Exhibit 4.2
AMENDED AND RESTATED
CERTIFICATE AND AGREEMENT
OF LIMITED PARTNERSHIP FOR
ATLAS AMERICA SERIES 25-2004(B) L.P.
DATED JUNE 22, 2004
TABLE OF CONTENTS
SECTION NO. DESCRIPTION PAGE
I. FORMATION
1.01 Formation........................................................1
1.02 Certificate of Limited Partnership...............................1
1.03 Name, Principal Office and Residence.............................1
1.04 Purpose..........................................................1
II. DEFINITION OF TERMS
2.01 Definitions......................................................2
III. SUBSCRIPTIONS AND FURTHER CAPITAL CONTRIBUTIONS
3.01 Designation of Managing General Partner and Participants .......11
3.02 Participants....................................................11
3.03 Subscriptions to the Partnership................................11
3.04 Capital Contributions of the Managing General Partner ..........13
3.05 Payment of Subscriptions........................................14
3.06 Partnership Funds...............................................14
IV. CONDUCT OF OPERATIONS
4.01 Acquisition of Leases...........................................15
4.02 Conduct of Operations...........................................17
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................................28
4.05 Indemnification and Exoneration.................................30
4.06 Other Activities................................................32
V. PARTICIPATION IN COSTS AND REVENUES, CAPITAL ACCOUNTS,
ELECTIONS AND DISTRIBUTIONS
5.01 Participation in Costs and Revenues.............................33
5.02 Capital Accounts and Allocations Thereto........................37
5.03 Allocation of Income, Deductions and Credits....................38
5.04 Elections.......................................................39
5.05 Distributions...................................................40
VI. TRANSFER OF INTERESTS
6.01 Transferability.................................................41
6.02 Special Restrictions on Transfers...............................41
6.03 Right of Managing General Partner to Hypothecate and/or
Withdraw Its Interests.........................................43
6.04 Presentment.....................................................43
VII. DURATION, DISSOLUTION, AND WINDING UP
7.01 Duration........................................................45
7.02 Dissolution and Winding Up......................................46
VIII. MISCELLANEOUS PROVISIONS
8.01 Notices.........................................................46
8.02 Time............................................................47
8.03 Applicable Law..................................................47
8.04 Agreement in Counterparts.......................................47
8.05 Amendment.......................................................47
8.06 Additional Partners.............................................48
8.07 Legal Effect....................................................48
EXHIBITS
EXHIBIT (I-A) - Form of Managing General Partner Signature Page for
Atlas America Series 25-2004(B) L.P.
EXHIBIT (I-B) - Form of Subscription Agreement for Atlas America Series
25-2004(B) L.P.
EXHIBIT (II) - Form of Drilling and Operating Agreement for Atlas
America Series 25-2004(B)L.P.
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These securities have not been registered under the Securities Act of 1933, as
amended, or any applicable state securities acts. These securities must be
acquired for investment, are restricted as to transferability, and may not be
transferred or sold except in conformance with the restrictions contained in
Article VI of this Amended and Restated Certificate and Agreement of Limited
Partnership and in the Subscription Agreement and Annex A, Exhibit (I-B) to this
Amended and Restated Certificate and Agreement of Limited Partnership.
AMENDED AND RESTATED CERTIFICATE AND
AGREEMENT OF LIMITED PARTNERSHIP
ATLAS AMERICA SERIES 25-2004(B) L.P.
THIS AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
("AGREEMENT"), amending and restating the original Certificate of Limited
Partnership, is made and entered into as of June 22, 2004, 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. The parties have formed 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 is the Amended and Restated 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 Series 25-2004(B)
L.P.
1.03(b). RESIDENCE. The residence of the Managing General Partner is its
principal place of business at 311 Rouser Road, Moon Township, Pennsylvania
15108, 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 Andrew M. Lubin at 49 Bancroft Mills, Unit P15,
Wilmington, Delaware 19806.
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. "Accredited Investor" means Accredited Investor, as that term is
defined in Regulation D as adopted by the Securities and
Exchange Commission as of the date of acceptance of the
Participant's subscription. As of the date of the Private
Placement Memorandum the term includes "any person who comes
within any of the following categories or who the issuer
reasonably believes comes within any of the following
categories, at the time of the sale of the securities to that
person:
(i) Any bank as defined in section 3(a)(2) of the Act, or
any savings and loan association or other institution as
defined in section 3(a)(5)(A) of the Act whether acting
in its individual or fiduciary capacity; any broker or
dealer registered pursuant to section 15 of the
Securities Exchange Act of 1934; any insurance company
as defined in section 2(13) of the Act; any investment
company registered under the Investment Company Act of
1940 or a business development company as defined in
section 2(a)(48) of that Act; Small Business Investment
Company licensed by the U.S. Small Business
Administration under section 301(c) or (d) of the Small
Business Investment Act of 1958; any plan established
and maintained by a state, its political subdivisions,
or any agency or instrumentality of a state or its
political subdivisions for the benefit of its employees,
if such plan has total assets in excess of $5,000,000;
employee benefit plan within the meaning of the Employee
Retirement Income Security Act of 1974 if the investment
decision is made by a plan fiduciary, as defined in
section 3(21) of such Act, which is either a bank,
savings and loan association, insurance company, or
registered investment adviser, or if the employee
benefit plan has total assets in excess of $5,000,000
or, if a self-directed plan, with investment decisions
made solely by persons that are accredited investors;
(ii) Any private business development company as defined in
section 202(a)(22) of the Investment Advisors Act of
1940;
(iii) Any organization described in section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or
similar business trust, or partnership, not formed for
the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(iv) Any director, executive officer, or general partner of
the issuer of the securities being offered or sold, or
any director, executive officer, or general partner of a
general partner of that issuer;
(v) Any natural person whose individual net worth, or joint
net worth with that person's spouse, at the time of his
purchase exceeds $1,000,000;
(vi) Any natural person who had an individual income in
excess of $200,000 in each of the two most recent years
or joint income with that person's spouse in excess of
$300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the
current year;
(vii) Any trust, with total assets in excess of $5,000,000,
not formed for the specific purpose of acquiring the
securities offered, whose purchase is directed by a
sophisticated person as described in Section
230.506(b)(2)(ii); and
(viii) Any entity in which all the equity owners are accredited
investors."
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2. "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.
3. "Administrator" means the official or agency administering the
securities laws of a state.
4. "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.
5. "Agreement" means this Amended and Restated Certificate and
Agreement of Limited Partnership, including all exhibits to this
Agreement.
6. "Anthem Securities" means Anthem Securities, Inc., whose
principal executive offices are located at 311 Rouser Road, P.O.
Box 926, Moon Township, Pennsylvania 15108-0926.
7. "Assessments" means additional amounts of capital which may be
mandatorily required of or paid voluntarily by a Participant
beyond his subscription commitment.
8. "Atlas" means Atlas Resources, Inc., a Pennsylvania corporation,
whose principal executive offices are located at 311 Rouser
Road, Moon Township, Pennsylvania 15108.
9. "Atlas America Series 25-2004 Program" means an offering of up
to two limited partnerships entitled Atlas America Series
25-2004(A) L.P. and Atlas America Series 25-2004(B) L.P.
10. "Capital Account" or "account" means the account established for
each party, maintained as provided in Section 5.02 and its
subsections.
11. "Capital Contribution" means the amount agreed to be contributed
to the Partnership by a Partner pursuant to Sections 3.04 and
3.05 and their subsections.
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12. "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.
13. "Code" means the Internal Revenue Code of 1986, as amended.
14. "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 wells which are not producers
of sufficient quantities of oil or gas to make
commercially reasonable their continued operations, and
provided that the expenses enumerated in this subsection
(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.
15. "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) Bryan Funding, Inc., the broker/dealer which will manage
the offering and sale of the Units in Minnesota and New
Hampshire.
16. "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.
17. "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 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 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 Section 4.03(d)(7) or pursuant to the Managing
General Partner's role as Tax Matters Partner.
18. "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
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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 Section 5.01 and its subsections of this Agreement.
19. "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).
20. "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.
21. "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 wells or other performance as a condition
of the assignment.
22. "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 Section
708(b)(1)(A) of the Code or the Partnership ceases to be
a going concern.
23. "Horizon" means a zone of a particular formation; that part of a
formation of sufficient porosity and permeability to form a
petroleum reservoir.
24. "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.
25. "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.
26. "Intangible Drilling Costs" or "Non-Capital Expenditures" means
those expenditures associated with property acquisition and the
drilling and completion of natural gas and oil wells 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
5
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.
27. "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.
28. "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 as an Investor General Partner
under Section 3.03(b)(2).
All Investor General Partners shall be of the same class and
have the same rights.
29. "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.
30. "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.
31. "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 as a Limited Partner under
Section 3.03(b)(2);
(iii) the Investor General Partners on the conversion of their
Investor General Partner Units to Limited Partner Units
pursuant to Section 6.01(b); and
(iv) any other persons who are admitted to the Partnership as
additional or substituted Limited Partners.
Except as provided in Section 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.
32. "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.
33. "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.
34. "Offering Termination Date" means the date set forth in the
Private Placement Memorandum 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.
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Notwithstanding the above, the Offering Termination Date may not
extend beyond the time that subscriptions for the maximum number
of Units set forth in Section 3.03(c)(1) have been received and
accepted by the Managing General Partner.
35. "Operating Costs" means expenditures made and costs incurred in
producing and marketing natural gas or oil from completed wells.
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.
36. "Operator" means the Managing General Partner, as operator of
Partnership Wells in Pennsylvania, and the Managing General
Partner or an Affiliate as Operator of Partnership Wells in
other areas of the United States.
37. "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.
38. "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.
39. "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.
40. "Participants" means:
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(i) the Managing General Partner to the extent of its
optional subscription under Section 3.03(b)(2);
(ii) the Limited Partners; and
(iii) the Investor General Partners.
41. "Partners" means:
(i) the Managing General Partner;
(ii) the Investor General Partners; and
(iii) the Limited Partners.
42. "Partnership" means Atlas America Series 25-2004(B) L.P.
43. "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.
44. "Partnership Well" means a well, some portion of the revenues
from which is received by the Partnership.
45. "Person" means a natural person, partnership, corporation,
association, trust or other legal entity.
46. "Private Placement Memorandum" means the offering document dated
March 8, 2004, as amended or supplemented from time to time, by
which the Units are offered and sold. The Private Placement
Memorandum specifically includes the supplement which will be
provided to each subscriber and prospective subscriber which
describes all or a portion of the proposed prospects for each
Partnership (the "Supplement").
47. "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.
48. "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.
49. "Prospect" means the drilling or spacing unit on which one
Partnership well will be drilled and, if warranted, completed,
which is the minimum area permitted by state law or local
practice on which one well may be drilled.
50. "Proved Developed Oil and Gas Reserves" means reserves that can
be expected to be recovered through existing wells with existing
equipment and operating methods. Additional oil and gas expected
to be obtained through the application of fluid injection or
other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery should be included as
"proved developed 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.
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51. "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.
52. "Proved Undeveloped Reserves" means reserves that are expected
to be recovered from either:
(i) new wells on undrilled acreage; or
(ii) from existing wells where a relatively major expenditure
is required for recompletion.
Reserves on undrilled acreage shall be limited to those drilling
units offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled
units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the
existing productive formation. Under no circumstances should
estimates for proved undeveloped reserves be attributable to any
acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the
area and in the same reservoir.
53. "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:
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(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.
54. "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.
55. "Sales Commissions" means all underwriting and brokerage
discounts and commissions incurred in the sale of Units payable
to registered broker/dealers, but excluding the following:
(a) the 1.5% nonaccountable due diligence fee;
(b) the .5% nonaccountable marketing expense fee;
(c) the 3.5% Dealer-Manager fee; and
(d) payments to broker/dealers from the Managing
General Partner in an amount equal to 1% of the
Partnership Net Production Revenues.
56. "Selling Agents" means those broker/dealers selected by the
Dealer-Manager which will participate in the offer and sale of
the Units.
57. "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
(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.
58. "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.
59. "Tangible Costs" or "Capital Expenditures" means those costs
associated with property acquisition and drilling and completing
natural gas and oil wells which are generally accepted as
capital expenditures under the Code. This includes all of the
following:
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(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.
60. "Tax Matters Partner" means the Managing General Partner.
61. "Units" or "Units of Participation" means Limited Partner
interests and Investor General Partner interests purchased by
Participants in the Partnership under the provisions of Section
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.
62. "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
Section 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 Section 3.03(c)(1).
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 Section 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 $25,000, 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 ($25,000); however, the Managing General Partner, in its discretion,
may accept at any time one-half Unit ($12,500) subscriptions from Accredited
Investors in the
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Partnership and from non-Accredited Investors only as set forth in the
Supplement. Larger subscriptions shall be accepted in $1,000 increments.
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 3.5% Dealer-Manager fee, the 8% Sales
Commission, the 1.5% nonaccountable marketing expense fee, and
the .5% nonaccountable due diligence fee, regardless of when
they subscribe, which shall not be paid with respect to these
sales; and
(ii) Registered Investment Advisors and their clients, and Selling
Agents and their registered representatives and principals,
shall be reduced by an amount equal to the 8% Sales Commission,
which shall not be paid with respect to these sales.
No more than 10% of the total Units shall be sold, in the aggregate, 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 Section 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 Section
3.03(b)(1), the Managing General Partner may subscribe for Units under the
provisions of Section 3.03(a) and its subsections up to the minimum
subscriptions which are required under Section 3.03(c)(2) for the Partnership to
begin operations, and, subject to the limitations on voting rights set forth in
Section 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:
(i) evidences the Managing General Partner's required subscription
under Section 3.03(b)(1); and
(ii) may be amended to reflect the amount of any optional
subscription under Section 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
2,400 Units, which is up to $60,000,000 of cash subscription proceeds excluding
the subscription discounts permitted under Section 3.03(a)(1). Notwithstanding
the foregoing, the maximum number of Units in both Atlas America Series
25-2004(A) L.P. and Atlas America Series 25-2004(B) L.P., in the aggregate,
shall not exceed 2,400 Units.
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3.03(c)(2). MINIMUM NUMBER OF UNITS. The minimum number of Units shall equal at
least 40 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 Section 3.03(a)(1).
Pursuant to Section 3.03(b)(2), the Managing General Partner, its officers,
directors, and Affiliates may purchase the number of Units required to satisfy
the minimum subscription proceeds required under Section 3.03(c)(1) to the
extent paid in cash and after the discounts permitted under Section 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
subscription proceeds. If a subscription is received before the distribution of
a Supplement to the Private Placement Memorandum which describes the proposed
prospects as discussed in "Terms of the Offering" and "Proposed Activities" in
the Private Placement Memorandum, then the subscriber must reaffirm his
subscription before his subscription is accepted or his subscription proceeds
are included in the minimum subscription proceeds required to break escrow.
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 Section 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:
(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.
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3.04(c). INTEREST FOR CONTRIBUTIONS. The interest of the Managing General
Partner, as Managing General Partner and not as a Participant in the capital and
revenues of the Partnership is in consideration for, and is the only
consideration for, its required Capital Contributions 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 Section 3.03(b)(2) as set forth in
Section 3.05(b)(1).
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
Section 3.06(b), up until the Offering Termination Date at a rate of the greater
of 6% per annum or the market rate paid by National City Bank of Philadelphia.
If the amount of interest paid by National City Bank of Pennsylvania is less
than 6% per annum, then the difference shall be paid by the Managing General
Partner.
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 Section 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, in proportion to
their respective number of Units, 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, in proportion to their
respective number of Units, 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.
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.
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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 Section 3.06(c)(2);
(iii) multi-tier arrangements meeting the requirements of Section
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 the other partnership in Atlas America Series 25-2004
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 Section 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:
(i) contributed to the Partnership by the Managing General Partner
or its Affiliates; and
(ii) credited towards the Managing General Partner's required Capital
Contribution set forth in Section 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
15
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 Section 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 Section 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.
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.
16
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 Section 4.03 and its
subsections, and to any authority which may be granted the Operator under
Section 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, wells 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;
(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
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(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,
wells, 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 Section
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 wells 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.
4.02(c)(4). RELATED PARTY TRANSACTIONS. Subject to the provisions of Section
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 Section 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 Wells shall be drilled under the
Drilling and Operating Agreement on a Cost plus 15% basis.
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
stead 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 are 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 powers and rights granted the
Managing General Partner under this section and its subsections. Each party
acknowledges that the power of attorney granted under Subsection 4.02(d)(2)(a):
(i) is a special power of attorney coupled with an interest and is
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 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:
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(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 Section 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 Section
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 or other legal
proceedings involving 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
(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.
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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 2004
calendar year, the Partnership shall provide each Participant an annual report
within 120 days after the close of the calendar year, and beginning with the
2005 calendar year, a report within 75 days after the end of the first six
months of its calendar year, containing unaudited financial statements of the
Partnership. The reports shall include a balance sheet and statements of income,
cash flow, and Partners' equity, which shall be prepared either in accordance
with accounting principals followed for federal tax reporting purposes or
generally accepted accounting principles which shall be determined in the
discretion of the Managing General Partner.
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. Annually, beginning January 1, 2006 the Partnership
shall prepare a summary of the computation of the Partnership's total oil and
gas Proved Reserves based on engineering reports prepared by the Managing
General Partner. The reserve computation shall also be reviewed by an
Independent Expert every other year beginning in 2007. Notwithstanding the
foregoing, this report shall not be provided to a Participant unless the
Participant requests, but only pursuant to the presentment feature in
Section 6.04.
4.03(b)(4). COST OF REPORTS. The cost of all reports described in this Section
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 other than
a list of the Participants. The Participant may inspect and copy any of the
records other than a list of the Participants 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 Section 4.01(a)(4) or fair market value of any
producing property as set forth in Section 4.03(d)(3).
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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.
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 that is not described
in the Private Placement Memorandum or this Agreement 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
22
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 matters set forth in Section 4.03(c)(2)(ii) and (iv) above.
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 Section 4.03(c),
except for the special voting rights granted Participants under Section
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:
(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. Each
Prospect shall 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.
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/Medina 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 Greene County, Pennsylvania within at least
1,000 feet from a producing well, although a partnership may
drill a new well or re-enter an existing well which is closer
than 1,000 feet to a plugged and abandoned well.
If the Partnership abandons its interest in a well, then this restriction will
continue for one year following the abandonment.
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
23
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:
(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.
With respect to its retained interest the Managing General Partner shall not
Farmout a Lease for the primary purpose of avoiding payment of its costs
relating to drilling the Lease. 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 Section 4.03(d)(5), the
Managing General Partner and its Affiliates shall not purchase any undeveloped
Leases from the Partnership other than at the higher of Cost or fair market
value. Farmouts to the Managing General Partner and its affiliates may be made
as set forth in Section 4.03(d)(9).
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). 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 under transactions that are fair and reasonable, nor take any action with
respect to the assets or property of the Partnership which does not primarily
benefit the Partnership.
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 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 significant expenditures
have been 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:
24
(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, wells,
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
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.
4.03(d)(7)(b). IF NOT DISCLOSED IN THE PRIVATE PLACEMENT MEMORANDUM 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 Private Placement Memorandum shall be set forth in a
written contract which precisely describes the services to be rendered and all
compensation to be paid. These contracts shall be 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:
(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 may Farmout an undeveloped lease or well
activity to the Managing General Partner, its Affiliates, or unaffiliated
third-parties 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;
25
(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 Section 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 wells 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 the geographic area and
dividing by the volume of all natural gas and oil sold from the wells in that
geographic area. The Managing General Partner, in its sole discretion, shall
determine what constitutes a geographic area.
4.03(d)(13). ADVANCE PAYMENTS. Advance payments by the Partnership to the
Managing General Partner and its Affiliates are prohibited except with respect
to the drilling contracts.
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 Costs, 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.
26
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.
In no event shall the democracy rights of Participants in the Roll-Up Entity be
less than those provided for under Sections 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 would be less than those provided
for under Sections 4.03(b)(5) and 4.03(b)(6).
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 a majority 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 a majority 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 Private Placement
Memorandum.
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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 Section 4.04(a)(3); or
(ii) withdraws pursuant to Section 4.04(a)(3)(f).
4.04(a)(2). COMPENSATION OF MANAGING GENERAL PARTNER. In addition to the
compensation set forth in Sections 4.01(a)(4) and 4.02(d)(1), the Managing
General Partner shall receive the compensation set forth in Sections
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.
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 be proportionately reduced to the extent the
Partnership acquires less than 100% of the Working Interest in
the well; and
(ii) it shall not be received for plugged or abandoned wells.
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/or 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 a 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 Section 3.03(a)(1), the
Dealer-Manager shall receive on each Unit sold:
(i) a 3.5% Dealer-Manager fee;
(ii) an 8% Sales Commission;
(iii) a 1.5% nonaccountable marketing expense fee; and
(iv) a .5% nonaccountable due diligence fee.
Finally, as an additional incentive, to the extent permitted by applicable law,
all Selling Agents and the Dealer-Manager that have one or more registered
representatives and/or principals who sell at least six Units each in the
Partnership and/or the other partnership in Atlas America Series 25-2004
Program, shall share in payments from the Managing General Partner in an amount
28
equal to 1% of the Partnership Net Production Revenues in the Partnership and
the other partnership in Atlas America Series 25-2004 Program. A qualifying
broker/dealer's participation in these payments shall be in the ratio which the
total amount of Units sold by all of its registered representatives and/or
principals who sell at least six Units each bears to the total amount of Units
sold by all registered representatives and/or principals who sell at least six
Units each.
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 Section 4.03(d)(7) with the
Partnership and shall be entitled to compensation under that 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 Section 7.01(c).
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.
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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 Section 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 Section 4.04(a)(3)(d)(i) above.
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 Wells equal to or less than its respective interest in the
revenues of the Partnership under the conditions set forth in Section 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:
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(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;
(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 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:
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(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 Sections
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.
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 Sections
3.05(b)(2) and (3) and 4.05(b).
No Limited Partner shall be required to reimburse the Managing General Partner,
the Operator, 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
32
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.
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 Section 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 set forth in Section 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.
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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 wells 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 wells 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 wells, 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.
5.01(a)(6). LEASE COSTS. The Leases shall be contributed to the Partnership by
the Managing General Partner as set forth in Section 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 Section 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 Section 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 Section 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 Section 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
34
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 (after deducting the
1% broker/dealer participation) to the receipt by Participants of cash
distributions from the Partnership equal to $2,500 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 wells have been
drilled, completed, and placed in production in a sales line;
(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) $2,500 per Unit (10% per Unit) in the first 12-month
period;
(b) $5,000 per Unit (20% per Unit) in the second 12-month
period;
(c) $7,500 per Unit (30% per Unit) in the third 12-month
period; or
(d) $10,000 per Unit (40% per Unit) in the fourth 12-month
period (no carry forward is required if such
distributions are less than $12,500 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) $2,500 per Unit (10% per Unit) in the first 12-month
period;
(b) $5,000 per Unit (20% per Unit) in the second 12-month
period;
(c) $7,500 per Unit (30% per Unit) in the third 12-month
period;
(d) $10,000 per Unit (40% per Unit) in the fourth 12-month
period; or
(e) $12,500 per Unit (50% per Unit) in the fifth 12-month
period.
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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 monthly
distribution, the Managing General Partner will not have any
subordination obligation if the distributions to Participants
equal $208.33 per Unit (8.33% of $2,500 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
(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 WELLS. The revenues
from all Partnership wells will be commingled, so regardless of when a
Participant subscribes he will share in the revenues from all wells 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 Section 5.01(b)(4), shall be
allocated among the Participants, including the Managing General Partner to the
extent of any optional subscription under Section 3.03(b)(2), in the ratio of
their respective Units based on $25,000 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 Section 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 Wells 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.
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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. Section 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 Section 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
Section 752 of the Code; and
(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. Section 1.704-l(b)(2)(iv)(g),
but excluding income and gain described in Treas. Reg. Section
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 Section 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 Section 752 of the
Code;
(vi) allocations to him of Partnership expenditures described in
Section 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.
Section 1.704-l(b)(2)(iv)(g), but excluding items described in
(vi) above, and loss or deduction described in Treas. Reg.
Section 1.704-l(b)(4)(i) or (iii).
5.02(b)(2). EXCEPTION. If Treas. Reg. Section 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 Section
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 Section
704 and other provisions of the Code and the related rules, regulations and
interpretations as may exist from time to time.
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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
Section 704(c) of the Code and the regulations thereunder, on the Partnership's
books, in accordance with Treas. Reg. Section 1.704-l(b)(2)(iv)(f).
5.02(f). AMOUNT OF BOOK ITEMS. In cases where Section 704(c) of the Code or
Section 5.02(e) applies, Capital Accounts shall be adjusted in accordance with
Treas. Reg. Section 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 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 Section 5.01(b) and its subsections.
5.03(b). TAX BASIS OF EACH PROPERTY. Subject to Section 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 Section 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 Section 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 Sections 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 Private Placement Memorandum, 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
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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
Sections 704(e)(2) and 706(d) of the Code and Treas. Reg.
Section 1.751-1(b)(2)(ii); and
(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. Section 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.
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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). SECTION 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 Sections 734 and 743 of
the Code.
5.05. DISTRIBUTIONS.
5.05(a). IN GENERAL.
5.05(a)(1). MONTHLY REVIEW OF ACCOUNTS. The Managing General Partner shall
review the accounts of the Partnership at least monthly to determine whether
cash distributions are appropriate and the amount to be distributed, if any.
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.
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 Section 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.
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ARTICLE VI
TRANSFER OF INTERESTS
6.01. TRANSFERABILITY.
6.01(a). IN GENERAL.
6.01(a)(1). CONSENT REQUIRED. In addition to other restrictions on
transferability provided in this Agreement, Units shall be nontransferable
except transfers to or with the written consent of the Managing General Partner.
6.01(a)(2). 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.
6.01(b). CONVERSION OF INVESTOR GENERAL PARTNER UNITS TO LIMITED PARTNER UNITS.
6.01(b)(1). AUTOMATIC CONVERSION. After all of the Partnership Wells have been
drilled and completed, as determined by the Managing General Partner, 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 Section 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) except as provided by operation of law 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 Sections 6.02(a)(1) and 6.02(a)(2).
41
6.02(a)(1). TAX LAW RESTRICTIONS. Subject to transfers permitted by Section 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 Section 708 of the Code; or
(ii) treated as a "publicly-traded" partnership for purposes of
Section 469(k) of the Code.
6.02(a)(2). SECURITIES LAWS RESTRICTION. Subject to transfers permitted by
Section 6.04 and transfers by operation of law, no Unit shall be sold, assigned,
pledged, hypothecated, or transferred unless there is either:
(i) an effective registration of the Unit under the Securities Act
of 1933, as amended, and qualification under applicable state
securities laws; or
(ii) an opinion of counsel acceptable to the Managing General Partner
that the registration and qualification of the Unit is not
required.
Transfers are also subject to any conditions contained in the Subscription
Agreement and Annex A to the Subscription Agreement.
6.02(a)(3). SUBSTITUTE PARTICIPANT.
6.02(a)(3)(a). PROCEDURE TO BECOME SUBSTITUTE PARTICIPANT. Subject to Sections
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 Managing General Partner consents to the substitution, which
shall be in the Managing General Partner's absolute discretion;
(iii) the assignee pays to the Partnership all costs and expenses
incurred in connection with the substitution; and
(iv) 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.
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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 Section 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.
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% of the
Partnership's subscription proceeds, the Managing General Partner may withdraw a
property interest in the form of a Working Interest in the Partnership's wells
equal to or less than its revenue interest without the consent of the
Participants.
6.04. PRESENTMENT.
6.04(a). IN GENERAL. Participants shall have the right to present their Units 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. If a Participant elects to present his Units
to the Managing General Partner for purchase, the Managing General Partner is
not required to pay the presentment price in cash. The Managing General Partner,
in its discretion, may offer the Participant other consideration which the
Participant has the option of accepting in exchange for his Units or rejecting
and keeping his Units.
The Managing General Partner shall not be obligated to purchase more than 10% of
the Units in any calendar year and this 10% 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 in 2009 subject to the following conditions:
(i) the presentment must be made within 120 days of the reserve
report set forth in Section 4.03(b)(3), a summary of which shall
be provided to a Participant, but only in connection with the
presentment as set forth in Section 6.04(b);
(ii) in accordance with Treas. Reg. Section 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
Participant:
43
(a) receives the information concerning his interest in the
net revenues;
(b) agrees to the presentment price; and
(c) has been paid in cash or other consideration.
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. Beginning in 2007 and every other year thereafter, the reserve
computations shall be reviewed by an Independent Expert.
However, until the Participant requests the Managing General Partner to purchase
his Units, the Managing General Partner shall not provide a Participant
information concerning the Partnership's Proved Reserves, the present worth of
future net revenues attributable to the Partnership's Proved Reserves, and the
Participant's interest in the present worth of the Partnership's future net
revenues. The calculation of the presentment price shall be as set forth in
Section 6.04(c).
At the time of the presentment, but not before, 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.
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:
(i) an amount based on 70% of the present worth of future net
revenues from the Proved Reserves determined as described in
Section 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:
44
(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:
(i) does not have sufficient cash flow; or
(ii) is unable to arrange financing or other consideration 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
45
(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 Section 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, but may
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:
(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:
46
(i) in writing; and
(ii) given by mail or wire addressed to the party to receive the
notice at the address designated in Section 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 Section 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 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.
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.
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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 do any or all of the following:
(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/ Frank P. Carolas
------------------------------------------
Frank P. Carolas, Executive Vice President
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