it sponsors. The Company serves as general partner and as
such has full and exclusive discretion in the management and control of the
partnerships. Fees earned for these drilling services, including the sale of
leases to the partnerships, amounted to $1,743,211 and $2,616,843 during 1998
and 1997, respectively. The Company receives a management fee from the
partnerships for its services in connection with the selection of the joint
venture prospects and the initial operations of the joint venture in addition to
syndication fees for funds raised directly by the Company. Management fees and
syndication fees earned during the year ended December 31, 1998 and 1997
amounted to $212,624 and $215,214, respectively.
In connection with the sponsorship of oil and gas partnerships, the Company is
reimbursed by the partnerships for certain operating and overhead costs incurred
on their behalf, including filing fees, legal fees, fees, accounting fees,
printing costs and other miscellaneous expenses. These reimbursements totaled
$104,354 and $110,577 during the years ended December 31, 1998 and 1997,
respectively.
Included in the Company's financial statements are contributions made to the
various Company sponsored oil and gas partnerships, less the applicable loss
generated by these partnerships relative to the Company's percentage ownership.
The Company has consolidated, on a pro-rata basis, the amounts associated with
these investments to the appropriate asset, liability, income and expense
accounts.
Certain directly related expenditures, (legal, syndication, printing, etc.) are
capitalized as the Company's investment in these partnerships. The investment
account is subsequently adjusted for the Company's percentage of operating
profits or losses. Production revenue and expenses related to the Company's
interest in the partnerships are recognized on an accrual basis.
At December 31, 1998 and 1997, the various partnerships owed the Company
$315,508 and $228,929, respectively, for amounts due the Company for turnkey
drilling services, syndication fees and reimbursement of fees and expenses
incurred on behalf of the partnerships. At year end 1998 and 1997, this was
offset by the amount owed by the Company for capital contributions totaling
$67,274 and $85,123, respectively resulting in a net receivable due from the
partnerships of $248,234 and $143,806, respectively.
During 1998, the Company received advances from the 1998-Year End Drilling
Program as prepayment of drilling fees for services to be performed by the
Company during 1999. At December 31, 1998 the amount of the advanced funds was
approximately $284,074.
3. SHORT TERM INVESTMENTS
During 1996, the Company purchased $19,925 of precious metals as a short-term
investment. This amount is reflected in Current Assets in the accompanying
financial statements. The Company follows the policy of carrying its short-term
investment in precious metals at cost. The current market value of such precious
metals is approximately $15,000. This decline in value is deemed by the Company
to be temporary and immaterial, accordingly no adjustment has been recorded in
the accompanying financial statements.
F-12
<PAGE> 35
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. RELATED PARTY TRANSACTIONS
Stock Transactions
The Company was organized in November 1994, as a Nevada corporation under the
name of Gem Source, Incorporated (Gem Source). In 1995, Gem Source sold
1,633,000 shares for $0.001 per share under Rule 504, an exemption under
Regulation D from full registration with the SEC.
Blue Ridge Group, Inc. (BRG) acquired control of Gem Source in March 1996 when
BRG acquired 1,000,000 shares of restricted stock at $0.10 a share. In May 1996,
the 2,633,000 outstanding common shares were the subject of a 5 to 1 reverse
split and the name of the Company was changed from Gem Source, Incorporated to
Blue Ridge Energy, Inc. In June 1996, BRG acquired another 1,000,000 of
restricted common stock from the company treasury for $0.05 a share, or $50,000.
In May 1996, BR Energy authorized the issuance and sale of 300,000 shares of
Series A Preferred Stock which had a par value of $0.001 per share at a price of
$3.00 per share. In July 1996 BR Energy acquired the assets (primarily accounts
receivable and undeveloped oil and gas leases in eastern Kentucky) of Target
Leasing, Ltd. I ("Target"), a Kentucky limited partnership, by the issuance and
exchange of 265,746 shares of BR Energy's Series A Preferred Stock based upon an
agreed value of $189,190 for the assets acquired. Legal fees paid related to the
issuance of these securities of $7,500 resulted in a net value of assets
received of $181,690, which equated to a value of $.71 per share before expenses
for the Series A Preferred Stock issued. At the time of its issuance, there was
not established market for the Series A Preferred Stock. The exchange price was
arbitrarily determined by the management of BR Energy. For financial statement
purposes, the value of the Series A Preferred Stock issued and the assets
acquired were recorded at the estimated fair market value of the assets
acquired, which was considered the value more clearly determinable. The
difference between the par value of the shares issued and the value of the
property received, plus the associated expenses related to the issuance of these
securities, were recorded as additional paid in capital of BR Energy. In 1997,
BR Energy issued an additional 32,000 shares of Series A Preferred Stock at a
cash price of $3.00 per share. The Series A Preferred Stock bore a 12% annual
dividend and each share was converted into one (1) share of BR Energy Common
Stock as of September 30, 1998. In total, 297,746 shares of Series A Preferred
Stock were issued by BR Energy.
In October 1996, the Smackover/Woodbine I Joint Venture sponsored by the
Company, and the West Currie Joint Venture sponsored by Fortune Exploration of
Kentucky, Inc. agreed to purchase shares of BRE Series B Preferred Stock at
$3.00 per share at a rate of 800 shares per participating interest. As of
December 31, 1998, 117,500 shares of Series B Preferred Stock had been issued
under this arrangement.
During 1997, the Company's majority shareholder, Blue Ridge Group, Inc.,
exercised warrants to purchase 200,000 shares of the Company's common stock at
$0.05 per share or $10,000. Subsequently, Blue Ridge Group, Inc. distributed
these shares to investors in one of its joint ventures.
During, 1998, the Company's Board of Directors approved the issuance of warrants
to Blue Ridge Group, Inc. to purchase 5,000,000 shares of Blue Ridge Energy,
Inc. restricted common stock at $0.05 per share. Blue Ridge Group, Inc.
previously held warrants to purchase 1,800,000 shares of restricted common stock
at $0.05 per share.
During 1998, the Company's majority shareholder, Blue Ridge Group, Inc.
exercised warrants to purchase 2,800,000 shares of the Company's common stock at
$0.05 per share, or $140,000. Subsequently, Blue Ridge Group, Inc. distributed
890,427 of these shares to investors in several of its partnerships.
As of December 31, 1998, there are 5,171,578 shares of common stock issued and
outstanding. A total of 3,110,575 shares are held by BRG and the remainders of
2,061,003 shares are held by approximately 300 shareholders, 40 of which are
original stockholders of the Company.
F-13
<PAGE> 36
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Advances from Related Parties
During 1996, the Company's majority shareholder, Blue Ridge Group, Inc.,
advanced $126,000 to the Company for the purchase of a working interest in a
well in Louisiana. This advance was repaid during the first quarter of 1997.
During 1997, the Company purchased for $250,000 the J.W. Harris 1C oil well from
two shareholders of the Company's majority shareholder, Blue Ridge Group, Inc.
Subsequent to this purchase, the well's performance deteriorated significantly
and the selling parties agreed to buy the well back from the company for the
original purchase price of $250,000. This $250,000 has been recorded in Advances
to Affiliates at December 31, 1997 and was paid in full in March of 1998.
During 1998, the Company agreed with Blue Ridge Group, Inc. to acquire and
develop oil and as oil and gas properties in the Appalachian Basin of Kentucky.
In order to facilitate the acquisition of these properties the Company advanced
approximately $1,300,000, bearing interest at 12% per annum, to Blue Ridge
Group, Inc. As of December 31, 1998 approximately $73,400 in interest had been
earned under this arrangement and approximately $200,000 had been repaid leaving
a remaining balance under this arrangement of approximately $1,100,000. During
the first quarter of 1999, Blue Ridge Group, Inc. has repaid an additional
$500,000 of this balance (See Note 9 - Subsequent Events).
Since June of 1996, the Registrant has entered into turnkey drilling contracts
with Group for the acquisition, drilling, completing and equipping of oil and
gas wells for the Registrant and the Limited Partnerships that the registrant
has sponsored. A summary of the amounts involved in these contracts is as
follows:
Year Ended December 31, 1997 $ 2,227,560
Year Ended December 31, 1998 $ 1,428,382
Additionally, Blue Ridge Group, Inc. provides various management,
administrative, accounting and geological services for the Company at a rate of
$20,000 per month which has been determined on a proportional basis because
specific identification of expenses is not practicable. Management believes that
this cost allocation method of expenses is reasonable. Blue Ridge Energy also
reimbursed Blue Ridge Group for direct costs paid on its behalf. As of December
31, 1998 and 1997, approximately $0 was due and payable to Blue Ridge Group
under this arrangement.
See footnote 9 for additional disclosure regarding the Company's line of credit
with Blue Ridge Group, Inc.
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consisted of the following at December
31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Unproved oil & gas properties 0 657,429
Proved oil & gas properties 458,929 0
Support equipment and facilities 96,971 0
---------- ----------
555,899 657,429
Furniture and Fixtures 364 364
---------- ----------
556,263 657,793
Less Accumulated Depreciation 16,195 154
---------- ----------
$ 540,068 $ 657,639
========== ==========
</TABLE>
Depreciation expense was $16,048 and $52 during the years ended 1998 and 1997,
respectively.
During 1996, the Company acquired approximately $154,810 of non-producing
leasehold interests from Target Leasing, Ltd. I in exchange for preferred stock.
The value assigned the acreage was based upon management's intention to utilize
these properties for future drilling efforts. These leases had an average term
of two to three years and were evaluated annually to determine the appropriate
carrying value. During 1998 and 1997, the Company evaluated these interests and
recorded an impairment of $77,405 each year for these leases. As of December 31,
1998, the remaining carrying value of these leases is $0. (See Note 4).
During 1996, the Company purchased an interest in drilling the Brookshire #1
well in Vermilion Parish, Louisiana from Mescalero Energy, Inc. for $126,000. In
1997, the operator of the well, Mescalero Energy filed for bankruptcy. As a
result of the operator's difficulties, the Company was unable to determine the
present productive capabilities of the well or the legal status of production
resulting from the well. Therefore, the Company recorded an impairment loss for
the entire amount invested in this project or $126,000 during 1997.
F-14
<PAGE> 37
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During 1998, the Company evaluated its investment of $392,380 in the Homestake
#1 re-entry well. The estimated undiscounted future cash flows from the
Homestake #1 well are estimated to be $186,426. This projection is calculated
using the reserves as projected with prices held constant at the December 31,
1998 year end oil price of $10.07 per barrel. This calculates to an impairment
regarding the Homestake #1 well of $205,954. Management elected to provide for a
additional impairment regarding the Homestake #1 property to allow for the
potential of a decline in production at a faster rate than as projected.
Accordingly, an impairment loss of $250,000 as related to the Homestake #1 well
was reflected in the December 31, 1998 financial statements.
6. OTHER ASSETS
At December 31, 1998 and 1997 other assets consist of the following:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Drilling rig deposit (Note 7) $ 65,000 $ -0-
Investment in limited partnerships 71,387 22,816
(Note 2)
Organization costs, net of amortization
of $320 and $240 80 160
Deposit 10,089 489
---------- ----------
$ 146,556 $ 23,465
========== ==========
</TABLE>
7. COMMITMENTS AND CONTINGENCIES
Commitments
The Company has agreed to automatically convert all shares of preferred stock
outstanding when a registration statement for the Company's Common stock is
filed with the SEC, or June 30, 2000, whichever comes first.
During the latter part of 1998, the Company committed to, and placed a deposit
of $65,000 on, the purchase of a new Ingersoll Rand RD20 air-powered drilling
rig with a total purchase price of approximately $657,000. During March 1999 the
Company made an additional down payment of $200,000 and obtained financing for
the remaining balance due of approximately $392,000 at an interest rate of 8.75%
for five years.
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 $2 million
limited to $1 million per occurrence. The Company believes it is adequately
insured for public liability and property damage to others with respect to its
operations. However, such insurance may not be sufficient to protect the Company
against liability for all consequences of well disasters, extensive fire damage,
or damage to the environment. The Company has never been fined or incurred
liability for pollution or other environmental damage in connection with its
operations.
As of December 31, 1998, the Company had no significant customers or suppliers
(other than its major stockholder, Blue Ridge Group, Inc. and its affiliates as
more fully described in footnote 4) who 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.
F-15
<PAGE> 38
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of stock that are designated,
respectively, common and preferred stock. The total number of shares of stock,
which the company initially had the authority to issue, was 20,000,000 shares
being designated as common stock. As of December 31, 1998, the Company was
authorized to issue 25,000,000 shares of stock - 20,000,000 being designated as
common stock and 5,000,000 shares designated as preferred stock.
Common Stock
The Company was organized in November, 1994, as a Nevada corporation under the
name of Gem Source, Incorporated (Gem Source) with an initial issuance of
1,000,000 shares of Common Stock with a par value of $0.001 per share. In 1995,
Gem Source had an offering of 1,633,000 shares under Rule 504, an exemption
under Regulation D from full registration with the SEC to bring the total
outstanding shares of common stock to 2,633,000.
Blue Ridge Group, Inc. (BRG) acquired control of Gem Source in March 1996, when
BRG acquired 1,000,000 shares of stock at $0.10 a share from existing
stockholders of the Company. In May 1996, the 2,633,000 outstanding common
shares were the subject of a 1 to 5 reverse split resulting in outstanding
shares of 526,600 with a par value of $0.005 per share. The name of the Company
was also changed from Gem Source to Blue Ridge Energy, Inc. Additionally, in
June 1996, BRG acquired another 1,000,000 of restricted common stock from the
Company treasury for $0.05 a share, or $50,000 and options to purchase an
additional 2,000,000 shares of restricted common stock at $0.05 per share. The
effective term of these warrants is from June 30, 1996 through June 30, 2001.
During February 1998, the Company granted warrants to Blue Ridge Group, Inc. to
purchase additional 5,000,000 shares of restricted common stock at $0.05 per
share. The effective term of these warrants is from March 31, 1998 through March
31, 2003.
During 1997, the Company's majority shareholder, Blue Ridge Group, Inc.,
exercised options to purchase 200,000 shares of the Company's common stock at
$0.05 per share or $10,000. Subsequently, Blue Ridge Group, Inc. distributed
these shares of stock to investors in one of its partnerships.
During 1998, the Company's majority shareholder, Blue Ridge Group, Inc.
exercised options to purchase 2,800,000 shares of the Company's common stock at
$0.05 per share, or $140,000. Subsequently, Blue Ridge Group, Inc. distributed
890,427 of these shares to investors in several of its partnerships.
During May 1998, the Company authorized the issuance of 2,000,000 shares of
Common Stock Warrants ("Warrants"). In conjunction with the sale of the
Company's Series D Preferred Stock 1,000,000 of these warrants have been
reserved and one warrant will be issued with each share of Series D Preferred
Stock sold and will be exercisable to purchase Blue Ridge Energy, Inc. common
stock at $1.00 per share between May 31, 1998 and May 31, 2003. As of December
31, 1998 there were 267,700 warrants issued and outstanding, none of which had
been exercised.
F-16
<PAGE> 39
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Series A Preferred Stock
In May 1996, BR Energy authorized the issuance and sale of 300,000 shares of
Series A Preferred Stock which had a par value of $0.001 per share at a price of
$3.00 per share. In July 1996 the BR Energy acquired the assets (primarily
accounts receivable and undeveloped oil and gas leases in eastern Kentucky) of
Target Leasing, Ltd. I ("Target"), a Kentucky limited partnership, by the
issuance and exchange of 265,746 shares of BR Energy's Series A Preferred Stock
based upon an agreed value of $189,190 for the assets acquired. Legal fees paid
related to the issuance of these securities of $7,500 resulted in a net value of
assets received of $181,690, which equated to a value of $.71 per share before
expenses for the Series A Preferred Stock issued. At the time of its issuance,
there was no established market for the Series A Preferred Stock. The exchange
price was arbitrarily determined by the management of BR Energy. For financial
statement purposes, the value of the Series A Preferred Stock issued and the
assets acquired were recorded at the estimated fair market value of the assets
acquired, which was considered the value more clearly determinable. The
difference between the par value of the shares issued and the value of the
property received plus the associated expenses related to the issuance of these
securities was recorded as additional paid in capital of BR Energy. In 1997, BR
Energy issued an additional 32,000 share of Series A Preferred Stock at a cash
price of $3.00 per share. The Series A Preferred Stock bore a 12% annual
dividend and each share was converted into one (1) share of BR Energy Common
Stock as of September 30, 1998. In total, 297,746 shares of Series A Preferred
Stock were issued by BR Energy.
Series B Preferred Stock
In conjunction with the Target exchange offer BR Energy also authorized the
issuance and sale of up to 300,000 shares of BR Energy's Series B Preferred
Stock for $3.00 per share, cash. The Series B Preferred Stock bore a 12% annual
dividend and was convertible into two (2) shares of BR Energy Common Stock.
During 1996 and 1997, 202,374 shares of BR Energy Series B Preferred Stock were
sold for approximately $596,000 (net of expenses). In 1998 approximately 175,000
shares of the issued Series B Preferred Stock were converted into BR Energy
Common Stock.
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 Common Stock, but subordinate to the
liquidation preference of the Series A Stock, the amount of $3.00 per share plus
all unpaid dividends on such share of each share of Series B Stock then held by
the shareholder.
At December 31, 1998 and 1997 there were 27,158 and 202,374 shares of Series B
Stock issued and outstanding.
Series C Preferred Stock
During 1997, the Company authorized the issuance and sale of 400,00 shares of
Series C Preferred Stock ("Series C Stock") which has a par value of $0.001 per
share at $6.00 per share. The Series C Stock bears a 12% per annum dividend
payable monthly. Each share of the Series C Stock shall be converted
automatically into two (2) shares of Common Stock effective when a registration
statement for the Common Stock is filed with the SEC or two years from issuance,
whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series C Stock shall be entitled
to receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock, but subordinate to the
liquidation preference of the Series A Stock and the Series B Stock, the amount
of $6.00 per share plus all unpaid dividends on such share of each share of
Series C Stock then held by the shareholder.
At December 31, 1998 and 1997, there were 169,450 shares of Series C Stock
issued and outstanding. The total amount received from the sale of this stock
was $1,016,700 less expenses paid of $260,358.
F-17
<PAGE> 40
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Series D Preferred Stock
During 1998, the Company authorized the issuance and sale of 1,000,000 shares of
Series D Preferred Stock ("Series D Stock") which has a par value of $0.001 per
share at $5.00 per share. The Series D Stock bears a 12% per annum dividend
payable monthly. In addition, the Company will issue one Common Stock Warrant
exercisable to purchase one share of the Company's Common Stock for $1.00 with
each share of Series D Stock sold. Each share of the Series D Stock shall be
converted automatically into one (1) share of Common Stock effective when a
registration statement for the Common Stock is filed with the SEC or two years
from issuance, whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series D Stock shall be entitled
to receive, prior and in preference to any distribution of any assets or surplus
funds of the Company to the holders of Common Stock, but subordinate to the
liquidation preference of the Series A Stock, the Series B Stock and the Series
C Stock, the amount of $5.00 per share plus all unpaid dividends on such share
of each share of Series D Stock then held by the shareholder.
At December 31, 1998, there were 267,700 shares of Series D Stock issued and
outstanding. The total amount received from the sale of this stock was
$1,338,500 less expenses paid of $272,130.
A summary of the common and preferred stock account at December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
SHARES PAR VALUE
---------------------------- ----------------------------
PAID-IN
AUTHORIZED ISSUED PER SHARE TOTAL CAPITAL
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Common 20,000,000 5,171,578 $ 0.005 $ 25,858 $ 973,599
Series B
Preferred 300,000 27,158 $ 0.001 27 77,467
Series C
Preferred 400,000 169,450 $ 0.001 169 756,173
Series D
Preferred 400,000 267,700 $ 0.001 268 1,066,102
SUMMARY:
COMMON 20,000,000 5,171,578 $ 0.005 $ 25,858 973,599
---------- ---------- ---------- ---------- ----------
PREFERRED 5,000,000 464,308 $ 0.001 $ 464 $1,899,742
---------- ---------- ---------- ---------- ----------
</TABLE>
8. INCOME TAXES
The Company adopted the provisions of SFAS 109 (required for fiscal years
beginning after December 15, 1992) which requires the use of the "liability"
method under which deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
The following reconciles the Company's Federal and State income tax provision
with the expected provision obtained by applying statutory rules to pre-tax
income:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Expected Tax Provision (Benefit) $ 28,575 $ (50,241)
Effect of Progressive Tax Rates (3,813) 9,107
---------- ----------
Tax Provision (Benefit) $ 24,762 $ (41,134)
========== ==========
</TABLE>
The tax effect of significant temporary differences representing the net
deferred tax liability at December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Net Operating Loss Carryforward $ (35,442) $ (48,681)
Intangible Drilling Costs 99,674 88,888
---------- ----------
Net Deferred Tax Liability $ 64,232 $ 40,207
========== ==========
</TABLE>
F-18
<PAGE> 41
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Income Tax Expense (Benefit) consists of the following components:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Currently Payable (Refundable):
Federal Income Tax $ -- $ (31,124)
State Income Tax 737 (7,377)
---------- ----------
737 (38,501)
Deferred Provision (Credit):
Federal Income Tax 20,181 (2,212)
State Income Tax 3,844 (421)
---------- ----------
24,025 (2,633)
---------- ----------
Total Tax Expense (Benefit) $ 24,762 $ (41,134)
---------- ----------
</TABLE>
During 1998 the Company filed a refund claim with the IRS to carry back a
portion of its 1997 net operating loss ($122,000). Accordingly, the Company
recorded a tax refund of $31,124 in the 1997 financial statements.
At December 31, 1998, the Company had a net operating loss carryforward of
approximately $104,000 to offset future taxable income. This net operating loss
carryforward will expire in 2018 unless utilized sooner.
9. SUBSEQUENT EVENTS
During March of 1999, the Company made an additional down payment of $200,000
and took delivery of its new Ingersoll Rand RD20 air powered drilling rig
financing the balance due on the rig, of approximately $392,000, with a note
payable over five years.
During the first quarter of 1999, Blue Ridge Group, Inc. reduced the balance on
its line of credit with the Company from approximately $1,100,000 to
approximately $600,000. This was accomplished through; (1) cash payments of
approximately $100,000 for the purchase of the aforementioned drilling rig and
ancillary equipment, (2) the sale of, at cost, approximately $250,000 in
additional drilling equipment required for the new rig's operation and (3) the
drilling and completion of three wells in the Appalachian Basin for the Company
whereby the Company received a 25% Working Interest in each well for a total of
$135,000. Also, during the first quarter of 1999, Blue Ridge Group, Inc. began
the drilling of several other wells, which will further contribute to the
reduction of this receivable.
During the first quarter of 1999, the Company entered into negotiations with
Premier Energy, LLC to purchase its 50% interest in Stone Mountain Energy, LLC
of Kingsport, Tennessee. Stone Mountain Energy, LLC owns a 150-mile natural gas
pipeline project, which will run from Harlan County in eastern Kentucky to
Knoxville, Tennessee. Subsequent to June 30, 1999, these negotiations were
terminated with no agreement being reached.
10. SUPPLEMENTAL INFORMATION ABOUT OIL AND GAS PRODUCING PROPERTIES (UNAUDITED)
Costs incurred in oil and gas acquisition, exploration and development
activities for the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(UNAUDITED)
1998 1997
---------- ----------
<S> <C> <C>
Acquisition of properties
- Proved
- Unproved $ 75,000 $ 265,770
Exploration costs 16,817 0
Development costs 225,350 0
Company's share of equity method investees
Of property acquisition, exploration and
Development 192,350 93,400
</TABLE>
F-19
<PAGE> 42
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Results of Operations for Oil and Gas Producing Activities for the Years ended
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(UNAUDITED)
1998 1997
---------- ----------
<S> <C> <C>
Oil and gas sales $ 27,501 $ 28,277
Gain on sale of oil and gas properties 0 0
Gain on sale of oil and gas leases 75,000 0
Production costs (27,225) (16,578)
Exploration expenses (16,817) (10,464)
Depreciation, depletion, and amortization
And valuation provision (343,405) (203,531)
---------- ----------
(284,946) (202,296)
Income tax credit 105,430 68,780
---------- ----------
Results of operations for oil and gas
Producing activities (excluding corporate
Overhead and financing cost) $ (179,516) $ (133,516)
========== ==========
</TABLE>
Reserve Quantities
The following estimates of proved and proved developed reserve quantities and
related standardized measure of discounted net cash flow are estimates only, and
do not purport to reflect realizable values or fair market values of the
Company's 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, these estimates are expected to
change, as future information becomes available. All of the Company's reserves
are located in the Untied States.
Proved reserves are estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment, and operating methods.
<TABLE>
<CAPTION>
(UNAUDITED)
OIL (BBLS) GAS (MCF)
---------- ----------
<S> <C> <C>
Reserves--December 31, 1996 1,005 40
Revisions 989 (40)
Purchases of minerals in place 580 --
Extensions 1,076 --
Production (1,414) --
---------- ----------
Reserves--December 31, 1997 2,236 0
Revisions -- 4
Purchases of minerals in place 13,452 11
Extensions 44,067 --
Production (1,718) (2)
---------- ----------
Reserves--December 31, 1998 58,037 13
---------- ----------
Proved Developed Reserves
December 31, 1996 1,005 40
========== ==========
December 31, 1997 2,236 0
========== ==========
December 31, 1998 58,037 13
========== ==========
</TABLE>
F-20
<PAGE> 43
BLUE RIDGE ENERGY, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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>
(UNAUDITED)
AS OF AS OF
DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Future cash inflows $ 618,246 $ 49,532
Future production costs (1) (122,981) (21,036)
Future income taxes (28,440) (3,871)
-------------- --------------
Future net cash flows 466,825 24,625
10% annual discount for estimated
timing of cash flow (174,873) (6,487)
-------------- --------------
Standardized measure of
discounted future net cash flows $ 291,952 $ 18,138
============== ==============
</TABLE>
<TABLE>
<CAPTION>
(UNAUDITED)
CHANGES IN STANDARDIZED MEASURE YEAR ENDED YEAR ENDED
OF DISCOUNTED FUTURE NET CASH FLOWS: DECEMBER 31, DECEMBER 31,
1998 1997
-------------- --------------
<S> <C> <C>
Standardized measure of discounted
future net cash flows (beginning) $ 18,138 $ 76,941
Sales of oil and gas, net of production costs (276) (7,520)
Net changes in price and production costs (137,291) (32,124)
Net changes in reserve quantities 121,016 (81,623)
Change in future income taxes (24,569) 7,613
Accretion of discount 84,463 30,011
Extensions of reserves in place 230,471 24,840
-------------- --------------
Standardized measure of discounted
future net cash flows (ending) $ 291,952 $ 18,138
============== ==============
</TABLE>
(1) Future development costs are not expected to be significant.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas (with consideration of price changes
only to the extent provided by contractual arrangements) to the estimated future
production of proved oil and gas reserves, less estimated future expenditures
(based on year-end costs) to be incurred in developing and producing the proved
reserves, less estimated future income tax expenses (based on year-end statutory
tax rates, with consideration of future tax rates already legislated) to be
incurred on pretax net cash flows less tax basis of the properties and available
credits, and assuming continuation of existing economic conditions. The
estimated future net cash flows are then discounted using a rate of 10 percent a
year to reflect the estimated timing of the future cash flows.
F-21
<PAGE> 44
BLUE RIDGE ENERGY, INC.
CONDENSED FINANCIAL STATEMENTS
JUNE 30,1999 AND 1998
(UNAUDITED)
F-22
<PAGE> 45
BLUE RIDGE ENERGY, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 142,713 $ 154,961
Accounts Receivable:
Managed Limited Partnerships 191,675 477,038
Trade and Other 74,716 86,625
Advances to Related Parties 258,760 463,298
---------- ----------
TOTAL CURRENT ASSETS 667,864 1,181,922
PROPERTY AND EQUIPMENT, NET 2,903,891 757,490
OTHER ASSETS, NET 91,683 35,048
---------- ----------
TOTAL ASSETS $3,663,438 $1,974,460
========== ==========
</TABLE>
The accompanying notes are an integral part
Of these financial statements.
F-23
<PAGE> 46
BLUE RIDGE ENERGY, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
------------- -------------
<S> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Liabilities $ 88,768 $ 20,788
Current Portion Long Term Debt 9,675 --
------------- -------------
TOTAL CURRENT LIABILITIES 98,443 20,788
LONG TERM DEBT 587,603 --
DEFERRED INCOME TAX LIABILITY 208,513 40,207
------------- -------------
TOTAL LIABILITIES 894,559 60,995
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value; 5,000,000 shares
authorized; 475,308 and 669,570 shares issued and
outstanding at June 30, 1999
and 1998, respectively 475 728
Common Stock, $0.005 par value; 20,000,000
shares authorized; 5,219,698 and 1,726,600 shares
issued and outstanding at June 30, 1999
and 1998, respectively 26,098 8,633
Additional Paid-In Capital 3,085,515 2,041,232
Accumulated Deficit (343,209) (137,128)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 2,768,879 1,913,465
------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 3,663,438 $ 1,974,460
============= =============
</TABLE>
The accompanying notes are an integral part
Of these financial statements.
F-24
<PAGE> 47
BLUE RIDGE ENERGY, INC.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
6 MONTHS 6 MONTHS 3 MONTHS 3 MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Turnkey Contract Sales $ 3,008,400 $ 1,581,181 $ 928,800 $ 180,500
Management Fees 115,675 88,675 60,000 --
Reimbursed Costs 65,415 50,672 33,600 --
Drilling Services Sales 294,651 -- 294,651 --
Oil and Gas Sales 14,190 4,872 7,485 3,653
------------- ------------- ------------- -------------
Total Operating Revenues 3,498,331 1,725,400 1,324,536 184,153
OPERATING COSTS AND
OTHER EXPENSES:
Turnkey Contract Costs 2,417,000 1,332,075 750,500 145,000
Drilling Services Costs 291,112 -- 291,112 --
Lease Operating Costs 7,482 1,998 3,224 1,998
Depreciation, Depletion
and Amortization 20,253 53 17,221 38
Marketing Costs 263,639 48,600 107,375 9,743
General and Administrative Costs 77,960 132,667 56,229 66,706
------------- ------------- ------------- -------------
Total Operating Costs 3,077,446 1,515,393 1,225,661 223,485
------------- ------------- ------------- -------------
OPERATING INCOME 420,885 210,007 98,875 (39,332)
OTHER INCOME (EXPENSE):
Interest Income (Expense) 16,364 4,035 (7,840) (30)
------------- ------------- ------------- -------------
Total Other Income 16,364 4,035 (7,840) (30)
------------- ------------- ------------- -------------
INCOME BEFORE TAXES 437,249 214,042 91,035 (39,362)
Income Tax Provision 144,281 81,336 30,041 (2,287)
------------- ------------- ------------- -------------
NET INCOME 292,968 $ 132,706 $ 60,994 $ (37,075)
============= ============= ============= =============
EARNINGS PER
COMMON SHARE:
Basic $ 0.03 $ (0.01) $ 0.00 $ (0.06)
Diluted $ 0.03 $ (0.01) $ 0.00 $ (0.06)
------------- ------------- ------------- -------------
Weighted Average Common
Shares Outstanding 5,219,698 1,726,600 5,168,245 1,726,600
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part
Of these financial statements.
F-25
<PAGE> 48
BLUE RIDGE ENERGY, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
6 MONTHS 6 MONTHS 3 MONTHS 3 MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net Income (Loss) $ 292,968 $ 132,706 $ 60,994 $ (37,075)
Adjustments to Reconcile Net Income to
Net Cash Flows from Operating Activities:
Depreciation, Depletion and Amortization 22,070 53 19,038 38
Increase (Decrease) in Deferred Taxes 144,281 81,336 30,041 (2,287)
(Decrease) in Drilling Advances (284,074) -- -- --
Decrease (Increase) in Accounts Receivable 73,534 (340,905) (71,916) 195,565
Increase (Decrease) in Accounts Payable
and Accrued Liabilities 3,816 (28,241) 25,541 (12,960)
------------ ------------ ------------ ------------
NET CASH (USED) BY
OPERATING ACTIVITIES 252,595 (155,051) 63,698 143,281
CASH FLOWS FROM
INVESTING ACTIVITIES:
Decrease (Increase) in Advances to Affiliate 44,156 (161,838) 0 (271,313)
Decrease (Increase) in Other Assets (10,127) (11,583) (6,707) (34,399)
Purchase of Drilling Equipment (245,000) -- (25,000) --
Purchase of Oil and Gas Properties (296,409) (99,905) (33,847) (63,987)
------------ ------------ ------------ ------------
NET CASH PROVIDED (USED)
IN INVESTING ACTIVITIES (507,380) (273,326) (65,554) (369,699)
CASH FLOWS FROM
FINANCING ACTIVITIES:
Additions to long term debt 0 -- 0 --
Payments of long term debt (167,881) (4,000) (117,381) --
Issuance of Preferred Stock 227,425 351,270 223,675 351,269
Retirement of Common Stock (15,000) -- -- --
Payments of Preferred Stock Dividends (147,923) (151,312) (72,546) (76,427)
------------ ------------ ------------ ------------
NET CASH PROVIDED (USED)
BY FINANCING ACTIVITIES (103,379) 195,958 33,748 274,842
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH (358,164) (232,419) 31,892 48,424
CASH AT BEGINNING OF PERIOD 480,952 367,455 90,896 86,612
------------ ------------ ------------ ------------
CASH AT END OF PERIOD $ 122,788 $ 135,036 $ 122,788 $ 135,036
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash Paid for Interest $ 5,062 $ -- $ 5,062 $ --
============ ============ ============ ============
Cash Paid for Income Taxes -- -- -- --
NON-CASH ACTIVITIES:
Purchase of drilling rigs and equipment financed $ 1,844,484 $ -- $ 972,150 $ --
through long-term debt and reduction in advance ================ ============ ============ ============
from BR Group
</TABLE>
The accompanying notes are an integral part
Of these financial statements.
F-26
<PAGE> 49
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
Blue Ridge Energy, Inc., (the Company), a Nevada corporation, was organized in
November 1994, as Gem Source, Incorporated (Gem Source), and subsequently
changed the name of the Company to Blue Ridge Energy, Inc. in May 1996. The
Company has offices at 632 Adams Street, Suite 710, Bowling Green, Kentucky,
42101 (See Note 3).
The Company is engaged in the oil and gas business primarily in Texas,
Kentucky, New Mexico and West Virginia. The Company sponsors oil and gas
drilling partnerships through which it raises money for the drilling of oil and
gas wells and participates for a 1% partnership interest as the managing
general partner of the oil and gas exploration partnerships. The Company also
owns two drilling rigs. These rigs are used to drill oil and gas wells for the
sponsored oil and gas grilling partnerships and also other non-affiliated oil
and gas companies. The rigs are operated on behalf of the Company by an
affiliate, Blue Ridge Group, Inc.
The Company also acquires direct working interest participation in oil and gas
properties. The participation includes exploratory and development wells and
includes both operated and non-operated working interest participation. These
acquisitions are funded by a combination of the profits earned from sponsoring
oil and gas drilling programs, the profit earned from contract drilling and
from the proceeds of private offerings of preferred stock.
The Company intends to maintain an active role in the oil and gas industry as
an operator of oil and gas wells, a sponsor of oil and gas drilling programs, a
participant in oil and gas programs, and as an independent producer of oil and
gas.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Drilling Operations
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 complete. The Company based on the short-term nature of the
drilling contracts; i.e. 4-5 days has utilized this accounting method.
Working Interests
Oil and gas revenue from working interests the Company owns is recognized at
the point of sale.
Managed Limited Partnerships
The Company sponsors privately offered limited partnerships for which it serves
as the Managing General Partner. The purpose of these partnerships is to
acquire and develop oil and gas leases. The partnerships enter into turnkey
drilling contracts with the Company to drill, complete and equip, if warranted,
the oil and gas leases. The Company receives direct compensation, reimbursement
of costs and expenses, and revenues related to turnkey drilling contracts.
F-27
<PAGE> 50
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
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:
<TABLE>
<CAPTION>
LIVES (YEARS)
-------------
<S> <C>
Machinery and Equipment 10
Autos and Trucks 5
Furniture and Fixtures 10
</TABLE>
The Company follows the successful effort 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 oil 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 tile 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.
F-28
<PAGE> 51
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Earnings Per Common Share
The Company's basic earnings per common share ("Basic EPS") are based on the
weighted average number of common shares outstanding during the respective
periods. The income available to common shareholders is computed after
deducting dividends on the preferred stock. The convertible preferred stock and
outstanding stock warrants are considered anti-dilutive and therefore, excluded
from the earnings per share calculations.
The following is a reconciliation of the numerators and denominators used in
the calculation of Basic EPS for the 6 months and 3 months ended June 30, 1999
and 1998:
<TABLE>
<CAPTION>
6 MONTHS 3 MONTHS
1999 1999
------------ ------------
<S> <C> <C>
Basic EPS computation -
Net Income $ 292,968 $ 60,994
Less: Preferred Stock Dividends (147,923) (72,546)
------------ ------------
Earnings (Loss) Available to Common $ 145,045 $ (11,552)
Stockholders ============ ============
</TABLE>
<TABLE>
<CAPTION>
DATES SHARES FRACTION WEIGHTED
OUTSTANDING O OUTSTANDING OF PERIOD AVERAGE SHARES
- ---------------------------------------- ----------- --------- --------------
<S> <C> <C> <C>
January 1 - June 30 5,171,578 100.0% 5,171,578
Common Stock Repurchased February 1 (5,000) 83.3% (4,165)
Series B Preferred Converted
April 1 - June 30 53,120 25.0% 13,280
--------- ---------
5,219,698
Weighted Average Shares ========= 5,180,693
=========
</TABLE>
<TABLE>
<CAPTION>
6 MONTHS 3 MONTHS
1999 1999
-------- --------
<S> <C> <C>
Basic EPS $ 0.03 $ 0.00
------ ======
</TABLE>
<TABLE>
<CAPTION>
6 MONTHS 3 MONTHS
1998 1998
------------ ------------
<S> <C> <C>
Basic EPS computation -
Net Income $ 132,706 $ (37,705)
Less: Preferred Stock Dividends (151,312) (72,546)
------------ ------------
Loss Available to Common Stockholders $ (18,606) $ (113,502)
============ ============
</TABLE>
<TABLE>
<CAPTION>
DATES SHARES FRACTION WEIGHTED
OUTSTANDING OUTSTANDING OF PERIOD AVERAGE SHARES
- ------------- ----------- --------- --------------
<S> <C> <C> <C>
January 1 - June 30 1,726,600 100.0% 1,726,600
--------- ---------
Weighted Average Shares 1,726,600
=========
</TABLE>
<TABLE>
<CAPTION>
6 MONTHS 3 MONTHS
1998 1998
-------- --------
<S> <C> <C>
Basic EPS $(0.01) $(0.06)
------ ------
</TABLE>
F-29
<PAGE> 52
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Supplemental Earnings Per Share Data
The following supplemental information presents the Company's pro forma
earnings per share assuming all preferred stock was converted to common stock
as of June 30, 1999:
<TABLE>
<S> <C>
Net Income $ 292,968
Preferred stock dividends paid (147,923)
Pro forma preferred stock dividends avoided 147,923
-------------
Pro forma Net Income available for
Common stockholders $ 292,968
=============
Weighted average shares outstanding
at 6/30/99 5,180,693
Pro forma conversion of all preferred
stock as of the beginning of 1999 645,358
-------------
Pro forma weighted average shares
outstanding assuming conversion
of all preferred stock $ 5,826,051
=============
Pro forma earnings per common share for
six months ended June 30,1999 $ .05
</TABLE>
===============================================================================
Income Taxes
Income taxes are provided based on earnings reported for financial statement
purposes. The provision for income taxes differ from the amounts currently
payable because of temporary differences (primarily intangible drilling costs)
in the recognition of certain income and expense items for financial reporting
and tax reporting purposes.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes cash
on hand and cash on deposit.
2. AFFILIATED OIL AND GAS PARTNERSHIPS
The Company provides turnkey drilling services for the various oil and gas
partnerships, which it sponsors. Fees earned for these drilling services,
including the sale of leases to the partnerships, amounted to $3,008,400 and
$1,581,181 during the six months ended June 30, 1999 and 1998, respectively.
The Company receives a management fee from the partnerships for its services in
connection with the selection of the joint venture prospects and the initial
operations of the joint venture in addition to syndication fees for funds
raised directly by the Company. Management fees and syndication fees earned
during the 6 months ended June 30, 1999 and 1998 amounted to $115,675 and
$88,675, respectively.
In connection with the sponsorship of oil and gas partnerships, the Company is
reimbursed by the partnerships for certain operating and overhead costs
incurred on their behalf, including filing fees, legal fees, accounting fees,
printing costs and other miscellaneous expenses. These reimbursements totaled
$65,415 and $50,672 during the 6 months ended June 30, 1999 and 1998,
respectively.
F-30
<PAGE> 53
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Included in the Company's financial statements are contributions made to the
various Company sponsored oil and gas partnerships, less the applicable loss
generated by these partnerships relative to the Company's percentage ownership.
The Company has allocated, on a pro-rata basis the amounts associated with
these investments to the appropriate asset, liability, income and expense
accounts.
3. RELATED PARTY TRANSACTIONS
Stock Transactions
The Company was organized in November 1994, as a Nevada corporation under the
name of Gem Source, Incorporated (Gem Source). In 1995, Gem Source sold
1,633,000 shares for $0.001 per share under Rule 504, an exemption under
Regulation D from full registration with the SEC.
Blue Ridge Group, Inc. (BRG) acquired control of Gem Source in March 1996 when
BRG acquired 1,000,000 shares of restricted stock at $0.10 a share. In May
1996, the 2,633,000 outstanding common shares were the subject of a 5 to 1
reverse split and the name of the Company was changed from Gem Source,
Incorporated to Blue Ridge Energy, Inc. In June 1996, BRG acquired another
1,000,000 of restricted common stock from the company treasury for $0.05 a
share, or $50,000.
As of June 30, 1999, there are 5,219,698 shares of common stock issued and
outstanding. A total of 3,110,575 shares are held by BRG and the remainders of
2,109,123 shares are held by approximately 470 shareholders, 40 of which are
original stockholders of the Company.
Advances from Related Parties
During 1998, the Company agreed with Blue Ridge Group, Inc. to acquire and
develop oil and gas properties and drilling equipment in the Appalachian Basin
of Kentucky. In order to facilitate the acquisition of these properties the
Company advanced approximately $1,300,000, bearing interest at 12% per annum,
to Blue Ridge Group, Inc. As of June 30, 1999 approximately $98,989 in interest
had been earned under this arrangement and the entire balance had been repaid
via the drilling of 10 gas wells and the purchase of drilling equipment.
Additionally, Blue Ridge Group, Inc. provides various management,
administrative, accounting and geological services for the Company at a rate of
$20,000 per month. Blue Ridge Energy also reimbursed Blue Ridge Group for
direct costs paid on its behalf. As of June 30, 1999 and 1998, approximately $0
was due and payable to Blue Ridge Group under this arrangement.
4. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, consisted of the following at June 30,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Oil and Gas Properties $ 852,308 $ 757,280
Drilling Rig and Equipment 2,089,484 --
Furniture and Fixtures 364 364
------------ ------------
2,942,156 757,644
Less Accumulated Depreciation 38,265 154
------------ ------------
$ 2,903,891 $ 757,490
============ ============
</TABLE>
Depreciation expense was $20,253 and $53 during the 6 months ended June 30,
1999 and 1998, respectively.
During the first quarter of 1999 the Company consummated the purchase of an
Ingersoll Rand drilling rig and its ancillary equipment for approximately $1.35
million of which approximately $600 thousand was provided by long-term debt. In
June 1999 the Company consummated the purchase of another Ingersoll Rand
drilling rig for approximately $750 thousand.
F-31
<PAGE> 54
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. COMMITMENTS AND CONTINGENCIES
Commitments
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 June 30, 2000,
whichever comes first.
Contingencies
The company's drilling and oil and gas exploration and production operations
are subject to inherent risks, including blowouts, fire and explosions which
could result in personal injury or death, suspended 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 $2 million
limited to $1 million per occurrence. The Company believes it is adequately
insured for public liability and property damage to others with respect to its
operations. However, such insurance may not be sufficient to protect the
Company against liability for all consequences of well disasters, extensive
fire damage, or damage to the environment. The Company has never been fined or
incurred liability for pollution or other environmental damage in connection
with its operations.
As of June 30, 1999, the Company had no significant customers or suppliers
(other than its majority stockholder, Blue Ridge Group, Inc.) which could,
individually, have a significant 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 tile FDIC.
6. STOCKHOLDERS' EQUITY
The Company is authorized to issue two classes of stock that are designated,
respectively, common and preferred stock. The total number of shares of stock,
which the company initially had the authority to issue, was 20,000,000 shares
being designated as common stock. As of June 30, 1999, the Company was
authorized to issue 25,000,000 shares of stock -- 20,000,000 being designated
as common stock and 5,000,000 shares designated as preferred stock.
Common Stock
The Company was organized in November, 1994, as a Nevada corporation under the
name of Gem Source, Incorporated (Gem Source) with an initial issuance of
1,000,000 shares of Common Stock with a par value of $0.001 per share. In 1995,
Gem Source had an offering of 1,633,000 shares under Rule 504, an exemption
under Regulation D from full registration with the SEC to bring the total
outstanding shares of common stock to 2,633,000.
Blue Ridge Group, Inc. (BRG) acquired control of Gem Source in March 1996, when
BRG acquired 1,000,000 shares of restricted stock at $0.10 a share. In May
1996, the 2,633,000 outstanding common shares were the subject of a 5 to 1
reverse split resulting in outstanding shares of 526,600 with a par value of
$0.005 per share. The name of the Company was also changed from Gem Source to
Blue Ridge Energy, Inc. Additionally, in June 1996, BRG acquired another
1,000,000 of restricted common stock from the Company treasury for $0.05 a
share, or $50,000 and options to purchase an additional 2,000,000 shares of
restricted common stock at $0.05 per share. The effective term of these
warrants is from June 30, 1996 through June 30, 2001. During February 1998, the
Company granted warrants to BRG to purchase additional 5,000,000 shares of
restricted common stock at $0.05 per share. The effective term of these
warrants is from March 31, 1998 through March 31, 2003.
During 1997, the Company's majority shareholder, Blue Ridge Group, Inc.,
exercised options to purchase 200,000 shares of the Company's common stock at
$0.05 per share or $10,000. Subsequently, Blue Ridge Group, Inc. distributed
these shares of stock to investors in several of its partnerships.
F-32
<PAGE> 55
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
During 1998, the Company's majority shareholder, Blue Ridge Group, Inc.
exercised options to purchase 2,800,000 shares of the Company's common stock at
$0.05 per share, or $140,000. Subsequently, Blue Ridge Group, Inc. distributed
890,427 of these shares to investors in several of its partnerships.
During May 1998, the Company authorized the issuance of 2,000,000 shares of
Common Stock Warrants ("Warrants"). In conjunction with the sale of the
Company's Series D Preferred Stock 1,000,000 of these warrants have been
reserved and one warrant will be issued with each share of Series D Preferred
Stock sold and will be exercised to purchase BR Energy common stock at $1.00
per share between May 31, 1998 and May 31, 2003. As of June 30, 1999, there
were 305,258 Series D Warrants issued and outstanding, none of which had been
exercised.
Series A Preferred Stock
During May 1996, the Company authorized the issuance and sale of 300,000 shares
of Series A Preferred Stock ("Series A Stock") which has a par value of $0.001
per share, at $3.00 per share. The Series A Stock bears a 12% per annum
dividend payable monthly. Each share of the Series A Stock shall be converted
automatically into one (1) share of Common Stock effective when a registration
statement for the Common Stock is filed with the U.S. Securities and Exchange
Commission (the "SEC") or September 30, 1998, whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company
either voluntary or involuntary, the holders of Series A Stock shall be
entitled to receive, prior and in preference to any distribution of any assets
or surplus funds of the Company to the holders of Common Stock the amount of
$3.00 per share plus all unpaid dividends on such share of each share of Series
A Stock then held by the shareholder.
In a Confidential Private Placement Memorandum dated July 25, 1996, the Company
offered 300,000 shares of Series A Stock in exchange for partnership interests
in Target Leasing, Ltd. I. The value assigned to the properties acquired of
$154,810 and the accounts receivables of $34,380 resulted in total
consideration received of $189,190. At June 30, 1999 and 1998 there were -0-
and 297,746 shares of Series A Stock issued and outstanding, respectively.
Series B Preferred Stock
During 1996, the Company authorized the issuance and sale of 300,000 shares of
Series B Preferred Stock ("Series B Stock") which has a par value of $0.001 per
share, at $3.00 per share. The Series B Stock bears a 12% per annum dividend
payable monthly. Each share of the Series B Stock shall be converted
automatically into two (2) shares of Common Stock effective when a registration
statement for the Common Stock is filed with the SEC OF two years from
issuance, whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company
either voluntary or involuntary, the holders of Series B Stock shall be
entitled to receive, prior and in preference to any distribution of any assets
or surplus funds of the Company to the holders of Common Stock, but subordinate
to the liquidation preference of the Series A Stock, the amount of $3.00 per
share plus all unpaid dividends on such share of each share of Series B Stock
then held by the shareholder.
At June 30, 1999 and 1998 there were 600 and 202,374 shares of Series B Stock
issued and outstanding.
Series C Preferred Stock
During 1997, the Company authorized the issuance and sale of 400,00 shares of
Series C Preferred Stock ("Series C Stock") which has a par value of $0.001 per
share at $6.00 per share. The Series C Stock bears a 12% per annum dividend
payable monthly. Each share of the Series C Stock shall be converted
automatically into two (2) shares of Common Stock effective when a registration
statement for the Common Stock is filed with the SEC or two years from
issuance, whichever occurs first.
F-33
<PAGE> 56
BLUE RIDGE ENERGY, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series C Stock shall be
entitled to receive, prior and in preference to any distribution of any assets
or surplus funds of the Company to the holders of Common Stock, but subordinate
to the liquidation preference of the Series A Stock and the Series B Stock, the
amount of $6.00 per share plus all unpaid dividends on such share of each share
of Series C Stock then held by the shareholder.
At June 30, 1999 and 1998, there were 169,450 shares of Series C Stock issued
and outstanding.
Series D Preferred Stock
During 1998, the Company authorized the issuance and sale of 1,000,000 shares
of Series D Preferred Stock ("Series D Stock") which has a par value of $0.001
per share at $5.00 per share. The Series D Stock bears a 12% per annum dividend
payable monthly. In addition, the Company will issue one Common Stock Warrant
exercisable to purchase one share of the Company's Common Stock for $ 1.00 with
each share of Series D Stock sold. Each share of the Series D Stock shall be
converted automatically into one (1) share of Common Stock effective when a
registration statement for the Common Stock is filed with the SEC or two years
from issuance, whichever occurs first.
In the event of any liquidation, dissolution or winding up of the Company,
either voluntary or involuntary, the holders of Series D Stock shall be
entitled to receive, prior and in preference to any distribution of any assets
or surplus funds of the Company to the holders of Common Stock, but subordinate
to the liquidation preference of the Series A Stock, the Series B Stock and the
Series C Stock, the amount of $5.00 per share plus all unpaid dividends on such
share of each share of Series D Stock then held by the shareholder.
At June 30, 1999, there were 305,258 shares of Series D Stock issued and
outstanding. The total amount received from the sale of this stock was
$1,831,548 less expenses paid of $537,753.
7. LONG-TERM DEBT
During April 1999 the Company purchased a drilling rig and related equipment
for a total of $1,274,484 with a cash down payment of $245,000 and the balance
($614,484) financed over five years. The terms of the financing agreements
requires monthly payments of $12,631 at interest rates ranging from 7.7% to
8.75%. The aggregate amount of required payments over the next five years as of
June 30, 1999 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 75,786
2000 151,572
2001 151,572
2002 151,572
2003 151,572
Balance 50,524
----------
732,598
Less - amount representing interest 135,320
----------
Principal balance at June 30, 1999 $ 597,278
==========
</TABLE>
8. SUBSEQUENT EVENTS
Beginning in the first quarter of 1999, the Company has been negotiating with
Premier Energy, LLC to purchase its 50% interest in Stone Mountain Energy, LLC
of Kingsport, Tennessee. Stone Mountain Energy, LLC owns a 150-mile natural gas
pipeline project, which will run from Harlan County in eastern Kentucky to
Knoxville, Tennessee. Subsequent to June 30, 1999 these negotiations were
terminated with no agreement being reached.
F-34
<PAGE> 57
PART III
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
(3)(i) Articles of Incorporation of Blue Ridge Energy, Inc.
(3)(ii) Bylaws of Blue Ridge Energy, Inc.
10.1 Turnkey drilling contract - Blue Ridge Energy Production Fund dated
August 1, 1996
10.2 Turnkey drilling contract - Smackover/Woodbine I Joint Venture dated
October 1, 1996
10.3 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated October 1, 1996
10.4 Turnkey drilling contract - Paluxy Joint Venture, Ltd. dated February
24, 1997
10.5 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated February 24, 1997
10.6 Turnkey drilling contract - Home Stake Joint Venture Ltd. dated
May 21, 1997
10.7 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated May 21, 1997
10.8 Turnkey drilling contract - Sherman/Moore #1 Joint Venture, Ltd. dated
September 26, 1997
10.9 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated September 26, 1997
10.10 Turnkey drilling contract - Phillips/Blue Ridge Joint Venture #1, Ltd.
dated February 10, 1998
10.11 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated February 10, 1998
10.12 Turnkey drilling contract - 1998 Year End Drilling Programs, Ltd.
dated December 1, 1998
10.13 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated December 1, 1998
10.14 Turnkey drilling contract - Harlan County Limited Partnership, Ltd.
dated March 4, 1999
10.15 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated March 4, 1999
10.16 Turnkey drilling contract - Cumberland Gap 10 Limited Partnership,
Ltd. dated April 13, 1999
10.17 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated April 13, 1999
</TABLE>
23
<PAGE> 58
<TABLE>
<S> <C>
10.18 Purchase contract for Ingersoll-Rand RD-20 drilling rig - from Noland
Company dated February 6, 1998
10.19 Bill of Sale of Ingersoll-Rand T-4 drilling rig - Blue Ridge Group,
Inc. to Blue Ridge Energy, Inc. dated June 30, 1999
10.20 Promissory Note for $126,000 from Blue Ridge Energy, Inc. to Blue
Ridge Group, Inc. dated June 30, 1996
10.21 Letter agreement and line of credit for $1,500,000 between Blue Ridge
Group, Inc. and Blue Ridge Energy, Inc. for the acquisition by Energy
of a 75% W.I. in 50 oil & gas wells in Appalachian Basin dated August
31, 1998
10.22 Management Services contract between Blue Ridge Energy, Inc. and Blue
Ridge Group dated September 30, 1996
10.23 Common Stock Purchases Warrant between Blue Ridge Energy, Inc. and
Blue Ridge Group for purchase of 2,000,000 shares of Blue Ridge Energy,
Inc. common stock - dated June 30, 1996
10.24 Common Stock Purchase Warrant between Blue Ridge Energy, Inc. and Blue
Ridge Group, Inc. for purchase of 5,000,000 of Blue Ridge Energy, Inc.
common stock - dated February 28, 1998
10.39 Limited Partnership Agreement of Home Stake Joint Venture, Ltd.
10.40(a) Joint Venture Agreement of Blue Ridge Energy Productions Fund - dated
August 1, 1996
10.41(a) Amended agreement of joint venture of Blue Ridge Production Fund -
dated August 20, 1996
10.42(a) Limited Partnership Agreement of Paluxy Joint Venture, Ltd.
10.43(a) Limited Partnership Agreement of Sherman/Moore #1 Joint Venture, Ltd.
10.44(a) Limited Partnership Agreement of Phillips/Blue Ridge Joint Venture #1,
Ltd.
10.45(a) Limited Partnership Agreement of 1998 Year End Drilling Program, Ltd.
10.46(a) Limited Partnership Agreement of Harlan County Limited Partnership,
Ltd.
10.47(a) Limited Partnership Agreement of Cumberland Gap 10 Limited
Partnership, Ltd.
10.48(a) Limited Partnership Agreement of B.V. Ranch #1 Limited Partnership,
Ltd.
(11) Computation of per share earnings - included in Part F/S
(13) Quarterly report on Form 10-QSB for the period ended September 30,
1999. Incorporated by reference to Part F/S of the Form 10-SB,
previously filed on November 10, 1999
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
(a) Included as exhibit 10.39 is the Limited Partnership Agreement of Home
Stake Joint Venture, Ltd. The other limited partnership agreements
listed above (10.40 through 10.48) are substantially similar in
contents to the Homestake Joint Venture Agreement. BR Energy considers
these limited partnership agreements as "ordinary course of business
type contracts" within the meaning of Item 601(b)(10) and accordingly,
have not been included herein
24
<PAGE> 59
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Blue Ridge Energy, Inc. Registrant
Date: January 19, 2000 By: /s/ J. THOMAS COOK, JR.
-----------------------------
J. Thomas Cook, Jr.
Director, Senior Vice President-Finance and
Chief Financial Officer
25
<PAGE> 60
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
(3)(i) Articles of Incorporation of Blue Ridge Energy, Inc.
(3)(ii) Bylaws of Blue Ridge Energy, Inc.
10.1 Turnkey drilling contract - Blue Ridge Energy Production Fund dated
August 1, 1996
10.2 Turnkey drilling contract - Smackover/Woodbine I Joint Venture dated
October 1, 1996
10.3 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated October 1, 1996
10.4 Turnkey drilling contract - Paluxy Joint Venture, Ltd. dated February
24, 1997
10.5 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated February 24, 1997
10.6 Turnkey drilling contract - Home Stake Joint Venture Ltd. dated
May 21, 1997
10.7 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated May 21, 1997
10.8 Turnkey drilling contract - Sherman/Moore #1 Joint Venture, Ltd. dated
September 26, 1997
10.9 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group Inc. dated September 26, 1997
10.10 Turnkey drilling contract - Phillips/Blue Ridge Joint Venture #1, Ltd.
dated February 10, 1998
10.11 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated February 10, 1998
10.12 Turnkey drilling contract - 1998 Year Ended Drilling Programs, Ltd.
dated December 1, 1998
10.13 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated December 1, 1998
10.14 Turnkey drilling contract - Harlan County Limited Partnership, Ltd.
dated March 4, 1999
10.15 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated March 4, 1999
10.16 Turnkey drilling contract - Cumberland Gap 10 Limited Partnership,
Ltd. dated April 13, 1999
10.17 Turnkey drilling contract - Blue Ridge Energy, Inc. and Blue Ridge
Group, Inc. dated April 13, 1999
</TABLE>
<PAGE> 61
<TABLE>
<S> <C>
10.18 Purchase contract for Ingersoll-Rand RD-20 drilling rig -- from Noland
Company dated February 6, 19998.
10.19 Bill of Sale of Ingersoll-Rand T-4 drilling rig - Blue Ridge Group,
Inc. to Blue Ridge Energy, Inc. dated June 30, 1999.
10.20 Promissory Note for $126,000 from Blue Ridge Energy Inc. to Blue Ridge
Group Inc. dated June 30, 1996.
10.21 Letter agreement and line of credit for $1,500,000 between Blue Ridge
Group Inc. and Blue Ridge Energy, Inc for the acquisition by Energy of
a 75% W.I. in 50 oil & gas wells in Appalachian Basin dated August 31,
1998.
10.22 Management Services contract between Blue Ridge Energy, Inc. and Blue
Ridge Group dated September 30, 1996.
10.23 Common Stock Purchases Warrant between Blue Ridge Energy, Inc. and
Blue Ridge Group for purchase of 2,000,000 shares of Blue Ridge Energy
Inc, common stock - dated June 30, 1996.
10.24 Common Stock Purchase Warrant between Blue Ridge Energy Inc and Blue
Ridge Group Inc for purchase of 5,000,000 of Blue Ridge Energy Inc
common stock - dated February 26, 1998.
10.39 Limited Partnership Agreement of Home Stake Joint Venture, Ltd.
10.40(a) Joint Venture Agreement of Blue Ridge Energy Productions Fund - dated
August 1, 1996.
10.41(a) Amended agreement of joint ventures of Blue ridge Production Fund -
dated August 20, 1996.
10.42(a) Limited Partnership Agreement of Palaxy Joint Venture, Ltd.
10.43(a) Limited Partnership Agreement of Sherman/Moore #1 Joint Venture, Ltd.
10.44(a) Limited Partnership Agreement of Phillips/Blue Ridge Joint Venture #1,
Ltd.
10.45(a) Limited Partnership Agreement of 1998 Year end drilling Program, Ltd.
10.46(a) Limited Partnership Agreement of Harlan County Limited Partnership,
Ltd.
10.47(a) Limited Partnership Agreement of Cumberland GAP 10 Limited
Partnership, Ltd.
10.48(a) Limited Partnership Agreement of Bill Rand #1 Limited Partnership,
Ltd.
(11) Computation of per share earnings - included in Part F/S
(13) Quarterly report on Form 10-QSB for the period ended September 30,
1999. Incorporated by reference to part F/S of the Form 10-SB,
previously filed on November 10, 1999
27.1 Financial Data Schedule
27.2 Financial Data Schedule
</TABLE>
(a) Included as exhibit 10.39 is the Limited Partnership Agreement of Home
Stake Joint Venture, Ltd. The other limited partnership agreements
listed above (10.40 through 10.48) are substantially similar in
contents to the Homestake Joint Venture Agreement. BR Energy considers
these limited partnership agreements as "ordinary course of business
type contracts" within the meaning of Item 601(b)(10) and accordingly,
have not been included herein.
<PAGE> 1
EXHIBIT (3)(i)
[STAMP]
ARTICLES OF INCORPORATION
OF
GEM SOURCE, INCORPORATED
KNOW ALL MEN BY THESE PRESENTS:
That we, the undersigned, have this day voluntarily associated
ourselves together for the purpose of forming a Corporation under and pursuant
to the laws of the State of Nevada, and we do hereby certify that:
ARTICLE I - NAME: The exact name of this corporation is:
Gem Source, Incorporated
ARTICLE II - RESIDENT AGENT:
The Resident Agent of the Corporation is Max C. Tanner, Esq., The Law
Offices of Max C. Tanner, 2950 East Flamingo Road, Suite G, Las Vegas, Nevada
89121.
ARTICLE III - DURATION: The Corporation shall have perpetual existence.
ARTICLE IV - PURPOSES: The purpose, object and nature of the business for which
this Corporation is organized are:
(a) To engage in any lawful activity;
(b) To carry on such business as may be necessary, convenient, or
desirable to accomplish the above purposes, and to do all
other things incidental thereto which are not forbidden by law
or by these Articles of Incorporation.
ARTICLE V - POWERS: The powers of the Corporation shall be those powers granted
by 78.060 and 78.070 of the Nevada Revised Statutes under which this corporation
is formed. In addition, the Corporation shall have the following specific
powers:
(a) To elect or appoint officers and agents of the Corporation and
to fix their compensation;
<PAGE> 2
(b) To act as an agent for or any individual, association,
partnership, corporation or other legal entity;
(c) To receive, acquire, hold, exercise rights arising out of the
ownership or possession thereof, sell, or otherwise dispose
of, shares or other interests in, or obligations of,
individuals, associations, partnerships, corporations, or
governments;
(d) To receive, acquire, hold, pledge, transfer, or otherwise
dispose of shares of the corporation, but such shares may only
be purchased, directly or indirectly, out of earned surplus;
(e) To make gifts or contributions for the public welfare or for
charitable, scientific or educational purposes, and in time of
war, to make donations in aid of war activities.
ARTICLE VI - CAPITAL STOCK:
Section 1. Authorized Shares. The total number of shares which this
Corporation is authorized to issue is 25,000,000 shares of Common Stock
at $.001 par value per share.
Section 2. Voting Rights of Shareholders. Each holder of the Common
Stock shall be entitled to one vote for each share of stock standing in
his name on the books of the Corporation.
Section 3. Consideration for Shares. The Common Stock shall be issued
for such consideration, as shall be fixed from time to time by the
Board of Directors. In the absence of fraud, the judgment of the
Directors as to the value of any property for shares shall be
conclusive. When shares are issued upon payment of the consideration
fixed by the Board of Directors, such shares shall be taken to be fully
paid stock and shall be non-assessable. The Articles shall not be
amended in this particular.
Section 4. Pre-emptive Rights. Except as may otherwise be provided by
the Board of Directors, no holder of any shares of the stock of the
Corporation, shall have any preemptive right to purchase, subscribe
for, or otherwise acquire any shares of stock of the Corporation of any
class now or hereafter authorized, or any securities exchangeable for
or convertible into such shares, or any warrants or other instruments
evidencing rights or options to subscribe for, purchase, or otherwise
acquire such shares.
2
<PAGE> 3
Section 5. Stock Rights and Options. The Corporation shall have the
power to create and issue rights, warrants, or options entitling the
holders thereof to purchase from the corporation any shares of its
capital stock of any class or classes, upon such terms and conditions
and at such times and prices as the Board of Directors may provide,
which terms and conditions shall be incorporated in an instrument or
instruments evidencing such rights. In the absence of fraud, the
judgment of the Directors as to the adequacy of consideration for the
issuance of such rights or options and the sufficiency thereof shall be
conclusive.
ARTICLE VII - ASSESSMENT OF STOCK: The capital stock of this Corporation, after
the amount of the subscription price has been fully paid in, shall not be
assessable for any purpose, and no stock issued as fully paid up shall ever be
assessable or assessed. The holders of such stock shall not be individually
responsible for the debts, contracts, or liabilities of the Corporation and
shall not be liable for assessments to restore impairments in the capital of the
Corporation.
ARTICLE VIII - DIRECTORS: For the management of the business, and for the
conduct of the affairs of the Corporation, and for the future definition,
limitation, and regulation of the powers of the Corporation and its directors
and shareholders, it is further provided:
Section 1. Size of Board. The members of the governing board of the
Corporation shall be styled directors. The number of directors of the
Corporation, their qualifications, terms of office, manner of election,
time and place of meeting, and powers and duties shall be such as are
prescribed by statute and in the by-laws of the Corporation. The name
and post office address of the directors constituting the first board
of directors, which shall be One (1) in number are:
NAME ADDRESS
Dennis Evans 6357 Vicuna Drive
Las Vegas, Nevada 89102
3
<PAGE> 4
Section 2. Powers of Board. In furtherance and not in limitation of the
powers conferred by the laws of the State of Nevada, the Board of
Directors is expressly authorized and empowered:
(a) To make, alter, amend, and repeal the By-Laws subject to the
power of the shareholders to alter or repeal the By-Laws made
by the Board of Directors.
(b) Subject to the applicable provisions of the ByLaws then in
effect, to determine, from time to time, whether and to what
extent, and at what times and places, and under what
conditions and regulations, the accounts and books of the
Corporation, or any of them, shall be open to shareholder
inspection. No shareholder shall have any right to inspect any
of the accounts, books or documents of the Corporation, except
as permitted by law, unless and until authorized to do so by
resolution of the Board of Directors or of the Shareholders of
the Corporation;
(c) To issue stock of the corporation for money, property,
services rendered, labor performed, cash advanced,
acquisitions for other corporations or for any other assets of
value in accordance with the action of the board of directors
without vote or consent of the shareholders and the judgment
of the board of directors as to value received and in return
therefore shall be conclusive and said stock, when issued,
shall be fully-paid and non-assessable.
(d) To authorize and issue, without shareholder consent,
obligations of the Corporation, secured and unsecured, under
such terms and conditions as the Board, in its sole
discretion, may determine, and to pledge or mortgage, as
security therefore, any real or personal property of the
Corporation, including after-acquired property;
(e) To determine whether any and, if so, what part, of the earned
surplus of the Corporation shall be paid in dividends to the
shareholders, and to direct and determine other use and
disposition of any such earned surplus;
(f) To fix, from time to time, the amount of the profits of the
Corporation to be reserved as working capital or for any other
lawful purpose;
(g) To establish bonus, profit-sharing, stock option, or other
types of incentive compensation plans for the employees,
including officers and directors, of the Corporation, and to
fix the amount of profits to be shared or distributed, and to
determine the persons to
4
<PAGE> 5
participate in any such plans and the amount of their
respective participations.
(h) To designate, by resolution or resolutions passed by a
majority of the whole Board, one or more committees, each
consisting of two or more directors, which, to the extent
permitted by law and authorized by the resolution or the
By-Laws, shall have and may exercise the powers of the Board;
(i) To provide for the reasonable compensation of its own members
by By-Law, and to fix the terms and conditions upon which such
compensation will be paid;
(j) In addition to the powers and authority herein before, or by
statute, expressly conferred upon it, the Board of Directors
may exercise all such powers and do all such acts and things
as may be exercised or done by the corporation, subject,
nevertheless, to the provisions of the laws of the State of
Nevada, of these Articles of Incorporation, and of the By-Laws
of the Corporation.
Section 3. Interested Directors. No contract or transaction between
this Corporation and any of its directors, or between this Corporation
and any other corporation, firm, association, or other legal entity
shall be invalidated by reason of the fact that the director of the
Corporation has a direct or indirect interest, pecuniary or otherwise,
in such corporation, firm, association, or legal entity, or because the
interested director was present at the meeting of the Board of
Directors which acted upon or in reference to such contract or
transaction, or because he participated in such action, provided that:
(1) the interest of each such director shall have been disclosed to or
known by the Board and a disinterested majority of the Board shall have
nonetheless ratified and approved such contract or transaction (such
interested director or directors may be counted in determining whether
a quorum is present for the meeting at which such ratification or
approval is given); or (2) the conditions of N.R.S. 78.140 are met.
ARTICLE IX - LIMITATION OF LIABILITY OF OFFICERS OR DIRECTORS: The personal
liability of a director or officer of the corporation to the corporation or the
Shareholders for damages for breach of fiduciary duty as a director or officer
shall be limited to acts or omissions which involve intentional misconduct,
fraud or a knowing violation of law.
ARTICLE X - INDEMNIFICATION: Each director and each officer of the corporation
may be indemnified by the corporation as follows:
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<PAGE> 6
(a) The corporation may indemnify any person who was or is a
party, or is threatened to be made a party, to any threatened,
pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation), by reason of
the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement,
actually and reasonably incurred by him in connection with the
action, suit or proceeding, if he acted in good faith and in a
manner which he reasonably believed to be in or not opposed to
the best interests of the corporation and with respect to any
criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any
action, suite or proceeding, by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its
equivalent, does not of itself create a presumption that the
person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any
criminal action or proceeding, he had reasonable cause to
believe that his conduct was unlawful.
(b) The corporation may indemnify any person who was or is a
party, or is threatened to be made a party, to any threatened,
pending or completed action or suit by or in the right of the
corporation, to procure a judgment in its favor by reason of
the fact that he is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or
other enterprise against expenses including amounts paid in
settlement and attorneys' fees actually and reasonably
incurred by him in connection with the defense or settlement
of the action or suit, if he acted in good faith and in a
manner which he reasonably believed to be in or not opposed to
the best interests of the corporation. Indemnification may not
be made for any claim, issue or matter as to which such a
person has been adjudged by a court of competent jurisdiction,
after exhaustion of all appeals there from, to be liable to
the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in
which the action or suit was brought or other court of
competent jurisdiction determines upon application that
6
<PAGE> 7
in view of all the circumstances of the case the person is
fairly and reasonably entitled to indemnity for such expenses
as the court deems proper.
(c) To the extent that a director, of officer, employee or agent
of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding
referred to in subsections (a) and (b) of this Article, or in
defense of any claim, issue or matter therein, he must be
indemnified by the corporation against expenses, including
attorney's fees, actually and reasonably incurred by him in
connection with the defense.
(d) Any indemnification under subsections (a) and (b) unless
ordered by a court or advanced pursuant to subsection (e),
must be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the
circumstances. The determination must be made:
(i) By the stockholders;
(ii) By the board of directors by majority vote of a
quorum consisting of directors who were not parties
to the act, suit or proceeding;
(iii) If a majority vote of a quorum consisting of
directors who were not parties to the act, suit or
proceeding so orders by independent legal counsel in
a written opinion; or
(iv) If a quorum consisting of directors who were not
parties to the act, suit or proceeding cannot be
obtained, by independent legal counsel in a written
opinion.
(e) Expenses of officers and directors incurred in defending a
civil or criminal action, suit or proceeding must be paid by
the corporation as they are incurred and in advance of the
final disposition of the action, suit or proceeding, upon
receipt of an undertaking by or on behalf of the director or
officer to repay the amount if it is ultimately determined by
a court of competent jurisdiction that he is not entitled to
be indemnified by the corporation. The provisions of this
subsection do not affect any rights to advancement of expenses
to which corporate personnel other than directors or officers
may be entitled under any contract or otherwise by law.
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<PAGE> 8
(f) The indemnification and advancement of expenses authorized in
or ordered by a court pursuant to this section:
(i) Does not exclude any other rights to which a person
seeking indemnification or advancement of expenses
may be entitled under the certificate or articles of
incorporation or any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise,
for either an action in his official capacity or an
action in another capacity while holding his office,
except that indemnification, unless ordered by a
court pursuant to subsection (b) or for the
advancement of expenses made pursuant to subsection
(e) may not be made to or on behalf of any director
or officer if a final adjudication establishes that
his acts or omissions involved intentional
misconduct, fraud or a knowing violation of the law
and was material to the cause of action.
(ii) Continues for a person who has ceased to be a
director, officer, employee or agent and inures to
the benefit of the heirs, executors and
administrators of such a person.
ARTICLE XI - PLACE OF MEETING; CORPORATE BOOKS: Subject to the laws of the State
of Nevada, the shareholders and the Directors shall have power to hold their
meetings, and the Directors shall have power to have an office or offices and to
maintain the books of the Corporation outside the State of Nevada, at such place
or places as may from time to time be designated in the By-Laws or by
appropriate resolution.
ARTICLE XII - AMENDMENT OF ARTICLES: The provisions of these Articles of
Incorporation may be amended, altered or repealed from time to time to the
extent and in the manner prescribed by the laws of the State of Nevada, and
additional provisions authorized by such laws as are then in force may be added.
All rights herein conferred on the directors, officers and shareholders are
granted subject to this reservation.
ARTICLE XIII - INCORPORATOR: The name and address of the sole incorporator
signing these Articles of Incorporation is as follows:
NAME POST OFFICE ADDRESS
1. Max C. Tanner 2950 East Flamingo Road, Suite G
Las Vegas, Nevada 89121
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<PAGE> 9
IN WITNESS WHEREOF, the undersigned incorporator has executed these
Articles of Incorporation this 30th day of November, 1994.
/s/ MAX C. TANNER
----------------------------------------
Max C. Tanner
STATE OF NEVADA )
)ss:
COUNTY OF CLARK )
On November 30, 1994, personally appeared before me, a Notary Public,
Max C. Tanner, who acknowledged to me that he executed the foregoing Articles of
Incorporation for Gem Source, Incorporated, a Nevada corporation.
/s/ JUNE Y. KELSAY
----------------------------------------
Notary Public
[NOTARY STAMP]
9
<PAGE> 10
[STAMP]
CERTIFICATE OF ACCEPTANCE
OF APPOINTMENT BY RESIDENT AGENT
IN MATTER OF GEM SOURCE, INCORPORATED
We, The Law Offices of Max C. Tanner, do hereby certify that on the
30th day of November, 1994, we accepted the appointment as Resident Agent of the
above-entitled corporation in accordance with Sec. 78.090, NRS 1957.
Furthermore, that the principal office in this state is located at The
Law Offices of Max C. Tanner, 2950 East Flamingo Road, Suite G, City of Las
Vegas 89121, County of Clark, State of Nevada.
IN WITNESS WHEREOF, I have hereunto set my hand this 30th day of
November, 1994.
THE LAW OFFICES OF MAX C. TANNER
By: /s/ MAX C. TANNER
------------------------------------
Max C. Tanner, Esq.
Resident Agent
10
<PAGE> 11
EXHIBIT A
AMENDMENT TO THE ARTICLES OF INCORPORATION
<PAGE> 12
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
OF
GEM SOURCE, INCORPORATED
Pursuant to NRS 78.385 and 78.390, the undersigned President and
Secretary of Gem Source, Incorporated do hereby certify:
That the following amendments to the articles of incorporation were
unanimously approved by the Board of Directors of said corporation by written
consent in lieu of a special meeting of the Board of Directors dated May 6, 1996
and by a majority of the outstanding shares entitled to vote.
Article I is hereby amended to read as follows:
The exact name of this Corporation is Blue Ridge Energy, Inc.
Article VI Section 1 - Capital Stock - Authorized Shares is hereby
amended to read as follows:
Section 1. Authorized Shares. The total number of shares which this
Corporation is authorized to issue is 25,000,000 Shares of Capital
Stock at $.001 par value per share.
(a) The total number of shares of Common stock which this
Corporation is authorized to issue is 20,000,000
shares at $.001 par value per share.
(b) The total number of shares of Preferred Stock which
this Corporation is authorized to issue is 5,000,000
shares at $.001 par value per share, which Preferred
Stock may contain special preferences as determined
by the Board of Directors of the Corporation,
including, but not limited to, the bearing of
interest and convertibility into shares of Common
Stock of the Corporation.
/s/ ROBERT D. BURR
-----------------------------------
Robert D. Burr, President
/s/ JAMES T. COOK, JR.
-----------------------------------
James T. Cook, Jr., Secretary
State of Kentucky )
)ss.
County of )
On the 16th day of May, 1996, personally appeared before me, a Notary Public,
Robert D. Burr, President of the above mentioned Corporation, who acknowledged
that he executed the above instrument.
/s/ NANCY A. BRIDGES
-----------------------------------
Signature of Notary
(Notary stamp or seal)
<PAGE> 13
State of Kentucky )
)ss.
County of )
On the 16th day of May, 1996, personally appeared before me, a Notary Public,
James T. Cook, Jr., Secretary of the above mentioned Corporation, who
acknowledged that he executed the above instrument.
/s/ NANCY A. BRIDGES
-----------------------------------
Signature of Notary
(Notary stamp or seal)
<PAGE> 1
EXHIBIT (3)(ii)
BY-LAWS
<PAGE> 2
BY-LAWS OF
GEM SOURCE, INCORPORATED
ARTICLE I
SHAREHOLDERS
Section 1.01 Annual Meeting. The annual meeting of the shareholders shall
be held at such date and time as shall be designated by the board of directors
and stated in the notice of the meeting or in a duly-executed waiver of notice
thereof. If the corporation shall fail to provide notice of the annual meeting
of the shareholders as set forth above, the annual meeting of the shareholders
of the corporation shall be held during the month of November or December of
each year as determined by the Board of Directors, for the purpose of electing
directors of the corporation to serve during the ensuing year and for the
transaction of such other business as may properly come before the meeting. If
the election of the directors is not held on the day designated herein for any
annual meeting of the shareholders, or at any adjournment thereof, the president
shall cause the election to be held at a special meeting of the shareholders as
soon thereafter as is convenient.
Section 1.02 Special Meetings. Special meetings of the shareholders may be
called by the president or the Board of Directors and shall be called by the
president at the written request of the holders of not less than 51% of the
issued and outstanding shares of capital stock of the corporation.
All business lawfully to be transacted by the shareholders may be
transacted at any special meeting at any adjournment thereof. However, no
business shall be acted upon at a special meeting, except that referred to in
the notice calling the meeting, unless all of the outstanding capital stock of
the corporation is represented either in person or by proxy. Where all of the
capital stock is represented, any lawful business may be transacted and the
meeting shall be valid for all purposes.
Section 1.03 Place of Meetings. Any meeting of the shareholders of the
corporation may be held at its principal office in the State of Nevada or such
other place in or out of the United States as the Board of Directors may
designate. A waiver of notice signed by the shareholders entitled to vote may
designate any place for the holding of such meeting.
<PAGE> 3
Section 1.04 Notice of Meetings.
(a) The secretary shall sign and deliver to all shareholders of record
written or printed notice of any meeting at least ten (10) days, but not
more than sixty (60) days, before the date of such meeting; which notice
shall state the place, date and time of the meeting, the general nature of
the business to be transacted, and, in the case of any meeting at which
directors are to be elected, the names of nominees, if any, to be presented
for election.
(b) In the case of any meeting, any proper business may be presented
for action, except that the following items shall be valid only if the
general nature of the proposal is stated in the notice or written waiver of
notice:
(1) Action with respect to any contract or transaction between the
corporation and one or more of its directors or another firm,
association, or corporation in which one or more of its directors has a
material financial interest;
(2) Adoption of amendments to the Articles of Incorporation; or
(3) Action with respect to the merger, consolidation,
reorganization, partial or complete liquidation, or dissolution of the
corporation.
(c) The notice shall be personally delivered or mailed by first class
mail to each shareholder of record at the last known address thereof, as
the same appears on the books of the corporation, and the giving of such
notice shall be deemed delivered the date the same is deposited in the
United States mail, postage prepaid. If the address of any shareholder does
not appear upon the books of the corporation, it will be sufficient to
address any notice to such shareholder at the principal office of the
corporation.
(d) The written certificate of the person calling any meeting, duly
sworn, setting forth the substance of the notice, the time and place the
notice was mailed or personally delivered to the several shareholders, and
the addresses to which the notice was mailed shall be prima facie evidence
of the manner and fact of giving such notice.
Section 1.05 Waiver of Notice. If all of the shareholders of the
corporation shall waive notice of a meeting, no notice shall be required, and,
whenever all of the shareholders shall meet in
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<PAGE> 4
person or by proxy, such meeting shall be valid for or all purposes without call
or notice, and at such meeting any corporate action may be taken.
Section 1.06 Determination of Shareholders of Record.
(a) The Board of Directors may at any time fix a future date as a
record date for the determination of the shareholders entitled to notice of
any meeting or to vote or entitled to receive payment of any dividend or
other distribution or allotment of any rights or entitled to exercise any
rights in respect of any other lawful action. The record date so fixed
shall not be more than sixty (60) days prior to the date of such meeting
nor more than sixty (60) days prior to any other action. When a record date
is so fixed, only shareholders of record on that date are entitled to
notice of and to vote at the meeting or to receive the dividend,
distribution or allotment of rights, or to exercise their rights, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date.
(b) If no record date is fixed by the Board of Directors, then (1) the
record date for determining shareholders entitled to notice of or to vote
at a meeting of shareholders shall be at the close of business on the
business day next preceding the day on which notice is given or, if notice
is waived, at the close of business on the day next preceding the day on
which the meeting is held; (2) the record date for determining shareholders
entitled to give consent to corporate action in writing without a meeting,
when no prior action by the Board of Directors is necessary, shall be the
day on which written consent is given; and (3) the record date for
determining shareholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto, or the sixtieth (60th) day prior to the date of such
other action, whichever is later.
Section 1.07 Quorum: Adjourned Meetings.
(a) At any meeting of the shareholders, a majority of the issued and
outstanding shares of the corporation represented in person or by proxy,
shall constitute a quorum.
(b) If less than a majority of the issued and outstanding shares are
represented, a majority of shares so represented may adjourn from time to
time at the meeting, until holders of the amount of stock required to
constitute a quorum shall be in attendance. At any such adjourned meeting
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<PAGE> 5
at which a quorum shall be present, any business may be transacted which
might have been transacted as originally called. When a shareholders'
meeting is adjourned to another time or place, notice need not be given of
the adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken, unless the adjournment is for
more than ten (10) days in which event notice thereof shall be given.
Section 1.08 Voting.
(a) Each shareholder of record, such shareholder's duly authorized
proxy or attorney-in-fact act shall be entitled to one (1) vote for each
share of stock standing registered in such shareholder's name on the books
of the corporation on the record date.
(b) Except as otherwise provided herein, all votes with respect to
shares standing in the name of an individual on the record date (included
pledged shares) shall be cast only by that individual or such individual's
duly authorized proxy or attorney-in-fact. With respect to shares held by a
representative of the estate of a deceased shareholder, guardian,
conservator, custodian or trustee, votes may be cast by such holder upon
proof of capacity, even though the shares do not stand in the name of such
holder. In the case of shares under the control of a receiver, the receiver
may cast votes carried by such shares even though the shares do not stand
in the name of the receiver provided that the order of the court of
competent jurisdiction which appoints the receiver contains the authority
to cast votes carried by such shares. If shares stand in the name of a
minor, votes may be cast only by the duly-appointed guardian of the estate
of such minor if such guardian has provided the corporation with written
notice and proof of such appointment.
(c) With respect to shares standing in the name of a corporation on the
record date, votes may be cast by such officer or agents as the by-laws of
such corporation prescribe or, in the absence of an applicable by-law
provision, by such person as may be appointed by resolution of the Board of
Directors of such corporation. In the event no person is so appointed, such
votes of the corporation may be cast by any person (including the officer
making the authorization) authorized to do so by the Chairman of the Board
of Directors, President or any Vice President of such corporation.
(d) Notwithstanding anything to the contrary herein contained, no votes
may be cast by shares owned by this corporation or its subsidiaries, if
any. If shares are held by this corporation or its subsidiaries, if any, in
a
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fiduciary capacity, no votes shall be cast with respect thereto on any
matter except to the extent that the beneficial owner thereof possesses
and exercises either a right to vote or to give the corporation holding the
same binding instructions on how to vote.
(e) With respect to shares standing in the name of two or more persons,
whether fiduciaries, members of a partnership, joint tenants, tenants in
common, husband and wife as community property, tenants by the entirety,
voting trustees, persons entitled to vote under a shareholder voting
agreement or otherwise and shares held by two or more persons (including
proxy holders) having the same fiduciary relationship respect in the same
shares, votes may be cast in the following manner:
(1) If only one such person votes, the votes of such person binds
all.
(2) If more than one person casts votes, the act of the majority so
voting binds all.
(3) If more than one person casts votes, but the vote is evenly
split on a particular matter, the votes shall be deemed cast
proportionately as split.
(f) Any holder of shares entitled to vote on any matter may cast a
portion of the votes in favor of such matter and refrain from casting the
remaining votes or cast the same against the proposal, except in the case
of elections of directors. If such holder entitled to vote fails to specify
the number of affirmative votes, it will be conclusively presumed that the
holder is casting affirmative votes with respect to all shares held.
(g) If a quorum is present, the affirmative vote of holders of a
majority of the shares represented at the meeting and entitled to vote on
any matter shall be the act of the shareholders, unless a vote of greater
number or voting by classes is required by the laws of the State of Nevada,
the Articles of Incorporation and these ByLaws.
Section 1.09 Proxies. At any meeting of shareholders, any holder of shares
entitled to vote may authorize another person or persons to vote by proxy with
respect to the shares held by an instrument in writing and subscribed to by the
holder of such shares entitled to vote. No proxy shall be valid after the
expiration of six (6) months from the date of execution thereof, unless coupled
with an interest or unless otherwise specified in the proxy. In no event shall
the term of a proxy exceed seven (7) years from the date of its execution. Every
proxy shall continue
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<PAGE> 7
in full force and effect until its expiration or revocation. Revocation may be
effected by filing an instrument revoking the same or a duly-executed proxy
bearing a later date with the secretary of the corporation.
Section 1.10 Order of Business. At the annual shareholders meeting, the
regular order of business shall be as follows:
(1) Determination of shareholders present and existence of quorum;
(2) Reading and approval of the minutes of the previous meeting or
meetings;
(3) Reports of the Board of Directors, the president, treasurer and
Secretary of the corporation, in the order named;
(4) Reports of committee;
(5) Election of directors;
(6) Unfinished business;
(7) New business;
(8) Adjournment.
Section 1. 11 Absentees Consent to Meetings. Transactions of any meeting of
the shareholders are as valid as though had at a meeting duly-held after regular
call and notice if a quorum is present, either in person or by proxy, and if,
either before or after the meeting, each of the persons entitled to vote, not
present in person or by proxy (and those who, although present, either object at
the beginning of the meeting to the transaction of any business because the
meeting has not been lawfully called or convened or expressly object at the
meeting to the consideration of matters not included in the notice which are
legally required to be included therein), signs a written waiver of notice
and/or consent to the holding of the meeting or an approval of the minutes
thereof. All such waivers, consents, and approvals shall be filed with the
corporate records and made a part of the minutes of the meeting. Attendance of a
person at a meeting shall constitute a waiver of notice of such meeting, except
when the person objects at the beginning of the meeting to the transaction of
any business because the meeting is not lawfully called or convened and except
that attendance at a meeting is not a waiver of any right to object to the
consideration of matters not included in the notice if such objection is
expressly made at the beginning. Neither the business to be transacted at nor
the purpose of any regular or special
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<PAGE> 8
meeting of shareholders need be specified in any written waiver of notice,
except as otherwise provided in Section 1.04(b) of these ByLaws.
Section 1.12 Action Without Meeting. Any action which may be taken by the
vote of the shareholders at a meeting may be taken without a meeting if
consented to by the holders of a majority of the shares entitled to vote or such
greater proportion as may be required by the laws of the State of Nevada, the
Articles of Incorporation, or these Bylaws. Whenever action is taken by written
consent, a meeting of shareholders needs not be called or noticed.
ARTICLE II
DIRECTORS
Section 2.01 Number, Tenure and Qualification. Except as otherwise
provided herein, the Board of Directors of the corporation shall consist of at
least one (1) but no more than nine (9) persons, who shall be elected at the
annual meeting of the shareholders of the corporation and who shall hold office
for one (1) year or until their successors are elected and qualify.
Section 2.02 Resignation. Any director may resign effective upon giving
written notice to the chairman of the Board of Directors, the president, or the
secretary of the corporation, unless the notice specifies a later time for
effectiveness of such resignation. If the Board of Directors accepts the
resignation of a director tendered to take effect at a future date, the Board or
the shareholders may elect a successor to take office when the resignation
becomes effective.
Section 2.03 Reduction in Number. No reduction of the number of directors
shall have the effect of removing any director prior to the expiration of his
term of office.
Section 2.04 Removal.
(a) The Board of Directors or the shareholders of the corporation, by a
majority vote, may declare vacant the office of a director who has been
declared incompetent by an order of a court of competent jurisdiction or
convicted of a felony.
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Section 2.05 Vacancies.
(a) A vacancy in the Board of Directors because of death, resignation,
removal, change in number of directors, or otherwise may be filled by the
shareholders at any regular or special meeting or any adjourned meeting
thereof or the remaining directors(s) by the affirmative vote of a majority
thereof. A Board of Directors consisting of less than the maximum number
authorized in section 2.01 of ARTICLE II constitutes vacancies on the Board
of Directors for purposes of this paragraph and may be filled as set forth
above including by the election of a majority of the remaining directors.
Each successor so elected shall hold office until the next annual meeting
of shareholders or until a successor shall have been duly-elected and
qualified.
(b) If, after the filling of any vacancy by the directors, the
directors then in office who have been elected by the shareholders shall
constitute less than a majority of the directors then in office, any holder
or holders of an aggregate of five percent (5%) or more of the total number
of shares entitled to vote may call a special meeting of shareholders to be
held to elect the entire Board of Directors. The term of office of any
director shall terminate upon such election of a successor.
Section 2.06 Regular Meetings. Immediately following the adjournment of,
and at the same place as, the annual meeting of the shareholders, the Board of
Directors, including directors newly elected, shall hold its annual meeting
without notice, other than this provision, to elect officers of the corporation
and to transact such further business as may be necessary or appropriate. The
Board of Directors may provide by resolution the place, date and hour for
holding additional regular meetings.
Section 2.07 Special Meetings. Special meetings of the Board of Directors
may be called by the chairman and shall be called by the chairman upon the
request of any two (2) directors or the president of the corporation.
Section 2.08 Place of Meetings. Any meeting of the directors of the
corporation may be held at its principal office in the State of Nevada, or at
such other place in or out of the United States as the Board of Directors may
designate. A waiver or notice signed by the directors may designate any place
for the holding of such meeting.
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Section 2.09 Notice of Meetings. Except as otherwise provided in Section
2.06, the chairman shall deliver to all directors written or printed notice
of any special meeting, at least three (3) days before the date of such meeting,
by delivery of such notice personally or mailing such notice first class mail,
or by telegram. If mailed, the notice shall be deemed delivered two (2) business
days following the date the same is deposited in the United States mail, postage
prepaid. Any director may waive notice of any meeting, and the attendance of a
director at a meeting shall constitute a waiver of notice of such meeting,
unless such attendance is for the express purpose of objecting to the
transaction of business threat because the meeting is not properly called or
convened.
Section 2.10 Quorum: Adjourned Meetings.
(a) A majority of the Board of Directors in office shall constitute a
quorum.
(b) At any meeting of the Board of Directors where a quorum is not
present, a majority of those present may adjourn, from time to time, until
a quorum is present, and no notice of such adjournment shall be required.
At any adjourned meeting where a quorum is present, any business may be
transacted which could have been transacted at the meeting originally
called.
Section 2.11 Action Without Meeting. Any action required or permitted to be
taken at any meeting of the Board of Directors or any committee thereof may be
taken without a meeting if a written consent thereto is signed by all of the
members of the Board of Directors or of such committee. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board of
Directors or committee. Such action by written consent shall have the same force
and effect as the unanimous vote of the Board of Directors or committee.
Section 2.12 Telephonic Meetings. Meetings of the Board of Directors may be
held through the use of a conference telephone or similar communications
equipment so long as all members participating in such meeting can hear one
another at the time of such meeting. Participation in such a meeting constitutes
presence in person at such meeting.
Section 2.13 Board Decisions. The affirmative vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.
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Section 2.14 Powers and Duties.
(a) Except as otherwise provided in the Articles of Incorporation or
the laws of the State of Nevada, the Board of Directors is invested with
the complete and unrestrained authority to manage the affairs of the
corporation, and is authorized to exercise for such purpose as the general
agent of the corporation, its entire corporate authority in such manner as
it sees fit. The Board of Directors may delegate any of its authority to
manage, control or conduct the current business of the corporation to any
standing or special committee or to any officer or agent and to appoint any
persons to be agents of the corporation with such powers, including the
power to sub-delegate, and upon such terms as may be deemed fit.
(b) The Board of Directors shall present to the shareholders at annual
meetings of the shareholders, and when called for by a majority vote of the
shareholders at a special meeting of the shareholders, a full and clear
statement of the condition of the corporation, and shall, at request,
furnish each of the shareholders with a true copy thereof.
(c) The Board of Directors, in its discretion, may submit any contract
or act for approval or ratification at any annual meeting of the
shareholders or any special meeting properly called for the purpose of
considering any such contract or act, provided a quorum is present. The
contract or act shall be valid and binding upon the corporation and upon
all the shareholders thereof, if approved and ratified by the affirmative
vote of a majority of the shareholders at such meeting.
(d) In furtherance and not in limitation of the powers conferred by the
laws of the State of Nevada, the Board of Directors is expressly authorized
and empowered to issue stock of the Corporation for money, property,
services rendered, labor performed, cash advanced, acquisitions for other
corporations or for or any other assets of value in accordance with the
action of the Board of Directors without vote or consent of the
shareholders and the judgment of the Board of Directors as to the value
received and in return therefore shall be conclusive and said stock, when
issued, shall be fully-paid and non-assessable.
Section 2.15 Compensation. The directors shall be allowed and paid all
necessary expenses incurred in attending any meetings of the Board, but shall
not receive any compensation for or their services as directors until such time
as the corporation is able to declare and pay dividends on its capital stock.
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Section 2.16 Board Officers.
(a) At its annual meeting, the Board of Directors shall elect, from
among its members, a chairman to preside at the meetings of the Board of
Directors. The Board of Directors may also elect such other board officers
and for such term as it may, from time to time, determine advisable.
(b) Any vacancy in any board office because of death, resignation,
removal or otherwise may be filled by the Board of Directors for the
unexpired portion of the term of such office.
Section 2.17 Order of Business. The order of business at any meeting of the
Board of Directors shall be as follows:
(1) Determination of members present and existence of quorum;
(2) Reading and approval of the minutes of any previous meeting or
meetings;
(3) Reports of officers and committeemen;
(4) Election of officers;
(5) Unfinished business;
(6) New business;
(7) Adjournment.
ARTICLE III
OFFICERS
Section 3.01 Election. The Board of Directors, at its first meeting
following the annual meeting of shareholders, shall elect a president, a
secretary and a treasurer to hold office for one (1) year next coming and until
their successors are elected and qualify. Any person may hold two or more
offices. The Board of Directors may, from time to time, by resolution, appoint
one or more vice presidents, assistant secretaries, assistant treasurers and
transfer agents of the corporation as it may deem advisable; prescribe their
duties; and fix their compensation.
11
<PAGE> 13
Section 3.02 Removal; Resignation. Any officer or agent elected or
appointed by the Board of Directors may be removed by it whenever, in its
judgment, the best interest of the corporation would be served thereby. Any
officer may resign at any time upon written notice to the corporation without
prejudice to the rights, if any, of the corporation under any contract to which
the resigning officer is a party.
Section 3.03 Vacancies. Any vacancy in any office because of death,
resignation, removal, or otherwise may be filled by the Board of Directors for
the unexpired portion of the term of such office.
Section 3.04 President. The president shall be the general manager and
executive officer of the corporation, subject to the supervision and control of
the Board of Directors, and shall direct the corporate affairs, with full power
to execute all resolutions and orders of the Board of Directors not especially
entrusted to some other officer of the corporation. The president shall preside
at all meetings of the shareholders and shall sign the certificates of stock
issued by the corporation, and shall perform such other duties as shall be
prescribed by the Board of Directors.
Unless otherwise ordered by the Board of Directors, the president shall
have full power and authority on behalf of the corporation to attend and to act
and to vote at any meetings of the shareholders of any corporation in which the
corporation may hold stock and, at any such meetings, shall possess and may
exercise any and all rights and powers incident to the ownership of such stock.
The Board of Directors, by resolution from time to time, may confer like powers
on any person or persons in place of the president to represent the corporation
for these purposes.
Section 3.05 Vice President. The Board of Directors may elect one or more
vice presidents who shall be vested with all the powers and perform all the
duties of the president whenever the president is absent or unable to act,
including the signing of the certificates of stock issued by the corporation,
and the vice president shall perform such other duties as shall be prescribed by
the Board of Directors.
Section 3.06 Secretary. The secretary shall keep the minutes of all
meetings of the shareholders and the Board of Directors in books provided for
that purpose. The secretary shall attend to the giving and service of all
notices of the corporation, may sign with the president in the name of the
corporation all contracts authorized by the Board of Directors or appropriate
committee, shall have the custody of the corporate seal, shall affix the
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corporate seal to all certificates of stock duly issued by the corporation,
shall have charge of stock certificate books, transfer books and stock ledgers,
and such other books and papers as the Board of Directors or appropriate
committee may direct, and shall, in general perform all duties incident to the
office of the secretary. All corporate books kept by the secretary shall be open
for examination by any director at any reasonable time.
Section 3.07 Assistant Secretary. The Board of Directors may appoint an
assistant secretary who shall have such powers and perform such duties as may be
prescribed for him by the secretary of the corporation or by the Board of
Directors.
Section 3.08 Treasurer. The treasurer shall be the chief financial officer
of the corporation, subject to the supervision and control of the Board of
Directors, and shall have custody of all the funds and securities of the
corporation. When necessary or proper, the treasurer shall endorse on behalf of
the corporation for collection checks, notes and other obligations, and shall
deposit all monies to the credit of the corporation in such bank or banks or
other depository as the Board of Directors may designate, and shall sign all
receipts and vouchers for payments made by the corporation. Unless otherwise
specified by the Board of Directors, the treasurer shall sign with the president
all bills of exchange and promissory notes of the corporation, shall also have
the care and custody of the stocks, bonds, certificates, vouchers, evidence of
debts, securities and such other property belonging to the corporation as the
Board of Directors shall designate, and shall sign all papers required by law,
by these By-laws or by the Board of Directors to be signed by the treasurer. The
treasurer shall enter regularly in the books of the corporation, to be kept for
that purpose, full and accurate accounts of all monies received and paid on
account of the corporation and whenever required by the Board of Directors, the
treasurer shall render a statement of any or all accounts. The treasurer shall
at all reasonable times exhibit the books of account to any directors of the
corporation and shall perform all acts incident to the position of treasurer
subject to the control of the Board of Directors. The treasurer shall, if
required by the Board of Directors, given a bond to the corporation in such sum
and with such security as shall be approved by the Board of Directors for the
faithful performance of all the duties of the treasurer and for restoration to
the corporation in the event of the treasurer's death, resignation, retirement,
or removal from office, of all books, records, papers, vouchers, money and other
property belonging to the corporation. The expense of such bond shall be borne
by the corporation.
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Section 3.09 Assistant Treasurer. The Board of Directors may appoint an
assistant treasurer who shall have such powers and perform such duties as may be
prescribed by the treasurer of the corporation or by the Board of Directors, and
the Board of Directors may require the assistant treasurer to give a bond to the
corporation in such sum and with such security as it may approve, for the
faithful performance of the duties of assistant treasurer, and for the
restoration to the corporation, in the event of the assistant treasurer's death,
resignation, retirement or removal from office, of all books, records, papers,
vouchers, money and other property belonging to the corporation. The expense of
such bond shall be borne by the corporation.
ARTICLE IV
CAPITAL STOCK
Section 4.01 Issuance. Shares of capital stock of the corporation shall be
issued in such manner and at such times and upon such conditions as shall be
prescribed by the Board of Directors.
Section 4.02 Certificates. Ownership in the corporation shall be evidenced
by certificates for shares of stock in such form as shall be prescribed by the
Board of Directors, shall be under the seal of the corporation and shall be
signed by the president or the vice president and also by the secretary or an
assistant secretary. Each certificate shall contain the name of the record
holder, the number, designation, if any, class or series of shares represented,
a statement of summary of any applicable rights, preferences, privileges, or
restrictions thereon, and a statement that the shares are assessable, if
applicable. All certificates shall be consecutively numbered. The name and
address of the shareholder, the number of shares, and the date of issue shall be
entered on the stock transfer books of the corporation.
Section 4.03 Surrender: Lost or Destroyed Certificates. All certificates
surrendered to the corporation, except those representing shares of treasury
stock, shall be canceled and no new certificates shall be issued until the
former certificate for a like number of shares shall have been canceled, except
that in case of a lost, stolen, destroyed or mutilated certificate, a new one
may be issued therefor. However, any shareholder applying for the issuance of a
stock certificate in lieu of one alleged to have been lost, stolen, destroyed or
mutilated shall, prior to the issuance of a replacement, provide the corporation
with his, her or its affidavit of the facts surrounding the loss, theft,
destruction or mutilation and an indemnity bond in an amount and upon such terms
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as the treasurer, or the Board of Directors, shall require. In no case shall the
bond be in amount less than twice the current market value of the stock and it
shall indemnify the corporation against any loss, damage, cost or inconvenience
arising as a consequence of the issuance of a replacement certificate.
Section 4.04 Replacement Certificate. When the Articles of Incorporation
are amended in any way affecting the statements contained in the certificates
for outstanding shares of capital stock of the corporation or it becomes
desirable for any reason, including, without limitation, the merger or
consolidation of the corporation with another corporation or the reorganization
of the corporation, to cancel any outstanding certificate for shares and issue a
new certificate therefor conforming to the rights of the holder, the Board of
Directors may order any holders of outstanding certificates for shares to
surrender and exchange the same for new certificates within a reasonable time to
be fixed by the Board of Directors. The order may provide that a holder of any
certificate(s) ordered to be surrendered shall not be entitled to vote, receive
dividends or exercise any other rights of shareholders until the holder has
complied with the order provided that such order operates to suspend such rights
only after notice and until compliance.
Section 4.05 Transfer of Shares. No transfer of stock shall be valid as
against the corporation except on surrender and cancellation by the certificate
therefor, accompanied by an assignment or transfer by the registered owner made
either in person or under assignment. Whenever any transfer shall be expressly
made for collateral security and not absolutely, the collateral nature of the
transfer shall be reflected in the entry of transfer on the books of the
corporation.
Section 4.06 Transfer Agent. The Board of Directors may appoint one or more
transfer agents and registrars of transfer and may require all certificates for
shares of stock to bear the signature of such transfer agent and such registrar
of transfer.
Section 4.07 Stock Transfer Books. The stock transfer books shall be closed
for or a period of ten (10) days prior to all meetings of the shareholders and
shall be closed for the payment of dividends as provided in Article V hereof and
during such periods as, from time to time, may be fixed by the Board of
Directors, and, during such periods, no stock shall be transferable.
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Section 4.08 Miscellaneous. The Board of Directors shall have the power and
authority to make such rules and regulations not inconsistent herewith as it
may deem expedient concerning the issue, transfer and registration of
certificates for shares of the capital stock of the corporation.
ARTICLE V
DIVIDENDS
Section 5.01 Dividends may be declared, subject to the provisions of the
laws of the State of Nevada and the Articles of Incorporation, by the Board of
Directors at any regular or special meeting and may be paid in cash, property,
shares of corporate stock, or any other medium. The Board of Directors may fix
in advance a record date, as provided in Section 1.06 of these By-laws, prior to
the dividend payment for the purpose of determining shareholders entitled to
receive payment of any dividend. The Board of Directors may close the stock
transfer books for such purpose for a period of not more than ten (10) days
prior to the payment date of such dividend.
ARTICLE VI
OFFICES; RECORDS; REPORTS; SEAL AND FINANCIAL MATTERS
Section 6.01 Principal Office. The principal office of the corporation in
the State of Nevada shall be the Law offices of Max C. Tanner, 2950 East
Flamingo Road, Suite G, Las Vegas, Nevada 89121, and the corporation may have an
office in any other state or territory as the Board of Directors may designate.
Section 6.02 Records. The stock transfer books and a certified copy of the
By-laws, Articles of Incorporation, any amendments thereto, and the minutes of
the proceedings of the shareholders, the Board of Directors, and committees of
the Board of Directors shall be kept at the principal office of the corporation
for the inspection of all who have the right to see the same and for the
transfer of stock. All other books of the corporation shall be kept at such
places as may be prescribed by the Board of Directors.
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Section 6.03 Financial Report on Request. Any shareholder or shareholders
holding at least five percent (5%) of the outstanding shares of any class of
stock may make a written request for an income statement of the corporation for
the three (3) month, six (6) month, or nine (9) month period of the current
fiscal year ended more than thirty (30) days prior to the date of the request
and a balance sheet of the corporation as of the end of such period. In
addition, if no annual report for the last fiscal year has been sent to
shareholders, such shareholder or shareholders may make a request for a balance
sheet as of the end of such fiscal year and an income statement and statement of
changes in financial position for such fiscal year. The statement shall be
delivered or mailed to the person making the request within thirty (30) days
thereafter. A copy of the statements shall be kept on file in the principal
office of the corporation for twelve (12) months, and such copies shall be
exhibited at all reasonable times to any shareholder demanding an examination of
them or a copy shall be mailed to each shareholder. Upon request by any
shareholder, there shall be mailed to the shareholder a copy of the last annual,
semiannual or quarterly income statement which it has prepared and a balance
sheet as of the end of the period. The financial statements referred to in this
Section 6.03 shall be accompanied by the report thereon, if any, of any
independent accountants engaged by the corporation or the certificate of an
authorized officer of the corporation that such financial statements were
prepared without audit from the books and records of the corporation.
Section 6.04 Right of Inspection.
(a) The accounting books and records and minutes of proceedings of the
shareholders and the Board of Directors and committees of the Board of
Directors shall be open to inspection upon the written demand of any
shareholder or holder of a voting trust certificate at any reasonable time
during usual business hours for a purpose reasonably related to such
holder's interest as a shareholder or as the holder of such voting trust
certificate. This right of inspection shall extend to the records of the
subsidiaries, if any, of the corporation. Such inspection may be made in
person or by agent or attorney, and the right of inspection includes the
right to copy and make extracts.
(b) Every director shall have the absolute right at any reasonable time
to inspect and copy all books, records and documents of every kind and to
inspect the physical properties of the corporation and/or its subsidiary
corporations. Such inspection may be made in person or by agent or
attorney, and the right of inspection includes the right to copy and make
extracts.
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Section 6.05 Corporate Seal. The Board of Directors may, by resolution,
authorize a seal, and the seal may be used by causing it, or a facsimile, to
be impressed or affixed or reproduced or otherwise. Except when otherwise
specifically provided herein, any officer of the corporation shall have the
authority to affix the seal to any document requiring it.
Section 6.06 Fiscal Year. The fiscal year-end of the corporation shall be
the calendar year or such other term as may be fixed by resolution of the Board
of Directors.
Section 6.07 Reserves. The Board of Directors may create, by resolution,
out of the earned surplus of the corporation such reserves as the directors may,
from time to time, in their discretion, think proper to provide for
contingencies, or to equalize dividends or to repair or maintain any property of
the corporation, or for such other purpose as the Board of Directors may deem
beneficial to the corporation, and the directors may modify or abolish any such
reserves in the manner in which they were created.
ARTICLE VII
INDEMNIFICATION
Section 7.01 Indemnification. The corporation shall, unless prohibited by
Nevada Law, indemnify any person (an "Indemnitee") who is or was involved in any
manner (including, without limitation, as a party or a witness) or is threatened
to be so involved in any threatened, pending or completed action suit or
proceeding, whether civil, criminal, administrative, arbitrative or
investigative, including without limitation, any action, suit or proceeding
brought by or in the right of the corporation to procure a judgment in its favor
(collectively, a "Proceeding") by reason of the fact that he is or was a
director, officer, employee or agent of the corporation, or is or was serving at
the request of the corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other entity or enterprise, against all Expenses and Liabilities actually and
reasonably incurred by him in connection with such Proceeding. The right to
indemnification conferred in this Article shall be presumed to have been relied
upon by the directors, officers, employees and agents of the corporation and
shall be enforceable as a contract right and inure to the benefit of heirs,
executors and administrators of such individuals.
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Section 7.02 Indemnification Contracts. The Board of Directors is
authorized on behalf of the corporation, to enter into, deliver and perform
agreements or other arrangements to provide any Indemnitee with specific rights
of indemnification in addition to the rights provided hereunder to the fullest
extent permitted by Nevada Law. Such agreements or arrangements may provide (i)
that the Expenses of officers and directors incurred in defending a civil or
criminal action, suit or proceeding, must be paid by the corporation as they are
incurred and in advance of the final disposition of any such action, suit or
proceeding provided that, if required by Nevada Law at the time of such advance,
the officer or director provides an undertaking to repay such amounts if it is
ultimately determined by a court of competent jurisdiction that such individual
is not entitled to be indemnified against such expenses, (iii) that the
Indemnitee shall be presumed to be entitled to indemnification under this
Article or such agreement or arrangement and the corporation shall have the
burden of proof to overcome that presumption, (iii) for procedures to be
followed by the corporation and the Indemnitee in making any determination of
entitlement to indemnification or for appeals therefrom and (iv) for insurance
or such other Financial Arrangements described in Paragraph 7.02 of this
Article, all as may be deemed appropriate by the Board of Directors at the time
of execution of such agreement or arrangement.
Section 7.03 Insurance and Financial Arrangements. The corporation may,
unless prohibited by Nevada Law, purchase and maintain insurance or make other
financial arrangements ("Financial Arrangements") on behalf of any Indemnitee
for any liability asserted against him and liability and expenses incurred by
him in his capacity as a director, officer, employee or agent, or arising out of
his status as such, whether or not the corporation has the authority to
indemnify him against such liability and expenses. Such other Financial
Arrangements may include (i) the creation of a trust fund, (ii) the
establishment of a program of self-insurance, (iii) the securing of the
corporation's obligation of indemnification by granting a security interest or
other lien on any assets of the corporation, or (iv) the establishment of a
letter of credit, guaranty or surety.
Section 7.04 Definitions. For purposes of this Article:
Expenses. The word "Expenses" shall be broadly construed and, without
limitation, means (i) all direct and indirect costs incurred, paid or
accrued, (ii) all attorneys' fees, retainers, court costs, transcripts,
fees of experts, witness fees, travel expenses, food and lodging expenses
while traveling, duplicating costs, printing and binding costs, telephone
charges, postage, delivery service, freight or other transportation fees
and expenses, (iii) all other
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disbursements and out-of-pocket expenses, (iv) amounts paid in settlement,
to the extent permitted by Nevada Law, and (v) reasonable compensation for
time spent by the Indemnitee for which he is otherwise not compensated by
the corporation or any third party, actually and reasonably incurred in
connection with either the appearance at or investigation, defense,
settlement or appeal of a Proceeding or establishing or enforcing a right
to indemnification under any agreement or arrangement, this Article, the
Nevada Law or otherwise; provided, however, that "Expenses" shall not
include any judgments or fines or excise taxes or penalties imposed under
the Employee Retirement Income Security Act of 1974, as amended ("ERISA")
or other excise taxes or penalties.
Liabilities. "Liabilities" means liabilities of any type whatsoever,
including, but not limited to, judgments or fines, ERISA or other excise
taxes and penalties, and amounts paid in settlement.
Nevada Law. "Nevada Law" means Chapter 78 of the Nevada Revised
Statutes as amended and in effect from time to time or any successor or
other statutes of Nevada having similar import and effect.
This Article. "This Article" means Paragraphs 7.01 through 7.04 of
these bylaws or any portion of them.
Power of Stockholders. Paragraphs 7.01 through 7.04, including this
Paragraph, of these Bylaws may be amended by the stockholders only by vote
of the holders of sixty-six and two-thirds percent (66 2/3%) of the entire
number of shares of each class, voting separately, of the outstanding
capital stock of the corporation (even though the right of any class to
vote is otherwise restricted or denied); provided, however, no amendment
or repeal of this Article shall adversely affect any right of any
Indemnitee existing at the time such amendment or repeal becomes effective.
Power of Directors. Paragraphs 7.01 through 7.04 and this Paragraph of
these Bylaws may be amended or repealed by the Board of Directors only by
vote of eighty percent (80%) of the total number of Directors and the
holders of sixty-six and two-thirds percent (66 2/3) of the entire number of
shares of each class, voting separately, of the outstanding capital stock of
the corporation (even though the right of any class to vote is otherwise
restricted or denied); provided, however, no amendment or repeal of this
Article shall adversely affect any right of any Indemnitee existing at the
time such amendment or repeal becomes effective.
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ARTICLE VIII
BY-LAWS
Section 8.01 Amendment. Amendments and changes of these By-Laws may be made
at any regular or special meeting of the Board of Directors by a vote of not
less than all of the entire Board, or may be made by a vote of, or a consent in
writing signed by the holders of a majority of the issued and outstanding
capital stock.
Section 8.02 Additional By-Laws. Additional by-laws not inconsistent
herewith may be adopted by the Board of Directors at any meeting of the Board of
Directors at which a quorum is present by an affirmative vote of a majority of
the directors present or by the unanimous consent of the Board of Directors in
accordance with Section 2.11 of these By-laws.
CERTIFICATION
I, the undersigned, being the duly elected secretary of the Corporation, do
hereby certify that the foregoing By-laws were adopted by the Board of Directors
on the 2nd day of December, 1994.
/s/ MARCI EVANS
---------------------------------
Marci Evans, Secretary
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EXHIBIT "D"
FORM OF STOCK CERTIFICATE
<PAGE> 24
INCORPORATED UNDER THE LAWS OF THE
STATE OF NEVADA
NUMBER [GRAPHIC] SHARES
21
GEM SOURCE, INC.
This Corporation is authorized to Issue 25,000,000 Common Shares
at $ Par Value
----
THIS CERTIFIES THAT __________________________________ is the owner of
____________________________ fully paid and nonassessable shares of the above
Corporation transferable only on the books of the Corporation by the holder
hereof in person or by duly authorized Attorney upon surrender of this
Certificate properly endorsed.
IN WITNESS WHEREOF, the said Corporation has caused this Certificate to be
signed by its duly authorized officers and its Corporate Seal to be hereunto
affixed this ______ day of ___________ A.D. 19 ______
- --------------------------------- (SEAL) ------------------------------
PRESIDENT SECRETARY/TREASURER
<PAGE> 1
EXHIBIT 10.1
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 1st day of August, 1996 by and
between the parties herein designated as "Joint Venture" and "Contractor."
Joint Venture: Blue Ridge Energy Production Fund
Address: 1953 Scottsville Road, Suite 201
Bowling Green, Kentucky 42104
Contractor: Blue Ridge Energy, Inc.
Address: 1953 Scottsville Road, Suite 201
Bowling Green, Kentucky 42104
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Joint Venture engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to acquire, rework, drill, test, and
complete its portion of eight oil and gas wells to be located in Fayette County,
Texas, (referred to herein as "wells") in search of oil and/or gas.
The Joint Venture will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the wells to
specified depths, (ii) to assure that Contractor will be available to drill,
test and complete the subject wells for the Joint Venture, (iii) to assure that
Contractor will make available on a preferential basis sufficient drilling and
completion apparatus needed to drill, test and complete the wells at the
earliest possible time, (iv) to obtain a preferential use of Contractor's
services, and (v) to assure competent supervisory personnel are available in the
drilling and completion of the subject wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such wells.
Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF WELLS: See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the wells by March 31, 1997, and Contractor
and the Joint Venture agree that time is of the essence under this Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Acquisition Price": $748,445
"Drilling, Completion, and Equipping Price": $293,455
4. DEPTH:
Subject to the right of the Joint Venture to direct the stoppage of work at any
time (as provided in paragraph 6), the wells shall be drilled to the depth as
specified in Exhibit "1" or to the depth at which the production casing (oil
string) is set, whichever depth is first reached, which depth is hereinafter
referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Joint Venture to the Contractor of the Drilling
Price becomes due and payable upon execution of this Agreement. Neither
commencement nor completion of Contractor's performance shall be a
condition precedent to this obligation to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Joint Venture agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Joint Venture shall determine whether Contractor shall set an oil string. In
the event the Joint Venture directs that drilling operations cease and to
abandon the wells, Contractor shall plug the wells, remove all drilling
apparatus from the well sites and the obligations of the parties hereunder shall
cease. In the event the Joint Venture directs Contractor to set an oil string
and makes timely payment to the Contractor of the completion price, Contractor
shall commence the operations necessary to complete the wells for commercial
production, including the setting of an oil string and the acquisition, delivery
and installation of a pump jack, holding tank and all other necessary equipment
needed to extract and contain oil from the wells. If Contractor should enter
into an assignment with another entity to undertake the Completion Program,
Contractor may bill Joint Venture, and Joint Venture will pay for any completion
costs over and above the Completion Price set forth herein.
7. STOPPAGE OF WORK BY JOINT VENTURE:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Joint Venture shall have the right to direct the stoppage of the
work to be performed by the Contractor hereunder at any time prior to reaching
the Contract Depth and even though Contractor has made no default hereunder. If
Joint Venture exercises its right to discontinue drilling a well, the Joint
Venture will not receive a refund for any unused portion of the Drilling Price
allocable to the discontinued well but the Joint Venture may direct Contractor
to apply the unused portion of the Drilling Price to the intangible cost of
another well that the Joint Venture shall specify. The unused portion of the
Drilling Price will be determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Joint Venture notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
wells. The resulting difference shall be the unused portion of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Joint Venture an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Joint Venture. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Joint Venture.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Joint Venture shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Joint Venture shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the wells or other property of the Joint Venture or
the land upon which said wells are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Joint Venture shall be under no liability to
reimburse Contractor for any such loss.
12.3 Joint Venture's Equipment: The Joint Venture shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Joint Venture for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Joint Venture, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Joint Venture, information obtained by Contractor
in the conduct of drilling operation on the wells, including, but not limited to
depth, formations penetrated, the results of coring, testing and surveying,
shall be considered confidential and shall not be divulged by Contractor or its
employees, to any person, firm or any corporation other than the Joint Venture's
designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Joint Venture respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
BLUE RIDGE ENERGY PRODUCTION FUND
A KENTUCKY JOINT VENTURE
By: Blue Ridge Energy, Inc.
Joint Venture Manager
By: /s/ ROBERT D. BURR
--------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
AUGUST 01, 1996
FAYETTE AND REAGAN PROSPECTS: The primary investment objective of the Joint
Venture is the acquisition of approximately 52% of the Working Interest, which
is approximately 39% of the Net Revenue Interest in seven producing wells (the
Equity #1, Justice Wilcox #2, Justice Wilcox #4, Schultz Pietsch #1, Andrew
Pietsch #1, Showdown Justice #1-H and the Showdown Justice #2-H and the drilling
and completion attempt of an eighth oil well (the Reagan #1) on the Fayette and
Reagan Prospects (hereinafter referred to as "Venture Wells"), which consists of
more than 1,142 acres of oil and gas leases in Fayette County, Texas, and the
production and sale of oil and/or gas therefrom. The eighth Venture Well will be
drilled to a depth of 5,400', or a depth sufficient to test the Wilcox Sandstone
formation.
D-6
<PAGE> 1
EXHIBIT 10.2
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 1st day of October, 1996 by and
between the parties herein designated as "Joint Venture" and "Contractor."
Joint Venture: Smackover / Woodbine I Joint Venture
Address: 1953 Scottsville Road, Suite 201
Bowling Green, Kentucky 42104
Contractor: Blue Ridge Energy, Inc.
Address: 1953 Scottsville Road, Suite 201
Bowling Green, Kentucky 42104
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Joint Venture engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of a Venture Well to be located in Navarro County, Texas, (referred to
herein as "Venture Well") in search of oil and/or gas.
The Joint Venture will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Venture
Well to specified depths, (ii) to assure that Contractor will be available to
drill, test and complete the subject Venture Well for the Joint Venture, (iii)
to assure that Contractor will make available on a preferential basis sufficient
drilling and completion apparatus needed to drill, test and complete the Venture
Well at the earliest possible time, (iv) to obtain a preferential use of
Contractor's services, and (v) to assure competent supervisory personnel are
available in the drilling and completion of the subject Venture Well.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Venture Well.
Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF VENTURE WELL: See Exhibit "1" attached hereto and made a part
hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Venture Well by March 31, 1997, and
Contractor and the Joint Venture agree that time is of the essence under this
Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Acquisition Price": $ 70,000
"Drilling, Completion, and Equipping Price": $547,500
4. DEPTH:
Subject to the right of the Joint Venture to direct the stoppage of work at any
time (as provided in paragraph 6), the Venture Well shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Joint Venture to the Contractor of the Drilling
Price becomes due and payable upon execution of this Agreement. Neither
commencement nor completion of Contractor's performance shall be a
condition precedent to this obligation to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Joint Venture agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Joint Venture shall determine whether Contractor shall set an oil string. In
the event the Joint Venture directs that drilling operations cease and to
abandon the Venture Well, Contractor shall plug the Venture Well, remove all
drilling apparatus from the well sites and the obligations of the parties
hereunder shall cease. In the event the Joint Venture directs Contractor to set
an oil string and makes timely payment to the Contractor of the completion
price, Contractor shall commence the operations necessary to complete the
Venture Well for commercial production, including the setting of an oil string
and the acquisition, delivery and installation of a pump jack, holding tank and
all other necessary equipment needed to extract and contain oil from the Venture
Well. If Contractor should enter into an assignment with another entity to
undertake the Completion Program, Contractor may bill Joint Venture, and Joint
Venture will pay for any completion costs over and above the Completion Price
set forth herein.
7. STOPPAGE OF WORK BY JOINT VENTURE:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Joint Venture shall have the right to direct the stoppage of the
work to be performed by the Contractor hereunder at any time prior to reaching
the Contract Depth and even though Contractor has made no default hereunder. If
Joint Venture exercises its right to discontinue drilling a well, the Joint
Venture will not receive a refund for any unused portion of the Drilling Price
allocable to the discontinued well but the Joint Venture may direct Contractor
to apply the unused portion of the Drilling Price to the intangible cost of
another well that the Joint Venture shall specify. The unused portion of the
Drilling Price will be determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Joint Venture notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Venture Well. The resulting difference shall be the unused portion of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Joint Venture an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Joint Venture. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Joint Venture.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Joint Venture shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Joint Venture shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Venture Well or other property of the Joint
Venture or the land upon which said Venture Well is located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Joint Venture shall be under no liability to
reimburse Contractor for any such loss.
12.3 Joint Venture's Equipment: The Joint Venture shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Joint Venture for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Joint Venture, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Joint Venture, information obtained by Contractor in
the conduct of drilling operation on the Venture Well, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Joint Venture's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Joint Venture respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
SMACKOVER / WOODBINE I JOINT VENTURE
A KENTUCKY JOINT VENTURE
By: Blue Ridge Energy, Inc.
Joint Venture Manager
By: /s/ ROBERT D. BURR
--------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
OCTOBER 01, 1996
WEST CURRIE PROSPECT: The primary investment objective of the Joint Venture is
the acquisition of approximately 65.37% of the Working Interest, which is
approximately 49.02% of the Net Revenue Interest in a well site on the West
Currie Prospect which consists of approximately 1,500 acres of oil and gas
leases in Navarro County, Texas and the well to be drilled thereon (hereinafter
referred to as "Venture Well"), and the production and sale of oil and/or gas
therefrom. The Venture Well will be drilled to a depth of 8,800', or a depth
sufficient to test the Norpthlet Sand formation.
D-6
<PAGE> 1
EXHIBIT 10.3
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 1st day of October, 1996 by and
between the parties herein designated as "Joint Venture" and "Contractor."
Joint Venture: Blue Ridge Energy, Inc.
Address: 1953 Scottsville Road, Suite 201
Bowling Green, Kentucky 42104
Contractor: Blue Ridge Group, Inc.
Address: 1953 Scottsville Road, Suite 201
Bowling Green, Kentucky 42104
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Joint Venture engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of a Venture Well to be located in Navarro County, Texas, (referred to
herein as "Venture Well") in search of oil and/or gas.
The Joint Venture will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Venture
Well to specified depths, (ii) to assure that Contractor will be available to
drill, test and complete the subject Venture Well for the Joint Venture, (iii)
to assure that Contractor will make available on a preferential basis sufficient
drilling and completion apparatus needed to drill, test and complete the Venture
Well at the earliest possible time, (iv) to obtain a preferential use of
Contractor's services, and (v) to assure competent supervisory personnel are
available in the drilling and completion of the subject Venture Well.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Venture Well.
Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF VENTURE WELL: See Exhibit "1" attached hereto and made a part
hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Venture Well by March 31, 1997, and
Contractor and the Joint Venture agree that time is of the essence under this
Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Completion, and Equipping Price": $402,500
4. DEPTH:
Subject to the right of the Joint Venture to direct the stoppage of work at any
time (as provided in paragraph 6), the Venture Well shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Joint Venture to the Contractor of the Drilling
Price becomes due and payable upon execution of this Agreement. Neither
commencement nor completion of Contractor's performance shall be a
condition precedent to this obligation to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Joint Venture agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Joint Venture shall determine whether Contractor shall set an oil string. In
the event the Joint Venture directs that drilling operations cease and to
abandon the Venture Well, Contractor shall plug the Venture Well, remove all
drilling apparatus from the well sites and the obligations of the parties
hereunder shall cease. In the event the Joint Venture directs Contractor to set
an oil string and makes timely payment to the Contractor of the completion
price, Contractor shall commence the operations necessary to complete the
Venture Well for commercial production, including the setting of an oil string
and the acquisition, delivery and installation of a pump jack, holding tank and
all other necessary equipment needed to extract and contain oil from the Venture
Well. If Contractor should enter into an assignment with another entity to
undertake the Completion Program, Contractor may bill Joint Venture, and Joint
Venture will pay for any completion costs over and above the Completion Price
set forth herein.
7. STOPPAGE OF WORK BY JOINT VENTURE:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Joint Venture shall have the right to direct the stoppage of the
work to be performed by the Contractor hereunder at any time prior to reaching
the Contract Depth and even though Contractor has made no default hereunder. If
Joint Venture exercises its right to discontinue drilling a well, the Joint
Venture will not receive a refund for any unused portion of the Drilling Price
allocable to the discontinued well but the Joint Venture may direct Contractor
to apply the unused portion of the
D-2
<PAGE> 3
Drilling Price to the intangible cost of another well that the Joint Venture
shall specify. The unused portion of the Drilling Price will be determined as
follows:
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Joint Venture notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Venture Well. The resulting difference shall be the unused portion of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Joint Venture an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Joint Venture. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Joint Venture.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Joint Venture shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Joint Venture shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the wells or other property of the Joint Venture or
the land upon which said wells are located.
D-3
<PAGE> 4
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Joint Venture shall be under no liability to
reimburse Contractor for any such loss.
12.3 Joint Venture's Equipment: The Joint Venture shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Joint Venture for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Joint Venture, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
D-4
<PAGE> 5
15. INFORMATION CONFIDENTIAL:
Upon written request by the Joint Venture, information obtained by Contractor
in the conduct of drilling operation on the wells, including, but not limited to
depth, formations penetrated, the results of coring, testing and surveying,
shall be considered confidential and shall not be divulged by Contractor or its
employees, to any person, firm or any corporation other than the Joint Venture's
designated representative.
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Joint Venture respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
BLUE RIDGE GROUP, INC.
By: /s/ JAMES T. COOK, JR.
-------------------------------
James T. Cook, Jr.,
Vice President--Finance & C.F.O.
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
OCTOBER 01, 1996
WEST CURRIE PROSPECT: The primary investment objective of the Joint Venture is
the acquisition of approximately 65.37% of the Working Interest, which is
approximately 49.02% of the Net Revenue Interest in a well site on the West
Currie Prospect which consists of approximately 1,500 acres of oil and gas
leases in Navarro County, Texas and the well to be drilled thereon (hereinafter
referred to as "Venture Well"), and the production and sale of oil and/or gas
therefrom. The Venture Well will be drilled to a depth of 8,800', or a depth
sufficient to test the Norpthlet Sand formation.
D-6
<PAGE> 1
EXHIBIT 10.4
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 24th day of February, 1997 by and
between the parties herein designated as "Joint Venture" and "Contractor."
Joint Venture: Paluxy Joint Venture, Ltd.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Joint Venture engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of a Venture Well to be located in Smith County, Texas, (referred to
herein as "Venture Well") in search of oil and/or gas.
The Joint Venture will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Venture
Well to specified depths, (ii) to assure that Contractor will be available to
drill, test and complete the subject Venture Well for the Joint Venture, (iii)
to assure that Contractor will make available on a preferential basis sufficient
drilling and completion apparatus needed to drill, test and complete the Venture
Well at the earliest possible time, (iv) to obtain a preferential use of
Contractor's services, and (v) to assure competent supervisory personnel are
available in the drilling and completion of the subject Venture Well.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Venture Well.
Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF VENTURE WELL: See Exhibit "1" attached hereto and made a part
hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Venture Well by June 30, 1997, and
Contractor and the Joint Venture agree that time is of the essence under this
Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Price": $647,280
"Completion and Equipping Price": $190,948
4. DEPTH:
Subject to the right of the Joint Venture to direct the stoppage of work at any
time (as provided in paragraph 7), the Venture Well shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Joint Venture to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Joint Venture of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Joint Venture agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Joint Venture shall determine whether Contractor shall set an oil string. In
the event the Joint Venture directs that drilling operations cease and to
abandon the Venture Well, Contractor shall plug the Venture Well, remove all
drilling apparatus from the well sites and the obligations of the parties
hereunder shall cease. In the event the Joint Venture directs Contractor to set
an oil string and makes timely payment to the Contractor of the completion
price, Contractor shall commence the operations necessary to complete the
Venture Well for commercial production, including the setting of an oil string
and the acquisition, delivery and installation of a pump jack, holding tank and
all other necessary equipment needed to extract and contain oil from the Venture
Well. If Contractor should enter into an assignment with another entity to
undertake the Completion Program, Contractor may bill Joint Venture, and Joint
Venture will pay for any completion costs over and above the Completion Price
set forth herein.
7. STOPPAGE OF WORK BY JOINT VENTURE:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Joint Venture shall have the right to direct the stoppage of the
work to be performed by the Contractor hereunder at any time prior to reaching
the Contract Depth and even though Contractor has made no default hereunder. If
Joint Venture exercises its right to discontinue drilling a well, the Joint
Venture will not receive a refund for any unused portion of the Drilling Price
allocable to the discontinued well but the Joint Venture may direct Contractor
to apply the unused portion of the Drilling Price to the intangible cost of
another well that the Joint Venture shall specify. The unused portion of the
Drilling Price will be determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Joint Venture notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
wells. The resulting difference shall be the unused portion of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Joint Venture an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Joint Venture. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Joint Venture.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Joint Venture shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Joint Venture shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the wells or other property of the Joint Venture or
the land upon which said wells are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe,
D-3
<PAGE> 4
drill collars and tool joints, and the Joint Venture shall be under no
liability to reimburse Contractor for any such loss.
12.3 Joint Venture's Equipment: The Joint Venture shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Joint Venture for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Joint Venture, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Joint Venture, information obtained by Contractor
in the conduct of drilling operation on the Venture Well, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Joint Venture's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Joint Venture respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
PALUXY JOINT VENTURE, LTD.
A KENTUCKY LIMITED PARTNERSHIP
By: Blue Ridge Energy, Inc.
Joint Venture Manager
By: /s/ ROBERT D. BURR
--------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
FEBRUARY 24, 1997
MOLLY JANE PROSPECT: The primary investment objective of the Joint Venture is
the acquisition of approximately a 50.00% Working Interest, which is
approximately a 35.00% Net Revenue Interest in a well site on the Molly Jane
Prospect and the production and sale of oil and/or gas therefrom. This prospect
consists of approximately 80 acres of oil and gas leases in Smith County, Texas
and the well to be re-entered and drilled thereon (the "Venture Well"). The
Venture Well will be drilled to a depth of 7,700', or a depth sufficient to test
the Paluxy Sandstone formation.
D-6
<PAGE> 1
EXHIBIT 10.5
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 24th day of February, 1997 by and
between the parties herein designated as "Joint Venture" and "Contractor."
Joint Venture: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Energy, Inc.
Address: 632 Adams Street. Suite 700
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Joint Venture engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of a Venture Well to be located in Smith County, Texas, (referred to
herein as "Venture Well") in search of oil and/or gas.
The Joint Venture will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Venture
Well to specified depths, (ii) to assure that Contractor will be available to
drill, test and complete the subject Venture Well for the Joint Venture, (iii)
to assure that Contractor will make available on a preferential basis sufficient
drilling and completion apparatus needed to drill, test and complete the Venture
Well at the earliest possible time, (iv) to obtain a preferential use of
Contractor's services, and (v) to assure competent supervisory personnel are
available in the drilling and completion of the subject Venture Well.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Venture Well.
Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF VENTURE WELL: See Exhibit "1" attached hereto and made a part
hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Venture Well by June 30, 1997, and
Contractor and the Joint Venture agree that time is of the essence under this
Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Price": $445,800
"Completion and Equipping Price": $164,200
4. DEPTH:
Subject to the right of the Joint Venture to direct the stoppage of work at any
time (as provided in paragraph 7), the Venture Well shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Joint Venture to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Joint Venture of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Joint Venture agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Joint Venture shall determine whether Contractor shall set an oil string. In
the event the Joint Venture directs that drilling operations cease and to
abandon the Venture Well, Contractor shall plug the Venture Well, remove all
drilling apparatus from the well sites and the obligations of the parties
hereunder shall cease. In the event the Joint Venture directs Contractor to set
an oil string and makes timely payment to the Contractor of the completion
price, Contractor shall commence the operations necessary to complete the
Venture Well for commercial production, including the setting of an oil string
and the acquisition, delivery and installation of a pump jack, holding tank and
all other necessary equipment needed to extract and contain oil from the Venture
Well. If Contractor should enter into an assignment with another entity to
undertake the Completion Program, Contractor may bill Joint Venture, and Joint
Venture will pay for any completion costs over and above the Completion Price
set forth herein.
7. STOPPAGE OF WORK BY JOINT VENTURE:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Joint Venture shall have the right to direct the stoppage of the
work to be performed by the Contractor hereunder at any time prior to reaching
the Contract Depth and even though Contractor has made no default hereunder. If
Joint Venture exercises its right to discontinue drilling a well, the Joint
Venture will not receive a refund for any unused portion of the Drilling Price
allocable to the discontinued well but the Joint Venture may direct Contractor
to apply the unused portion of the Drilling Price to the intangible cost of
another well that the Joint Venture shall specify. The unused portion of the
Drilling Price will be determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Joint Venture notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Venture Well. The resulting difference shall be the unused portion of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Joint Venture an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Joint Venture. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Joint Venture.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Joint Venture shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Joint Venture shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Venture Well or other property of the Joint
Venture or the land upon which said Venture Well is located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe,
D-3
<PAGE> 4
drill collars and tool joints, and the Joint Venture shall be under no
liability to reimburse Contractor for any such loss.
12.3 Joint Venture's Equipment: The Joint Venture shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Joint Venture for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Joint Venture, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Joint Venture, information obtained by Contractor
in the conduct of drilling operation on the Venture Well, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Joint Venture's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Joint Venture respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
BLUE RIDGE INC.
By: /s/ JAMES T. COOK, JR.
--------------------------------
James T. Cook, Jr.,
Vice President-Finance & C.F.O.
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
FEBRUARY 24, 1997
MOLLY JANE PROSPECT: The primary investment objective of the Joint Venture is
the acquisition of approximately a 50.00% Working Interest, which is
approximately a 35.00% Net Revenue Interest in a well site on the Molly Jane
Prospect and the production and sale of oil and/or gas therefrom. This prospect
consists of approximately 80 acres of oil and gas leases in Smith County, Texas
and the well to be re-entered and drilled thereon (the "Venture Well"). The
Venture Well will be drilled to a depth of 7,700', or a depth sufficient to test
the Paluxy Sandstone formation.
D-6
<PAGE> 1
EXHIBIT 10.6
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 21st day of May, 1997 by and
between the parties herein designated as "Joint Venture" and "Contractor."
Joint Venture: Home Stake Joint Venture, Ltd.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Joint Venture engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of a Re-Entry Well to be located in Lea County, New Mexico and a
Venture Well to be located in Throckmorton County, Texas, (referred to herein as
"Re-Entry and/or Venture Wells") in search of oil and/or gas.
The Joint Venture will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Re-Entry
and/or Venture Wells to specified depths, (ii) to assure that Contractor will be
available to drill, test and complete the subject Re-Entry and/or Venture Wells
for the Joint Venture, (iii) to assure that Contractor will make available on a
preferential basis sufficient drilling and completion apparatus needed to drill,
test and complete the Re-Entry and/or Venture Wells at the earliest possible
time, (iv) to obtain a preferential use of Contractor's services, and (v) to
assure competent supervisory personnel are available in the drilling and
completion of the subject Re-Entry and/or Venture Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Re-Entry
and/or Venture Wells. Contractor agrees that the work to be conducted under the
terms of this Agreement will be done with diligence and care in a good and
workmanlike manner and agrees to provide competent supervision of the work
performed hereunder. Unless specifically otherwise provided for herein, all the
required equipment, services and labor are furnished for the price set forth
herein.
1. LOCATION OF RE-ENTRY AND/OR VENTURE WELLS:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Re-Entry and/or Venture Wells by
September 30, 1997, and Contractor and the Joint Venture agree that time is of
the essence under this Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Acquisition Price": $ 80,000
"Drilling Price": $552,684
"Completion and Equipping Price": $438,500
4. DEPTH:
Subject to the right of the Joint Venture to direct the stoppage of work at any
time (as provided in paragraph 7), the Re-Entry and/or Venture Wells shall be
drilled to the depths as specified in Exhibit "1" or to the depths at which the
production casing (oil string) is set, whichever depth is first reached, which
depth is hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Joint Venture to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Joint Venture of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Joint Venture agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Joint Venture shall determine whether Contractor shall set an oil string. In
the event the Joint Venture directs that drilling operations cease and to
abandon the Re-Entry and/or Venture Wells, Contractor shall plug the Re-Entry
and/or Venture Wells, remove all drilling apparatus from the well sites and the
obligations of the parties hereunder shall cease. In the event the Joint Venture
directs Contractor to set an oil string and makes timely payment to the
Contractor of the completion price, Contractor shall commence the operations
necessary to complete the Re-Entry and/or Venture Wells for commercial
production, including the setting of an oil string and the acquisition, delivery
and installation of a pump jack, holding tank and all other necessary equipment
needed to extract and contain oil from the Re-Entry and/or Venture Wells. If
Contractor should enter into an assignment with another entity to undertake the
Completion Program, Contractor may bill the Joint Venture, and the Joint Venture
will pay for any completion costs over and above the Completion Price set forth
herein.
7. STOPPAGE OF WORK BY THE JOINT VENTURE:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Joint Venture shall have the right to direct the stoppage of the
work to be performed by the Contractor hereunder at any time prior to reaching
the Contract Depths and even though Contractor has made no default hereunder. If
the Joint Venture exercises its right to discontinue drilling a well, the Joint
Venture will not receive a refund for any unused portion of the Drilling Price
allocable to the discontinued well but the Joint Venture may direct Contractor
to apply the unused portion of
D-2
<PAGE> 3
the Drilling Price to the intangible cost of another well that the Joint Venture
shall specify. The unused portion of the Drilling Price will be determined as
follows:
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Joint Venture notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Re-Entry and/or Venture Wells. The resulting difference shall be the unused
portion of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Joint Venture an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Joint Venture. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Joint Venture.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Joint Venture shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Joint Venture shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Re-Entry and/or Venture Wells or other property
of the Joint Venture or the land upon which said Re-Entry and/or Venture Wells
are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Joint Venture shall be under no liability to
reimburse Contractor for any such loss.
12.3 Joint Venture's Equipment: The Joint Venture shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Joint Venture for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Joint Venture, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Joint Venture, information obtained by Contractor in
the conduct of drilling operation on the Re-Entry and/or Venture Wells,
including, but not limited to depth, formations penetrated, the results of
coring, testing and surveying, shall be considered confidential and shall not be
divulged by Contractor or its employees, to any person, firm or any corporation
other than the Joint Venture's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Joint Venture respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
HOME STAKE JOINT VENTURE, LTD.
A KENTUCKY LIMITED PARTNERSHIP
By: Blue Ridge Energy, Inc.
Joint Venture Manager
By: /s/ ROBERT D. BURR
--------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
MAY 21, 1997
HOME STAKE PROSPECT: The primary investment objectives of the Joint Venture are
the acquisition of approximately a 66.67% Working Interest, which is
approximately 50.00% of the Net Revenue Interest, in a well site on the Home
Stake Prospect and the acquisition of a 100.00% Working Interest, which is
approximately 75.00% of the Net Revenue Interest in the Kelly Prospect and the
production and sale of oil and/or gas therefrom. The Home Stake Prospect
consists of approximately 160 acres of oil and gas leases in Lea County, New
Mexico, and the well to be re-entered and drilled thereon (the "Re-Entry Well").
The Re-Entry Well will be drilled to a depth of 11,200', or a depth sufficient
to test the Strawn Limestone formation. The Kelly Prospect consists of
approximately 70 acres of oil and gas leases in Throckmorton County, Texas and
the well to be drilled thereon (the "Venture Well"). The Venture Well will be
drilled to a depth of 4,600', or a depth sufficient to test the Mississippian
Chapel Limestone formations.
D-6
<PAGE> 1
EXHIBIT 10.7
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 21st day of May, 1997 by and
between the parties herein designated as "Joint Venture" and "Contractor."
Joint Venture: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Group, Inc.
Address: 632 Adams Street, Suite 700
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Joint Venture engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of a Re-Entry Well to be located in Lea County, New Mexico and a Venture
Well to be located in Throckmorton County, Texas, (referred to herein as
"Re-Entry and/or Venture Wells") in search of oil and/or gas.
The Joint Venture will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Re-Entry
and/or Venture Wells to specified depths, (ii) to assure that Contractor will be
available to drill, test and complete the subject Re-Entry and/or Venture Wells
for the Joint Venture, (iii) to assure that Contractor will make available on a
preferential basis sufficient drilling and completion apparatus needed to drill,
test and complete the Re-Entry and/or Venture Wells at the earliest possible
time, (iv) to obtain a preferential use of Contractor's services, and (v) to
assure competent supervisory personnel are available in the drilling and
completion of the subject Re-Entry and/or Venture Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Re-Entry
and/or Venture Wells. Contractor agrees that the work to be conducted under the
terms of this Agreement will be done with diligence and care in a good and
workmanlike manner and agrees to provide competent supervision of the work
performed hereunder. Unless specifically otherwise provided for herein, all the
required equipment, services and labor are furnished for the price set forth
herein.
1. LOCATION OF RE-ENTRY AND/OR VENTURE WELLS:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Re-Entry and/or Venture Wells by
September 30, 1997, and Contractor and the Joint Venture agree that time is of
the essence under this Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Price": $682,500
"Completion and Equipping Price": $485,000
4. DEPTH:
Subject to the right of the Joint Venture to direct the stoppage of work at any
time (as provided in paragraph 7), the Re-Entry and/or Venture Wells shall be
drilled to the depth as specified in Exhibit "1" or to the depth at which the
production casing (oil string) is set, whichever depth is first reached, which
depth is hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Joint Venture to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Joint Venture of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Joint Venture agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Joint Venture shall determine whether Contractor shall set an oil string. In
the event the Joint Venture directs that drilling operations cease and to
abandon the Re-Entry and/or Venture Wells, Contractor shall plug the Re-Entry
and/or Venture Wells, remove all drilling apparatus from the well sites and the
obligations of the parties hereunder shall cease. In the event the Joint Venture
directs Contractor to set an oil string and makes timely payment to the
Contractor of the completion price, Contractor shall commence the operations
necessary to complete the Re-Entry and/or Venture Wells for commercial
production, including the setting of an oil string and the acquisition, delivery
and installation of a pump jack, holding tank and all other necessary equipment
needed to extract and contain oil from the Re-Entry and/or Venture Wells. If
Contractor should enter into an assignment with another entity to undertake the
Completion Program, Contractor may bill Joint Venture, and Joint Venture will
pay for any completion costs over and above the Completion Price set forth
herein.
7. STOPPAGE OF WORK BY JOINT VENTURE:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Joint Venture shall have the right to direct the stoppage of the
work to be performed by the Contractor hereunder at any time prior to reaching
the Contract Depths and even though Contractor has made no default hereunder. If
Joint Venture exercises its right to discontinue drilling a well, the Joint
Venture will not receive a refund for any unused portion of the Drilling Price
allocable to the discontinued well but the Joint Venture may direct Contractor
to apply the unused portion of
D-2
<PAGE> 3
the Drilling Price to the intangible cost of another well that the Joint Venture
shall specify. The unused portion of the Drilling Price will be determined as
follows:
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Joint Venture notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Re-Entry and/or Venture Wells. The resulting difference shall be the unused
portion of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Joint Venture an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Joint Venture. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Joint Venture.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Joint Venture shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Joint Venture shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Re-Entry and/or Venture Wells or other property
of the Joint Venture or the land upon which said Re-Entry and/or Venture Wells
are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Joint Venture shall be under no liability to
reimburse Contractor for any such loss.
12.3 Joint Venture's Equipment: The Joint Venture shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Joint Venture for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Joint Venture, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Joint Venture, information obtained by Contractor in
the conduct of drilling operation on the Re-Entry and/or Venture Wells,
including, but not limited to depth, formations penetrated, the results of
coring, testing and surveying, shall be considered confidential and shall not be
divulged by Contractor or its employees, to any person, firm or any corporation
other than the Joint Venture's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Joint Venture respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
BLUE RIDGE GROUP, INC.
By: /s/ JAMES T. COOK, JR.
--------------------------------
James T. Cook, Jr., Vice
President-Finance & C.F.O.
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
MAY 21, 1997
HOME STAKE PROSPECT: The primary investment objectives of the Joint Venture are
the acquisition of approximately a 66.67% Working Interest, which is
approximately 50.00% of the Net Revenue Interest, in a well site on the Home
Stake Prospect and the acquisition of a 100.00% Working Interest, which is
approximately 75.00% of the Net Revenue Interest in the Kelly Prospect and the
production and sale of oil and/or gas therefrom. The Home Stake Prospect
consists of approximately 160 acres of oil and gas leases in Lea County, New
Mexico, and the well to be re-entered and drilled thereon (the "Re-Entry Well").
The Re-Entry Well will be drilled to a depth of 11,200', or a depth sufficient
to test the Strawn Limestone formation. The Kelly Prospect consists of
approximately 70 acres of oil and gas leases in Throckmorton County, Texas and
the well to be drilled thereon (the "Venture Well"). The Venture Well will be
drilled to a depth of 4,600', or a depth sufficient to test the Mississippian
Chapel Limestone formations.
D-6
<PAGE> 1
EXHIBIT 10.8
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 26th day of September, 1997 by
and between the parties herein designated as "Joint Venture" and "Contractor."
Joint Venture: Sherman / Moore #1 Joint Venture, Ltd.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Joint Venture engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and
complete its portion of two Venture Wells to be located in Sherman County,
Texas, (referred to herein as "Venture Wells") in search of oil and/or gas.
The Joint Venture will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the wells to
specified depths, (ii) to assure that Contractor will be available to drill,
test and complete the subject Venture Wells for the Joint Venture, (iii) to
assure that Contractor will make available on a preferential basis sufficient
drilling and completion apparatus needed to drill, test and complete the Venture
Wells at the earliest possible time, (iv) to obtain a preferential use of
Contractor's services, and (v) to assure competent supervisory personnel are
available in the drilling and completion of the subject Venture Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Venture Wells.
Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF VENTURE WELLS:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Venture Wells by December 31, 1997, and
Contractor and the Joint Venture agree that time is of the essence under this
Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Price": $704,860
"Completion and Equipping Price": $391,530
4. DEPTH:
Subject to the right of the Joint Venture to direct the stoppage of work at any
time (as provided in paragraph 7), the Venture Wells shall be drilled to the
depth as specified in Exhibit "1" or to the depths at which the production
casing (oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Joint Venture to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Joint Venture of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Joint Venture agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Joint Venture shall determine whether Contractor shall set an oil string. In
the event the Joint Venture directs that drilling operations cease and to
abandon the Venture Wells, Contractor shall plug the Venture Wells, remove all
drilling apparatus from the well sites and the obligations of the parties
hereunder shall cease. In the event the Joint Venture directs Contractor to set
an oil string and makes timely payment to the Contractor of the completion
price, Contractor shall commence the operations necessary to complete the
Venture Wells for commercial production, including the setting of an oil string
and the acquisition, delivery and installation of a pump jack, holding tank and
all other necessary equipment needed to extract and contain oil from the Venture
Wells. If Contractor should enter into an assignment with another entity to
undertake the Completion Program, Contractor may bill the Joint Venture, and the
Joint Venture will pay for any completion costs over and above the Completion
Price set forth herein.
7. STOPPAGE OF WORK BY THE JOINT VENTURE:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Joint Venture shall have the right to direct the stoppage of the
work to be performed by the Contractor hereunder at any time prior to reaching
the Contract Depths and even though Contractor has made no default hereunder. If
the Joint Venture exercises its right to discontinue drilling a well, the Joint
Venture will not receive a refund for any unused portion of the Drilling Price
allocable to the discontinued well but the Joint Venture may direct Contractor
to apply the unused portion of the Drilling Price to the intangible cost of
another well that the Joint Venture shall specify. The unused portion of the
Drilling Price will be determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Joint Venture notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Venture Wells. The resulting difference shall be the unused portion of the
price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Joint Venture an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Joint Venture. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Joint Venture.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Joint Venture shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Joint Venture shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Venture Wells or other property of the Joint
Venture or the land upon which said Venture Wells are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Joint Venture shall be under no liability to
reimburse Contractor for any such loss.
12.3 Joint Venture's Equipment: The Joint Venture shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Joint Venture for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Joint Venture, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Joint Venture, information obtained by Contractor in
the conduct of drilling operation on the Venture Wells, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Joint Venture's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Joint Venture respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
SHERMAN / MOORE #1 JOINT VENTURE, LTD.
A KENTUCKY LIMITED PARTNERSHIP
By: Blue Ridge Energy, Inc.
Joint Venture Manager
By: /s/ ROBERT D. BURR
--------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
SEPTEMBER 26, 1997
SHERMAN/MOORE #1 PROSPECT: The primary investment objectives of the Joint
Venture are the acquisition of approximately a 100.00% Working Interest, which
is approximately 75.00% of the Net Revenue Interest, in two well sites on the
Sherman/Moore Prospect and the production and sale of oil and/or gas therefrom.
The Sherman/Moore Prospect consists of approximately 1,120 acres of oil and gas
leases in Sherman County, Texas, and the wells to be reentered and drilled
thereon (the "Venture Wells"). The Venture Wells will be drilled to a depth of
3,200', or a depth sufficient to test the Brown Dolomite formation.
D-6
<PAGE> 1
EXHIBIT 10.9
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 26th day of September, 1997 by
and between the parties herein designated as "Joint Venture" and "Contractor."
Joint Venture: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Group, Inc.
Address: 632 Adams Street, Suite 700
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Joint Venture engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and
complete its portion of two Venture Wells to be located in Sherman County,
Texas, (referred to herein as "Venture Wells") in search of oil and/or gas.
The Joint Venture will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Venture
Wells to specified depths, (ii) to assure that Contractor will be available to
drill, test and complete the subject Venture Wells for the Joint Venture, (iii)
to assure that Contractor will make available on a preferential basis sufficient
drilling and completion apparatus needed to drill, test and complete the Venture
Wells at the earliest possible time, (iv) to obtain a preferential use of
Contractor's services, and (v) to assure competent supervisory personnel are
available in the drilling and completion of the subject Venture Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Venture Wells.
Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF WELLS: See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Venture Wells by December 31, 1997, and
Contractor and the Joint Venture agree that time is of the essence under this
Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Price": $625,000
"Completion and Equipping Price": $292,900
4. DEPTH:
Subject to the right of the Partnership to direct the stoppage of work at any
time (as provided in paragraph 7), the Venture Wells shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Joint Venture to the Contractor of the Drilling
Price becomes due and payable upon receipt by the Joint Venture of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Joint Venture agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Joint Venture shall determine whether Contractor shall set an oil string. In
the event the Joint Venture directs that drilling operations cease and to
abandon the Venture Wells, Contractor shall plug the Venture Wells, remove all
drilling apparatus from the well sites and the obligations of the parties
hereunder shall cease. In the event the Joint Venture directs Contractor to set
an oil string and makes timely payment to the Contractor of the completion
price, Contractor shall commence the operations necessary to complete the
Venture Wells for commercial production, including the setting of an oil string
and the acquisition, delivery and installation of a pump jack, holding tank and
all other necessary equipment needed to extract and contain oil and/or gas from
the Venture Wells. If Contractor should enter into an assignment with another
entity to undertake the Completion Program, Contractor may bill the Joint
Venture, and the Joint Venture will pay for any completion costs over and above
the Completion Price set forth herein.
7. STOPPAGE OF WORK BY JOINT VENTURE:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Joint Venture shall have the right to direct the stoppage of the
work to be performed by the Contractor hereunder at any time prior to reaching
the Contract Depth and even though Contractor has made no default hereunder. If
the Joint Venture exercises its right to discontinue drilling a well, the Joint
Venture will not receive a refund for any unused portion of the Drilling Price
allocable to the discontinued well but the Joint Venture may direct Contractor
to apply the unused portion of the Drilling Price to the intangible cost of
another well that the Joint Venture shall specify. The unused portion of the
Drilling Price will be determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Joint Venture notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Venture Wells. The resulting difference shall be the unused portion of the
price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Joint Venture an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Joint Venture. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Joint Venture.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Joint Venture shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Joint Venture shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Venture Wells or other property of the Joint
Venture or the land upon which said Venture Wells are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Joint Venture shall be under no liability to
reimburse Contractor for any such loss.
12.3 Joint Venture's Equipment: The Joint Venture shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Joint Venture for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Joint Venture, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Joint Venture, information obtained by Contractor in
the conduct of drilling operation on the Venture Wells, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Joint Venture's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Joint Venture respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-----------------------------------
Robert D. Burr, President
BLUE RIDGE GROUP, INC.
By: /s/ JAMES T. COOK, JR.
-----------------------------------
James T. Cook, Jr., Vice
President--Finance & C.F.O.
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
SEPTEMBER 26, 1997
SHERMAN/MOORE #1 PROSPECT: The primary investment objectives of the Joint
Venture are the acquisition of approximately a 100.00% Working Interest, which
is approximately 75.00% of the Net Revenue Interest, in two well sites on the
Sherman/Moore Prospect and the production and sale of oil and/or gas therefrom.
The Sherman/Moore Prospect consists of approximately 1,120 acres of oil and gas
leases in Sherman County, Texas, and the wells to be re-entered and drilled
thereon (the "Venture Wells"). The Venture Wells will be drilled to a depth of
3,200', or a depth sufficient to test the Brown Dolomite formation.
D-6
<PAGE> 1
EXHIBIT 10.10
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 10th day of February, 1998 by and
between the parties herein designated as "Partnership" and "Contractor."
Partnership: Phillips / Blue Ridge Joint Venture #1, Ltd.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 700
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Partnership engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of one Venture Well to be located in Sherman County, Texas, (referred
to herein as "Venture Well") in search of oil and/or gas.
The Partnership will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Venture
Well to specified depth, (ii) to assure that Contractor will be available to
drill, test and complete the subject Venture Well for the Partnership, (iii) to
assure that Contractor will make available on a preferential basis sufficient
drilling and completion apparatus needed to drill, test and complete the Venture
Well at the earliest possible time, (iv) to obtain a preferential use of
Contractor's services, and (v) to assure competent supervisory personnel are
available in the drilling and completion of the subject Venture Well.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Venture Well.
Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF VENTURE WELL:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Venture Well by May 31, 1998,
and Contractor and the Partnership agree that time is of the essence under this
Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Price": $651,580
"Completion, and Equipping Price": $323,790
4. DEPTH:
Subject to the right of the Partnership to direct the stoppage of work at any
time (as provided in paragraph 7), the Venture Well shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Partnership to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Partnership of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Partnership agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Partnership shall determine whether Contractor shall set an oil string. In
the event the Partnership directs that drilling operations cease and to abandon
the Venture Well, Contractor shall plug the Venture Well, remove all drilling
apparatus from the well sites and the obligations of the parties hereunder shall
cease. In the event the Partnership directs Contractor to set an oil string and
makes timely payment to the Contractor of the completion price, Contractor shall
commence the operations necessary to complete the Venture Well for commercial
production, including the setting of an oil string and the acquisition, delivery
and installation of a pump jack, holding tank and all other necessary equipment
needed to extract and contain oil and/or gas from the Venture Well. If
Contractor should enter into an assignment with another entity to undertake the
Completion Program, Contractor may bill the Partnership, and the Partnership
will pay for any completion costs over and above the Completion Price set forth
herein.
7. STOPPAGE OF WORK BY THE PARTNERSHIP:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Partnership shall have the right to direct the stoppage of the work
to be performed by the Contractor hereunder at any time prior to reaching the
Contract Depth and even though Contractor has made no default hereunder. If the
Partnership exercises its right to discontinue drilling a well, the Partnership
will not receive a refund for any unused portion of the Drilling Price allocable
to the discontinued well but the Partnership may direct Contractor to apply the
unused portion of the Drilling Price to the intangible cost of another well that
the Partnership shall specify. The unused portion of the Drilling Price will be
determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Partnership notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Venture Well. The resulting difference shall be the unused portion of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Partnership an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Partnership. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Partnership.
8.2 Delivery tickets, if requested by the Partnership, covering any
material or supplies furnished by the Partnership shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Partnership shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Venture Well or other property of the
Partnership or the land upon which Venture well is located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Partnership shall be under no liability to
reimburse Contractor for any such loss.
12.3 Partnership's Equipment: The Partnership shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Partnership for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Partnership, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Partnership, information obtained by Contractor in
the conduct of drilling operation on the Venture Well, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Partnership's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Partnership respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
PHILLIPS / BLUE RIDGE JOINT VENTURE #1, LTD.
A KENTUCKY LIMITED PARTNERSHIP
By: Blue Ridge Energy, Inc.
Managing General Partner
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
FEBRUARY 10, 1998
PHILLIPS PUGH PROSPECT: The primary investment objective of the Partnership is
the acquisition of approximately a 93.75% Working Interest, which is
approximately 70.31% of the Net Revenue Interest, in one well site on the
Phillips Pugh Prospect and the production and sale of oil and/or gas therefrom.
The Phillips Pugh Prospect consists of approximately 640 acres of oil and gas
leases in Sherman County, Texas, and the well to be drilled thereon (the
"Venture Well"). The Venture Well will be drilled to a depth of 2,900', or a
depth sufficient to test the Brown Dolomite formation.
D-6
<PAGE> 1
EXHIBIT 10.11
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 10th day of February, 1998 by and
between the parties herein designated as "Partnership" and "Contractor."
Partnership: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Group, Inc.
Address: 632 Adams Street, Suite 700
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Partnership engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of one Venture Well to be located in Sherman County, Texas, (referred
to herein as "Venture Well") in search of oil and/or gas.
The Partnership will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Venture
Well to a specified depth, (ii) to assure that Contractor will be available to
drill, test and complete the subject Venture Well for the Partnership, (iii) to
assure that Contractor will make available on a preferential basis sufficient
drilling and completion apparatus needed to drill, test and complete the Venture
Well at the earliest possible time, (iv) to obtain a preferential use of
Contractor's services, and (v) to assure competent supervisory personnel are
available in the drilling and completion of the subject Venture Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Venture Well.
Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF VENTURE WELL:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Venture Well by May 31, 1998, and
Contractor and the Partnership agree that time is of the essence under this
Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Price": $457,625
"Completion and Equipping Price": $228,390
4. DEPTH:
Subject to the right of the Partnership to direct the stoppage of work at any
time (as provided in paragraph 7), the Partnership Wells shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Partnership to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Partnership of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Partnership agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Partnership shall determine whether Contractor shall set an oil string. In
the event the Partnership directs that drilling operations cease and to abandon
the Texas and Kentucky Venture Wells, Contractor shall plug the Venture Well,
remove all drilling apparatus from the well site and the obligations of the
parties hereunder shall cease. In the event the Partnership directs Contractor
to set an oil string and makes timely payment to the Contractor of the
completion price, Contractor shall commence the operations necessary to complete
the Venture Well for commercial production, including the setting of an oil
string and the acquisition, delivery and installation of a pump jack, holding
tank and all other necessary equipment needed to extract and contain oil and/or
gas from the Venture Well. If Contractor should enter into an assignment with
another entity to undertake the Completion Program, Contractor may bill the
Partnership, and the Partnership will pay for any completion costs over and
above the Completion Price set forth herein.
7. STOPPAGE OF WORK BY THE PARTNERSHIP:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Partnership shall have the right to direct the stoppage of the work
to be performed by the Contractor hereunder at any time prior to reaching the
Contract Depth and even though Contractor has made no default hereunder. If the
Partnership exercises its right to discontinue drilling a well, the Partnership
will not receive a refund for any unused portion of the Drilling Price allocable
to the discontinued well but the Partnership may direct Contractor to apply the
unused portion of the Drilling Price to the intangible cost of another well that
the Partnership shall specify. The unused portion of the Drilling Price will be
determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Partnership notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Venture Well. The resulting difference shall be the unused portion of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Partnership an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Partnership. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Partnership.
8.2 Delivery tickets, if requested by the Partnership, covering any
material or supplies furnished by the Partnership shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Partnership shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Venture Well or other property of the
Partnership or the land upon which said Venture Well is located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Partnership shall be under no liability to
reimburse Contractor for any such loss.
12.3 Partnership's Equipment: The Partnership shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Partnership for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Partnership, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Partnership, information obtained by Contractor in
the conduct of drilling operation on the Venture Well, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Partnership's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Partnership respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
BLUE RIDGE GROUP, INC.
By: /s/ JAMES T. COOK, JR.
-------------------------------
James T. Cook, Jr., Vice
President - Finance & C.F.O.
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
FEBRUARY 10, 1998
PHILLIPS PUGH PROSPECT: The primary investment objective of the Partnership is
the acquisition of approximately a 93.75% Working Interest, which is
approximately 70.31% of the Net Revenue Interest, in one well site on the
Phillips Pugh Prospect and the production and sale of oil and/or gas therefrom.
The Phillips Pugh Prospect consists of approximately 640 acres of oil and gas
leases in Sherman County, Texas, and the well to be drilled thereon (the
"Venture Well"). The Venture Well will be drilled to a depth of 2,900', or a
depth sufficient to test the Brown Dolomite formation.
D-6
<PAGE> 1
EXHIBIT 10.12
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 1st day of December, 1998 by and
between the parties herein designated as "Partnership" and "Contractor."
Partnership: 1998 Year End Drilling Programs, Ltd.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Partnership engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of one Venture Well to be located in Shelby County, Texas, (referred to
herein as "Texas Venture Well") and nine Venture Wells to be located in Bell and
Knox Counties, Kentucky (referred to herein as "Kentucky Venture Wells") in
search of oil and/or gas.
The Partnership will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Texas and
Kentucky Venture Wells to a specified depth, (ii) to assure that Contractor will
be available to drill, test and complete the subject Texas and Kentucky Venture
Wells for the Partnership, (iii) to assure that Contractor will make available
on a preferential basis sufficient drilling and completion apparatus needed to
drill, test and complete the Texas and Kentucky Venture Wells at the earliest
possible time, (iv) to obtain a preferential use of Contractor's services, and
(v) to assure competent supervisory personnel are available in the drilling and
completion of the subject Texas and Kentucky Venture Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Texas and
Kentucky Venture Wells. Contractor agrees that the work to be conducted under
the terms of this Agreement will be done with diligence and care in a good and
workmanlike manner and agrees to provide competent supervision of the work
performed hereunder. Unless specifically otherwise provided for herein, all the
required equipment, services and labor are furnished for the price set forth
herein.
1. LOCATION OF VENTURE WELLS:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Texas and Kentucky Venture Wells by
March 31, 1999, and Contractor and the Partnership agree that time is of the
essence under this Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid $1,482,500 for the drilling, completion and equipping.
4. DEPTH:
Subject to the right of the Partnership to direct the stoppage of work at any
time (as provided in paragraph 7), the Texas and Kentucky Venture Wells shall be
drilled to the depth as specified in Exhibit "1" or to the depth at which the
production casing (oil string) is set, whichever depth is first reached, which
depth is hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Partnership to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Partnership of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Partnership agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Partnership shall determine whether Contractor shall set an oil string. In
the event the Partnership directs that drilling operations cease and to abandon
the Texas and Kentucky Venture Wells, Contractor shall plug the Texas and
Kentucky Venture Wells, remove all drilling apparatus from the well sites and
the obligations of the parties hereunder shall cease. In the event the
Partnership directs Contractor to set an oil string and makes timely payment to
the Contractor of the completion price, Contractor shall commence the operations
necessary to complete the Texas and Kentucky Venture Wells for commercial
production, including the setting of an oil string and the acquisition, delivery
and installation of a pump jack, holding tank and all other necessary equipment
needed to extract and contain oil and/or gas from the Texas and Kentucky Venture
Wells. If Contractor should enter into an assignment with another entity to
undertake the Completion Program, Contractor may bill the Partnership, and the
Partnership will pay for any completion costs over and above the Completion
Price set forth herein.
7. STOPPAGE OF WORK BY THE PARTNERSHIP:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Partnership shall have the right to direct the stoppage of the work
to be performed by the Contractor hereunder at any time prior to reaching the
Contract Depth and even though Contractor has made no default hereunder. If the
Partnership exercises its right to discontinue drilling a well, the Partnership
will not receive a refund for any unused portion of the Drilling Price allocable
to the discontinued well but the Partnership may direct Contractor to apply the
unused portion of the Drilling Price to the intangible cost of another well that
the Partnership shall specify. The unused portion of the Drilling Price will be
determined as follows:
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Partnership notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
D-2
<PAGE> 3
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the Texas
and Kentucky Venture Wells. The resulting difference shall be the unused portion
of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Partnership an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Partnership. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Partnership.
8.2 Delivery tickets, if requested by the Partnership, covering any
material or supplies furnished by the Partnership shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Partnership shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Texas and Kentucky Venture Wells or other
property of the Partnership or the land upon which said Texas and Kentucky
Venture Wells are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Joint Venture shall be under no liability to
reimburse Contractor for any such loss.
D-3
<PAGE> 4
12.3 Partnership's Equipment: The Partnership shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Partnership for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Partnership, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Partnership, information obtained by Contractor in
the conduct of drilling operation on the Texas and Kentucky Venture Wells,
including, but not limited to depth, formations penetrated, the results of
coring, testing and surveying, shall be considered confidential and shall not be
divulged by Contractor or its employees, to any person, firm or any corporation
other than the Joint Venture's designated representative.
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
D-4
<PAGE> 5
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Partnership respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
1998 YEAR END DRILLING PROGRAM, LTD.
A KENTUCKY LIMITED PARTNERSHIP
By: Blue Ridge Energy, Inc.
Managing General Partner
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
DECEMBER 1, 1998
The primary investment objectives of the Partnership are: (i) the acquisition of
the following Working Interests and Net Revenue Interests in ten oil and gas
wells:
<TABLE>
<CAPTION>
PARTNERSHIP PARTNERSHIP
WORKING NET REVENUE TARGET
WELL NAME INTEREST INTEREST COUNTY, STATE DEPTH FORMATION
- --------- -------- -------- ------------- ----- ---------
<S> <C> <C> <C> <C> <C>
Huber-EREC #15 25.0% 18.2500% Bell, KY 2,500' Maxon Sand
Huber-EREC #16 25.0% 18.2500% Bell, KY 2,500' Maxon Sand
Huber-EREC #20 25.0% 18.2500% Bell, KY 2,500' Maxon Sand
Evan Big Sandy #158 25.0% 18.2500% Johnson, KY 3,500' Devonian Shale
Evan Big Sandy #159 25.0% 18.2500% Magoffin, KY 3,500' Devonian Shale
Evan Big Sandy #160 25.0% 18.2500% Letcher, KY 3,500' Devonian Shale
Evan Big Sandy #162 25.0% 18.2500% Johnson, KY 3,500' Devonian Shale
Evan Big Sandy #133 50.0% 36.5000% Knott, KY 3,500' Devonian Shale
Evan Harlan $531 15.9% 12.6535% Harlan, KY 6,000' Coniferous Sand
USA-Thomas Hailey #1 30.0% 23.0000% Shelby, KY 6,400' James Limestone
</TABLE>
D-6
<PAGE> 1
EXHIBIT 10.13
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 1st day of December, 1998 by and
between the parties herein designated as "Partnership" and "Contractor."
Partnership: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Group, Inc.
Address: 632 Adams Street, Suite 700
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Partnership engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of one Venture Well to be located in Shelby County, Texas, (referred to
herein as "Texas Venture Well") and nine Venture Wells to be located in Bell and
Knox Counties, Kentucky, (referred to herein as "Kentucky Venture Wells") in
search of oil and/or gas.
The Partnership will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the
Texas and Kentucky Venture Wells to a specified depth, (ii) to assure that
Contractor will be available to drill, test and complete the subject Texas and
Kentucky Venture Wells for the Partnership, (iii) to assure that Contractor will
make available on a preferential basis sufficient drilling and completion
apparatus needed to drill, test and complete the Texas and Kentucky Venture
Wells at the earliest possible time, (iv) to obtain a preferential use of
Contractor's services, and (v) to assure competent supervisory personnel are
available in the drilling and completion of the subject Texas and Kentucky
Venture Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Texas and
Kentucky Venture Wells. Contractor agrees that the work to be conducted under
the terms of this Agreement will be done with diligence and care in a good and
workmanlike manner and agrees to provide competent supervision of the work
performed hereunder. Unless specifically otherwise provided for herein, all the
required equipment, services and labor are furnished for the price set forth
herein.
1. LOCATION OF VENTURE WELLS:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Texas and Kentucky Venture Wells by
March 31, 1999, and Contractor and the Partnership agree that time is of the
essence under this Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid $1,050,000 for the drilling, completion and equipping.
4. DEPTH:
Subject to the right of the Partnership to direct the stoppage of work at any
time (as provided in paragraph 7), the Texas and Kentucky Venture Wells shall be
drilled to the depth as specified in Exhibit "1" or to the depth at which the
production casing (oil string) is set, whichever depth is first reached, which
depth is hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Partnership to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Partnership of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Partnership agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Partnership shall determine whether Contractor shall set an oil string. In
the event the Partnership directs that drilling operations cease and to abandon
the Texas and Kentucky Venture Wells, Contractor shall plug the Texas and
Kentucky Venture Wells, remove all drilling apparatus from the well sites and
the obligations of the parties hereunder shall cease. In the event the
Partnership directs Contractor to set an oil string and makes timely payment to
the Contractor of the completion price, Contractor shall commence the operations
necessary to complete the Texas and Kentucky Venture Wells for commercial
production, including the setting of an oil string and the acquisition, delivery
and installation of a pump jack, holding tank and all other necessary equipment
needed to extract and contain oil and/or gas from the Texas and Kentucky Venture
Wells. If Contractor should enter into an assignment with another entity to
undertake the Completion Program, Contractor may bill the Partnership, and the
Partnership will pay for any completion costs over and above the Completion
Price set forth herein.
7. STOPPAGE OF WORK BY THE PARTNERSHIP:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Partnership shall have the right to direct the stoppage of the work
to be performed by the Contractor hereunder at any time prior to reaching the
Contract Depth and even though Contractor has made no default hereunder. If the
Partnership exercises its right to discontinue drilling a well, the Partnership
will not receive a refund for any unused portion of the Drilling Price allocable
to the discontinued well but the Partnership may direct Contractor to apply the
unused portion of the Drilling Price to the intangible cost of another well that
the Partnership shall specify. The unused portion of the Drilling Price will be
determined as follows:
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Partnership notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
D-2
<PAGE> 3
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Texas and Kentucky Venture Wells. The resulting difference shall be the unused
portion of the price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Partnership an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Partnership. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Partnership.
8.2 Delivery tickets, if requested by the Partnership, covering any
material or supplies furnished by the Partnership shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Partnership shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Texas and Kentucky Venture Wells or other
property of the Partnership or the land upon which said Texas and Kentucky
Venture Wells are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Partnership shall be under no liability to
reimburse Contractor for any such loss.
D-3
<PAGE> 4
12.3 Partnership's Equipment: The Partnership shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Partnership for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Partnership, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Partnership, information obtained by Contractor in
the conduct of drilling operation on the Texas and Kentucky Venture Wells,
including, but not limited to depth, formations penetrated, the results of
coring, testing and surveying, shall be considered confidential and shall not be
divulged by Contractor or its employees, to any person, firm or any corporation
other than the Partnership's designated representative.
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
D-4
<PAGE> 5
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Partnership respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
BLUE RIDGE GROUP, INC.
By: /s/ JAMES T. COOK, JR.
-------------------------------
James T. Cook, Jr.
Sr. Vice President - Finance &
C.F.O.
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
DECEMBER 1, 1998
The primary investment objectives of the Partnership are: (i) the acquisition of
the following Working Interests and Net Revenue Interests in ten oil and gas
wells:
<TABLE>
<CAPTION>
PARTNERSHIP PARTNERSHIP
WORKING NET REVENUE TARGET
WELL NAME INTEREST INTEREST COUNTY, STATE DEPTH FORMATION
- --------- -------- -------- ------------- ----- ---------
<S> <C> <C> <C> <C> <C>
Huber-EREC #15 25.0% 18.2500% Bell, KY 2,500' Maxon Sand
Huber-EREC #16 25.0% 18.2500% Bell, KY 2,500' Maxon Sand
Huber-EREC #20 25.0% 18.2500% Bell, KY 2,500' Maxon Sand
Evan Big Sandy #158 25.0% 18.2500% Johnson, KY 3,500' Devonian Shale
Evan Big Sandy #159 25.0% 18.2500% Magoffin, KY 3,500' Devonian Shale
Evan Big Sandy #160 25.0% 18.2500% Letcher, KY 3,500' Devonian Shale
Evan Big Sandy #162 25.0% 18.2500% Johnson, KY 3,500' Devonian Shale
Evan Big Sandy #133 50.0% 36.5000% Knott, KY 3,500' Devonian Shale
Evan Harlan $531 15.9% 12.6535% Harlan, KY 6,000' Coniferous Sand
USA-Thomas Hailey #1 30.0% 23.0000% Shelby, KY 6,400' James Limestone
</TABLE>
D-6
<PAGE> 1
EXHIBIT 10.14
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 4th day of March, 1999 by and
between the parties herein designated as "Partnership" and "Contractor."
Partnership: Harlan County Limited Partnership, Ltd.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Partnership engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of five Venture Wells to be located in Harlan County, Kentucky,
(referred to herein as "Venture Wells") in search of oil and/or gas.
The Partnership will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the Venture
Wells to specified depths, (ii) to assure that Contractor will be available to
drill, test and complete the subject Venture Wells for the Partnership, (iii) to
assure that Contractor will make available on a preferential basis sufficient
drilling and completion apparatus needed to drill, test and complete the Venture
Wells at the earliest possible time, (iv) to obtain a preferential use of
Contractor's services, and (v) to assure competent supervisory personnel are
available in the drilling and completion of the subject Venture Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Venture Wells.
Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF VENTURE WELLS:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Venture Wells by March 31, 2000, and
Contractor and the Partnership agree that time is of the essence under this
Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Completing, and Equipping Price": $705,600
4. DEPTH:
Subject to the right of the Partnership to direct the stoppage of work at any
time (as provided in paragraph 7), the Venture Wells shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Partnership to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Partnership of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Partnership agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Partnership shall determine whether Contractor shall set an oil string. In
the event the Partnership directs that drilling operations cease and to abandon
the Venture Wells, Contractor shall plug the Venture Wells, remove all drilling
apparatus from the well sites and the obligations of the parties hereunder shall
cease. In the event the Partnership directs Contractor to set an oil string and
makes timely payment to the Contractor of the completion price, Contractor shall
commence the operations necessary to complete the Venture Wells for commercial
production, including the setting of an oil string and the acquisition, delivery
and installation of a pump jack, holding tank and all other necessary equipment
needed to extract and contain oil and/or gas from the Venture Wells. If
Contractor should enter into an assignment with another entity to undertake the
Completion Program, Contractor may bill the Partnership, and the Partnership
will pay for any completion costs over and above the Completion Price set forth
herein.
7. STOPPAGE OF WORK BY THE PARTNERSHIP:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Partnership shall have the right to direct the stoppage of the work
to be performed by the Contractor hereunder at any time prior to reaching the
Contract Depth and even though Contractor has made no default hereunder. If the
Partnership exercises its right to discontinue drilling a well, the Partnership
will not receive a refund for any unused portion of the Drilling Price allocable
to the discontinued well but the Partnership may direct Contractor to apply the
unused portion of the Drilling Price to the intangible cost of another well that
the Partnership shall specify. The unused portion of the Drilling Price will be
determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Partnership notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Venture Wells. The resulting difference shall be the unused portion of the
price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Partnership an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Partnership. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Partnership.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Partnership shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Partnership shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the wells or other property of the Partnership or
the land upon which said Venture Wells is located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Partnership shall be under no liability to
reimburse Contractor for any such loss.
12.3 Partnership's Equipment: The Partnership shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Partnership for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Partnership, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Partnership, information obtained by Contractor in
the conduct of drilling operation on the Venture Wells, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Partnership's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Partnership respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
HARLAN COUNTY LIMITED PARTNERSHIP, LTD.
A KENTUCKY LIMITED PARTNERSHIP
By: Blue Ridge Energy, Inc.
Managing General Partner
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
MARCH 4, 1999
The primary investment objective of the Partnership is the acquisition of
approximately a 30.00% Working Interest, which is approximately 18.75% of the
Net Revenue Interest in five well sites out of fifteen to be drilled on the
Harlan County Prospect and the production and sale of oil/gas therefrom. William
W. Kelley, Jr., an Independent Petroleum Geologist to the Managing General
Partner, will select the five wells to be acquired by the Partnership. Mr.
Kelley will utilize various criteria including production notes, sand thickness,
sand porosity, sand permeability, and geographical location. The Harlan County
Prospect consists of approximately 6,500 acres of oil and gas leases in Harlan
County, Kentucky and the wells to be drilled thereon (the "Partnership Wells").
The Partnership Wells will be drilled to depths of approximately 6,000' or
depths sufficient to test the Maxon Sand formation.
D-6
<PAGE> 1
EXHIBIT 10.15
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 4th day of March, 1999 by and
between the parties herein designated as "Partnership" and "Contractor."
Partnership: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Group, Inc.
Address: 632 Adams Street, Suite 700
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Partnership engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of five Partnership Wells to be located in Harlan County, Kentucky,
(referred to herein as "Partnership Wells") in search of oil and/or gas.
The Partnership will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the
Partnership Wells to a specified depth, (ii) to assure that Contractor will be
available to drill, test and complete the subject Partnership Wells for the
Partnership, (iii) to assure that Contractor will make available on a
preferential basis sufficient drilling and completion apparatus needed to drill,
test and complete the Partnership Wells at the earliest possible time, (iv) to
obtain a preferential use of Contractor's services, and (v) to assure competent
supervisory personnel are available in the drilling and completion of the five
Partnership Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Partnership
Wells. Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF PARTNERSHIP WELLS:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the five Partnership Wells by March 31,
2000, and Contractor and the Partnership agree that time is of the essence under
this Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Completing, and Equipping Price": $565,000
4. DEPTH:
Subject to the right of the Partnership to direct the stoppage of work at any
time (as provided in paragraph 7), the Partnership Wells shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Partnership to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Partnership of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Partnership agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Partnership shall determine whether Contractor shall set an oil string. In
the event the Partnership directs that drilling operations cease and to abandon
the five Partnership Wells, Contractor shall plug the Partnership Wells, remove
all drilling apparatus from the well sites and the obligations of the parties
hereunder shall cease. In the event the Partnership directs Contractor to set an
oil string and makes timely payment to the Contractor of the completion price,
Contractor shall commence the operations necessary to complete the Partnership
Wells for commercial production, including the setting of an oil string and the
acquisition, delivery and installation of a pump jack, holding tank and all
other necessary equipment needed to extract and contain oil and/or gas from the
Partnership Wells. If Contractor should enter into an assignment with another
entity to undertake the Completion Program, Contractor may bill the Partnership,
and the Partnership will pay for any completion costs over and above the
Completion Price set forth herein.
7. STOPPAGE OF WORK BY THE PARTNERSHIP:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Partnership shall have the right to direct the stoppage of the work
to be performed by the Contractor hereunder at any time prior to reaching the
Contract Depth and even though Contractor has made no default hereunder. If the
Partnership exercises its right to discontinue drilling a well, the Partnership
will not receive a refund for any unused portion of the Drilling Price allocable
to the discontinued well but the Partnership may direct Contractor to apply the
unused portion of the Drilling Price to the intangible cost of another well that
the Partnership shall specify. The unused portion of the Drilling Price will be
determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Partnership notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Partnership Wells. The resulting difference shall be the unused portion of the
price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Partnership an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Partnership. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Partnership.
8.2 Delivery tickets, if requested by the Partnership, covering any
material or supplies furnished by the Partnership shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Partnership shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Partnership Wells or other property of the
Partnership or the land upon which said Partnership Wells are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Partnership shall be under no liability to
reimburse Contractor for any such loss.
12.3 Partnership's Equipment: The Partnership shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Partnership for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Partnership, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Partnership, information obtained by Contractor in
the conduct of drilling operation on the Partnership Wells, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Joint Venture's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Partnership respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
BLUE RIDGE GROUP, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
MARCH 4, 1999
The primary investment objective of the Partnership is the acquisition of
approximately a 30.00% Working Interest, which is approximately 18.75% of the
Net Revenue Interest in five well sites out of fifteen to be drilled on the
Harlan County Prospect and the production and sale of oil/gas therefrom. William
W. Kelley, Jr., an Independent Petroleum Geologist to the Managing General
Partner, will select the five wells to be acquired by the Partnership. Mr.
Kelley will utilize various criteria including production notes, sand thickness,
sand porosity, sand permeability, and geographical location. The Harlan County
Prospect consists of approximately 6,500 acres of oil and gas leases in Harlan
County, Kentucky and the wells to be drilled thereon (the "Partnership Wells").
The Partnership Wells will be drilled to depths of approximately 6,000' or
depths sufficient to test the Maxon Sand formation.
D-6
<PAGE> 1
EXHIBIT 10.16
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 13th day of April, 1999 by and
between the parties herein designated as "Partnership" and "Contractor."
Partnership: Cumberland Gap 10 Limited Partnership, Ltd.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Partnership engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of ten Partnership Wells to be located in Harlan County, Kentucky,
(referred to herein as "Partnership Wells") in search of oil and/or gas.
The Partnership will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the
Partnership Wells to a specified depth, (ii) to assure that Contractor will be
available to drill, test and complete the subject Partnership Wells for the
Partnership, (iii) to assure that Contractor will make available on a
preferential basis sufficient drilling and completion apparatus needed to drill,
test and complete the Partnership Wells at the earliest possible time, (iv) to
obtain a preferential use of Contractor's services, and (v) to assure competent
supervisory personnel are available in the drilling and completion of the ten
Partnership Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Partnership
Wells. Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF PARTNERSHIP WELLS:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the ten Partnership Wells by March 31,
2000, and Contractor and the Partnership agree that time is of the essence under
this Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Completing, and Equipping Price": $1,411,200
4. DEPTH:
Subject to the right of the Partnership to direct the stoppage of work at any
time (as provided in paragraph 7), the Partnership Wells shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Partnership to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Partnership of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Partnership agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Partnership shall determine whether Contractor shall set an oil string. In
the event the Partnership directs that drilling operations cease and to abandon
the five Partnership Wells, Contractor shall plug the Partnership Wells, remove
all drilling apparatus from the well sites and the obligations of the parties
hereunder shall cease. In the event the Partnership directs Contractor to set an
oil string and makes timely payment to the Contractor of the completion price,
Contractor shall commence the operations necessary to complete the Partnership
Wells for commercial production, including the setting of an oil string and the
acquisition, delivery and installation of a pump jack, holding tank and all
other necessary equipment needed to extract and contain oil and/or gas from the
Partnership Wells. If Contractor should enter into an assignment with another
entity to undertake the Completion Program, Contractor may bill the Partnership,
and the Partnership will pay for any completion costs over and above the
Completion Price set forth herein.
7. STOPPAGE OF WORK BY THE PARTNERSHIP:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Partnership shall have the right to direct the stoppage of the work
to be performed by the Contractor hereunder at any time prior to reaching the
Contract Depth and even though Contractor has made no default hereunder. If the
Partnership exercises its right to discontinue drilling a well, the Partnership
will not receive a refund for any unused portion of the Drilling Price allocable
to the discontinued well but the Partnership may direct Contractor to apply the
unused portion of the Drilling Price to the intangible cost of another well that
the Partnership shall specify. The unused portion of the Drilling Price will be
determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Partnership notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Partnership Wells. The resulting difference shall be the unused portion of the
price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Partnership an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Partnership. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Partnership.
8.2 Delivery tickets, if requested by the Partnership, covering any
material or supplies furnished by the Partnership shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Partnership shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Partnership Wells or other property of the
Partnership or the land upon which said Partnership Wells are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Partnership shall be under no liability to
reimburse Contractor for any such loss.
12.3 Partnership's Equipment: The Partnership shall assume liability at
all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Partnership for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Partnership, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Partnership, information obtained by Contractor in
the conduct of drilling operation on the Partnership Wells, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Joint Venture's designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Partnership respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-----------------------------------
Robert D. Burr, President
CUMBERLAND GAP 10 LIMITED PARTNERSHIP, LTD.
A KENTUCKY LIMITED PARTNERSHIP
By: Blue Ridge Energy, Inc.
Managing General Partner
By: /s/ ROBERT D. BURR
-----------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
APRIL 13, 1999
The primary investment objectives of the Partnership are: (1) the acquisition of
approximately a 30.00% Working Interest, which is approximately 23.00% of the
Net Revenue Interest in ten well sites to be drilled on the Cumberland Gap 10
Prospect and the production and sale of oil/gas therefrom. The Cumberland Gap 10
Prospect consists of approximately 6,500 acres of oil and gas leases in Harlan
County, Kentucky and the wells to be drilled thereon (the "Kentucky Partnership
Wells"). The Kentucky Partnership Wells will be drilled to depths of
approximately 6,000' or depths sufficient to test the Corniferous Sand formation
and (2) the assignment of income from a 25% Working Interest which is an 18.75%
Net Revenue Interest in the Colton Williams #44-1 Well ("Texas Well") to be
drilled on the 960 acre Rocksprings Prospect in Edwards County. The Texas Well
will be drilled to a depth of 7,000 feet or a depth sufficient to test the
Holman Sands. There will be no cost to the Partnership for the assignment of
income from the Colton Williams #44-1 well and the assignment of income is
limited to when twice the partners' original capital contributions, or
$3,600,000, is received by the Partners from the production of all Partnership
wells.
D-6
<PAGE> 1
EXHIBIT 10.17
TURNKEY DRILLING CONTRACT
THIS AGREEMENT, is made and entered into as of 13th day of April, 1999 by and
between the parties herein designated as "Partnership" and "Contractor."
Partnership: Blue Ridge Energy, Inc.
Address: 632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
Contractor: Blue Ridge Group, Inc.
Address: 632 Adams Street, Suite 700
Bowling Green, Kentucky 42101
IN CONSIDERATION of the mutual promises, conditions and agreements herein
contained, Partnership engages Contractor as an Independent Contractor to
furnish the equipment, labor and services to drill, test, and complete its
portion of ten Partnership Wells to be located in Harlan County, Kentucky,
(referred to herein as "Partnership Wells") in search of oil and/or gas.
The Partnership will make the specified payments to Contractor in order (i) to
obtain a price from Contractor for the drilling and completion of the
Partnership Wells to specified depths, (ii) to assure that Contractor will be
available to drill, test and complete the subject Partnership Wells for the
Partnership, (iii) to assure that Contractor will make available on a
preferential basis sufficient drilling and completion apparatus needed to drill,
test and complete the Partnership Wells at the earliest possible time, (iv) to
obtain a preferential use of Contractor's services, and (v) to assure competent
supervisory personnel are available in the drilling and completion of the ten
Partnership Wells.
Contractor agrees to furnish all equipment, labor and services necessary for the
drilling to the depth indicated herein and the completion of such Partnership
Wells. Contractor agrees that the work to be conducted under the terms of this
Agreement will be done with diligence and care in a good and workmanlike manner
and agrees to provide competent supervision of the work performed hereunder.
Unless specifically otherwise provided for herein, all the required equipment,
services and labor are furnished for the price set forth herein.
1. LOCATION OF PARTNERSHIP WELLS:
See Exhibit "1" attached hereto and made a part hereof.
2. TERMINATION DATE:
Contractor agrees to use its best efforts to complete operations for the
acquisition, drilling and testing of the Partnership Wells by March 31, 2000,
and Contractor and the Partnership agree that time is of the essence under this
Agreement.
D-1
<PAGE> 2
3. BASIS OF DETERMINING AMOUNTS PAYABLE TO CONTRACTOR:
Contractor shall be paid at the following rate for the work performed hereunder:
"Drilling, Completing, and Equipping Price": $1,125,000
4. DEPTH:
Subject to the right of the Partnership to direct the stoppage of work at any
time (as provided in paragraph 7), the Partnership Wells shall be drilled to the
depth as specified in Exhibit "1" or to the depth at which the production casing
(oil string) is set, whichever depth is first reached, which depth is
hereinafter referred to as the "Contract Depth."
5. TIME OF PAYMENT:
5.1 Basis: Payment by the Partnership to the Contractor of the Drilling
Price becomes due and payable upon the receipt by the Partnership of an
invoice from the Contractor. Neither commencement nor completion of
Contractor's performance shall be a condition precedent to this obligation
to pay.
5.2 Attorneys' Fees: If this Agreement is placed in the hands of an
attorney for collection of any sums due hereunder, or suit is brought on
same, or sums due hereunder are collected through bankruptcy or probate
proceedings, then the Partnership agrees that there shall be added to
the amount due reasonable attorneys' fees and costs.
6. COMPLETION PROGRAM:
The Partnership shall determine whether Contractor shall set an oil string. In
the event the Partnership directs that drilling operations cease and to abandon
the five Partnership Wells, Contractor shall plug the Partnership Wells, remove
all drilling apparatus from the well sites and the obligations of the parties
hereunder shall cease. In the event the Partnership directs Contractor to set an
oil string and makes timely payment to the Contractor of the completion price,
Contractor shall commence the operations necessary to complete the Partnership
Wells for commercial production, including the setting of an oil string and the
acquisition, delivery and installation of a pump jack, holding tank and all
other necessary equipment needed to extract and contain oil and/or gas from the
Partnership Wells. If Contractor should enter into an assignment with another
entity to undertake the Completion Program, Contractor may bill the Partnership,
and the Partnership will pay for any completion costs over and above the
Completion Price set forth herein.
7. STOPPAGE OF WORK BY THE PARTNERSHIP:
Notwithstanding the provisions of paragraph 3 with respect to the depth to be
drilled, the Partnership shall have the right to direct the stoppage of the work
to be performed by the Contractor hereunder at any time prior to reaching the
Contract Depth and even though Contractor has made no default hereunder. If the
Partnership exercises its right to discontinue drilling a well, the Partnership
will not receive a refund for any unused portion of the Drilling Price allocable
to the discontinued well but the Partnership may direct Contractor to apply the
unused portion of the Drilling Price to the intangible cost of another well that
the Partnership shall specify. The unused portion of the Drilling Price will be
determined as follows:
D-2
<PAGE> 3
Contractor shall determine a sum equal to all the actual expenses reasonably and
necessarily incurred up to the date the Partnership notified Contractor to
discontinue drilling plus such additional expenses reasonably and necessarily
incurred in order for Contractor to cease operations, including plugging and
abandoning the hole, and dismantling the rig plus the sum of 15% of such total
actual expenses. This sum shall be deducted from the Drilling Price of the
Partnership Wells. The resulting difference shall be the unused portion of the
price.
8. REPORTS TO BE FURNISHED BY CONTRACTOR:
8.1 Contractor shall keep and furnish to the Partnership an accurate
record of the work performed and formations drilled on the IADC-API Daily
Drilling Report form or other form acceptable to the Partnership. A
legible copy of said form signed by Contractor's representative shall be
furnished by Contractor to the Partnership.
8.2 Delivery tickets, if requested by the Joint Venture, covering any
material or supplies furnished by the Partnership shall be turned in
each day with the daily drilling report. The quantity, description and
condition of materials and supplies so furnished shall be checked by
Contractor and such tickets shall be properly certified by Contractor.
9. RESPONSIBILITY FOR A SOUND LOCATION:
Contractor shall prepare a sound location, adequate in size and capable of
properly supporting the drilling rig. Contractor shall be responsible for a
conductor pipe program adequate to prevent soil and subsoil washout. In the
event subsurface conditions cause a cratering or shifting of the location
surface, and loss or damage to the rig or its associated equipment results
therefrom, the Partnership shall not be responsible for reimbursing Contractor
for any such loss or damage including payment of work stoppage rate during
repair and/or demobilization if applicable.
10. RESPONSIBILITY FOR ROAD AND LOCATIONS:
Contractor agrees at all times to maintain roads to locations and each location
in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle.
11. PAYMENT OF CLAIMS:
Contractor agrees to pay all claims for labor, material, services and supplies
to be furnished by Contractor hereunder, and agrees to allow no lien or charge
to be fixed upon the lease, the Partnership Wells or other property of the
Partnership or the land upon which said Partnership Wells are located.
12. RESPONSIBILITY FOR LOSS OR DAMAGE:
12.1 Contractor's Surface Equipment: Contractor shall assume liability at
all times for damage to or destruction of Contractor's surface equipment,
including but not limited to all drilling tools, machinery and appliances,
for use above the surface, regardless of when or how such damage or
destruction occurs.
D-3
<PAGE> 4
12.2 Contractor's In-Hole Equipment Basis: Contractor shall assume
liability at all times for damage to or destruction of Contractor's
in-hole equipment, including but not limited to drill pipe, drill collars
and tool joints, and the Partnership shall be under no liability to
reimburse Contractor for any such loss.
12.3 Partnership's Equipment: The Partnership shall assume liability
at all times for any defective equipment owned by it, including but not
limited to casing, tubing, well head equipment, and Contractor shall be
under no liability to reimburse the Partnership for any such loss or
damage.
12.4 Fire or Blow-Out: Should a fire or blowout occur or should the hole
for any cause attributable to Contractor's operators be lost or damaged
while Contractor is engaged in the performance of work hereunder, all such
loss of or damage to the hole including cost of regaining control of a
fire or blowout, shall be borne by Contractor; and if the hole is not in
condition to be carried to the Contract Depth as herein provided,
Contractor shall, if requested by the Partnership, commence a new hole
without delay at Contractor's cost; and the drilling of the new hole shall
be conducted under the terms and conditions of this Agreement in the same
manner as though it were the first hole and Contractor shall be
responsible for replacement of any casing lost in a junked and abandoned
hole as well as the cost of preparing a new drill site for the new hole
and the road thereto. In such case, Contractor shall not be entitled to
any payment or compensation for expenditures made or incurred by
Contractor on or in connection with the abandoned hole.
13. NO WAIVER EXCEPT IN WRITING:
It is fully understood and agreed that none of the requirements of this
Agreement shall be considered as waived by either party unless the same is done
in writing, and then only by the persons executing this Agreement, or other duly
authorized agent or representative of the party.
14. FORCE MAJEURE:
If either party hereto is rendered unable, wholly or in part (and its
performance hereunder is not rendered merely commercially impracticable) by
force majeure to carry out its obligation under this Agreement, it shall give
the other party prompt written notice of the force majeure with reasonably full
particulars. Thereupon, the obligations of the notifying party, so far as they
are affected by the force majeure, shall be suspended during, but not longer
than, the continuance of the force majeure, and the notifying party agrees to
use reasonable diligence to remove the force majeure as quickly as possible.
This paragraph shall not relieve either party hereto for its obligations to
expend sums of money or to indemnify the other party hereto, as provided
elsewhere in this Agreement. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, extreme weather conditions, or governmental restraint.
15. INFORMATION CONFIDENTIAL:
Upon written request by the Partnership, information obtained by Contractor in
the conduct of drilling operation on the Partnership Wells, including, but not
limited to depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by
Contractor or its employees, to any person, firm or any corporation other than
the Partnership designated representative.
D-4
<PAGE> 5
16. ASSIGNMENT:
Neither party may assign this Agreement without the prior written consent of the
other, and prompt notice of any such intent to assign shall be given to the
other party. If any assignment is made that materially alters Contractor's
financial burden, Contractor's compensation shall be adjusted to give effect to
any increase or decrease in Contractor's operating costs.
17. NOTICES AND PLACE OF PAYMENT:
All notices to be given with respect to this Agreement unless otherwise provided
for shall be given to Contractor and to the Partnership respectively at the
addresses hereinabove shown. All sums payable hereunder to Contractor shall be
payable at the address hereinabove shown unless otherwise specified herein.
BLUE RIDGE ENERGY, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
BLUE RIDGE GROUP, INC.
By: /s/ ROBERT D. BURR
-------------------------------
Robert D. Burr, President
D-5
<PAGE> 6
EXHIBIT "1" TO EXHIBIT "D"
APRIL 13, 1999
The primary investment objectives of the Partnership are: (1) the acquisition of
approximately a 30.00% Working Interest, which is approximately 23.00% of the
Net Revenue Interest in ten well sites to be drilled on the Cumberland Gap 10
Prospect and the production and sale of oil/gas therefrom. The Cumberland Gap 10
Prospect consists of approximately 6,500 acres of oil and gas leases in Harlan
County, Kentucky and the wells to be drilled thereon (the "Kentucky Partnership
Wells"). The Kentucky Partnership Wells will be drilled to depths of
approximately 6,000' or depths sufficient to test the Corniferous Sand formation
and (2) the assignment of income from a 25% Working Interest which is an 18.75%
Net Revenue Interest in the Colton Williams #44-1 Well ("Texas Well") to be
drilled on the 960 acre Rocksprings Prospect in Edwards County. The Texas Well
will be drilled to a depth of 7,000 feet or a depth sufficient to test the
Holman Sands. There will be no cost to the Partnership for the assignment of
income from the Colton Williams #44-1 well and the assignment of income is
limited to when twice the partners' original capital contributions, or
$3,600,000, is received by the Partners from the production of all Partnership
wells.
D-6
<PAGE> 1
EXHIBIT 10.18
NOLAND COMPANY
DRILLING EQUIPMENT BRANCH
DRILL RIG - QUOTATION AND BUYER'S ORDER
QUOTATION AND/OR CONTRACT NO.
--------------------------------------------------
DATE: February 6, 1998
-------------------------
NOLAND REPRESENTATIVE Charles H. Powell
----------------------------------------------------------
QUOTED TO (BUYER):
NAME Blue Ridge Group
---------------------------------------------------------------------------
ADDRESS 632 Adams Street Suite #700
------------------------------------------------------------------------
CITY Bowling Green STATE KY ZIP 42101
-------------------- ------- -----------------------------------
PHONE NUMBER 502-842-2421
-------------------------------------------------------------------
SELLER:
NOLAND COMPANY
2227 SHENANDOAH AVENUE, N.W.
ROANOKE, VA 24017
(703) 982-8001
NO LIABILITY INSURANCE INCLUDED
I. WE ARE PLEASED TO QUOTE ON THE WITHIN STATED EQUIPMENT:
Rig: Ingersoll-Rand RD-20 S/N
---------------------- --------------------------------------
Drill Mounted On CMC 4 Axle Carrier
------------------------------------------------------
Other (Specify) S/N
------------------- -------------------------------
Compressor Ingersoll-Rand HR 2.5 1250 CFM@ 350 PSI
----------------------------------- ------ ------
Power Unit Cummins QSK 19C 700 Horsepower @ 1800 RPM
------------------------------------------------------------
Vehicle Identification No. New Equipment - VIN # will be provided when
--------------------------------------------
available
-----------------------------------------------------------------------
-----------------------------------------------------------------------
7/95 Page 1 of 6
<PAGE> 2
<TABLE>
<CAPTION>
WITH FOLLOWING EXTRA EQUIPMENT: Yes No
<S> <C> <C>
Optional Truck 4 Axle CMC Carrier [ ] [ ]
----------------------------------
Optional Compressor I - R 1250 / 350 [X] [ ]
-----------------------------
Air Line Lubricator 60 gal [X] [ ]
-----------------------------
Air Pressure Regulator [X] [ ]
--------------------------
Heavy Hoist Package 110,000 Lb Pullback [X] [ ]
-----------------------------
Hot Box Pre-Heater Diesel Fired [X] [ ]
------------------------------
Water Injection System 25 gpm [X] [ ]
--------------------------
Night Lighting [X] [ ]
----------------------------------
Water Mud Pump [ ] [X]
----------------------------------
Petol Wrench [X] [ ]
------------------------------------
Table Bushing 4 1/2" Solid [X] [ ]
----------------------
Table Bushing Split 5 3/8" [ ] [X]
----------------------
4 1/2" x 9 1/2" Spindle Sub [ ] [X]
---------------------
4 1/2" x 24" Spindle Sub [ ] [X]
------------------------
4 1/2" x 48" Spindle Sub [X] [ ]
------------------------
Drill Steel [ ] [X]
-------------------------------------
Hammer [ ] [X]
------------------------------------------
Hammer Bits [ ] [X]
-------------------------------------
Stabilizer [ ] [X]
--------------------------------------
4 1/2" x 3 1/2" Bit Sub Reg. API [ ] [X]
----------------
Roller Bits [ ] [X]
-------------------------------------
Auxiliary 175 Gallon Fuel or Water Tank [ ] [X]
---------
Rapid Travel Kit [ ] [X]
--------------------------------
6 1/4" Bit Basket [X] [ ]
--------------------------------
8" Bit Basket [X] [ ]
-----------------------------------
10" Bit Basket [ ] [X]
----------------------------------
</TABLE>
7/95 Page 2 of 6
<PAGE> 3
<TABLE>
<CAPTION>
YES NO
<S> <C>
Hammer Sub 3 1/2" API Box & Pin 18" Long [ ] [X]
--------
Includes Hammer breakout tools for [X] [ ]
--------------
6" and 8" Hammers [X] [ ]
--------------------------------
Special Paint [ ] [ ]
-----------------------------------
[ ] [ ]
-------------------------------------------------
</TABLE>
Total Quoted Price $741,000.00
------------------
Sales Tax
------------------
Total
------------------
II. DESCRIPTION OF TRADE-IN:
Year 1989 Make I-R T4WLT
------- ---------------------------------------------------
Model No. 900/350 Long Derrick RIG S/N 3057
------------------------- --------------------------
Power Unit KT-19 Cumming Compressor I-R HR2 900 CFM@ 350 PSI
---------------- ------------- ------
Drill Mounted On: Year 1986 Make Pettibone
----------- -----------------------------------
Model Crane Carrier Chassis Vehicle I.D.# 2P9428HC2F0002513
---------------------- ---------------------------
Truck Engine Detroit 6-71
---------------------------------------------------------
Water Injection 25 gpm Cast DHD Lube 50 gal
------------------- -------------------------
Rotary Head 2-Motor Spur
----------------------------------------------------------
III. PAYMENT AND DELIVERY AGREEMENTS:
<TABLE>
<S> <C>
Quoted Price (Excluding Taxes and Titling Fees): $ 741,000.00
---------------
(A) State Sales Tax: $
---------------
(B) Local Sales Tax: $
---------------
Less:
(A) Trade-In Allowance: $
---------------
(B) Lease Conversion: $
---------------
(C) Deposit With Order: $
---------------
BALANCE DUE: $
-----------------
(Plus other fees as itemized on page 4)
Terms of Sale:
[ ] Cash on Delivery [X] To be financed by
------
Center Capital
------------------------
</TABLE>
Any applicable sales taxes will be added. /s/ CHP
2/6/98
7/95 Page 3 of 6
<PAGE> 4
Additional Amount to be Collected For:
Registration Fee $ N/A Title Fee $ N/A
----- -----
Uninsured Motor Vehicle Fee $ N/A Other Fees $ N/A
----- -----
Amount of processing fee charged, if any. If no processing fee is
charged, please indicate "none": none
---------------------------------
Local dealer's business license tax: none
-----------------------------
Delivery Terms F.O.B.
Eastern Kentucky
-----------------------------------------------------------------
IV. ADDITIONAL TERMS AND CONDITIONS:
In the event the foregoing quotation and its terms and conditions are
acceptable to the Buyer, then it is the intent and agreement of Buyer
and Noland Company ("Seller") that this document shall become a
contract and subject to the additional terms and conditions as follows:
a. Unless otherwise provided herein, the prices quoted apply to this
quotation only, are subject to change without notice prior to
acceptance, are based upon current market costs, are subject to any
applicable manufacturer price escalation and, except where noted, do
not include shipping or transportation charges. Any change in
quantities, delivery dates, handling or destination may incur a price
adjustment. Federal, state or local applicable taxes or titling charges
are not a part of the quoted price and are the responsibility of the
Buyer. It is the responsibility of the Buyer to provide the proper
authorities or certificates whenever a tax exempt status is claimed.
b. Terms of sale are cash unless otherwise provided herein. The title and
right to possession of the machinery and materials quoted herein and
any replacements or substitutions shall remain with the Seller until
all amounts due are fully paid and, if financing is provided by the
Seller, a security interest is hereby granted until full remittance is
made for all negotiated documents including specified late charges,
interest, collection and attorney's fees, etc.
c. If Seller arranges financing for this purchase, the following notice is
applicable: "This sale is conditioned upon approval of buyer's
proposed retail installment sale contract as submitted to or through
the Seller. If that proposed retail installment sale contract is not
approved under the terms agreed to with the Seller, the buyer may
cancel this sale and any down payment and/or trade-in submitted by the
buyer will be returned to the buyer, provided that any vehicle
delivered to the buyer by the Seller pursuant to this agreement is
returned to the Seller in the
7/95 Page 4 of 6
<PAGE> 5
same condition as delivered to the buyer, normal wear and tear
excepted, within twenty-four hours of written or oral notice to the
buyer of the credit denial".
d. Seller shall not be responsible for delay caused by fires or other
casualties, strikes, lockouts, differences with workmen, accidents,
war insurrections, government regulations, delay in transportation,
delay by suppliers of materials, or contingencies beyond its control.
Receipt of the machinery or materials covered by this contract from a
common carrier shall constitute an acceptance and release or waiver of
any responsibility on the part of the Seller for damages in transit or
loss due to delay in delivery.
e. Seller does not manufacture the goods it sells but will pass on to the
buyer, to the extent possible, all benefits realized under whatever
warranty, if any, which may be extended by the manufacturer of the
goods sold. Seller hereby disclaims any and all warranties, expressed
or implied, including but not limited to the warranties of
merchantability and fitness for a particular purpose or any warranties
arising from a course of dealing or usage of trade. No employee of
Seller is authorized to make or assume any warranty, liability or
responsibility with regard to the goods on behalf of Seller.
f. When material defects are discovered, Buyer shall comply with all
requirements of any applicable manufacturer's warranty before
proceeding with replacement or repairs. The goods are sold "as is" and
the Seller assumes no liability in the event the goods are defective in
any way. Seller shall not be liable under any circumstances for
consequential, special or punitive damages, or lost profits arising
from faulty installation, application or operation by Buyer; or those
caused by defective goods and any attendant labor, repairs, or other
expense incident to their removal and replacement; or on account of the
use or resale of goods.
g. On refurbished or used equipment, no warranties are stated or implied
by the Seller except as otherwise noted in writing. The Seller has no
liability for damage or failure due to negligence, misuse, accident,
improper operation, improper application or installation caused by the
Buyer. On components manufactured by others and contained on
refurbished or used equipment, Seller assigns to the Buyer, to the
extent assignable, the manufacturer's standard warranty and any
transferrable extended warranties which may be in effect.
The Buyer shall pay all expenses of removal, installation and/or
transportation costs to and from the location where warranty service is
performed. Such repair on replacement shall be done at the soonest
practical time. Defective goods will be returned within 10 days to
Seller, freight prepaid, for inspection and credit if applicable. Under
no circumstances will Seller be liable for incidental or consequential
damages.
h. Cancellation of this quotation/buyer's order or any other failure of
buyer to consummate the purchase contemplated hereby for any reason
other than Seller's failure to give final acceptance of this
quotation/buyer's order will result in forfeiture of any deposit paid
to Seller and liability for any damages exceeding the deposit amount.
Page 5 of 6
<PAGE> 6
i. All contracts or agreements are subject to the approval of the
Seller's corporate headquarters, to be indicated by the written
acceptance of an authorized agent of the Seller. This agreement shall
become effective on the date and at the place of such acceptance.
j. THIS QUOTATION WILL EXPIRE UNLESS ACCEPTED ON OR BEFORE THE ___ DAY (OR
IF THIS BLANK IS NOT FILLED IN, THE SEVENTH DAY) FOLLOWING THE DATE SET
FORTH ON THE FIRST PAGE HEREOF, AND IN ANY EVENT IS SUBJECT TO RECEIPT
BY SELLER OF SATISFACTORY CREDIT INFORMATION AND CREDIT APPROVAL.
k. Seller makes no warranty that the description or performance of
equipment contained herein conforms to any plans, specifications or
requirements of Buyer, who is cautioned to compare this quotation with
actual specified requirements to avoid error. Seller assumes no
responsibility for any addenda and/or alternates unless expressly
stated in this quotation. Any alternate offered is based on Seller's
interpretation of the specifications and Buyers is cautioned to
carefully compare the alternate with actual requirements.
SUBMITTED BY: NOLAND COMPANY
By: /s/ CHARLES H. POWELL
------------------------
Title: Sales Representative
----------------------
THE FOREGOING QUOTATION IS HEREBY ACCEPTED AS A CONTRACT THIS 6th day of
FEBRUARY, 1998, SUBJECT TO FURTHER ACCEPTANCE OF THE SELLER, AND BUYER
ACKNOWLEDGES RECEIPT OF A COPY OF THIS CONTRACT.
BUYER: /s/ BLUE RIDGE GROUP
----------------------
(Print full corporate,
partnership or individual name)
By: /s/ [ILLEGIBLE]
-------------------------
Title: Vice President
----------------------
FINAL ACCEPTANCE:
NOLAND COMPANY
Title:
----------------------
Date:
----------------------
2/6/98
<PAGE> 1
EXHIBIT 10.19
BILL OF SALE
COMMONWEALTH OF KENTUCKY, )
County of Warren )
That Blue Ridge Group, Inc. of the County and Commonwealth aforesaid, for
and in consideration of the sum of Four Hundred Ninety Five Thousand and no/xx
Dollars as applied to the sale of an Ingersoll Rand T-4 Drilling Rig by Blue
Ridge Group, Inc. of 632 Adams Street, Ste. 700, Bowling Green, Kentucky 42101
to Blue Ridge Energy, Inc. of 632 Adams Street, Ste. 710, Bowling Green,
Kentucky 42101, the receipt for which is hereby acknowledged, have BARGAINED,
SOLD AND DELIVERED, and by these presents do BARGAIN, SELL and DELIVER unto the
said Blue Ridge Energy, Inc. of 632 Adams Street, Ste. 710 Bowling Green,
Kentucky 42101, the following described personal property in Warren County,
Kentucky, to-wit:
Ingersoll Rand T-4 Drilling Rig, Serial #29801
And we do hereby bind ourselves and our heirs, executors, administrators and
assigns, to forever WARRANT and DEFEND to title to the said property unto the
said Blue Ridge Energy, Inc. of 632 Adams Street, Ste. 710, Bowling Green,
Kentucky 42101, and its heirs, executors, administrators and assigns, against
every person whomsoever lawfully claiming, or to claim the same, or any part
thereof.
WITNESS my hand at Bowling Green, Kentucky, this 30th day of June, 1999.
1999.
BLUE RIDGE GROUP, INC. BLUE RIDGE ENERGY, INC.
By: /s/ GREGORY B. SHEA By: /s/ JAMES T. COOK, JR.
----------------------------------- -----------------------------------
Gregory B. Shea, Sr. Vice President James T. Cook, Jr. Vice President
<PAGE> 1
EXHIBIT 10.20
PROMISSORY NOTE
$126,000.00 Bowling Green, Kentucky
June 30, 1996
FOR VALUE RECEIVED, the undersigned promises to pay to the order of Blue
Ridge Group, Inc. the principal sum of One Hundred Twenty Six Thousand AND
no/100 ($126,000.00) with interest from date at the rate of 8% per annum on the
unpaid balance until paid. The entire principal balance and all accrued interest
shall be payable on the 30th day of September, 1996.
Privilege is reserved to prepay at any time, without premium or fee, or any
penalty whatsoever the entire indebtedness or any part thereof at any time prior
to maturity.
If any deficiency in the payment of this note is not made on the due date,
the entire principal balance plus accrued interest shall at once become due and
payable without notice at the option of the Holders/Payees.
In the event of foreclosure or collection proceedings, the undersigned
shall reimburse the Holders/Payees for all reasonable attorney fees and court
costs as permitable by the Kentucky Revised Statutes.
This note shall not be assumed without the prior written consent of the
Holders/Payees, nor the financing assumed by anyone without the consent of the
Holders/Payees.
The undersigned shall be bound and waives presentment for payment, demand,
protest, and notice of demand, protest and nonpayment.
/s/ JAMES T. COOK, JR.
------------------------------------
Blue Ridge Energy, Inc.
<PAGE> 1
EXHIBIT 10.21
August 31, 1998
Blue Ridge Group, Inc.
632 Adams Street, Suite 710
Bowling Green, KY 42101
Dear Mr. Burr:
When executed by you, this letter shall serve as an agreement by and
between Blue Ridge Energy, Inc., (herein "Energy") and Blue Ridge Group, Inc.
(herein "Group") regarding the acquisition by Energy of a 25% Working Interest
in up to fifty (50) oil and gas wells located in the Appalachian Basin as well
as the acquisition of drilling rigs and ancillary equipment to drill oil and gas
wells. Our agreement with respect to these acquisitions is as follows:
1: Group intends to locate, drill and develop up to fifty (50) wells in the
Appalachian Basin. Energy will purchase a 25% Working Interest resulting in
an 18.75% Net Revenue Interest in each well located, drilled and developed
for $55,000.
2: Energy intends to acquire drilling rigs and related equipment for ongoing
operations in the Appalachian Basin. Group may sell to Energy, at
historical cost any excess drilling rigs and equipment in its possession
that would suit Energy's ongoing needs.
3: In order to facilitate the foregoing, Energy agrees to extend a line of
credit of $1,500,000 to Group for a period of one year from which Group may
draw funds as required. Group will pay interest of 12% per annum on all
outstanding balances under this arrangement. Amounts due under this line of
credit will be repaid as funds generated by Group's operations become
available, by the sale of drilling rigs and equipment to Energy and/or by
the exchange of 25% Working Interest in oil and gas wells located in the
Appalachian Basin at a rate of $55,000 per 25% Working Interest conveyed.
If the foregoing fully describes your understanding of the agreement between
Blue Ridge and Premier, please acknowledge your assent to the terms and
conditions hereof by signing in the space provided below.
Truly Yours,
/s/ JAMES T. COOK, JR.
James T. Cook, Jr.
Sr. Vice President-Finance
Agreed and accepted this 31st day
August, 1998 by Blue Ridge Energy, Inc.
/s/ ROBERT D. BURR
- -----------------------------------
By: Robert D. Burr
--------------
Its: President
---------
<PAGE> 1
EXHIBIT 10.22
MANAGEMENT SERVICES CONTRACT
September 30, 1996
Blue Ridge Group, Inc. hereby agrees to provide Blue Ridge Energy, Inc. with the
following services:
1. General Management
2. Administration
3. Financial and Accounting Records
4. Tax and Audit Preparation
As compensation for these services Blue Ridge Group, Inc. will receive a monthly
fee of $20,000.00 on the 30th day of the month in which such services are
performed. This contract will continue in force indefinitely or until such time
as it is terminated by either party with a 30 day written notice.
Agreed to and Accepted by: Agreed to and Accepted by:
Blue Ridge Group, Inc. Blue Ridge Energy, Inc.
/s/ ROBERT D. BURR /s/ JAMES T. COOK, JR.
- ----------------------------------- ------------------------------------
<PAGE> 1
EXHIBIT 10.23
WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS
THE HOLDER OF THIS WARRANT AND/OR SHARES DELIVERS TO THE COMPANY AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE.
BLUE RIDGE ENERGY, INC.
COMMON STOCK PURCHASE WARRANT
Expiring June 30, 2001
THIS CERTIFIES THAT, for value received, Blue Ridge Group, Inc. (the "Warrant
Holder"), at any time and from time to time on any Business Day on or prior to
5:00 p.m., Central Time, on June 30, 2001 (the "Expiration Date") is entitled to
subscribe for and purchase from BLUE RIDGE ENERGY, INC., a Nevada corporation
(the "Company"), 2,000,000 shares of Common Stock at a price per share equal to
the Exercise Price.
1. CERTAIN DEFINITIONS
The following terms, as used herein, have the following meanings:
"Business Day" means any day except a Saturday, Sunday, or other day on
which commercial banks in Bowling Green, Kentucky, are authorized by law to
close.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's currently authorized common stock, $.01
par value, and stock of any other class or other consideration into which
such currently authorized common stock may hereafter have been changed.
"Exercise Price" means Five cents ($0.05) per share.
"Securities Act" means the Securities Act of 1933, or any successor Federal
statute, and the rules and regulations of the Commission thereunder, all as
the same shall be in effect a the time.
"Warrant Shares" means the 2,000,000 shares of Common Stock issued or
issuable upon exercise for this Warrant.
<PAGE> 2
2. EXERCISE OF WARRANT
The Warrant Holder or its assignee may exercise this Warrant, in whole or in
part, at any time or from time to time on any Business Day prior to the
Expiration Date, by delivering to the Company a duly executed notice (a "Notice
of Exercise") in the form of Exhibit A hereto and by payment to the Company of
the Exercise Price per Warrant Share by cashier's check in an amount equal to
the product of (I) the Exercise Price time (ii) the number of Warrant Shares as
to which this warrant is being exercised.
As soon as reasonably practicable but not later than twenty Business Days after
the Company shall have received such Notice of Exercise and payment, the Company
shall execute and deliver certificates representing the number of shares of
Common Stock specified in such Notice of Exercise, issued in the name of the
Warrant Holder. This Warrant shall be deemed to have been exercised and such
share certificate or certificates shall be deemed to have been issued, and such
Warrant Holder shall be deemed for all purposes to have become a holder of
record of shares of Common Stock, as of the first Business Day after the date
that such Notice of Exercise and payment shall has been received by the Company.
The Warrant Holder shall surrender this Warrant Certificate to the Company when
it delivers the Notice of Exercise, and in the event of a partial exercise of
the Warrant, the Company shall execute and deliver to the Warrant Holder, at the
time the Company delivers the share certificate or certificates issued pursuant
to such Notice of Exercise, a new Warrant Certificate for the unexercised
balance of the Warrant.
Each Certificate for Warrant Shares issued upon exercise of this Warrant, unless
at the time of exercise such Warrant Shares are registered under the Securities
Act, shall bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS THE HOLDER OF THE
SHARES DELIVERS TO THE COMPANY AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
Any certificate for Warrant Shares issued at any time in exchange or
substitution for any certificate bearing such legend shall also bear such legend
unless, in the written opinion of counsel, which counsel and opinion shall be
reasonably accepted to the Company, the Warrant Shares represented thereby need
no longer be subject to restrictions on resale under the Securities Act.
The Company shall not be required to issue fractions of shares of Common Stock
upon an exercise
2
<PAGE> 3
of the Warrant. If any fraction of a share would, but for this restriction, be
issuable upon an exercise of the Warrant, in lieu of delivering such fractional
share, the Company shall pay to the Warrant Holder, in cash, an amount equal to
the same fraction times the Closing Price on the trading day immediately prior
to the date -of such exercise.
3. INVESTMENT REPRESENTATION
By accepting the Warrant, the Warrant Holder represents that he is acquiring the
Warrant for his own account for investment purposes and not with the view to any
sale or distribution, and that the Warrant Holder will not offer, sell or
otherwise dispose of the Warrant or the Warrant Shares except under
circumstances as will not result in a violation of applicable securities laws.
4. VALIDITY OF WARRANT AND ISSUANCE OF SHARES
The Company represents and warrants that this Warrant has been duly authorized
and is validly issued.
The Company further represents and warrants that on the date hereof it duly
authorized and reserved, and the Company hereby agrees that it will at all times
until the Expiration Date have duly authorized and reserved, such number of
shares of Common Stock as will be sufficient to permit the exercise in full of
the Warrant, and that all such shares are and will be duly authorized and, when
issued upon exercise of the Warrant, will be validly issued, fully paid and
non-assessable, and free and clear of all security interests, claims, liens,
equities and other encumbrances.
5. ADJUSTMENTS
The Exercise Price in effect at any time, and the number of Warrant Shares that
may be purchased upon any exercise of the Warrant, shall be subject to change or
adjustment as follows:
(a) Common Stock Reorganization. If the Company shall subdivide its
outstanding shares of Common Stock into a greater number of shares, by way
of stock split, stock dividend or otherwise, or consolidate its outstanding
shares of Common Stock into a smaller number of shares (any such event
being herein call a "Common Stock Reorganization"), then (I) the Exercise
Price shall be adjusted, effective immediately after the effective date of
such Common Stock Reorganization, to a price determined by multiplying the
Exercise Price in effect immediately prior to such effective date by a
fraction, the numerator of which shall be the number of shares of Common
Stock outstanding on such effective date before giving effect to such
Common Stock Reorganization and the denominator of which shall be the
number of shares of Common Stock outstanding after giving effect to such
Common Stock Reorganization, and (ii) the number of shares of Common Stock
subject to purchase upon exercise of this Warrant shall be adjusted,
effective at such time, to a number determined by multiplying the number of
shares of Common Stock subject
3
<PAGE> 4
to purchase immediately before such Common Stock Reorganization by a
fraction, the numerator of which shall be the number of shares outstanding
after giving effect to such Common Stock Reorganization and the denominator
of which shall be the number of shares of Common Stock outstanding
immediately before giving effect to such Common Stock Reorganization.
(b) Capital Reorganization. If there shall be any consolidation or merger
to which the Company is a party, other than a consolidation or a merger of
which the company is the surviving corporation and which does not result in
any reclassification of, or change (other than a Common Stock
Reorganization) in, outstanding shares of Common Stock, or any sale or
conveyance of the property of the company as an entirety or substantially
as an entirety, or any recapitalization of the Company (any such event
being called a "Capital Reorganization"), then, effective upon the
effective date of such Capital Reorganization, the Warrant holder shall no
longer have the right to purchase Common Stock, but shall have instead the
right to purchase, upon exercise of this Warrant, the kind and amount of
shares of stock and other securities and property (including cash) which
the Warrant Holder would have owned or have been entitled to receive
pursuant to such Capital Reorganization if this Warrant had been exercised
immediately prior to the effective date of such Capital Reorganization. As
a condition to effecting any Capital Reorganization, the Company or the
successor or surviving corporation, as the case may be, shall execute and
deliver to the Warrant Holder an agreement as to the Warrant Holder's
rights in accordance with this Section 5(b), providing, to the extent of
any right to purchase equity securities hereunder, for subsequent
adjustments as nearly equivalent as may be practicable to the adjustments
provided for in this Section 5. The provisions of this Section 5 (b) shall
similarly apply to successive Capital Reorganizations.
(c) Notice of Adjustment. The Company shall give notice to the Warrant
Holder of any event which requires an adjustment pursuant to this Section
5, describing such event in reasonable detail and specifying the record
date or effective date, as the case may be, and, if determinable, the
required adjustment and computation thereof. If the required adjustment is
not determinable as the time of such notice, the Company shall give notice
to the Warrant Holder of such adjustment and computation as soon as
reasonably practicable after such ad adjustment becomes determinable.
6. LOST, MUTILATED OR MISSING WARRANT CERTIFICATES
Upon receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of any Warrant Certificate, and, in the case of loss,
theft or destruction, upon receipt of an indemnification or bond satisfactory to
the Company, or, in the case of mutilation, upon surrender and cancellation of
the mutilated Warrant Certificate, the Company shall execute and deliver a new
replacement Warrant Certificate of like tenor and representing the right to
purchase the same
4
<PAGE> 5
aggregate number of Warrant Shares. The recipient of any such Warrant
Certificate shall reimburse the Company for all reasonable expenses incidental
to the replacement of such missing or mutilated Warrant Certificate.
7. NOTICES
All notices, requests, demands and other communications under this Warrant must
be in writing and will be deemed duly given: (i) when personally delivered, (ii)
upon receipt of a facsimile transmission with a confirmed transmission answer
back, (iii) three (3) days after having been deposited in the United States
mail, certified or registered, return receipt requested, postage prepaid, or
(iv) one (1) business day after having been dispatched by a nationally
recognized overnight courier service, addressed to the parties as follows:
If to the Company: Blue Ridge Energy, Inc.
1953 Scottsville Road
Bowling Green, Kentucky 42104
If to the
Warrant Holder: Blue Ridge Group, Inc.
1953 Scottsville Road
Bowling Green, Kentucky 42104
Any party may change its address for notice purposes by giving notice of such
change of address in accordance with the foregoing provisions.
8. MISCELLANEOUS
(a) This Warrant shall not entitle the Warrant Holder, prior to the
exercise of the Warrant, to any rights as a shareholder of the Company.
(b) In case any one or more of the provisions contained in this Warrant
shall be invalid, illegal or unenforceable in any respect, the validity,
legality and unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in
any way be affected or impaired thereby. The parties shall endeavor in good
faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as
close as possible to that of the invalid, illegal or unenforceable
provisions.
(c) This Warrant is personal to the Warrant Holder and may not be assigned
without the prior written consent of the Company and any attempt to assign
without such written consent shall be null and void. All of the provisions
of this Warrant by or for the benefit of the Company or the Warrant Holder
bind and inure to the benefit
5
<PAGE> 6
of their respective successors and permitted assigns.
(d) This Warrant, the construction, interpretation and enforcement hereof
and the rights of the parties hereto shall be determined under, governed by
and construed in accordance with the laws of the State of Kentucky without
regard to principles of conflicts of interest.
(e) The section headings used herein are for convenience of reference only
and shall not be construed in any way to affect the interpretation of any
provisions of the Warrant.
(f) This Warrant constitutes the entire agreement between the Company and
the Warrant Holder regarding the subject matter hereof and supersedes all
previous agreements. There are no verbal agreements, representations,
warranties, undertakings or agreements among the parties. This Warrant may
not be amended or modified in any respect, except by a written instrument
signed by the Company and the Warrant Holder.
IN WITNESS WHEREOF, the Company and the Warrant Holder agree to the foregoing
terms and conditions and have executed this Warrant as of the day and year first
above written.
COMPANY
BLUE RIDGE ENERGY, INC.,
a Nevada Corporation
/s/ ROBERT D. BURR
--------------------------------------
By: Robert D. Burr, President and CEO
BLUE RIDGE GROUP, INC.
/s/ JAMES T. COOK, JR.
--------------------------------------
By: James T. Cook, Jr. Vice President
- Finance
6
<PAGE> 7
EXHIBIT A
COMMON STOCK WARRANT
FORM OF NOTICE OF EXERCISE
TO: BLUE RIDGE ENERGY, INC.
Reference is made to the Common Stock Purchase Warrant dated June 30, 1996
(the "Warrant"). Initially capitalized terms used herein have the meaning
as defined in the Warrant.
The undersigned, pursuant to the provisions set forth in the Warrant,
hereby irrevocably elects and agrees to purchase 2,000,000 shares of Common
Stock, and makes payment herewith in full therefor at the Exercise Price of
Five cents ($0.05) by cash or check.
The undersigned hereby represents that it is exercising the Warrant for its
own account for investment purposes and not with the view to any sale or
distribution and that the Warrant Holder will not offer, sell or otherwise
dispose of the Warrant or any underlying Warrant Shares in violation of
applicable securities laws.
------------------------------------
Printed Name: Blue Ridge Group, Inc.
Date:
-------------------------------
7
<PAGE> 1
WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE HEREUNDER HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933 AND MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FILED UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS
THE HOLDER OF THIS WARRANT AND/OR SHARES DELIVERS TO THE COMPANY AN OPINION OF
COUNSEL ACCEPTABLE TO THE COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE.
BLUE RIDGE ENERGY, INC.
COMMON STOCK PURCHASE WARRANT
Expiring February 28, 2003
THIS CERTIFIES THAT, for value received, Blue Ridge Group, Inc. (the "Warrant
Holder"), at any time and from time to time on any Business Day on or prior to
5:00 p.m., Central Time, on February 28, 2003 (the "Expiration Date") is
entitled to subscribe for and purchase from BLUE RIDGE ENERGY, INC., a Nevada
corporation (the "Company"), 5,000,000 shares of Common Stock at a price per
share equal to the Exercise Price.
1. CERTAIN DEFINITIONS
The following terms, as used herein, have the following meanings:
"Business Day" means any day except a Saturday, Sunday, or other day on
which commercial banks in Bowling Green, Kentucky, are authorized by law to
close.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's currently authorized common stock, $.01
par value, and stock of any other class or other consideration into which
such currently authorized common stock may hereafter have been changed.
"Exercise Price" means Five cents ($0.05) per share.
"Securities Act" means the Securities Act of 1933, or any successor Federal
statute, and the rules and regulations of the Commission thereunder, all as
the same shall be in effect at the time.
"Warrant Shares" means the 5,000,000 shares of Common Stock issued or
issuable upon exercise for this Warrant.
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<PAGE> 2
2. EXERCISE OF WARRANT
The Warrant Holder or its assignee may exercise this Warrant, in whole or in
part, at any time or from time to time on any Business Day prior to the
Expiration Date, by delivering to the Company a duly executed notice (a "Notice
of Exercise") in the form of Exhibit A hereto and by payment to the Company of
the Exercise Price per Warrant Share by cashier's check in an amount equal to
the product of (I) the Exercise Price time (ii) the number of Warrant Shares as
to which this warrant is being exercised.
As soon as reasonably practicable but not later than twenty Business Days after
the Company shall have received such Notice of Exercise and payment, the Company
shall execute and deliver certificates representing the number of shares of
common Stock specified in such Notice of Exercise, issued in the name of the
Warrant Holder. This Warrant shall be deemed to have been exercised and such
share certificate or certificates shall be deemed to have been issued, and such
Warrant Holder shall be deemed for all purposes to have become a holder of
record of shares of Common Stock, as of the first Business Day after the date
that such Notice of Exercise and payment shall has been received by the Company.
The Warrant Holder shall surrender this Warrant Certificate to the Company when
it delivers the Notice of Exercise, and in the event of a partial exercise of
the Warrant, the Company shall execute and deliver to the Warrant Holder, at the
time the Company delivers the share certificate or certificates issued pursuant
to such Notice of Exercise, a new Warrant Certificate for the unexercised
balance of the Warrant.
Each Certificate for Warrant Shares issued upon exercise of this Warrant, unless
at the time of exercise such Warrant Shares are registered under the Securities
Act, shall bear the following legend:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933 AND MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FILED UNDER SAID
ACT AND ANY APPLICABLE STATE SECURITIES LAWS, UNLESS THE HOLDER OF THE
SHARES DELIVERS TO THE COMPANY AN OPINION OF COUNSEL ACCEPTABLE TO THE
COMPANY THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
Any certificate for Warrant Shares issued at any time in exchange or
substitution for any certificate bearing such legend shall also bear such legend
unless, in the written opinion of counsel, which counsel and opinion shall be
reasonably accepted to the Company, the Warrant Shares represented thereby need
no longer be subject to restrictions on resale under the Securities Act.
The Company shall not be required to issue fractions of shares of common Stock
upon an exercise
2
<PAGE> 3
of the Warrant. If any fraction of a share would, but for this restriction, be
issuable upon an exercise of the Warrant, in lieu of delivering such fractional
share, the Company shall pay to the Warrant Holder, in cash, an amount equal to
the same fraction times the Closing Price on the trading day immediately prior
to the date of such exercise.
3. INVESTMENT REPRESENTATION
By accepting the Warrant, the Warrant Holder represents that he is acquiring the
Warrant for his own account for investment purposes and not with the view to any
sale or distribution, and that the Warrant Holder will not offer, sell or
otherwise dispose of the Warrant or the Warrant Shares except under
circumstances as will not result in a violation of applicable securities laws.
4. VALIDITY OF WARRANT AND ISSUANCE OF SHARES
The Company represents and warrants that this Warrant has been duly authorized
and is validly issued.
The Company further represents and warrants that on the date hereof it duly
authorized and reserved, and the Company hereby agrees that it will at all times
until the Expiration Date have duly authorized and reserved, such number of
shares of Common Stock as will be sufficient to permit the exercise in full of
the Warrant, and that all such shares are and will be duly authorized and, when
issued upon exercise of the Warrant, will be validly issued, fully paid and
non-assessable, and free and clear of all security interests, claims, liens,
equities and other encumbrances.
5. ADJUSTMENTS
The Exercise Price in effect at any time, and the number of Warrant Shares that
may be purchased upon any exercise of the Warrant, shall be subject to change or
adjustment as follows:
(a) Common Stock Reorganization. If the Company shall subdivide its
outstanding shares of Common Stock into a greater number of shares, by way
of stock split, stock dividend or otherwise, or consolidate its outstanding
shares of Common Stock into a smaller number of shares (any such event
being herein call a "Common Stock Reorganization"), then (I) the Exercise
Price shall be adjusted, effective immediately after the effective date of
such Common Stock Reorganization, to a price determined by multiplying the
Exercise Price in effect immediately prior to such effective date by a
fraction, the numerator of which shall be the number of shares of Common
Stock outstanding on such effective date before giving effect to such
Common Stock Reorganization and the denominator of which shall be the
number of shares of Common Stock outstanding after giving effect to such
Common Stock Reorganization, and (ii) the number of shares of Common Stock
subject to purchase upon exercise of this Warrant shall be adjusted,
effective at such time, to a number determined by multiplying the number of
shares of Common Stock subject
3
<PAGE> 4
to purchase immediately before such Common Stock Reorganization by a
fraction, the numerator of which shall be the number of shares outstanding
after giving effect to such Common Stock Reorganization and the denominator
of which shall be the number of shares of Common Stock outstanding
immediately before giving effect to such Common Stock Reorganization.
(b) Capital Reorganization. If there shall be any consolidation or merger
to which the Company is a party, other than a consolidation or a merger of
which the company is the surviving corporation and which does not result in
any reclassification of, or change (other than a Common Stock
Reorganization) in, outstanding shares of Common Stock, or any sale or
conveyance of the property of the company as an entirety or substantially
as an entirety, or any recapitalization of the Company (any such event
being called a "Capital Reorganization"), then, effective upon the
effective date of such Capital Reorganization, the Warrant holder shall no
longer have the right to purchase Common Stock, but shall have instead the
right to purchase, upon exercise of this Warrant, the kind and amount of
shares of stock and other securities and property (including cash) which
the Warrant Holder would have owned or have been entitled to receive
pursuant to such Capital Reorganization if this Warrant had been exercised
immediately prior to the effective date of such Capital Reorganization. As
a condition to effecting any Capital Reorganization, the Company or the
successor or surviving corporation, as the case may be, shall execute and
deliver to the Warrant Holder an agreement as to the Warrant Holder's
rights in accordance with this Section 5(b), providing, to the extent of
any right to purchase equity securities hereunder, for subsequent
adjustments as nearly equivalent as may be practicable to the adjustments
provided for in this Section 5. The provisions of this Section 5 (b) shall
similarly apply to successive Capital Reorganizations.
(c) Notice of Adjustment. The Company shall give notice to the Warrant
Holder of any event which requires an adjustment pursuant to this Section
5, describing such event in reasonable detail and specifying the record
date or effective date, as the case may be, and, if determinable, the
required adjustment and computation thereof. If the required adjustment is
not determinable as the time of such notice, the Company shall give notice
to the Warrant Holder of such adjustment and computation as soon as
reasonably practicable after such adjustment becomes determinable.
6. LOST, MUTILATED OR MISSING WARRANT CERTIFICATES
Upon receipt by the Company of evidence satisfactory to it of the loss, theft,
destruction or mutilation of any Warrant Certificate, and, in the case of loss,
theft or destruction, upon receipt of an indemnification or bond satisfactory to
the Company, or, in the case of mutilation, upon surrender and cancellation of
the mutilated Warrant Certificate, the Company shall execute and deliver a new
replacement Warrant Certificate of like tenor and representing the right to
purchase the same
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<PAGE> 5
aggregate number of Warrant Shares. The recipient of any such Warrant
Certificate shall reimburse the Company for all reasonable expenses incidental
to the replacement of such missing or mutilated Warrant Certificate.
7. NOTICES
All notices, requests, demands and other communications under this Warrant must
be in writing and will be deemed duly given: (i) when personally delivered, (ii)
upon receipt of a facsimile transmission with a confirmed transmission answer
back, (iii) three (3) days after having been deposited in the United States
mail, certified or registered, return receipt requested, postage prepaid, or
(iv) one (1) business day after having been dispatched by a nationally
recognized overnight courier service, addressed to the parties as follows:
If to the Company: Blue Ridge Energy, Inc.
632 Adams Street, Suite 710
Bowling Green, Kentucky 42101
If to the
Warrant Holder: Blue Ridge Group, Inc.
632 Adams Street, Suite 700
Bowling Green, Kentucky 42101
Any party may change its address for notice purposes by giving notice of such
change of address in accordance with the foregoing provisions.
8. MISCELLANEOUS
(a) This Warrant shall not entitle the Warrant Holder, prior to the
exercise of the Warrant, to any rights as a shareholder of the Company.
(b) In case any one or more of the provisions contained in this Warrant
shall be invalid, illegal or unenforceable in any respect, the validity,
legality and unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein shall not in
any way be affected or impaired thereby. The parties shall endeavor in good
faith negotiations to replace the invalid, illegal or unenforceable
provisions with valid provisions the economic effect of which comes as
close as possible to that of the invalid, illegal or unenforceable
provisions.
(c) This Warrant is personal to the Warrant Holder and may not be assigned
without the prior written consent of the Company and any attempt to assign
without such written consent shall be null and void. All of the provisions
of this Warrant by or for the benefit of the Company or the Warrant Holder
bind and inure to the benefit
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<PAGE> 6
of their respective successors and permitted assigns.
(d) This Warrant, the construction, interpretation and enforcement hereof
and the rights of the parties hereto shall be determined under, governed by
and construed in accordance with the laws of the State of Kentucky without
regard to principles of conflicts of interest.
(e) The section headings used herein are for convenience of reference only
and shall not be construed in any way to affect the interpretation of any
provisions of the Warrant.
(f) This Warrant constitutes the entire agreement between the Company and
the Warrant Holder regarding the subject matter hereof and supersedes all
previous agreements. There are no verbal agreements, representations,
warranties, undertakings or agreements among the parties. This Warrant may
not be amended or modified in any respect, except by a written instrument
signed by the Company and the Warrant Holder.
IN WITNESS WHEREOF, the Company and the Warrant Holder agree to the foregoing
terms and conditions and have executed this Warrant as of the day and year first
above written.
COMPANY
BLUE RIDGE ENERGY, INC.,
a Nevada Corporation
/s/ ROBERT D. BURR
--------------------------------------
By: Robert D. Burr, President and CEO
BLUE RIDGE GROUP, INC.
/s/ JAMES T. COOK, JR.
--------------------------------------
By: James T. Cook, Jr. Vice President-
Finance
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<PAGE> 7
EXHIBIT A
COMMON STOCK WARRANT
FORM OF NOTICE OF EXERCISE
TO: BLUE RIDGE ENERGY, INC.
Reference is made to the Common Stock Purchase Warrant dated February 28,
1998 (the "Warrant"). Initially capitalized terms used herein have the
meaning as defined in the Warrant.
The undersigned, pursuant to the provisions set forth in the Warrant,
hereby irrevocably elects and agrees to purchase 5,000,000 shares of Common
Stock, and makes payment herewith in full therefor at the Exercise Price of
Five cents ($0.05) by cash or check.
The undersigned hereby represents that it is exercising the Warrant for its
own account for investment purposes and not with the view to any sale or
distribution and that the Warrant Holder will not offer, sell or otherwise
dispose of the Warrant or any underlying Warrant Shares in violation of
applicable securities laws.
------------------------------------
Printed Name: Blue Ridge Group, Inc.
Date:
-------------------------------
7
<PAGE> 1
---------------------------------------------------------
LIMITED PARTNERSHIP
AGREEMENT
OF
HOME STAKE JOINT VENTURE, LTD.
---------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
1. The Joint Venture.............................................................................................1
1.1 Definitions.............................................................................................1
1.2 Organization............................................................................................5
1.3 Joint Venture Name......................................................................................5
1.4 Character of Business...................................................................................5
1.5 Principal Place of Business.............................................................................5
1.6 Term of Joint Venture...................................................................................5
1.7 Filings ................................................................................................5
1.8 Independent Activities..................................................................................6
2. Capitalization................................................................................................6
2.1 Capital Contributions of the Joint Venture Manager and Initial Limited Partner..........................6
2.2 Capital Contributions of the Joint Venturers............................................................6
2.3 Additional Capital Contributions........................................................................7
2.4 No Interest on Capital Contributions, No Withdrawals....................................................7
3. Capital Accounts and Allocations..............................................................................7
3.1 Capital Accounts........................................................................................7
3.2 Allocation of Profits and Losses........................................................................8
3.3 Depletion..............................................................................................10
3.4 Apportionment Among Joint Venturers....................................................................11
4. Distributions................................................................................................11
4.1 Time of Distribution...................................................................................11
4.2 Distributions..........................................................................................11
4.3 Capital Account Deficits...............................................................................11
5. Activities...................................................................................................11
5.1 Management.............................................................................................11
5.2 Conduct of Operations..................................................................................11
5.3 Acquisition and Sale of Leases.........................................................................12
5.4 Title to Leases........................................................................................12
5.5 Release, Abandonment, and Sale or Exchange of Properties...............................................12
5.6 Certain Transactions With Joint Venture Manager or Affiliates..........................................12
6. Joint Venture Manager........................................................................................13
6.1 Joint Venture Manager..................................................................................13
6.2 Authority of Joint Venture Manager.....................................................................13
6.3 Certain Restrictions on Joint Venture Manager's Power and Authority....................................14
6.4 Indemnification of Joint Venture Manager...............................................................15
6.5 Withdrawal.............................................................................................15
6.6 Management Fee.........................................................................................15
6.7 Organization and Offering Fee..........................................................................15
6.8 Tax Matters Partner....................................................................................16
</TABLE>
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<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
7. Joint Venturers..............................................................................................16
7.1 Management.............................................................................................16
7.2 Assignment of Units....................................................................................16
7.3 Prohibited Transfers...................................................................................17
7.4 Withdrawal by Joint Venturers..........................................................................17
7.5 Calling of Meetings....................................................................................17
7.6 Voting Rights..........................................................................................17
7.7 Voting by Proxy........................................................................................18
7.8 Conversion of Additional General Partner Interests into Limited Partner Interests .....................18
7.9 Liability of Joint Venturers...........................................................................18
8. Books and Records............................................................................................18
8.1 Books and Records......................................................................................18
8.2 Reports ...............................................................................................19
8.3 Bank Accounts..........................................................................................19
8.4 Federal Income Tax Elections...........................................................................19
9. Dissolution; Winding-Up......................................................................................19
9.1 Dissolution............................................................................................19
9.2 Liquidation............................................................................................20
9.3 Winding-Up.............................................................................................20
10. Power of Attorney...........................................................................................21
10.1 Joint Venture Manager as Attorney-in-Fact.............................................................21
10.2 Nature as Special Power...............................................................................21
11. Miscellaneous Provisions....................................................................................22
11.1 Liability of Parties..................................................................................22
11.2 Notices...............................................................................................22
11.3 Paragraph Headings, Section References................................................................22
11.4 Severability..........................................................................................22
11.5 Sole Agreement........................................................................................22
11.6 Applicable Law........................................................................................22
11.7 Execution in Counterparts.............................................................................22
11.8 Waiver of Action for Partition........................................................................22
11.9 Amendments............................................................................................23
11.10 Substitution of Signature Pages.......................................................................23
11.11 Incorporation by Reference............................................................................23
</TABLE>
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<PAGE> 4
LIMITED PARTNERSHIP AGREEMENT
OF
HOME STAKE JOINT VENTURE, LTD.
THIS LIMITED JOINT VENTURE AGREEMENT ("Agreement") is entered into and
effective as of the ___ day of ____________, 1997, by and between (i) BLUE RIDGE
ENERGY, INC., a Nevada corporation, as the Joint Venture Manager, (ii) ROBERT D.
BURR, 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 Joint Venture Manager and the Initial Limited Partner formed a
Kentucky limited partnership named Home Stake Joint Venture, Ltd. ("Joint
Venture") 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 Joint Venture.
C. The parties desire to enter into this Agreement to set forth their
mutual understandings.
AGREEMENT:
NOW, THEREFORE, the parties hereby agree as follows:
1. THE JOINT VENTURE.
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 Joint Venturer who
purchases Units as an additional general partner, and such Additional General
Partner's transferees and assigns who are admitted as a Substitute Joint
Venturer. The term "Additional General Partners" shall not include such Joint
Venturer who converts such Joint Venturer's interest in the Joint Venture into a
Limited Partner interest pursuant to Section 7.8.
(c) "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.
(d) "Agreement" shall mean this Limited Partnership Agreement, as
amended from time to time.
(e) "Capital Account" shall mean, with respect to any Joint
Venturer, the capital account maintained for such Joint Venturer pursuant to
Section 3.1.
(f) "Capital Contribution" shall mean the total contributions made
by a Joint Venturer to the capital of the Joint Venture pursuant to Section 2.
(g) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time (or any corresponding provisions of succeeding law).
(h) "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
<PAGE> 5
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 Joint
Venture Manager.
(i) "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 Joint Venture Manager from previously established reserves
(referred to in (B)(ii) below), over (B) the sum of (i) all cash expenditures of
the Joint Venture 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 Joint Venture
Manager.
(j) "General Partners" shall mean the Additional General Partners
and the Joint Venture Manager.
(k) "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 Joint Venturer to the Joint Venture shall be the gross fair market value
of such asset, as determined by the contributing Joint Venturer and the
Joint Venture;
(2) The Gross Asset Value of all Joint Venture assets shall be
adjusted to equal their respective gross fair market values, as determined
by the Joint Venture Manager, as of the following times: (a) the
acquisition of an additional interest in the Joint Venture by any new or
existing Joint Venturer in exchange for more than a de minimis Capital
Contribution; (b) the distribution by the Joint Venture of property in
consideration for an interest in the Joint Venture; and (c) the liquidation
of the Joint Venture within the meaning of Treas. Reg. Section 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 Joint Venture Manager
reasonably determines that such adjustments are necessary or appropriate to
reflect the relative economic interests of the Joint Venturers in the Joint
Venture;
(3) The Gross Asset Value of any Joint Venture asset
distributed to any Joint Venturer shall be the gross fair market value of
such asset on the date of distribution; and
(4) The Gross Asset Value of Joint Venture assets shall be
increased (or decreased) to reflect any adjustments to the adjusted basis
of such assets pursuant to Code Sections 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. Section 1.704-1(b)(2)(iv)(m) and Section
3.3.2(g); provided, however, that Gross Asset Value shall not be adjusted
pursuant to this Section 1.1.1(k)(4) to the extent the Joint Venture
Manager determines that an adjustment pursuant to Section 1.1.1(k)(2) is
necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to this Section 1.1.1(k)(4).
If the Gross Asset Value of an asset has been determined or adjusted
pursuant to Sections 1.1.1(k)(1), 1.1.1(k)(2), or 1.1.1(k)(4), 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.
(l) "Initial Limited Partner" shall mean Robert D. Burr or any
successor to the Initial Limited Partner's interest in the Partnership.
(m) "Joint Venture" shall mean the partnership formed by the Joint
Venturers pursuant to the Act and governed by this Agreement.
A-2
<PAGE> 6
(n) "Joint Venture Manager" shall mean Blue Ridge Energy, Inc. or
its successors, in their capacity as the Joint Venture Manager.
(o) "Joint Venturer" shall mean any Person other than the Joint
Venture Manager 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 Joint Venturer
pursuant to the terms of this Agreement, and (ii) who is the owner of a Unit.
(p) "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.
(q) "Limited Partner" shall mean an Joint Venturer who purchases
Units as a Limited Partner, such Limited Partner's transferee or assignee who is
admitted as a Substitute Joint Venturer, and an Additional General Partner who
converts their interest to a Limited Partner interest pursuant to the provisions
of this Agreement.
(r) "Management Fee" shall mean that fee to which the Joint
Venture Manager is entitled pursuant to Section 6.6.
(s) "Nonrecourse Liability" shall have the meaning set forth in
Treas. Reg Sections 1.704-2(b)(3) and 1.752-1(a)(2).
(t) "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.
(u) "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.
(v) "Organization and Offering Fee" shall mean the fee to which
the Joint Venture Manager is entitled pursuant to Section 6.7.
(w) "Participant List" shall mean an alphabetical list of the
names, addresses and business telephone numbers of the Joint Venturers, along
with the number of Units held by each of them.
(x) "Partner Minimum Gain" shall mean partner nonrecourse debt
minimum gain within the meaning of Treas. Reg Section 1.704-2(i)(3).
(y) "Partner Nonrecourse Debt" shall have the meaning set forth
in Treas. Reg Section 1.704-2(b)(4).
(z) "Partner Nonrecourse Deductions" shall have the meaning set
forth in Treas. Reg Section 1.704-2(i)(2).
(aa) "Partners" shall mean the Joint Venture Manager, the Initial
Limited Partner, and the Joint Venturers.
(bb) "Partnership Minimum Gain" shall have the meaning set forth
in Treas. Reg Section 1.704-2(b)(2).
(cc) "Permitted Transfer" shall mean any transfer of Units
satisfying the provisions of Section 7.2.
A-3
<PAGE> 7
(dd) "Person" shall mean any individual, partnership, corporation,
limited liability company, trust, or other entity.
(ee) "Placement Memorandum" shall mean that Private Placement
Memorandum pursuant to which the Units are being offered and sold.
(ff) "Profits" and "Losses" shall mean, for each fiscal year or
other period, an amount equal to the Joint Venture's taxable income or loss for
such year or period, determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss, or deduction required to be stated
separately pursuant to Code Section 703(a)(1) shall be included in taxable
income or loss), with the following adjustments:
(1) Any income of the Joint Venture that is exempt from
Federal income tax and not otherwise taken into account in computing
Profits or Losses pursuant to this Section 1.1.1(ff) shall be added to such
taxable income or loss;
(2) Any expenditures of the Joint Venture described in Code
Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures
pursuant to Treas. Reg Section 1.704-1(b)(2)(iv)(i), and not otherwise
taken into account in computing Profits or Losses pursuant to this Section
1.1.1(ff) shall be subtracted from such taxable income or loss;
(3) In the event the Gross Asset Value of any Joint Venture
asset is adjusted pursuant to Sections 1.1.1(k)(2) or 1.1.1(k)(4), 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 Joint
Venture 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 1.1.1(h); and
(6) Notwithstanding any other provisions of this Section
1.1.1(ff), any items which are specially allocated pursuant to this
Agreement shall not be taken into account in computing Profits or Losses.
(gg) "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 Joint Venture owns or intends to own one or more Oil and Gas Interests
which is geographically defined on the basis of geological data by the Joint
Venture Manager and which is reasonably anticipated by the Joint Venture Manager
to contain at least one reservoir. An area covering lands which are believed by
the Joint Venture Manager 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 Joint Venture
Manager 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 Joint Venture is to a horizon
containing proved reserves.
(hh) "Re-Entry Well" shall mean the Home Stake Prospect which
consists of approximately 160 acres of oil and gas leases in Lea County, New
Mexico, and the well to be re-entered and drilled thereon.
(ii) "Subscription Agreement" shall mean the agreement attached to
the Placement Memorandum as Exhibit G, pursuant to which an investor subscribes
to Units in the Joint Venture.
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(jj) "Substitute Joint Venturer" shall mean any Person admitted to
the Joint Venture as an Joint Venturer pursuant to Section 7.7.2(c).
(kk) "TMP" shall mean the tax matters partner of the Joint Venture
for purposes of Code Sections 6621 through 6233.
(ll) "Unit" shall mean an interest of an Joint Venturer in the
Joint Venture, each Unit representing a commitment to make a Capital
Contribution of $17,100 to the Joint Venture.
(mm) "Venture Well" shall mean the North Ennis Creek Prospect
which consists of approximately 490 acres of oil and gas leases in Scurry
County, Texas and the well to be drilled thereon.
(nn) "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 Joint Venture Manager and the Initial Limited Partner
formed the Joint Venture pursuant to the provisions of the Act. The Joint
Venturers hereby agree to continue the Joint Venture as a limited partnership
pursuant to the provisions of the Act and upon the terms and conditions set
forth in this Agreement.
1.3 JOINT VENTURE NAME. The name of the Joint Venture shall be Home Stake
Joint Venture, Ltd. and all business of the Joint Venture shall be conducted in
such name. The Joint Venture Manager may change the name of the Joint Venture
upon ten days notice to the Joint Venturers. The Joint Venture shall hold all of
its property in the name of the Joint Venture and not in the name of any Joint
Venturer.
1.4 CHARACTER OF BUSINESS. The principal business of the Joint Venture
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 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. Without limiting the foregoing, Joint Venture 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
Joint Venture shall be at 632 Adams Street, Suite 710, Bowling Green, Kentucky
42101. The Joint Venture Manager may change the principal place of business of
the Joint Venture to any other place within the Commonwealth of Kentucky upon
ten days notice to the Joint Venturers.
1.6 TERM OF JOINT VENTURE. The Joint Venture commenced upon the filing of
its Certificate of Limited Partnership, and shall continue until terminated as
provided in Section 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 Joint Venture Manager shall take any and all
other actions reasonably necessary to perfect and maintain the status of the
Joint Venture as a limited partnership under the laws of Kentucky. The Joint
Venture Manager shall cause amendments to the Certificate of Limited Partnership
to be filed whenever required by the Act.
(b) The Joint Venture Manager 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 Joint Venture as a limited
partnership qualified to do business in any other states or jurisdictions in
which the Joint Venture engages in business.
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(c) Upon the dissolution of the Joint Venture, the Joint Venture
Manager 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 Joint Venture to withdraw from any other states or
jurisdictions in which the Joint Venture 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 Joint Venture or otherwise, without
having or incurring any obligation to offer any interest in such activities to
the Joint Venture or any Joint Venturer. Except as otherwise provided herein,
however, the Joint Venture Manager and its Affiliates may pursue business
opportunities that are consistent with the Joint Venture's investment objectives
for their own account only after they have determined that such opportunity
either cannot be pursued by the Joint Venture because of insufficient funds or
because it is not appropriate for the Joint Venture under the existing
circumstances. Neither this Agreement, nor any activity undertaken pursuant
hereto, shall prevent the Joint Venture Manager from engaging in such
activities, or require the Joint Venture Manager to permit the Joint Venture or
any Joint Venturer to participate in any such activities, and as a material part
of the consideration for the execution of this Agreement by the Joint Venture
Manager and the admission of each Joint Venturer, each Joint Venturer hereby
waives, relinquishes, and renounces any such right or claim of participation.
Notwithstanding the foregoing, the Joint Venture Manager still has a fiduciary
obligation to the Joint Venturers.
2. CAPITALIZATION.
2.1 CAPITAL CONTRIBUTIONS OF THE JOINT VENTURE MANAGER AND INITIAL LIMITED
PARTNER.
(a) On or before the date hereof, the Joint Venture Manager shall
make a Capital Contribution in cash to the Joint Venture of an amount equal to
1% of the aggregate Capital Contributions of the Joint Venturers. In
consideration of making such Capital Contribution, becoming an Additional
General Partner, subjecting its assets to the liabilities of the Joint Venture,
and undertaking other obligations as herein set forth, the Joint Venture Manager
shall receive the interest in the Joint Venture provided herein.
(b) On or before the date hereof, the Initial Limited Partner
shall contribute $100 in cash to the capital of the Joint Venture. 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 Joint Venture, the Joint Venture 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 Joint
Venturer.
2.2 CAPITAL CONTRIBUTIONS OF THE JOINT VENTURERS.
(a) The interests of the Joint Venturers have been divided into 80
units ("Units"), each of which is for Seventeen Thousand One Hundred Dollars
($17,100). Upon execution of this Agreement, each initial Joint Venturer (whose
names and addresses and number of Units for which the Joint Venturer has
subscribed are set forth in Exhibit A) shall contribute to the capital of the
Joint Venture the sum of $10,000 for each Unit purchased. If the Joint Venture
Manager decides to complete the Re-Entry Well, the Joint Venture Manager shall
give notice to each of the Joint Venturers and each Joint Venturer shall
contribute an additional $4,275 per Unit to the capital of the Joint Venture
within seven days after receipt of such notice. If the Joint Venture Manager
decides to complete the Venture Well, the Joint Venture Manager shall give
notice to each of the Joint Venturers and each Joint Venturer shall contribute
an additional $2,825 per Unit to the capital of the Joint Venture within seven
days after receipt of such notice.
(b) Except as provided in Section 4.3, any proceeds of the
offering of Units for sale pursuant to the Placement Memorandum not used,
committed for use, or reserved as operating capital in the Joint Venture's
operations within one year after the closing of such offering shall be
distributed pro rata to the Joint Venturers as a return of capital.
(c) Until proceeds from the offering of Units are invested in the
Joint Venture's operations, such proceeds may be temporarily invested in income
producing short-term, highly liquid investments where there is appropriate
safety
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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 Joint
Venturers providing such Capital Contributions.
2.3 ADDITIONAL CAPITAL CONTRIBUTIONS. After all Capital Contributions made
pursuant to Sections 2.1 and 2.2 have been expended, if the Joint Venture
Manager determines that additional capital is required for the Joint Venture's
business, the Joint Venture Manager shall give notice thereof to each of the
Joint Venturers, and each of the Joint Venturers shall be obligated to make an
additional Capital Contribution pro rata in accordance with the Capital
Contributions previously made by each of them; provided, however, that the total
additional Capital Contributions required to be made by the Joint Venturers
pursuant to this Section 2.3 shall not exceed the amount required to be
contributed by the Joint Venturers pursuant to Sections 2.1 and 2.2. Payment of
any such additional Capital Contribution shall be due within seven days of the
mailing of the notice by the Joint Venture Manager. If any Joint Venturer shall
fail to pay an additional Capital Contribution required to be made by such Joint
Venturer or that portion of the amount required to be contributed by the Joint
Venturers pursuant to Sections 2.1 and 2.2 upon completion of each well, within
seven days after the date due, such Joint Venturer shall be in default, and, in
addition to all rights and remedies available to the Joint Venture at law, in
equity or otherwise, the Joint Venture Manager shall have the right to set off
against any distributions otherwise due to such Joint Venturer an amount equal
to 300% of the amount which the Joint Venturer failed to contribute.
2.4 NO INTEREST ON CAPITAL CONTRIBUTIONS, NO WITHDRAWALS. No interest shall
be paid on any Capital Contributions and, except as otherwise provided herein,
no Joint Venturer, other than the Initial Limited Partner as authorized herein,
may withdraw the Joint Venturer's Capital Contribution.
3. CAPITAL ACCOUNTS AND ALLOCATIONS.
3.1 CAPITAL ACCOUNTS.
(a) A separate Capital Account shall be established and maintained
for each Joint Venturer on the books and records of the Joint Venture. A Joint
Venturer shall have a single Capital Account even though the Joint Venturer may
be both a General Partner and a Limited Partner. Capital Accounts shall be
maintained in accordance with Treas. Reg. Section 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 Joint Venture
Manager 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 Joint
Venture Manager may make such modification provided that it is not likely to
have a material effect on the amounts distributable to any Joint Venturer
pursuant to Section 9.3 upon the dissolution of the Joint Venture. The Joint
Venture Manager also shall (i) make any adjustments that are necessary or
appropriate to maintain equality between the Capital Accounts of the Joint
Venturers and the amount of Joint Venture capital reflected on the Joint
Venture's balance sheet, as computed for book purposes, in accordance with
Treas. Reg. Section 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. Section 1.704-1(b).
(b) Each Joint Venturer's Capital Account shall be credited with
(i) the amount of money contributed by such Joint Venturer to the Joint Venture;
(ii) the amount of any Joint Venture liabilities that are assumed by such Joint
Venturer (within the meaning of Treas. Reg. Section 1.704-1(b)(2)(iv)(c)); (iii)
the Gross Asset Value of property contributed by such Joint Venturer to the
Joint Venture (net of liabilities secured by such contributed property that the
Joint Venture is considered to assume or take subject to under Code Section
752); and (iv) allocations to such Joint Venturer of Profits (or items thereof),
including income and gain exempt from tax and income and gain described in
Treas. Reg. Section 1.704-1(b)(2)(iv)(g) (relating to adjustments to reflect
book value).
(c) Each Joint Venturer's Capital Account shall be debited with
(i) the amount of money distributed to such Joint Venturer by the Joint Venture;
(ii) the amount of such Joint Venturer's individual liabilities that are assumed
by the Joint Venture (other than liabilities described in Treas. Reg. Section
1.704-1(b)(2)(iv)(b)(2) that are assumed by the Joint Venture); (iii) the Gross
Asset Value of property distributed to such Joint Venturer by the Joint Venture
(net of liabilities secured by such distributed property that such Joint
Venturer is considered to assume or take subject to under Code Section 752);
(iv) allocations to such Joint Venturer of expenditures of the Joint Venture not
deductible in computing Joint Venture taxable
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income and not properly chargeable to capital account (as described in Code
Section 705(a)(2)(B)), and (v) allocations to such Joint Venturer of Losses (or
item thereof), including Losses and deductions described in Treas. Reg. Section
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. Section 1.704-1(b)(4)(iii) (relating to excess
percentage depletion).
(d) Solely for purposes of maintaining the Capital Accounts:
(1) Each year the Joint Venture shall compute (in accordance
with Treas. Reg. Section 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 Section 613A(c)(3) which theoretically could
apply to any Joint Venturer), which results in the greatest simulated
depletion allowance. The simulated depletion allowance with respect to each
Oil and Gas Interest shall reduce the Joint Venturers' Capital Accounts in
the same proportion as the Joint Venturers were allocated adjusted basis
with respect to such Oil and Gas Interest under Section 3.3.3(a). In no
event shall the Joint Venture's aggregate simulated depletion allowance
with respect to an Oil and Gas Interest exceed the Joint Venture'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 Joint Venture, the Joint Venture shall determine the simulated
(hypothetical) gain or loss with respect to such Oil and Gas Interest
(solely for Capital Account purposes) by subtracting the Joint Venture's
simulated adjusted basis for the Oil and Gas Interest sold (maintained
solely for Capital Account purposes) from the amount realized by the Joint
Venture 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 Joint Venturers in accordance with Section
3.3.1(d)(1). The Capital Accounts of the Joint Venturers shall be adjusted
upward by the amount of any simulated gain on such disposition in
proportion to such Joint Venturers' allocable share of the portion of total
amount realized from the disposition of such Oil and Gas Interest that
exceeds the Joint Venture's simulated adjusted basis in such Oil and Gas
Interest. The Capital Accounts of the Joint Venturers shall be adjusted
downward by the amount of any simulated loss in proportion to such Joint
Venturers' allocable shares of the total amount realized from the
disposition of such Oil and Gas Interest that represents recovery of the
Joint Venture's simulated adjusted basis in such Oil and Gas Interest.
(e) Except as otherwise provided in this Agreement, neither an
Joint Venturer nor the Initial Limited Partner shall be obligated to the Joint
Venture or to any other Joint Venturer to restore any negative balance in their
Capital Accounts. Upon liquidation of the Joint Venture, or the liquidation of
the interest of the Joint Venture Manager (in each case determined as provided
in Treas. Reg. Section 1.704-1(b)(2)(ii)(g), if the Joint Venture Manager has a
deficit balance in its Capital Account after crediting all Profit upon the sale
of the Joint Venture's assets which have been sold, and after making all
allocations provided for herein, then the Joint Venture Manager shall be
obligated to contribute to the Joint Venture, on or before the later to occur of
(i) the close of the Joint Venture'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) Except as provided in this Section 3.2 or in Section 3.3, the
following shall apply:
(1) Profits and Losses of the Joint Venture (computed without
regard to the items referred to in Sections 3.3.2(a)(2) and 3.3.2(a)(3))
shall be allocated 99% to the Joint Venturers and 1% to the Joint Venture
Manager.
(2) Operating Costs shall be allocated 80% to the Joint
Venturers and 20% to the Joint Venture Manager.
(3) All items of revenue or income attributable to an Oil and
Gas Interest shall be allocated 80% to the Joint Venturers and 20% to the
Joint Venture Manager.
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(b) Notwithstanding anything to the contrary in Section 3.3.2(a),
no Joint Venturer shall be allocated any item to the extent that such allocation
would create or increase a deficit in such Joint Venturer's Capital Account. For
purposes of this Section 3.3.2(b), in determining whether an allocation would
create or increase a deficit in an Joint Venturer's Capital Account, such
Capital Account shall be reduced for those items described in Treas. Reg.
Sections 1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall be increased by any
amounts which such Joint Venturer is obligated to restore in accordance with
Treas. Reg. Section 1.704-1(b)(2)(ii)(c), or is deemed obligated to restore
pursuant to Treas. Reg. Sections 1.704-2(g)(1) and 1.704-2(i)(5). Any item, the
allocation of which to any Joint Venturer is prohibited by this Section
3.3.2(b), shall be reallocated to those Joint Venturers not having a deficit in
their Capital Accounts (as adjusted as provided in this Section 3.3.2(b)) in the
proportion that the positive balance of each such Joint Venturer's adjusted
Capital Account bears to the aggregate balance of all such Joint Venturers'
adjusted Capital Accounts, with any remaining losses or deductions being
allocated to the Joint Venture Manager. Notwithstanding the provisions of
Section 3.3.2(a), to the extent items are allocated to the Joint Venturers by
virtue of the preceding provisions of this Section 3.3.2(b), the Profits
thereafter recognized shall be allocated to such Joint Venturers (in proportion
to the items previously allocated to them pursuant to this Section 3.3.2(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 3.3.2(b).
(c) In the event any Joint Venturer unexpectedly receives any
adjustments, allocations, or distributions described in Treas. Reg. Section
1.704-1(b)(2)(ii)(d)(4), (5), or (6), items of Joint Venture income and gain
shall be specifically allocated to such Joint Venturer in an amount and manner
sufficient to eliminate (to the extent required by the regulations) the deficit
balance in such Joint Venturer's Capital Account (as adjusted in accordance with
the provisions of Section 3.3.2(b)) as quickly as possible; provided, however,
that an allocation pursuant to this Section 3.3.2(c) shall be made if and only
to the extent that such Joint Venturer would have a deficit Capital Account (as
adjusted in Section 3.3.2(b)) after all other allocations provided for in
Section 3 have been tentatively made as if this Section 3.3.2(c) were not in
this Agreement. It is the intention of the Joint Venturers that the provisions
of this Section 3.3.2(c) constitute a "qualified income offset" within the
meaning of Treas. Reg. Section 1.704-1(b)(2)(ii)(d), and such provisions shall
be so construed.
(d) Notwithstanding any other provision of this Section 3.2, if
there is a net decrease in Partnership Minimum Gain during any taxable year, all
Joint Venturers shall be allocated items of Joint Venture income and gain for
that year equal to that Joint Venturer's share (within the meaning of Treas. Reg
Section 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
Section 1.704-2(f) applies. This Section 3.3.2(d) is intended to comply with the
minimum gain chargeback requirement of Treas. Reg Section 1.704-2(f) and shall
be interpreted consistently therewith.
(e) Notwithstanding any other provision of this Section 3.2, other
than Section 3.3.2(d), if there is a net decrease in Partner Minimum Gain
attributable to Partner Nonrecourse Debt during any Joint Venture fiscal year,
rules similar to those contained in Section 3.3.2(d) shall apply in a manner
consistent with Treas. Reg Section 1.704-2(i)(4). This Section 3.3.2(e) is
intended to comply with the minimum gain chargeback requirement of Treas. Reg
Section 1.704-2(i)(4) and shall be interpreted consistently therewith.
(f) Any Partner Nonrecourse Deductions for any fiscal year or
other period shall be specially allocated to the Joint Venturer 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.
Section 1.704-2(i)(1).
(g) To the extent an adjustment to the adjusted tax basis of any
Joint Venture asset pursuant to Code Sections 734(b) or 743(b) is required,
pursuant to Treas. Reg. Section 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 Joint Venturers in a manner
consistent with the manner in which their Capital Accounts are required to be
adjusted pursuant to such regulation.
(h) Notwithstanding anything in this Section 3.2, if as a result
of the regulatory allocations provided for in Sections 3.3.2(c) through 3.3.2(f)
the Joint Venture Manager determines that the Capital Accounts of the Joint
Venturers
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do not reflect the economic agreement among the parties, the Joint Venture
Manager, in its discretion, may adjust the allocations provided for in Section
3.3.2(a) so that the Capital Accounts of the Joint Venturers will be equal to
the amount they would have been equal to had such regulatory allocations not
been a part of this Agreement.
(i) The Joint Venturers 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 Joint Venture income
and loss for income tax purposes.
(j) For purposes of Code Section 752 and the regulations
thereunder, the excess nonrecourse liabilities of the Joint Venture (within the
meaning of Treas. Reg Section 1.752-3(a)(3)), if any, shall be allocated 99% to
the Joint Venturers and 1% to the Joint Venture Manager.
3.3 DEPLETION.
(a) The depletion deduction with respect to each Oil and Gas
Interest of the Joint Venture shall be computed separately by each Joint
Venturer in accordance with Code Section 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 Joint Venturers'
interests in the capital of the Joint Venture.
(b) Upon the taxable disposition of an Oil or Gas Interest by the
Joint Venture, the amount realized therefrom shall be allocated among the Joint
Venturers (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 Joint Venturers in the same proportion as the aggregate
adjusted basis of such property was allocated to such Joint Venturers (or
their predecessors in interest) pursuant to Section 3.3.3(a); and
(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 3.3.1(d) as if such gain constituted an item of
Profit.
3.4 APPORTIONMENT AMONG JOINT VENTURERS.
(a) Except as otherwise provided in this Agreement, all
allocations and distributions to the Joint Venturers shall be apportioned among
them pro rata based upon the number of Units held by each of the Joint
Venturers.
(b) For purposes of Section 3.3.4(a), an Joint Venturer'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 Joint Venturer 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
3.3.4(c).
(c) If, during any taxable year of the Joint Venture, there is a
change in any Joint Venturer's interest in the Joint Venture, each Joint
Venturer's allocation of any item of income, gain, loss, deduction, or credit of
the Joint Venture for such taxable year shall be determined by taking into
account the varying interests of the Joint Venturers pursuant to such method as
is permitted by Code Section 706(d) and the regulations thereunder.
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4. DISTRIBUTIONS.
4.1 TIME OF DISTRIBUTION. The Joint Venture Manager shall distribute the
Joint Venture'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 Joint Venture,
which distributions shall be made in accordance with Section 9.3) shall be made
in accordance with Section 3.3.2(a). In no event shall funds be advanced or
borrowed for purposes of distributions if the amount of such distributions would
exceed the Joint Venture'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.
4.3 CAPITAL ACCOUNT DEFICITS. No distributions shall be made to any Joint
Venturer to the extent such distribution would create or increase a deficit in
such Joint Venturer's Capital Account (as adjusted in Section 3.3.2(b)). If a
distribution is not made to an Joint Venturer by reason of the preceding
sentence, then the amount which would have been distributed to such Joint
Venturer shall be distributed to the other Joint Venturers in the proportion
that the positive Capital Account balance of each Joint Venturer bears to the
aggregate positive Capital Account balances of all of the Joint Venturers. Any
such amount remaining after reduction of all Capital Accounts to zero shall be
distributed to the Joint Venture Manager.
5. ACTIVITIES.
5.1 MANAGEMENT. The Joint Venture Manager shall conduct, direct, and
exercise full and exclusive control over all activities of the Joint Venture.
Joint Venturers shall have no power over the conduct of the affairs of the Joint
Venture or otherwise commit or bind the Joint Venture in any manner. The Joint
Venture Manager shall manage the affairs of the Joint Venture in a prudent and
businesslike fashion and shall use its best efforts to carry out the purposes
and character of the business of the Joint Venture.
5.2 CONDUCT OF OPERATIONS.
(a) The Joint Venturers agree to participate in the Joint
Venture's program of operations as established by the Joint Venture Manager;
provided, however, that no well drilled to the point of setting casing need be
completed if, in the Joint Venture Manager'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 Joint Venture may participate with others in
the drilling of wells and it may enter into joint ventures, partnerships, or
other such arrangements.
(b) The Joint Venture shall not participate in any joint
operations on any co-owned Lease unless there has been acquired or reserved on
behalf of the Joint Venture 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 Joint Venture Manager is the
operator of such Lease, the Joint Venture Manager 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 Joint Venture being treated as a member of an
association taxable as a corporation for Federal income tax purposes.
(c) The relationship of the Joint Venture and the Joint Venture
Manager (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 5.5.2(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 Joint Venture Manager as operator and the Joint Venture as a
non-operator, and with the accounting procedure to govern as the accounting
procedures under such operating agreements.
(d) The Joint Venture Manager is expected to act as the operator
of all Joint Venture wells, and the Joint Venture Manager may designate such
other persons as it deems appropriate to conduct the actual drilling and
producing operations of the Joint Venture.
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(e) As operator of Joint Venture wells, the Joint Venture Manager
or its Affiliates shall receive per-well charges for each producing well based
on the Working Interest acquired by the Joint Venture. These per-well charges
shall be subject to annual adjustment beginning January 1, 1998 as provided in
the accounting procedures of the operating agreements.
(f) The Joint Venture shall enter into a turnkey drilling contract
with the Joint Venture Manager or its Affiliates as described in the Placement
Memorandum.
(g) The funds of the Joint Venture shall not be commingled with
the funds of any other Person.
(h) The Joint Venture Manager shall have a fiduciary
responsibility for the safekeeping and use of all funds and assets of the Joint
Venture, whether or not in the Joint Venture Manager'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 Joint Venture.
5.3 ACQUISITION AND SALE OF LEASES.
(a) To the extent the Joint Venture does not acquire a full
interest in a Lease from the Joint Venture Manager or its Affiliate, the
remainder of the interest in such Lease may be held by the Joint Venture Manager
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 Joint Venture Manager or its Affiliate to the exclusion of the
Joint Venture. Any Leases acquired by the Joint Venture from the Joint Venture
Manager or its Affiliate shall be acquired at the fair market value of such
property.
(b) The Joint Venture shall acquire only Leases reasonably
expected to meet the stated purposes of the Joint Venture. 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 Joint Venture's best interest.
5.4 TITLE TO LEASES.
(a) Record title to each Lease acquired by the Joint Venture may
be temporarily held in the name of the Joint Venture Manager, or in the name of
any nominee designated by the Joint Venture Manager, as agent for the Joint
Venture 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 Joint
Venture.
(b) The Joint Venture Manager shall take the necessary steps in
its best judgment to render title to the Leases to be assigned to the Joint
Venture acceptable for the purposes of the Joint Venture. No operation shall be
commenced on any Prospect acquired by the Joint Venture unless the Joint Venture
Manager is satisfied that the undertaking of such operation would be in the best
interest of Joint Venturers and the Joint Venture. The Joint Venture Manager
shall be free, however, to use its own best judgment in waiving title
requirements and shall not be liable to the Joint Venture or Joint Venturers for
any mistakes of judgment unless such mistakes were made in a manner not in
accordance with general industry standards in the geographic area. Neither the
Joint Venture Manager 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 Joint Venture or the
extent of the interest covered thereby.
5.5 RELEASE, ABANDONMENT, AND SALE OR EXCHANGE OF PROPERTIES. Except as
provided elsewhere in Section 5 and in Section 6.3, the Joint Venture Manager
shall have full power to dispose of the production and other assets of the Joint
Venture, 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.
5.6 CERTAIN TRANSACTIONS WITH JOINT VENTURE MANAGER OR AFFILIATES. Any
services, equipment, or supplies which the Joint Venture Manager or an Affiliate
furnishes to the Joint Venture which is not specifically referred to herein
shall be furnished at a competitive rate which could be obtained in the
geographical area of operations. Any such services for which
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the Joint Venture Manager 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.
6. JOINT VENTURE MANAGER.
6.1 JOINT VENTURE MANAGER. The Joint Venture Manager shall have the sole
and exclusive right and power to manage and control the affairs of and to
operate the Joint Venture, to do all things necessary to carry on the business
of the Joint Venture for the purposes described in Section 1.4 and to conduct
the activities of the Joint Venture as set forth in Section 5. No financial
institution or any other person, firm, or corporation dealing with the Joint
Venture Manager shall be required to ascertain whether the Joint Venture Manager
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 Joint Venture Manager. The Joint Venture Manager shall
devote so much of its time to the business of the Joint Venture as in its
judgment the conduct of the Joint Venture'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 Joint Venture not expressly set forth herein. The Joint
Venture Manager may engage in business ventures of any nature and description
independently or with others and neither the Joint Venture nor any of the Joint
Venturers shall have any rights in and to such independent ventures or the
income or profits derived therefrom.
6.2 AUTHORITY OF JOINT VENTURE MANAGER. The Joint Venture Manager is
specifically authorized and empowered, on behalf of the Joint Venture, and by
consent of the Joint Venturers herein given, to do any act, execute any document
or enter into any contract or any agreement of any nature necessary or
desirable, in the opinion of the Joint Venture Manager, in pursuance of the
purposes of the Joint Venture. Without limiting the generality of the foregoing,
in addition to any and all other powers conferred upon the Joint Venture Manager
pursuant to this Agreement and the Act, and except as otherwise prohibited by
law or hereunder, the Joint Venture Manager shall have the power and authority
to:
(a) Acquire Leases and other Oil and Gas Interests in furtherance of
the Joint Venture'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 Joint Venture Manager 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 Joint Venture, employ and retain such personnel as
it deems desirable for the conduct of the Joint Venture's activities, including
employees, consultants, and attorneys and exercise on behalf of the Joint
Venture, in such manner as the Joint Venture Manager, in its sole judgment,
deems best, all rights, elections, and obligations granted to or imposed upon
the Joint Venture;
(d) Manage, operate, and develop any Joint Venture property, and enter
into operating agreements with respect to properties acquired by the Joint
Venture, including an operating agreement with the Joint Venture Manager as
described in the Placement Memorandum, which agreements may contain such terms,
provisions, and conditions as are usual and customary within the industry and as
the Joint Venture Manager shall approve;
(e) Compromise, sue, or defend any and all claims in favor of or
against the Joint Venture;
(f) Subject to the provisions of Section 8.4, make or revoke any
election permitted the Joint Venture by any taxing authority;
(g) Perform any and all acts it deems necessary or appropriate for the
protection and preservation of Joint Venture assets;
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(h) Maintain, at the expense of the Joint Venture, such insurance
coverage for public liability, fire and casualty, and any and all other
insurance necessary or appropriate to the business of the Joint Venture 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 Joint
Venture;
(j) Enter into agreements to hire services of any kind or nature;
(k) Assign interests in properties to the Joint Venture;
(l) Borrow money on behalf of the Joint Venture from third parties or
the Joint Venture Manager or its Affiliates.
(m) Enter into soliciting dealer agreements and perform all of the
Joint Venture's obligations thereunder, to issue and sell Units pursuant to the
terms and conditions of this Agreement, the Subscription Agreements, and the
Placement Memorandum, to accept and execute on behalf of the Joint Venture
Subscription Agreements, and to admit Joint Venturers and Substitute Joint
Venturers; 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 Joint Venture.
6.3 CERTAIN RESTRICTIONS ON JOINT VENTURE MANAGER'S POWER AND AUTHORITY.
Notwithstanding any other provisions of this Agreement to the contrary, neither
the Joint Venture Manager nor any of its Affiliates shall have the power or
authority to, and shall not, do, perform, or authorize any of the following:
(a) 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 Joint
Venture (except upon liquidation of the Joint Venture pursuant to Section
9), unless cash funds of the Joint Venture are insufficient to pay the
obligations and other liabilities of the Joint Venture;
(2) dispose of the good will of the Joint Venture; or
(3) do any other act which would make it impossible to carry on
the ordinary business of the Joint Venture;
(b) Bind or obligate the Joint Venture with respect to any matter
outside the scope of the Joint Venture business;
(c) Use the Joint Venture name, credit, or property for other than
Joint Venture purposes;
(d) Utilize Joint Venture funds to invest in the securities of another
Person except in the following instances:
(1) investments in Working Interests or undivided Lease interests
made in the ordinary course of the Joint Venture's business;
(2) temporary investments made in compliance with Section
2.2.2(c);
(3) investments which are a necessary and incidental part of a
property acquisition transaction; and
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(4) investments in entities established solely to limit the Joint
Venture'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.
(e) Sell, transfer, or assign its interest (except for a collateral
assignment which may be granted to a bank or other financial institution) in the
Joint Venture, or any part thereof, or otherwise withdraw as Joint Venture
Manager without written notice to the Joint Venturers.
6.4 INDEMNIFICATION OF JOINT VENTURE MANAGER. The Joint Venture Manager
shall have no liability to the Joint Venture or to any Joint Venturer for any
loss suffered by the Joint Venture which arises out of any action or inaction of
the Joint Venture Manager if the Joint Venture Manager, in good faith,
determined that such course of conduct was in the best interest of the Joint
Venture, that the Joint Venture Manager was acting on behalf of or performing
services for the Joint Venture, and that such course of conduct did not
constitute gross negligence or willful misconduct of the Joint Venture Manager.
The Joint Venture Manager shall be indemnified by the Joint Venture against any
losses, judgments, liabilities, expenses, and amounts paid in settlement of any
claims sustained by it in connection with the Joint Venture, provided that the
Joint Venture Manager has determined, in good faith, that the course of conduct
which caused the loss or liability was in the best interest of the Joint
Venture, that the Joint Venture Manager was acting on behalf of or performing
services for the Joint Venture, and that the same were not the result of gross
negligence or willful misconduct on the part of the Joint Venture Manager.
Indemnification of the Joint Venture Manager is recoverable only from the
tangible net assets of the Joint Venture, including the insurance proceeds from
the Joint Venture's insurance policies and the insurance and indemnification of
the Joint Venture's subcontractors, and is not recoverable from the Joint
Venturers.
6.5 WITHDRAWAL.
(a) Notwithstanding the limitations contained in Section 6.6.3(e), the
Joint Venture Manager shall have the right, by giving written notice to the
Joint Venturers, to substitute in its stead as Joint Venture Manager any
successor entity or any entity controlled by the Joint Venture Manager, and the
Joint Venturers, by execution of this Agreement, hereby expressly consent to
such a transfer unless it would adversely affect the status of the Joint Venture
as a partnership for Federal income tax purposes.
(b) The Joint Venture Manager may voluntarily withdraw from the Joint
Venture after written notice to the Joint Venturers.
(c) In the event a Joint Venture Manager withdraws and the Joint
Venturers elect to continue the Joint Venture, the withdrawing Joint Venture
Manager's interest in the assets of the Joint Venture shall be determined by
independent appraisal by a qualified independent petroleum engineering
consultant who shall be selected by mutual agreement of the Joint Venture
Manager and the successor Joint Venture Manager. Such appraisal will take into
account an appropriate discount to reflect the risk of recovery of oil and gas
reserves. The withdrawn Joint Venture Manager shall be paid for its interest
within ten days of the determination of the value of such interest.
6.6 MANAGEMENT FEE. The Joint Venture shall pay the Joint Venture Manager,
on the date hereof, a one-time management fee equal to 4.9% of the total Capital
Contributions required to be made by the Joint Venturers pursuant to Section
2.2.2(a).
6.7 ORGANIZATION AND OFFERING FEE. The Joint Venture shall pay the Joint
Venture Manager, on the date hereof, a one-time organization and offering fee
equal to 2.8% of the Capital Contributions required to be made by the Joint
Venturers pursuant to Section 2.2.2(a), to reimburse the Joint Venture Manager
for paying all costs of organizing and selling the Units 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.
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6.8 TAX MATTERS PARTNER. The Joint Venture Manager shall serve as the Tax
Matters Partner for purposes of Code Sections 6221 through 6233. The Joint
Venture may engage its accountants and/or attorneys to assist the Tax Matters
Partner in discharging its duties hereunder.
7. JOINT VENTURERS.
7.1 MANAGEMENT. No Joint Venturer shall take part in the control or
management of the business or transact any business for the Joint Venture, and
no Joint Venturer shall have the power to sign for or bind the Joint Venture,
all of such authority having been given to the Joint Venture Manager in Section
6. Any action or conduct of Joint Venturers on behalf of the Joint Venture is
hereby expressly prohibited. Any Joint Venturer who violates the provisions of
this Section 7.1 shall be liable to the remaining Joint Venturers, the Joint
Venture Manager, and the Joint Venture for any damages, costs, or expenses any
of them may incur as a result of such violation. Joint Venturers shall have the
right to vote only with respect to those matters specifically provided for in
these Sections.
7.2 ASSIGNMENT OF UNITS.
(a) An Joint Venturer may transfer all or any portion of the Joint
Venturer'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 Joint Venture such documents and instruments of conveyance as may be
necessary or appropriate in the opinion of counsel to the Joint Venture to
effect such transfer;
(2) The transferor and transferee shall furnish the Joint Venture
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 Joint Venture is reimbursed by the transferor and/or
transferee for all costs and expenses that it reasonably incurs in
connection with such transfer.
(4) If the transferor is an Additional General Partner, the Joint
Venture Manager has consented to the transfer, which shall be in the sole
discretion of the Joint Venture Manager.
(b) A Person who acquires one or more Units but who is not admitted as
a Substitute Joint Venturer, 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 Joint
Venture, shall not be entitled to inspect the books or records of the Joint
Venture, 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 Section 7, a transferee of
Units may be admitted to the Joint Venture as a Substitute Joint Venturer only
upon satisfaction of the following conditions:
(1) The Joint Venture Manager 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 Joint
Venturer and executes such documents and instruments as the Joint Venture
Manager may reasonably request as may be necessary or appropriate to
confirm
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such transferee as a Joint Venturer of the Joint Venture 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 Joint Venture with evidence satisfactory to counsel
for the Joint Venture of the authority of the transferee to become a Joint
Venturer 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
Joint Venture 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 Joint Venturer hereby covenants and agrees with the Joint
Venture, for the benefit of the Joint Venture and all Joint Venturers, that (i)
the Joint Venturer is not currently making a market in Units and (ii) the Joint
Venturer will not transfer any Unit on an established securities market or a
secondary market (or the substantial equivalent thereof) within the meaning of
Code Section 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 Joint Venturer further agrees
that the Joint Venturer will not transfer any Unit to any Person unless such
Person agrees to be bound by the provisions of this Section 7.2 and to transfer
such Units only to Persons who agree to be similarly bound.
7.3 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 Joint Venture
is required by a court of competent jurisdiction to recognize a transfer that is
not a Permitted Transfer (or if the Joint Venture Manager, in its sole
discretion, elects to recognize a transfer that is not a Permitted Transfer),
the Joint Venture shall have the right (without limiting any other legal or
equitable rights of the Joint Venture) 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 Joint Venture.
(b) In the case of a 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 Joint Venture and
the other Joint Venturers 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.
7.4 WITHDRAWAL BY JOINT VENTURERS. An Joint Venturer may not withdraw from
the Joint Venture, except as otherwise provided in this Agreement.
7.5 CALLING OF MEETINGS. Joint Venturers owning 20% or more of the then
outstanding Units entitled to vote shall have the right to request that the
Joint Venture Manager call a meeting of the Joint Venturers. The Joint Venture
Manager 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 Joint
Venturers 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. Joint Venturers shall have the
right to submit proposals to the Joint Venture Manager for inclusion in the
voting materials for the next meeting of Joint Venturers for consideration and
approval by the Joint Venturers. Joint Venturers shall have the right to vote in
person or by proxy.
7.6 VOTING RIGHTS. Joint Venturers 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 Joint Venturers, 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.
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7.7 VOTING BY PROXY. The Joint Venturers may vote either in person or by
proxy.
7.8 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 Joint Venture Manager 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 interest for a
Limited Partner interest at any time.
(b) The Joint Venture Manager shall notify all Additional General
Partners at least 30 days prior to any material change in the amount of the
Joint Venture's insurance coverage.
(c) The Joint Venture Manager 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 Joint Venture Manager that such conversion
will not cause a termination of the Joint Venture for Federal income tax
purposes, and will be effective upon the Joint Venture Manager's filing an
amendment to the Joint Venture's Certificate of Limited Partnership reflecting
such conversion. The Joint Venture Manager is obligated to file an amendment to
the Joint Venture's 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 Joint Venture Manager that the conversion will not
constitute a termination of the Joint Venture 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 Joint
Venture Manager of such intent to convert. Upon such conversion, such Additional
General Partner shall become a Limited Partner, but such Additional General
Partner shall remain liable to the Joint Venture for any additional Capital
Contribution(s) required and such Additional General Partner's proportionate
share of any Joint Venture obligation or liability arising prior to the
conversion.
(d) Limited Partners may not convert and/or exchange their interests
for Additional General Partner interests.
7.9 LIABILITY OF JOINT VENTURERS. Except as otherwise provided in this
Agreement or the Act, each Additional General Partner shall be jointly and
severally liable for the debts and obligations of the Joint Venture. In
addition, each Additional General Partner shall be jointly and severally liable
for any wrongful acts or omissions of the Joint Venture Manager and/or the
misapplication of money or property of a third party by the Joint Venture
Manager acting within the scope of its apparent authority to the extent such
acts or omissions are chargeable to the Joint Venture.
8. BOOKS AND RECORDS.
8.1 BOOKS AND RECORDS.
(a) For accounting and income tax purposes, the Joint Venture shall
operate on a calendar year.
(b) The Joint Venture Manager shall keep just and true records and
books of account with respect to the operations of the Joint Venture and shall
maintain and preserve during the term of the Joint Venture and for four years
thereafter all such records, books of account, and other relevant Joint Venture
documents. The Joint Venture Manager 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 Joint Venture and shall be kept on the
accrual method of accounting.
(c) The Joint Venture Manager shall keep or cause to be kept complete
and accurate books and records with respect to the Joint Venture's business,
which books and records shall at all times be kept at the principal office of
the Joint Venture. Any records maintained by the Joint Venture in the regular
course of its business, including the names and addresses of Joint Venturers,
books of account, and records of Joint Venture proceedings, may be kept on or be
in the form of RAM disks, magnetic tape, photographs, micrographies, 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
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records of the Joint Venture shall be made available for review by any Joint
Venturer or the Joint Venturer's representative at any reasonable time.
(d) The Participant List shall be maintained as a part of the books
and records of the Joint Venture, shall be available for the inspection by any
Joint Venturer or such Joint Venturer's designated agent at the principal office
of the Joint Venture upon the request of any Joint Venturer and shall be updated
at least quarterly to reflect changes in the information contained therein.
8.2 REPORTS. The Joint Venture Manager shall deliver to each Joint Venturer
the following financial statements and reports at the times indicated below:
(a) Within 120 days after the end of each fiscal year, financial
statements, including a balance sheet and statements of income, Joint Venturers'
equity, and cash flows, all of which shall be prepared in accordance with
generally accepted accounting principles, and a reconciliation of such financial
statements with the information furnished to the Joint Venturers for Federal
income tax reporting purposes.
(b) By March 15 of each year, a report containing such information as
to enable each Joint Venturer to prepare and file such Joint Venturer's Federal
income tax return.
(c) Such other reports and financial statements as the Joint Venture
Manager shall determine from time to time.
8.3 BANK ACCOUNTS. All funds of the Joint Venture 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 Joint Venture
Manager. All withdrawals therefrom shall be made upon checks signed by the Joint
Venture Manager or any person authorized to do so by the Joint Venture Manager.
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 Joint Venture under the Code shall be
made by the Joint Venture Manager in its sole discretion. Each Joint Venturer
agrees to provide the Joint Venture with all information necessary to give
effect to any election to be made by the Joint Venture.
(b) The Joint Venture shall elect to currently deduct intangible
drilling and development costs 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 Joint
Venturer shall not dissolve the Joint Venture. The successor to the rights of
such Joint Venturer shall have all the rights of an Joint Venturer for the
purpose of settling or administering the estate or affairs of such Joint
Venturer; provided, however, that no successor shall become a Substitute Joint
Venturer except in accordance with Section 7; and provided further that upon the
occurrence of any of the events referred to in the first sentence of this
Section 9.9.1(a) with respect to an Additional General Partner, the Joint
Venture shall be dissolved and wound up unless at that time there is at least
one other Additional General Partner, in which event the business of the Joint
Venture shall continue to be carried on. Neither the expulsion of any Joint
Venturer, nor the admission or substitution of an Joint Venturer, shall work a
dissolution of the Joint Venture. The estate of a deceased, insane, incompetent,
or bankrupt Joint Venturer shall be liable for all his liabilities as an Joint
Venturer.
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(b) Notwithstanding anything in the Act to the contrary, the Joint
Venture shall be dissolved upon, but not before, the earliest to occur of (i)
the written consent of the Joint Venture Manager and Joint Venturers owning a
majority of the then outstanding Units to dissolve and wind up the affairs of
the Joint Venture; (ii) subject to the provisions of Section 9.9.1(c), the
retirement, withdrawal, removal, death, adjudication of insanity or incapacity,
or bankruptcy (or, in the case of a corporate Joint Venture Manager, the
withdrawal, removal, filing of a certificate of dissolution, liquidation, or
bankruptcy) of the Joint Venture Manager; (iii) the sale, forfeiture, or
abandonment of all, or substantially all, of the Joint Venture's property and
the sale and/or collection of any evidences of indebtedness received in
connection therewith; (iv) December 31, 2047 or (v) a dissolution event
described in Section 9.9.1(a).
(c) In the case of any event described in Section 9.9.1(b)(ii), if a
successor Joint Venture Manager is selected by Joint Venturers owning a majority
of the then outstanding Units within 90 days after such event, and if such Joint
Venturers agree within such 90 day period to continue the business of the Joint
Venture, then the Joint Venture shall not be dissolved.
(d) If, notwithstanding the provisions of this Agreement, the
retirement, withdrawal, removal, death, insanity, incapacity, dissolution,
liquidation, or bankruptcy of any Joint Venturer, or the assignment of a Joint
Venturer's interest in the Joint Venture, or the substitution or admission of a
new Joint Venturer, shall be deemed under the Act to cause a dissolution of the
Joint Venture, then, except as provided in Section 9.9.1(c), the remaining Joint
Venturers may, in accordance with the Act, continue the Joint Venture business
as a new partnership and all such remaining Joint Venturers agree to be bound by
the provisions of this Agreement.
9.2 LIQUIDATION. Upon a dissolution of the Joint Venture, the Joint Venture
Manager, or in the event there is no Joint Venture Manager, any other Person
selected by the Joint Venturers to act as the liquidator, shall cause the
affairs of the Joint Venture to be wound up and shall take account of the Joint
Venture's assets (including Capital Contributions, if any, of the Joint Venture
Manager pursuant to Section 3.3.1(e)) and, subject to the provisions of Section
9.9.3(b) shall be liquidated as promptly as is consistent with obtaining the
fair market value thereof (which dissolution and liquidation may be accomplished
over a period spanning one or more tax years in the sole discretion of the Joint
Venture Manager or the liquidator), and the proceeds therefrom, 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 Joint Venture and winding up of its
affairs, the assets of the Joint Venture shall be distributed as follows:
(1) all of the Joint Venture's debts and liabilities to Persons
other than to Joint Venturers shall be paid and discharged;
(2) to the establishment of any cash reserves which the Joint
Venture Manager or liquidator determines to create in their sole discretion
for unmatured and/or contingent liabilities or obligations of the Joint
Venture; and
(3) to the Joint Venturers, in accordance with their respective
Capital Accounts; provided, however, that if the Joint Venture Manager or
liquidator establishes any reserves in accordance with the provisions of
Section 9.9.3(a)(2), then the distributions pursuant to this Section
9.9.3(a)(3) (including distribution of any released reserves) shall be pro
rata in accordance with the balances of the Joint Venturers' Capital
Accounts.
(b) Distributions pursuant to Section 9.3 shall be made in cash or in
kind to the Joint Venturers, at the election of the Joint Venture Manager.
Notwithstanding the provision of this Section 9.9.3(b), in no event shall the
Joint Venturers reserve the right to take in kind and separately dispose of
their share of production.
(c) Any in kind property distributions to the Joint Venturers shall be
made to a liquidating trust or similar entity for the benefit of the Joint
Venturers, unless at the time of the distribution:
A-20
<PAGE> 24
(1) the Joint Venture Manager shall offer the individual Joint
Venturers the election of receiving in kind property distributions and the
Joint Venturers 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
Joint Venturers that they will not, at any time, be responsible for the
operation or disposition of Joint Venture properties.
10. POWER OF ATTORNEY.
10.1 JOINT VENTURE MANAGER AS ATTORNEY-IN-FACT. Each Joint Venturer makes,
constitutes, and appoints the Joint Venture Manager their true and lawful
attorney-in-fact, with full power of substitution, in the name, place, and stead
of the Joint Venturer, 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 Joint Venture
shall engage, or seek to engage, to do business and to do such other acts as are
required to constitute the Joint Venture 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 Joint Venture 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 Joint Venturer to comply with, the laws of
any state or other jurisdiction to reflect a change of name or address of the
Joint Venturer.
(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 Joint
Venture or the Joint Venturer; (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 Joint Venturer
granting it;
(b) shall survive the delivery of any assignment by the Joint Venturer
of the whole or any portion of the Joint Venturer's Units; except that where the
assignee thereof has been approved by the Joint Venture Manager for admission
A-21
<PAGE> 25
to the Joint Venture as a Substitute Joint Venturer, the power of attorney shall
survive the delivery of such 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 Joint Venturers 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 Joint Venture 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 Joint Venture,
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 Joint Venture Manager, 632 Adams Street, Suite 710,
Bowling Green, Kentucky 42101.
(b) If to an Joint Venturer, at such Joint Venturer'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 Joint Venture Manager and such percentage of Joint Venturers 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 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 Joint Venturer irrevocably
waives, during the term of the Joint Venture, any right that such Joint Venturer
may have to maintain any action for partition with respect to the Joint Venture
and the property of the Joint Venture.
A-22
<PAGE> 26
11.9 AMENDMENTS.
(a) Unless otherwise specifically herein provided, this Agreement
shall not be amended without the consent of Joint Venturers owning a majority of
the then outstanding Units entitled to vote.
(b) The Joint Venture Manager may, without notice to, or consent of,
any Joint Venturer, 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 Joint Venture;
(2) The admission of Substitute Joint Venturers or additional
Joint Venturers in accordance with this Agreement;
(3) A reduction in, return of, or withdrawal of, all or a portion
of any Joint Venturer's Capital Contribution;
(4) A correction of any typographical error or omission;
(5) A change which is necessary in order to qualify the Joint
Venture as a limited partnership under the laws of any other state or which
is necessary or advisable, in the opinion of the Joint Venture Manager, to
ensure that the Joint Venture 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 3.3.2(a), in a manner that, in the sole opinion of
the Joint Venture Manager (which opinion shall be determinative), would
result in the most favorable aggregate consequences to the Joint Venturers
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 Joint Venture Manager shall have no authority, right,
or power under this Section 11.11.9(b) to amend the voting rights of the Joint
Venturers.
11.10 SUBSTITUTION OF SIGNATURE PAGES. This Agreement has been executed in
duplicate by the Joint Venturers and one executed copy of the signature page is
attached to the Joint Venturer'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 Joint Venturers.
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.
A-23
<PAGE> 27
HOME STAKE JOINT VENTURE, LTD.
JOINT VENTURE AGREEMENT SIGNATURE PAGE
<TABLE>
<S> <C>
Number of Units of Limited Partnership interest
- ----------
Number of Units of General Partnership interest
- ----------
Cash Payment - $17,100 per Unit to be paid as follows:
- ---------- $10,000 payable upon subscription for the drilling and testing of the Re-Entry and Venture
Wells (Payable to "SOUTH CENTRAL BANK, ESCROW AGENT FOR THE HOME STAKE JOINT VENTURE,
LTD.") and
$4,275 payable if and when the Joint Venture Manager decides to complete the Re-Entry Well
(Payable to "HOME STAKE JOINT VENTURE, LTD.") and
$2,825 payable if and when the Joint Venture Manager decides to
complete the Venture Well (Payable to "HOME STAKE JOINT VENTURE,
LTD.").
</TABLE>
REGISTRATION INFORMATION
- --------------------------------------------------------------------------------
Print Name
- --------------------------------------------------------------------------------
Social Security Number or Tax ID Number
X
- --------------------------------------------------------------------------------
Signature
Mailing Address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Home Ph #:
- --------------------------------------------------------------------------------
Work Ph #:
- --------------------------------------------------------------------------------
Check One:
Individual IRA
- ---- ----
J/T/W/R/O/S Keogh
- ---- ----
Partnership TIC
- ---- ----
Trust Created Corporation
- ---- on ________ ----
Limited Liability Community
- ---- Company ---- Property
Check One:
[ ] Accredited Investor
[ ] Non-Accredited Investor
- --------------------------------------------------------------------------------
Print Name of Joint Owner
(if applicable)
- --------------------------------------------------------------------------------
Social Security Number or Tax ID Number
X
- --------------------------------------------------------------------------------
Signature of Joint Owner
DEALER MANAGER'S ACCEPTANCE
Ridgemont Securities, Inc., as Dealer Manager, herewith accepts the foregoing
subscription.
- --------------------------------------------------------------------------------
Deborah Morones, President
Date:
----------------------
JOINT VENTURE'S ACCEPTANCE
Blue Ridge Energy, Inc., as Joint Venture Manager, herewith accepts the
foregoing subscription in the Home Stake Joint Venture.
- --------------------------------------------------------------------------------
Robert D. Burr, President
Date:
----------------------
A-24
<PAGE> 28
EXHIBIT A
TO
AGREEMENT OF LIMITED PARTNERSHIP
OF
HOME STAKE JOINT VENTURE, LTD.
<TABLE>
<CAPTION>
Names and Addresses of Investors Nature of Interest Number of Units
- -------------------------------- ------------------ ---------------
<S> <C> <C>
</TABLE>
A-25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE DECEMBER
31, 1998 AUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN FORM 10-SB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 480,952
<SECURITIES> 0
<RECEIVABLES> 339,925
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,308,718
<PP&E> 556,263
<DEPRECIATION> 16,195
<TOTAL-ASSETS> 2,995,342
<CURRENT-LIABILITIES> 519,701
<BONDS> 0
0
464
<COMMON> 25,858
<OTHER-SE> 2,385,087
<TOTAL-LIABILITY-AND-EQUITY> 2,995,342
<SALES> 1,770,712
<TOTAL-REVENUES> 2,087,690
<CGS> 1,455,607
<TOTAL-COSTS> 1,944,395
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 72,813
<INCOME-TAX> 24,762
<INCOME-CONTINUING> 48,051
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48,051
<EPS-BASIC> (.09)
<EPS-DILUTED> (.09)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE
30, 1999 UNAUDITED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN FORM 10 S-B.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> JUN-30-1999
<CASH> 142,713
<SECURITIES> 0
<RECEIVABLES> 266,391
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 667,864
<PP&E> 2,942,156
<DEPRECIATION> 38,265
<TOTAL-ASSETS> 3,663,438
<CURRENT-LIABILITIES> 98,443
<BONDS> 587,603
0
475
<COMMON> 26,098
<OTHER-SE> 2,742,306
<TOTAL-LIABILITY-AND-EQUITY> 3,663,438
<SALES> 3,022,590
<TOTAL-REVENUES> 3,498,331
<CGS> 2,424,482
<TOTAL-COSTS> 2,999,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,062
<INCOME-PRETAX> 437,249
<INCOME-TAX> 144,281
<INCOME-CONTINUING> 292,968
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 292,968
<EPS-BASIC> .03
<EPS-DILUTED> .03
</TABLE>
