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EXHIBIT 10(l)
AGREEMENT
OF
LIMITED PARTNERSHIP
OF
AEJH 1989 LIMITED PARTNERSHIP
By and Between
ALEXANDER ENERGY CORPORATION
As General Partner
And
JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY
As Limited Partner
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TABLE OF CONTENTS
Page
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ARTICLE I
ORGANIZATION
SECTION 1.01 Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.03 Principal Place of Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.04 Purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.05 Organizational Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.06 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.07 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
ARTICLE II
CAPITAL CONTRIBUTIONS
SECTION 2.01 Initial Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.02 Optional Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.03 Payment of Optional Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.04 Default in Payment of Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.05 Return of Capital Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.06 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.07 Certain Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.08 Capital Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
ARTICLE III
COSTS, REVENUES AND ALLOCATIONS
SECTION 3.01 Sharing of Costs and Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3.02 Allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.03 Limitations on Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.04 Lender as Partner. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
ARTICLE IV
MANAGEMENT AND OPERATION
SECTION 4.01 Management of Partnership Affairs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.02 Powers of General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
4.03 Operating Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.04 Limitations on General Partner's Powers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.05 Performance of Obligations as Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.06 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.07 Fiduciary Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
4.08 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.09 Organizational Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
4.10 Management Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
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ARTICLE V
TAXES
SECTION 5.01 Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.02 Tax Elections . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.03 Maintenance of Status as Partnership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
5.04 Partnership Tax Audits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
ARTICLE VI
RIGHTS OF LIMITED PARTNER
SECTION 6.01 Generally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.02 Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
6.03 Limited Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.04 Trustee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
ARTICLE VII
DISTRIBUTIONS
SECTION 7.01 Monthly Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
7.02 Method of Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ARTICLE VIII
BOOKS, RECORDS, REPORTS AND BANK ACCOUNTS
SECTION 8.01 Maintenance of Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.02 Periodic Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
8.03 Quarterly Financial Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.04 Annual Certified Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.05 Additional Reports and Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
8.06 Bank Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
ARTICLE IX
OPTIONAL OPERATIONS; LEASEHOLD ACQUISITION
SECTION 9.01 Optional Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
9.02 Acquisition of Leasehold Interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.03 Limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE X
ASSIGNMENT OF INTERESTS AND SUBSTITUTIONS; REMOVAL
SECTION 10.01 Assignment by Limited Partners . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
10.02 Assignment by General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
10.03 Partition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
10.04 Removal of the General Partner . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
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ARTICLE XI
LIQUIDATION AND TERMINATION
SECTION 11.01 Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
11.02 Covenant Not to Withdraw . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.03 Continuation and Reconstitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
11.04 Liquidation and Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.05 Cancellation of Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
ARTICLE XII
GENERAL PROVISIONS
12.01 No Third-Party Beneficiaries; Assignability; Binding Nature . . . . . . . . . . . . . . . . . . . . . . 40
12.02 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
12.03 Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
12.04 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
12.05 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.06 Rights Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.07 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.08 No Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.09 Internal References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.10 Counterpart Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
EXHIBIT A Form of Certificate of Limited Partnership Insurance
EXHIBIT B Insurance
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AGREEMENT
OF
LIMITED PARTNERSHIP
OF
AEJH 1989 LIMITED PARTNERSHIP
THIS AGREEMENT OF LIMITED PARTNERSHIP (the "Agreement") is entered
into as of ______________, 1989, by and between ALEXANDER ENERGY CORPORATION,
an Oklahoma corporation, as general partner (the "General Partner") and JOHN
HANCOCK MUTUAL LIFE INSURANCE COMPANY, a Massachusetts mutual life insurance
company, as limited partner (the "Limited Partner"). The General Partner and
the Limited Partner are each sometimes referred to herein individually as a
"Partner" and collectively as "Partners." This Agreement is entered into under
the following terms and conditions:
ARTICLE I.
ORGANIZATION
1.01 Formation. The parties hereto hereby form a limited
partnership (the "Partnership") for the purposes hereinafter set forth under
and pursuant to the Delaware Revised Uniform Limited Partnership Act, as
amended, 6 Del. C. Sections 17-101, et seq. (the "Act"). The Limited Partner
is hereby admitted as a limited partner of the Partnership.
1.02 Name. The name of the Partnership shall be "AEJH 1989 Limited
Partnership" and all Partnership business shall be conducted in such name,
unless the law of a state in which the Partnership does business requires that
the business be conducted in some other name. In such a case, the business may
be conducted under such other name or names as the General Partner shall
determine to be necessary that do not adversely affect the limited liability
of the Limited Partner hereunder. All property owned by the Partnership,
whether real or personal, tangible or intangible, shall be deemed to be owned
by the Partnership as an entity, and no Partner, individually, shall have any
ownership of such property. The Partnership shall hold all of its assets in the
name of the Partnership. Nothing in this Section 1.02 shall be deemed to limit
the ability of the General Partner, any Affiliate, or any other person to
operate Leasehold Interests in which the Partnership owns an interest pursuant
to an Operating Agreement as described in Section 4.03.
1.03 Principal Place of Business. (a) The address of the registered
office of the Partnership in the State of Delaware shall be:
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The Corporation Trust Company
1209 Orange Street
Corporation Trust Center
Wilmington, New Castle County, Delaware 19801
The name and address of the registered agent for service of process on the
Partnership in the State of Delaware shall be:
The Corporation Trust Company
1209 Orange Street
Corporation Trust Center
Wilmington, New Castle County, Delaware 19801
(b) The principal place of business of the Partnership shall be:
600 Triad Center
501 Northwest Expressway
Oklahoma City, Oklahoma 73118
or such other place as designated by the General Partner. The Partnership shall
have such other places of business as the General Partner deems necessary or
desirable. The General Partner shall notify the Limited Partner of any change
in the principal place of business of the Partnership.
(c) The General Partner's principal place of business is:
600 Triad Center
501 Northwest Expressway
Oklahoma City, Oklahoma 73118
The Limited Partner's principal place of business is:
P.O. BOX 111
Boston, Massachusetts 02117
Attention: Bond and Corporate Finance Department
1.04 Purposes. The purpose of the Partnership shall be to acquire,
own, and dispose of Leasehold Interests attributable to the Zilkha Properties
and otherwise, to explore for, produce, transport, sell, treat, and process
oil, gas, and other minerals produced therefrom. The Partnership may also
acquire, own and dispose of other Leasehold Interests and explore for, produce,
transport, sell, treat, and process oil, gas and other minerals therefrom, and
may engage in any other business that now or hereafter may be necessary,
proper, advisable, or convenient to accomplish the purposes set forth herein,
including entering into and performing its obligations under the Zilkha
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Agreement, the Note Agreement and the Escrow Agreement, and that are not
forbidden by the laws of any jurisdiction in which the Partnership does
business.
1.05 Organizational Certificates. Immediately following the
execution hereof, the General Partner shall cause the Partnership to execute
and file the Certificate with the Secretary of State of Delaware and shall
deliver a certified copy thereof as filed to the Limited Partner. The
Certificate shall be in the form of Exhibit A. The General Partner also shall
deliver to the Limited Partner a certified copy of each amendment to the
Certificate or any amended and restated Certificate (if any) as filed with the
Secretary of State of Delaware promptly after such filing. Upon the request of
the General Partner, the Limited Partner shall execute, acknowledge, and
deliver all other certificates and instruments conforming with this Agreement
that are necessary to enable the General Partner to organize, qualify,
continue, and terminate the Partnership as a limited partnership (or otherwise
as a partnership in which the Limited Partner has limited liability) under the
laws of the State of Delaware and to qualify, continue, and terminate the
Partnership as a limited partnership (or otherwise as a partnership in which
the Limited Partner has limited liability) in all other jurisdictions in which
the Partnership may conduct business. Prior to commencing business the General
Partner shall obtain an opinion of counsel satisfactory to the Limited Partner
as to the limited liability of the Limited Partner under the laws of the State
of Delaware. Prior to conducting business in any jurisdiction other than
Delaware, the General Partner shall comply with all requirements necessary to
qualify the Partnership as a foreign limited partnership (or otherwise as a
partnership in which the Limited Partner has limited liability) in such
jurisdiction and shall obtain an opinion of counsel in such jurisdiction
satisfactory to the Limited Partner as to the limited liability of the Limited
Partner in such jurisdiction. Throughout the term of the Partnership, the
General Partner shall cause the Partnership to comply with all requirements
necessary to maintain the limited liability of the Limited Partner under the
laws of the State of Delaware and of each other jurisdiction in which the
Partnership does business.
1.06 Term. The Partnership shall commence at the time the
Certificate is filed with the Secretary of State of Delaware and shall continue
in existence until the close of Partnership business on December 31, 2015 or
until the earlier termination of the Partnership in accordance with any
provision of this Agreement.
1.07 Definitions- As used in this Agreement, the terms "Agreement,"
"General Partner," "Limited Partner," "Partner," "partnership," and "Act" shall
have the meanings set forth
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hereinabove. In addition, the following terms shall have the following
respective meanings:
"Acquisition Amount" with respect to any property acquired by
the Partnership (or group of properties acquired in the same
transaction) including, without limitation, any Leasehold Interest or
interest therein, shall mean (a) if such property (or group of
properties) is contributed to the Partnership by a Partner, the fair
market value thereof as determined by the contributing Partner and the
Partnership, or (b) if such property (or group of properties) is
purchased by the Partnership or otherwise acquired except as described
in clause (a), the purchase price or other consideration paid by the
Partnership therefor.
"Affiliate" shall mean any person or entity controlling,
controlled by, or under common control with the General Partner.
"Control" as used in the immediately preceding sentence, means, with
respect to any person or entity, the possession, directly or
indirectly, of the power to direct or cause the direction of the
management or policies of the controlled person or entity.
"Business Day" shall mean any day other than a Saturday, a
Sunday, or a holiday for banks in the State of Oklahoma or the
Commonwealth of Massachusetts.
"Capital Contribution" shall mean any Initial Contribution
or Optional Contribution.
"Carrying Value" shall mean, with respect to any asset, the
asset's adjusted basis for federal income tax purposes, except as
follows:
(i) The Carrying Value of any asset contributed
by a Partner to the Partnership shall be the gross fair market value
of such asset, as determined by the contributing Partner and the
Partnership;
(ii) The Carrying Value of all Partnership assets
shall be adjusted to equal their respective gross fair market values,
as determined by the General Partner, as of the following times:
(a) The acquisition of an additional
interest in the Partnership by any new or existing Partner in exchange
for more than a minimal capital contribution;
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(b) The distribution by the Partnership
to a Partner of more than a minimal amount of Partnership property
other than money, unless all Partners receive simultaneous
distributions of undivided interests in the distributed property in
proportion to their interest in the Partnership; and
(c) Termination of the Partnership for
federal income tax purposes pursuant to Code Section 708(b)(1)(B); and
(iii) If the Carrying Value of an asset has been
determined or adjusted pursuant to (i) or (ii) above, such Carrying
Value shall hereafter be adjusted by the Depreciation (or Simulated
Depletion, as the case may be, as defined in Section 2.08(C)), taken
into account with respect to such asset.
"Certificate" shall mean the Certificate of Limited
Partnership of the Partnership, as it may be amended or restated from
time to time.
"Certified Public Accountants" shall mean Arthur
Young & Co. or such other certified public accounting firm of national
standing designated by the General Partner and approved by the Limited
Partner.
"Code" shall mean the Internal Revenue Code of 1986,
as amended.
"Cost Overruns" shall mean the excess of the costs
charged to the Partnership in connection with any Optional Operation
over the amount of Optional Contributions, if any, agreed to be made
to the Partnership by the Partners to fund such Optional Operation.
"Depreciation" shall mean, for each taxable year of
the Partnership, an amount equal to the depreciation, amortization or
other cost recovery deduction allowable for federal income tax
purposes with respect to an asset for such taxable year, except that
if the Carrying Value of an asset differs from its adjusted basis for
federal income tax purposes at the beginning of such taxable year,
then the depreciation, amortization or cost recovery deductions with
respect to such Partnership property shall be an amount which bears
the same ratio to such beginning Carrying Value as federal income tax
depreciation, amortization or other cost recovery deduction for such
taxable year bears to such beginning adjusted tax basis.
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"Distributable Net Revenues" shall mean Net Revenues
less all payments made by the Partnership pursuant to the Note.
"Election Period" shall have the meaning specified
in Section 9.01.
"Initial Contribution" shall mean any contribution to
the capital of the Partnership made pursuant to Section 2.01.
"Initial Costs" shall mean the Acquisition Amounts of
the Leasehold Interests that the Partnership shall acquire, and the
costs of drilling, testing, and completing or plugging and abandoning
Partnership Wells (other than plugging and abandoning after a period
of production), but shall exclude Lease Operating Costs.
"Interest Rate" shall mean the lower of (a) 2% over
the prime commercial lending rate from time to time announced by
Citibank, N.A. for new 90-day loans to substantial and responsible
borrowers or (b) the maximum lawful rate provided for by applicable
law.
"Lease Operating Costs" shall mean costs chargeable
to the Partnership under an Operating Agreement other than the costs
of (i) acquiring Leasehold Interests, (ii) drilling, testing, and
completing or plugging and abandoning a Partnership Well, or (iii)
Optional Operations; provided, however, such term shall include (x) the
costs of plugging and abandoning Partnership Wells after a period of
production and (y) the costs of reworking a Partnership Well.
"Leasehold Interest' shall mean any right, title, or
interest (or contractual right to acquire any right, title, or
interest) in and under any oil, gas or other mineral lease or any
other interest in oil and gas including, without limitation, mineral
rights, leases, royalties, overriding royalties, or farm-ins.
"Management Fee" shall mean the monthly fee to be
paid to the General Partner pursuant to Section 4.10.
"Net Operating Cash Flow" shall mean the excess, if
any, of Revenues generated by and identifiable with the Partnership's
Leasehold Interests, over the aggregate of all Lease Operating Costs.
"Net Revenues" shall mean the Revenues, less all
cash expenditures (including, without limitation, the
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Management Fee and Organizational Costs but excluding payments on the
Note) attributable to the Partnership's Leasehold Interests and
determined in the same manner as Net Proceeds are determined as
defined in the Note.
"Note" shall mean those certain promissory notes,
whether one or more, issued by the Partnership pursuant to the Note
Agreement (as defined below) and dated April 25, 1989 in the maximum
aggregate principal face amount of $2,185,276.30.
"Operating Agreement" shall mean any operating or
similar agreement to which the Leasehold Interests of the Partnership
are subject.
"Optional Contribution" shall mean any contribution
to the capital of the Partnership to fund an Optional Operation under
Section 9.01, or acquire additional Leasehold Interests under Section
9.02.
"Optional Operation" shall mean the drilling,
recompleting, deepening, or plugging back of a Partnership Well;
provided, however, that any matter that, under the applicable
Operating Agreement, the operator may undertake without the consent of
the co-owners shall not constitute an Optional Operation.
"Organizational Costs" shall mean all costs
associated with forming the Partnership and qualifying it as a foreign
limited partnership (or otherwise as a partnership in which the
Limited Partner has limited liability), including, without limitation,
all legal fees and expenses and all reasonable expenses incurred by
the General Partner or the Partnership in connection with the
acquisition of the Zilkha Properties and the negotiation, preparation,
printing, reproduction, execution, delivery, filing, recording or
registration and any refiling, re-recording, or re-registration, of
this Agreement and the Zilkha Agreement, the Note Agreement dated
April 25, 1989, by and among the Partnership, the General Partner and
John Hancock Mutual Life Insurance Company (the "Note Agreement"), the
Escrow Agreement (as defined in the Note Agreement), the Mortgages (as
defined in the Note Agreement), and all instruments and documents
executed and delivered pursuant hereto and thereto, including counsel
fees and expenses and all reasonable out-of-pocket expenses and fees,
including any post-closing expenses and fees related to any of the
foregoing instruments or agreements.
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"Partnership Account" shall mean the Partnership's
bank account described in Section 8.06.
"Partnership Well" shall mean any well in which the
Partnership has an interest.
"Payout" shall mean that point in time when the Note
shall have been paid in full and discharged.
"Revenues" for any period shall mean the gross
revenues to the Partnership during such period from whatever source
derived (including, without limitation, revenues from production of
Partnership Wells, sale of Leasehold Interests and other Partnership
assets, recoveries from third parties pursuant to contract rights and
interest income on Partnership funds).
"Sharing Ratio" shall have the meaning specified in
Section 3.01.
"Zilkha Agreement" shall mean that certain Purchase
Agreement between the Partnership and Zilkha Energy Company to be
dated as of April 25, 1989, which shall be in the form and substance
reviewed by and acceptable to the Limited Partner.
"Zilkha Properties" shall mean all Leasehold
Interests acquired by the Partnership from Zilka Energy Company under
or pursuant to the Zilkha Agreement.
ARTICLE II.
CAPITAL CONTRIBUTIONS
2.01 Initial Contributions. Following the formation of the
Partnership, the Partnership shall enter into the Zilkha Agreement. It is
contemplated that the Partnership will acquire the Zilkha Properties under the
Zilkha Agreement with money contributed to the Partnership by the Partners and
money loaned to the Partnership pursuant to the Note Agreement. The original
capital of the Partnership shall consist of a sum of $879,481.10, which shall
be contributed to the Partnership $439,740.55 by the General Partner and
$439,740.55 by the Limited Partner. No additional contributions may be made to
the capital of the Partnership except in money and except as set forth in this
Agreement; provided, however, that if the Partnership elects to accept
assignments out of escrow of any of the properties placed in escrow pursuant
to the Zilkha Agreement and the Partnership causes 70% of the purchase price
of such properties to be funded out of funds that had been contributed to
escrow by the Limited Partner in its capacity as lender with respect to the
properties being so acquired, then the Limited Partner and the General Partner
each shall be obligated to contribute to the capital of the Partnership 15% of
the purchase price of the properties being so acquired, up to a maximum of
$28,532.95 each with respect to all such escrowed properties in the aggregate.
Any acquisition or proposed acquisition by the Partnership of any such
escrowed properties without causing 70% of the purchase price therefor to be
funded out of funds that had been contributed to the escrow by the Limited
Partner in the capacity as lender with respect to the specific properties
being acquired shall be treated as and deemed to constitute an Optional
Operation under Section 9.02 hereof. The General Partner may elect to acquire
for its own account any such escrow properties described in the immediately
foregoing sentence, but only after proposing acquisition by the Partnership of
such properties pursuant to the procedures of Section 9.02, and only if the
Limited Partner elects not to contribute with respect to acquisition by the
Partnership of such properties.
2.02 Optional Contributions. If, pursuant to Article IX, the
Limited Partner shall elect to make Optional Contributions, each Partner shall
be liable to contribute to the capital of the Partnership an amount equal to
its Sharing Ratio of the Partnership's share of the costs of the Optional
Operations or acquisitions in question, as the case may be. Within a reasonable
time after any such election shall be made, the General
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Partner shall prepare any appropriate amendments to this Agreement and any
other certificates or documents that have been filed that may be required by
law, in form and substance satisfactory to the Limited Partner and its counsel,
setting forth the Limited Partner's agreement to make such Optional
Contributions. To the extent required by applicable law, such amendments shall
be executed, acknowledged and delivered by the Partners and filed by the
General partner as required by the laws of the State of Delaware and any other
state in which the Partnership then shall be doing business.
2.03 payment of Optional Contributions. On or before the 15th day
of each calendar month (but if such day shall not be a Business Day, on the
first Business Day thereafter), the General Partner shall present the Limited
Partner with a certificate stating that the General Partner is in compliance
with the provisions of this Agreement and that no event described in Section
11.01(g) or 11.02 has occurred with respect to the General Partner and a
statement, in reasonable detail, of the following items to the extent that same
constitute costs incurred by the Partnership in accordance with this Agreement:
(a) estimated dry-hole costs or completion costs of any
Partnership Well as set forth in Authority for Expenditure statements received
prior to the date of the statement from the General Partner and since the
latest such statement that the Limited Partner shall have received from the
operator of such Partnership Well (which Authorities for Expenditure, if the
General Partner shall be the operator, shall be for amounts proportional to
those of other owners of working or operating interests in such Partnership
Well taking into account the percentage of such interests);
(b) amounts by which actual dry-hole costs or completion
costs of any Partnership Well during the preceding month shall have exceeded
previously estimated costs, reduced by amounts by which actual dry-hole costs
or completion costs of any Partnership Well shall have fallen short of
previously estimated costs as per a final accounting thereof prepared by the
operator of such Partnership Well and received prior to the date of the
statement from the General Partner and since the latest such statement (and, if
the General Partner shall be the operator, such accounting shall be prepared as
soon as reasonably practicable after completion of all operations with respect
to such Partnership Well); and
(c) costs of acquiring Leasehold Interests as provided in
Section 9.02, unless previously funded; provided, however, that no such cost or
expense shall be included in such a statement more than once.
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To the extent that funds are at that time required to pay that portion
of the costs so itemized as to which the Limited Partner has elected to make
Optional Contributions, the itemized statement shall include a request by the
General Partner for contributions to the Capital of the Partnership, stating
specifically the amounts of Optional Contributions required at that time. To
the extent the Limited Partner has elected to make Optional Contributions in
accordance with the provisions of Article IX, then not later than the 25th day
after the Limited Partner's receipt of such statement, each Partner shall pay
into the Partnership Account by wire transfer of immediately available funds an
amount equal to its Sharing Ratio of the total Optional Contributions so called
for by the General Partner with respect to the Optional Operations or
acquisitions in question, as the case may be.
2.04 Default in Payment of Capital Contributions. In the event any
Partner shall default in the payment of any Capital Contribution such Partner
shall be obligated to make, the Partnership shall have all rights and remedies
available at law, in equity, or under this Agreement to collect the unpaid
amount of such Capital Contribution, and if such amount or any portion thereof
shall remain unpaid for ten days after the date due, such unpaid amount shall
bear interest at a rate equal to the Interest Rate from the date due until
paid.
2.05 Return of Capital Contribution. No Partner shall be entitled
to a return of any cash or property contributed to the capital of the
Partnership except as provided in Section 4.09 or Articles VII and XI;
provided, however, that if the Limited Partner shall have agreed to make
Optional Contributions but shall not have received statements pursuant to
Section 2.03 calling for the actual contribution of such amounts within six
months following the date of such agreement (or such other time as the General
Partner and the Limited Partner may agree at the time of the Limited Partner's
agreement to make such Optional Contributions), or if any amount so contributed
shall not have been spent within such six-month (or other) period, the Limited
Partner shall not be required to contribute any amount not already contributed
and the amounts already contributed but not so spent shall be returned to the
Limited Partner, and any such reduction or return shall constitute a compromise
under Section section 17-502(b) of the Act.
2.06 Interest. No Partner shall be entitled to be paid interest on
its capital account or on Capital Contributions.
2.07 Certain Borrowing. Lease Operating Costs and Cost Overruns
shall be funded out of Revenues generated by the Partnership's Leasehold
Interests, to the extent that such Revenues are available therefor; provided,
however, at any time the Partnership shall not have sufficient cash available
to fund
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Lease Operating Costs and Cost Overruns, the General Partner shall notify the
Limited Partner of the need for funds and the time by which they shall be
needed. Before the time such funds are so needed, the Limited Partner, at its
sole option, may lend funds to the Partnership, or propose to the General
Partner that it propose to third parties that they make loans to the
Partnership, to cover such needs, but in any such case, the interest rate shall
be lower than the General Partner's average short-term borrowing rate. If the
Limited Partner shall not make or arrange for such loans by the time the funds
shall be needed to pay Lease Operating Costs or Cost Overruns, the General
Partner may (a) advance such funds for or on behalf of the Partnership, and
each such advance shall constitute a loan from the General Partner to the
Partnership and shall bear interest (on the basis of a 365-day year) from the
date of the advance until the date of repayment at the average short-term
borrowing rate then being paid by the General Partner, or (b) cause the
Partnership to borrow such funds from one or more third parties that are not
Affiliates but only if such loan is (i) unsecured or (ii) nonrecourse except as
to Leasehold Interests on which such funds shall be spent; provided, however,
that the aggregate of any and all of such funds borrowed by the Partnership as
described in clauses (a) or (b) of this sentence, shall not exceed $200,000 and
that the rate of interest on such loans shall be the lesser of the applicable
rate as determined above and the maximum rate permitted by law. Such advances
shall not be considered as Capital Contributions. All advances shall be repaid
out of the next available funds of the Partnership, including Capital
Contributions received; provided, however, that if such advance is from a
Partner, any amounts so payable shall be applied to amounts then due to the
Partnership from such Partner.
2.08 Capital Accounts. A capital account shall be established and
maintained for each Partner. Except as specified in clauses (A) through (G)
below, each Partner's capital account shall be (a) increased by (i) the amount
of cash and the fair market value of all property contributed by such Partner
to the Partnership (net of any liabilities securing such contributed property
that the Partnership is considered to assume or take subject to under Section
752 of the Code), (ii) that Partner's allocable share of income and gain (or
items thereof) for federal income tax purposes, including income and gain
(other than Simulated Gain) described in Treasury Regulation
section 1.704-1(b)(2)(iv)(g), but excluding income and gain described in
Treasury Regulation section 1.704-1(b)(4)(i), (iii) that Partner's
allocable share of Simulated Gain, and (iv) that Partner's allocable share
(determined by reference to its share of the related proceeds of such items
under the terms of this Agreement) of income exempt from tax described in
Section 705 (a)(1)(B) of the Code, and (b) decreased by (i) the amount of cash
and the fair market value of property distributed to such Partner (net of
liabilities securing such distributed property that such partner
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is considered to assume or take subject to under Section 752 of the Code), (ii)
that Partner's allocable share of losses and other items of deduction for
federal income tax purposes, including loss and deduction (other than Simulated
Loss) described in Treasury Regulation section 1.704-1(b)(2)(iv)(g), but
excluding loss and deduction described in Treasury Regulation section
1.704-1(b)(4)(i) or section 1.704-1(b)(4)(iii), (iii) that Partner's allocable
share of Simulated Loss and Simulated Depletion, and (iv) that
Partner's allocable share of expenditures described in Section 705(a)(2)(B) of
the Code (determined by reference to such Partner's share of the cost of such
related items). The definitions and rules governing the maintenance and
operation of the capital accounts and the computation of the amounts to be
charged and credited thereto are as follows:
(A) If the Carrying Value of any property contributed to the
Partnership is different from its adjusted basis, upon a sale or other taxable
disposition of such property the gain or loss resulting from such sale or
disposition with respect to which gain or loss is recognized for federal income
tax purposes shall be computed by reference to the Carrying Value of such
property, notwithstanding that the adjusted tax basis of such property differs
from its Carrying Value. If the Carrying Value of any distributed property is
different from its then adjusted basis on the books and records of the
Partnership, the gain or loss (including Simulated Gain or Simulated Loss) that
would have been realized if such properties had been sold and the cash proceeds
distributed to such Partner or Partners shall be charged or credited to the
capital accounts of the Partners in accordance with the preceding sentence. In
lieu of the depreciation, amortization and other cost recovery deduction taken
into account for federal income tax purposes there shall be taken into account
Depreciation as defined in Section 1.07.
(B) The allocation of basis pursuant to Section 3.02(f) and
amounts realized pursuant to clause (D) below to a Partner shall have no effect
on that Partner's capital account except as specified in clause (C) below.
Further, neither the deduction for depletion nor the taxable gain or loss
resulting upon the sale, abandonment, or other taxable disposition of an oil or
gas property (all as computed pursuant to Section 3.02 (f)), shall be charged
or credited to any Partner's capital account, except to the extent and in the
manner provided in clause (C) below.
(C) For the purposes of maintaining the Partners' capital
accounts, the following rules shall apply:
(x) The Partnership shall establish and maintain books
and records containing asset accounts representing the aggregate
adjusted depletable basis credited to the capital accounts of all
Partners in
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each oil or gas property (as defined in Section 614 of the Code) at
the time the property first becomes a property of the Partnership (the
"Simulated Basis"). The Simulated Basis for each property shall be
adjusted from time to time in the same manner as if the Simulated
Basis were the Partnership's adjusted basis in such property to
reflect (1) additions to basis and (2) Simulated Depletion, as
provided in clause (y) below; and the Simulated Basis, as adjusted,
shall be utilized to determine Simulated Gain or Simulated Loss, as
provided in clause (z) below.
(y) The Partnership shall compute a depletion allowance
("Simulated Depletion") on each oil or gas property for each taxable
year based on the Simulated Basis, as theretofore adjusted, in
accordance with the provisions of Treasury Regulation 1.704-1(b)(2)
(iv)(k)(2) or (k)(3). Such Simulated Depletion allowance with
respect to each oil or gas property shall be allocated to the
Partners, and shall reduce each Partner's capital account, in the same
proportion that the Partners were allocated the adjusted basis of such
property as provided in Section 3.02(f). However, in no event shall
the Partnership's aggregate Simulated Depletion allowance with respect
to an oil or gas property exceed the Partnership's Simulated Basis of
such property.
(z) The Partnership shall compute simulated gain or loss
attributable to the sale, abandonment, or other taxable disposition of
an oil or gas property based on the difference between the amount
realized from the disposition and the Simulated Basis of such
property, as theretofore adjusted. Any resulting gain ("Simulated
Gain") shall be allocated to the Partners and shall increase their
respective capital accounts in the same manner as the amount realized
from such disposition in excess of Simulated Basis is allocated to the
Partners under Section 2.08(D). Any resulting loss ("Simulated Loss")
shall be allocated to the Partners and shall reduce their capital
accounts in the same proportion that such Partners (or their
predecessors in interest) shall have been allocated the adjusted basis
of such property as provided in Section 3.02(f).
(D) Subject to the provisions of Section 2.08 (A), for
purposes of determining each Partner's allocable share of the amount realized
from the sale or other taxable disposition of oil or gas properties (other than
oil, gas, or other hydrocarbon substances), the following steps shall be taken:
First, the portion of the amount realized that represents a recovery of
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the Partnership's Simulated Basis, as theretofore adjusted to date, in each
property sold or disposed of shall be allocated to the Partners in the same
proportion as the Partners (or their predecessors in interest) shall have been
allocated adjusted basis with respect to that property under Section 3.02(f).
Second, any remaining portion of the amount realized shall then be allocated to
the Partners in such a way as to cause, to the maximum extent possible, the
total amount realized allocated to that Partner under this clause (D) to equal
that Partner's Sharing Ratio of the proceeds derived from such sale or other
disposition (including such Partner's Sharing Ratio of any proceeds from the
sale or disposition of tangible property associated with such oil or gas
property).
(E) In the event the Carrying Value of the Partnership
assets is adjusted in accordance with the provisions of Subparagraph (ii) under
the definition of "Carrying Value" contained in Section 1.07 hereof, the
capital accounts of all Partners shall be adjusted simultaneously to reflect
the aggregate net adjustment as if the Partnership recognized gain or loss
equal to the amount of such aggregate net adjustment.
(F) In all events, and notwithstanding anything contained
in this Agreement which might otherwise produce a conflicting result, capital
accounts shall be maintained in accordance with the provisions of Treasury
Regulation Section 1.704-1(b)(2)(iv) and Section 1.704-1(b)(4)(iv).
(G) In the event any interest in the Partnership is
transferred in accordance with the terms of this Agreement, the transferee
shall succeed to the capital account of the transferor to the extent it relates
to the transferred interest, and to the extent such succession is necessary to
maintain the capital accounts in compliance with applicable Treasury
Regulations.
ARTICLE III.
COSTS, REVENUES AND ALLOCATIONS
3.01 Sharing of Costs and Revenues. All costs and revenues of the
Partnership shall be shared between the Partners in proportion to their
respective sharing ratios ("Sharing Ratios"). The Partners' Sharing Ratios
shall be as follows:
(a) All costs (other than interest payable pursuant to
Section 7.02, costs of Optional Operations, cost of acquiring properties
and interest payable on the Note) and revenues shall be shared:
General Partner 47.5%
Limited Partner 52.5%
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(b) Costs of interest payable pursuant to Section 7.02:
General Partner 100%
Limited Partner 0%
(c) Costs of Optional Operations, costs of acquiring
properties and interest payable on the Note shall be shared:
General Partner 50%
Limited Partner 50%
3.02 Allocations. Except as provided in Section 11.04, for
accounting and income tax purposes all items of Partnership income, gain,
loss, deduction, and credit shall be allocated to the Partners as follows:
(a) All items of income arising from the sale of oil,
gas, or other hydrocarbon substances and all other items of income or gain
other than those items described in Section 3.02(b), (c), (h), (k), (1) and (m)
shall be allocated to the Partners in accordance with the allocation of the
revenues giving rise to such income or gain.
(b) Gain or loss realized upon the sale, abandonment, or
other taxable disposition of all or part of any oil or gas property shall be
computed separately by the Partners in the same manner as depletion pursuant to
Section 3.02 (f) and shall not be charged or credited to any Partner's
capital account, except to the extent and in the manner provided in Section
2.08(C)(z).
(c) Gain or loss realized upon the sale, abandonment, or
other taxable disposition of tangible property shall be allocated to the
Partners in accordance with the manner in which the Partners shared the cost of
such tangible property.
(d) Cost recovery deductions with respect to tangible
property shall be allocated to the Partners in accordance with the manner in
which the Partners shared the cost of such tangible property.
(e) If any depreciation, cost recovery, or intangible
drilling and development costs shall be recaptured as a result of the
disposition of any Partnership property, the character of the gain allocated
under other provisions of this Agreement shall be determined and allocated to
the Partners in such manner and in the proportion (to the maximum extent
possible) that the Partners that originally received allocations of cost
recovery and intangible drilling and development cost
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deductions attributable to the assets disposed of shall recognize the ordinary
income element of any such gain so recognized.
(f) The deduction for depletion with respect to each
separate Partnership property (as defined in Section 614 of the Code) shall be
computed separately for each Partner rather than by the Partnership and shall
not be charged to any Partner's capital account; and for purposes of such
computation, each Partner shall be considered to own, and shall be allocated,
its proportionate share of the adjusted basis in each Partnership oil and gas
property as follows: the proportionate share of each Partner in the adjusted
basis of each Partnership property shall be such Partner's interest in the
Partnership capital with respect to that property, which shall be determined in
accordance with its Sharing Ratio (i) in the Partnership capital used to
acquire or provide capitalized improvements to such property if the property
shall be acquired or improved by the Partnership, or (ii) in the adjusted basis
of property if such property shall be contributed to the Partnership; provided,
however, that if the fair market value of such property differs from its
adjusted basis to the contributor immediately preceding such contribution, the
basis of such property shall be shared between the Partners to take account of
such variance in accordance with the principles of Section 704(c) of the Code;
and the General Partner shall maintain separate records for each Partner's
share of the adjusted basis in each Partnership oil and gas property and adjust
each Partner's share of the adjusted basis in each such property for any cost
or percentage depletion allowable on such property and use such adjusted basis
in the computation of gain or loss on the disposition of such property;
provided, however, that the Limited Partner shall advise the General Partner
upon request by the General Partner of the Limited Partner's adjusted basis on
each oil and gas property of the Partnership as computed in this Section
3.02(f); and the amount of gain or loss to be recognized by a Partner for
income tax purposes as a result of the sale or other taxable disposition of an
oil or gas property shall be equal to the difference between the amount
realized from such sale or disposition allocated to such Partner, pursuant to
Section 2.08(D) and such Partner's adjusted basis in such property, computed in
the manner described above.
(g) Deductions with respect to Lease Operating Costs and
intangible drilling and development costs shall be allocated to the Partners in
accordance with their respective share of such costs.
(h) The consequent decrease in deduction or increase in income
resulting from any dry-hole or bottom-hole contribution obtained from a third
person in connection with the drilling of a Partnership Well shall be allocated
in the same manner as the costs of drilling such Partnership Well are charged
to the parties under this Agreement.
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(i) All other losses, deductions, and credits not falling
within the foregoing provisions of this Section 3.02 shall be allocated to and
accounted for by each Partner in accordance with its respective share of the
costs that gave rise to the loss, deduction, or credit.
(j) If not otherwise provided for herein, income arising
from the receipt of property other than money shall be allocated to the
Partners in the same proportions as the proceeds of sale would be shared if the
property were sold immediately after receipt thereof by the Partnership.
(k) Notwithstanding the foregoing provisions of this
Section 3.02, no allocation of loss or deduction (other than an allocation of
nonrecourse deductions described in paragraph 3.02(1) or 3.02(0) below) shall
be made to a Limited Partner to the extent such allocation would cause or
increase a deficit balance in such Limited Partner's capital account. Such loss
or deduction shall be allocated to the General Partner.
(l) Notwithstanding the foregoing provisions of this
Section 3.02, in the event there is a net decrease in Partnership minimum gain
for the Partnership's taxable year, each partner will be allocated items of
income and gain for such year (and, if necessary, for subsequent years), in
proportion to, and to the extent of, an amount equal to the greater of (i) the
portion of such Partner's share of the net decrease in Partnership minimum gain
during such year that is allocable to the disposition of Partnership properties
subject to one or more nonrecourse liabilities of the Partnership; or (ii) the
deficit balance in such Partner's Capital Account at the end of such year
(determined before any allocation of Partnership income, gain, loss, deduction,
or Section 705(a)(2)(B) expenditure for such year and excluding from such
deficit Capital Account balance any amount that such Partner is obligated to
restore under Treasury Regulation Section 1.704-1(b)(2)(ii)(c), as well as any
addition thereto pursuant to the next to last sentences of paragraphs,
(b)(4)(iv)(f) and (h)(5) of Treasury Regulation Section 1.704-1 after taking
into account thereunder any changes during such year in Partnership minimum
gain and in the minimum gain attributable to any Partner's nonrecourse debt).
For purposes of this Section 3.02(1) the Partner's Capital Account shall be
reduced by the items described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) and (6). Also, the amount of the Partnership's
"minimum gain" shall be as determined under Treasury Regulation Section
1.704-1(b)(4)(iv)(c) and a Partner's share of Partnership minimum gain shall be
as determined under Treasury Regulation Section 1.704-1(b)(4)(iv)(f). This
Section 3.02(1) is intended to comply with the minimum gain chargeback
provisions of Treasury Regulation Section 1.704-1(b)(4)(iv)(e) and shall be
interpreted consistently therewith.
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(m) In the event any limited partner unexpectedly
receives any adjustment, allocation or distribution described in Treasury
Regulation 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income and
gain shall be specially allocated to such Partner in an amount and manner
sufficient to eliminate the deficit balance in such Partner's capital account
created by such adjustments, allocations, or distributions as quickly as
possible. This Section 3.02(m) is intended to constitute a "qualified income
offset" under Treasury Regulation Section 1.704-1(b)(2)(ii)(d) and shall be
interpreted consistently therewith.
(n) Notwithstanding anything else herein provided to the
contrary, all items of income, gain, loss and deduction with respect to
property contributed to the Partnership shall, solely for tax purposes, be
allocated among the Partners so as to take account of the variation between the
basis of the property to the Partnership and its fair market value at the time
of contribution, in such manner as the General Partner determines comports with
the requirements of Section 704(c) of the Code and the Treasury Regulations
issued thereunder.
(o) Notwithstanding the foregoing provisions in this
Section 3.02, any item of Partnership loss, deduction or Section 705(a)(2)(B)
expenditure that is attributable to a partner nonrecourse debt (as defined in
Treasury Regulation Section 1.704-1T(b)(4)(iv)(k)(4)) will be allocated to the
Partner that bears the economic risk of loss for such debt to the extent
required by Treasury Regulation Section 1.704-1T(b)(4)(iv)(h). Also, in the
event 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 such debt at the beginning of such year
will be allocated items of Partnership income and gain for such year (and, if
necessary, for subsequent years) in proportion to, and to the extent of, an
amount equal to the greater of (i) the portion of such Partner's share of the
net decrease in the minimum gain attributable to such partner nonrecourse debt
that is allocable to the disposition of Partnership property subject to such
debt; or (ii) the deficit balance in such partner's capital account at the end
of such year (determined before any allocation of Partnership income, gain,
loss, deduction, or Section 705(a)(2)(B) expenditure for such year and
excluding from such deficit capital account balance any amount that such
Partner is obligated to restore under Treasury Regulation Section
1.704-1(b)(2)(ii)(c), as well as any addition thereto pursuant to the next to
last sentences of paragraphs (b)(4)(iv)(f) and (h)(5) of Treasury Regulation
Section 1.704-1T after taking into account thereunder any changes during such
year in Partnership minimum gain and in the minimum gain attributable to any
partner nonrecourse debt). For purposes of this Section 3.02(o), the Partner's
capital account shall be reduced by the items described in Treasury Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6). Also, the amount of the
Partnership's "minimum gain
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attributable to a partner nonrecourse debt" shall be as determined under
Treasury Regulation Section 1.704-1T(b)(4)(iv)(h). This Section 3.02(o) is
intended to comply with the provisions of Treasury Regulation Section
1.704-1T(b)(4)(iv)(h) and shall be interpreted consistently therewith.
3.03 Limitation on Deductions. Notwithstanding any provision of
this Agreement to the contrary, in no event shall (a) the aggregate deductions
that may be claimed by the Partners as their distributive shares of Partnership
losses during the first two years of operation of the Partnership exceed the
sum of the Capital Contributions of the Partners to the Partnership, or (b) the
interest of the General Partner in any item of Partnership income, gain, loss,
deduction, expense, or credit ever be less than 1% thereof.
3.04 Lender as Partner. Without limiting the provisions of Section
4.04(a),except as provided in the Note Agreement and Mortgages no creditor that
makes a nonrecourse loan to the Partnership may have or acquire at any time as
a result of making the loan any direct or indirect interest in the profits,
capital, or property of the Partnership unless and to the extent it is as a
secured creditor.
ARTICLE IV.
MANAGEMENT AND OPERATION
4.01 Management of Partnership Affairs. Except where the consent of
the Limited Partner is expressly required by this Agreement or by law, the
General Partner shall have full, complete, and exclusive authority to manage
the affairs of the Partnership, to make all decisions regarding the business of
the Partnership, and to perform any and all other acts or activities customary
or incidental to the management of the Partnership's business.
4.02 Powers of General Partner. Except as otherwise provided in
this Agreement or applicable law and subject in all respects to the terms,
conditions, and limitations contained in this Agreement and any applicable
Operating Agreement, the General Partner shall have the rights, powers, and
authority to do on behalf of the Partnership all things that, in the General
Partner's judgment, are necessary, proper, or desirable to carry out its duties
and responsibilities pursuant to this Agreement, including, without limitation,
the power:
(a) To acquire interests in Leasehold Interests to the
extent permitted by Article IX and other real or personal property necessary or
appropriate to the conduct of the Partnership business;
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(b) To maintain, explore, develop, operate, manage, and
defend the Partnership's property, to drill, test, plug and abandon, complete,
equip, rework, deepen, and recomplete Partnership Wells for the production of
oil and gas therefrom, and to do any and all other things necessary or
appropriate to carry out the terms and provisions of this Agreement that would
or might be done by a normal and prudent operator in the exploration,
development, operation, and management of its own property;
(c) To sell the production accruing to the Leasehold
Interests in which the Partnership owns an interest, and to execute gas sales
contracts, casinghead gas contracts, transfer orders, division orders, or any
other instruments in connection with the sale of production from the Leasehold
Interests in which the Partnership owns an interest;
(d) To purchase, lease, rent, or otherwise acquire or
obtain the use of facilities, machinery, equipment, tools, materials, and all
other kinds and types of real or personal property that may in any way be
deemed necessary, convenient, or advisable in connection with carrying on the
business of the Partnership;
(e) To pay all taxes, charges, against the Partnership
and its property;
(f) To sue and be sued, complain, and defend in the name
of and on behalf of the Partnership;
(g) To quitclaim, surrender, release, or abandon the
Partnership's interest in any Leasehold Interest not productive of oil or gas
or to transfer same pursuant to forced pooling, unitization, and
communitization orders of a governmental agency having jurisdiction over such
Leasehold Interest; provided, however, that the General Partner shall notify
the Limited Partner of any such action it proposes to take prior to taking such
action and provided further that the General Partner shall not, and shall not
permit any Affiliate to, file or otherwise instigate, directly or indirectly,
proceedings leading to any such order;
(h) To execute and deliver all checks, drafts,
endorsements, and other orders for the payment of Partnership obligations;
(i) To appear and to represent the Partnership before any
regulatory agency, and to make all necessary or appropriate filings and
elections before such agency;
(j) To take any other action, execute, and deliver any
other documents, including the Zilkha Agreement, the Note Agreement and the
Escrow Agreement, and perform any other
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acts that the General Partner deems appropriate to carry out the business and
affairs of the Partnership in accordance with this Agreement; and
(k) To approve the merger or consolidation of the Partnership.
Persons dealing with the Partnership shall be entitled to rely conclusively on
the specific authority and express power of the General Partner as set forth in
this Agreement.
4.03 Operating Agreements. The General Partner may cause the
Partnership to enter into one or more Operating Agreements, which Operating
Agreements shall govern the exploration, development, and operation of the
Leasehold Interests in which the Partnership owns an interest. Except for
Operating Agreements applicable to Leasehold Interests at the time the General
Partner, an Affiliate, or the Partnership first shall acquire an interest
therein, each such Operating Agreement (a) shall be on terms usual and
customary in the oil and gas industry, (b) to the extent reasonably practicable
shall be on the A.A.P.L. Form 610 , (1977 or 1982 version) Model Form Operating
Agreement, and (c) shall not include "non-consent penalties" exceeding 400% or
permission for the operator to make expenditures in excess of $25,000 without
the consent of the co-owners. The General Partner or an Affiliate may be the
operator under any Operating Agreement even though it owns no interest in the
Leasehold Interests governed thereby.
4.04 Limitations on General Partner's Powers. Notwithstanding
any other provisions of this Agreement to the contrary, the General Partner
shall not have the power or authority to, and shall not, do, perform, or
authorize any of the following for the Partnership without having first
obtained the consent in writing of all of the Partners:
(a) Borrow any money in the name or on behalf of the
Partnership except as provided in Section 2.07;
(b) Mortgage, pledge, assign in trust, or otherwise
encumber any Partnership property, or to assign any monies owing or to be owing
to the Partnership, except for the operator's lien provided for in any
Operating Agreement to which the Partnership's Leasehold Interests are
subject;
(c) Guarantee in the name or on behalf of the Partnership
the payment of money or the performance of any contract or other obligation of
any person, firm, or corporation, other than of the Partnership;
(d) Sell, assign, farm out, abandon, or otherwise
dispose of, or take any action that will lead to (or fail to
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take action that will prevent) the release or disposition of, the Partnership's
interest in any Leasehold Interest on which a Partnership Well that is
producing or capable of producing oil or gas in paying quantities shall be
located; provided, however, that after a Partnership Well that previously shall
have been producing shall have ceased production, or shall have been plugged,
the General Partner may sell, assign, farm out, abandon, or otherwise dispose
of, or take an action that will lead to (or fail to take action that will
prevent) the disposition of, the Leasehold Interests in which the Partnership
owns an interest with respect to such well, but if the General Partner or an
Affiliate owns an interest for its own account in the same Leasehold Interests,
the General Partner shall have the right to make such disposition or to take
(or fail to take) such action for the Partnership if and only if it does so on
the same terms and conditions as the General Partner or such Affiliate shall
dispose of, or take action that will lead to (or fail to take action that will
prevent) the release or disposition of, such interest it owns for its own
account; and provided further that, if the same constitutes a permitted
election under a forced pooling, unitization, or communitization order of a
governmental agency having jurisdiction over such Leasehold Interest, the
General Partner may cause the Partnership to farm out such Leasehold Interest
to a person other than the General Partner or an Affiliate on terms usual and
customary in the oil and gas industry, following five Business Days, notice to
the Limited Partner;
(e) Cause the Partnership to purchase any Leasehold
Interest unless the Limited Partner shall have agreed to contribute its Sharing
Ratio of the costs of such purchase pursuant to Sections 2.02 and 9.02;
(f) Cause the Partnership to participate in any Optional
Operation unless the Limited Partner shall have agreed to contribute its
Sharing Ratio of the costs thereof pursuant to Sections 2.02 and 9.01;
(g) Take any action that would lead any third party
reasonably to believe that the Limited Partner is a general partner of the
Partnership;
(h) Amend or in any way modify or change this except as
provided in Section 2.02 or 12.07; or
(i) Cause the Partnership to change the nature of its
business.
4.05 Performance of Obligations as operator. The General Partner
as operator under any Operating Agreement pursuant to which it is operator
shall perform all of its obliga-
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tions and duties thereunder in accordance with all of the terms and provisions
thereof.
4.06 Insurance. The General Partner shall carry and maintain in
force and effect on behalf of the Partnership (either directly or through
Operating Agreements) the insurance coverages shown on Exhibit B from the date
hereof and as long hereafter as the Partnership remains in existence, or until
the Limited Partner shall advise the General Partner that it no longer desires
for the Partnership to be covered by such insurance. The General Partner shall
be free to change insurance carriers from time to time; provided, however, that
the coverages of the policies, their limits, and the financial standing of the
insurance carriers at all times shall not be diminished from the coverages and
limits of the policies and the financial standing of the insurance carriers
shown on Exhibit B. The Partnership and the Limited Partner shall be named as
additional insureds or loss payees on such policies, as the case may be. Each
such insurance policy shall include a provision requiring the issuer of such
insurance policy to give the Limited Partner 30 days, prior written notice of
any change, alteration, cancellation, or termination of any such policy. Upon
request by the Limited Partner, the General Partner shall cause the carrier of
any such insurance to provide the Limited Partner a certificate of insurance or
other evidence of such coverage satisfactory to the Limited Partner.
4.07 Fiduciary Relationship. The General Partner shall have a
fiduciary duty and obligation to the Limited Partner to conduct the affairs of
the Partnership in the best interests of the Partnership and the mutual best
interests of its Partners, including, without limitation, the safekeeping and
use of all Partnership funds and assets and the use thereof for the benefit of
the Partnership. The General Partner at all times shall act with integrity and
in good faith and utilize its best efforts in all activities relating to the
conduct of the business of the Partnership and in resolving conflicts of
interest. During the existence of the Partnership, the General Partner shall
devote such time and effort to the Partnership business and operations as shall
be necessary to promote fully the interests of the Partnership and the mutual
best interests of the Partners; however, it is specifically understood and
agreed that the General Partner shall not be required to devote full time to
Partnership business, and (subject to the other express provisions hereof) the
General Partner and Affiliates at any time and from time to time may engage in
and possess an interest in other business ventures of any and every type and
description, independently or with others, including, without limitation, the
ownership, acquisition, exploration, development, operation, and management of
oil and gas properties, oil and gas drilling programs, and partnerships similar
to this Partnership (but the General Partner promptly shall notify the Limited
Partner of any
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such action involving Leasehold Interests in which the Partnership also owns an
interest unless otherwise expressly provided herein); and
(subject to the other express provisions hereof) neither the Partnership nor
the Limited Partner by virtue of this Agreement shall have any right, title, or
interest in or to such independent ventures. In addition to the Management
Fee, the General Partner shall be entitled to reimbursement from the
partnership for the reasonable out-of-pocket expenses (other than (i) general
and administrative costs included in the determination of the Management Fee
and (ii) pension or other benefits or any other form of overhead) incurred by
it on account of the duties and services provided, furnished, or performed by
it as General Partner; provided, however, that with respect to Organizational
Costs, the provisions of Section 4.09 shall apply,
4.08 Compliance. The General Partner shall:
(a) Comply in all respects with the terms of this Agreement;
(b) Cause all Affiliates to comply with the terms of this
Agreement; and
(c) Cause the Partnership:
(i) To comply with the terms and provisions of all
agreements to which the Partnership is a party or to which its
properties are subject;
(ii) To comply with all applicable laws, ordinances,
or governmental rules and regulations to which the Partnership is
subject;
(iii) To obtain and maintain in good standing all
licenses, permits, franchises, and other governmental authorizations
necessary with respect to the ownership of Partnership properties and
the conduct of Partnership business and operations; and
(iv) To expend Partnership funds in accordance with
this Agreement and, in particular, to expend Capital Contributions for
the purposes for which they are advanced hereunder.
4.09 Organizational Costs. The Partnership shall be responsible for
and pay all Organizational Costs. To this end, the Partnership shall reimburse
the General Partner for all Organizational Costs it shall incur on behalf of
the Partnership.
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4.10 Management Fee. The Partnership shall pay the General Partner,
monthly within 5 days after billing, the direct internal general and
administrative costs incurred by the General Partner in managing the
Partnership's Leasehold Interests. Bills shall be submitted to the Partnership
by the General Partner by the 10th of each month, itemizing the direct general
and administrative costs incurred by the General Partner during the previous
month to manage the Partnership's Leasehold Interests; provided, however, in no
event shall a monthly bill from the General Partner exceed $10,000.
ARTICLE V.
TAXES
5.01 Tax Returns. The General Partner shall prepare and timely file
the necessary federal (and any state) income tax returns for the Partnership
and shall use its best efforts to prepare and file properly such income tax
returns, including making the elections described below. In addition, the
General Partner each year shall submit a copy of the final Partnership return
figures to the Limited Partner not later than 15 days before such Partnership
return must be filed. The General Partner will consider in good faith any
reasonable changes in such return recommended by the Limited Partner. The
Limited Partner shall furnish to the General Partner all pertinent information
in its possession relating to Partnership operations that is necessary to
enable the General Partner to prepare and file such Partnership income tax
returns.
5.02 Tax Elections. The General Partner shall make the following
elections on the appropriate returns of the Partnership:
(a) In accordance with Section 263(c) of the Code and the
applicable income tax regulations and comparable provisions of state law, to
deduct as an expense intangible drilling and development costs with respect to
productive and nonproductive wells, and the preparation of wells for production
of oil or gas;
(b) To adopt the calendar year as the partnership's
fiscal year;
(c) To adopt the accrual basis of accounting;
(d) If there is a distribution of Partnership property as
described in Section 734 of the Code or if there is a transfer of a Partnership
interest as described in Section 743 of the Code, upon written request of any
Partner to the General Partner, pursuant to Section 754 of the Code, to adjust
the basis of Partnership properties; provided, however, that the partner
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making such request shall pay any incremental accounting costs for determining
such adjustment;
(e) To claim cost recovery deductions in accordance with
the accelerated cost recovery system described in Section 168 of the Code;
(f) To elect to amortize the organizational expenses of
the Partnership ratably over a period of 60 months as permitted by Section
709(b) of the Code; and
(g) Any other election the General Partner may deem
appropriate and in the best interests of the Partners.
Neither the Partnership nor any Partner shall make an election for the
Partnership to be excluded from the provisions of Subchapter K, Chapter 1,
Subtitle A of the Code or any similar provision of any state's income tax laws.
5.03 Maintenance of Status as Partnership. The General Partner at
all times during the existence of the Partnership shall maintain a net worth
not less than 10% of the total capital contributions to the Partnership. For
the purposes of computing the net worth of the General Partner, the current
fair market value of its assets will be used and there will be excluded from
such assets any interest in, and any notes and accounts receivable from and
payable to, any limited partnership. The General Partner hereby agrees to
indemnify and save the Limited Partner harmless, to the fullest extent
permitted by law, from all liabilities, costs, expenses, and damages
(including, without limitation, any increased tax liability or obligations and
attorneys, fees and costs of suit) the Limited Partner may incur in the event
of a breach of this Section 5.03 by the General Partner; provided, however,
that such indemnification shall not arise if, within 30 days following the
event causing such breach, the General Partner shall notify the Limited Partner
of its election to dissolve the Partnership pursuant to Section 11.01(c) if
such an election then shall be permitted.
5.04 Partnership Tax Audits. The General Partner will be treated as
the tax matters partner of the Partnership pursuant to Section 6231(a)(7) of
the Code. The General Partner shall inform all other Partners of all matters
that may come to its attention in its capacity as tax matters partner by giving
notice thereof within five days after becoming so informed, and the General
Partner shall not take any action contemplated by Sections 6222 through 6232 of
the Code unless the General Partner shall have (i) given the Limited Partner
prior notice of the contemplated action and (ii) if such action in any way
binds or limits the rights of the Limited Partner, received the consent of the
Limited Partner thereto. This provision is not intended to authorize the
General Partner to take any action left to the
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determination of an individual Partner under Sections 6222 through 6232 of the
Code.
ARTICLE VI.
RIGHTS OF LIMITED PARTNER
6.01 Generally. In addition to the other rights specifically set
forth herein, the Limited Partner shall have the right:
(a) To have the Partnership books kept at the principal
place of business of the Partnership and at all reasonable times to inspect and
copy any of them;
(b) To have on demand true and full information of all
things affecting the Partnership and a formal account of Partnership affairs
whenever circumstances render it just and reasonable;
(c) To have dissolution and winding up by decree of court
as provided for in the Act;
(d) To approve (i) the dissolution and winding up of the
Partnership; (ii) any amendment of this Agreement; (iii) the sale, exchange,
lease, mortgage, pledge, or other transfer of a material portion of the assets
of the Partnership other than in the ordinary course of business; (iv) the
merger or consolidation of the Partnership; (v) the admission, removal or
retention of any Partner; (vi) the incurrence, renewal, or refinancing of a
debt by the partnership other than in the ordinary course of business; and
(vii) the matters set forth in Section 4.04 hereof;
(e) To consult with and advise the General Partner with
respect to any matter related to the business of the Partnership; and
(f) To exercise all other rights of a limited partner
under the Act.
The Partners hereby agree that the rights granted to the Limited Partner under
this Agreement, and the exercise of such rights, shall not be deemed to be
participation in the control of the business of the Partnership within the
meaning of the Act.
6.02 Limitations. The Limited Partner shall not have the authority
or power in its capacity as a Limited Partner to act as agent for or on behalf
of the Partnership or any other Partner, to do any act that would be binding on
the Partnership or any other Partner, or to incur any expenditures on behalf of
or with respect to the Partnership.
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6.03 Limited Liability. The Limited Partner shall not be liable
for the losses, debts, liabilities, contracts, or other obligations of the
Partnership except to the extent of (a) any unpaid Capital Contributions
the Limited Partner has agreed to make as described in Sections 2.01 and 2.02,
(b) the Limited Partner's share of the assets of the Partnership, and (c) its
share of the undistributed net profits of the Partnership. The Limited Partner
shall not be required to make any loans to the Partnership. The Limited Partner
may under certain circumstances be required pursuant to the Act return an
amount wrongfully distributed to it. The Partnership shall indemnify the
Limited Partner and hold it harmless, to the fullest extent permitted by law,
from and against all losses, costs, liabilities, and expenses it shall incur on
account of its being a Partner in the Partnership beyond the matters previously
set forth in this Section 6.03 as matters for which it shall be liable;
provided, however, that such indemnification shall not apply to the extent that
such losses, costs, liabilities and expenses shall have arisen pursuant to
Section 17-303(a) of the Act on account of the Limited Partner's having
participated in control of the business of the Partnership.
6.04 Trustee. If the General Partner shall fail to comply with any
material provision hereof and such failure shall have continued for a period of
30 days following notice thereof from the Limited Partner, the Limited Partner
may cause the Partnership, at the General Partner's sole expense, to assign the
Partnership's rights to receive revenues to a trustee named by the Limited
Partner. Such trustee shall receive and hold Partnership revenues for the
benefit of all the Partners but shall not have the rights of the General
Partner hereunder. The trustee's sole right and responsibility shall be to
receive Partnership funds and disburse them in accordance with the other
provisions of this Agreement. Notwithstanding any such assignment, the General
Partner and the Limited Partner shall continue to be the general partner and
the limited partner, respectively, of the Partnership.
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ARTICLE VII.
DISTRIBUTIONS
7.01 Monthly Distributions. On the first day of the month following
delivery of the statement described in the first sentence of Section 2.03 (or,
if no Capital Contributions then are to be made, at the time such statement
would have been sent), commencing with the first day of the second month
following the month in which the General Partner first receives Revenues
attributable to the activities of the Partnership, the General Partner shall
distribute to the Partners all Distributable Net Revenues of the Partnership
received during the second preceding calendar month; provided, however, that
the General Partner, at
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its option, may cause the Partnership to retain all or any portion of such
amount up to the amount the Limited Partner then shall be obligated to
contribute to the capital of the Partnership pursuant to the statement
delivered pursuant to Section 2.03 or pursuant to Section 2.04, and any sums so
retained shall be deemed to satisfy the Limited Partner's obligation to make
such portion of the Optional Contribution it then shall be required to make.
All distributions of Distributable Net Revenues realized prior to Payout shall
be made 63% to the Limited Partner and 37% to the General Partner. All
distributions of Distributable Net Revenues realized after Payout shall be made
52.5% to the Limited Partner and 47.5% to the General Partner.
7.02 Method of Payment. All distributions to the Limited Partner
shall be made by wire transfer in immediately available funds to such bank or
address and in accordance with such instructions as the Limited Partner may
from time to time give to the General Partner. Any distributions required to be
paid but not paid within ten days after the date due shall bear interest at a
rate equal to the Interest Rate from the due date until paid.
ARTICLE VIII.
BOOKS, RECORDS, REPORTS AND BANK ACCOUNTS
8.01 Maintenance of Books. The Partnership's books shall be
maintained in accordance with the terms of this Agreement at the principal
place of business of the Partnership. The calendar year shall be selected as
the accounting year of the Partnership and the Partnership's books of account
shall be maintained on an accrual basis according to the successful efforts
method. The costs and revenues of the Partnership shall be reported on a
well-by-well basis.
8.02 Periodic Reports. If requested by the Limited Partner,
concurrently with the delivery of the statement described in the first sentence
of Section 2.03 (or, if no Optional Contributions then are to be made, at the
time such statement would have been sent), the General Partner shall deliver to
the Limited Partner a moving 12-month statement of Partnership monthly
production and the related revenue and lease operating expenses on a
well-by-well basis, and of costs by well itemized by appropriate tax
classification with respect to new Partnership Wells. The General Partner also
shall deliver to the Limited Partner an annual reserve report prepared by an
independent petroleum engineering firm selected by the General Partner and
reasonably acceptable to the Limited Partner. The General Partner shall use its
best efforts to prepare any additional reports reasonably requested by the
Limited Partner at the expense of the Limited Partner. The General Partner
shall furnish copies of all written reports delivered pursuant to this Section
8.02 to such
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other persons as the Limited Partner reasonably may request. The costs of all
such reports shall be borne by the Partnership. The Limited Partner shall not
disclose or divulge to any person (other than its employees, auditors,
counsel, or other consultants) any information contained in any such report
that is expressly identified as confidential or proprietary in writing at the
time of its delivery to the Limited Partner and will keep confidential any such
information; provided, however, that the Limited Partner shall not be obligated
to treat as confidential any information (a) that is or becomes publicly
available or readily ascertainable from public sources or that the Limited
Partner receives from a third party (other than the General Partner's or the
Partnership's employees, auditors, or counsel), (b) as may be required or
appropriate in any report, statement, or testimony submitted to any municipal,
state, or federal regulatory body having or claiming to have jurisdiction over
the Limited Partner or to the National Association of Insurance Commissioners
or similar organizations or their successors, (c) as may be required or
appropriate in response to any summons or subpoena or in connection with any
litigation, (d) to the extent that the Limited Partner believes it appropriate
to comply with any law, order, regulation, or ruling applicable to it, and (e)
to the extent that the Limited Partner believes it appropriate to disclose
such information to the prospective transferee of all or any of its interest as
Limited Partner, but only to the extent that such prospective transferee shall
agree to be subject to the same terms and conditions described in this sentence
and that such disclosure is not in violation of applicable securities laws.
8.03 Quarterly Financial Reports. The General Partner shall furnish
the Limited Partner quarterly financial reports of the General Partner. The
Limited Partner shall not disclose or divulge to any person (other than its
employees, auditors, counsel, and other consultants) any information contained
in any financial statements of the General Partner delivered pursuant to this
Section 8.03 that is expressly identified as confidential or proprietary and
will keep confidential any such information, subject, however, to the
exceptions provided in the last sentence of Section 8.02.
8.04 Annual Certified Financial Statements. Unless otherwise
notified in writing by the Limited Partner prior to the end of the calendar
year, within 90 days after the end of each calendar year during the term of
this Agreement, the General Partner shall furnish the Limited Partner financial
statements covering the activities of the Partnership as of the end of and for
such period certified by the Certified Public Accountants. The financial
statements shall include a balance sheet, an income statement, descriptions of
the Partners' respective investments hereunder, and changes in Partners'
capital. Such financial statements shall be prepared in accordance with
generally accep-
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ted accounting principles and shall be accompanied by a report of the Certified
Public Accountants certifying the statements and stating that (a) their
examination was made in accordance with generally accepted auditing standards
and, in their opinion, such financial statements fairly present the financial
position, financial results of operations, and changes in Partners' capital in
accordance with generally accepted accounting principles consistently applied
and (b) in making the examination and reporting on the financial statements
described above, nothing came to their attention that caused them to believe
that (i) the income and revenues were not paid or credited in accordance with
the financial and accounting provisions of this Agreement, (ii) the costs and
expenses were not charged in accordance with the financial and accounting
provisions of this Agreement, or (iii) the General Partner failed to comply in
any material respect with the financial and accounting provisions of this
Agreement, or if they did conclude that the General Partner so failed,
specifying the nature and period of existence of such failure. The costs of all
such reports shall be borne by the Partnership. Within 120 days after the end
of each fiscal year during the term of this Agreement, the General Partner at
its sole cost and expense shall prepare and furnish to the Limited Partner a
certified annual financial statement of the General Partner. The Limited
Partner shall not disclose or divulge to any person (other than its employees,
auditors, counsel, and other consultants) any information contained in any
financial statements of the General Partner delivered pursuant to this Section
8.04 that is expressly identified as confidential or proprietary and will keep
confidential any such information, subject, however, to the exceptions provided
in the last sentence of Section 8.02.
8.05 Additional Reports and Information. The General Partner shall
furnish the Limited Partner such additional reports and information as the
General Partner may consider appropriate or as the Limited Partner reasonably
may request. The costs of all such reports shall be borne by the Partnership.
During ordinary business hours the Limited Partner or its authorized agent or
representative shall have reasonable access to all books, records, and
materials in the Partnership's offices regarding the Partnership or its
activities.
8.06 Bank Account. The General Partner shall establish and maintain
a separate interest-bearing account for all Partnership funds in the
Partnership name at The Liberty National Bank and Trust Company of Oklahoma
City or another bank which is a member of the Federal Deposit Insurance
Corporation having comparable or greater capital, surplus, and undivided
profits. Such account shall provide the highest interest rate available at the
bank for such funds. The General Partner may not commingle the Partnership
funds with other funds of the General Partner.
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ARTICLE IX.
OPTIONAL OPERATIONS; LEASEHOLD ACQUISITION
9.01 Optional Operations.
Upon receipt of any notice pursuant to an Operating Agreement or other
arrangement proposing any Optional Operation, or upon the General Partner's
giving such a notice (either for itself or for the Partnership) to third
parties on account of an interest in any Leasehold Interest in which the
Partnership owns an interest, the General Partner shall notify the Limited
Partner of the same; provided, however, that if the Election Period (as
hereinafter defined) shall be less than thirty days and if the General Partner
shall give such notice, the General Partner shall notify the Limited Partner of
the same at least 40 days prior to the expiration of such Election Period. Such
notice shall include a copy of any written notice from any third party or by
the General Partner to any third party proposing such Optional Operation, a
statement of the time by which the Partnership shall be obliged contractually
to notify the operator of the applicable Leasehold Interest or other
appropriate person whether the Partnership elects to participate in such
operation (the "Election Period"), the consequences of failing to notify such
person within such period, a summary of the pertinent geological and
engineering data and financial projections regarding the proposed operation, a
statement (the "Statement") whether the General Partner recommends
participation in such Optional Operation and whether the General Partner has
agreed or intends to agree to participate with respect to any interest it owns
for its own account in the Leasehold Interests affected, such title information
as the Limited Partner reasonably may request, and a statement that the Limited
Partner's failure to respond at least 10 days prior to the expiration of the
Election Period shall be deemed to mean it elects not to make additional
contributions to the capital of the Partnership to fund such Optional
Operation, provided, if the Statement from the General Partner recommends that
the Partnership participate in the Optional Operation in question, such
Statement shall also include a cash purchase offer from the General Partner to
the Partnership for the Partnership's interest in the well bore, and well bore
only, of the Partnership Well (whether existing or to be drilled) which is the
subject of such Optional Operation setting forth the terms of such offer
including, without limitation, the amount which the General Partner offers to
pay for such interest.
IF the Statement from the General Partner recommends that the
Partnership not participate in the Optional Operation in question, the
Partnership will not participate in such Optional Operation. Instead, the
Partnership will, subject to the other provisions of this Agreement including,
without limitation,
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Sections 4.04 and 6.01 hereof, follow the General Partner's recommendation
(which shall be contained in such Statement) to (i) farm-out to a third party,
which is not an Affiliate of the General Partner, the Partnership's interest in
the well bore, and well bore only, of the Partnership Well (whether existing or
to be drilled) which is the subject of the proposed Optional Operation, (ii)
sell such interest to a third party which is not an Affiliate of the General
Partner, or (iii) be subject to the nonconsent provisions of the applicable
Operating Agreement.
If the Statement from the General Partner recommends that the
Partnership participate in the Optional Operation in question, the Limited
Partner shall have the right (but not the obligation), at its sole option, to
make additional contributions of capital to the Partnership to fund such
Optional Operation, which election may be exercised by the Limited Partners
notifying the General Partner at least 10 days before the expiration of the
Election Period whether it elects to make such Optional Contributions;
provided, however, the Limited Partner's failure to notify the General Partner
of its election at least 10 days before the expiration of the Election Period
shall be deemed to mean it has elected not to make such Optional Contributions.
If the Limited Partner elects, or is deemed to elect, not to make additional
contributions to the capital of the Partnership to fund the proposed Optional
Operation, then the General Partner shall not cause the Partnership to
participate in such Optional Operation, and shall either (i) cause the
Partnership to give all notices, make such elections, and take all such further
actions as may be necessary to prevent the Partnership from becoming obligated
to participate, or (ii) farm-out to a third party, which is not an Affiliate of
the General Partner, the Partnership's interest in the Partnership Well which
is the subject of the proposed Optional Operation; provided, however, if the
Limited Partner consents in writing at least 10 days before the expiration of
the Election Period, the Partnership may accept the General Partner's purchase
offer and sell its interest in the Partnership Well in question to the General
Partner.
9.02 Acquisition of Leasehold Interests. Whenever the General
Partner receives a request or proposal under any agreement or arrangement to
which the Partnership is a party for the Partnership to acquire Leasehold
Interests that are covered by an Operating Agreement, or at any other time that
the General Partner desires to propose that the Partnership acquire additional
Leasehold Interests that are covered by an Operating Agreement, the General
Partner may (but shall not be obligated to) propose that the Partnership
acquire Leasehold Interests by giving notice thereof to the Limited Partner.
Such notice shall include copies of proposed acquisition documents, a statement
of the proposed Acquisition Amount therefor, a summary of the pertinent
geological, geophysical, and engineering data, financial projections regarding
the proposed acquisition, title
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information (if such Leasehold Interests then shall be producing) a summary of
any existing reserve report, if available, (if such notice shall be from the
General Partner), and a statement whether the General Partner recommends such
acquisition and whether the General Partner has agreed or intends to agree to
acquire an interest in such Leasehold Interest for its own account. The Limited
Partner shall have the right (but not the obligation), at its sole option, to
make additional contributions to the capital of the Partnership therefor, and
the Limited Partner shall notify the General Partner whether it elects to make
such contributions; provided, however, that the Limited Partner's failure to
notify the General Partner of its election within 30 Business Days after its
receipt of the General Partner's notice shall be deemed to mean it has elected
not to make such contributions. If the Limited Partner elects not to make such
contributions, or if the Limited Partner has not made its election before the
Partnership is required to notify any party as to the Partnership's decision,
or if the General Partner does not give notice of the proposed acquisition to
the Limited Partner, then the General Partner shall not cause the Partnership,
to acquire such Leasehold Interests, and shall cause the Partnership to give
all notices, make such elections and to take all such other actions as may be
necessary to prevent the Partnership from becoming obligated to so acquire
same.
9.03 Limitation. Under no circumstances shall the Limited Partner
be obligated by this Article IX to contribute more to an acquisition and/or
operation, as applicable, than the maximum amount of such contributions, or
upon any schedule other than the schedule for such contributions, to which it
agrees in its notice to the General Partner of its election to make such
contributions pursuant to this Article IX.
ARTICLE X.
ASSIGNMENT OF INTERESTS AND SUBSTITUTIONS; REMOVAL
10.01 Assignment by Limited Partners. The Limited Partner may
assign or otherwise transfer all or any part of its interest in the Partnership
at any time, but no such assignee shall become a substitute Limited Partner
unless (a) the Limited Partner shall give the assignee such right, (b) the
General Partner shall consent in its sole discretion to the admission of the
assignee as a substitute Limited Partner, and (c) the assignee shall execute
and deliver such instruments, in form and substance reasonably satisfactory to
the General Partner, as the General Partner may deem necessary to effect such
substitution and to confirm the agreement of the assignee to be bound by all of
the terms and provisions of this Agreement; and until such conditions shall be
fulfilled, the Limited Partner shall continue as a limited partner of the
Partnership. The Partnership and the General Partner shall be entitled to treat
the record owner of
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any Partnership interest as the absolute owner thereof in all respects and
shall incur no liability for distributions of cash or other property made in
good faith to such owner until such time as the General Partner shall have
received a written assignment of such interest that complies with the terms of
this Agreement. The assignor shall reimburse the Partnership for all expenses
the Partnership shall incur on account of any such assignment.
10.02 Assignment by General Partner. The General Partner shall not
assign or otherwise transfer all or any part of its interest in the Partnership
(including the right to receive distributions, except as hereinafter provided)
without the prior written consent of the Limited Partner, and no assignee of
the General Partner shall become a substitute General Partner without the prior
written consent of the Limited Partner in its sole discretion. The General
Partner shall not pledge, mortgage, or otherwise encumber its interest in the
Partnership; provided, however, that the General Partner may pledge its right
to receive any or all distributions hereunder if:
(i) Partnership funds are not used or obligated in any
way to repay the debt secured thereby;
(ii) No property of the Partnership is mortgaged, pledged,
or otherwise encumbered to secure such debt;
(iii) The Partnership's right to receive the proceeds from
the sale of production attributable to its interests in Leasehold Interests is
not pledged, mortgaged, or otherwise encumbered; and
(iv) The debt is secured by the full faith and credit of
the General Partner.
All of the expenses of obtaining and servicing any assignment or financing
permitted under this Section 10.02 and all repayments thereof and costs and
interest or other charges related thereto shall be borne and paid by the
General Partner, and in no event shall such repayments, costs, interest, or
other charges be charged to the account of or paid by the Limited Partner or
the Partnership.
10.03 Partition. Neither Partner nor the Partnership shall partition
or seek to partition, whether through order of any court or otherwise, any
Leasehold Interest in which the Partnership owns an interest.
10.04 Removal of the General Partner. The General Partner may be
removed by the Limited Partner at any time that the Limited Partner, in the
good faith exercise of its sole and absolute discretion, determines that the
General Partner (a) has
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engaged in gross negligence or wilfull misconduct in carrying out its duties
hereunder, or (b) has experienced a material and adverse change in its
financial condition and/or circumstances.
ARTICLE XI.
DISSOLUTION, LIQUIDATION AND TERMINATION
11.01 Dissolution. The Partnership shall be dissolved upon the first
to occur of any of the following:
(a) The consent in writing of the General Partner and the
Limited Partner;
(b) The election of the Limited Partner by written notice
to the General Partner at any time after the earliest to occur of (i) any
change in the ownership or control of the stock of the General Partner such
that the current management of the General Partner no longer is ultimately
directing its business and affairs, as determined by the Limited Partner in
good faith, or (ii) the enactment of any legislation that, for federal or
applicable state income tax purposes, either would cause the Partnership to be
treated as an association taxable as a corporation or would eliminate or
substantially reduce deductions, credits, or other benefits permitted as of the
date hereof with respect to Initial Costs, in each case as determined by the
Limited Partner in good faith;
(c) The election of the General Partner by written notice
to the Limited Partner at any time after December 31, 1999;
(d) The sale or other disposition of all or substantially
all of the assets of the Partnership;
(e) The removal of the General Partner in accordance with
the provisions of Section 10.04 hereof;
(f) The occurrence of any event that, under the Act,
causes the dissolution of a limited partnership;
(g) Entry of a decree or order relating to a Partner by a
court having jurisdiction (i) granting relief under Title 11 of the United
States Code or any successor statute; (ii) approving as properly filed a
petition seeking reorganization of such party under Title 11 of the United
States Code or any successor statute, or any other state or federal law; (iii)
for the appointment of a receiver, liquidator, trustee in bankruptcy or
insolvency of such Partner or of the property of such Partner; (iv) appointing
a custodian, trustee, receiver, or agent with authorization to take charge of a
material portion of the property of a Partner for the purpose of enforcing a
lien against
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such property; or (v) for the winding up or liquidation of the affairs of a
Partner, and, in any such case, such decree or order shall have remained in
force undischarged and unstayed for 60 days;
(h) December 31, 2015;
(i) The election of either partner by written notice to
the other, at any time after December 31, 1999, if the Note has not been paid in
full by such date; or
(j) THE General Partner makes a general assignment for
the benefit of its creditors, or fails to pay its debts generally as they
become due, or admits in writing its inability to pay its debts generally as
they become due.
11.02 Covenant Not to Withdraw. Except for causing a dissolution
pursuant to Section 11.01(c), the General Partner covenants and agrees not to
withdraw voluntarily from the Partnership, whether directly or by dissolution
or any other voluntary act. If the General Partner shall violate such covenant
and agreement, the withdrawal shall be effective for purposes of Section 11.01
to cause a dissolution of the Partnership, but the General Partner shall be
liable to the Limited Partner for all damages suffered or incurred by it as a
result of such withdrawal. For purposes of this Agreement, a "voluntary
withdrawal" by the General Partner shall consist of any of the applicable
events set forth in Section 17-402 of the Act other than those described in
subparagraphs (3) and (5) thereof.
11.03 Continuation and Reconstitution. Upon the occurrence of any
event that would cause a dissolution pursuant to Section 11.01 that also
constitutes an "event of withdrawal of a general partner" as defined in
Section 17-101(3) of the Act, the partnership shall not, notwithstanding
anything to the contrary contained in Section 17-801(3) of the Act, be
dissolved and shall not be wound up by reason of such event if, within 90 days
after such event, the Limited Partner agrees in writing to continue the
business of the partnership and to the appointment of, effective as of the date
of such event, a new general partner of the Partnership, which shall be
admitted as the general partner and shall succeed to the rights and duties of
the General Partner hereunder. In the event the partnership shall be so
continued, the Partnership shall distribute to the General Partner an amount
equal to the amount that would have been distributed to the General Partner
pursuant to Section 11.04 had the partnership been liquidated at that time.
The General Partner's consent shall not be required for any continuation
hereunder or for the designation of the new general partner hereunder. The
Limited Partner's right to elect to continue the business of the
Partnership may be exercised at its sole option, and its failure to exercise
such right shall not relieve the General Partner of any
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of its obligations, including, without limitation, those arising pursuant to
Section 11.02.
11.04 Liquidation and Termination. Upon dissolution of the
Partnership, the General Partner shall act as liquidating trustee or may
appoint in writing one or more liquidating trustees who shall have full
authority to wind up the affairs of the Partnership and make final distribution
as provided herein; provided, however, that if the Partnership shall be
dissolved pursuant to the provisions of Section 11.01(c), (e), or, to the
extent such event affects the General Partner only, (g) or Section 11.02, the
liquidating trustee shall be a person selected in writing by the Limited
Partner. The liquidating trustee shall proceed diligently to wind up the
affairs of the Partnership and make final distribution as provided herein. Once
liquidation shall be completed a final accounting shall be made of the affairs
of the Partnership and of each Partner from the date of the last accounting.
In the event the Partnership shall be dissolved and liquidated pursuant to the
provisions of Section 11.01(c), (e), or, to the extent such affects the
General Partner only, (g) or Section 11.02, all costs associated with
liquidation of the Partnership shall be borne by the General Partner;
otherwise, the costs of liquidation shall be borne as a Partnership expense.
Until final distribution, the liquidating trustee shall continue to operate the
Partnership properties with all of the power and authority of the
General Partner. The steps to be accomplished by the liquidating trustee are
as follows:
(a) As promptly as possible after dissolution and again
after final liquidation, the liquidating trustee shall cause a proper
accounting to be made by the Certified Public Accountants of the Partnership's
assets, liabilities, and operations through the last day of the calendar month
in which the dissolution shall occur or the final liquidation shall be
completed, as appropriate;
(b) The liquidating trustee shall pay all of the debts
and liabilities of the Partnership (including all expenses incurred in
liquidation and any advances made by the Partners pursuant to Section 2.07) or
otherwise make reasonable provision therefor (including, without limitation,
the establishment of a cash escrow fund for contingent liabilities in such
amount and for such term as the liquidating trustee may reasonably determine);
and
(c) All remaining assets of the Partnership shall be
distributed to the Partners as follows:
(i) If all Partners consent, selected Partnership
property may be sold, and any resulting gain or loss (including
Simulated Gain or Simulated Loss) from each sale shall be computed and
allocated to
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the capital accounts of the Partners as provided in Sections 2.08 and
3.02; provided, however, that any interest in any Leasehold Interest
contributed by a Partner for which such Partner shall not yet have
received credit as required by Section 2.08, shall be reassigned to
such Partner;
(ii) With respect to any properties of the
Partnership not sold pursuant to clause (i) above, the fair market
value of such properties shall be determined and the unrealized gain
or loss (including unrealized Simulated Gain or Simulated Loss) that
would have been realized if the sale of all such properties at their
fair market values had occurred shall be charged or credited to the
capital accounts of the Partners above as if such properties had been
actually sold;
(iii) After the allocations of gain or loss
(including Simulated Gain or Simulated Loss) required by clauses (i)
and (ii) above shall have been credited or debited, as the case may
be, to the capital accounts of the Partners, the balances of the
capital accounts of the Partners shall be determined. If the General
Partner has a deficit balance in its capital account, it shall restore
the amount of such deficit balance to the Partnership within 90 days
and thereafter, the capital accounts of all Partners shall be
satisfied in full.
All assignments made under the provisions of this Section 11.04 shall be made
in a form acceptable to the Partnership and assignee and shall be made subject
to the liability of each assignee for costs, expenses, and liabilities
theretofore incurred or for which the Partnership shall have committed prior to
the date of termination and such costs, expenses, and liabilities shall be
allocated to such assignee pursuant to this Section 11.04. The distribution of
cash and/or property to a Limited Partner in accordance with the provisions of
this Section 11.04 shall constitute a complete return to the Limited Partner of
its Capital Contributions and a complete distribution to the Limited Partner of
its interest in the Partnership and all the Partnership's property.
11.05 Cancellation of Certificate. Upon the completion of the
distribution of Partnership assets as provided herein, the Partnership shall be
terminated, and the person acting as liquidating trustee (or the Partners if
necessary) shall cause the cancellation of the Certificate and shall take such
other actions as may be necessary to terminate the Partnership.
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ARTICLE XII.
GENERAL PROVISIONS
12.01 No Third-Party Beneficiaries; Assignability; Binding Nature.
Nothing in this Agreement (express or implied) is intended or shall be
construed to confer upon any person or entity not a party hereto any right,
remedy, or claim under or by reason of this Agreement. Except as expressly
provided herein, the rights and duties of the parties hereunder are not
assignable. Subject to the prior provisions of this Section 12.01, this
Agreement shall be binding upon and shall inure to the benefit of the
respective successors and assigns of the parties hereto.
12.02 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto pertaining to the subject matter hereof
and supersedes all prior and contemporaneous agreements and understandings of
the parties hereto in connection therewith.
12.03 Partial Invalidity. In case any one or more of the covenants,
agreements, or provisions hereof shall be invalid, illegal, or unenforceable in
any respect, the validity. of the remaining covenants, agreements, or
provisions hereof shall be in no way affected, prejudiced, or disturbed
thereby.
12.04 Notices. All notices, consents, approvals, requests, demands,
or other communications required or permitted to be given hereunder shall be in
writing, shall be given by mail, return receipt requested, postage prepaid,
prepaid telegram with confirmation of delivery obtained, or personally
delivered with confirmation of delivery obtained and shall be deemed to have
been duly given when received at the address specified below:
If to the General Partner:
Alexander Energy Corporation
Triad Center
501 Northwest Expressway, Suite 600
Oklahoma City, Oklahoma 73118
Attention: Bob G. Alexander
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If to the Limited Partner:
John Hancock Mutual Life Insurance
John Hancock Place
200 Clarendon Street
P.O. Box 111
Boston, Massachusetts 02117
Attention: Bond and Corporate Finance Department, T-57
(and, if regarding any statement pursuant to
Section 2.03, an additional copy to
Securities Administration)
provided, however, that if any Election Period shall be less than five Business
Days or any well shall be in progress of the kind described in Section 9.02,
any notice with respect thereto may be made by telephone, if to the General
Partner, to Bob G. Alexander at (405) 840-5020, and if to the Limited Partner,
to William A. Kinsley at (617) 572-9600. Any party shall have the right to
change its address for notice hereunder from time to time to such other address
within the continental United States of America as may hereafter be furnished
in writing by such party to the other parties hereto.
12.05 Further Assurances. Each party hereto from time to time shall
do and perform such further acts and execute and deliver such further
instruments, assignments, and documents as may be required or reasonably
requested by the other party to establish, maintain, or protect the respective
rights and remedies of the parties hereto and to carry out and effect the
intentions and purposes of this Agreement.
12.06 Rights Cumulative. The rights and remedies granted to the
parties under this Agreement shall not be exclusive rights and remedies but
shall be in addition to all other rights and remedies available at law or in
equity.
12.07 Amendment. This Agreement may be modified, restated or amended
at any time, but only by a writing signed by both Partners.
12.08 No Waiver. The failure of any party hereto to insist upon
strict performance of any provision hereof shall not constitute a waiver of, or
estoppel against asserting the right to require such performance in the future,
nor shall a waiver or estoppel in any one instance constitute a waiver or
estoppel with respect to a later breach of a similar nature or otherwise.
12.09 Internal References. Unless otherwise specified, all
references in this Agreement to "Articles" and "Sec-
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46
tions" are to articles and sections of this Agreement, and all references to
"Exhibits" are to Exhibits attached to this Agreement, all of which are made
parts hereof for all purposes.
12.10 Counterpart Execution. This Agreement may be executed in a
number of counterparts, each of which shall have the force and effect of an
original although constituting but one instrument for all purposes.
IN WITNESS WHEREOF, the Partners have executed this Agreement on the
date set forth first above.
GENERAL PARTNER: ALEXANDER ENERGY CORPORATION
By :/s/ BOB G. ALEXANDER
Name: Bob B. Alexander
Title: President
LIMITED PARTNER: JOHN HANCOCK MUTUAL LIFE
INSURANCE COMPANY
By: /s/ WILLIAM A KINSLEY
Name: William A. Kinsley
Title: Senior Investment Officer
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EXHIBIT A
CERTIFICATE OF LIMITED PARTNERSHIP OF
AEJH 1989 LIMITED PARTNERSHIP
This Certificate of Limited Partnership of AEJH 1989 Limited
Partnership (the "Partnership") is being executed and filed by the undersigned
General Partner (the "General Partner") to form a limited partnership under the
Delaware Revised Uniform Limited Partnership Act (6 Del. C. 17-101, et seq.).
ARTICLE I
The name of the limited partnership formed hereby is
AEJH 1989 LIMITED PARTNERSHIP
ARTICLE II
The address of the registered office of the Partnership in the State
of Delaware is: The Corporation Trust Company, 1209 Orange Street, Corporation
Trust Center, Wilmington, New Castle County, Delaware 19801, and the name and
address of the registered agent for service of process on the Partnership in
the State of Delaware is: The Corporation Trust Company, 1209 Orange Street,
Corporation Trust Center, Wilmington, New Castle County, Delaware 19801.
ARTICLE III
The name and business address of the General Partner of the
Partnership is:
Name Business Address
---- ----------------
Alexander Energy Corporation 600 Triad Center
501 Northwest Expressway
Oklahoma City, Oklahoma 73118
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
day of , 1989.
GENERAL PARTNER: ALEXANDER ENERGY CORPORATION
By:_________________________
Name:
Title:
48
EXHIBIT B
Insurance
At all times during the conducting (including predrilling and
exploratory drilling activity) of operations hereunder:
A. Workmen's Compensation and/or Employer's Liability Insurance
in amounts reasonably, sufficient to cover liability for injury to or death of
operator's employees, such insurance if required by laws of the state in which
the leased lands are located, to be in conformity with such laws.
B. Comprehensive General Liability Insurance with combined limits
of not less than $500,000 and no deductibles covering bodily injury and
property damage liability, including coverage for the following hazards:
Personal Injury
Broad Form PD
Premises Medical
Broad Form Contractual
Additional Insured - Working Interest
Underground Resources & Equipment (also see
paragraph D below)
Blowout & Cratering (also see paragraph E below)
Explosion, Collapse & Underground PD
Incidental Malpractice
Waiver of Subrogation
Owner's Protective
C. Comprehensive Automobile Liability Insurance with combined
limits of not less than $500,000 and deductibles not greater than $500 covering
bodily injury and property damage liability, including coverage for all owned,
hired and nonowned vehicles. ,
D. Umbrella Liability Insurance in an amount not less than
$5,000,000 in excess of all primary limits.
E. Operator's Expense Indemnity Insurance of at least $3,000,000
on an annual basis as a combined single limit covering: costs incurred as a
result of blowout of a well, including damage to drilling and production
equipment, cleanup, containment and redrilling, and liability for gradual
pollution, subject to a $25,000 deductible per occurrence.
In addition, the Partnership will carry such other available insurance
as is necessary to protect the Partnership against losses due to casualty and
will require contractors and subcontractors to maintain such insurance. The
policies shall contain a waiver of territorial restrictions where necessary,
and otherwise shall conform to the provisions set forth in the Cer-
49
tificate and Agreement of Limited Partnership to which this Exhibit B is
attached. The insurance policies will be underwritten by insurance companies
having a Best's Rating of A+.
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