EXHIBIT 4.2
-----------
AMENDED AND RESTATED CERTIFICATE
AND
AGREEMENT OF LIMITED PARTNERSHIP
FOR
ATLAS AMERICA SERIES 26-2005 L.P.
DATED AUGUST 25, 2005
TABLE OF CONTENTS
SECTION NO. DESCRIPTION PAGE SECTION NO. DESCRIPTION PAGE
I. FORMATION VII. DURATION, DISSOLUTION, AND
1.01 Formation..................................1 WINDING UP
1.02 Certificate of Limited Partnership.........1 7.01 Duration..................................47
1.03 Name, Principal Office and Residence.......1 7.02 Dissolution and Winding Up................47
1.04 Purpose....................................1
VIII. MISCELLANEOUS PROVISIONS
II. DEFINITION OF TERMS 8.01 Notices...................................48
2.01 Definitions................................2 8.02 Time......................................49
8.03 Applicable Law............................49
III. SUBSCRIPTIONS AND FURTHER CAPITAL CONTRIBUTIONS 8.04 Agreement in Counterparts.................49
3.01 Designation of Managing General Partner 8.05 Amendment.................................49
and Participants.....................11 8.06 Additional Partners.......................49
3.02 Participants..............................11 8.07 Legal Effect..............................49
3.03 Subscriptions to the Partnership..........12
3.04 Capital Contributions of the Managing EXHIBITS
General Partner...........................13
3.05 Payment of Subscriptions..................14 EXHIBIT (I-A) - Managing General Partner
3.06 Partnership Funds.........................14 Signature Page for Atlas
America Series 26-2005 L.P.
IV. CONDUCT OF OPERATIONS
4.01 Acquisition of Leases.....................15 EXHIBIT (I-B) - Subscription Agreement for
4.02 Conduct of Operations.....................17 Atlas America Series 26-2005
4.03 General Rights and Obligations of the L.P.
Participants and Restricted and
Prohibited Transactions...................20 EXHIBIT (II) - Drilling and Operating
4.04 Designation, Compensation and Agreement for Atlas America
Removal of Managing General Series 26-2005 L.P.
Partner and Removal of Operator.......28
4.05 Indemnification and Exoneration...........31
4.06 Other Activities..........................33
V. PARTICIPATION IN COSTS AND REVENUES,
CAPITAL ACCOUNTS, ELECTIONS AND
DISTRIBUTIONS
5.01 Participation in Costs and Revenues.......34
5.02 Capital Accounts and Allocations
Thereto...............................37
5.03 Allocation of Income, Deductions and
Credits...............................39
5.04 Elections.................................40
5.05 Distributions.............................41
VI. TRANSFER OF INTERESTS
6.01 Transferability...........................42
6.02 Special Restrictions on Transfers.........43
6.03 Right of Managing General
Partner to Hypothecate and/or
Withdraw Its Interests....................44
6.04 Presentment...............................45
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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 26-2005 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 August 25, 2005, 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 26-2005 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 110 S. Poplar Street, Suite 101,
Wilmington, Delaware 19801.
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
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(ii) cause the Partnership to engage in activities outside the stated
business purposes of the Partnership through joint ventures with
other entities.
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 ss.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. "Capital Account" or "account" means the account established for
each party, maintained as provided in ss.5.02 and its subsections.
10. "Capital Contribution" means the amount agreed to be contributed
to the Partnership by a Partner pursuant to ss.ss.3.04 and 3.05
and their subsections.
11. "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.
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12. "Code" means the Internal Revenue Code of 1986, as amended.
13. "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.
14. "Dealer-Manager" means Anthem Securities, Inc., an Affiliate of
the Managing General Partner, the broker/dealer which will manage
the offering and sale of the Units.
15. "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.
16. "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 ss.4.03(d)(7) or pursuant to the
Managing General Partner's role as Tax Matters Partner.
17. "Distribution Interest" means an undivided interest in the
Partnership's assets after payments to the Partnership's creditors
or the creation of a reasonable reserve therefor, in the ratio the
positive balance of a party's Capital Account bears to the
aggregate positive balance of the Capital Accounts of all of the
parties determined after taking into account all Capital Account
adjustments for the taxable year during which liquidation occurs
(other than those made pursuant to liquidating distributions or
restoration of deficit Capital Account balances). Provided,
however, after the Capital Accounts of all of the parties have
been reduced to zero, the interest in the remaining Partnership
assets shall equal a party's interest in the related Partnership
revenues as set forth in ss.5.01 and its subsections of this
Agreement.
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18. "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).
19. "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.
20. "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.
21. "Final Terminating Event" means any one of the following:
(i) the expiration of the Partnership's fixed term;
(ii) notice to the Participants by the Managing General Partner
of its election to terminate the Partnership's affairs;
(iii) notice by the Participants to the Managing General Partner
of their similar election through the affirmative vote of
Participants whose Units equal a majority of the total
Units; or
(iv) the termination of the Partnership under ss.708(b)(1)(A)
of the Code or the Partnership ceases to be a going
concern.
22. "Horizon" means a zone of a particular formation; that part of a
formation of sufficient porosity and permeability to form a
petroleum reservoir.
23. "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.
24. "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.
25. "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:
(i) all expenditures made for any well before production in
commercial quantities for wages, fuel, repairs, hauling,
supplies and other costs and expenses incident to and
necessary for drilling the well and preparing the well for
production of natural gas or oil, that are currently
deductible pursuant to Section 263(c) of the Code and
Treasury Reg. Section 1.612-4, and are generally termed
"intangible drilling and development costs,"
(ii) the expense of plugging and abandoning any well before a
completion attempt; and
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(iii) the costs (other than Tangible Costs and Lease costs) to
re-enter and deepen an existing well, complete the well to
deeper reservoirs, or plug and abandon the well if it is
nonproductive from the targeted deeper reservoirs.
26. "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.
27. "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
ss.3.03(b)(2).
All Investor General Partners shall be of the same class and have
the same rights.
28. "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.
29. "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.
30. "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 ss.3.03(b)(2);
(iii) the Investor General Partners on the conversion of their
Investor General Partner Units to Limited Partner Units
pursuant to ss.6.01(b); and
(iv) any other persons who are admitted to the Partnership as
additional or substituted Limited Partners.
Except as provided in ss.3.05(b), with respect to the required
additional Capital Contributions of Investor General Partners, all
Limited Partners shall be of the same class and have the same
rights.
31. "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.
32. "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.
33. "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 ss.3.03(c)(1) have been received and
accepted by the Managing General Partner.
34. "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, but do not
include the costs to re-enter and deepen an existing well,
complete the well to deeper formations or reservoirs, or plug and
abandon the well if it is nonproductive from the targeted deeper
formations or reservoirs.
35. "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.
36. "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.
37. "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.
38. "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.
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39. "Participants" means:
(i) the Managing General Partner to the extent of its optional
subscription under ss.3.03(b)(2);
(ii) the Limited Partners; and
(iii) the Investor General Partners.
40. "Partners" means:
(i) the Managing General Partner;
(ii) the Investor General Partners; and
(iii) the Limited Partners.
41. "Partnership" means Atlas America Series 26-2005 L.P.
42. "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.
43. "Partnership Well" means a well, some portion of the revenues from
which is received by the Partnership.
44. "Person" means a natural person, partnership, corporation,
association, trust or other legal entity.
45. "Private Placement Memorandum" means the offering document dated
July 15, 2005, as amended or supplemented from time to time, by
which the Units are offered and sold.
46. "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.
47. "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.
48. "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.
49. "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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50. "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.
51. "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.
52. "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.
53. "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.
54. "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 2.5% 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.
55. "Selling Agents" means those broker/dealers selected by the
Dealer-Manager which will participate in the offer and sale of the
Units.
56. "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.
57. "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.
58. "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;
(ii) the costs (other than Intangible Drilling Costs and Lease
costs) to re-enter and deepen an existing well, complete
the well to deeper reservoirs, or plug and abandon the
well if it is nonproductive from the targeted deeper
reservoirs; and
(iii) 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.
59. "Tax Matters Partner" means the Managing General Partner.
60. "Units" or "Units of Participation" means Limited Partner
interests and Investor General Partner interests, which will be
converted to Limited Partner Units as set forth in ss.6.01(b),
purchased by Participants in the Partnership under the provisions
of ss.3.03 and its subsections, including any rights to profits,
losses, income, gain, credits, deductions, cash distributions or
returns of capital or other attributes of the Units.
61. "Working Interest" means an interest in a Lease which is subject
to some portion of the cost of development, operation, or
maintenance of the Lease.
ARTICLE III
SUBSCRIPTIONS AND FURTHER CAPITAL CONTRIBUTIONS
3.01. DESIGNATION OF MANAGING GENERAL PARTNER AND PARTICIPANTS. Atlas shall
serve as Managing General Partner of the Partnership. Atlas shall further serve
as a Participant to the extent of any subscription made by it pursuant to
ss.3.03(b)(2).
Limited Partners and Investor General Partners, including Affiliates of the
Managing General Partner, shall serve as Participants.
3.02. PARTICIPANTS.
3.02(a). LIMITED PARTNER AT FORMATION. Atlas America, Inc., as Original Limited
Partner, has acquired one Unit and has made a Capital Contribution of $100. On
the admission of one or more Limited Partners, the Partnership shall return to
the Original Limited Partner its Capital Contribution and shall reacquire its
Unit. The Original Limited Partner shall then cease to be a Limited Partner in
the Partnership with respect to the Unit.
3.02(b). OFFERING OF INTERESTS. The Partnership is authorized to admit to the
Partnership at the Initial Closing Date, any Interim Closing Date(s), and the
Offering Termination Date additional Participants whose Subscription Agreements
are accepted by the Managing General Partner if, after the admission of the
additional Participants, the total Units do not exceed the maximum number of
Units set forth in ss.3.03(c)(1).
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 in an interest-bearing account or accounts
by an independent escrow holder and shall not be released to the Partnership
until the receipt of the minimum amount of subscription proceeds set forth in
ss.3.03(c)(2). Thereafter, subscriptions may be paid directly to the Partnership
account.
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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. 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 2.5%
Dealer-Manager fee, the 7% 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 7%
Sales Commission, which shall not be paid with respect to
these sales.
No more than 10% of the total Units shall be sold with the discounts described
above.
3.03(a)(2). EFFECT OF SUBSCRIPTION. Execution of a Subscription Agreement
shall serve as an agreement by the Participant to be bound by
each and every term of this Agreement.
3.03(b). SUBSCRIPTIONS BY MANAGING GENERAL PARTNER.
3.03(b)(1). MANAGING GENERAL PARTNER'S REQUIRED SUBSCRIPTION. The Managing
General Partner, as a general partner and not as a
Participant, shall:
(i) contribute to the Partnership the Leases which will be
drilled by the Partnership on the terms set forth in
ss.4.01(a)(4); and
(ii) pay the costs or make the required contributions charged
to it under this Agreement.
These Capital Contributions shall be paid or made by the Managing General
Partner at the time the costs are required to be paid by the Partnership, but no
later than December 31, 2006.
3.03(b)(2). MANAGING GENERAL PARTNER'S OPTIONAL ADDITIONAL SUBSCRIPTION. In
addition to the Managing General Partner's required subscription under
ss.3.03(b)(1), the Managing General Partner may subscribe for Units under the
provisions of ss.3.03(a) and its subsections up to the minimum subscriptions
which are required under ss.3.03(c)(2) for the Partnership to begin operations,
and, subject to the limitations on voting rights set forth in ss.4.03(c)(3), to
that extent shall be deemed a Participant in the Partnership for all purposes
under this Agreement.
3.03(b)(3). EFFECT OF AND EVIDENCING SUBSCRIPTION. The Managing General Partner
has executed a Managing General Partner Signature Page which:
(i) evidences the Managing General Partner's required
subscription under ss.3.03(b)(1); and
(ii) may be amended to reflect the amount of any optional
subscription under ss.3.03(b)(2).
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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
1,400 Units, which is up to $35,000,000 of cash subscription proceeds excluding
the subscription discounts permitted under ss.3.03(a)(1).
3.03(c)(2). MINIMUM NUMBER OF UNITS. The minimum number of Units shall equal at
least 80 Units, but in any event not less than that number of Units which
provides the Partnership with cash subscription proceeds of $2,000,000,
excluding the subscription discounts permitted under ss.3.03(a)(1). Pursuant to
ss.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 ss.3.03(c)(1) to the extent paid in cash
and after the discounts permitted under ss.3.03(a)(1).
If subscriptions for the minimum number of Units have not been received and
accepted at the Offering Termination Date, 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.
3.03(d). ACCEPTANCE OF SUBSCRIPTIONS.
3.03(d)(1). DISCRETION BY THE MANAGING GENERAL PARTNER. Acceptance of
subscriptions is discretionary with the Managing General Partner. The Managing
General Partner may reject any subscription for any reason it deems appropriate.
3.03(d)(2). TIME PERIOD IN WHICH TO ACCEPT SUBSCRIPTIONS. Subscriptions shall be
accepted or rejected by the Partnership within 30 days of their receipt. If a
subscription is rejected, then all funds shall be returned to the subscriber
promptly.
3.03(d)(3). ADMISSION TO THE PARTNERSHIP. The Participants shall be admitted to
the Partnership as follows:
(i) not later than 15 days after the release from escrow of
Participants' funds to the Partnership; and
(ii) after the close of the escrow account not later than the
last day of the calendar month in which their Subscription
Agreements were accepted by the Partnership.
3.04. CAPITAL CONTRIBUTIONS OF THE MANAGING GENERAL PARTNER.
3.04(a). MINIMUM AMOUNT OF MANAGING GENERAL PARTNER'S REQUIRED CONTRIBUTION. The
Managing General Partner is required to:
(i) make aggregate Capital Contributions to the Partnership,
including Leases contributed under ss.3.03(b)(1)(i), of
not less than 25% of all Capital Contributions to the
Partnership; and
(ii) maintain a minimum Capital Account balance equal to not
less than 1% of total positive Capital Account balances
for the Partnership.
3.04(b). ON LIQUIDATION THE MANAGING GENERAL PARTNER MUST CONTRIBUTE DEFICIT
BALANCE IN ITS CAPITAL ACCOUNT. The Managing General Partner shall contribute to
the Partnership any deficit balance in its Capital Account on the occurrence of
either of the following events:
(i) the liquidation of the Partnership; or
(ii) the liquidation of the Managing General Partner's interest
in the Partnership.
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This shall be determined after taking into account all adjustments for the
Partnership's taxable year during which the liquidation occurs, other than
adjustments made pursuant to this requirement, by the end of the taxable year in
which its interest in the Partnership is liquidated or, if later, within 90 days
after the date of the liquidation.
3.04(c). INTEREST FOR CONTRIBUTIONS. The interest of the Managing General
Partner, as Managing General Partner and not as a Participant, in the capital
and revenues of the Partnership is fully vested and nonforfeitable as of the
date of the formation of the Partnership and 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 ss.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
ss.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 Pennsylvania.
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 ss.6.01(b).
3.05(b)(3). DEFAULT PROVISIONS. The failure of an Investor General Partner to
timely make a required additional Capital Contribution under this section
results in his personal liability to the other Investor General Partners for the
amount in default. The remaining Investor General Partners, 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.
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3.06(b). SPECIAL ACCOUNT AFTER THE RECEIPT OF THE MINIMUM PARTNERSHIP
SUBSCRIPTIONS. Following the receipt of the minimum number of Units and breaking
escrow, the funds of the Partnership shall be held in a separate
interest-bearing account maintained for the Partnership and shall not be
commingled with funds of any other entity.
3.06(c). INVESTMENT.
3.06(c)(1). INVESTMENTS IN OTHER ENTITIES. Partnership funds may not be invested
in the securities of another person except in the following instances:
(i) investments in Working Interests or undivided Lease
interests made in the ordinary course of the Partnership's
business;
(ii) temporary investments made as set forth in ss.3.06(c)(2);
(iii) multi-tier arrangements meeting the requirements of
ss.4.03(d)(15);
(iv) investments involving less than 5% of the Partnership's
subscription proceeds which are a necessary and incidental
part of a property acquisition transaction; and
(v) investments in entities established solely to limit the
Partnership's liabilities associated with the ownership or
operation of property or equipment, provided that
duplicative fees and expenses shall be prohibited.
3.06(c)(2). PERMISSIBLE INVESTMENTS BEFORE INVESTMENT IN PARTNERSHIP ACTIVITIES.
After the Initial Closing Date and until proceeds from the offering are invested
in the Partnership's operations, the proceeds may be temporarily invested in
income producing short-term, highly liquid investments, in which there is
appropriate safety of principal, such as U.S. Treasury Bills.
ARTICLE IV
CONDUCT OF OPERATIONS
4.01. ACQUISITION OF LEASES.
4.01(a). ASSIGNMENT TO PARTNERSHIP.
4.01(a)(1). IN GENERAL. The Managing General Partner shall select, acquire and
assign or cause to have assigned to the Partnership full or partial interests in
Leases, by any method customary in the natural gas and oil industry, subject to
the terms and conditions set forth below.
The Partnership shall acquire only Leases reasonably expected to meet the stated
purposes of the Partnership. No Leases shall be acquired for the purpose of a
subsequent sale, Farmout, or other disposition unless the acquisition is made
after a well has been drilled to a depth sufficient to indicate that the
acquisition would be in the Partnership's best interest.
4.01(a)(2). FEDERAL AND STATE LEASES. The Partnership is authorized to acquire
Leases on federal and state lands.
4.01(a)(3). MANAGING GENERAL PARTNER'S DISCRETION AS TO TERMS AND BURDENS OF
ACQUISITION. Subject to the provisions of ss.4.03(d) and its subsections, the
acquisitions of Leases or other property may be made under any terms and
obligations, including:
(i) any limitations as to the Horizons to be assigned to the
Partnership; and
(ii) subject to any burdens as the Managing General Partner
deems necessary in its sole discretion.
4.01(a)(4). COST OF LEASES. All Leases shall be:
(i) contributed to the Partnership by the Managing General
Partner or its Affiliates; and
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(ii) credited towards the Managing General Partner's required
Capital Contribution set forth in ss.3.03(b)(1) at the
Cost of the Lease, unless the Managing General Partner has
cause to believe that Cost is materially more than the
fair market value of the property, in which case the
credit for the contribution must be made at a price not in
excess of the fair market value.
A determination of fair market value must be:
(i) supported by an appraisal from an Independent Expert; and
(ii) maintained in the Partnership's records for six years
along with associated supporting information.
4.01(a)(5). THE MANAGING GENERAL PARTNER, OPERATOR OR THEIR AFFILIATES' RIGHTS
IN THE REMAINDER INTERESTS. Subject to the provisions of ss.4.03(d) and its
subsections, to the extent the Partnership does not acquire a full interest in a
Lease from the Managing General Partner or its Affiliates, the remainder of the
interest in the Lease may be held by the Managing General Partner or its
Affiliates. They may either:
(i) retain and exploit the remaining interest for their own
account; or
(ii) sell or otherwise dispose of all or a part of the
remaining interest.
Profits from the exploitation and/or disposition of their retained interests in
the Leases shall be for the benefit of the Managing General Partner or its
Affiliates to the exclusion of the Partnership.
4.01(a)(6). NO BREACH OF DUTY. Subject to the provisions of ss.4.03 and its
subsections, acquisition of Leases from the Managing General Partner, the
Operator or their Affiliates shall not be considered a breach of any obligation
owed by them to the Partnership or the Participants.
4.01(b). NO OVERRIDING ROYALTY INTERESTS. Neither the Managing General Partner,
the Operator nor any Affiliate shall retain any Overriding Royalty Interest on
the Leases acquired by the Partnership.
4.01(c). TITLE AND NOMINEE ARRANGEMENTS.
4.01(c)(1). LEGAL TITLE. Legal title to all Leases acquired by the Partnership
shall be held on a permanent basis in the name of the Partnership. However,
Partnership properties may be held temporarily in the name of:
(i) the Managing General Partner;
(ii) the Operator;
(iii) their Affiliates; or
(iv) in the name of any nominee designated by the Managing
General Partner to facilitate the acquisition of the
properties.
4.01(c)(2). MANAGING GENERAL PARTNER'S DISCRETION. The Managing General Partner
shall take the steps which are necessary in its best judgment to render title to
the Leases to be acquired by the Partnership acceptable for the purposes of the
Partnership. The Managing General Partner shall be free, however, to use its own
best judgment in waiving title requirements.
The Managing General Partner shall not be liable to the Partnership or to the
other parties for any mistakes of judgment; nor shall the Managing General
Partner be deemed to be making any warranties or representations, express or
implied, as to the validity or merchantability of the title to the Leases
assigned to the Partnership or the extent of the interest covered thereby except
as otherwise provided in the Drilling and Operating Agreement.
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.
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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 ss.4.03 and its
subsections, and to any authority which may be granted the Operator under
ss.4.02(c)(3)(b), the Managing General Partner shall have full authority to do
all things deemed necessary or desirable by it in the conduct of the business of
the Partnership. Without limiting the generality of the foregoing, the Managing
General Partner is expressly authorized to engage in:
(i) the making of all determinations of which Leases, 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 ss.4.03(d)(6);
(ix) the formation of any further limited or general
partnership, tax partnership, joint venture, or other
relationship which it deems desirable with any parties who
it, in its sole and absolute discretion, selects,
including any of its Affiliates;
(x) the control of any matters affecting the rights and
obligations of the Partnership, including:
(a) the employment of attorneys to advise and
otherwise represent the Partnership;
(b) the conduct of litigation and other incurring of
legal expense; and
(c) the settlement of claims and litigation;
(xi) the operation of producing 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 ss.4.03 and
its subsections, any transaction which the Managing General Partner is
authorized to enter into on behalf of the Partnership under the authority
granted in this section and its subsections, may be entered into by the Managing
General Partner with itself or with any other general partner, the Operator, or
any of their Affiliates.
4.02(d). ADDITIONAL POWERS. In addition to the powers granted the Managing
General Partner under ss.4.02(c) and its subsections or elsewhere in this
Agreement, the Managing General Partner, when specified, shall have the
following additional express powers.
4.02(d)(1). DRILLING CONTRACTS. All Partnership Wells shall be drilled under the
Drilling and Operating Agreement at Cost plus an unaccountable, fixed payment
reimbursement to the Managing General Partner of $15,000 per well for the
Participants' share of the Managing General Partner's general and administrative
overhead plus 15%.
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.
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4.02(e). BORROWINGS AND USE OF PARTNERSHIP REVENUES.
4.02(e)(1). POWER TO BORROW OR USE PARTNERSHIP REVENUES.
4.02(e)(1)(a). IN GENERAL. If additional funds over the Participants' Capital
Contributions are needed for Partnership operations, then the Managing General
Partner may:
(i) use Partnership revenues for such purposes; or
(ii) the Managing General Partner and its Affiliates may
advance to the Partnership the funds necessary under
ss.4.03(d)(8)(b), although they are not obligated to
advance the funds to the Partnership.
4.02(e)(1)(b). LIMITATION ON BORROWING. The borrowings, other than credit
transactions on open account customary in the industry to obtain goods and
services, shall be subject to the following limitations:
(i) the borrowings must be without recourse to the Investor
General Partners and the Limited Partners except as
otherwise provided in this Agreement; and
(ii) the amount that may be borrowed at any one time may not
exceed an amount equal to 5% of the Partnership's
subscription proceeds.
4.02(f). TAX MATTERS PARTNER.
4.02(f)(1). DESIGNATION OF TAX MATTERS PARTNER. The Managing General Partner is
hereby designated the Tax Matters Partner of the Partnership under 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:
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(i) they also subscribe to the Partnership as Investor General
Partners; or
(ii) in the case of the Managing General Partner, it purchases
Limited Partner Units.
4.03(a)(2). NO MANAGEMENT AUTHORITY OF PARTICIPANTS. Participants, other than
the Managing General Partner if it buys Units, shall have no power over the
conduct of the affairs of the Partnership. No Participant, other than the
Managing General Partner if it buys Units, shall take part in the management of
the business of the Partnership, or have the power to sign for or to bind the
Partnership.
4.03(b). REPORTS AND DISCLOSURES.
4.03(b)(1). ANNUAL REPORTS AND FINANCIAL STATEMENTS. Beginning with the 2005
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
2006 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. Notwithstanding the above, if the
Partnership sells Units to 500 or more Participants and receives and accepts
cash subscription proceeds exceeding $10 million, which the Partnership may do
in the Managing General Partner's sole discretion, it must register the Units
with the SEC under the Securities Exchange Act of 1934 ("Exchange Act"). This
would require the Partnership to comply with the reporting requirements of the
Exchange Act, including timely filing of quarterly reports on Form 10-Q, annual
reports on Form 10-K and current reports on Form 8-K, and would subject the
Partnership to other actions including, but not limited to, corporate governance
and disclosure requirements under the Sarbanes-Oxley Act of 2002. This would
increase the Partnership's Administrative Costs and Direct Costs, including
legal and accounting fees, which would be paid by the Participants and the
Managing General Partner as described in ss.5.01(a)(4). These additional
expenses also would include the costs of required annual audited financial
statements which would not otherwise be required under this Agreement.
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, 2007 and every year
thereafter, the Partnership shall provide to each Participant the following:
(i) a summary of the computation of the Partnership's total
oil and gas Proved Reserves;
(ii) a summary of the computation of the present worth of the
reserves determined using:
(a) a discount rate of 10%;
(b) a constant price for the oil;
(c) basing the price of gas on the existing gas
contracts; and
(iii) a statement of each Participant's interest in the
reserves.
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The reserve computations shall be based on engineering reports prepared by the
Managing General Partner and reviewed by an Independent Expert.
4.03(b)(4). COST OF REPORTS. The cost of all reports described in this
ss.4.03(b), including the additional required reports if the Units must be
registered with the SEC as described in ss.4.03(b)(1), shall be paid by the
Partnership as Direct Costs.
4.03(b)(5). PARTICIPANT ACCESS TO RECORDS. The Participants and/or their
representatives shall be permitted access to all Partnership records. The
Participant may inspect and copy any of the records after giving adequate notice
to the Managing General Partner at any reasonable time.
Notwithstanding the foregoing, the Managing General Partner may keep logs, well
reports, and other drilling and operating data confidential for reasonable
periods of time. The Managing General Partner may release information concerning
the operations of the Partnership to the sources that are customary in the
industry or required by rule, regulation, or order of any regulatory body.
4.03(b)(6). REQUIRED LENGTH OF TIME TO HOLD RECORDS. The Managing General
Partner must maintain and preserve during the term of the Partnership and for
six years thereafter all accounts, books and other relevant documents which
include:
(i) a record that a Participant meets the suitability
standards established in connection with an investment in
the Partnership; and
(ii) any appraisal of the fair market value of the Leases as
set forth in ss.4.01(a)(4) or fair market value of any
producing property as set forth in ss.4.03(d)(3).
4.03(b)(7). PARTICIPANT LIST. The following provisions apply regarding access to
a list of Participants:
(i) A current alphabetical list of the names, addresses, and
business telephone numbers of the Participants along with
the number of Units held by each of them (the "Participant
List") must be maintained as a part of the Partnership's
books and records and be available for inspection by any
Participant or his designated agent at the home office of
the Partnership on the Participant's request.
(ii) The purposes for which a Participant may request a copy of
the Participant List only include matters relating to
Participant's voting rights under this Agreement and the
exercise of Participants' rights under the federal proxy
laws.
(iii) The Managing General Partner shall require the Participant
requesting the Participant List to represent in writing
that the list was not requested for a commercial purpose
unrelated to the Participant's interest in the Partnership
and the Participant shall pay the costs of copying the
list. It shall be a defense in any action or proceeding
related to the Managing General Partner's refusal to
provide the Participant List to any Participant if the
Managing General Partner determines that the actual
purpose and reason for the Participant's request for
inspection or for a copy of the Participant List is to
secure the list of Participants or other information for
the purpose of selling the list or information or copies
of the list, or of using the same for a commercial purpose
other than in the interest of the applicant as a
Participant relative to the affairs of the Partnership.
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
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(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 the period needed 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 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 ss.4.03(c)(2)(ii) and (iv) above.
23
In determining the requisite percentage in interest of Units necessary to
approve any Partnership matter on which the Managing General Partner and its
Affiliates may not vote or consent, any Units owned by the Managing General
Partner and its Affiliates shall not be included.
4.03(c)(4). RESTRICTIONS ON LIMITED PARTNER VOTING RIGHTS. The exercise by the
Limited Partners of the rights granted Participants under ss.4.03(c), except for
the special voting rights granted Participants under ss.4.03(c)(2), shall be
subject to the prior legal determination that the grant or exercise of the
powers will not adversely affect the limited liability of Limited Partners.
Notwithstanding the foregoing, if in the opinion of counsel to the Partnership
the legal determination is not necessary under Delaware law to maintain the
limited liability of the Limited Partners, then it shall not be required. A
legal determination under this paragraph may be made either pursuant to:
(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, Greene County and Westmoreland County,
Pennsylvania within at least 1,000 feet from a producing
well, although the 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 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.
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This section does not prevent the Managing General Partner or its Affiliates
from subsequently dealing with their retained interest as they may choose with
unaffiliated parties or Affiliated partnerships.
4.03(d)(3). LIMITATIONS ON SALE OF UNDEVELOPED AND DEVELOPED LEASES TO THE
MANAGING GENERAL PARTNER. Other than another Program managed by the Managing
General Partner and its Affiliates as set forth in ss.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 ss.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:
(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.
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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;
(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.
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4.03(d)(11). FUTURE PRODUCTION. Neither the Managing General Partner nor any
Affiliate shall commit the future production of a well developed by the
Partnership exclusively for its own benefit.
4.03(d)(12). MARKETING ARRANGEMENTS. Subject to ss.4.06(c), all benefits from
marketing arrangements or other relationships affecting the property of the
Managing General Partner or its Affiliates and the Partnership shall be fairly
and equitably apportioned according to the respective interests of each in the
property. The Managing General Partner shall treat all 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, each seller of natural gas
and oil in a given area will be paid a weighted average selling price for all
natural gas and oil sold 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.
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
27
(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 ss.ss.4.03(c)(1) and 4.03(c)(2) of this
Agreement. If the Roll-Up Entity is a corporation, then the democracy rights of
Participants shall correspond to the democracy rights provided for in this
Agreement to the greatest extent possible.
4.03(d)(16)(d). NO ROLL-UP IF ACCUMULATION OF SHARES WOULD BE IMPEDED. The
Partnership shall not participate in any proposed Roll-Up transaction which
includes provisions which would operate to materially impede or frustrate the
accumulation of shares by any purchaser of the securities of the Roll-Up Entity,
except to the minimum extent necessary to preserve the tax status of the Roll-Up
Entity.
The Partnership shall not participate in any proposed Roll-Up transaction which
would limit the ability of a Participant to exercise the voting rights of its
securities of the Roll-Up Entity on the basis of the number of Units held by
that Participant.
4.03(d)(16)(e). NO ROLL-UP IF ACCESS TO RECORDS WOULD BE LIMITED. The
Partnership shall not participate in a Roll-Up in which Participants' rights of
access to the records of the Roll-Up Entity would be less than those provided
for under ss.ss.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.
4.04. DESIGNATION, COMPENSATION AND REMOVAL OF MANAGING GENERAL PARTNER AND
REMOVAL OF OPERATOR.
4.04(a). MANAGING GENERAL PARTNER.
4.04(a)(1). TERM OF SERVICE. Atlas shall serve as the Managing General Partner
of the Partnership until either it:
(i) is removed pursuant to ss.4.04(a)(3); or
(ii) withdraws pursuant to ss.4.04(a)(3)(f).
4.04(a)(2). COMPENSATION OF MANAGING GENERAL PARTNER. In addition to the
compensation set forth in ss.ss.4.01(a)(4) and 4.02(d)(1), the Managing General
Partner shall receive the compensation set forth in ss.ss.4.04(a)(2)(b) through
4.04(a)(2)(g).
4.04(a)(2)(a). CHARGES MUST BE NECESSARY AND REASONABLE. Charges by the Managing
General Partner for goods and services must be fully supportable as to:
(i) the necessity of the goods and services; and
28
(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 natural 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 natural gas production is gathered and transported 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 and
transporting the natural gas. If the Partnership's natural gas production is
gathered and transported through a gathering system owned by the Managing
General Partner or its Affiliates other than Atlas Pipeline Partners, then the
Managing General Partner or its Affiliates shall receive, or retain in the case
of the Managing General Partner, the gathering fee paid to the Managing General
Partner. Also, in the Mississippian and Devonian Shale Reservoirs in Anderson,
Campbell, Morgan, Roane and Scott Counties, Tennessee, if the Coalfield Pipeline
does not have sufficient capacity to compress and transfer the natural gas
produced from the Partnership's wells as determined by Atlas America, then Atlas
America or an Affiliate other than Atlas Pipeline Partners may construct an
additional gathering system and/or enhancements to the Coalfield Pipeline. On
completion of the construction, Atlas America will transfer its ownership in the
additional gathering system and/or enhancements to the owners of the Coalfield
Pipeline, which will then pay Atlas America an amount equal to $.12 per mcf of
natural gas transported through the newly constructed and/or enhanced gathering
system. Coalfield Pipeline will charge this $.12 per mcf to the Partnership in
addition to the rate that it is charging at that time. As of the date of the
Private Placement Memorandum, Coalfield Pipeline was charging $.55 per mcf for
transportation plus fees for compression.
4.04(a)(2)(e). DEALER-MANAGER FEE. Subject to ss.3.03(a)(1), the Dealer-Manager
shall receive on each Unit sold:
(i) a 2.5% Dealer-Manager fee;
(ii) a 7% 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 (including Units
sold at discounted prices) each shall share in payments from the Managing
General Partner in an amount equal to 1% of the Partnership Net Production
Revenues. 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.
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4.04(a)(2)(f). DRILLING AND OPERATING AGREEMENT. The Managing General Partner
and its Affiliates shall receive compensation as set forth in the Drilling and
Operating Agreement.
4.04(a)(2)(g). OTHER TRANSACTIONS. The Managing General Partner and its
Affiliates may enter into transactions pursuant to ss.4.03(d)(7) with the
Partnership and shall be entitled to compensation under 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
ss.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 to
calculate the presentment price in the most recent presentment offer under
ss.6.04, if any.
The cost of the appraisal shall be borne equally by the removed Managing General
Partner and the Partnership.
4.04(a)(3)(c). INCOMING MANAGING GENERAL PARTNER'S OPTION TO PURCHASE. The
incoming Managing General Partner shall have the option to purchase 20% of the
removed Managing General Partner's interest in the Partnership as Managing
General Partner, and not as a Participant, for the value determined by the
Independent Expert.
4.04(a)(3)(d). METHOD OF PAYMENT. The method of payment for the removed Managing
General Partner's interest must be fair and protect the solvency and liquidity
of the Partnership. The method of payment shall be as follows:
(i) when the termination is voluntary, the method of payment
shall be a non-interest bearing unsecured promissory note
with principal payable, if at all, from distributions
which the Managing General Partner otherwise would have
received under the Partnership Agreement had the Managing
General Partner not been terminated; and
(ii) when the termination is involuntary, the method of payment
shall be an interest bearing promissory note coming due in
no less than five years with equal installments each year.
The interest rate shall be that charged on comparable
loans.
4.04(a)(3)(e). TERMINATION OF CONTRACTS. At the time of its removal the removed
Managing General Partner 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.
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Notwithstanding any other provision in this Agreement, the Partnership or the
successor Managing General Partner shall not:
(i) be a party to any natural gas supply agreement that the
Managing General Partner or its Affiliates enters into
with a third-party;
(ii) have any rights pursuant to such natural gas supply
agreement; or
(iii) receive any interest in the Managing General Partner's and
its Affiliates' pipeline or gathering system or
compression facilities.
4.04(a)(3)(f). THE MANAGING GENERAL PARTNER'S RIGHT TO VOLUNTARILY WITHDRAW. At
any time beginning 10 years after the Offering Termination Date and the
Partnership's primary drilling activities, the Managing General Partner may
voluntarily withdraw as Managing General Partner on giving 120 days' written
notice of withdrawal to the Participants. If the Managing General Partner
withdraws, then the following conditions shall apply:
(i) the Managing General Partner's interest in the Partnership
shall be determined as described in ss.4.04(a)(3)(b) above
with respect to removal; and
(ii) the interest shall be distributed to the Managing General
Partner as described in ss.4.04(a)(3)(d)(i) above.
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 ss.6.03. If the
Managing General Partner withdraws an interest, then the Managing General
Partner shall:
(i) pay the expenses of withdrawing; and
(ii) fully indemnify the Partnership against any additional
expenses which may result from a partial withdrawal of its
interests, including insuring that a greater amount of
Direct Costs or Administrative Costs is not allocated to
the Participants.
4.04(a)(4). REMOVAL OF OPERATOR. The Operator may be removed and a new Operator
may be substituted at any time on 60 days advance written notice to the outgoing
Operator by the Managing General Partner acting on behalf of the Partnership on
the affirmative vote of Participants whose Units equal a majority of the total
Units.
The Operator shall not be removed until a substituted Operator has been selected
by an affirmative vote of Participants whose Units equal a majority of the total
Units and installed as such.
4.05. INDEMNIFICATION AND EXONERATION.
4.05(a)(1). STANDARDS FOR THE MANAGING GENERAL PARTNER NOT INCURRING LIABILITY
TO THE PARTNERSHIP OR PARTICIPANTS. The Managing General Partner, the Operator,
and their Affiliates shall not have any liability whatsoever to the Partnership,
or to any Participant, for any loss suffered by the Partnership or Participants
which arises out of any action or inaction of the Managing General Partner, the
Operator, or their Affiliates if:
(i) the Managing General Partner, the Operator, and their
Affiliates determined in good faith that the course of
conduct was in the best interest of the Partnership;
(ii) the Managing General Partner, the Operator, and their
Affiliates were acting on behalf of, or performing
services for, the Partnership; and
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(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) the Partnership's tangible net assets, which includes
revenues from operations; and
(ii) any insurance proceeds received by the Partnership.
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:
(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.
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The Partnership shall not bear the cost of that portion of insurance which
insures the Managing General Partner, the Operator, or their Affiliates for any
liability for which they could not be indemnified pursuant to ss.ss.4.05(a)(1)
and 4.05(a)(2).
4.05(b). LIABILITY OF PARTNERS. Under the Delaware Revised Uniform Limited
Partnership Act, the Investor General Partners are liable jointly and severally
for all liabilities and obligations of the Partnership. Notwithstanding the
foregoing, as among themselves, the Investor General Partners agree that each
shall be solely and individually responsible only for his pro rata share of the
liabilities and obligations of the Partnership based on his respective number of
Units.
In addition, the Managing General Partner agrees to use its corporate assets to
indemnify each of the Investor General Partners against all Partnership related
liabilities which exceed the Investor General Partner's interest in the
undistributed net assets of the Partnership and insurance proceeds, if any.
Further, the Managing General Partner agrees to indemnify each Investor General
Partner against any personal liability as a result of the unauthorized acts of
another Investor General Partner.
If the Managing General Partner provides indemnification, then each Investor
General Partner who has been indemnified shall transfer and subrogate his rights
for contribution from or against any other Investor General Partner to the
Managing General Partner.
4.05(c). ORDER OF PAYMENT OF CLAIMS. Claims shall be paid as follows:
(i) first, out of any insurance proceeds;
(ii) second, out of Partnership assets and revenues; and
(iii) last, by the Managing General Partner as provided in
ss.ss.3.05(b)(2) and (3) and 4.05(b).
No Limited Partner shall be required to reimburse the Managing General Partner,
the Operator, their Affiliates or the Investor General Partners for any
liability in excess of his agreed Capital Contribution, except:
(i) for a liability resulting from the Limited Partner's
unauthorized participation in Partnership management; or
(ii) from some other breach by the Limited Partner of this
Agreement.
4.05(d). AUTHORIZED TRANSACTIONS ARE NOT DEEMED TO BE A BREACH. No transaction
entered into or action taken by the Partnership, or the Managing General
Partner, the Operator, or their Affiliates, which is authorized by this
Agreement shall be deemed a breach of any obligation owed by the Managing
General Partner, the Operator, or their Affiliates to the Partnership or the
Participants.
4.06. OTHER ACTIVITIES.
4.06(a). THE MANAGING GENERAL PARTNER MAY PURSUE OTHER NATURAL GAS AND OIL
ACTIVITIES FOR ITS OWN ACCOUNT. The Managing General Partner, the Operator, and
their Affiliates are now engaged, and will engage in the future, for their own
account and for the account of others, including other investors, in all aspects
of the natural gas and oil business. This includes without limitation, the
evaluation, acquisition, and sale of producing and nonproducing Leases, and the
exploration for and production of natural gas, oil and other minerals.
The Managing General Partner is required to devote only so much of its time as
is necessary to manage the affairs of the Partnership. Except as expressly
provided to the contrary in this Agreement, and subject to fiduciary duties, the
Managing General Partner, the Operator, and their Affiliates may do the
following:
(i) continue their activities, or initiate further such
activities, individually, jointly with others, or as a
part of any other limited or general partnership, tax
partnership, joint venture, or other entity or activity to
which they are or may become a party, in any locale and in
the same fields, areas of operation or prospects in which
the Partnership may likewise be active;
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(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 ss.5.01(b)(4), the Managing General Partner shall be credited
with Organization and Offering Costs paid by it and for services provided by it
as Organization Costs up to and including 15% of the Partnership's subscription
proceeds. Any Organization and Offering Costs paid and/or provided in services
by the Managing General Partner in excess of this amount shall not be credited
towards the Managing General Partner's required Capital Contribution or revenue
share set forth in ss.5.01(b)(4). The Managing General Partner's credit for
services provided to the Partnership as Organization Costs shall be determined
based on generally accepted accounting principles.
5.01(a)(2). INTANGIBLE DRILLING COSTS. Ninety percent (90%) of the Partnership's
subscription proceeds received from the Participants shall be used to pay 100%
of the Intangible Drilling Costs.
5.01(a)(3). TANGIBLE COSTS. Ten percent (10%) of the Partnership's subscription
proceeds received from the Participants shall be used by the Partnership to pay
Tangible Costs. All remaining Tangible Costs in excess of an amount equal to 10%
of the Partnership's subscription proceeds shall be charged 100% 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.
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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, 90% of each Participant's subscription proceeds
shall be applied to Intangible Drilling Costs and 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 ss.4.01(a)(4).
5.01(b). REVENUES. Revenues shall be credited as set forth below.
5.01(b)(1). ALLOCATION OF REVENUES ON DISPOSITION OF PROPERTY. If the parties'
Capital Accounts are adjusted to reflect the simulated depletion of a natural
gas or oil property of the Partnership, then the portion of the total amount
realized by the Partnership on the taxable disposition of the property that
represents recovery of its simulated tax basis in the property shall be
allocated to the parties in the same proportion as the aggregate adjusted tax
basis of the property was allocated to the parties or their predecessors in
interest. If the parties' Capital Accounts are adjusted to reflect the actual
depletion of a natural gas or oil property of the Partnership, then the portion
of the total amount realized by the Partnership on the taxable disposition of
the property that equals the parties' aggregate remaining adjusted tax basis in
the property shall be allocated to the parties in proportion to their respective
remaining adjusted tax bases in the property. Thereafter, any excess shall be
allocated to the Managing General Partner in an amount equal to the difference
between the fair market value of the Lease at the time it was contributed to the
Partnership and its simulated or actual adjusted tax basis at that time.
Finally, any excess shall be credited as provided in ss.5.01(b)(4), below.
In the event of a sale of developed natural gas and oil properties with
equipment on the properties, the Managing General Partner may make any
reasonable allocation of proceeds between the equipment and the Leases.
5.01(b)(2). INTEREST. Interest earned on each Participant's subscription
proceeds before the Offering Termination Date under ss.3.05(b)(1) shall be
credited to the accounts of the respective subscribers who paid the subscription
proceeds to the Partnership. The interest shall be paid to the Participant not
later than the Partnership's first cash distribution from operations.
After the Offering Termination Date and until proceeds from the offering are
invested in the Partnership's natural gas and oil operations, any interest
income from temporary investments shall be allocated pro rata to the
Participants providing the subscription proceeds.
All other interest income, including interest earned on the deposit of
production revenues, shall be credited as provided in ss.5.01(b)(4), below.
5.01(b)(3). SALE OR DISPOSITION OF EQUIPMENT. Proceeds from the sale or
disposition of equipment shall be credited to the parties charged with the costs
of the equipment in the ratio in which the costs were charged.
5.01(b)(4). OTHER REVENUES. Subject to ss.5.01(b)(4)(a), the Managing General
Partner and the Participants shall share in all other Partnership revenues in
the same percentage as their respective Capital Contribution bears to the total
Partnership Capital Contributions, except that the Managing General Partner
shall receive an additional 7% of Partnership revenues. However, the Managing
General Partner's total revenue share may not exceed 40% 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 35% of the total Partnership Capital Contributions and the
Participants contribute 65% of the total Partnership Capital Contributions, then
the Managing General Partner shall receive 40% of the Partnership revenues, not
42%, because its revenue share cannot exceed 40% of Partnership revenues, and
the Participants shall receive 60% of Partnership revenues.
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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 (10%) per Unit, based on
$25,000 per Unit, regardless of the actual subscription price paid by the
Participants for their Units, in each of the first five 12-month periods. In
this regard:
(i) the 60-month subordination period shall begin with the
first cash distribution from operations to the
Participants;
(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.
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;
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(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 ss.5.01(b)(4), shall be allocated
among the Participants, including the Managing General Partner to the extent of
any optional subscription under ss.3.03(b)(2), in the ratio of their respective
Units based on $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 ss.3.03(b)(2), in the
ratio of the subscription price designated on their respective Subscription
Agreements rather than the number of their respective Units.
5.01(c)(2). COSTS AND REVENUES NOT DIRECTLY ALLOCABLE TO A PARTNERSHIP WELL.
Costs and revenues not directly allocable to a particular Partnership Well or
additional operation shall be allocated among the Partnership 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, allocating any item of income, gain, loss,
deduction or credit which is not otherwise specifically allocated in this
Agreement or is clearly inconsistent with a party's economic interest in the
Partnership, or making any other allocations under this Agreement, the Managing
General Partner may adopt any method of allocation which it, in its reasonable
discretion, selects in its sole discretion, after consultation with the
Partnership's legal counsel or accountants. Any new allocation provisions shall
be made in a manner that is consistent with the parties' economic interests in
the Partnership and which would result in the most favorable aggregate
consequences to the Participants as nearly as possible consistent with the
original allocations described in this Agreement.
5.02. CAPITAL ACCOUNTS AND ALLOCATIONS THERETO.
5.02(a). CAPITAL ACCOUNTS FOR EACH PARTY TO THE AGREEMENT. A single, separate
Capital Account shall be established for each party, regardless of the number of
interests owned by the party, the class of the interests and the time or manner
in which the interests were acquired.
5.02(b). CHARGES AND CREDITS.
5.02(b)(1). GENERAL STANDARD. Except as otherwise provided in this Agreement,
the Capital Account of each party shall be determined and maintained in
accordance with Treas. Reg. ss.1.704-l(b)(2)(iv) and shall be increased by:
(i) the amount of money contributed by him to the Partnership;
37
(ii) the fair market value of property contributed by him,
without regard to ss.7701(g) of the Code, to the
Partnership, net of liabilities secured by the contributed
property that the Partnership is considered to assume or
take subject to under ss.752 of the Code; and
(iii) allocations to him of Partnership income and gain, or
items thereof, including income and gain exempt from tax
and income and gain described in Treas. Reg.
ss.1.704-l(b)(2)(iv)(g), but excluding income and gain
described in Treas. Reg. ss.1.704-l(b)(4)(i);
and shall be decreased by:
(iv) the amount of money distributed to him by the Partnership;
(v) the fair market value of property distributed to him,
without regard to ss.7701(g) of the Code, by the
Partnership, net of liabilities secured by the distributed
property that he is considered to assume or take subject
to under ss.752 of the Code;
(vi) allocations to him of Partnership expenditures described
in ss.705(a)(2)(B) of the Code; and
(vii) allocations to him of Partnership loss and deduction, or
items thereof, including loss and deduction described in
Treas. Reg. ss.1.704-l(b)(2)(iv)(g), but excluding items
described in (vi) above, and loss or deduction described
in Treas. Reg. ss.1.704-l(b)(4)(i) or (iii).
5.02(b)(2). EXCEPTION. If Treas. Reg. ss.1.704-l(b)(2)(iv) fails to provide
guidance, Capital Account adjustments shall be made in a manner that:
(i) maintains equality between the aggregate governing Capital
Accounts of the parties and the amount of Partnership
capital reflected on the Partnership's balance sheet, as
computed for book purposes;
(ii) is consistent with the underlying economic arrangement of
the parties; and
(iii) is based, wherever practicable, on federal tax accounting
principles.
5.02(c). PAYMENTS TO THE MANAGING GENERAL PARTNER. The Capital Account of the
Managing General Partner shall be reduced by payments to it pursuant to
ss.4.04(a)(2) only to the extent of the Managing General Partner's distributive
share of any Partnership deduction, loss, or other downward Capital Account
adjustment resulting from the payments. Also, in the event, and to the extent,
that the Managing General Partner is treated under the Code as having been
transferred an interest in the Partnership in connection with the performance of
services for the Partnership (whether before or after the formation of the
Partnership):
(i) any resulting compensation income shall be allocated 100%
to the Managing General Partner;
(ii) any associated increase in Capital Accounts shall be
credited 100% to the Managing General Partner; and
(iii) any associated deduction to which the Partnership is
entitled shall be allocated 100% to the Managing General
Partner.
5.02(d). DISCRETION OF MANAGING GENERAL PARTNER IN THE METHOD OF MAINTAINING
CAPITAL ACCOUNTS. Notwithstanding any other provisions of this Agreement, the
method of maintaining Capital Accounts may be changed from time to time, in the
discretion of the Managing General Partner, to take into consideration ss.704
and other provisions of the Code and the related rules, regulations and
interpretations as may exist from time to time.
5.02(e). REVALUATIONS OF PROPERTY. In the discretion of the Managing General
Partner the Capital Accounts of the parties may be increased or decreased to
reflect a revaluation of Partnership property, including intangible assets such
as goodwill, on a property-by-property basis except as otherwise permitted under
ss.704(c) of the Code and the regulations thereunder, on the Partnership's
books, in accordance with Treas. Reg. ss.1.704-l(b)(2)(iv)(f).
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5.02(f). AMOUNT OF BOOK ITEMS. In cases where ss.704(c) of the Code or
ss.5.02(e) applies, Capital Accounts shall be adjusted in accordance with Treas.
Reg. ss.1.704-l(b)(2)(iv)(g) for allocations of depreciation, depletion,
amortization and gain and loss, as computed for book purposes, with respect to
the property.
5.03. ALLOCATION OF INCOME, DEDUCTIONS AND CREDITS.
5.03(a). IN GENERAL.
5.03(a)(1). DEDUCTIONS ARE ALLOCATED TO PARTY CHARGED WITH EXPENDITURE. To the
extent permitted by law and except as otherwise provided in this Agreement, all
deductions and credits, including, but not limited to, intangible drilling and
development costs and depreciation, shall be allocated to the party who has been
charged with the expenditure giving rise to the deductions and credits; and to
the extent permitted by law, these parties shall be entitled to the deductions
and credits in computing taxable income or tax liabilities to the exclusion of
any other party. Also, any Partnership deductions that would be nonrecourse
deductions if they were not attributable to a loan made or guaranteed by the
Managing General Partner or its Affiliates shall be allocated to the Managing
General Partner to the extent required by law.
5.03(a)(2). INCOME AND GAIN ALLOCATED IN ACCORDANCE WITH REVENUES. Except as
otherwise provided in this Agreement, all items of income and gain, including
gain on disposition of assets, shall be allocated in accordance with the related
revenue allocations set forth in ss.5.01(b) and its subsections.
5.03(b). TAX BASIS OF EACH PROPERTY. Subject to ss.704(c) of the Code, the tax
basis of each oil and gas property for computation of cost depletion and gain or
loss on disposition shall be allocated and reallocated when necessary based on
the capital interest in the Partnership as to the property and the capital
interest in the Partnership for this purpose as to each property shall be
considered to be owned by the parties in the ratio in which the expenditure
giving rise to the tax basis of the property has been charged as of the end of
the year.
5.03(c). GAIN OR LOSS ON OIL AND GAS PROPERTIES. Each party shall separately
compute its gain or loss on the disposition of each natural gas and oil property
in accordance with the provisions of ss.613A(c)(7)(D) of the Code, and the
calculation of the gain or loss shall consider the party's adjusted basis in his
property interest computed as provided in ss.5.03(b) and the party's allocable
share of the amount realized from the disposition of the property.
5.03(d). GAIN ON DEPRECIABLE PROPERTY. Gain from each sale or other disposition
of depreciable property shall be allocated to each party whose share of the
proceeds from the sale or other disposition exceeds its contribution to the
adjusted basis of the property in the ratio that the excess bears to the sum of
the excesses of all parties having an excess.
5.03(e). LOSS ON DEPRECIABLE PROPERTY. Loss from each sale, abandonment or other
disposition of depreciable property shall be allocated to each party whose
contribution to the adjusted basis of the property exceeds its share of the
proceeds from the sale, abandonment or other disposition in the proportion that
the excess bears to the sum of the excesses of all parties having an excess.
5.03(f). ALLOCATION IF RECAPTURE TREATED AS ORDINARY INCOME. Any recapture
treated as an increase in ordinary income by reason of ss.ss.1245, 1250, or 1254
of the Code shall be allocated to the parties in the amounts in which the
recaptured items were previously allocated to them; provided that to the extent
recapture allocated to any party is in excess of the party's gain from the
disposition of the property, the excess shall be allocated to the other parties
but only to the extent of the other parties' gain from the disposition of the
property.
5.03(g). TAX CREDITS. If a Partnership expenditure, whether or not deductible,
that gives rise to a tax credit in a Partnership taxable year also gives rise to
valid allocations of Partnership loss or deduction, or other downward Capital
Account adjustments, for the year, then the parties' interests in the
Partnership with respect to the credit, or the cost giving rise thereto, shall
be in the same proportion as the parties' respective distributive shares of the
loss or deduction, and adjustments. If Partnership receipts, whether or not
taxable, that give rise to a tax credit, including a marginal well production
credit under ss.45I of the Code, in a Partnership taxable year also give rise to
valid allocations of Partnership income or gain, or other upward Capital Account
adjustments, for the year, then the parties' interests in the Partnership with
respect to the credit, or the Partnership's receipts or production of natural
gas and oil production giving rise thereto, shall be in the same proportion as
the parties' respective shares of the Partnership's production revenues from the
sales of its natural gas and oil production as provided in ss.5.01(b)(4).
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5.03(h). DEFICIT CAPITAL ACCOUNTS AND QUALIFIED INCOME OFFSET. Notwithstanding
any provisions of this Agreement to the contrary, an allocation of loss or
deduction which would result in a party having a deficit Capital Account balance
as of the end of the taxable year to which the allocation relates, if charged to
the party, to the extent the Participant is not required to restore the deficit
to the Partnership, taking into account:
(i) adjustments that, as of the end of the year, reasonably
are expected to be made to the party's Capital Account for
depletion allowances with respect to the Partnership's
natural gas and oil properties;
(ii) allocations of loss and deduction that, as of the end of
the year, reasonably are expected to be made to the party
under ss.ss.704(e)(2) and 706(d) of the Code and Treas.
Reg. ss.1.751-1(b)(2)(ii); and
(iii) distributions that, as of the end of the year, reasonably
are expected to be made to the party to the extent they
exceed offsetting increases to the party's Capital
Account, assuming for this purpose that the fair market
value of Partnership property equals its adjusted tax
basis, that reasonably are expected to occur during or
prior to the Partnership taxable years in which the
distributions reasonably are expected to be made;
shall be charged to the Managing General Partner. Further, the Managing General
Partner shall be credited with an additional amount of Partnership income or
gain equal to the amount of the loss or deduction as quickly as possible to the
extent such chargeback does not cause or increase deficit balances in the
parties' Capital Accounts which are not required to be restored to the
Partnership.
Notwithstanding any provisions of this Agreement to the contrary, if a party
unexpectedly receives an adjustment, allocation, or distribution described in
(i), (ii), or (iii) above, or any other distribution, which causes or increases
a deficit balance in the party's Capital Account which is not required to be
restored to the Partnership, the party shall be allocated items of income and
gain, consisting of a pro rata portion of each item of Partnership income,
including gross income, and gain for the year, in an amount and manner
sufficient to eliminate the deficit balance as quickly as possible.
5.03(i). MINIMUM GAIN CHARGEBACK. To the extent there is a net decrease during a
Partnership taxable year in the minimum gain attributable to a Partner
nonrecourse debt, then any Partner with a share of the minimum gain attributable
to the debt at the beginning of the year shall be allocated items of Partnership
income and gain in accordance with Treas. Reg. ss.1.704-2(i).
5.03(j). PARTNERS' ALLOCABLE SHARES. Except as otherwise provided in this
Agreement, each party's allocable share of Partnership income, gain, loss,
deductions and credits shall be determined by the use of any method prescribed
or permitted by the Secretary of the Treasury by regulations or other guidelines
and selected by the Managing General Partner which takes into account the
varying interests of the parties in the Partnership during the taxable year. In
the absence of such regulations or guidelines, except as otherwise provided in
this Agreement, the allocable share shall be based on actual income, gain, loss,
deductions and credits economically accrued each day during the taxable year in
proportion to each party's varying interest in the Partnership on each day
during the taxable year.
5.04. ELECTIONS.
5.04(a). ELECTION TO DEDUCT INTANGIBLE COSTS. The Partnership's federal income
tax return shall be made in accordance with an election under the option granted
by the Code to deduct intangible drilling and development costs.
5.04(b). NO ELECTION OUT OF SUBCHAPTER K. No election shall be made by the
Partnership, any Partner, or the Operator for the Partnership to be excluded
from the application of the partnership provisions of the Code, including
Subchapter K of Chapter 1 of Subtitle A 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). SS.754 ELECTION. In the event of the transfer of an interest in the
Partnership, or on the death of an individual party hereto, or in the event of
the distribution of property to any party, the Managing General Partner may
choose for the Partnership to file an election in accordance with the applicable
Treasury Regulations to cause the basis of the Partnership's assets to be
adjusted for federal income tax purposes as provided by ss.ss.734 and 743 of the
Code.
5.04(e). SS.83 ELECTION. The Partnership, the Managing General Partner and each
Participant hereby agree to be legally bound by the provisions of this
ss.5.04(e) and further agree that, in the Managing General Partner's sole
discretion, the Partnership and all of its Partners may elect a safe harbor
under which the fair market value of a Partnership interest that is transferred
in connection with the performance of services is treated as being equal to the
liquidation value of that interest for transfers on or after the date final
regulations providing the safe harbor are published in the Federal Register. If
the Managing General Partner determines to elect the safe harbor on behalf of
the Partnership and all of its Partners, which determination may be made solely
in the best interests of the Managing General Partner, the Partnership, the
Managing General Partner and each Participant further agree that:
(i) the Partnership shall be authorized and directed to elect
the safe harbor;
(ii) the Partnership and each of its Partners (including any
Person to whom a Partnership interest is transferred in
connection with the performance of services) shall comply
with all requirements of the safe harbor with respect to
all Partnership interests transferred in connection with
the performance of services while the election remains
effective; and
(iii) the Managing General Partner, in its sole discretion, may
cause the Partnership to terminate the safe harbor
election, which determination may be made in the sole
interests of the Managing General Partner.
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.
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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 ss.7.02.
5.05(d). INTEREST AND RETURN OF CAPITAL. Except as otherwise provided in this
Agreement, no party shall under any circumstances be entitled to any interest on
amounts retained by the Partnership. Each Participant shall look only to his
share of distributions, if any, from the Partnership for a return of his Capital
Contribution.
ARTICLE VI
TRANSFER OF INTERESTS
6.01. TRANSFERABILITY.
6.01(a). 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 ss.3.05(b)(2).
6.01(b)(3). CONVERSION SHALL NOT AFFECT ALLOCATIONS. The conversion shall not
affect the allocation to any Participant of any item of Partnership income,
gain, loss, deduction or credit or other item of special tax significance other
than Partnership liabilities, if any. Further, the conversion shall not affect
any Participant's interest in the Partnership's natural gas and oil properties
and unrealized receivables.
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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:
(a) 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; and
(b) Units may not be assigned to a person who is under
the age of 18 or incompetent (unless an
attorney-in-fact, guardian, custodian or
conservator has been appointed to handle the
affairs of that person) without the Managing
General Partner's consent;
(ii) the costs and expenses associated with the assignment must
be paid by the assignor Participant;
(iii) the assignment must be in a form satisfactory to the
Managing General Partner; and
(iv) the terms of the assignment must not contravene those of
this Agreement.
Transfers of Units are subject to the following additional restrictions set
forth in ss.ss.6.02(a)(1) and 6.02(a)(2).
6.02(a)(1). TAX LAW RESTRICTIONS. Subject to transfers permitted by ss.6.04 and
transfers by operation of law, no sale, assignment, exchange or transfer of a
Unit shall be made which, in the opinion of counsel to the Partnership, would
result in the Partnership being either:
(i) terminated for tax purposes under ss.708 of the Code; or
(ii) treated as a "publicly-traded" partnership for purposes of
ss.469(k) of the Code.
6.02(a)(2). SECURITIES LAWS RESTRICTION. Subject to transfers permitted by
ss.6.04 and transfers by operation of law, no Unit shall be sold, assigned,
pledged, hypothecated, or transferred 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
ss.ss.6.02(a)(1) and 6.02(a)(2), an assignee of a Participant's Unit shall
become a substituted Participant entitled to all the rights of a Participant if,
and only if:
(i) the assignor gives the assignee the right;
43
(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.
6.02(b)(3). TRANSFER DOES NOT REQUIRE AN ACCOUNTING. No transfer of a Unit shall
require an accounting by the Managing General Partner. Also, no transfer shall
grant rights under this Agreement, including the exercise of any elections, as
between the transferring parties and the remaining parties to this Agreement to
more than one party unanimously designated by the transferees and, if he should
have retained an interest under this Agreement, the transferor.
6.02(b)(4). NOTICE. Until the Managing General Partner receives a proper notice
of designation acceptable to it, the Managing General Partner shall continue to
account only to the person to whom it was furnishing notices before the time
pursuant to ss.8.01 and its subsections. This party shall continue to exercise
all rights applicable to the Units previously owned by the transferor.
6.03. RIGHT OF MANAGING GENERAL PARTNER TO HYPOTHECATE AND/OR WITHDRAW ITS
INTERESTS. The Managing General Partner shall have the authority without the
consent of the Participants and without affecting the allocation of costs and
revenues received or incurred under this Agreement, to hypothecate, pledge, or
otherwise encumber, on any terms it chooses for its own general purposes either:
(i) its Partnership interest; or
(ii) an undivided interest in the assets of the Partnership
equal to or less than its respective interest in the
revenues of the Partnership.
All repayments of these borrowings and costs, interest or other charges related
to the borrowings shall be borne and paid separately by the Managing General
Partner. In no event shall the repayments, costs, interest, or other charges
related to the borrowing be charged to the account of the Participants.
In addition, subject to a required participation of not less than 1% in the
Partnership as Managing General Partner, the Managing General Partner may
withdraw a property interest held by the Partnership in the form of a Working
Interest in the Partnership Wells equal to or less than its respective interest
in the revenues of the Partnership without the consent of the Participants.
44
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.
The Managing General Partner shall not be obligated to purchase more than 5% of
the Units in any calendar year and this 5% limit may not be waived. The Managing
General Partner shall not purchase less than one Unit unless the lesser amount
represents the Participant's entire interest in the Partnership, however, the
Managing General Partner may waive this limitation.
A Participant may present his Units in writing to the Managing General Partner
every year beginning in 2010 subject to the following conditions:
(i) the presentment must be made within 120 days of the
reserve report set forth in ss.4.03(b)(3);
(ii) in accordance with Treas. Reg. ss.1.7704-1(f), the
purchase may not be made until at least 60 calendar days
after the Participant notifies the Partnership in writing
of the Participant's intention to exercise the presentment
right; and
(iii) the purchase shall not be considered effective until the
presentment price has been paid in cash or other
consideration to the Participant.
6.04(b). REQUIREMENT FOR INDEPENDENT PETROLEUM CONSULTANT. The amount of the
presentment price attributable to Partnership reserves shall be determined based
on the last reserve report of the Partnership prepared by the Managing General
Partner and reviewed by an Independent Expert. The Managing General Partner
shall estimate the present worth of future net revenues attributable to the
Partnership's interest in the Proved Reserves. In making this estimate, the
Managing General Partner shall use the following terms:
(i) a discount rate equal to 10%;
(ii) a constant price for the oil; and
(iii) base the price of natural gas on the existing natural gas
contracts at the time of the purchase.
The calculation of the presentment price shall be as set forth in ss.6.04(c).
6.04(c). CALCULATION OF PRESENTMENT PRICE. The presentment price shall be based
on the Participant's share of the net assets and liabilities of the Partnership
and allocated pro rata to each Participant in the ratio that his number of Units
bears to the total number of Units. The presentment price shall include the sum
of the following Partnership items:
(i) an amount based on 70% of the present worth of future net
revenues from the Proved Reserves determined as described
in ss.6.04(b);
(ii) cash on hand;
(iii) prepaid expenses and accounts receivable less a reasonable
amount for doubtful accounts; and
(iv) the estimated market value of all assets, not separately
specified above, determined in accordance with standard
industry valuation procedures.
There shall be deducted from the foregoing sum the following items:
45
(i) an amount equal to all debts, obligations, and other
liabilities, including accrued expenses; and
(ii) any distributions made to the Participants between the
date of the request and the actual payment. However, if
any cash distributed was derived from the sale after the
presentment request of natural gas, oil or other mineral
production, or of a producing property owned by the
Partnership, for purposes of determining the reduction of
the presentment price, the distributions shall be
discounted at the same rate used to take into account the
risk factors employed to determine the present worth of
the Partnership's Proved Reserves.
6.04(d). FURTHER ADJUSTMENT MAY BE ALLOWED. The presentment price may be further
adjusted by the Managing General Partner for estimated changes therein from the
date of the report to the date of payment of the presentment price to the
Participants because of the following:
(i) the production or sales of, or additions to, reserves and
lease and well equipment, sale or abandonment of Leases,
and similar matters occurring before the request for
purchase; and
(ii) any of the following occurring before payment of the
presentment price to the selling Participants:
(a) changes in well performance;
(b) increases or decreases in the market price of
natural gas, oil or other minerals;
(c) revision of regulations relating to the importing
of hydrocarbons;
(d) changes in income, ad valorem, and other tax laws
such as material variations in the provisions for
depletion; and
(e) similar matters.
6.04(e). SELECTION BY LOT. If less than all Units presented at any time are to
be purchased, then the Participants whose Units are to be purchased will be
selected by lot.
The Managing General Partner's obligation to purchase Units presented may be
discharged for its benefit by a third-party or an Affiliate. The Units of the
selling Participant will be transferred to the party who pays for it. A selling
Participant will be required to deliver an executed assignment of his Units,
together with any other documentation as the Managing General Partner may
reasonably request.
6.04(f). NO OBLIGATION OF THE MANAGING GENERAL PARTNER TO ESTABLISH A RESERVE.
The Managing General Partner shall have no obligation to establish any reserve
to satisfy the presentment obligations under this section.
6.04(g). SUSPENSION OF PRESENTMENT FEATURE. The Managing General Partner may
suspend this presentment feature by so notifying Participants at any time if it:
(i) does not have sufficient cash flow; or
(ii) is unable to borrow funds or arrange 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.
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ARTICLE VII
DURATION, DISSOLUTION, AND WINDING UP
7.01. DURATION.
7.01(a). FIFTY YEAR TERM. The Partnership shall continue in existence for a term
of 50 years from the effective date of this Agreement unless sooner terminated
as set forth below.
7.01(b). TERMINATION. The Partnership shall terminate following the occurrence
of:
(i) a Final Terminating Event; or
(ii) any event which under the Delaware Revised Uniform Limited
Partnership Act causes the dissolution of a limited
partnership.
7.01(c). CONTINUANCE OF PARTNERSHIP EXCEPT ON FINAL TERMINATING EVENT. Other
than the occurrence of a Final Terminating Event, the Partnership or any
successor limited partnership shall not be wound up, but shall be continued by
the parties and their respective successors as a successor limited partnership
under all the terms of this Agreement. The successor limited partnership shall
succeed to all of the assets of the Partnership. As used throughout this
Agreement, the term "Partnership" shall include the successor limited
partnership and the parties to the successor limited partnership.
7.02. DISSOLUTION AND WINDING UP.
7.02(a). FINAL TERMINATING EVENT. On the occurrence of a Final Terminating Event
the affairs of the Partnership shall be wound up and there shall be distributed
to each of the parties its Distribution Interest in the remaining Partnership
assets.
7.02(b). TIME OF LIQUIDATING DISTRIBUTION. To the extent practicable and in
accordance with sound business practices in the judgment of the Managing General
Partner, liquidating distributions shall be made by:
(i) the end of the taxable year in which liquidation occurs,
determined without regard to ss.706(c)(2)(A) of the Code;
or
(ii) if later, within 90 days after the date of the
liquidation.
Notwithstanding, the following amounts are not required to be distributed within
the foregoing time periods so long as the withheld amounts are distributed as
soon as practical:
(i) amounts withheld for reserves reasonably required for
liabilities of the Partnership; and
(ii) installment obligations owed to the Partnership.
7.02(c). IN-KIND DISTRIBUTIONS. The Managing General Partner shall not be
obligated to offer in-kind property distributions to the Participants, 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.
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If the Managing General Partner has not received a Participant's consent within
30 days after the Managing General Partner mailed the request for consent, then
it shall be presumed that the Participant has refused his consent.
7.02(d). SALE IF NO CONSENT. Any Partnership asset which would otherwise be
distributed in-kind to a Participant, except for the failure or refusal of the
Participant to give his written consent to the distribution, may instead be sold
by the Managing General Partner at the best price reasonably obtainable from an
independent third-party, who is not an Affiliate of the Managing General Partner
or to itself or its Affiliates, including an Affiliated Income Program, at fair
market value as determined by an Independent Expert selected by the Managing
General Partner.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.01. NOTICES.
8.01(a). METHOD. Any notice required under this Agreement shall be:
(i) in writing; and
(ii) given by mail or wire addressed to the party to receive
the notice at the address designated in ss.1.03.
If there is a transfer of Units under this Agreement, no notice to the
transferee shall be required, nor shall the transferee have any rights under
this Agreement, until notice has been given to the Managing General Partner.
Any transfer of rights under this Agreement shall not increase the duty to give
notice. If there is a transfer of Units under this Agreement to more than one
party, then notice to any owner of any interest in the Units shall be notice to
all owners of the Units.
8.01(b). CHANGE IN ADDRESS. The address of any party to this Agreement may be
changed by written notice as follows:
(i) to the Participants if there is a change of address by the
Managing General Partner; or
(ii) to the Managing General Partner if there is a change of
address by a Participant.
8.01(c). TIME NOTICE DEEMED GIVEN. If the notice is given by the Managing
General Partner, then the notice shall be considered given, and any applicable
time shall run, from the date the notice is placed in the mail or delivered to
the telegraph company.
If the notice is given by any Participant, then the notice shall be considered
given and any applicable time shall run from the date the notice is received.
8.01(d). EFFECTIVENESS OF NOTICE. Any notice to a party other than the Managing
General Partner, including a notice requiring concurrence or nonconcurrence,
shall be effective, and any failure to respond binding, irrespective of the
following:
(i) whether or not the notice is actually received; or
(ii) any disability or death on the part of the noticee, even
if the disability or death is known to the party giving
the notice.
8.01(e). FAILURE TO RESPOND. Except pursuant to ss.7.02(c) or when this
Agreement expressly requires affirmative approval of a Participant, any
Participant who fails to respond in writing within the time specified to a
request by the Managing General 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.
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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.
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;
(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; or
(iv) cure any ambiguity, correct or supplement any provision in
this Agreement that may be inconsistent with any other
provision in this Agreement, or add any other provision to
this Agreement with respect to matters, events or issues
arising under this Agreement that is not inconsistent with
the provisions of this Agreement.
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, EVP
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