LIMITED PARTNERSHIP AGREEMENT OF
ATLAS AMERICA PUBLIC #12-2003 LIMITED PARTNERSHIP
DATED OCTOBER 18, 2003
TABLE OF CONTENTS
Section No. Description Page Section No. Description Page
I. FORMATION VII. DURATION, DISSOLUTION, AND WINDING UP
1.01 Formation............................. 1 7.01 Duration.............................. 48
1.02 Certificate of Limited Partnership.... 1 7.02 Dissolution and Winding Up............ 48
1.03 Name, Principal Office and Residence.. 1
1.04 Purpose............................... 1 VIII. MISCELLANEOUS PROVISIONS
8.01 Notices............................... 49
II. DEFINITION OF TERMS 8.02 Time.................................. 50
2.01 Definitions........................... 2 8.03 Applicable Law........................ 50
8.04 Agreement in Counterparts............. 50
III. SUBSCRIPTIONS AND FURTHER CAPITAL 8.05 Amendment............................. 50
CONTRIBUTIONS 8.06 Additional Partners................... 50
3.01 Designation of Managing General 8.07 Legal Effect.......................... 50
Partner and Participants ........... 10
3.02 Participants.......................... 10 EXHIBITS
3.03 Subscriptions to the Partnership...... 11 EXHIBIT (I-A) -
3.04 Capital Contributions of the Managing Form of Managing General Partner Signature Page
General Partner....................... 12 EXHIBIT (I-B) -
3.05 Payment of Subscriptions.............. 13 Form of Subscription Agreement
3.06 Partnership Funds..................... 13 EXHIBIT (II) -
Form of Drilling and Operating Agreement
IV. CONDUCT OF OPERATIONS
4.01 Acquisition of Leases................. 14
4.02 Conduct of Operations................. 16
4.03 General Rights and Obligations of the
Participants and Restricted and
Prohibited Transactions........... 20
4.04 Designation, Compensation and Removal
of Managing General Partner and
Removal of Operator............... 30
4.05 Indemnification and Exoneration....... 33
4.06 Other Activities...................... 35
V. PARTICIPATION IN COSTS AND REVENUES, CAPITAL
ACCOUNTS, ELECTIONS AND DISTRIBUTIONS
5.01 Participation in Costs and Revenues... 36
5.02 Capital Accounts and Allocations
Thereto........................... 39
5.03 Allocation of Income, Deductions and
Credits........................... 40
5.04 Elections............................. 42
5.05 Distributions......................... 42
VI. TRANSFER OF INTERESTS
6.01 Transferability....................... 43
6.02 Special Restrictions on Transfers..... 44
6.03 Right of Managing General Partner to
Hypothecate and/or Withdraw Its
Interests............................. 45
6.04 Presentment........................... 46
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FORM OF LIMITED PARTNERSHIP AGREEMENT OF
ATLAS AMERICA PUBLIC #12-2003 LIMITED PARTNERSHIP
THIS AGREEMENT OF LIMITED PARTNERSHIP ("AGREEMENT"), is made and entered into
as of October 18, 2003, by and among Atlas Resources, Inc.,
referred to as "Atlas" or the "Managing General Partner," and the remaining
parties from time to time signing a Subscription Agreement for Limited Partner
Units, these parties sometimes referred to as "Limited Partners," or for
Investor General Partner Units, these parties sometimes referred to as
"Investor General Partners."
ARTICLE I
FORMATION
1.01. Formation. Subject to the provisions of this agreement, the parties
hereto do hereby form a limited partnership under the Delaware Revised Uniform
Limited Partnership Act on the terms and conditions set forth in this
Agreement.
1.02. Certificate of Limited Partnership. This document is not only an
agreement among the parties, but also may be the Certificate and Agreement of
Limited Partnership of the Partnership. This document shall be filed or
recorded in the public offices required under applicable law or deemed
advisable in the discretion of the Managing General Partner. Amendments to the
certificate of limited partnership shall be filed or recorded in the public
offices required under applicable law or deemed advisable in the discretion of
the Managing General Partner.
1.03. Name, Principal Office and Residence.
1.03(a). Name. The name of the Partnership is Atlas America Public #12-2003
Limited Partnership.
1.03(b). Residence. The residence of the Managing General Partner is its
principal place of business at ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇
▇▇▇▇▇, which shall also serve as the principal place of business of the
Partnership.
The residence of each Participant shall be as set forth on the Subscription
Agreement executed by the Participant.
All addresses shall be subject to change on notice to the parties.
1.03(c). Agent for Service of Process. The name and address of the agent for
service of process shall be ▇▇. ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇ at Atlas Resources, Inc.,
▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇.
1.04. Purpose. The Partnership shall engage in all phases of the natural gas
and oil business. This includes, without limitation, exploration for,
development and production of natural gas and oil on the terms and conditions
set forth below and any other proper purpose under the Delaware Revised
Uniform Limited Partnership Act.
The Managing General Partner may not, without the affirmative vote of
Participants whose Units equal a majority of the total Units, do the
following:
(i) change the investment and business purpose of the Partnership;
or
(ii) cause the Partnership to engage in activities outside the
stated business purposes of the Partnership through joint
ventures with other entities.
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ARTICLE II
DEFINITION OF TERMS
2.01. Definitions. As used in this Agreement, the following terms shall have
the meanings set forth below:
1. "Administrative Costs" means all customary and routine expenses
incurred by the Sponsor for the conduct of Partnership
administration, including: in-house legal, finance, in-house
accounting, secretarial, travel, office rent, telephone, data
processing and other items of a similar nature. Administrative
Costs shall be limited as follows:
(i) no Administrative Costs charged shall be duplicated
under any other category of expense or cost; and
(ii) no portion of the salaries, benefits, compensation or
remuneration of controlling persons of the Managing
General Partner shall be reimbursed by the Partnership
as Administrative Costs. Controlling persons include
directors, executive officers and those holding 5% or
more equity interest in the Managing General Partner or
a person having power to direct or cause the direction
of the Managing General Partner, whether through the
ownership of voting securities, by contract, or
otherwise.
2. "Administrator" means the official or agency administering the
securities laws of a state.
3. "Affiliate" means with respect to a specific person:
(i) any person directly or indirectly owning, controlling,
or holding with power to vote 10% or more of the
outstanding voting securities of the specified person;
(ii) any person 10% or more of whose outstanding voting
securities are directly or indirectly owned, controlled,
or held with power to vote, by the specified person;
(iii) any person directly or indirectly controlling,
controlled by, or under common control with the
specified person;
(iv) any officer, director, trustee or partner of the
specified person; and
(v) if the specified person is an officer, director, trustee
or partner, any person for which the person acts in any
such capacity.
4. "Agreement" means this Limited Partnership, including all
exhibits to this Agreement.
5. "Anthem Securities" means Anthem Securities, Inc., whose
principal executive offices are located at ▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇,
▇.▇. ▇▇▇ ▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇-▇▇▇▇.
6. "Assessments" means additional amounts of capital which may be
mandatorily required of or paid voluntarily by a Participant
beyond his subscription commitment.
7. "Atlas" means Atlas Resources, Inc., a Pennsylvania
corporation, whose principal executive offices are located at
▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇.
8. "Capital Account" or "account" means the account established
for each party, maintained as provided in ss.5.02 and its
subsections.
9. "Capital Contribution" means the amount agreed to be
contributed to the Partnership by a Partner pursuant to
ss.ss.3.04 and 3.05 and their subsections.
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10. "Carried Interest" means an equity interest in the Partnership
issued to a Person without consideration, in the form of cash
or tangible property, in an amount proportionately equivalent
to that received from the Participants.
11. "Code" means the Internal Revenue Code of 1986, as amended.
12. "Cost," when used with respect to the sale or transfer of
property to the Partnership, means:
(i) the sum of the prices paid by the seller or transferor
to an unaffiliated person for the property, including
bonuses;
(ii) title insurance or examination costs, brokers'
commissions, filing fees, recording costs, transfer
taxes, if any, and like charges in connection with the
acquisition of the property;
(iii) a pro rata portion of the seller's or transferor's
actual necessary and reasonable expenses for seismic and
geophysical services; and
(iv) rentals and ad valorem taxes paid by the seller or
transferor for the property to the date of its transfer
to the buyer, interest and points actually incurred on
funds used to acquire or maintain the property, and the
portion of the seller's or transferor's reasonable,
necessary and actual expenses for geological,
engineering, drafting, accounting, legal and other like
services allocated to the property cost in conformity
with generally accepted accounting principles and
industry standards, except for expenses in connection
with the past drilling of ▇▇▇▇▇ which are not producers
of sufficient quantities of oil or gas to make
commercially reasonable their continued operations, and
provided that the expenses enumerated in this subsection
(iv) shall have been incurred not more than 36 months
before the sale or transfer to the Partnership.
"Cost," when used with respect to services, means the
reasonable, necessary and actual expense incurred by the seller
on behalf of the Partnership in providing the services,
determined in accordance with generally accepted accounting
principles.
As used elsewhere, "Cost" means the price paid by the seller in
an arm's-length transaction.
13. "Dealer-Manager" means:
(i) Anthem Securities, Inc., an Affiliate of the Managing
General Partner, the broker/dealer which will manage the
offering and sale of the Units in all states other than
Minnesota and New Hampshire; and
(ii) ▇▇▇▇▇ Funding, Inc., the broker/dealer which will manage
the offering and sale of Units in Minnesota and New
Hampshire.
14. "Development Well" means a well drilled within the proved area
of a natural gas or oil reservoir to the depth of a
stratigraphic Horizon known to be productive.
15. "Direct Costs" means all actual and necessary costs directly
incurred for the benefit of the Partnership and generally
attributable to the goods and services provided to the
Partnership by parties other than the Sponsor or its
Affiliates. Direct Costs:
(i) may not include any cost otherwise classified as
Organization and Offering Costs, Administrative Costs,
Intangible Drilling Costs, Tangible Costs, Operating
Costs or costs related to the Leases; but
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(ii) may include the cost of services provided by the Sponsor
or its Affiliates if the services are provided pursuant
to written contracts and in compliance with
ss.4.03(d)(7) or pursuant to the Managing General
Partner's role as Tax Matters Partner.
16. "Distribution Interest" means an undivided interest in the
Partnership's assets after payments to the Partnership's
creditors or the creation of a reasonable reserve therefor, in
the ratio the positive balance of a party's Capital Account
bears to the aggregate positive balance of the Capital Accounts
of all of the parties determined after taking into account all
Capital Account adjustments for the taxable year during which
liquidation occurs (other than those made pursuant to
liquidating distributions or restoration of deficit Capital
Account balances). Provided, however, after the Capital
Accounts of all of the parties have been reduced to zero, the
interest in the remaining Partnership assets shall equal a
party's interest in the related Partnership revenues as set
forth in ss.5.01 and its subsections of this Agreement.
17. "Drilling and Operating Agreement" means the proposed Drilling
and Operating Agreement between the Managing General Partner or
an Affiliate as Operator, and the Partnership as Developer, a
copy of the proposed form of which is attached to this
Agreement as Exhibit (II).
18. "Exploratory Well" means a well drilled to:
(i) find commercially productive hydrocarbons in an unproved
area;
(ii) find a new commercially productive Horizon in a field
previously found to be productive of hydrocarbons at
another Horizon; or
(iii) significantly extend a known prospect.
19. "Farmout" means an agreement by the owner of the leasehold or
Working Interest to assign his interest in certain acreage or
well to the assignees, retaining some interest such as an
Overriding Royalty Interest, an oil and gas payment, offset
acreage or other type of interest, subject to the drilling of
one or more specific ▇▇▇▇▇ or other performance as a condition
of the assignment.
20. "Final Terminating Event" means any one of the following:
(i) the expiration of the Partnership's fixed term;
(ii) notice to the Participants by the Managing General
Partner of its election to terminate the Partnership's
affairs;
(iii) notice by the Participants to the Managing General
Partner of their similar election through the
affirmative vote of Participants whose Units equal a
majority of the total Units; or
(iv) the termination of the Partnership under ss.708(b)(1)(A)
of the Code or the Partnership ceases to be a going
concern.
21. "Horizon" means a zone of a particular formation; that part of
a formation of sufficient porosity and permeability to form a
petroleum reservoir.
22. "Independent Expert" means a person with no material relationship
to the Sponsor or its Affiliates who is qualified and in the
business of rendering opinions regarding the value of natural gas
and oil properties based on the evaluation of all pertinent
economic, financial, geologic and engineering information
available to the Sponsor or its Affiliates.
23. "Initial Closing Date" means the date after the minimum amount
of subscription proceeds has been received when subscription
proceeds are first withdrawn from the escrow account.
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24. "Intangible Drilling Costs" or "Non-Capital Expenditures" means
those expenditures associated with property acquisition and the
drilling and completion of natural gas and oil ▇▇▇▇▇ that under
present law are generally accepted as fully deductible
currently for federal income tax purposes. This includes all
expenditures made for any well before production in commercial
quantities for wages, fuel, repairs, hauling, supplies and
other costs and expenses incident to and necessary for drilling
the well and preparing the well for production of natural gas
or oil, that are currently deductible pursuant to Section
263(c) of the Code and Treasury Reg. Section 1.612-4, and are
generally termed "intangible drilling and development costs,"
including the expense of plugging and abandoning any well
before a completion attempt.
25. "Interim Closing Date" means those date(s) after the Initial
Closing Date, but before the Offering Termination Date, that
the Managing General Partner, in its sole discretion, applies
additional subscription proceeds to additional Partnership
activities, including drilling activities.
26. "Investor General Partners" means:
(i) the persons signing the Subscription Agreement as
Investor General Partners; and
(ii) the Managing General Partner to the extent of any
optional subscription under ss.3.03(b)(2).
All Investor General Partners shall be of the same class and
have the same rights.
27. "Landowner's Royalty Interest" means an interest in production,
or its proceeds, to be received free and clear of all costs of
development, operation, or maintenance, reserved by a landowner
on the creation of a Lease.
28. "Leases" means full or partial interests in natural gas and oil
leases, oil and natural gas mineral rights, fee rights,
licenses, concessions, or other rights under which the holder
is entitled to explore for and produce oil and/or natural gas,
and includes any contractual rights to acquire any such
interest.
29. "Limited Partners" means:
(i) the persons signing the Subscription Agreement as
Limited Partners;
(ii) the Managing General Partner to the extent of any
optional subscription under ss.3.03(b)(2);
(iii) the Investor General Partners on the conversion of their
Investor General Partner Units to Limited Partner Units
pursuant to ss.6.01(b); and
(iv) any other persons who are admitted to the Partnership as
additional or substituted Limited Partners.
Except as provided in ss.3.05(b), with respect to the required
additional Capital Contributions of Investor General Partners,
all Limited Partners shall be of the same class and have the
same rights.
30. "Managing General Partner" means:
(i) Atlas Resources, Inc.; or
(ii) any Person admitted to the Partnership as a general
partner other than as an Investor General Partner who is
designated to exclusively supervise and manage the
operations of the Partnership.
31. "Managing General Partner Signature Page" means an execution
and subscription instrument in the form attached as Exhibit (I-
A) to this Agreement, which is incorporated in this Agreement
by reference.
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32. "Offering Termination Date" means the date after the minimum
amount of subscription proceeds has been received on which the
Managing General Partner determines, in its sole discretion,
the Partnership's subscription period is closed and the
acceptance of subscriptions ceases, which shall not be later
than December 31, 2003.
33. "Operating Costs" means expenditures made and costs incurred in
producing and marketing natural gas or oil from completed
▇▇▇▇▇. These costs include, but are not limited to:
(i) labor, fuel, repairs, hauling, materials, supplies,
utility charges and other costs incident to or related
to producing and marketing natural gas and oil;
(ii) ad valorem and severance taxes;
(iii) insurance and casualty loss expense; and
(iv) compensation to well operators or others for services
rendered in conducting these operations.
Operating Costs also include reworking, workover, subsequent
equipping, and similar expenses relating to any well.
34. "Operator" means the Managing General Partner, as operator of
Partnership ▇▇▇▇▇ in Pennsylvania, and the Managing General
Partner or an Affiliate as Operator of Partnership ▇▇▇▇▇ in
other areas of the United States.
35. "Organization and Offering Costs" means all costs of organizing
and selling the offering including, but not limited to:
(i) total underwriting and brokerage discounts and
commissions (including fees of the underwriters'
attorneys);
(ii) expenses for printing, engraving, mailing, salaries of
employees while engaged in sales activities, charges of
transfer agents, registrars, trustees, escrow holders,
depositaries, engineers and other experts;
(iii) expenses of qualification of the sale of the securities
under federal and state law, including taxes and fees,
accountants' and attorneys' fees; and
(iv) other front-end fees.
Organization and Offering Costs also includes: (i) the 2.5%
Dealer-Manager fee; (ii) a 7% Sales Commission; (iii) a .5%
accountable reimbursement for training and education meetings,
gifts that do not exceed $100 per year, and an occasional meal, a
ticket to a sporting event or the theater, or comparable
entertainment which is neither so frequent nor so extensive as to
raise any question of propriety and is not preconditioned on
achievement of a sales target ("Reimbursement for Training and
Education Meetings"); and (iv) a .5% reimbursement of the
Selling Agents' bona fide accountable due diligence expenses;
payable to the Dealer Manager.
36. "Organization Costs" means all costs of organizing the offering
including, but not limited to:
(i) expenses for printing, engraving, mailing, salaries of
employees while engaged in sales activities, charges of
transfer agents, registrars, trustees, escrow holders,
depositaries, engineers and other experts;
(ii) expenses of qualification of the sale of the securities
under federal and state law, including taxes and fees,
accountants' and attorneys' fees; and
(iii) other front-end fees.
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37. "Overriding Royalty Interest" means an interest in the natural gas and
oil produced under a Lease, or the proceeds from the sale thereof,
carved out of the Working Interest, to be received free and clear of
all costs of development, operation, or maintenance.
38. "Participants" means:
(i) the Managing General Partner to the extent of its optional
subscription under ss.3.03(b)(2);
(ii) the Limited Partners; and
(iii) the Investor General Partners.
39. "Partners" means:
(i) the Managing General Partner;
(ii) the Investor General Partners; and
(iii) the Limited Partners.
40. "Partnership" means Atlas America Public #12-2003 Limited Partnership.
41. "Partnership Net Production Revenues" means gross revenues after
deduction of the related Operating Costs, Direct Costs, Administrative
Costs and all other Partnership costs not specifically allocated.
42. "Partnership Well" means a well, some portion of the revenues from
which is received by the Partnership.
43. "Person" means a natural person, partnership, corporation, association,
trust or other legal entity.
44. "Production Purchase" or "Income" Program means any program whose
investment objective is to directly acquire, hold, operate, and/or
dispose of producing oil and gas properties. Such a program may acquire
any type of ownership interest in a producing property, including, but
not limited to, working interests, royalties, or production payments. A
program which spends at least 90% of capital contributions and funds
borrowed (excluding offering and organizational expenses) in the above
described activities is presumed to be a production purchase or income
program.
45. "Program" means one or more limited or general partnerships or other
investment vehicles formed, or to be formed, for the primary purpose
of:
(i) exploring for natural gas, oil and other hydrocarbon
substances; or
(ii) investing in or holding any property interests which permit the
exploration for or production of hydrocarbons or the receipt of
such production or its proceeds.
46. "Prospect" means an area covering lands which are believed by the
Managing General Partner to contain subsurface structural or
stratigraphic conditions making it susceptible to the accumulations of
hydrocarbons in commercially productive quantities at one or more
Horizons. The area, which may be different for different Horizons,
shall be:
(i) designated by the Managing General Partner in writing before
the conduct of Partnership operations; and
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(ii) 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.
If the well to be drilled by the Partnership is to a Horizon containing
Proved Reserves, then a "Prospect" for 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
▇▇▇▇▇. Subject to the foregoing sentence, "Prospect" shall be deemed
the drilling or spacing unit for the Clinton/▇▇▇▇▇▇ geological
formation and the Mississippian and/or Upper Devonian Sandstone
reservoirs in Ohio, Pennsylvania, and New York.
47. "Proved Developed Oil and Gas Reserves" means reserves that can be
expected to be recovered through existing ▇▇▇▇▇ with existing equipment
and operating methods. Additional oil and gas expected to be obtained
through the application of fluid injection or other improved recovery
techniques for supplementing the natural forces and mechanisms of
primary recovery should be included as "proved developed reserves" only
after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased
recovery will be achieved.
48. "Proved Reserves" means the estimated quantities of crude oil, natural
gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions,
i.e., prices and costs as of the date the estimate is made. Prices
include consideration of changes in existing prices provided only by
contractual arrangements, but not on escalations based upon future
conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation
test. The area of a reservoir considered proved includes:
(a) that portion delineated by drilling and defined by gas-
oil and/or oil-water contacts, if any; and
(b) the immediately adjoining portions not yet drilled, but
which can be reasonably judged as economically
productive on the basis of available geological and
engineering data.
In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower
proved limit of the reservoir.
(ii) Reserves which can be produced economically through application
of improved recovery techniques (such as fluid injection) are
included in the "proved" classification when successful testing
by a pilot project, or the operation of an installed program in
the reservoir, provides support for the engineering analysis on
which the project or program was based.
(iii) Estimates of proved reserves do not include the following:
(a) oil that may become available from known reservoirs but
is classified separately as "indicated additional
reserves";
(b) crude oil, natural gas, and natural gas liquids, the
recovery of which is subject to reasonable doubt because
of uncertainty as to geology, reservoir characteristics,
or economic factors;
(c) crude oil, natural gas, and natural gas liquids, that
may occur in undrilled prospects; and
(d) crude oil, natural gas, and natural gas liquids, that
may be recovered from oil shales, coal, gilsonite and
other such sources.
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49. "Proved Undeveloped Reserves" means reserves that are expected to be
recovered from either:
(i) new ▇▇▇▇▇ on undrilled acreage; or
(ii) from existing ▇▇▇▇▇ where a relatively major expenditure is
required for recompletion.
Reserves on undrilled acreage shall be limited to those drilling units
offsetting productive units that are reasonably certain of production
when drilled. Proved reserves for other undrilled units can be claimed
only where it can be demonstrated with certainty that there is
continuity of production from the existing productive formation. Under
no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection
or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and
in the same reservoir.
50. "Reimbursement for Training and Education Meetings" means a .5%
accountable reimbursement for training and education meetings, gifts
that do not exceed $100 per year, and an occasional meal, a ticket to a
sporting event or the theater, or comparable entertainment which is
neither so frequent nor so extensive as to raise any question of
propriety and is not preconditioned on achievement of a sales target.
51. "Roll-Up" means a transaction involving the acquisition, merger,
conversion or consolidation, either directly or indirectly, of the
Partnership and the issuance of securities of a Roll-Up Entity. The
term does not include:
(i) a transaction involving securities of the Partnership that have
been listed for at least 12 months on a national exchange or
traded through the National Association of Securities Dealers
Automated Quotation National Market System; or
(ii) a transaction involving the conversion to corporate, trust or
association form of only the Partnership if, as a consequence
of the transaction, there will be no significant adverse change
in any of the following:
(a) voting rights;
(b) the Partnership's term of existence;
(c) the Managing General Partner's compensation; and
(d) the Partnership's investment objectives.
52. "Roll-Up Entity" means a partnership, trust, corporation or other
entity that would be created or survive after the successful completion
of a proposed roll-up transaction.
53. "Sales Commissions" means all underwriting and brokerage discounts and
commissions incurred in the sale of Units payable to registered broker/
dealers, but excluding the Dealer-Manager fee, a .5% accountable
marketing expense fee, and a .5% reimbursement for bona fide
accountable due diligence expenses.
54. "Selling Agents" means those broker/dealers selected by the Dealer-
Manager which will participate in the offer and sale of the Units.
55. "Sponsor" means any person directly or indirectly instrumental in
organizing, wholly or in part, a program or any person who will manage
or is entitled to manage or participate in the management or control of
a program. The definition includes:
(i) the managing and controlling general partner(s) and any other
person who actually controls or selects the person who controls
25% or more of the exploratory, development or producing
activities of the program, or any segment thereof, even if that
person has not entered into a contract at the time of formation
of the program; and
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(ii) whenever the context so requires, the term "sponsor" shall be
deemed to include its affiliates.
"Sponsor" does not include wholly independent third-parties such as
attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of
units.
56. "Subscription Agreement" means an execution and subscription instrument
in the form attached as Exhibit (I-B) to this Agreement, which is
incorporated in this Agreement by reference.
57. "Tangible Costs" or "Capital Expenditures" means those costs associated
with drilling and completing natural gas and oil ▇▇▇▇▇ which are
generally accepted as capital expenditures under the Code. This
includes all of the following:
(i) costs of equipment, parts and items of hardware used in
drilling and completing a well; and
(ii) those items necessary to deliver acceptable natural gas and oil
production to purchasers to the extent installed downstream
from the wellhead of any well and which are required to be
capitalized under the Code and its regulations.
58. "Tax Matters Partner" means the Managing General Partner.
59. "Units" or "Units of Participation" means up to 375 Limited Partner
interests and up to 7,125 Investor General Partner interests purchased
by Participants in the Partnership under the provisions of ss.3.03 and
its subsections, including any rights to profits, losses, income, gain,
credits, deductions, cash distributions or returns of capital or other
attributes of the Units.
60. "Working Interest" means an interest in a Lease which is subject to
some portion of the cost of development, operation, or maintenance of
the Lease.
ARTICLE III
SUBSCRIPTIONS AND FURTHER CAPITAL CONTRIBUTIONS
3.01. Designation of Managing General Partner and Participants. Atlas shall
serve as Managing General Partner of the Partnership. Atlas shall further serve
as a Participant to the extent of any subscription made by it pursuant to
ss.3.03(b)(2).
Limited Partners and Investor General Partners, including Affiliates of the
Managing General Partner, shall serve as Participants.
3.02. Participants.
3.02(a). Limited Partner at Formation. Atlas America, Inc., as Original
Limited Partner, has acquired one Unit and has made a Capital Contribution of
$100.
On the admission of one or more Limited Partners, the Partnership shall return
to the Original Limited Partner its Capital Contribution and shall reacquire
its Unit. The Original Limited Partner shall then cease to be a Limited
Partner in the Partnership with respect to the Unit.
3.02(b). Offering of Interests. The Partnership is authorized to admit to the
Partnership at the Initial Closing Date, any Interim Closing Date(s), and the
Offering Termination Date additional Participants whose Subscription
Agreements are accepted by the Managing General Partner if, after the
admission of the additional Participants, the total Units do not exceed the
maximum number of Units set forth in ss.3.03(c)(1).
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3.02(c). Admission of Participants. No action or consent by the Participants
shall be required for the admission of additional Participants pursuant to
this Agreement.
All subscribers' funds shall be held by an independent interest bearing escrow
holder and shall not be released to the Partnership until the receipt of the
minimum amount of subscription proceeds set forth in ss.3.03(c)(2).
Thereafter, subscriptions may be paid directly to the Partnership account.
3.03. Subscriptions to the Partnership.
3.03(a). Subscriptions by Participants.
3.03(a)(1). Subscription Price and Minimum Subscription. The subscription
price of a Unit in the Partnership shall be $10,000, except as set forth
below, and shall be designated on each Participant's Subscription Agreement
and payable as set forth in Section 3.05(b)(1). The minimum subscription per
Participant shall be one Unit ($10,000); however, the Managing General
Partner, in its discretion, may accept one-half Unit ($5,000) subscriptions.
Larger subscriptions shall be accepted in $1,000 increments, beginning with
$6,000, $7,000, etc.
Notwithstanding the foregoing, the subscription price for:
(i) the Managing General Partner, its officers, directors, and
Affiliates, and Participants who buy Units through the officers
and directors of the Managing General Partner, shall be reduced
by an amount equal to the 2.5% Dealer-Manager fee, the 7% Sales
Commission, the .5% accountable Reimbursement for Training and
Education Meetings, and the .5% reimbursement of the Selling
Agents' bona fide accountable due diligence expenses, which
shall not be paid with respect to these sales; and
(ii) the subscription price for Registered Investment Advisors and
their clients, and Selling Agents and their registered
representatives and principals, shall be reduced by an amount
equal to the 7% Sales Commission, which shall not be paid with
respect to these sales.
No more than 5% of the total Units shall be sold with the discounts described
above.
3.03(a)(2). Effect of Subscription. Execution of a Subscription Agreement
shall serve as an agreement by the Participant to be bound by each and every
term of this Agreement.
3.03(b). Subscriptions by Managing General Partner.
3.03(b)(1). Managing General Partner's Required Subscription. The Managing
General Partner, as a general partner and not as a Participant, shall:
(i) contribute to the Partnership the Leases which will be drilled
by the Partnership on the terms set forth in ss.4.01(a)(4); and
(ii) pay the costs or make the required contributions charged to it
under this Agreement.
These Capital Contributions shall be paid or made by the Managing General
Partner at the time the costs are required to be paid by the Partnership, but no
later than December 31, 2004.
3.03(b)(2). Managing General Partner's Optional Additional Subscription. In
addition to the Managing General Partner's required subscription under
ss.3.03(b)(1), the Managing General Partner may subscribe to up to 10% of the
Units under the provisions of ss.3.03(a) and its subsections, and, subject to
the limitations on voting rights set forth in ss.4.03(c)(3), to that extent
shall be deemed a Participant in the Partnership for all purposes under this
Agreement.
3.03(b)(3). Effect of and Evidencing Subscription. The Managing General
Partner has executed a Managing General Partner Signature Page which:
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(i) evidences the Managing General Partner's required subscription
under ss.3.03(b)(1); and
(ii) may be amended to reflect the amount of any optional
subscription under ss.3.03(b)(2).
Execution of the Managing General Partner Signature Page serves as an
agreement by the Managing General Partner to be bound by each and every term
of this Agreement.
3.03(c). Maximum and Minimum Number of Units.
3.03(c)(1). Maximum Number of Units. The maximum number of Units may not
exceed 7,500 Units, which is up to $75,000,000 of cash subscription proceeds
excluding the subscription discounts permitted under ss.3.03(a)(1).
Notwithstanding the foregoing, the maximum number of Units in all partnerships
in Atlas America Public #12-2003 Program, in the aggregate, shall not exceed
7,500 Units which is up to $75,000,000 of cash subscription proceeds excluding
the subscription discounts permitted under ss.3.03(a)(1).
3.03(c)(2). Minimum Number of Units. The minimum number of Units shall equal
at least 100 Units, but in any event not less than that number of Units which
provides the Partnership with cash subscription proceeds of $1,000,000,
excluding the subscription discounts permitted under ss.3.03(a)(1).
If at the Offering Termination Date the minimum number of Units has not been
received and accepted, then all monies deposited by subscribers shall be
promptly returned to them. They shall receive interest earned on their
subscription proceeds from the date the monies were deposited in escrow
through the date of refund.
The partnership may break escrow and begin its drilling activities in the
Managing General Partner's sole discretion on receipt of the minimum
subscriptions.
3.03(d). Acceptance of Subscriptions.
3.03(d)(1). Discretion by the Managing General Partner. Acceptance of
subscriptions is discretionary with the Managing General Partner. The Managing
General Partner may reject any subscription for any reason it deems
appropriate.
3.03(d)(2). Time Period in Which to Accept Subscriptions. Subscriptions shall
be accepted or rejected by the Partnership within 30 days of their receipt. If
a subscription is rejected, then all funds shall be returned to the subscriber
promptly.
3.03(d)(3) Admission to the Partnership. The Participants shall be admitted to
the Partnership as follows:
(i) not later than 15 days after the release from escrow of
Participants' funds to the Partnership; and
(ii) after the close of the escrow account not later than the last
day of the calendar month in which their Subscription
Agreements were accepted by the Partnership.
3.04. Capital Contributions of the Managing General Partner.
3.04(a). Minimum Amount of Managing General Partner's Required Contribution.
The Managing General Partner is required to:
(i) make aggregate Capital Contributions to the Partnership,
including Leases contributed under ss.3.03(b)(1)(i), of not
less than 25% of all Capital Contributions to the Partnership;
and
(ii) maintain a minimum Capital Account balance equal to not less
than 1% of total positive Capital Account balances for the
Partnership.
3.04(b). On Liquidation the Managing General Partner Must Contribute Deficit
Balance in Its Capital Account. The Managing General Partner shall contribute
to the Partnership any deficit balance in its Capital Account on the
occurrence of either of the following events:
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(i) the liquidation of the Partnership; or
(ii) the liquidation of the Managing General Partner's interest in
the Partnership.
This shall be determined after taking into account all adjustments for the
Partnership's taxable year during which the liquidation occurs, other than
adjustments made pursuant to this requirement, by the end of the taxable year
in which its interest in the Partnership is liquidated or, if later, within 90
days after the date of the liquidation.
3.04(c). Interest for Contributions. The interest of the Managing General
Partner in the capital and revenues of the Partnership is in consideration
for, and is the only consideration for, its Capital Contribution to the
Partnership.
3.05. Payment of Subscriptions.
3.05(a). Managing General Partner's Subscriptions. The Managing General
Partner shall pay any optional subscription under ss.3.03(b)(2) in the same
manner as the Participants.
3.05(b). Participant Subscriptions and Additional Capital Contributions of the
Investor General Partners.
3.05(b)(1). Payment of Subscription Agreements. A Participant shall pay the
amount designated as the subscription price on the Subscription Agreement
executed by the Participant 100% in cash at the time of subscribing. A
Participant shall receive interest on the amount he pays from the time his
subscription proceeds are deposited in the escrow account, or the Partnership
account after the minimum number of Units have been received as provided in
ss.3.06(b), up until the Offering Termination Date.
3.05(b)(2). Additional Required Capital Contributions of the Investor General
Partners. Investor General Partners must make Capital Contributions to the
Partnership when called by the Managing General Partner, in addition to their
subscriptions, for their pro rata share of any Partnership obligations and
liabilities which are recourse to the Investor General Partners and are
represented by their ownership of Units before the conversion of Investor
General Units to Limited Partner Units under ss.6.01(b).
3.05(b)(3). Default Provisions. The failure of an Investor General Partner to
timely make a required additional Capital Contribution under this section
results in his personal liability to the other Investor General Partners for
the amount in default. The remaining Investor General Partners, pro rata, must
pay the defaulting Investor General Partner's share of Partnership liabilities
and obligations. In that event, the remaining Investor General Partners:
(i) shall have a first and preferred lien on the defaulting
Investor General Partner's interest in the Partnership to
secure payment of the amount in default plus interest at the
legal rate;
(ii) shall be entitled to receive 100% of the defaulting Investor
General Partner's cash distributions directly from the
Partnership until the amount in default is recovered in full
plus interest at the legal rate; and
(iii) may commence legal action to collect the amount due plus
interest at the legal rate.
3.06. Partnership Funds.
3.06(a). Fiduciary Duty. The Managing General Partner has a fiduciary
responsibility for the safekeeping and use of all funds and assets of the
Partnership, whether or not in the Managing General Partner's possession or
control. The Managing General Partner shall not employ, or permit another to
employ, the funds and assets in any manner except for the exclusive benefit of
the Partnership. Neither this Agreement nor any other agreement between the
Managing General Partner and the Partnership shall contractually limit any
fiduciary duty owed to the Participants by the Managing General Partner under
applicable law, except as provided in ss.ss.4.01, 4.02, 4.04, 4.05 and 4.06 of
this Agreement.
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3.06(b). Special Account After the Receipt of the Minimum Partnership
Subscriptions. Following the receipt of the minimum number of Units and
breaking escrow, the funds of the Partnership shall be held in a separate
interest-bearing account maintained for the Partnership and shall not be
commingled with funds of any other entity.
3.06(c). Investment.
3.06(c)(1). Investments in Other Entities. Partnership funds may not be
invested in the securities of another person except in the following
instances:
(i) investments in Working Interests or undivided Lease interests
made in the ordinary course of the Partnership's business;
(ii) temporary investments made as set forth in ss.3.06(c)(2);
(iii) multi-tier arrangements meeting the requirements of
ss.4.03(d)(15);
(iv) investments involving less than 5% of the Partnership's
subscription proceeds which are a necessary and incidental part
of a property acquisition transaction; and
(v) investments in entities established solely to limit the
Partnership's liabilities associated with the ownership or
operation of property or equipment, provided that duplicative
fees and expenses shall be prohibited.
3.06(c)(2). Permissible Investments Before Investment in Partnership
Activities. After the Initial Closing Date and until proceeds from the
offering are invested in the Partnership's operations, the proceeds may be
temporarily invested in income producing short-term, highly liquid
investments, in which there is appropriate safety of principal, such as U.S.
Treasury Bills.
ARTICLE IV
CONDUCT OF OPERATIONS
4.01. Acquisition of Leases.
4.01(a). Assignment to Partnership.
4.01(a)(1). In General. The Managing General Partner shall select, acquire and
assign or cause to have assigned to the Partnership full or partial interests
in Leases, by any method customary in the natural gas and oil industry,
subject to the terms and conditions set forth below.
The Partnership and other partnerships in Atlas America Public #12-2003
Program may acquire and develop interests in Leases covering one or more of
the same Prospects, in the Managing General Partner's discretion.
The Partnership shall acquire only Leases reasonably expected to meet the
stated purposes of the Partnership. No Leases shall be acquired for the
purpose of a subsequent sale, Farmout, or other disposition unless the
acquisition is made after a well has been drilled to a depth sufficient to
indicate that the acquisition would be in the Partnership's best interest.
4.01(a)(2). Federal and State Leases. The Partnership is authorized to acquire
Leases on federal and state lands.
4.01(a)(3). Managing General Partner's Discretion as to Terms and Burdens of
Acquisition. Subject to the provisions of ss.4.03(d) and its subsections, the
acquisitions of Leases or other property may be made under any terms and
obligations, including:
(i) any limitations as to the Horizons to be assigned to the
Partnership; and
(ii) subject to any burdens as the Managing General Partner deems
necessary in its sole discretion.
4.01(a)(4). Cost of Leases. All Leases shall be:
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(i) contributed to the Partnership by the Managing General Partner
or its Affiliates other than an affiliated program; and
(ii) credited towards the Managing General Partner's required
Capital Contribution set forth in ss.3.03(b)(1) at the Cost of
the Lease, unless the Managing General Partner has cause to
believe that Cost is materially more than the fair market value
of the property, in which case the credit for the contribution
must be made at a price not in excess of the fair market value.
A determination of fair market value must be:
(i) supported by an appraisal from an Independent Expert; and
(ii) maintained in the Partnership's records for six years along
with associated supporting information.
4.01(a)(5). The Managing General Partner, Operator or Their Affiliates' Rights
in the Remainder Interests. Subject to the provisions of ss.4.03(d) and its
subsections, to the extent the Partnership does not acquire a full interest in
a Lease from the Managing General Partner or its Affiliates, the remainder of
the interest in the Lease may be held by the Managing General Partner or its
Affiliates. They may either:
(i) retain and exploit the remaining interest for their own
account; or
(ii) sell or otherwise dispose of all or a part of the remaining
interest.
Profits from the exploitation and/or disposition of their retained interests
in the Leases shall be for the benefit of the Managing General Partner or its
Affiliates to the exclusion of the Partnership.
4.01(a)(6). No Breach of Duty. Subject to the provisions of ss.4.03 and its
subsections, acquisition of Leases from the Managing General Partner, the
Operator or their Affiliates shall not be considered a breach of any
obligation owed by them to the Partnership or the Participants.
4.01(b). No Overriding Royalty Interests. Neither the Managing General
Partner, the Operator nor any Affiliate shall retain any Overriding Royalty
Interest on the Leases acquired by the Partnership.
4.01(c). Title and Nominee Arrangements.
4.01(c)(1). Legal Title. Legal title to all Leases acquired by the Partnership
shall be held on a permanent basis in the name of the Partnership. However,
Partnership properties may be held temporarily in the name of:
(i) the Managing General Partner;
(ii) the Operator;
(iii) their Affiliates; or
(iv) in the name of any nominee designated by the Managing General
Partner to facilitate the acquisition of the properties.
4.01(c)(2). Managing General Partner's Discretion. The Managing General
Partner shall take the steps which are necessary in its best judgment to
render title to the Leases to be acquired by the Partnership acceptable for
the purposes of the Partnership. The Managing General Partner shall be free,
however, to use its own best judgment in waiving title requirements.
The Managing General Partner shall not be liable to the Partnership or to the
other parties for any mistakes of judgment; nor shall the Managing General
Partner be deemed to be making any warranties or representations, express or
implied, as to the validity or merchantability of the title to the Leases
assigned to the Partnership or the extent of the interest covered thereby
except as otherwise provided in the Drilling and Operating Agreement.
15
4.01(c)(3). Commencement of Operations. The Partnership shall not begin
operations on the Leases acquired by the Partnership unless the Managing
General Partner is satisfied that necessary title requirements have been
satisfied.
4.02. Conduct of Operations.
4.02(a). In General. The Managing General Partner shall establish a program of
operations for the Partnership. Subject to the limitations contained in
Article III of this Agreement concerning the maximum Capital Contribution
which can be required of a Limited Partner, the Managing General Partner, the
Limited Partners, and the Investor General Partners agree to participate in
the program so established by the Managing General Partner.
4.02(b). Management. Subject to any restrictions contained in this Agreement,
the Managing General Partner shall exercise full control over all operations
of the Partnership.
4.02(c). General Powers of the Managing General Partner.
4.02(c)(1). In General. Subject to the provisions of 14.03 and its
subsections, and to any authority which may be granted the Operator under
ss.4.02(c)(3)(b), the Managing General Partner shall have full authority to do
all things deemed necessary or desirable by it in the conduct of the business
of the Partnership. Without limiting the generality of the foregoing, the
Managing General Partner is expressly authorized to engage in:
(i) the making of all determinations of which Leases, ▇▇▇▇▇ and
operations will be participated in by the Partnership, which
includes:
(a) which Leases are developed;
(b) which Leases are abandoned; or
(c) which leases are sold or assigned to other parties,
including other investor ventures organized by the
Managing General Partner, the Operator, or any of their
Affiliates;
(ii) the negotiation and execution on any terms deemed desirable in
its sole discretion of any contracts, conveyances, or other
instruments, considered useful to the conduct of the operations
or the implementation of the powers granted it under this
Agreement, including, without limitation:
(a) the making of agreements for the conduct of operations,
including agreements and financial instruments relating
to hedging the Partnership's natural gas and oil;
(b) the exercise of any options, elections, or decisions
under any such agreements; and
(c) the furnishing of equipment, facilities, supplies and
material, services, and personnel;
(iii) the exercise, on behalf of the Partnership or the parties, as
the Managing General Partner in its sole judgment deems best,
of all rights, elections and options granted or imposed by any
agreement, statute, rule, regulation, or order;
(iv) the making of all decisions concerning the desirability of
payment, and the payment or supervision of the payment, of all
delay rentals and shut-in and minimum or advance royalty
payments;
(v) the selection of full or part-time employees and outside
consultants and contractors and the determination of their
compensation and other terms of employment or hiring;
(vi) the maintenance of insurance for the benefit of the Partnership
and the parties as it deems necessary, but in no event less in
amount or type than the following:
(a) worker's compensation insurance in full compliance with
the laws of the Commonwealth of Pennsylvania and any
other applicable state laws;
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(b) liability insurance, including automobile, which has a
$1,000,000 combined single limit for bodily injury and
property damage in any one accident or occurrence and in
the aggregate; and
(c) liability and excess liability insurance as to bodily
injury and property damage with combined limits of
$50,000,000 during drilling operations and thereafter,
per occurrence or accident and in the aggregate, which
includes $1,000,000 of seepage, pollution and
contamination insurance which protects and defends the
insured against property damage or bodily injury claims
from third-parties, other than a co-owner of the Working
Interest, alleging seepage, pollution or contamination
damage resulting from a pollution incident. The excess
liability insurance shall be in place and effective no
later than the date drilling operations begin, and the
Partnership shall have the benefit of the Managing
General Partner's $50,000,000 liability insurance on the
same basis as the Managing General Partner and its
Affiliates, including the Managing General Partner's
other Programs;
(vii) the use of the funds and revenues of the Partnership, and the
borrowing on behalf of, and the loan of money to, the
Partnership, on any terms it sees fit, for any purpose,
including without limitation:
(a) the conduct or financing, in whole or in part, of the
drilling and other activities of the Partnership;
(b) the conduct of additional operations; and
(c) the repayment of any borrowings or loans used initially
to finance these operations or activities;
(viii) the disposition, hypothecation, sale, exchange, release,
surrender, reassignment or abandonment of any or all assets of
the Partnership, including without limitation, the Leases,
▇▇▇▇▇, equipment and production therefrom, provided that the
sale of all or substantially all of the assets of the
Partnership shall only be made as provided in ss.4.03(d)(6);
(ix) the formation of any further limited or general partnership,
tax partnership, joint venture, or other relationship which it
deems desirable with any parties who it, in its sole and
absolute discretion, selects, including any of its Affiliates;
(x) the control of any matters affecting the rights and obligations
of the Partnership, including:
(a) the employment of attorneys to advise and otherwise
represent the Partnership;
(b) the conduct of litigation and other incurring of legal
expense; and
(c) the settlement of claims and litigation;
(xi) the operation of producing ▇▇▇▇▇ drilled on the Leases or on a
Prospect which includes any part of the Leases;
(xii) the exercise of the rights granted to it under the power of
attorney created under this Agreement; and
(xiii) the incurring of all costs and the making of all expenditures
in any way related to any of the foregoing.
4.02(c)(2). Scope of Powers. The Managing General Partner's powers shall
extend to any operation participated in by the Partnership or affecting its
Leases, or other property or assets, irrespective of whether or not the
Managing General Partner is designated operator of the operation by any
outside persons participating therein.
4.02(c)(3). Delegation of Authority.
4.02(c)(3)(a). In General. The Managing General Partner may subcontract and
delegate all or any part of its duties under this Agreement to any entity
chosen by it, including an entity related to it. The party shall have the same
powers in the conduct of the duties as would the Managing General Partner. The
delegation, however, shall not relieve the Managing General Partner of its
responsibilities under this Agreement.
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4.02(c)(3)(b). Delegation to Operator. The Managing General Partner is
specifically authorized to delegate any or all of its duties to the Operator
by executing the Drilling and Operating Agreement. This delegation shall not
relieve the Managing General Partner of its responsibilities under this
Agreement.
In no event shall any consideration received for operator services be in
excess of competitive rates or duplicative of any consideration or
reimbursements received under this Agreement. The Managing General Partner may
not benefit by interpositioning itself between the Partnership and the actual
provider of operator services.
4.02(c)(4). Related Party Transactions. Subject to the provisions of ss.4.03
and its subsections, any transaction which the Managing General Partner is
authorized to enter into on behalf of the Partnership under the authority
granted in this section and its subsections, may be entered into by the
Managing General Partner with itself or with any other general partner, the
Operator, or any of their Affiliates.
4.02(d). Additional Powers. In addition to the powers granted the Managing
General Partner under ss.4.02(c) and its subsections or elsewhere in this
Agreement, the Managing General Partner, when specified, shall have the
following additional express powers.
4.02(d)(1). Drilling Contracts. All Partnership ▇▇▇▇▇ shall be drilled under
the Drilling and Operating Agreement on a Cost plus 15% basis. The Managing
General Partner or its Affiliates, as drilling contractor, may not do the
following:
(i) receive a rate that is not competitive with the rates charged
by unaffiliated contractors in the same geographic region;
(ii) enter into a turnkey drilling contract with the Partnership;
(iii) profit by drilling in contravention of its fiduciary
obligations to the Partnership; or
(iv) benefit by interpositioning itself between the Partnership and
the actual provider of drilling contractor services.
4.02(d)(2). Power of Attorney.
4.02(d)(2)(a). In General. Each Participant appoints the Managing General
Partner his true and lawful attorney-in-fact for him and in his name, place,
and ▇▇▇▇▇ and for his use and benefit, from time to time:
(i) to create, prepare, complete, execute, file, swear to, deliver,
endorse, and record any and all documents, certificates,
government reports, or other instruments as may be required by
law or necessary to amend this Agreement as authorized under
the terms of this Agreement, or to qualify the Partnership as a
limited partnership or partnership in commendam and to conduct
business under the laws of any jurisdiction in which the Managing
General Partner elects to qualify the Partnership or conduct
business; and
(ii) to create, prepare, complete, execute, file, swear to, deliver,
endorse and record any and all instruments, assignments,
security agreements, financing statements, certificates, and
other documents as may be necessary from time to time to
implement the borrowing powers granted under this Agreement.
4.02(d)(2)(b). Further Action. Each Participant authorizes the attorney-in-
fact to take any further action which the attorney-in-fact considers necessary
or advisable in connection with any of the foregoing. Each party acknowledges
that the power of attorney granted under this section:
(i) is a special power of attorney coupled with an interest and
irrevocable; and
(ii) shall survive the assignment by the Participant of the whole or
a portion of his Units; except when the assignment is of all of
the Participant's Units and the purchaser, transferee, or
assignee of the Units is
18
admitted as a successor Participant, the power of attorney shall
survive the delivery of the assignment for the sole purpose of
enabling the attorney-in- fact to execute, acknowledge, and file
any agreement, certificate, instrument or document necessary to
effect the substitution.
4.02(d)(2)(c). Power of Attorney to Operator. The Managing General Partner is
hereby authorized to grant a Power of Attorney to the Operator on behalf of
the Partnership.
4.02(e). Borrowings and Use of Partnership Revenues.
4.02(e)(1). Power to Borrow or Use Partnership Revenues.
4.02(e)(1)(a). In General. If additional funds over the Participants' Capital
Contributions are needed for Partnership operations, then the Managing General
Partner may:
(i) use Partnership revenues for such purposes; or
(ii) the Managing General Partner and its Affiliates may advance to
the Partnership the funds necessary under ss.4.03(d)(8)(b),
although they are not obligated to advance the funds to the
Partnership.
4.02(e)(1)(b). Limitation on Borrowing. The borrowings, other than credit
transactions on open account customary in the industry to obtain goods and
services, shall be subject to the following limitations:
(i) the borrowings must be without recourse to the Investor General
Partners and the Limited Partners except as otherwise provided
in this Agreement; and
(ii) the amount that may be borrowed at any one time may not exceed
an amount equal to 5% of the Partnership's subscription
proceeds.
4.02(f). Tax Matters Partner.
4.02(f)(1). Designation of Tax Matters Partner. The Managing General Partner is
hereby designated the Tax Matters Partner of the Partnership under ss.6231(a)(7)
of the Code. The Managing General Partner is authorized to act in this capacity
on behalf of the Partnership and the Participants and to take any action,
including settlement or litigation, which it in its sole discretion deems to be
in the best interest of the Partnership.
4.02(f)(2). Costs Incurred by Tax Matters Partner. Costs incurred by the Tax
Matters Partner shall be considered a Direct Cost of the Partnership.
4.02(f)(3). Notice to Participants of IRS Proceedings. The Tax Matters Partner
shall notify all Participants of any partnership administrative proceedings
commenced by the IRS, and thereafter shall furnish all Participants periodic
reports at least quarterly on the status of the proceedings.
4.02(f)(4). Participant Restrictions. Each Participant agrees as follows:
(i) he will not file the statement described in Section
6224(c)(3)(B) of the Code prohibiting the Managing General
Partner as the Tax Matters Partner for the Partnership from
entering into a settlement on his behalf with respect to
partnership items, as that term is defined in Section
6231(a)(3) of Code, of the Partnership;
(ii) he will not form or become and exercise any rights as a member
of a group of Partners having a 5% or greater interest in the
profits of the Partnership under Section 6223(b)(2) of the
Code; and
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(iii) the Managing General Partner is authorized to file a copy of
this Agreement, or pertinent portions of this Agreement, with
the IRS under Section 6224(b) of the Code if necessary to
perfect the waiver of rights under this subsection.
4.03. General Rights and Obligations of the Participants and Restricted and
Prohibited Transactions.
4.03(a)(1). Limited Liability of Limited Partners. Limited Partners shall not
be bound by the obligations of the Partnership other than as provided under
the Delaware Revised Uniform Limited Partnership Act. Limited Partners shall
not be personally liable for any debts of the Partnership or any of the
obligations or losses of the Partnership beyond the amount of the subscription
price designated on the Subscription Agreement executed by each respective
Limited Partner unless:
(i) they also subscribe to the Partnership as Investor General
Partners; or
(ii) in the case of the Managing General Partner, it purchases
Limited Partner Units.
4.03(a)(2). No Management Authority of Participants. Participants, other than
the Managing General Partner if it buys Units, shall have no power over the
conduct of the affairs of the Partnership. No Participant, other than the
Managing General Partner if it buys Units, shall take part in the management
of the business of the Partnership, or have the power to sign for or to bind
the Partnership.
4.03(b). Reports and Disclosures.
4.03(b)(1). Annual Reports and Financial Statements. Beginning with the
calendar year in which the Partnership had its Offering Termination Date, the
Partnership shall provide each Participant an annual report within 120 days
after the close of that calendar year, and beginning with the following
calendar year, a report within 75 days after the end of the first six months
of its calendar year, containing except as otherwise indicated, at least the
information set forth below:
(i) Audited financial statements of the Partnership, including a
balance sheet and statements of income, cash flow, and Partners'
equity, which shall be prepared on an accrual basis in accordance
with generally accepted accounting principles with a
reconciliation with respect to information furnished for income
tax purposes and accompanied by an auditor's report containing an
opinion of an independent public accountant selected by the
Managing General Partner stating that his audit was made in
accordance with generally accepted auditing standards and that in
his opinion the financial statements present fairly the financial
position, results of operations, partners' equity, and cash flows
in accordance with generally accepted accounting principles.
Semiannual reports are not required to be audited.
(ii) A summary itemization, by type and/or classification of the
total fees and compensation including any unaccountable, fixed
payment reimbursements for Administrative Costs and Operating
Costs, paid by the Partnership, or indirectly on behalf of the
Partnership, to the Managing General Partner, the Operator, and
their Affiliates. In addition, Participants shall be provided
the percentage that the annual unaccountable, fixed fee
reimbursement for Administrative Costs bears to annual
Partnership revenues. Also, the independent certified public
accountant will provide written attestation annually, which
will be included in the annual report, that the method used to
make allocations was consistent with the method described in
ss.4.04(a)(2)(c) of this Agreement and that the total amount of
costs allocated did not materially exceed the amounts actually
incurred by the Managing General Partner.
If the Managing General Partner subsequently decides to
allocate expenses in a manner different from that described in
ss.4.04(a)(2)(c) of this Agreement, then the change must be
reported to the Participants together with an explanation of
the reason for the change and the basis used for determining
the reasonableness of the new allocation method.
20
(iii) A description of each Prospect in which the Partnership owns an
interest, including:
(a) the cost, location, and number of acres under Lease; and
(b) the Working Interest owned in the Prospect by the
Partnership.
Succeeding reports, however, must only contain material
changes, if any, regarding the Prospects.
(iv) A list of the ▇▇▇▇▇ drilled or abandoned by the Partnership
during the period of the report, indicating:
(a) whether each of the ▇▇▇▇▇ has or has not been completed;
(b) a statement of the cost of each well completed or
abandoned; and
(c) justification for ▇▇▇▇▇ abandoned after production has
begun.
(v) A description of all Farmouts, farmins, and joint ventures,
made during the period of the report, including:
(a) the Managing General Partner's justification for the
arrangement; and
(b) a description of the material terms.
(vi) A schedule reflecting:
(a) the total Partnership costs;
(b) the costs paid by the Managing General Partner and the
costs paid by the Participants;
(c) the total Partnership revenues;
(d) the revenues received or credited to the Managing
General Partner and the revenues received and credited
to the Participants; and
(e) a reconciliation of the expenses and revenues in
accordance with the provisions of Article V.
Additionally, on request the Managing General Partner will provide the
information specified by Form 10-Q (if such report is required to be filed
with the SEC) within 45 days after the close of each quarterly fiscal period.
4.03(b)(2). Tax Information. The Partnership shall, by March 15 of each year,
prepare, or supervise the preparation of, and transmit to each Participant the
information needed for the Participant to file the following:
(i) his federal income tax return;
(ii) any required state income tax return; and
(iii) any other reporting or filing requirements imposed by any
governmental agency or authority.
4.03(b)(3). Reserve Report. Beginning with the second calendar year after the
Offering Termination Date and every year thereafter, the Partnership shall
provide to each Participant the following:
(i) a summary of the computation of the Partnership's total oil and
gas Proved Reserves;
(ii) a summary of the computation of the present worth of the
reserves determined using:
21
(a) a discount rate of 10%;
(b) a constant price for the oil; and
(c) basing the price of gas on the existing gas contracts;
(iii) a statement of each Participant's interest in the reserves; and
(iv) an estimate of the time required for the extraction of the
reserves with a statement that because of the time period
required to extract the reserves the present value of revenues
to be obtained in the future is less than if immediately
receivable.
The reserve computations shall be based on engineering reports prepared by the
Managing General Partner and reviewed by an Independent Expert.
Also, if there is an event that leads to the reduction of the Partnership's
Proved Reserves of 10% or more, excluding:
(i) reduction as a result of normal production;
(ii) sales of reserves; or
(iii) product price changes,
then a computation and estimate must be sent to each Participant within 90
days.
4.03(b)(4). Cost of Reports. The cost of all reports described in this
ss.4.03(b) shall be paid by the Partnership as Direct Costs.
4.03(b)(5). Participant Access to Records. The Participants and/or their
representatives shall be permitted access to all Partnership records. The
Participant may inspect and copy any of the records after giving adequate
notice to the Managing General Partner at any reasonable time.
Notwithstanding the foregoing, the Managing General Partner may keep logs,
well reports, and other drilling and operating data confidential for
reasonable periods of time. The Managing General Partner may release
information concerning the operations of the Partnership to the sources that
are customary in the industry or required by rule, regulation, or order of any
regulatory body.
4.03(b)(6). Required Length of Time to Hold Records. The Managing General
Partner must maintain and preserve during the term of the Partnership and for
six years thereafter all accounts, books and other relevant documents which
include:
(i) a record that a Participant meets the suitability standards
established in connection with an investment in the
Partnership; and
(ii) any appraisal of the fair market value of the Leases as set
forth in ss.4.01(a)(4) or fair market value of any producing
property as set forth in ss.4.03(d)(3).
4.03(b)(7). Participant Lists. The following provisions apply regarding access
to the list of Participants:
(i) an alphabetical list of the names, addresses, and business
telephone numbers of the Participants along with the number of
Units held by each of them (the "Participant List") must be
maintained as a part of the Partnership's books and records and
be available for inspection by any Participant or his
designated agent at the home office of the Partnership on the
Participant's request;
(ii) the Participant List must be updated at least quarterly to
reflect changes in the information contained in the Participant
List;
22
(iii) a copy of the Participant List must be mailed to any
Participant requesting the Participant List within 10 days of
the written request, printed in alphabetical order on white
paper, and in a readily readable type size in no event smaller
than 10-point type and a reasonable charge for copy work will
be charged by the Partnership;
(iv) the purposes for which a Participant may request a copy of the
Participant List include, without limitation, matters relating
to Participant's voting rights under this Agreement and the
exercise of Participant's rights under the federal proxy laws;
and
(v) if the Managing General Partner neglects or refuses to exhibit,
produce, or mail a copy of the Participant List as requested,
the Managing General Partner shall be liable to any Participant
requesting the list for the costs, including attorneys fees,
incurred by that Participant for compelling the production of
the Participant List, and for actual damages suffered by any
Participant by reason of the refusal or neglect. It shall be a
defense that the actual purpose and reason for the request for
inspection or for a copy of the Participant List is to secure
the list of Participants or other information for the purpose
of selling the list or information or copies of the list, or of
using the same for a commercial purpose other than in the
interest of the applicant as a Participant relative to the
affairs of the Partnership. The Managing General Partner will
require the Participant requesting the Participant List to
represent in writing that the list was not requested for a
commercial purpose unrelated to the Participant's interest in
the Partnership. The remedies provided under this subsection to
Participants requesting copies of the Participant List are in
addition to, and shall not in any way limit, other remedies
available to Participants under federal law or the laws of any
state.
4.03(b)(8). State Filings. Concurrently with their transmittal to
Participants, and as required, the Managing General Partner shall file a copy
of each report provided for in this ss.4.03(b) with:
(i) the California Commissioner of Corporations; and
(ii) The Arizona Corporation Commission; and
(iii) the securities commissions of other states which request the
report.
4.03(c). Meetings of Participants.
4.03(c)(1). Procedure for a Participant Meeting.
4.03(c)(1)(a). Meetings May Be Called by Managing General Partner or
Participants. Meetings of the Participants may be called as follows:
(i) by the Managing General Partner; or
(ii) by Participants whose Units equal 10% or more of the total
Units for any matters for which Participants may vote.
The call for a meeting by Participants shall be deemed to have been made on
receipt by the Managing General Partner of a written request from holders of
the requisite percentage of Units stating the purpose(s) of the meeting.
4.03(c)(1)(b). Notice Requirement. The Managing General Partner shall deposit
in the United States mail within 15 days after the receipt of the request,
written notice to all Participants of the meeting and the purpose of the
meeting. The meeting shall be held on a date not less than 30 days nor more
than 60 days after the date of the mailing of the notice, at a reasonable time
and place.
Notwithstanding the foregoing, the date for notice of the meeting may be
extended for a period of up to 60 days if, in the opinion of the Managing
General Partner, the additional time is necessary to permit preparation of
proxy or information statements or other documents required to be delivered in
connection with the meeting by the SEC or other regulatory authorities.
23
4.03(c)(1)(c). May Vote by Proxy. Participants shall have the right to vote at
any Participant meeting either:
(i) in person; or
(ii) by proxy.
4.03(c)(2). Special Voting Rights. At the request of Participants whose Units
equal 10% or more of the total Units, the Managing General Partner shall call
for a vote by Participants. Each Unit is entitled to one vote on all matters,
and each fractional Unit is entitled to that fraction of one vote equal to the
fractional interest in the Unit. Participants whose Units equal a majority of
the total Units may, without the concurrence of the Managing General Partner
or its Affiliates, vote to:
(i) dissolve the Partnership;
(ii) remove the Managing General Partner and elect a new Managing
General Partner;
(iii) elect a new Managing General Partner if the Managing General
Partner elects to withdraw from the Partnership;
(iv) remove the Operator and elect a new Operator;
(v) approve or disapprove the sale of all or substantially all of
the assets of the Partnership;
(vi) cancel any contract for services with the Managing General
Partner, the Operator, or their Affiliates without penalty on
60 days notice; and
(vii) amend this Agreement; provided however:
(a) any amendment may not increase the duties or liabilities
of any Participant or the Managing General Partner or
increase or decrease the profit or loss sharing or
required Capital Contribution of any Participant or the
Managing General Partner without the approval of the
Participant or the Managing General Partner; and
(b) any amendment may not affect the classification of
Partnership income and loss for federal income tax
purposes without the unanimous approval of all
Participants.
4.03(c)(3). Restrictions on Managing General Partner's Voting Rights. With
respect to Units owned by the Managing General Partner or its Affiliates, the
Managing General Partner and its Affiliates may vote or consent on all matters
other than the following:
(i) the matters set forth in ss.4.03(c)(2)(ii) and (iv) above; or
(ii) any transaction between the Partnership and the Managing
General Partner or its Affiliates.
In determining the requisite percentage in interest of Units necessary to
approve any Partnership matter on which the Managing General Partner and its
Affiliates may not vote or consent, any Units owned by the Managing General
Partner and its Affiliates shall not be included.
4.03(c)(4). Restrictions on Limited Partner Voting Rights. The exercise by the
Limited Partners of the rights granted Participants under ss.4.03(c), except
for the special voting rights granted Participants under ss.4.03(c)(2), shall
be subject to the prior legal determination that the grant or exercise of the
powers will not adversely affect the limited liability of Limited Partners.
Notwithstanding the foregoing, if in the opinion of counsel to the Partnership
the legal determination is not necessary under Delaware law to maintain the
limited liability of the Limited Partners, then it shall not be required. A
legal determination under this paragraph may be made either pursuant to:
24
(i) an opinion of counsel, the counsel being independent of the
Partnership and selected on the vote of Limited Partners whose
Units equal a majority of the total Units held by Limited
Partners; or
(ii) a declaratory judgment issued by a court of competent
jurisdiction.
The Investor General Partners may exercise the rights granted to the
Participants whether or not the Limited Partners can participate in the vote
if the Investor General Partners represent the requisite percentage of Units
necessary to take the action.
4.03(d). Transactions with the Managing General Partner.
4.03(d)(1). Transfer of Equal Proportionate Interest. When the Managing
General Partner or an Affiliate (excluding another Program in which the
interest of the Managing General Partner or its Affiliates is substantially
similar to or less than their interest in the Partnership) sells, transfers or
conveys any natural gas, oil or other mineral interests or property to the
Partnership, it must, at the same time, sell, transfer or convey to the
Partnership an equal proportionate interest in all its other property in the
same Prospect. Notwithstanding, a Prospect shall be deemed to consist of the
drilling or spacing unit on which the well will be drilled by the Partnership,
which is the minimum area permitted by state law or local practice on which
one well may be drilled, if the following conditions are met:
(i) the geological feature to which the well will be drilled
contains Proved Reserves; and
(ii) the drilling or spacing unit protects against drainage.
With respect to a natural gas or oil Prospect located in Ohio, Pennsylvania
and New York on which a well will be drilled by the Partnership to test the
Clinton/▇▇▇▇▇▇ geological formation or the Mississippian and/or Upper Devonian
Sandstone reservoirs, a Prospect shall be deemed to consist of the drilling
and spacing unit if it meets the test in the preceding sentence. Additionally,
for a period of five years after the drilling of the Partnership Well neither
the Managing General Partner nor its Affiliates may drill any well:
(i) in the Clinton/▇▇▇▇▇▇ geological formation within 1,650 feet of
an existing Partnership Well in Pennsylvania or within 1,000
feet of an existing Partnership Well in Ohio; or
(ii) in the Mississippian/Upper Devonian Sandstone reservoirs in
Fayette County and ▇▇▇▇▇▇ County, Pennsylvania within 1,000
feet of an existing Partnership Well, although existing ▇▇▇▇▇
may be re-entered by parties other than the Partnership even
though they are not 1,000 feet from each other.
If the Partnership abandons its interest in a well, then this restriction will
continue for one year following the abandonment.
If the area constituting the Partnership's Prospect is subsequently enlarged
to encompass any area in which the Managing General Partner or an Affiliate
(excluding another Program in which the interest of the Managing General
Partner or its Affiliates is substantially similar to or less than their
interest in the Partnership) owns a separate property interest and the
activities of the Partnership were material in establishing the existence of
Proved Undeveloped Reserves that are attributable to the separate property
interest, then the separate property interest or a portion thereof must be
sold, transferred, or conveyed to the Partnership as set forth in this section
and ss.ss.4.01(a)(4) and 4.03(d)(2).
Notwithstanding the foregoing, Prospects in the Clinton/▇▇▇▇▇▇ geological
formation, the Mississippian and/or Upper Devonian Sandstone reservoirs, or
any other formation or reservoir shall not be enlarged or contracted if the
Prospect was limited to the drilling or spacing unit because the well was
being drilled to Proved Reserves in the geological formation and the drilling
or spacing unit protected against drainage.
4.03(d)(2). Transfer of Less than the Managing General Partner's and its
Affiliates' Entire Interest. A sale, transfer or a conveyance to the Partnership
of less than all of the ownership of the Managing General Partner or an
Affiliate (excluding another Program in which the interest of the Managing
General Partner or its Affiliates is substantially similar to or less than their
interest in the Partnership) in any Prospect shall not be made unless:
25
(i) the interest retained by the Managing General Partner or the
Affiliate is a proportionate Working Interest;
(ii) the respective obligations of the Managing General Partner or
its Affiliates and the Partnership are substantially the same
after the sale of the interest by the Managing General Partner
or its Affiliates; and
(iii) the Managing General Partner's interest in revenues does not
exceed the amount proportionate to its retained Working
Interest.
This section does not prevent the Managing General Partner or its Affiliates
from subsequently dealing with their retained interest as they may choose with
unaffiliated parties or Affiliated partnerships.
4.03(d)(3). Limitations on Sale of Undeveloped and Developed Leases to the
Managing General Partner. Other than another Program managed by the Managing
General Partner and its Affiliates as set forth in ss.ss.4.03(d)(5) and
4.03(d)(9), the Managing General Partner and its Affiliates shall not Farmout
or purchase any undeveloped Leases from the Partnership other than at the
higher of Cost or fair market value.
The Managing General Partner and its Affiliates, other than an Affiliated
Income Program, may not purchase any producing natural gas or oil property
from the Partnership unless:
(i) the sale is in connection with the liquidation of the
Partnership; or
(ii) the Managing General Partner's well supervision fees under the
Drilling and Operating Agreement for the well have exceeded the
net revenues of the well, determined without regard to the
Managing General Partner's well supervision fees for the well,
for a period of at least three consecutive months.
In both (i) and (ii), the sale must be at fair market value supported by an
appraisal of an Independent Expert selected by the Managing General Partner.
4.03(d)(4). Limitations on Activities of the Managing General Partner and its
Affiliates on Leases Acquired by the Partnership. During a period of five
years after the Offering Termination Date of the Partnership, if the Managing
General Partner or any of its Affiliates (excluding another Program in which
the interest of the Managing General Partner or its Affiliates is
substantially similar to or less than their interest in the Partnership)
proposes to acquire an interest from an unaffiliated person in a Prospect in
which the Partnership possesses an interest or in a Prospect in which the
Partnership's interest has been terminated without compensation within one
year preceding the proposed acquisition, then the following conditions shall
apply:
(i) if the Managing General Partner or the Affiliate (excluding
another Program in which the interest of the Managing General
Partner or its Affiliates is substantially similar to or less
than their interest in the Partnership) does not currently own
property in the Prospect separately from the Partnership, then
neither the Managing General Partner nor the Affiliate shall be
permitted to purchase an interest in the Prospect; and
(ii) if the Managing General Partner or the Affiliate (excluding
another Program in which the interest of the Managing General
Partner or its Affiliates is substantially similar to or less
than their interest in the Partnership) currently owns a
proportionate interest in the Prospect separately from the
Partnership, then the interest to be acquired shall be divided
between the Partnership and the Managing General Partner or the
Affiliate in the same proportion as is the other property in the
Prospect. Provided, however, if cash or financing is not
available to the Partnership to enable it to complete a purchase
of the additional interest to which it is entitled, then neither
the Managing General Partner nor the Affiliate shall be permitted
to purchase any additional interest in the Prospect.
4.03(d)(5). Transfer of Leases Between Affiliated Limited Partnerships. The
transfer of an undeveloped Lease from the Partnership to an Affiliated Drilling
Program must be made at fair market value if the undeveloped Lease has been held
for
26
more than two years. Otherwise, if the Managing General Partner deems it to be
in the best interest of the Partnership, the transfer may be made at Cost.
An Affiliated Income Program may purchase a producing natural gas and oil
property from the Partnership at any time at:
(i) fair market value as supported by an appraisal from an
Independent Expert if the property has been held by the
Partnership for more than six months or there have been
significant expenditures made in connection with the property;
or
(ii) Cost as adjusted for intervening operations if the Managing
General Partner deems it to be in the best interest of the
Partnership.
However, these prohibitions shall not apply to joint ventures or Farmouts
among Affiliated partnerships, provided that:
(i) the respective obligations and revenue sharing of all parties
to the transaction are substantially the same; and
(ii) the compensation arrangement or any other interest or right of
either the Managing General Partner or its Affiliates is the
same in each Affiliated partnership or if different, the
aggregate compensation of the Managing General Partner or the
Affiliate is reduced to reflect the lower compensation
arrangement.
4.03(d)(6). Sale of All Assets. The sale of all or substantially all of the
assets of the Partnership, including without limitation, Leases, ▇▇▇▇▇,
equipment and production therefrom, shall be made only with the consent of
Participants whose Units equal a majority of the total Units.
4.03(d)(7). Services.
4.03(d)(7)(a). Competitive Rates. The Managing General Partner and any
Affiliate shall not render to the Partnership any oil field, equipage, or
other services nor sell or lease to the Partnership any equipment or related
supplies unless:
(i) the person is engaged, independently of the Partnership and as
an ordinary and ongoing business, in the business of rendering
the services or selling or leasing the equipment and supplies
to a substantial extent to other persons in the natural gas and
oil industry in addition to the partnerships in which the
Managing General Partner or an Affiliate has an interest; and
(ii) the compensation, price, or rental therefor is competitive with
the compensation, price, or rental of other persons in the area
engaged in the business of rendering comparable services or
selling or leasing comparable equipment and supplies which
could reasonably be made available to the Partnership.
If the person is not engaged in such a business, then the compensation, price
or rental shall be the Cost of the services, equipment or supplies to the
person or the competitive rate which could be obtained in the area, whichever
is less.
4.03(d)(7)(b). If Not Disclosed in the Prospectus or This Agreement Then
Services by the Managing General Partner Must be Described in a Separate
Contract and Cancelable. Any services for which the Managing General Partner
or an Affiliate is to receive compensation other than those described in this
Agreement or the Prospectus shall be set forth in a written contract which
precisely describes the services to be rendered and all compensation to be
paid. These contracts are cancelable without penalty on 60 days written notice
by Participants whose Units equal a majority of the total Units.
4.03(d)(8). Loans.
4.03(d)(8)(a). No Loans from the Partnership. No loans or advances shall be
made by the Partnership to the Managing General Partner or any Affiliate.
4.03(d)(8)(b). Loans to the Partnership. Neither the Managing General Partner
nor any Affiliate shall loan money to the Partnership if the interest to be
charged exceeds either:
27
(i) the Managing General Partner's or the Affiliate's interest
cost; or
(ii) that which would be charged to the Partnership, without
reference to the Managing General Partner's or the Affiliate's
financial abilities or guarantees, by unrelated lenders, on
comparable loans for the same purpose.
Neither the Managing General Partner nor any Affiliate shall receive points or
other financing charges or fees, regardless of the amount, although the actual
amount of the charges incurred from third-party lenders may be reimbursed to
the Managing General Partner or the Affiliate.
4.03(d)(9). Farmouts. The Managing General Partner shall not enter into a
Farmout to avoid its paying its share of costs related to drilling an
undeveloped Lease. The Partnership shall not Farmout an undeveloped Lease or
well activity to the Managing General Partner or its Affiliates except as set
forth in ss.4.03(d)(3). Notwithstanding, this restriction shall not apply to
Farmouts between the Partnership and another partnership managed by the
Managing General Partner or its Affiliates, either separately or jointly,
provided that the respective obligations and revenue sharing of all parties to
the transactions are substantially the same and the compensation arrangement
or any other interest or right of the Managing General Partner or its
Affiliates is the same in each partnership, or, if different, the aggregate
compensation of the Managing General Partner and its Affiliates is reduced to
reflect the lower compensation agreement.
The Partnership may Farmout an undeveloped lease or well activity only if the
Managing General Partner, exercising the standard of a prudent operator,
determines that:
(i) the Partnership lacks the funds to complete the oil and gas
operations on the Lease or well and cannot obtain suitable
financing;
(ii) drilling on the Lease or the intended well activity would
concentrate excessive funds in one location, creating undue
risks to the Partnership;
(iii) the Leases or well activity have been downgraded by events
occurring after assignment to the Partnership so that
development of the Leases or well activity would not be
desirable; or
(iv) the best interests of the Partnership would be served.
If the Partnership Farmouts a Lease or well activity, the Managing General
Partner must retain on behalf of the Partnership the economic interests and
concessions as a reasonably prudent oil and gas operator would or could retain
under the circumstances prevailing at the time, consistent with industry
practices.
4.03(d)(10). No Compensating Balances. Neither the Managing General Partner
nor any Affiliate shall use the Partnership's funds as compensating balances
for its own benefit.
4.03(d)(11). Future Production. Neither the Managing General Partner nor any
Affiliate shall commit the future production of a well developed by the
Partnership exclusively for its own benefit.
4.03(d)(12). Marketing Arrangements. Subject to ss.4.06(c), all benefits from
marketing arrangements or other relationships affecting the property of the
Managing General Partner or its Affiliates and the Partnership shall be fairly
and equitably apportioned according to the respective interests of each in the
property. The Managing General Partner shall treat all ▇▇▇▇▇ in a geographic
area equally concerning to whom and at what price the Partnership's natural gas
and oil will be sold and to whom and at what price the natural gas and oil of
other natural gas and oil Programs which the Managing General Partner has
sponsored or will sponsor will be sold. For example, the Managing General
Partner calculates a weighted average selling price for all the natural gas and
oil sold in a geographic area by taking all the money received from the sale of
all the natural gas and oil sold to its customers in a geographic area and
dividing by the volume of all natural gas and oil sold from the ▇▇▇▇▇ in that
geographic area. The Managing General Partner, in its sole discretion, shall
determine what constitutes a geographic area.
28
4.03(d)(13). Advance Payments. Advance payments by the Partnership to the
Managing General Partner and its Affiliates are prohibited except when advance
payments are required to secure the tax benefits of prepaid drilling costs and
for a business purpose.
4.03(d)(14). No Rebates. No rebates or give-ups may be received by the
Managing General Partner or any Affiliate nor may the Managing General Partner
or any Affiliate participate in any reciprocal business arrangements which
would circumvent these guidelines.
4.03(d)(15). Participation in Other Partnerships. If the Partnership
participates in other partnerships or joint ventures (multi-tier
arrangements), then the terms of any of these arrangements shall not result in
the circumvention of any of the requirements or prohibitions contained in this
Agreement, including the following:
(i) there shall be no duplication or increase in organization and
offering expenses, the Managing General Partner's compensation,
Partnership expenses or other fees and costs;
(ii) there shall be no substantive alteration in the fiduciary and
contractual relationship between the Managing General Partner
and the Participants; and
(iii) there shall be no diminishment in the voting rights of the
Participants.
4.03(d)(16). Roll-Up Limitations.
4.03(d)(16)(a). Requirement for Appraisal and Its Assumptions. In connection
with a proposed Roll-Up, an appraisal of all Partnership assets shall be
obtained from a competent Independent Expert. If the appraisal will be
included in a prospectus used to offer securities of a Roll-Up Entity, then
the appraisal shall be filed with the SEC and the Administrator as an exhibit
to the registration statement for the offering. Thus, an issuer using the
appraisal shall be subject to liability for violation of Section 11 of the
Securities Act of 1933 and comparable provisions under state law for any
material misrepresentations or material omissions in the appraisal.
Partnership assets shall be appraised on a consistent basis. The appraisal
shall be based on all relevant information, including current reserve
estimates prepared by an independent petroleum consultant, and shall indicate
the value of the Partnership's assets as of a date immediately before the
announcement of the proposed Roll-Up transaction. The appraisal shall assume
an orderly liquidation of the Partnership's assets over a 12-month period.
The terms of the engagement of the Independent Expert shall clearly state that
the engagement is for the benefit of the Partnership and the Participants. A
summary of the independent appraisal, indicating all material assumptions
underlying the appraisal, shall be included in a report to the Participants in
connection with a proposed Roll-Up.
4.03(d)(16)(b). Rights of Participants Who Vote Against Proposal. In
connection with a proposed Roll-Up, Participants who vote "no" on the proposal
shall be offered the choice of:
(i) accepting the securities of the Roll-Up Entity offered in the
proposed Roll-Up; or
(ii) one of the following:
(a) remaining as Participants in the Partnership and preserving
their Units in the Partnership on the same terms and
conditions as existed previously; or
(b) receiving cash in an amount equal to the Participants' pro
rata share of the appraised value of the net assets of the
Partnership based on their respective number of Units.
4.03(d)(16)(c). No Roll-Up If Diminishment of Voting Rights. The Partnership
shall not participate in any proposed Roll-Up which, if approved, would result
in the diminishment of any Participant's voting rights under the Roll-Up
Entity's chartering agreement.
29
In no event shall the democracy rights of Participants in the Roll-Up Entity
be less than those provided for under ss.ss.4.03(c)(1) and 4.03(c)(2) of this
Agreement. If the Roll-Up Entity is a corporation, then the democracy rights
of Participants shall correspond to the democracy rights provided for in this
Agreement to the greatest extent possible.
4.03(d)(16)(d). No Roll-Up If Accumulation of Shares Would be Impeded. The
Partnership shall not participate in any proposed Roll-Up transaction which
includes provisions which would operate to materially impede or frustrate the
accumulation of shares by any purchaser of the securities of the Roll-Up
Entity, except to the minimum extent necessary to preserve the tax status of
the Roll-Up Entity.
The Partnership shall not participate in any proposed Roll-Up transaction
which would limit the ability of a Participant to exercise the voting rights
of its securities of the Roll-Up Entity on the basis of the number of Units
held by that Participant.
4.03(d)(16)(e). No Roll-Up If Access to Records Would Be Limited. The
Partnership shall not participate in a Roll-Up in which Participants' rights
of access to the records of the Roll-Up Entity will be less than those
provided for under ss.ss.4.03(b)(5), 4.03(b)(6) and 4.03(b)(7) of this
Agreement.
4.03(d)(16)(f). Cost of Roll-Up. The Partnership shall not participate in any
proposed Roll-Up transaction in which any of the costs of the transaction
would be borne by the Partnership if Participants whose Units equal 66% of the
total Units do not vote to approve the proposed Roll-Up.
4.03(d)(16)(g). Roll-Up Approval. The Partnership shall not participate in a
Roll-Up transaction unless the Roll-Up transaction is approved by Participants
whose Units equal 66% of the total Units.
4.03(d)(17). Disclosure of Binding Agreements. Any agreement or arrangement
which binds the Partnership must be disclosed in the Prospectus.
4.03(d)(18). Transactions Must Be Fair and Reasonable. Neither the Managing
General Partner nor any Affiliate shall sell, transfer, or convey any property
to or purchase any property from the Partnership, directly or indirectly,
except:
(i) under transactions that are fair and reasonable; nor
(ii) take any action with respect to the assets or property of the
Partnership which does not primarily benefit the Partnership.
4.04. Designation, Compensation and Removal of Managing General Partner and
Removal of Operator.
4.04(a). Managing General Partner.
4.04(a)(1). Term of Service. Atlas shall serve as the Managing General Partner
of the Partnership until either it:
(i) is removed pursuant to ss.4.04(a)(3); or
(ii) withdraws pursuant to ss.4.04(a)(3)(f).
4.04(a)(2). Compensation of Managing General Partner. In addition to the
compensation set forth in ss.ss.4.01(a)(4) and 4.02(d)(1), the Managing
General Partner shall receive the compensation set forth in
ss.ss.4.04(a)(2)(b) through 4.04(a)(2)(g).
4.04(a)(2)(a). Charges Must Be Necessary and Reasonable. Charges by the
Managing General Partner for goods and services must be fully supportable as
to:
(i) the necessity of the goods and services; and
(ii) the reasonableness of the amount charged.
All actual and necessary expenses incurred by the Partnership may be paid out
of the Partnership's subscription proceeds and revenues.
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4.04(a)(2)(b). Direct Costs. The Managing General Partner and its Affiliates
shall be reimbursed for all Direct Costs. Direct Costs, however, shall be
billed directly to and paid by the Partnership to the extent practicable.
4.04(a)(2)(c). Administrative Costs. The Managing General Partner shall
receive an unaccountable, fixed payment reimbursement for its Administrative
Costs of $75 per well per month. The unaccountable, fixed payment
reimbursement of $75 per well per month shall be subject to the following:
(i) it shall not be increased in amount during the term of the
Partnership;
(ii) it shall be proportionately reduced to the extent the
Partnership acquires less than 100% of the Working Interest in
the well;
(iii) it shall be the entire payment to reimburse the Managing
General Partner for the Partnership's Administrative Costs; and
(iv) it shall not be received for plugged or abandoned ▇▇▇▇▇.
4.04(a)(2)(d). Gas Gathering. The Managing General Partner shall be
responsible for gathering and transporting the natural gas produced by the
Partnership to interstate pipeline systems, local distribution companies and
end-users in the area and shall receive a gathering fee at a competitive rate
for gathering and transporting the Partnership's gas. If the Partnership's gas
production is gathered and transported through the gathering system owned by
Atlas Pipeline Partners, then the Managing General Partner shall apply its
gathering fee towards the agreement between Atlas Pipeline Partners and Atlas
America, Inc., Resource Energy, Inc., and Viking Resources Corporation. If the
Partnership's gas production is gathered and transferred through the gathering
system owned by a third-party, then the Managing General Partner shall pay a
portion or all of its gathering fee to the third-party gathering the natural
gas.
4.04(a)(2)(e). Dealer-Manager Fee. Subject to ss.3.03(a)(1), the Dealer-
Manager shall receive on each Unit sold to investors:
(i) a 2.5% Dealer-Manager fee;
(ii) a 7% Sales Commission;
(iii) a .5% accountable Reimbursement for Training and Education
Meetings; and
(iv) a .5% reimbursement of the Selling Agents' bona fide
accountable due diligence expenses.
4.04(a)(2)(f). Drilling and Operating Agreement. The Managing General Partner
and its Affiliates shall receive compensation as set forth in the Drilling and
Operating Agreement.
4.04(a)(2)(g). Other Transactions. The Managing General Partner and its
Affiliates may enter into transactions pursuant to ss.4.03(d)(7) with the
Partnership and shall be entitled to compensation under this section.
4.04(a)(3). Removal of Managing General Partner.
4.04(a)(3)(a). Majority Vote Required to Remove the Managing General Partner.
The Managing General Partner may be removed at any time on 60 days' advance
written notice to the outgoing Managing General Partner by the affirmative
vote of Participants whose Units equal a majority of the total Units.
If the Participants vote to remove the Managing General Partner from the
Partnership, then Participants must elect by an affirmative vote of
Participants whose Units equal a majority of the total Units either to:
(i) terminate, dissolve, and wind up the Partnership; or
(ii) continue as a successor limited partnership under all the terms
of this Partnership Agreement as provided in ss.7.01(c).
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If the Participants elect to continue as a successor limited partnership, then
the Managing General Partner shall not be removed until a substituted Managing
General Partner has been selected by an affirmative vote of Participants whose
Units equal a majority of the total Units and installed as such.
4.04(a)(3)(b). Valuation of Managing General Partner's Interest in the
Partnership. If the Managing General Partner is removed, then its interest in
the Partnership shall be determined by appraisal by a qualified Independent
Expert. The Independent Expert shall be selected by mutual agreement between
the removed Managing General Partner and the incoming Managing General
Partner. The appraisal shall take into account an appropriate discount, to
reflect the risk of recovery of natural gas and oil reserves, but not less
than that used in the most recent presentment offer, if any.
The cost of the appraisal shall be borne equally by the removed Managing
General Partner and the Partnership.
4.04(a)(3)(c). Incoming Managing General Partner's Option to Purchase. The
incoming Managing General Partner shall have the option to purchase 20% of the
removed Managing General Partner's interest in the Partnership as Managing
General Partner and not as a Participant for the value determined by the
Independent Expert.
4.04(a)(3)(d). Method of Payment. The method of payment for the removed
Managing General Partner's interest must be fair and protect the solvency and
liquidity of the Partnership. The method of payment shall be as follows:
(i) when the termination is voluntary, the method of payment shall
be a non-interest bearing unsecured promissory note with
principal payable, if at all, from distributions which the
Managing General Partner otherwise would have received under
the Partnership Agreement had the Managing General Partner not
been terminated; and
(ii) when the termination is involuntary, the method of payment
shall be an interest bearing promissory note coming due in no
less than five years with equal installments each year. The
interest rate shall be that charged on comparable loans.
4.04(a)(3)(e). Termination of Contracts. The removed Managing General Partner,
at the time of its removal shall cause, to the extent it is legally possible,
its successor to be transferred or assigned all its rights, obligations and
interests as Managing General Partner of the Partnership in contracts entered
into by it on behalf of the Partnership. In any event, the removed Managing
General Partner shall cause its rights, obligations and interests as Managing
General Partner of the Partnership in any such contract to terminate at the
time of its removal.
Notwithstanding any other provision in this Agreement, the Partnership or the
successor Managing General Partner shall not:
(i) be a party to any natural gas supply agreement that the
Managing General Partner or its Affiliates enters into with a
third-party;
(ii) have any rights pursuant to such natural gas supply agreement;
or
(iii) receive any interest in the Managing General Partner's and its
Affiliates' pipeline or gathering system or compression
facilities.
4.04(a)(3)(f). The Managing General Partner's Right to Voluntarily Withdraw.
At any time beginning 10 years after the Offering Termination Date and the
Partnership's primary drilling activities, the Managing General Partner may
voluntarily withdraw as Managing General Partner on giving 120 days' written
notice of withdrawal to the Participants. If the Managing General Partner
withdraws, then the following conditions shall apply:
(i) the Managing General Partner's interest in the Partnership
shall be determined as described in ss.4.04(a)(3)(b) above with
respect to removal; and
(ii) the interest shall be distributed to the Managing General
Partner as described in ss.4.04(a)(3)(d)(i) above.
32
Any successor Managing General Partner shall have the option to purchase 20%
of the withdrawing Managing General Partner's interest in the Partnership at
the value determined as described above with respect to removal.
4.04(a)(3)(g). The Managing General Partner's Right to Withdraw Property
Interest. The Managing General Partner has the right at any time to withdraw a
property interest held by the Partnership in the form of a Working Interest in
the Partnership ▇▇▇▇▇ equal to or less than its respective interest in the
revenues of the Partnership under the conditions set forth in ss.6.03. If the
Managing General Partner withdraws an interest, then the Managing General
Partner shall:
(i) pay the expenses of withdrawing; and
(ii) fully indemnify the Partnership against any additional expenses
which may result from a partial withdrawal of its interests
including insuring that a greater amount of Direct Costs or
Administrative Costs is not allocated to the Participants.
4.04(a)(4). Removal of Operator. The Operator may be removed and a new
Operator may be substituted at any time on 60 days advance written notice to
the outgoing Operator by the Managing General Partner acting on behalf of the
Partnership on the affirmative vote of Participants whose Units equal a
majority of the total Units.
The Operator shall not be removed until a substituted Operator has been
selected by an affirmative vote of Participants whose Units equal a majority
of the total Units and installed as such.
4.05. Indemnification and Exoneration.
4.05(a)(1). Standards for the Managing General Partner Not Incurring Liability
to the Partnership or Participants. The Managing General Partner, the
Operator, and their Affiliates shall not have any liability whatsoever to the
Partnership or to any Participant for any loss suffered by the Partnership or
Participants which arises out of any action or inaction of the Managing
General Partner, the Operator, or their Affiliates if:
(i) the Managing General Partner, the Operator, and their
Affiliates determined in good faith that the course of conduct
was in the best interest of the Partnership;
(ii) the Managing General Partner, the Operator, and their
Affiliates were acting on behalf of, or performing services
for, the Partnership; and
(iii) the course of conduct did not constitute negligence or
misconduct of the Managing General Partner, the Operator, or
their Affiliates.
4.05(a)(2). Standards for Managing General Partner Indemnification. The
Managing General Partner, the Operator, and their Affiliates shall be
indemnified by the Partnership against any losses, judgments, liabilities,
expenses, and amounts paid in settlement of any claims sustained by them in
connection with the Partnership, provided that:
(i) the Managing General Partner, the Operator, and their
Affiliates determined in good faith that the course of conduct
which caused the loss or liability was in the best interest of
the Partnership;
(ii) the Managing General Partner, the Operator, and their
Affiliates were acting on behalf of, or performing services
for, the Partnership; and
(iii) the course of conduct was not the result of negligence or
misconduct of the Managing General Partner, the Operator, or
their Affiliates.
Provided, however, payments arising from such indemnification or agreement to
hold harmless are recoverable only out of the following:
(i) tangible net assets;
33
(ii) revenues from operations; and
(iii) any insurance proceeds.
4.05(a)(3). Standards for Securities Law Indemnification. Notwithstanding
anything to the contrary contained in the above, the Managing General Partner,
the Operator, and their Affiliates and any person acting as a broker/dealer
shall not be indemnified for any losses, liabilities or expenses arising from
or out of an alleged violation of federal or state securities laws by such
party unless:
(i) there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to the
particular indemnitee;
(ii) the claims have been dismissed with prejudice on the merits by
a court of competent jurisdiction as to the particular
indemnitee; or
(iii) a court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and finds that
indemnification of the settlement and the related costs should
be made, and the court considering the request for
indemnification has been advised of the position of the SEC,
the Massachusetts Securities Division, and any state securities
regulatory authority in which plaintiffs claim they were
offered or sold Units with respect to the issue of
indemnification for violation of securities laws.
4.05(a)(4). Standards for Advancement of Funds to the Managing General Partner
and Insurance. The advancement of Partnership funds to the Managing General
Partner, the Operator, or their Affiliates for legal expenses and other costs
incurred as a result of any legal action for which indemnification is being
sought is permissible only if the Partnership has adequate funds available and
the following conditions are satisfied:
(i) the legal action relates to acts or omissions with respect to
the performance of duties or services on behalf of the
Partnership;
(ii) the legal action is initiated by a third-party who is not a
Participant, or the legal action is initiated by a Participant
and a court of competent jurisdiction specifically approves the
advancement; and
(iii) the Managing General Partner or its Affiliates undertake to
repay the advanced funds to the Partnership, together with the
applicable legal rate of interest thereon, in cases in which
such party is found not to be entitled to indemnification.
The Partnership shall not bear the cost of that portion of insurance which
insures the Managing General Partner, the Operator, or their Affiliates for
any liability for which they could not be indemnified pursuant to
ss.ss.4.05(a)(1) and 4.05(a)(2).
4.05(b). Liability of Partners. Under the Delaware Revised Uniform Limited
Partnership Act, the Investor General Partners are liable jointly and severally
for all liabilities and obligations of the Partnership. Notwithstanding the
foregoing, as among themselves, the Investor General Partners agree that each
shall be solely and individually responsible only for his pro rata share of the
liabilities and obligations of the Partnership based on his respective number of
Units.
In addition, the Managing General Partner agrees to use its corporate assets
to indemnify each of the Investor General Partners against all Partnership
related liabilities which exceed the Investor General Partner's interest in
the undistributed net assets of the Partnership and insurance proceeds, if
any. Further, the Managing General Partner agrees to indemnify each Investor
General Partner against any personal liability as a result of the unauthorized
acts of another Investor General Partner.
34
If the Managing General Partner provides indemnification, then each Investor
General Partner who has been indemnified shall transfer and subrogate his
rights for contribution from or against any other Investor General Partner to
the Managing General Partner.
4.05(c). Order of Payment of Claims. Claims shall be paid as follows:
(i) first, out of any insurance proceeds;
(ii) second, out of Partnership assets and revenues; and
(iii) last, by the Managing General Partner as provided in
ss.ss.3.05(b)(2) and (3) and 4.05(b).
No Limited Partner shall be required to reimburse the Managing General
Partner, the Operator, or their Affiliates or the Investor General Partners
for any liability in excess of his agreed Capital Contribution, except:
(i) for a liability resulting from the Limited Partner's
unauthorized participation in Partnership management; or
(ii) from some other breach by the Limited Partner of this
Agreement.
4.05(d). Authorized Transactions Are Not Deemed to Be a Breach. No transaction
entered into or action taken by the Partnership or the Managing General
Partner, the Operator, or their Affiliates, which is authorized by this
Agreement shall be deemed a breach of any obligation owed by the Managing
General Partner, the Operator, or their Affiliates to the Partnership or the
Participants.
4.06. Other Activities.
4.06(a). The Managing General Partner May Pursue Other Natural Gas and Oil
Activities for Its Own Account. The Managing General Partner, the Operator,
and their Affiliates are now engaged, and will engage in the future, for their
own account and for the account of others, including other investors, in all
aspects of the natural gas and oil business. This includes without limitation,
the evaluation, acquisition, and sale of producing and nonproducing Leases,
and the exploration for and production of natural gas, oil and other minerals.
The Managing General Partner is required to devote only so much of its time as
is necessary to manage the affairs of the Partnership. Except as expressly
provided to the contrary in this Agreement, and subject to fiduciary duties,
the Managing General Partner, the Operator, and their Affiliates may do the
following:
(i) continue their activities, or initiate further such activities,
individually, jointly with others, or as a part of any other
limited or general partnership, tax partnership, joint venture,
or other entity or activity to which they are or may become a
party, in any locale and in the same fields, areas of operation
or prospects in which the Partnership may likewise be active;
(ii) reserve partial interests in Leases being assigned to the
Partnership or any other interests not expressly prohibited by
this Agreement;
(iii) deal with the Partnership as independent parties or through any
other entity in which they may be interested;
(iv) conduct business with the Partnership as set forth in this
Agreement; and
(v) participate in such other investor operations, as investors or
otherwise.
The Managing General Partner and its Affiliates shall not be required to
permit the Partnership or the Participants to participate in any of the
operations in which the Managing General Partner and its Affiliates may be
interested or share in any profits or other benefits from the operations.
However, except as otherwise provided in this Agreement, the Managing General
Partner and its Affiliates may pursue business opportunities that are
consistent with the Partnership's investment objectives for their own account
only after they have determined that the opportunity either:
35
(i) cannot be pursued by the Partnership because of insufficient
funds; or
(ii) it is not appropriate for the Partnership under the existing
circumstances.
4.06(b). Managing General Partner May Manage Multiple Partnerships. The
Managing General Partner or its Affiliates may manage multiple Programs
simultaneously.
4.06(c). Partnership Has No Interest in Natural Gas Contracts or Pipelines and
Gathering Systems. Notwithstanding any other provision in this Agreement, the
Partnership shall not:
(i) be a party to any natural gas supply agreement that the
Managing General Partner, the Operator, or their Affiliates
enter into with a third-party or have any rights pursuant to
such natural gas supply agreement; or
(ii) receive any interest in the Managing General Partner's, the
Operator's, and their Affiliates' pipeline or gathering system
or compression facilities.
ARTICLE V
PARTICIPATION IN COSTS AND REVENUES,
CAPITAL ACCOUNTS, ELECTIONS AND DISTRIBUTIONS
5.01. Participation in Costs and Revenues. Except as otherwise provided in
this Agreement, costs and revenues shall be charged and credited to the
Managing General Partner and the Participants as set forth in this section and
its subsections.
5.01(a). Costs. Costs shall be charged as set forth below.
5.01(a)(1). Organization and Offering Costs. Organization and Offering Costs
shall be charged 100% to the Managing General Partner. For purposes of sharing
in revenues under ss.5.01(b)(4), the Managing General Partner shall be credited
with Organization and Offering Costs paid by it and for services provided by it
as Organization Costs up to and including 15% of the Partnership's subscription
proceeds. Any Organization and Offering Costs paid and/or provided in services
by the Managing General Partner in excess of this amount shall not be credited
towards the Managing General Partner's required Capital Contribution or revenue
share as set forth in ss.5.01(b)(4). The Managing General Partner's credit for
services provided to the Partnership as Organization Costs shall be determined
based on generally accepted accounting principles.
5.01(a)(2). Intangible Drilling Costs. Intangible Drilling Costs shall be
charged 100% to the Participants.
5.01(a)(3). Tangible Costs. Tangible Costs shall be charged 66% to the
Managing General Partner and 34% to the Participants. However, if the total
Tangible Costs for all of the Partnership's ▇▇▇▇▇ that would be charged to the
Participants exceeds an amount equal to 10% of the Partnership's subscription
proceeds, then the excess shall be charged to the Managing General Partner.
5.01(a)(4). Operating Costs, Direct Costs, Administrative Costs and All Other
Costs. Operating Costs, Direct Costs, Administrative Costs, and all other
Partnership costs not specifically allocated shall be charged to the parties
in the same ratio as the related production revenues are being credited.
5.01(a)(5). Allocation of Intangible Drilling Costs and Tangible Costs at
Partnership Closings. Intangible Drilling Costs and the Participants' share of
Tangible Costs of a well or ▇▇▇▇▇ to be drilled and completed with the
proceeds of a Partnership closing shall be charged 100% to the Participants
who are admitted to the Partnership in that closing and shall not be
reallocated to take into account other Partnership closings.
Although the proceeds of each Partnership closing will be used to pay the
costs of drilling different ▇▇▇▇▇, not less than 90% of each Participant's
subscription proceeds shall be applied to Intangible Drilling Costs and not
more than 10% of each Participant's subscription proceeds shall be applied to
Tangible Costs regardless of when he subscribes.
36
5.01(a)(6). Lease Costs. The Leases shall be contributed to the Partnership by
the Managing General Partner as set forth in ss.4.01(a)(4).
5.01(b). Revenues. Revenues shall be credited as set forth below.
5.01(b)(1). Allocation of Revenues on Disposition of Property. If the parties'
Capital Accounts are adjusted to reflect the simulated depletion of a natural
gas or oil property of the Partnership, then the portion of the total amount
realized by the Partnership on the taxable disposition of the property that
represents recovery of its simulated tax basis in the property shall be
allocated to the parties in the same proportion as the aggregate adjusted tax
basis of the property was allocated to the parties or their predecessors in
interest. If the parties' Capital Accounts are adjusted to reflect the actual
depletion of a natural gas or oil property of the Partnership, then the
portion of the total amount realized by the Partnership on the taxable
disposition of the property that equals the parties' aggregate remaining
adjusted tax basis in the property shall be allocated to the parties in
proportion to their respective remaining adjusted tax bases in the property.
Thereafter, any excess shall be allocated to the Managing General Partner in
an amount equal to the difference between the fair market value of the Lease
at the time it was contributed to the Partnership and its simulated or actual
adjusted tax basis at that time. Finally, any excess shall be credited as
provided in ss.5.01(b)(4), below.
In the event of a sale of developed natural gas and oil properties with
equipment on the properties, the Managing General Partner may make any
reasonable allocation of proceeds between the equipment and the Leases.
5.01(b)(2). Interest. Interest earned on each Participant's subscription
proceeds before the Offering Termination Date under ss.3.05(b)(1) shall be
credited to the accounts of the respective subscribers who paid the
subscription proceeds to the Partnership. The interest shall be paid to the
Participant not later than the Partnership's first cash distribution from
operations.
After the Offering Termination Date and until proceeds from the offering are
invested in the Partnership's natural gas and oil operations, any interest
income from temporary investments shall be allocated pro rata to the
Participants providing the subscription proceeds.
All other interest income, including interest earned on the deposit of
production revenues, shall be credited as provided in ss.5.01(b)(4), below.
5.01(b)(3). Sale or Disposition of Equipment. Proceeds from the sale or
disposition of equipment shall be credited to the parties charged with the
costs of the equipment in the ratio in which the costs were charged.
5.01(b)(4). Other Revenues. Subject to ss.5.01(b)(4)(a), the Managing General
Partner and the Participants shall share in all other Partnership revenues in
the same percentage as their respective Capital Contribution bears to the total
Partnership Capital Contributions, except that the Managing General Partner
shall receive an additional 7% of Partnership revenues. However, the Managing
General Partner's total revenue share may not exceed 35% of Partnership
revenues. For example, if the Managing General Partner contributes 25% of the
total Partnership Capital Contributions and the Participants contribute 75% of
the total Partnership Capital Contributions, then the Managing General Partner
shall receive 32% of the Partnership revenues and the Participants shall receive
68% of the Partnership revenues. On the other hand, if the Managing General
Partner contributes 30% of the total Partnership Capital Contributions and the
Participants contribute 70% of the total Partnership Capital Contributions, then
the Managing General Partner shall receive 35% of the Partnership revenues, not
37%, because its revenue share cannot exceed 35% of Partnership revenues, and
the Participants shall receive 65% of Partnership revenues.
5.01(b)(4)(a). Subordination. The Managing General Partner shall subordinate
up to 50% of its share of Partnership Net Production Revenues to the receipt
by Participants of cash distributions from the Partnership equal to $1,000 per
Unit (which is 10% per Unit) regardless of their actual subscription price of
the Units, in each of the first five 12-month periods beginning with the
Partnership's first cash distributions from operations. In this regard:
(i) the 60-month subordination period shall begin with the first
cash distribution from operations to the Participants, but no
subordination distributions to the Participants shall be
required until the Partnership's first cash distribution to the
Participants after substantially all Partnership ▇▇▇▇▇ have
been drilled, completed, and placed in production in a sales
line;
37
(ii) subsequent subordination distributions, if any, shall be
determined and made at the time of each subsequent distribution
of revenues to the Participants; and
(iii) the Managing General Partner shall not subordinate more than
50% of its share of Partnership Net Production Revenues in any
subordination period.
The subordination shall be determined by:
(i) carrying forward to subsequent 12-month periods the amount, if
any, by which cumulative cash distributions to Participants,
including any subordination payments, are less than:
(a) $1,000 per Unit (10% per Unit) in the first 12-month
period;
(b) $2,000 per Unit (20% per Unit) in the second 12-month
period;
(c) $3,000 per Unit (30% per Unit) in the third 12-month
period; or
(d) $4,000 per Unit (40% per Unit) in the fourth 12-month
period (no carry forward is required if such
distributions are less than $5,000 per Unit (50% per
Unit) in the fifth 12-month period because the Managing
General Partner's subordination obligation terminates on
the expiration of the fifth 12-month period); and
(ii) reimbursing the Managing General Partner for any previous
subordination payments to the extent cumulative cash
distributions to Participants, including any subordination
payments, would exceed:
(a) $1,000 per Unit (10% per Unit) in the first 12-month
period;
(b) $2,000 per Unit (20% per Unit) in the second 12-month
period;
(c) $3,000 per Unit (30% per Unit) in the third 12-month
period;
(d) $4,000 per Unit (40% per Unit) in the fourth 12-month
period; or
(e) $5,000 per Unit (50% per Unit) in the fifth 12-month
period.
The Managing General Partner's subordination obligation shall be further
subject to the following conditions:
(i) the subordination obligation may be prorated in the Managing
General Partner's discretion (e.g. in the case of a quarterly
distribution, the Managing General Partner will not have any
subordination obligation if the distributions to Participants
equal $250 per Unit (25% of $1,000 per Unit per year) or more
assuming there is no subordination owed for any preceding
period);
(ii) the Managing General Partner shall not be required to return
Partnership distributions previously received by it, even
though a subordination obligation arises after the
distributions;
(iii) subject to the foregoing provisions of this section, only
Partnership revenues in the current distribution period shall
be debited or credited to the Managing General Partner as may
be necessary to provide, to the extent possible, subordination
distributions to the Participants and reimbursements to the
Managing General Partner;
(iv) no subordination payments to the Participants or reimbursements
to the Managing General Partner shall be made after the
expiration of the fifth 12-month subordination period; and
38
(v) subordination payments to the Participants shall be subject to
any lien or priority required by the Managing General Partner's
lenders pursuant to agreements previously entered into or
subsequently entered into or renewed by the Managing General
Partner.
5.01(b)(5). Commingling of Revenues From All Partnership ▇▇▇▇▇. The revenues
from all Partnership ▇▇▇▇▇ will be commingled, so regardless of when a
Participant subscribes he will share in the revenues from all ▇▇▇▇▇ on the
same basis as the other Participants.
5.01(c). Allocations.
5.01(c)(1). Allocations among Participants. Except as provided otherwise in
this Agreement, costs (other than Intangible Drilling Costs and Tangible
Costs) and revenues charged or credited to the Participants as a group, which
includes all revenue credited to the Participants under ss.5.01(b)(4), shall
be allocated among the Participants, including the Managing General Partner to
the extent of any optional subscription under ss.3.03(b)(2), in the ratio of
their respective Units based on $10,000 per Unit regardless of the actual
subscription price for a Participant's Units.
Intangible Drilling Costs and Tangible Costs charged to the Participants as a
group shall be allocated among the Participants, including the Managing
General Partner to the extent of any optional subscription under
ss.3.03(b)(2), in the ratio of the subscription price designated on their
respective Subscription Agreements rather than the number of their respective
Units.
5.01(c)(2). Costs and Revenues Not Directly Allocable to a Partnership Well.
Costs and revenues not directly allocable to a particular Partnership Well or
additional operation shall be allocated among the Partnership ▇▇▇▇▇ or
additional operations in any manner the Managing General Partner in its
reasonable discretion, shall select, and shall then be charged or credited in
the same manner as costs or revenues directly applicable to the Partnership
Well or additional operation are being charged or credited.
5.01(c)(3). Managing General Partner's Discretion in Making Allocations For
Federal Income Tax Purposes. In determining the proper method of allocating
charges or credits among the parties, or in making any other allocations under
this Agreement, the Managing General Partner may adopt any method of allocation
which it, in its reasonable discretion, selects, if, in its sole discretion
based on advice from its legal counsel or accountants, a revision to the
allocations is required for the allocations to be recognized for federal income
tax purposes either because of the promulgation of Treasury Regulations or other
developments in the tax law. Any new allocation provisions shall be provided by
an amendment to this Agreement and shall be made in a manner that would result
in the most favorable aggregate consequences to the Participants as nearly as
possible consistent with the original allocations described in this Agreement.
5.02. Capital Accounts and Allocations Thereto.
5.02(a). Capital Accounts for Each Party to the Agreement. A single, separate
Capital Account shall be established for each party, regardless of the number
of interests owned by the party, the class of the interests and the time or
manner in which the interests were acquired.
5.02(b). Charges and Credits.
5.02(b)(1). General Standard. Except as otherwise provided in this Agreement,
the Capital Account of each party shall be determined and maintained in
accordance with Treas. Reg. ss.1.704-l(b)(2)(iv) and shall be increased by:
(i) the amount of money contributed by him to the Partnership;
(ii) the fair market value of property contributed by him, without
regard to ss.7701(g) of the Code, to the Partnership, net of
liabilities secured by the contributed property that the
Partnership is considered to assume or take subject to under
ss.752 of the Code; and
39
(iii) allocations to him of Partnership income and gain, or items
thereof, including income and gain exempt from tax and income
and gain described in Treas. Reg. ss.1.704-l(b)(2)(iv)(g), but
excluding income and gain described in Treas. Reg. ss.1.704-
l(b)(4)(i);
and shall be decreased by:
(iv) the amount of money distributed to him by the Partnership;
(v) the fair market value of property distributed to him, without
regard to ss.7701(g) of the Code, by the Partnership, net of
liabilities secured by the distributed property that he is
considered to assume or take subject to under ss.752 of the
Code;
(vi) allocations to him of Partnership expenditures described in
ss.705(a)(2)(B) of the Code; and
(vii) allocations to him of Partnership loss and deduction, or items
thereof, including loss and deduction described in Treas. Reg.
ss.1.704-l(b)(2)(iv)(g), but excluding items described in (vi)
above, and loss or deduction described in Treas. Reg. ss.1.704-
l(b)(4)(i) or (iii).
5.02(b)(2). Exception. If Treas. Reg. ss.1.704-l(b)(2)(iv) fails to provide
guidance, Capital Account adjustments shall be made in a manner that:
(i) maintains equality between the aggregate governing Capital
Accounts of the parties and the amount of Partnership capital
reflected on the Partnership's balance sheet, as computed for
book purposes;
(ii) is consistent with the underlying economic arrangement of the
parties; and
(iii) is based, wherever practicable, on federal tax accounting
principles.
5.02(c). Payments to the Managing General Partner. The Capital Account of the
Managing General Partner shall be reduced by payments to it pursuant to
ss.4.04(a)(2) only to the extent of the Managing General Partner's
distributive share of any Partnership deduction, loss, or other downward
Capital Account adjustment resulting from the payments.
5.02(d). Discretion of Managing General Partner in the Method of Maintaining
Capital Accounts. Notwithstanding any other provisions of this Agreement, the
method of maintaining Capital Accounts may be changed from time to time, in
the discretion of the Managing General Partner, to take into consideration
ss.704 and other provisions of the Code and the related rules, regulations and
interpretations as may exist from time to time.
5.02(e). Revaluations of Property. In the discretion of the Managing General
Partner the Capital Accounts of the parties may be increased or decreased to
reflect a revaluation of Partnership property, including intangible assets
such as goodwill, on a property-by-property basis except as otherwise
permitted under ss.704(c) of the Code and the regulations thereunder, on the
Partnership's books, in accordance with Treas. Reg. ss.1.704-l(b)(2)(iv)(f).
5.02(f). Amount of Book Items. In cases where ss.704(c) of the Code or
ss.5.02(e) applies, Capital Accounts shall be adjusted in accordance with
Treas. Reg. ss.1.704-l(b)(2)(iv)(g) for allocations of depreciation,
depletion, amortization and gain and loss, as computed for book purposes, with
respect to the property.
5.03. Allocation of Income, Deductions and Credits.
5.03(a). In General.
5.03(a)(1). Deductions Are Allocated to Party Charged with Expenditure. To the
extent permitted by law and except as otherwise provided in this Agreement,
all deductions and credits, including, but not limited to, intangible drilling
and development costs and depreciation, shall be allocated to the party who
has been charged with the expenditure giving rise to the deductions and
credits; and to the extent permitted by law, these parties shall be entitled
to the deductions and credits in computing taxable income or tax liabilities
to the exclusion of any other party. Also, any Partnership deductions that
would be
40
nonrecourse deductions if they were not attributable to a loan made
or guaranteed by the Managing General Partner or its Affiliates shall be
allocated to the Managing General Partner to the extent required by law.
5.03(a)(2). Income and Gain Allocated in Accordance With Revenues. Except as
otherwise provided in this Agreement, all items of income and gain, including
gain on disposition of assets, shall be allocated in accordance with the
related revenue allocations set forth in ss.5.01(b) and its subsections.
5.03(b). Tax Basis of Each Property. Subject to ss.704(c) of the Code, the tax
basis of each oil and gas property for computation of cost depletion and gain
or loss on disposition shall be allocated and reallocated when necessary based
on the capital interest in the Partnership as to the property and the capital
interest in the Partnership for this purpose as to each property shall be
considered to be owned by the parties in the ratio in which the expenditure
giving rise to the tax basis of the property has been charged as of the end of
the year.
5.03(c). Gain or Loss on Oil and Gas Properties. Each party shall separately
compute its gain or loss on the disposition of each natural gas and oil
property in accordance with the provisions of ss.613A(c)(7)D) of the Code, and
the calculation of the gain or loss shall consider the party's adjusted basis
in his property interest computed as provided in ss.5.03(b) and the party's
allocable share of the amount realized from the disposition of the property.
5.03(d). Gain on Depreciable Property. Gain from each sale or other
disposition of depreciable property shall be allocated to each party whose
share of the proceeds from the sale or other disposition exceeds its
contribution to the adjusted basis of the property in the ratio that the
excess bears to the sum of the excesses of all parties having an excess.
5.03(e). Loss on Depreciable Property. Loss from each sale, abandonment or
other disposition of depreciable property shall be allocated to each party
whose contribution to the adjusted basis of the property exceeds its share of
the proceeds from the sale, abandonment or other disposition in the proportion
that the excess bears to the sum of the excesses of all parties having an
excess.
5.03(f). Allocation If Recapture Treated As Ordinary Income. Any recapture
treated as an increase in ordinary income by reason of ss.ss.1245, 1250, or 1254
of the Code shall be allocated to the parties in the amounts in which the
recaptured items were previously allocated to them; provided that to the extent
recapture allocated to any party is in excess of the party's gain from the
disposition of the property, the excess shall be allocated to the other parties
but only to the extent of the other parties' gain from the disposition of the
property.
5.03(g). Tax Credits. As of the date of the Prospectus, tax credits are not
available to the Partnership. If this changes in the future, however, and if a
Partnership expenditure, whether or not deductible, that gives rise to a tax
credit in a Partnership taxable year also gives rise to valid allocations of
Partnership loss or deduction, or other downward Capital Account adjustments,
for the year, then the parties' interests in the Partnership with respect to
the credit, or the cost giving rise thereto, shall be in the same proportion
as the parties' respective distributive shares of the loss or deduction, and
adjustments. Identical principles shall apply in determining the parties'
interests in the Partnership with respect to tax credits that arise from
receipts of the Partnership, whether or not taxable.
5.03(h). Deficit Capital Accounts and Qualified Income Offset. Notwithstanding
any provisions of this Agreement to the contrary, an allocation of loss or
deduction which would result in a party having a deficit Capital Account
balance as of the end of the taxable year to which the allocation relates, if
charged to the party, to the extent the Participant is not required to restore
the deficit to the Partnership, taking into account:
(i) adjustments that, as of the end of the year, reasonably are
expected to be made to the party's Capital Account for
depletion allowances with respect to the Partnership's natural
gas and oil properties;
(ii) allocations of loss and deduction that, as of the end of the
year, reasonably are expected to be made to the party under
ss.ss.704(e)(2) and 706(d) of the Code and Treas. Reg.
ss.1.751-1(b)(2)(ii); and
41
(iii) distributions that, as of the end of the year, reasonably are
expected to be made to the party to the extent they exceed
offsetting increases to the party's Capital Account, assuming
for this purpose that the fair market value of Partnership
property equals its adjusted tax basis, that reasonably are
expected to occur during or prior to the Partnership taxable
years in which the distributions reasonably are expected to be
made;
shall be charged to the Managing General Partner. Further, the Managing
General Partner shall be credited with an additional amount of Partnership
income or gain equal to the amount of the loss or deduction as quickly as
possible to the extent such chargeback does not cause or increase deficit
balances in the parties' Capital Accounts which are not required to be
restored to the Partnership.
Notwithstanding any provisions of this Agreement to the contrary, if a party
unexpectedly receives an adjustment, allocation, or distribution described in
(i), (ii), or (iii) above, or any other distribution, which causes or
increases a deficit balance in the party's Capital Account which is not
required to be restored to the Partnership, the party shall be allocated items
of income and gain, consisting of a pro rata portion of each item of
Partnership income, including gross income, and gain for the year, in an
amount and manner sufficient to eliminate the deficit balance as quickly as
possible.
5.03(i). Minimum Gain Chargeback. To the extent there is a net decrease during
a Partnership taxable year in the minimum gain attributable to a Partner
nonrecourse debt, then any Partner with a share of the minimum gain
attributable to the debt at the beginning of the year shall be allocated items
of Partnership income and gain in accordance with Treas. Reg. ss.1.704-2(i).
5.03(j). Partners' Allocable Shares. Except as otherwise provided in this
Agreement, each party's allocable share of Partnership income, gain, loss,
deductions and credits shall be determined by the use of any method prescribed
or permitted by the Secretary of the Treasury by regulations or other
guidelines and selected by the Managing General Partner which takes into
account the varying interests of the parties in the Partnership during the
taxable year. In the absence of such regulations or guidelines, except as
otherwise provided in this Agreement, the allocable share shall be based on
actual income, gain, loss, deductions and credits economically accrued each
day during the taxable year in proportion to each party's varying interest in
the Partnership on each day during the taxable year.
5.04. Elections.
5.04(a). Election to Deduct Intangible Costs. The Partnership's federal income
tax return shall be made in accordance with an election under the option
granted by the Code to deduct intangible drilling and development costs.
5.04(b). No Election Out of Subchapter K. No election shall be made by the
Partnership, any Partner, or the Operator for the Partnership to be excluded
from the application of the partnership provisions of Subchapter K of the
Code.
5.04(c). Contingent Income. If it is determined that any taxable income
results to any party by reason of its entitlement to a share of profits or
revenues of the Partnership before the profit or revenue has been realized by
the Partnership, the resulting deduction as well as any resulting gain, shall
not enter into Partnership net income or loss but shall be separately
allocated to the party.
5.04(d). ss.754 Election. In the event of the transfer of an interest in the
Partnership, or on the death of an individual party hereto, or in the event of
the distribution of property to any party, the Managing General Partner may
choose for the Partnership to file an election in accordance with the
applicable Treasury Regulations to cause the basis of the Partnership's assets
to be adjusted for federal income tax purposes as provided by ss.ss.734 and
743 of the Code.
5.05. Distributions.
5.05(a). In General.
5.05(a)(1). Quarterly Review of Accounts. The Managing General Partner shall
review the accounts of the Partnership at least quarterly to determine whether
cash distributions are appropriate and the amount to be distributed, if any.
42
5.05(a)(2). Distributions. The Partnership shall distribute funds to the
Managing General Partner and the Participants allocated to their accounts
which the Managing General Partner deems unnecessary to retain by the
Partnership.
5.05(a)(3). No Borrowings. In no event, however, shall funds be advanced or
borrowed for distributions if the amount of the distributions would exceed the
Partnership's accrued and received revenues for the previous four quarters,
less paid and accrued Operating Costs with respect to the revenues. The
determination of revenues and costs shall be made in accordance with generally
accepted accounting principles, consistently applied.
5.05(a)(4). Distributions to the Managing General Partner. Cash distributions
from the Partnership to the Managing General Partner shall only be made as
follows:
(a) in conjunction with distributions to Participants; and
(b) out of funds properly allocated to the Managing General
Partner's account.
5.05(a)(5). Reserve. At any time after one year from the date each Partnership
Well is placed into production, the Managing General Partner shall have the
right to deduct each month from the Partnership's proceeds of the sale of the
production from the well up to $200 for the purpose of establishing a fund to
cover the estimated costs of plugging and abandoning the well. All of these
funds shall be deposited in a separate interest bearing account for the
benefit of the Partnership, and the total amount so retained and deposited
shall not exceed the Managing General Partner's reasonable estimate of the
costs.
5.05(b). Distribution of Uncommitted Subscription Proceeds. Any net subscription
proceeds not expended or committed for expenditure, as evidenced by a written
agreement, by the Partnership within 12 months of the Offering Termination Date,
except necessary operating capital, shall be distributed to the Participants in
the ratio that the subscription price designated on each Participant's
Subscription Agreement bears to the total subscription prices designated on all
of the Participants' Subscription Agreements, as a return of capital. The
Managing General Partner shall reimburse the Participants for the selling or
other offering expenses allocable to the return of capital.
For purposes of this subsection, "committed for expenditure" shall mean
contracted for, actually earmarked for or allocated by the Managing General
Partner to the Partnership's drilling operations, and "necessary operating
capital" shall mean those funds which, in the opinion of the Managing General
Partner, should remain on hand to assure continuing operation of the
Partnership.
5.05(c). Distributions on Winding Up. On the winding up of the Partnership
distributions shall be made as provided in ss.7.02.
5.05(d). Interest and Return of Capital. No party shall under any
circumstances be entitled to any interest on amounts retained by the
Partnership. Each Participant shall look only to his share of distributions,
if any, from the Partnership for a return of his Capital Contribution.
ARTICLE VI
TRANSFER OF INTERESTS
6.01. Transferability.
6.01(a). Rights of Assignee. On a transfer unless an assignee becomes a
substituted Participant in accordance with the provisions set forth below, he
shall not be entitled to any of the rights granted to a Participant under this
Agreement, other than the right to receive all or part of the share of the
profits, losses, income, gain, credits and cash distributions or returns of
capital to which his assignor would otherwise be entitled.
43
6.01(b). Conversion of Investor General Partner Units to Limited Partner
Units.
6.01(b)(1). Automatic Conversion. After all of the Partnership ▇▇▇▇▇ have
been drilled and completed the Managing General Partner shall file an amended
certificate of limited partnership with the Secretary of State of the State of
Delaware for the purpose of converting the Investor General Partner Units to
Limited Partner Units.
6.01(b)(2). Investor General Partners Shall Have Contingent Liability. On
conversion the Investor General Partners shall be Limited Partners entitled to
limited liability; however, they shall remain liable to the Partnership for
any additional Capital Contribution required for their proportionate share of
any Partnership obligation or liability arising before the conversion of their
Units as provided in ss.3.05(b)(2).
6.01(b)(3). Conversion Shall Not Affect Allocations. The conversion shall not
affect the allocation to any Participant of any item of Partnership income,
gain, loss, deduction or credit or other item of special tax significance
other than Partnership liabilities, if any. Further, the conversion shall not
affect any Participant's interest in the Partnership's natural gas and oil
properties and unrealized receivables.
6.01(b)(4). Right to Convert if Reduction of Insurance. Notwithstanding the
foregoing, the Managing General Partner shall notify all Participants at least
30 days before the effective date of any adverse material change in the
Partnership's insurance coverage. If the insurance coverage is to be
materially reduced, then the Investor General Partners shall have the right to
convert their Units into Limited Partner Units before the reduction by giving
written notice to the Managing General Partner.
6.02. Special Restrictions on Transfers.
6.02(a). In General. Transfers are subject to the following general
conditions:
(i) only whole Units may be assigned unless the Participant owns
less than a whole Unit, in which case his entire fractional
interest must be assigned;
(ii) the costs and expenses associated with the assignment must be
paid by the assignor Participant;
(iii) the assignment must be in a form satisfactory to the Managing
General Partner; and
(iv) the terms of the assignment must not contravene those of this
Agreement.
Transfers of Units are subject to the following additional restrictions set
forth in ss.ss.6.02(a)(1) and 6.02(a)(2).
6.02(a)(1). Tax Law Restrictions. Subject to transfers permitted by ss.6.04
and transfers by operation of law, no sale, assignment, exchange, or transfer
of a Unit shall be made which, in the opinion of counsel to the Partnership,
would result in the Partnership being either:
(i) terminated for tax purposes under ss.708 of the Code; or
(ii) treated as a "publicly-traded" partnership for purposes of
ss.469(k) of the Code.
6.02(a)(2). Securities Laws Restriction. Subject to transfers permitted by
ss.6.04 and transfers by operation of law, no Unit shall be sold, assigned,
pledged, hypothecated, or transferred which, in the opinion of counsel to the
Partnership, would result in the violation of any applicable federal or state
securities laws.
Transfers are also subject to any conditions contained in the Subscription
Agreement and Exhibit (B) to the Prospectus.
44
6.02(a)(3). Substitute Participant.
6.02(a)(3)(a). Procedure to Become Substitute Participant. Subject to
ss.ss.6.02(a)(1) and 6.02(a)(2), an assignee of a Participant's Unit shall
become a substituted Participant entitled to all the rights of a Participant
if, and only if:
(i) the assignor gives the assignee the right;
(ii) the assignee pays to the Partnership all costs and expenses
incurred in connection with the substitution; and
(iii) the assignee executes and delivers the instruments necessary to
establish that a legal transfer has taken place and to confirm
the agreement of the assignee to be bound by all of the terms
of this Agreement.
6.02(a)(3)(b). Rights of Substitute Participant. A substitute Participant is
entitled to all of the rights attributable to full ownership of the assigned
Units including the right to vote.
6.02(b). Effect of Transfer.
6.02(b)(1). Amendment of Records. The Partnership shall amend its records at
least once each calendar quarter to effect the substitution of substituted
Participants.
Any transfer permitted under this Agreement when the assignee does not become
a substituted Participant shall be effective as follows:
(i) midnight of the last day of the calendar month in which it is
made; or
(ii) at the Managing General Partner's election, 7:00 A.M. of the
following day.
6.02(b)(2). Transfer Does Not Relieve Transferor of Certain Costs. No
transfer, including a transfer of less than all of a Participant's Units or
the transfer of Units to more than one party, shall relieve the transferor of
its responsibility for its proportionate part of any expenses, obligations and
liabilities under this Agreement related to the Units so transferred, whether
arising before or after the transfer.
6.02(b)(3). Transfer Does Not Require An Accounting. No transfer of a Unit
shall require an accounting by the Managing General Partner. Also, no transfer
shall grant rights under this Agreement, including the exercise of any
elections, as between the transferring parties and the remaining parties to
this Agreement to more than one party unanimously designated by the
transferees and, if he should have retained an interest under this Agreement,
the transferor.
6.02(b)(4). Notice. Until the Managing General Partner receives a proper
notice of designation acceptable to it, the Managing General Partner shall
continue to account only to the person to whom it was furnishing notices
before the time pursuant to ss.8.01 and its subsections. This party shall
continue to exercise all rights applicable to the Units previously owned by
the transferor.
6.03. Right of Managing General Partner to Hypothecate and/or Withdraw Its
Interests. The Managing General Partner shall have the authority without the
consent of the Participants and without affecting the allocation of costs and
revenues received or incurred under this Agreement, to hypothecate, pledge, or
otherwise encumber, on any terms it chooses for its own general purposes
either:
(i) its Partnership interest; or
(ii) an undivided interest in the assets of the Partnership equal to
or less than its respective interest in the revenues of the
Partnership.
45
All repayments of these borrowings and costs, interest or other charges
related to the borrowings shall be borne and paid separately by the Managing
General Partner. In no event shall the repayments, costs, interest, or other
charges related to the borrowing be charged to the account of the
Participants.
In addition, subject to a required participation of not less than 1% in the
Partnership as Managing General Partner, the Managing General Partner may
withdraw a property interest held by the Partnership in the form of a Working
Interest in the Partnership ▇▇▇▇▇ equal to or less than its respective
interest in the revenues of the Partnership if:
(i) the withdrawal is necessary to satisfy the bona fide request of
its creditors; or
(ii) the withdrawal is approved by Participants whose Units equal a
majority of the total Units.
6.04. Presentment.
6.04(a). In General. Participants shall have the right to present their
interests to the Managing General Partner for purchase subject to the
conditions and limitations set forth in this section. A Participant, however,
is not obligated to present his Units for purchase.
The Managing General Partner shall not be obligated to purchase more than 5%
of the Units in any calendar year and this 5% limit may not be waived. The
Managing General Partner shall not purchase less than one Unit unless the
lesser amount represents the Participant's entire interest in the Partnership,
however, the Managing General Partner may waive this limitation.
A Participant may present his Units in writing to the Managing General Partner
every year beginning with the fifth calendar year after the Offering
Termination Date subject to the following conditions:
(i) the presentment must be made within 120 days of the reserve
report set forth in ss.4.03(b)(3);
(ii) in accordance with Treas. Reg. ss.1.7704-1(f), the purchase may
not be made until at least 60 calendar days after the
Participant notifies the Partnership in writing of the
Participant's intention to exercise the presentment right; and
(iii) the purchase shall not be considered effective until the
presentment price has been paid in cash to the Participant.
6.04(b). Requirement for Independent Petroleum Consultant. The amount of the
presentment price attributable to Partnership reserves shall be determined
based on the last reserve report of the Partnership prepared by the Managing
General Partner and reviewed by an Independent Expert. The Managing General
Partner shall estimate the present worth of future net revenues attributable
to the Partnership's interest in the Proved Reserves. In making this estimate,
the Managing General Partner shall use the following terms:
(i) a discount rate equal to 10%;
(ii) a constant price for the oil; and
(iii) base the price of natural gas on the existing natural gas
contracts at the time of the purchase.
The calculation of the presentment price shall be as set forth in ss.6.04(c).
6.04(c). Calculation of Presentment Price. The presentment price shall be
based on the Participant's share of the net assets and liabilities of the
Partnership and allocated pro rata to each Participant in the ratio that his
number of Units bears to the total number of Units. The presentment price
shall include the sum of the following Partnership items:
46
(i) an amount based on 70% of the present worth of future net
revenues from the Proved Reserves determined as described in
ss.6.04(b);
(ii) cash on hand;
(iii) prepaid expenses and accounts receivable less a reasonable
amount for doubtful accounts; and
(iv) the estimated market value of all assets, not separately
specified above, determined in accordance with standard
industry valuation procedures.
There shall be deducted from the foregoing sum the following items:
(i) an amount equal to all debts, obligations, and other
liabilities, including accrued expenses; and
(ii) any distributions made to the Participants between the date of
the request and the actual payment. However, if any cash
distributed was derived from the sale, after the presentment
request, of natural gas, oil or other mineral production, or of
a producing property owned by the Partnership, for purposes of
determining the reduction of the presentment price, the
distributions shall be discounted at the same rate used to take
into account the risk factors employed to determine the present
worth of the Partnership's Proved Reserves.
6.04(d). Further Adjustment May Be Allowed. The presentment price may be
further adjusted by the Managing General Partner for estimated changes therein
from the date of the report to the date of payment of the presentment price to
the Participants because of the following:
(i) the production or sales of, or additions to, reserves and lease and
well equipment, sale or abandonment of Leases, and similar matters
occurring before the request for purchase; and
(ii) any of the following occurring before payment of the presentment price
to the selling Participants:
(a) changes in well performance;
(b) increases or decreases in the market price of natural
gas, oil or other minerals;
(c) revision of regulations relating to the importing of
hydrocarbons;
(d) changes in income, ad valorem, and other tax laws such
as material variations in the provisions for depletion;
and
(e) similar matters.
6.04(e). Selection by Lot. If less than all Units presented at any time are to
be purchased, then the Participants whose Units are to be purchased will be
selected by lot.
The Managing General Partner's obligation to purchase Units presented may be
discharged for its benefit by a third-party or an Affiliate. The Units of the
selling Participant will be transferred to the party who pays for it. A
selling Participant will be required to deliver an executed assignment of his
Units, together with any other documentation as the Managing General Partner
may reasonably request.
6.04(f). No Obligation of the Managing General Partner to Establish a Reserve.
The Managing General Partner shall have no obligation to establish any reserve
to satisfy the presentment obligations under this section.
6.04(g). Suspension of Presentment Feature. The Managing General Partner may
suspend this presentment feature by so notifying Participants at any time if
it:
47
(i) does not have sufficient cash flow; or
(ii) is unable to borrow funds for this purpose on terms it deems
reasonable.
In addition, the presentment feature may be conditioned, in the Managing
General Partner's sole discretion, on the Managing General Partner's receipt
of an opinion of counsel that the transfers will not cause the Partnership to
be treated as a "publicly traded partnership" under the Code.
The Managing General Partner shall hold the purchased Units for its own
account and not for resale.
ARTICLE VII
DURATION, DISSOLUTION, AND WINDING UP
7.01. Duration.
7.01(a). Fifty Year Term. The Partnership shall continue in existence for a
term of 50 years from the effective date of this Agreement unless sooner
terminated as set forth below.
7.01(b). Termination. The Partnership shall terminate following the occurrence
of:
(i) a Final Terminating Event; or
(ii) any event which under the Delaware Revised Uniform Limited
Partnership Act causes the dissolution of a limited
partnership.
7.01(c). Continuance of Partnership Except on Final Terminating Event. Other
than the occurrence of a Final Terminating Event, the Partnership or any
successor limited partnership shall not be wound up, but shall be continued by
the parties and their respective successors as a successor limited partnership
under all the terms of this Agreement. The successor limited partnership shall
succeed to all of the assets of the Partnership. As used throughout this
Agreement, the term "Partnership" shall include the successor limited
partnerships and the parties to the successor limited partnerships.
7.02. Dissolution and Winding Up.
7.02(a). Final Terminating Event. On the occurrence of a Final Terminating
Event the affairs of the Partnership shall be wound up and there shall be
distributed to each of the parties its Distribution Interest in the remaining
Partnership assets.
7.02(b). Time of Liquidating Distribution. To the extent practicable and in
accordance with sound business practices in the judgment of the Managing
General Partner, liquidating distributions shall be made by:
(i) the end of the taxable year in which liquidation occurs,
determined without regard to ss.706(c)(2)(A) of the Code; or
(ii) if later, within 90 days after the date of the liquidation.
Notwithstanding, the following amounts are not required to be distributed
within the foregoing time periods so long as the withheld amounts are
distributed as soon as practical:
(i) amounts withheld for reserves reasonably required for
liabilities of the Partnership; and
(ii) installment obligations owed to the Partnership.
7.02(c). In-Kind Distributions. The Managing General Partner shall not be
obligated to offer in-kind property distributions to the Participants, and
shall do so, in its discretion. Any in-kind property distributions to the
Participants shall be made to a liquidating trust or similar entity for the
benefit of the Participants, unless at the time of the distribution:
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(i) the Managing General Partner offers the individual Participants
the election of receiving in-kind property distributions and
the Participants accept the offer after being advised of the
risks associated with direct ownership; or
(ii) there are alternative arrangements in place which assure the
Participants that they will not, at any time, be responsible
for the operation or disposition of Partnership properties.
If the Managing General Partner has not received a Participant's consent
within 30 days after the Managing General Partner mailed the request for
consent, then it shall be presumed that the Participant has refused his
consent.
7.02(d). Sale If No Consent. Any Partnership asset which would otherwise be
distributed in-kind to a Participant, except for the failure or refusal of the
Participant to give his written consent to the distribution, may instead be
sold by the Managing General Partner at the best price reasonably obtainable
from an independent third-party, who is not an Affiliate of the Managing
General Partner or to itself or its Affiliates, including an Affiliated Income
Program, at fair market value as determined by an Independent Expert selected
by the Managing General Partner.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.01. Notices.
8.01(a). Method. Any notice required under this Agreement shall be:
(i) in writing; and
(ii) given by mail or wire addressed to the party to receive the
notice at the address designated in ss.1.03.
If there is a transfer of Units under this Agreement, no notice to the
transferee shall be required, nor shall the transferee have any rights under
this Agreement, until notice has been given to the Managing General Partner.
Any transfer of rights under this Agreement shall not increase the duty to
give notice. If there is a transfer of Units under this Agreement to more than
one party, then notice to any owner of any interest in the Units shall be
notice to all owners of the Units.
8.01(b). Change in Address. The address of any party to this Agreement may be
changed by written notice as follows:
(i) to the Participants if there is a change of address by the
Managing General Partner; or
(ii) to the Managing General Partner if there is a change of address
by a Participant.
8.01(c). Time Notice Deemed Given. If the notice is given by the Managing
General Partner, then the notice shall be considered given, and any applicable
time shall run, from the date the notice is placed in the mail or delivered to
the telegraph company.
If the notice is given by any Participant, then the notice shall be considered
given and any applicable time shall run from the date the notice is received.
8.01(d). Effectiveness of Notice. Any notice to a party other than the
Managing General Partner, including a notice requiring concurrence or
nonconcurrence, shall be effective, and any failure to respond binding,
irrespective of the following:
(i) whether or not the notice is actually received; or
(ii) any disability or death on the part of the noticee, even if the
disability or death is known to the party giving the notice.
8.01(e). Failure to Respond. Except pursuant to ss.7.02(c) or when this
Agreement expressly requires affirmative approval of a Participant, any
Participant who fails to respond in writing within the time specified to a
request by the Managing General
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Partner as set forth below, for approval of or
concurrence in a proposed action shall be conclusively deemed to have approved
the action. The Managing General Partner shall send the first request and the
time period shall be not less than 15 business days from the date of mailing
of the request. If the Participant does not respond to the first request, then
the Managing General Partner shall send a second request. If the Participant
does not respond within seven calendar days from the date of the mailing of
the second request, then the Participant shall be conclusively deemed to have
approved the action.
8.02. Time. Time is of the essence of each part of this Agreement.
8.03. Applicable Law. The terms and provisions of this Agreement shall be
construed under the laws of the State of Delaware, provided, however, this
section shall not be deemed to limit causes of action for violations of federal
or state securities law to the laws of the State of Delaware. Neither this
Agreement nor the Subscription Agreement shall require mandatory venue or
mandatory arbitration of any or all claims by Participants against the Sponsor.
8.04. Agreement in Counterparts. This Agreement may be executed in counterpart
and shall be binding on all parties executing this or similar agreements from
and after the date of execution by each party.
8.05. Amendment.
8.05(a). Procedure for Amendment. No changes in this Agreement shall be
binding unless:
(i) proposed in writing by the Managing General Partner, and
adopted with the consent of Participants whose Units equal a
majority of the total Units; or
(ii) proposed in writing by Participants whose Units equal 10% or
more of the total Units and approved by an affirmative vote of
Participants whose Units equal a majority of the total Units.
8.05(b). Circumstances Under Which the Managing General Partner Alone May
Amend. The Managing General Partner is authorized to amend this Agreement and
its exhibits without the consent of Participants in any way deemed necessary
or desirable by it to:
(i) add or substitute in the case of an assigning party additional
Participants;
(ii) enhance the tax benefits of the Partnership to the parties; or
(iii) satisfy any requirements, conditions, guidelines, options, or
elections contained in any opinion, directive, order, ruling,
or regulation of the SEC, the IRS, or any other federal or
state agency, or in any federal or state statute, compliance
with which it deems to be in the best interest of the
Partnership.
Notwithstanding the foregoing, no amendment materially and adversely affecting
the interests or rights of Participants shall be made without the consent of
the Participants whose interests will be so affected.
8.06. Additional Partners. Each Participant hereby consents to the admission
to the Partnership of additional Participants as the Managing General Partner,
in its discretion, chooses to admit.
8.07. Legal Effect. This Agreement shall be binding on and inure to the
benefit of the parties, their heirs, devisees, personal representatives,
successors and assigns, and shall run with the interests subject to this
Agreement. The terms "Partnership," "Limited Partner," "Investor General
Partner," "Participant," "Partner," "Managing General Partner," "Operator," or
"parties" shall equally apply to any successor limited partnership, and any
heir, devisee, personal representative, successor or assign of a party.
IN WITNESS WHEREOF, the parties hereto set their hands as of the day and year
hereinabove shown.
ATLAS: ATLAS RESOURCES, INC.
Managing General Partner
By: /s/ ▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇
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▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Executive Vice President
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