As filed with the Securities and Exchange Commission on October 7, 1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
(Exact name of Registrant as Specified in its Charter)
311 ROUSER ROAD
MOON TOWNSHIP, PENNSYLVANIA 15108
(412) 262-2830
(Address and Telephone Number of
Principal Executive Offices and
Principal Place of Business)
JAMES R. O'MARA, PRESIDENT
ATLAS RESOURCES, INC.
311 ROUSER ROAD, MOON TOWNSHIP, PENNSYLVANIA 15108
(412) 262-2830
(Name, Address and Telephone Number of Agent for Service)
Copies to:
WALLACE W. KUNZMAN, JR., ESQ. JAMES R. O'MARA
KUNZMAN & BOLLINGER, INC. ATLAS RESOURCES, INC.
5100 N. BROOKLINE 311 ROUSER ROAD
SUITE 600 MOON TOWNSHIP,
OKLAHOMA CITY, OKLAHOMA 73112 PENNSYLVANIA 15108
Approximate Date of Commencement of Proposed Sale to the Public;
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES
EFFECTIVE.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box:
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Title of Each Dollar Maximum Maximun Amount of
Class of Securities Amount Offering Aggregate Registration
to be Registered to be Registered Price per Offering Fee
Unit Price
- ----------------------------------------------------------------------------
Units (1) $12,000,000 $10,000 $12,000,000 $3,540.00
(1) "Units" means the Limited Partner interests and the Investor
General Partner interests offered to Participants in the
Partnership.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE
WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE
COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- ---------------------------------------------------------------------
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404
Item of Form SB-2
Caption in Prospectus
- -----------------------------------------------------------
1. Front of Registration Statement and Outside
Front Cover of Prospectus
Front Page of Registration Statement and Outside Front
Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus
Inside Front and Outside Back Cover Pages of Prospectus
3. Summary Information and Risk Factors
Summary of the Offering; Risk Factors
4. Use of Proceeds
Summary of the Offering; Capitalization and Source of Funds and Use of
Proceeds
5. Determination of Offering Price
Not Applicable
6. Dilution
Not Applicable
7. Selling Security Holders
Not Applicable
8. Plan of Distribution
Summary of the Offering; Plan of Distribution
9. Legal Proceedings
Litigation
10. Directors, Executive Officers, Promoters and
Control Persons
Management
11. Security Ownership of Certain Beneficial
Owners and Management
Management
12. Description of Securities
Summary of the Offering; Terms of the Offering; Summary of Partnership
Agreement
13. Interest of Named Experts and Counsel
Legal Opinions; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities
Fiduciary Responsibilities of the Managing General Partner
15. Organization Within Last Five Years
Management
16. Description of Business
Proposed Activities; Management
17. Management's Discussion and Analysis or Plan
of Operation
Proposed Activities
18. Description of Property
A. Issuers Engaged or to Be Engaged in Significant
Mining Operations
B. Supplementing Financial Information about Oil and
Gas Producing Activities
Proposed Activities
A.Not Applicable
B.Not Applicable
19. Certain Relationships and Related Transactions
Compensation; Management; Conflicts of Interest
20. Market for Common Equity and Related
Stockholder Matters
Not Applicable
21. Executive Compensation
Management
22. Financial Statements
Financial Information Concerning the Managing General Partner and the
Partnership
23. Changes In and Disagreements With Accountants
on Accounting and Financial Disclosure
Not Applicable
- ---------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTILL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES ANS EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IT IS NOT AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
THE OFFER OD SALE IS NOT PERMITTED
- ----------------------------------------------------------------------
Preliminary Prospectus (Subject to Completion)
Dated October 7, 1998
Prospectus
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
$1,000,000 Minimum Aggregate Capital Contributions
General and Limited Partner Interests at $10,000 per Unit
Minimum Purchase: 1 Unit ($10,000)
This Prospectus describes an offering of 800 general and limited
partner interests of $10,000 each in Atlas-Energy for the
Nineties-Public #7 Ltd., a limited partnership. Investors in the
Partnership will be admitted either as Investor General Partners or
Limited Partners depending upon their election and whether the
requisite suitability standards are met. See "Summary of the Offering -
Terms of the Offering - Types of Units" for a discussion of the
difference between Investor General Partner Units and Limited Partner
Units. The Managing General Partner of the Partnership is Atlas
Resources, Inc. ("Atlas"), a Pennsylvania corporation.
The Partnership will be funded to drill Development Wells which are
located primarily in the Mercer County area of Pennsylvania, although
the Managing General Partner has reserved the right to use up to 15% of
the Partnership Subscription to drill wells in other areas of the
United States. The Managing General Partner anticipates that all the
Partnership's well will be classified as gas wells which may produce a
small amount of oil. The Partnership is expected to generate
significant tax deductions. (See "Proposed Activities" and "Tax
Aspects".) For the meaning of certain capitalized terms used herein,
see "Definitions".
----------------------------------------------
THESE SECURITIES ARE SPECULATIVE AND ARE SUBJECT TO CERTAIN RISKS
INCLUDING:
* PURCHASE OF THE UNITS INVOLVES A HIGH LEVEL OF RISK; CONSEQUENTLY,
PROSPECTIVE INVESTORS MUST MEET STRICT SUITABILITY STANDARDS
ESTABLISHED BY THE MANAGING GENERAL PARTNER;
* THE DRILLING AND COMPLETION OPERATIONS TO BE UNDERTAKEN BY THE
PARTNERSHIP FOR THE DEVELOPMENT OF GAS RESERVES INVOLVE THE
POSSIBILITY OF A SUBSTANTIAL OR PARTIAL LOSS OF AN INVESTMENT IN THE
PARTNERSHIP BECAUSE OF WELLS WHICH ARE PRODUCTIVE BUT DO NOT PRODUCE
ENOUGH REVENUE TO RETURN THE INVESTMENT MADE;
* THE REVENUES OF THE PARTNERSHIP ARE DIRECTLY RELATED TO THE ABILITY
TO MARKET THE NATURAL GAS AND THE PRICE OF NATURAL GAS WHICH IS
UNSTABLE AND CANNOT BE PREDICTED AND IF THE PRICE OF GAS DECREASES
THEN THE PARTICIPANT RETURNS WILL DECREASE;
* UNLIMITED JOINT AND SEVERAL LIABILITY FOR PARTNERSHIP OBLIGATIONS
FOR THOSE INVESTORS WHO CHOOSE TO INVEST AS INVESTOR GENERAL
PARTNERS UNTIL THEY CONVERT TO LIMITED PARTNER INTERESTS;
* LACK OF LIQUIDITY OR A MARKET FOR THE UNITS;
* LACK OF CONFLICT OF INTEREST RESOLUTION PROCEDURES, CONSEQUENTLY,
CONFLICTS OF INTEREST BETWEEN THE MANAGING GENERAL PARTNER AND THE
INVESTORS MAY NOT NECESSARILY BE RESOLVED IN THE BEST INTERESTS OF
THE INVESTORS;
* TOTAL RELIANCE ON MANAGING GENERAL PARTNER AND ITS AFFILIATES;
* AUTHORIZATION OF SUBSTANTIAL FEES TO MANAGING GENERAL PARTNER AND
ITS AFFILIATES;
* INVESTORS AND THE MANAGING GENERAL PARTNER WILL SHARE IN COSTS
DISPROPORTIONATELY TO THEIR SHARING OF REVENUES;
* POSSIBLE ALLOCATION OF TAXABLE INCOME TO INVESTORS IN EXCESS OF
THEIR CASH DISTRIBUTIONS FROM THE PARTNERSHIP; AND
* NO GUARANTY OF CASH DISTRIBUTIONS EVERY QUARTER.
(SEE "RISK FACTORS", PAGE 9.)
------------------------------------
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE
TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------------------------
Dealer-Manager Fee,
Price to Commissions Net Proceeds
Public and Due Proceeds to for Drilling
Diligence Partnership(4) Costs(5)
Reimbursement(3)
---------- --------- ----------- ----------
Per Unit (1) $ 10,000 $ 1,050 $ 10,000 $ 10,000
Minimum (2) $ 1,000,000 $ 105,000 $ 1,000,000 $ 1,000,000
Maximum (2) $ 8,000,000 $ 840,000 $ 8,000,000 $ 8,000,000
Potential
Maximum (2) $12,000,000 $1,260,000 $12,000,000 $12,000,000
- ---------------------------
(1) The minimum required purchase is one (1) Unit or $10,000;
however, the Managing General Partner, in its discretion, may
accept one-half Unit ($5,000) subscriptions. (See "Terms of the
Offering - Suitability Standards".)
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<PAGE> ii
(2) The subscription period will terminate on or before December
31, 1998 ("Offering Termination Date"). The maximum amount of
subscriptions to be accepted from investors will be $8,000,000 (800
Units), and the minimum amount of subscriptions will be $1,000,000
(100 Units). However, if subscriptions for all 800 Units being
offered are obtained, the Managing General Partner, in its sole
discretion, may offer up to 400 additional Units and increase the
maximum aggregate subscriptions with which the Partnership may be
funded to not more than 1,200 Units ($12,000,000).
The subscription proceeds will be deposited in an interest bearing
escrow account at National City Bank of Pennsylvania before the
receipt of the minimum Partnership Subscription. Subject to the
receipt of the minimum Partnership Subscription, there will be two
closings which are tentatively set for December 1, 1998 ("Initial
Closing Date"), and December 31, 1998. The Partnership will begin
all activities, including drilling, after the Initial Closing Date.
An investor will receive interest on his Agreed Subscription until
the Offering Termination Date at the market rate paid by National
City Bank of Pennsylvania.
If subscriptions for $1,000,000 are not received by December 31,
1998, the sums deposited in the escrow account will be returned to
the subscribers with interest thereon. Checks for the full
subscription amount should be made payable to "Atlas Public #7
Ltd., Escrow Agent, National City Bank of PA" and sent, together
with a copy of the executed subscription, to National City Bank of
Pennsylvania, Corporate Trust Department, 300 Fourth Avenue,
Pittsburgh, Pennsylvania 15278-2331. (See "Terms of the Offering -
Partnership Closings and Escrow".)
(3) The Units will be offered on a "best efforts" basis by Anthem
Securities, Inc. ("Anthem Securities"), a registered broker-dealer
which is a member of the NASD and an Affiliate of the Managing
General Partner, acting as Dealer-Manager in all states other than
Minnesota and New Hampshire, and by other selected registered
broker-dealers, which are members of the NASD, acting as Selling
Agents. Bryan Funding, Inc., a member of the NASD, will serve as
Dealer-Manager in the states of Minnesota and New Hampshire, and
will receive the same compensation as Anthem Securities with
respect to sales in those states. Best efforts means that the
Dealer-Manager and broker-dealers will not guarantee the sale of a
certain amount of Units.
The Dealer-Manager will manage and oversee the offering of the
Units as described above and will receive from the Partnership on
each Unit sold to investors:
(i) a 2.5% Dealer-Manager fee;
(ii) a 7.5% Sales Commission; and
(iii) a .5% reimbursement of the Selling Agents' bona fide
accountable due diligence expenses.
The 7.5% Sales Commission and the .5% reimbursement of accountable
due diligence expenses will be reallowed to the Selling Agents.
The Managing General Partner is also utilizing the services of
three wholesalers who are employees of the Managing General Partner
and associated with Anthem Securities. (See "Plan of
Distribution".) The 2.5% Dealer-Manager fee will be reallowed to
the wholesalers for Agreed Subscriptions obtained through the
wholesalers' effort.
Subject to the receipt of the minimum Partnership Subscription and
the checks having cleared the banking system, Dealer-Manager fees,
Sales Commissions and accountable due diligence reimbursements will
be paid to the Dealer-Manager and broker-dealers approximately
every two weeks until the Offering Termination Date.
(4) The Managing General Partner will pay all Organization Costs
associated with the issuance of the Units, which will not exceed
4.5% of Agreed Subscriptions ($450 per Unit). (See "Participation
in Costs and Revenues".)
(5) After the payment of Organization and Offering Costs by the
Managing General Partner, the Partnership will utilize 100% of the
Partnership Subscription to drill and complete Development Wells as
described herein. (See "Proposed Activities".)
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<PAGE> iii
TABLE OF CONTENTS
Summary of the Offering 1
Forward Looking Statements and Associated Risks 1
The Partnership 1
Investment Objectives 1
Investment Features 2
Terms of the Offering 2
Reports 3
No Additional Assessments 3
Suitability Standards - Long Term Investment 3
Partnership Agreement 3
Application of Proceeds 4
Required Capital Contributions of the Managing
General Partner 4
Participation in Costs and Revenues 4
Prior Activities 5
Risk Factors 5
Actions to be Taken by Managing General Partner
to Reduce Risks of Additional Payments by
Investor General Partners 7
Compensation to the Managing General Partner,
the Operator and their Affiliates 7
Organizational Diagram 8
Conflicts of Interest 8
Distribution 9
Risk Factors 9
Special Risks of the Partnership 9
Risk of Loss Because of Speculative Nature of Investment 9
Risk of Loss Because of Unlimited Liability
of Investor General Partners 10
Risk Created by the Illiquidity and the
Restrictions on Transferability of
the Units 10
Risk Created by a Participant's Required
Reliance upon the Managing General Partner 11
Risk Created by the Management Obligations
of the Managing General Partner Not
Being Exclusive 11
Risk Created Because the Managing General
Partner's Liquid Net Worth Is Not Guaranteed 11
Diversification Depends Upon Subscription Proceeds 11
Disproportionate Costs Borne by Participants 11
Compensation and Fees to the Managing General Partner
Regardless of Success of the Activities 11
Dry Hole Risk in Development Drilling 11
Risk of Unproductive Wells in Development Drilling 11
Risks Regarding Marketing of Gas 12
Risk of Possible Delays in Production and
Shut-In Wells 13
Risk Regarding the Unspecified Location of a
Portion of the Prospects 13
No Guarantee of Data Regarding Currently
Proposed Prospects 13
Managing General Partner's Subordination
is not a Guarantee 13
Risk That Borrowings by the Managing
General Partner Could Reduce Funds
Available for Its Subordination Obligation 13
Possibility of Reduction or Unavailability
of Insurance 13
Possible Nonperformance by Subcontractors 14
Risk of Prepayment to Managing General Partner 14
Possible Leasehold Defects 14
Partnership Borrowings May Reduce or Delay Distributions 14
Managing General Partner Will Receive
Benefit from Transfer of Leases 14
Risk of Other Circumstances Causing
Distributions To Be Reduced or Delayed 14
Risk Arising From Conflicts of Interest
Between Managing General Partner and
the Partnership 14
Risk Regarding Participation with Third Parties 15
Risk That Dissolution of the Partnership or
Withdrawal or Removal of the Managing
General Partner May Have Adverse Effects 15
Risk of Reduced Distributions If the Managing
General Partner Is Indemnified 15
Risk of Limited Partner Liability for
Repayment of Certain Distributions 15
Possibility of Unauthorized Acts of Investor
General Partners 15
Risks That Repurchase Obligation May Not
Be Funded and Repurchase Price May Not
Reflect Full Value 16
Possible Participation in Roll-Up 16
General Risks of the Oil and Gas Business 16
Risk of Loss Because of Speculative Nature of
Gas Business 16
Risks of Loss Because of Decrease in the
Price of Gas 17
Risk of Loss From Drilling Hazards 17
Risk Created by Competition in Marketing
Natural Gas Production 17
Risk of New Governmental Regulations
Adversely Affecting the Partnership 17
Risk of Pollution and Environmental Liabilities 17
Risk That Costs May Increase 17
Year 2000 Risks 17
Tax Risks 17
Tax Consequences May Vary Depending on
Individual Circumstances 17
Risk of Changes in the Law 17
No Advance Ruling from the IRS on Tax Consequences 18
Possible Taxes in Excess of Cash Distributions 18
Partnership Allocations Are Subject to Challenge
by the IRS in the Event of an Audit 18
1998 Tax Deductions Are Subject to Challenge
by the IRS in the Event of an Audit 18
Possible Alternative Minimum Tax Liability 18
Investment Interest Deductions May Be Limited 18
Lack of Tax Shelter Registration 19
State and Local Taxes May Apply 19
Capitalization and Source of Funds and Use of Proceeds 19
In General 19
Source of Funds 19
Use of Proceeds 19
Subsequent Source of Funds and Borrowings 21
Compensation 21
Oil and Gas Revenues 21
Lease Costs 21
Administrative Costs 21
Drilling Contracts 22
Per Well Charges 22
Transportation and Marketing Fees 22
Dealer-Manager Fees 22
Other Compensation 22
Estimate of Administrative Costs and Direct Costs to be
Borne by the Partnership 23
Terms Of The Offering 23
Subscription to the Partnership 23
Partnership Closings and Escrow 24
Acceptance of Subscriptions 24
Drilling Period 24
Suitability Standards 25
Subscription by Managing General Partner 26
Conflicts of Interest 27
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<PAGE> iv
In General 27
Fiduciary Responsibility of the Managing General
Partner 27
Transactions with Managing General Partner
and its Affiliates 27
Conflict Regarding the Drilling and Operating
Agreement 27
Conflicts Regarding Sharing of Costs and Revenues 28
Tax Matters Partner 28
Other Activities of the Managing General Partner,
the Operator and their Affiliates 28
Conflicts Involving the Acquisition of Leases 28
Conflicts Between Participants 31
Lack of Independent Underwriter and Due
Diligence Investigation 31
Conflicts Concerning Legal Counsel 31
Conflicts Regarding Repurchase Obligation 31
Other Conflicts 31
Procedures to Reduce Conflicts of Interest 31
Policy Regarding Roll-Ups 33
Certain Transactions 34
Fiduciary Responsibility of the Managing General
Partner 35
General 35
Limitations on Managing General Partner Liability
as Fiduciary 35
Limitations on Managing General Partner
Indemnification 36
Prior Activities 36
Management 43
Managing General Partner and Operator 43
Recent Merger of Managing General Partner's
Parent Company, Atlas Group 43
Organizational Diagram 44
Officers, Directors and Key Personnel 44
Remuneration 46
Transactions with Management and Affiliates 47
Investment Objectives 48
Proposed Activities 48
In General 48
Intended Areas of Operations 49
Acquisition of Leases 49
Interest of Parties 51
Title to Properties 51
Formation of the Partnership and Powers of the
Managing General Partner 51
Drilling and Completion Activities; Operation
of Producing Wells 51
Sale of Oil and Gas Production 53
Insurance 54
Use of Consultants and Subcontractors 55
Information Regarding Currently Proposed
Prospects 55
Competition, Markets and Regulation 82
Competition and Markets 82
Crude Oil Regulation 83
Federal Gas Regulation 83
State Regulations 83
Environmental Regulation 83
Proposed Regulation 84
Participation in Costs and Revenues 84
In General 84
Costs 84
Revenues 84
Subordination of Portion of Managing General
Partner's Net Revenue Share 85
Allocation and Adjustment Among Participants 87
Distributions 87
Tax Aspects 87
Summary of Tax Opinion 87
In General 90
Partnership Classification 90
Limitations on Passive Activities 90
Taxable Year 91
1998 Expenditures 91
Availability of Certain Deductions 91
Intangible Drilling and Development Costs 91
Drilling Contracts 92
Depletion Allowance 93
Depreciation - Modified Accelerated Cost
Recovery System 93
Leasehold Costs and Abandonment 94
Tax Basis of Participants' Interests 94
Distributions from a Partnership 94
Sale of the Properties 94
Disposition of Partnership Interests 94
Minimum Tax - Tax Preferences 95
Limitations on Deduction of Investment Interest 95
Allocations 95
"At Risk" Limitation for Losses 96
Partnership Organization and Syndication Fees 96
Tax Elections 96
Disallowance of Deductions under Section 183
of the Code 96
Termination of a Partnership 97
Lack of Registration as a Tax Shelter 97
Tax Returns and Audits 97
Penalties and Interest 98
State and Local Taxes 98
Severance, Franchise, and Ad Valorem (Real
Estate) Taxes 99
Social Security Benefits and Self-Employment Tax 99
Foreign Partners 99
Estate and Gift Taxation 99
Changes in Law 99
Definitions 99
Summary of Partnership Agreement 105
Responsibility of Managing General Partner 105
Liabilities of General Partners, Including Investor
General Partners 105
Liability of Limited Partners 106
Amendments 106
Notice 106
Voting Rights 106
Access to Records 107
Withdrawal of Managing General Partner 107
Removal of Operator 108
Term and Dissolution 108
Summary of Drilling and Operating Agreement 108
Reports to Investors 109
Repurchase Obligation 110
Transferability of Units 111
Plan of Distribution 112
Sales Material 113
Legal Opinions 113
Experts 113
Litigation 113
Additional Information 113
Financial Information Concerning the Managing
General Partner and the Partnership 114
Exhibits
Exhibit (A) Amended and Restated Certificate and Agreement of
Limited Partnership
Exhibit (I-A) Managing General Partner Signature Page
Exhibit (I-B) Subscription Agreement
Exhibit (II) Drilling and Operating Agreement
Exhibit (B) Special Suitability Requirements and Disclosures to
Investors
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<PAGE>.1
SUMMARY OF THE OFFERING
This summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Prospective
investors are directed to "Definitions," which defines the capitalized
terms used throughout this Prospectus.
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
All statements, other than statements of historical facts, included in
this Prospectus and its exhibits that address activities, events or
developments that the Partnership anticipates will or may occur in the
future, including such things as estimated future capital expenditures,
business strategy, competitive strengths and goals, references to
future success, and other similar matters are forward-looking
statements. These statements are based on certain assumptions and
analyses made by the Partnership in light of its experience and its
perception of historical trends, current conditions and expected future
developments. However, whether actual results will conform with the
Partnership's expectations is subject to a number of risks and
uncertainties, including general economic, market or business
conditions, changes in laws or regulations, and other factors, many of
which are beyond the control of the Partnership. Consequently, all of
the forward-looking statements made in this Prospectus and its exhibits
are qualified by these cautionary statements and there can be no
assurance that actual results will conform with the Partnership's
expectations.
THE PARTNERSHIP
Atlas-Energy for the Nineties-Public #7 Ltd. (the "Partnership"), is a
Pennsylvania limited partnership. Atlas Resources, Inc. ("Atlas"), of
Pittsburgh, Pennsylvania, serves as Managing General Partner and
Operator, and the subscribers to Units will be either Limited Partners
or Investor General Partners depending upon their election. Limited
Partners and Investor General Partners will be referred to collectively
as Participants.
The Partnership will be funded to drill Development Wells which are
located primarily in the Mercer County area of Pennsylvania, although
the Managing General Partner has reserved the right to use up to 15% of
the Partnership Subscription to drill wells in other areas of the
United States. The Managing General Partner anticipates that all of the
Partnership's wells will be classified as gas wells which may produce a
small amount of oil.
The majority of the Development Wells drilled by the Partnership will
test the Clinton/Medina geological formation ("Clinton/Medina"). For a
description of the Prospects which are currently proposed see "Proposed
Activities - Information Regarding Currently Proposed Prospects". The
Managing General Partner and its Affiliates will act as general
drilling contractor and operator for all the wells. (See "Proposed
Activities".)
INVESTMENT OBJECTIVES
Except for the historical information contained herein, the matters
discussed below are forward looking statements that involve risks and
uncertainties, including the risk that the wells are productive but do
not produce enough revenue to return the investment made, Dry Holes,
uncertainties concerning the price of gas, and the other risks detailed
below. The actual results that the Partnership achieves may differ
materially from the objectives set forth below due to such risks and
uncertainties. The Partnership's principal investment objectives are
to invest the Partnership Subscription in natural gas Development
Wells which will:
(1) Provide quarterly cash distributions until the wells are
depleted, (historically 20+ years) with a preferred annual cash
flow of 10% during the first five years based on the original
subscription amount. (See "Risk Factors - Special Risks of the
Partnership - Risk of Unproductive Wells in Development Drilling,"
"Prior Activities" and "Participation in Costs and Revenues -
Subordination of Portion of Managing General Partner's Net Revenue
Share".)
(2) Obtain tax deductions in 1998 from intangible drilling and
development costs to offset a portion of the Participants' taxable
income (subject to the passive activity rules in the case of
Limited Partners). One Unit will produce a 1998 tax deduction of
$8,500 (85%) against ordinary income for Investor General
Partners and against passive income for Limited Partners. For an
investor in either the 39.6% or 36% tax bracket, one Unit will save
$3,366 or $3,060 respectively in federal taxes this year. Most states also
allow this type of a deduction against the state income tax.
(3) Offset a portion of any taxable income generated by the
Partnership with tax deductions from percentage depletion,
presently 17% (estimated to be 19% on net revenue). The Managing
General Partner estimates that this feature should reduce an
investor's effective tax rate from 39.6% to 32.1% (i.e., 81% of
39.6%) on Partnership net revenues.
(4) Obtain tax deductions of the remaining 15% of the initial
investment from 1999 through 2006. The investor will receive an
additional $1,500 tax deduction per Unit generated through the
remaining depreciation over a seven-year cost recovery period of
the Partnership's equipment costs for the wells.
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<PAGE> 2
ATTAINMENT OF THE PARTNERSHIP'S INVESTMENT OBJECTIVES WILL DEPEND ON
MANY FACTORS, INCLUDING THE ABILITY OF THE MANAGING GENERAL PARTNER TO
SELECT SUITABLE PROSPECTS WHICH WILL BE PRODUCTIVE AND PRODUCE ENOUGH
REVENUE TO RETURN THE INVESTMENT MADE. THE SUCCESS OF THE PARTNERSHIP
DEPENDS LARGELY ON FUTURE ECONOMIC CONDITIONS, ESPECIALLY THE FUTURE
PRICE OF NATURAL GAS WHICH IS VOLATILE.
THERE CAN BE NO GUARANTEE THAT THE FOREGOING OBJECTIVES WILL BE
ATTAINED.
INVESTMENT FEATURES
PREFERRED 10% CASH RETURN (CUMULATIVE 5 YEARS). The Partnership is
structured to provide preferred cash distributions to the Participants
equal to a minimum of 10% of their Agreed Subscription in each of the
first five twelve-month periods of Partnership operations. To help
insure the Participants achieve this investment feature, the Managing
General Partner will subordinate up to 40% of its 31% share of
Partnership Net Production Revenues (i.e., up to 12.4% of the
Partnership Net Production Revenues). (Partnership Net Production
Revenues means gross revenues after deduction of the related Operating
Costs, Direct Costs, Administrative Costs and all other Partnership
costs not specifically allocated.)
This feature allows the investors to receive a greater percentage of
cash distributions if the Partnership does not provide the 10% return
to Participants as described above. As of April 1, 1998, all of the
Managing General Partner's previous six public limited partnerships are
achieving or exceeding the 10% preferred twelve-month cash
distributions. The Managing General Partner has subordinated from time
to time its Partnership revenues in all the public partnerships. (See
"Risk Factors - Special Risks of the Partnership - Risk That Borrowings
by the Managing General Partner Could Reduce Funds Available for Its
Subordination Obligation" and "Participation in Costs and Revenues -
Subordination of Portion of Managing General Partner's Net Revenue
Share".)
REPURCHASE OBLIGATION. Beginning in 2003, the Participants may present
their interests for repurchase by the Managing General Partner.
Repurchase of Units is subject to certain conditions, including the
financial ability of the Managing General Partner to purchase the
Units. As of April 1, 1998, 4.5 Units have been presented to the
Managing General Partner for repurchase in its previous six public
limited partnerships. (See "Risk Factors - Special Risks of the
Partnership - Risk That Repurchase Obligation May Not Be Funded and
Repurchase Price May Not Reflect Full Value" and "Repurchase
Obligation".)
INVESTOR INTEREST FEATURE. A Participant will receive interest on his
Agreed Subscription up until the Offering Termination Date. The
interest will be paid to Participants approximately eight weeks after
the Offering Termination Date.
TERMS OF THE OFFERING
IN GENERAL. Units of Participation ("Units") are offered at $10,000 per
Unit. The minimum subscription is one Unit; however, the Managing
General Partner, in its discretion, may accept one-half Unit ($5,000)
subscriptions. Larger subscriptions will be accepted in $1,000
increments. Agreed Subscriptions are payable 100% in cash at the time
of subscribing.
The maximum amount of subscriptions to be accepted from Participants
will be $8,000,000 (800 Units), and the minimum amount of subscriptions
will be $1,000,000 (100 Units). However, if subscriptions for all 800
Units being offered are obtained, the Managing General Partner, in its
sole discretion, may offer up to 400 additional Units and increase the
maximum aggregate subscriptions with which the Partnership may be
funded to not more than 1,200 Units ($12,000,000).
Pending receipt of the minimum Partnership Subscription, subscription
deposits in the escrow account will earn interest at National City Bank
of Pennsylvania's variable market rate for short-term deposits. If the
minimum Partnership Subscription is not received on or before December
31, 1998, subscriptions will be refunded in full with interest earned
thereon. Although the Managing General Partner and its Affiliates may
buy up to 10% of the Units, the Managing General Partner currently does
not anticipate that it and its Affiliates will purchase any Units. Any
Units purchased by the Managing General Partner and its Affiliates will
not be applied towards the minimum Partnership Subscription required
for the Partnership to begin operations. For a full discussion of the
various terms of the offering, see "Terms of the Offering".
ESCROW ACCOUNT. The subscription proceeds will be deposited in an
interest bearing escrow account at National City Bank of Pennsylvania,
Pittsburgh, Pennsylvania until the receipt of the minimum Partnership
Subscription after which the funds will be paid directly to the
Partnership account. Subject to receipt of the minimum Partnership
Subscription, there will be two closings which are tentatively set for
December 1, 1998 ("Initial Closing Date"), and December 31, 1998. The
Partnership will begin its activities, including drilling, after the
Initial Closing Date. (See "Terms of the Offering - Partnership
Closings and Escrow".)
TYPES OF UNITS. Participants may purchase Limited Partner Units or
Investor General Partner Units. Although costs, revenues and cash
distributions allocable to the Participants
- ---------------------------------------------------------------------
<PAGE> 3
are shared pro rata based upon the amount of their Agreed
Subscriptions, there are material
differences in the federal income tax effects and liability associated
with these different types of Units in the Partnership. Investor
General Partners will have unlimited joint and several liability
regarding Partnership activities, but their use of Partnership losses
will not be subject to the passive activity limitations. Limited
Partners will have limited liability, but their use of Partnership
losses generally will be limited to net passive income from "passive"
trade or business activities, which generally includes the Partnership
and other limited partnership investments. (See "- Actions to be Taken
by Managing General Partner to Reduce Risks of Additional Payments by
Investor General Partners," below, "Risk Factors - Special Risks of
the Partnership - Risk of Loss Because of Unlimited Liability of
Investor General Partners," "Tax Aspects - Limitations on Passive
Activities," and "Summary of Partnership Agreement".)
REPORTS
The following information and reports will be provided to each
Participant:
(i) status reports detailing the progress of drilling activities;
(ii) within 120 days after the end of each calendar year audited
financial statements showing the income, expenses, assets and
liabilities of the Partnership at the end of its fiscal year
prepared in accordance with generally accepted accounting
principles; and
(iii) annual tax information for the Partnership's operations by
March 15 of the following year. (See "Reports to Investors".)
NO ADDITIONAL ASSESSMENTS
The Units are not subject to assessment, and the Partnership will not
call upon the Participants for additional amounts of capital beyond
their Agreed Subscriptions. However, in the case of Investor General
Partners, if the insurance proceeds, Partnership assets, and the
indemnification of the Investor General Partners by the Managing
General Partner were not sufficient to satisfy Partnership liabilities
for which the Investor General Partners were also liable, the Managing
General Partner could call upon Investor General Partners to make
additional Capital Contributions to the Partnership from their personal
assets to satisfy these liabilities. Investor General Partners do not
have an option to refuse to contribute an additional Capital
Contribution called by the Managing General Partner to pay Partnership
liabilities. (See "Summary of Partnership Agreement - Liabilities of
General Partners, Including Investor General Partners.")
If the Partnership requires additional funds, which the Managing
General Partner does not anticipate, these funds will have to be
provided by borrowings or the retention of Partnership revenues. (See
"Capitalization and Source of Funds and Use of Proceeds".)
SUITABILITY STANDARDS - LONG TERM INVESTMENT
The Managing General Partner has instituted strict suitability
standards for investment in the Partnership. The high degree of
investment risk, the restrictions on the sale of Units, the lack of a
market for the Units, and the tax consequences of the sale of Units
make an investment in the Partnership suitable only for persons who are
able to hold their Units on a long-term investment basis. (See "Terms
of the Offering - Suitability Standards".)
This is not an appropriate investment for IRAs, Keogh plans and
qualified retirement plans.
PARTNERSHIP AGREEMENT
The Partnership is a Pennsylvania limited partnership and will be
governed by the Partnership Agreement, the form of which is included as
Exhibit (A) to this Prospectus, as well as the provisions of the
Pennsylvania Revised Uniform Limited Partnership Act. Among other
matters, the Partnership Agreement provides for the distribution of
revenues and the allocation of costs, revenues, expenses, income, gain,
deductions and credits to and among the Partners. The Partnership
Agreement also provides for Partnership reporting and the conduct of
Partnership business and operations. The Participants have certain
rights, exercisable with limited exception by majority vote, relating
to their ownership of a Unit in the Partnership. These include the
right to:
(i) call a meeting of the Partners;
(ii) remove the Managing General Partner and elect a new Managing
General Partner;
(iii) elect a new Managing General Partner if the Managing General
Partner elects to withdraw from the Partnership;
(iv) remove the Operator and elect a new Operator;
(v) amend the Partnership Agreement;
- -------------------------------------------------------------------
- --
<PAGE> 4
(vi) dissolve and wind up the Partnership;
(vii) approve or disapprove any sale of all or substantially all of
the assets of the Partnership; and
(viii) cancel any contract for services with the Managing General
Partner, the Operator or their Affiliates without penalty upon
sixty days' notice.
The Managing General Partner and its Affiliates may vote any Units
purchased by them with respect to these matters other than (ii) and
(iv) above. These and other rights are more particularly described in
Section 4.03(c) and its subsections of the Partnership Agreement and
are subject to certain limitations as set forth therein.
APPLICATION OF PROCEEDS
The Partnership Subscription will be expended by the Partnership for
the purposes and in the percentages shown below assuming the minimum
number of Units is sold.
EXPENDITURE OF THE PARTNERSHIP SUBSCRIPTION
MINIMUM PARTNERSHIP
SUBSCRIPTION PERCENTAGE
Organization and Offering Costs $ -0- -0-
Lease Acquisition Costs -0- -0-
Intangible Drilling Costs 850,000 85%
Tangible Costs 150,000 15%
---------- ----------
$1,000,000 100%
========== ==========
For a more complete discussion of how the Partnership will apply the
proceeds of this offering, see "Capitalization and Source of Funds and
Use of Proceeds".
REQUIRED CAPITAL CONTRIBUTIONS OF THE MANAGING GENERAL PARTNER
The Managing General Partner is required to contribute to the
Partnership the Leases which will be drilled by the Partnership at its
Cost or fair market value if Cost is materially more than fair market
value. The Managing General Partner also is required to pay 51% of the
Tangible Costs of drilling the Partnership Wells and 100% of the
Organization and Offering Costs. Although Organization and Offering
Costs in excess of 15% of the Partnership Subscription also will be
paid by the Managing General Partner, these payments will be without
recourse to the Partnership and the Managing General Partner will not
be credited with these amounts towards its required Capital
Contribution. The Managing General Partner's aggregate Capital
Contributions to the Partnership (including the Leases contributed)
must equal at least 24.5% of all Capital Contributions to the
Partnership. (See 3.04(b)(2) of the Partnership Agreement.) The
Managing General Partner will also pay 31% of the Partnership's
Operating Costs, Administrative Costs, Direct Costs and all other costs
not specifically allocated.
PARTICIPATION IN COSTS AND REVENUES
The following table sets forth the participation in costs and revenues
of the Partnership between the Managing General Partner and the
Participants. Gross revenues from the sale of the Partnership's gas
will be reduced by Landowner Royalties and any other burdens on the
Leases. (See "Proposed Activities - Acquisition of Leases - Interest
of Parties", "Participation in Costs and Revenues" and "Definitions".)
MANAGING
GENERAL PARTNER PARTICIPANTS
--------------- --------------
PARTNERSHIP COSTS
Organization and Offering Costs (1) 100% 0%
Lease Costs 100% 0%
Intangible Drilling Costs (2) 0% 100%
Tangible Costs (2) 51% 49%
Operating Costs, Administrative Costs,
Direct Costs and All Other Costs (3) 31% 69%
PARTNERSHIP REVENUES
Equipment Proceeds (4) (4)
All other Revenues including
Production Revenues (5) 31% 69%
- ---------------------------------------------------------------------
<PAGE> 5
(1) The Managing General Partner's payment of Organization and
Offering costs in an amount up to 15% of the Partnership
Subscription will be credited towards its required Capital
Contribution. Although Organization and Offering Costs in excess
of 15% of the Partnership Subscription also will be paid by the
Managing General Partner, these payments will be without recourse
to the Partnership and the Managing General Partner will not be
credited with these amounts towards its required Capital
Contribution.
(2) More specifically, Intangible Drilling Costs and the Participants'
share of Tangible Costs of a well or wells to be drilled and
completed with the proceeds of a Partnership closing will be
charged 100% to the Participants who are admitted to the
Partnership in the closing and will not be reallocated to take
into account other Partnership closings. Although the proceeds of
each Partnership closing will be used to pay the costs of drilling
different wells, each Participant will pay the same amount of costs
regardless of when he subscribes.
(3) If the Managing General Partner has to subordinate a portion of its
share of Partnership revenues in an amount up to 12.4% of
Partnership Net Production Revenues, then Operating Costs, Direct
Costs, Administrative Costs and all other Partnership costs not
specifically allocated will be charged to the parties in the same
ratio as the related production revenues are being credited. (See
"- Investment Features - Preferred 10% Cash Return (cumulative 5
years)," above and "Risk Factors - Special Risks of the Partnership
- - Risk That Borrowings by the Managing General Partner Could Reduce
Funds Available for Its Subordination Obligation".)
(4) Proceeds from the sale or other disposition of equipment will be
credited to the parties charged with the costs of the equipment in
the ratio in which the costs were charged.
(5) The revenues from all Partnership Wells will be commingled, so
regardless of when a Participant subscribes he will share in the
revenues from all wells on the same basis as the other
Participants.
PRIOR ACTIVITIES
The Managing General Partner has previously sponsored six public and
twenty-two private Development Drilling Programs formed since 1985 to
conduct natural gas drilling and development activities in Pennsylvania
and Ohio. With respect to the Managing General Partner's prior Programs
since 1985, twenty-five of the twenty-eight Programs have not yet
returned to the investor 100% of his capital contributions without
taking tax savings into account. However, all the Programs are
continuing to make cash distributions and twenty-three of the Programs
were formed in 1990 or subsequent years. (See "- General Risks of the
Oil and Gas Business - Risk of Loss Because of Speculative Nature of
Gas Business," "Prior Activities" and "Proposed Activities".)
Also, as of July 15, 1998, the annual return on investment (ROI) for
the prior 25 Programs which have a full twelve months of gas sales from
all of their wells has averaged 12.4%, and has ranged from 7% to 19%
without taking tax savings into account. The average return for the
Programs was calculated by adding their "Average Yearly Returns" as set
forth in Table 3 of "Prior Activities" and dividing by 25 (the number
of Programs). A portion of the distributions may be considered to
include a return to Participants of their capital or investment in the
Programs. (See "Risk Factors - Special Risks of the Partnership - Risk
of Loss Because of Speculative Nature of Investment.")
The Managing General Partner and its Affiliates have drilled more than
1,650 Development Wells over the 26 year period from 1972 to 1998 and
during this time approximately 97% of the wells have been completed and
produced commercial quantities of gas. In the current area of primary
interest in Mercer County, Pennsylvania, approximately 97% of more than
approximately 810 wells drilled have been completed and produced
commercial quantities of gas. (See "Prior Activities" and "Proposed
Activities - Information Regarding Currently Proposed Prospects".)
RISK FACTORS
This offering involves numerous risks, including the risks of oil and
gas drilling, the risks associated with investments in oil and gas
drilling programs, and tax risks. (See "Risk Factors".) Each
prospective investor should carefully consider a number of significant
risk factors inherent in and affecting the business of the Partnership
and this offering, including the following.
RISKS PERTAINING TO OIL AND GAS INVESTMENTS:
The drilling and completion operations to be undertaken by the
Partnership for the development of gas reserves involve the
possibility of a substantial or partial loss of an investment in
the Partnership because of wells which are productive but do not
produce enough revenue to return the investment made and/or from
time to time Dry Holes.
The revenues of the Partnership are directly related to the
ability to market the natural gas and the price of natural gas
which is currently unstable and cannot be predicted. If gas prices
decrease then investor returns will decrease.
Oil and gas operations in the United States are subject to
extensive government regulation. Future pollution and
environmental laws could have an adverse effect on the
Partnership.
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<PAGE> 6
SPECIAL RISKS OF THE PARTNERSHIP:
The Managing General Partner will have the exclusive management
and control of all aspects of the business of the Partnership.
Investor General Partner Units in the Partnership will be
converted to Limited Partner interests by the Managing General
Partner after substantially all of the Partnership Wells have been
drilled and completed, which is anticipated to be in late summer
of 1999. Investor General Partner Units may also be converted to
Limited Partner interests at the option of the Investor General
Partner if the Partnership's insurance will be materially reduced,
which is not anticipated. Before the conversion of Investor
General Partners to Limited Partners, Investor General Partners
will have unlimited joint and several liability for all
obligations and liabilities to creditors and claimants arising
from the conduct of Partnership operations. If these liabilities
exceed the Partnership's assets, insurance and the assets of the
Managing General Partner (which has agreed to indemnify the
Investor General Partners), the Investor General Partners could
incur liability in excess of their Agreed Subscriptions. (See
"Proposed Activities - Insurance" and "Transferability of Units -
Conversion of Units by Investor General Partners.")
Lack of liquidity or a market for the Units, necessitating a long-
term investment commitment.
Lack of asset diversification and concentration of investment risk
should less than the maximum Partnership Subscription be raised
and thus fewer wells drilled. The Managing General Partner
anticipates that approximately 4.9 wells will be drilled if only
the minimum Partnership Subscription of $1,000,000 is received,
and approximately 39.25 wells will be drilled if the maximum
Partnership Subscription of $8,000,000 is received.
Certain conflicts of interest between the Managing General Partner
and the Partnership and lack of procedures to resolve such
conflicts.
The Managing General Partner and its Affiliates can be expected to
profit from the Partnership even though it is possible that
Partnership activities could result in little or no profit, or a
loss, to Participants.
Investors and the Managing General Partner will share in costs
disproportionately to their sharing of revenues.
The Managing General Partner intends that the Partnership will
drill the currently proposed Prospects described in "Proposed
Activities - Information Regarding Currently Proposed Prospects."
If there are adverse events with respect to any of the currently
proposed Prospects, the Managing General Partner has the right
acting as a prudent operator to substitute the Partnership's
Prospects. Also, up to 15% of the Partnership Subscription may be
used to drill Prospects which are located in other areas of the
United States which are not described in "Proposed Activities -
Information Regarding Currently Proposed Prospects".
The Managing General Partner's subordination of a portion of its
share of Partnership Net Production Revenues is not a guarantee by
the Managing General Partner. If the wells produce small volumes
of gas and/or the price of gas decreases, then even with
subordination the cash flow to the Participants may be very small
and they may not receive a return of their entire investment.
Quarterly cash distributions to investors may be deferred if
revenues are used for Partnership operations or reserves or if
production is reduced because of decreases in the price of gas.
Subject to certain conditions, beginning in 2003 the Participants
may present their interests for purchase by the Managing General
Partner. There is a risk that the Managing General Partner, or its
Affiliates, will either not have the necessary cash flow or be
able to arrange financing for these purposes on reasonable terms
as determined by the Managing General Partner. In this event the
Managing General Partner is able to suspend its repurchase
obligation.
TAX RISKS:
There is no guarantee that if the Partnership is audited the IRS
will not challenge the deductions claimed by the Partnership.
Possible allocation of taxable income to investors in excess of
their cash distributions from the Partnership.
Alternative minimum taxable income of "independent producers,"
which includes most investors, cannot be reduced by more than 40%
by reason of the repeal of the preference item for intangible
drilling and development costs.
- ---------------------------------------------------------------------
<PAGE> 7
The proper application of many provisions of the IRS regulations
governing partnership allocations is currently unclear. Should the
IRS successfully challenge the allocation provisions contained in
the Partnership Agreement, Participants could incur a greater tax
liability. (See "Tax Aspects - Allocations".)
ACTIONS TO BE TAKEN BY MANAGING GENERAL PARTNER TO REDUCE RISKS OF
ADDITIONAL PAYMENTS BY INVESTOR GENERAL PARTNERS
The Managing General Partner will attempt to conduct the operations of
the Partnership in a manner designed to reduce the risk that an
Investor General Partner could be required to make additional payments
to the Partnership. The actions to be taken by the Managing General
Partner are set forth below.
1. INSURANCE. Fifty million dollars of liability coverage during
drilling operations and eleven million dollars thereafter as
described in "Proposed Activities - Insurance."
2. CONVERSION OF INVESTOR GENERAL PARTNER UNITS TO LIMITED
PARTNER INTERESTS. Pursuant to the Partnership Agreement, Investor
General Partner Units in the Partnership will be converted to
Limited Partner interests after substantially all of the
Partnership Wells have been drilled and completed, which is
anticipated to be in late summer of 1999. After conversion the
Investor General Partners will have the lesser liability of
limited partners under Pennsylvania law for obligations and
liabilities arising after the conversion, however, they will
continue to have the responsibilities of general partners with
respect to Partnership contract, tort and environmental
liabilities and obligations incurred before the effective date of
the conversion. Thus, an Investor General Partner might become
liable for obligations in excess of his Agreed Subscription to the
Partnership during the time when the Partnership is engaged in
drilling activities and for environmental claims that arose during
drilling activities but were not discovered until after
conversion.
3. NONRECOURSE DEBT. Under the Partnership Agreement the Partnership
will be permitted to borrow funds only from the Managing General
Partner or its Affiliates which will not have recourse against the
non-Partnership assets of the individual Investor General
Partners. Accordingly, no Investor General Partner could be
required to contribute funds to the Partnership in the case of a
default under this loan arrangement and any borrowings will be
repaid from Partnership revenues. The amount that may be borrowed
at any one time may not exceed an amount equal to 5% of the
Partnership Subscription. Because the Participants do not bear
the risk of repaying these borrowings with non-Partnership assets,
the borrowings will not increase the extent to which Participants
are allowed to deduct their individual shares of Partnership
losses. (See "Tax Aspects - Tax Basis of Participants' Interests"
and "- `At Risk' Limitation For Losses".)
To further protect the Investor General Partners, during producing
operations all third party goods and services will be acquired by
the Managing General Partner and its Affiliates, and the
Partnership will then acquire the goods and services from the
Managing General Partner and its Affiliates at their Cost.
4. INDEMNIFICATION. The Managing General Partner will indemnify
each Investor General Partner from any liability incurred in
connection with the Partnership which is in excess of the Investor
General Partner's interest in the undistributed net assets of the
Partnership and insurance proceeds, if any. Upon indemnification
by the Managing General Partner, each Investor General Partner who
has been indemnified is deemed to have transferred and subrogated
his rights for contribution from or against any other Investor
General Partner to the Managing General Partner.
The Managing General Partner's indemnification obligation,
however, will not eliminate an Investor General Partner's
potential liability if the insurance is not sufficient or
available to cover a liability and the Managing General Partner's
assets are insufficient to satisfy its indemnification obligation.
There can be no assurance that the Managing General Partner's
assets, including its liquid assets, will be sufficient to satisfy
its indemnification obligation. (See "Risk Factors - Special Risks
of the Partnership - Risk Created Because the Managing General
Partner's Liquid Net Worth Is Not Guaranteed" and "Financial
Information Concerning the Managing General Partner and the
Partnership".)
COMPENSATION TO THE MANAGING GENERAL PARTNER, THE OPERATOR AND THEIR
AFFILIATES
The following is a tabular presentation of the items of compensation
and reimbursement to be received by the Managing General Partner and
its Affiliates from the Partnership which are discussed more fully in
"Compensation."
FORM OF COMPENSATION AND/OR REIMBURSEMENT AMOUNT
Partnership Interest 31% of the oil and gas revenues of the
Partnership in return for paying
Organization and Offering Costs equal
to 15% of the Partnership
Subscription, 51% of Tangible Costs
and contributing all the Leases to
the Partnership at Cost, or fair
market value if the Managing
General Partner has cause to believe
Cost is materially
more than fair market value.(1)
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<PAGE> 8
Contract drilling rates Competitive industry rates. The Managing
General Partner anticipates that it
will have a profit of approximately
15% per well if the well is drilled
to a depth of 6,020 feet in the
Mercer County area of the Appalachian
Basin. (1)
Operator's Per-Well
Charges Competitive industry rates, currently
$275 per well per month in the
Appalachian Basin. (See "Proposed
Activities - Drilling and Completion
Activities; Operation of Producing
Wells".) (1)
Direct Costs Reimbursement at Cost.(1)
Administrative Costs Unaccountable, fixed payment reimbursement of
the Managing General Partner's
administrative overhead which the
Managing General Partner has set at
$75 per well per month. (1)
Transportation and
Marketing Fee Competitive industry rate of 29cents
per MCF. (1)
Dealer-Manager Fees The Dealer-Manager will receive certain fees
from the Managing General Partner on
each Unit sold. (2) (See
"Compensation".)
(1) Cannot be quantified at the present time because the number of
wells that will be drilled and the amount of gas that will be
produced from the wells cannot be predicted.
(2) Cannot be quantified at the present time because the amount of
money to be raised in the offering cannot be predicted.
Organizational Diagram
The following organizational chart shows the relationship between the
Managing General Partner and its Affiliates. (See "Management".)
<TABLE>
<CAPTION>
Organizational Diagram
RESOURCE AMERICA,INC.
:
THE ATLAS GROUP,INC.
:
AIC, INC
:
: : : : : : : : :
ATLAS MERCER GAS PENNSYLVANIA ATLAS ENERGY TRANSATCO ATLAS GAS ANTHEM ATLAS ENERGY ATLAS
RESOURCES GATHERING INDUSTRIAL CORPORATION INC.,WHICH MARKETING SECURITIES INC GROUP, INC. INFORMATION
(MANAGING INC., (GAS ENERGY,INC. (DRILLER AND OWNS 50% OF INC. (REG BROKER/ (DRILLER AND MG'MENT LLC
GENERAL GATHERING ("PIE") OPERATOR IN TOPICO (MARKETS DEALER AND OPERATOR IN (MARKETS INFO
PARTNER, COMPANY) (SELLS GAS TO WV AND (OPERATES NATURAL DEALER-MANAGER OHIO AND TECH SERV)
DRILLER PENNSYLVANIA MANAGING PIPELINE GAS) :
AND OPERATOR) INDUSTRY) GENERAL IN OHIO :
: :
: :
ARD AED
INVESTMENTS, INC. INVESTMENTS, INC.
INC.
<C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 6
</TABLE>
<R/>
CONFLICTS OF INTEREST
The Managing General Partner has a fiduciary duty to exercise good
faith and to deal fairly with the Participants in handling the affairs
of the Partnership. Nevertheless, there are various conflicts of
interest between the Managing General Partner and the Participants
with respect to the Partnership. Conflicts of interest are inherent in
oil and gas drilling Programs involving non-industry participants
because the transactions are entered into without arms' length
negotiation. The conflicts of interest include but are not limited to
the following:
_______________________________________________________________________
<PAGE> 9
(i) services provided to the Partnership by the Managing General
Partner and its Affiliates and the amount of compensation paid
by the Partnership for these services;
(ii) which Leases will be acquired by the Partnership or other
Programs sponsored by the Managing General Partner or its
Affiliates and the terms upon which the acquisitions are made;
(iii) the allocation of the Managing General Partner's management
time, services and other functions among the Partnership and
other Programs sponsored by the Managing General Partner and
its Affiliates; and
(iv) the Managing General Partner's obligation to repurchase
Participants' Units presented to it beginning in 2003 and the
amount of the repurchase price.
Other than certain guidelines set forth in "Conflicts of Interest",
the Managing General Partner has no established procedures to resolve
a conflict of interest. Thus, conflicts of interest between the
Managing General Partner and the Participants may not necessarily be
resolved in the best interests of the Participants.
Under Section 4.05(a) of the Partnership Agreement, the Managing
General Partner, the Operator and their Affiliates have no liability to
the Participants for any action or inaction on their part which they
determined was in the best interest of the Partnership, if the conduct
did not constitute negligence or misconduct. (See "Conflicts of
Interest".)
DISTRIBUTION
The Units will be offered on a "best efforts" basis by Anthem
Securities, a registered broker-dealer which is a member of the NASD
and an Affiliate of the Managing General Partner, acting as Dealer-
Manager in all states other than Minnesota and New Hampshire, and by
other selected registered broker-dealers, which are members of the
NASD, acting as Selling Agents. Bryan Funding, Inc., a member of the
NASD, will serve as Dealer-Manager in the states of Minnesota and New
Hampshire, and will receive the same compensation as Anthem Securities,
Inc. with respect to sales in those states. Best efforts means that
the Dealer-Manager and broker-dealers will not guarantee the sale of a
certain amount of Units.
The Dealer-Manager will manage and oversee the offering of the Units as
described above and will receive from the Partnership on each Unit sold
to investors a 2.5% Dealer-Manager fee, a 7.5% Sales Commission and a
.5% reimbursement of the Selling Agents' bona fide accountable due
diligence expenses. The 7.5% Sales Commission and the .5%
reimbursement of accountable due diligence expenses will be reallowed
to the Selling Agents. The Managing General Partner is also utilizing
the services of three wholesalers who are employees of the Managing
General Partner and associated with Anthem Securities. The 2.5%
Dealer-Manager fee will be reallowed to the wholesalers for Agreed
Subscriptions obtained through the wholesalers' effort.
After the minimum Partnership Subscription is received and the checks
having cleared the banking system, the Dealer-Manager fees, the Sales
Commissions and the accountable due diligence reimbursements will be
paid to the Dealer-Manager and broker-dealers approximately every two
weeks until the Offering Termination Date. (See "Terms of the Offering
- - Partnership Closings and Escrow," "Participation in Costs and
Revenues" and "Plan of Distribution".)
THE FOREGOING SUMMARY OF CERTAIN PROVISIONS OF THE PROSPECTUS IS NOT
INTENDED TO BE A COMPLETE DESCRIPTION OF THE TERMS AND CONSEQUENCES OF
AN INVESTMENT IN THE PARTNERSHIP. YOU AND YOUR ADVISERS SHOULD
CAREFULLY READ THE ENTIRE PROSPECTUS AND ALL ATTACHED EXHIBITS BEFORE
MAKING AN INVESTMENT IN THE PARTNERSHIP.
RISK FACTORS
An investment in the Partnership involves a high degree of risk and is
suitable only for investors of substantial financial means who have no
need of liquidity in their investment.
SPECIAL RISKS OF THE PARTNERSHIP
RISK OF LOSS BECAUSE OF SPECULATIVE NATURE OF INVESTMENT. Exploration
for gas is an inherently speculative activity. There is always the
risk that drilling activity will result in wells which do not produce
gas in sufficient quantities to return the investment made and from
time to time Dry Holes. There is a substantial risk that the price of
gas will be volatile and may decrease. A Participant will be able to
recover his investment only through distributions of sales proceeds
from production of the Partnership gas reserves which deplete over
time. All or a portion of these distributions may be considered to
include a return to Participants of their investment in the
Partnership. There can be no guarantee that the Participants will
recover all of their investment or if they do recover their investment
that they will receive a rate of return on their investment which is
competitive with other types of investment. (See "Proposed Activities
- - Intended Areas of Operations".)
____________________________________________________________________-
<PAGE> 10
RISK OF LOSS BECAUSE OF UNLIMITED LIABILITY OF INVESTOR GENERAL
PARTNERS. Under Pennsylvania law, each Investor General Partner will
have unlimited joint and several liability with respect to the
activities of the Partnership. A joint liability is one in which a
claimant must sue all co-obligors; whereas a joint and several
liability is one in which a claimant, at its option, may sue all but
also may sue any one or more of the co-obligors for the entire amount
of the liability. This could result in an Investor General Partner
being required to make payments, in addition to his original
investment and in amounts which are impossible to determine because of
their uncertain nature, for the development and operation of the
wells. Also, the Partnership may own less than 100% of the Working
Interest in some of the wells and each Investor General Partner may
then have joint and several liability with the other third party
owners of the well.
Under the terms of the Partnership Agreement the Investor General
Partners agree to be responsible for and pay their respective
proportionate shares of the obligations and liabilities. This
agreement, however, does not legally negate each Investor General
Partner's joint and several liability for the obligations and
liabilities to third parties if an Investor General Partner does not
pay his respective proportionate share of the obligations and
liabilities and/or a court holds the Investor General Partners and
the other third party owners of the Working Interest to be jointly
and severally liable. Participants will not have liability for any
non-environmental events on the Lease which occurred before its
transfer to the Partnership. (See "Summary of the Offering - Actions
to be Taken by Managing General Partner to Reduce Risks of Additional
Payments by Investor General Partners", " - General Risks of the Oil
and Gas Business - Risk of Loss From Drilling Hazards," " - General
Risks of the Oil and Gas Business - Risk of Pollution and
Environmental Liabilities," and "Summary of Partnership Agreement -
Liabilities of General Partners, Including Investor General
Partners".)
In addition to the other actions summarized in this Prospectus which
will be taken by the Managing General Partner to reduce the risk of
additional payments by the Investor General Partners, the Managing
General Partner has agreed to indemnify each Investor General Partner
from any liability incurred in connection with the Partnership which
is in excess of the Investor General Partner's share of Partnership
assets. There can be no assurance that the Managing General Partner's
assets, including its liquid assets, will be sufficient to satisfy its
indemnification obligation. This risk is increased because the
Managing General Partner has made and will make similar financial
commitments in other Programs. The Partnership will also have the
benefit of general and excess liability insurance of $50,000,000
during drilling operations and $11,000,000 thereafter, per occurrence
and in the aggregate. Nevertheless, the Investor General Partners may
become subject to contract liability which is not covered by
insurance; tort liability in excess of the amounts insured under the
policies; and liability for pollution, abuses of the environment and
other damages against which the Managing General Partner cannot insure
because coverage is not available or against which it may elect not to
insure because of high premium costs or other reasons. Although the
Managing General Partner will not transfer any Lease to the
Partnership if it has actual knowledge that there is an existing
potential environmental liability on the Lease, there will not be an
independent environmental audit of the Leases before they are
transferred to the Partnership. Thus, there can be no guarantee that
the Leases will not have any existing potential environmental
liability. (See " - Possibility of Reduction or Unavailability of
Insurance" and "Proposed Activities - Insurance".)
If the insurance proceeds, Partnership assets, and the Managing
General Partner's indemnification of the Investor General Partners
were not sufficient to satisfy the liability, then the Investor
General Partner's personal assets could be required to be used to
satisfy the liability. Investor General Partners do not have an option
to refuse to contribute an additional Capital Contribution called by
the Managing General Partner to pay Partnership liabilities. (See
"Summary of Partnership Agreement - Liabilities of General Partners,
Including Investor General Partners.")
RISKS CREATED BY THE ILLIQUIDITY AND THE RESTRICTIONS ON
TRANSFERABILITY OF THE UNITS. An investor must assume the risks of an
illiquid investment. The Units are not marketable; and the
transferability of Units is limited by express provision of the
Partnership Agreement and the provisions of state and federal
securities laws. The Units cannot be readily liquidated in the event of
an emergency, and the sale would create adverse tax and economic
consequences for the selling Participant. (See "Repurchase Obligation"
and "Transferability of Units".)
Under the Partnership Agreement, Units are nontransferable except with
the consent of the Managing General Partner. An assignee of a
Participant's Unit is entitled to become a substituted Partner with the
right to vote only if the assignor gives the assignee the right, the
Managing General Partner consents to the substitution, the assignee
pays the costs of substitution, and executes the necessary instruments
binding him to the terms of the Partnership Agreement.
Under the federal securities laws, Units cannot be transferred if there
is not an effective registration of the Units under the Securities Act
of 1933 or an exemption therefrom. The Managing General Partner has no
obligation to register the Units for this purpose. Further, the
Managing General Partner will not consent to a transfer and
substitution of a Participant if doing so would result in a violation
of the securities laws or cause the Partnership to be terminated or
treated as a publicly traded partnership for tax purposes. (See "Tax
Aspects - Limitations on Passive Activities" and " - Termination of a
Partnership".)
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<PAGE> 11
RISK CREATED BY A PARTICIPANT'S REQUIRED RELIANCE UPON THE MANAGING
GENERAL PARTNER. The Managing General Partner will have the exclusive
right to control the affairs and business of the Partnership. No
prospective investor should purchase any Units unless he is willing to
entrust all aspects of management of the Partnership to the Managing
General Partner. Nevertheless, a Participant has the right at any time
to obtain full information regarding the business and financial
condition of the Partnership and, if necessary, to sue for an
accounting. (See "Conflicts of Interest" and "Summary of Partnership
Agreement".)
RISK CREATED BY THE MANAGEMENT OBLIGATIONS OF THE MANAGING GENERAL
PARTNER NOT BEING EXCLUSIVE. The Managing General Partner must devote
that amount of time to the Partnership's affairs that it determines is
reasonably necessary. The Managing General Partner and its Affiliates
will be engaged in other oil and gas activities and other unrelated
business ventures for their own account or for the account of others
during the term of the Partnership, including other Programs. (See
"Conflicts of Interest - Other Activities of the Managing General
Partner, the Operator and their Affiliates".)
RISK CREATED BECAUSE THE MANAGING GENERAL PARTNER'S LIQUID NET WORTH IS
NOT GUARANTEED. The Managing General Partner is primarily responsible
for the conduct of the Partnership's affairs. A significant financial
reversal for the Managing General Partner could adversely affect the
Partnership and the value of the Units if it diverted the Managing
General Partner's time and attention away from the Partnership or
caused staff reductions. This could impair the Managing General
Partner's ability to perform its duties as Managing General Partner and
Operator with respect to the operation of the wells and the marketing
of the Partnership's gas production.
The net worth of the Managing General Partner is based primarily on the
estimated value of producing gas properties that it holds. The net
worth is not available in cash absent borrowings or a sale of the
properties. Also, gas prices are volatile and if gas prices decrease,
this will have a direct adverse effect on the estimated value of the
properties and the net worth of the Managing General Partner. There is
no assurance that the Managing General Partner will have the necessary
net worth, currently or in the future, to meet its indemnification
obligation to the Investor General Partners or other financial
commitments under the Partnership Agreement. These risks are increased
because the Managing General Partner has made and will make similar
financial commitments in other Programs. (See "Financial Information
Concerning the Managing General Partner and the Partnership".)
DIVERSIFICATION DEPENDS UPON SUBSCRIPTION PROCEEDS. The fewer the
number of Units purchased, the fewer the number of wells which the
Partnership will drill. This decreases the Partnership's ability to
spread the risks of drilling. The Managing General Partner anticipates
that approximately 4.9 wells will be drilled if only the minimum
Partnership Subscription of $1,000,000 is received, and approximately
39.25 wells will be drilled if the maximum Partnership Subscription of
$8,000,000 is received.
On the other hand, to the extent more than the minimum Partnership
Subscription is received the number of wells which the Partnership will
drill will increase, thereby increasing the diversification of the
Partnership. Nevertheless, as the number of wells to be drilled
increases the Partnership's overall investment return may decrease if
the Managing General Partner is unable to find enough attractive
Prospects to be drilled. Also, in a large Partnership greater demands
will be placed on the management capabilities of the Managing General
Partner. (See "Proposed Activities - In General".)
DISPROPORTIONATE COSTS BORNE BY PARTICIPANTS. Under the cost and
revenue sharing provisions of the Partnership Agreement, the
Participants and the Managing General Partner will share in costs
disproportionately to their sharing of revenues. The Managing General
Partner will pay 100% of Organization and Offering Costs and 51% of the
Tangible Costs and contribute the Leases to the Partnership. The
Managing General Partner's Capital Contributions must equal at least
24.5% of all Capital Contributions to the Partnership. In return, the
Managing General Partner will receive 31% of the Partnership's
production revenues and pay 31% of the Partnership's Operating Costs,
Administrative Costs, Direct Costs and all other costs not specifically
allocated. The Participants will pay 100% of Intangible Drilling Costs
and 49% of Tangible Costs. The Participant's Capital Contributions
will equal 75.5% of all Capital Contributions to the Partnership. In
return, the Participants will receive 69% of the Partnership's
production revenues and pay 69% of the Partnership's Operating Costs,
Administrative Costs, Direct Costs and all other costs not specifically
allocated. (See "Participation in Costs and Revenues".)
COMPENSATION AND FEES TO THE MANAGING GENERAL PARTNER REGARDLESS OF
SUCCESS OF THE ACTIVITIES. The Managing General Partner and its
Affiliates can be expected to profit from the Partnership even though
Partnership activities result in little or no profit, or a loss to
Participants. (See "Compensation".)
DRY HOLE RISK IN DEVELOPMENT DRILLING. Although the Dry Hole risk
associated with drilling Development Wells is reduced, there can be no
assurance that there will not be some Dry Holes. (See "Prior
Activities".)
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<PAGE> 12
RISK OF UNPRODUCTIVE WELLS IN DEVELOPMENT DRILLING. Completion of a
Development Well in the Clinton/Medina geologic formation in
Pennsylvania or Ohio, or any other Development Well drilled by the
Partnership in the United States, should not be equated with
commercial success. For example, the Clinton/Medina geologic formation
is characterized by low permeability (ability of hydrocarbon-bearing
rock to allow the flow of oil and gas), low porosity
(capacity of rock to hold oil and gas) and other geological
characteristics which may reduce the profit potential of a well
completed to this geologic formation. A Development Well drilled to the
Clinton/Medina geologic formation or other geologic formations in the
United States may be completed and productive but not produce enough
revenue to return the investment made, even if tax consequences are
considered. With respect to the Managing General Partner's prior
partnerships since 1985, twenty-five of the twenty-eight partnerships
have not yet returned to the investor 100% of his capital contributions
without taking tax savings into account. However, all the partnerships
are continuing to make cash distributions and twenty-three of the
partnerships were formed in 1990 or subsequent years. (See "- General
Risks of the Oil and Gas Business - Risk of Loss Because of Speculative
Nature of Gas Business," "Prior Activities" and "Proposed Activities".)
RISKS REGARDING MARKETING OF GAS. The Managing General Partner
estimates that a portion of the Partnership's gas production in the
Mercer County area, which is the primary area of interest, will be
transported through the Managing General Partner's and its Affiliates'
own pipeline system and sold directly to industrial end-users situated
in the area where the wells will be drilled. The remainder of the
Partnership's gas from the Mercer County area will be transported
through the Managing General Partner's and its Affiliates' pipeline
system to the interconnection points maintained with Tennessee Gas
Transmission Co., National Fuel Supply Corporation, National Fuel Gas
Distribution Company, East Ohio Natural Gas Company and Peoples Natural
Gas Company. The Managing General Partner markets portions of the gas
through long term contracts, short term contracts and monthly spot
market sales. There is no assurance of the price at which the
Partnership's gas will be sold, and generally, the revenues received by
the Partnership will be less the farther the gas is transported because
of the increased transportation costs. During 1997 the average price
paid after deducting all expenses, including transportation costs, was
$2.39 per MCF. (See "- General Risks of the Oil and Gas Business -
Risk of Loss Because of Decrease in the Price of Gas," "Proposed
Activities - Sale of Oil and Gas Production" and "Competition, Markets
and Regulation - Competition and Markets".)
It is anticipated that approximately 10% to 30% of the gas produced by
the Managing General Partner and its Affiliates, including the Managing
General Partner's previous Programs, in the Mercer County area will be
sold to industrial end-users. The sale to industrial end-users can
raise risks relating to the credit worthiness of the industrial end-
user. If the industrial end-user does not pay, or delays payment, the
Partnership may not be paid or may experience delays in receiving
payment for natural gas that has already been delivered. For example,
after Sharon Steel Corporation ("Sharon") filed Chapter 11 bankruptcy
in 1987, it continued to purchase most of the Managing General
Partner's and its Affiliates' natural gas production in the Mercer
County area until it filed a second Chapter 11 bankruptcy in 1992. At
that time, the Managing General Partner and various Programs in which
it was either the Managing General Partner and/or operator lost
approximately $2,400,000, for approximately 77 days of gas sales, of
which approximately $600,000 was owed to the Managing General Partner
and the balance was owed to the various Programs. (See "- General Risk
of the Oil and Gas Business - Risk Created by Competition in Marketing
Natural Gas Production," "Proposed Activities - Sale of Oil and Gas
Production," "Competition, Markets and Regulation - Competition and
Markets" and "Financial Information Concerning the Managing General
Partner and the Partnership".)
There also can be no assurance that the terms of a gas supply agreement
with an end-user will continue to be favorable over the life of the
wells. Most gas supply agreements provide that prices may be adjusted
upward or downward from time to time in accordance with market
conditions. Also, when the gas supply agreements expire the end-users
may negotiate lower pricing terms. (See "Proposed Activities - Sale of
Oil and Gas Production" and "Competition, Markets and Registration -
Competition and Markets".)
Further, potential conflicts of interest are presented by the Managing
General Partner's obligation to market the oil and gas production of
other Programs sponsored by it and its Affiliates as well as the
Partnership's gas production. In order to reduce this potential
conflict of interest, the Partnership Agreement provides that all
benefits from marketing arrangements or other relationships affecting
property of the Managing General Partner or its Affiliates and the
Partnership will be fairly and equitably apportioned according to the
respective interest of each in the property.
Marketing the relatively small amounts of oil produced by the wells
generally is not a problem. The Managing General Partner anticipates
selling all oil to Ergon or other oil
companies in the area where the well is situated in spot sales. With
respect to natural gas production from the wells, the Managing General
Partner will treat all wells in a geographic area equally concerning to
whom and at what price the Partnership's gas will be sold and to whom
and at what price the gas of other oil and gas Programs which the
Managing General Partner has sponsored or will sponsor will be sold.
The Managing General Partner calculates a weighted average selling
price for all of the gas sold in a geographic area by taking all money
received from the sale of all the gas sold to its customers in a
geographic area and dividing by the volume of all gas sold from the
wells in that geographic area. This ensures that the various Programs
receive the same selling price for their gas production in the same
geographic area. Also, if the Managing General Partner determines
curtailment of production would be in the best interests of its
Programs, production will be curtailed to the same degree in all the
wells in the same geographic area. On the other hand, if the Managing
General Partner has not decided to curtail production, but all the gas
produced cannot be sold because of limited demand which increases
pipeline pressure, then the production that is sold will be from those
wells which are best able to feed into the pipeline, regardless of
which Programs own the wells. (See "Conflicts of Interest - Procedures
to Reduce Conflicts of Interest.")
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<PAGE> 13
RISK OF POSSIBLE DELAYS IN PRODUCTION AND SHUT-IN WELLS. Production
from wells may be reduced or Shut-In due to marketing demands which
tend to be seasonal. There is no assurance that the Managing General
Partner will not have to curtail production in 1999 or subsequent years
awaiting a better price for the gas. However, the Managing General
Partner has not voluntarily restricted its gas production within the
last two years because of a lack of a profitable market price.
Production from wells drilled in certain areas may also be delayed for
up to several months until construction of the necessary pipelines and
production facilities is completed. However, such delays are not
anticipated by the Managing General Partner with respect to any of the
wells currently proposed for the Partnership. (See "Proposed Activities
- - Sale of Oil and Gas Production" and "Competition, Markets and
Regulation - Competition and Markets".)
RISK REGARDING THE UNSPECIFIED LOCATION OF A PORTION OF THE PROSPECTS.
The Managing General Partner intends that the Partnership will drill
the currently proposed Prospects described in "Proposed Activities -
Information Regarding Currently Proposed Prospects". These Prospects
represent approximately 80% of the potential $12,000,000 maximum
Partnership Subscription assuming 100% of the Working Interest is
acquired by the Partnership. The currently proposed Prospects are all
situated in the Mercer County area of Pennsylvania. However, the
Managing General Partner has reserved the right to use up to 15% of the
Partnership Subscription to drill Development Wells in other areas of
the United States which are not described herein. The Partnership also
will acquire additional Prospects which are not described if more than
$8,000,000 is raised and/or the Partnership acquires less than 100% of
the Working Interest in one or more Prospects. In addition, the
Managing General Partner has the right to delete any Prospect which it
deems to be inappropriate for the Partnership because of adverse events
or for which insufficient funds are available.
A prospective Participant has no information regarding any additional
and/or substitutional Prospects. The Partnership does not have the
right of first refusal in the selection of Prospects from the inventory
of the Managing General Partner and its Affiliates, and they may sell
their Prospects to other Programs, companies, joint ventures or other
persons at any time. (See "- Risk Created by a Participant's Required
Reliance upon the Managing General Partner," above, and "Proposed
Activities - Acquisition of Leases" and "Proposed Activities -
Information Regarding Currently Proposed Prospects".)
NO GUARANTEE OF DATA REGARDING CURRENTLY PROPOSED PROSPECTS. The data
included in "Proposed Activities - Information Regarding Currently
Proposed Prospects" has been prepared by the Managing General Partner
from sources which it believes are reliable. However, the Managing
General Partner cannot guarantee that the data reflects all the wells
drilled in the area or that the amount of gas production is always
accurate. The production information for some of the wells is
incomplete because the wells are being operated by third parties and
the information is unavailable to the Managing General Partner. Also,
some of the wells which have been drilled by the Managing General
Partner's other Programs have only been producing for a short period of
time or are not yet completed or online so there is no production
information. (See "Proposed Activities - Information Regarding
Currently Proposed Prospects".)
MANAGING GENERAL PARTNER'S SUBORDINATION IS NOT A GUARANTEE. The
Managing General Partner has agreed to subordinate a portion of its
share of Partnership Net Production Revenues if cash distributions to
the Participants are less than the specified return. If the wells,
however, produce only a small volume of gas, and/or the price of gas
decreases, then even with subordination the cash flow to the
Participants may be very small and they may not receive a return of
their entire investment. (See " - Risk That Borrowings by the Managing
General Partner Could Reduce Funds Available for Its Subordination
Obligation" and "Participation in Costs and Revenues - Subordination of
Portion of Managing General Partner's Net Revenue Share".)
RISK THAT BORROWINGS BY THE MANAGING GENERAL PARTNER COULD REDUCE FUNDS
AVAILABLE FOR ITS SUBORDINATION OBLIGATION. It is anticipated that the
Managing General Partner will pledge, for its own corporate purposes,
either its Partnership interest and/or an undivided interest in the
assets of the Partnership equal to its interest in the revenues of the
Partnership. If there was a default to the lender under this pledge
arrangement, this would reduce the Managing General Partner's Net
Production Revenues available for its subordination obligation. Also,
the Managing General Partner is not obligated to secure any similar
financing for any Participants for their own account. (See "Conflicts
of Interest - Other Conflicts" and "Summary of Partnership Agreement".)
POSSIBILITY OF REDUCTION OR UNAVAILABILITY OF INSURANCE. It is possible
that some or all of the insurance coverage which the Partnership has
available may become unavailable or prohibitively expensive. If this
occurs then the Investor General Partners who elect to remain Investor
General Partners after notice that the insurance is being reduced could
be exposed to additional financial risk. Also, all Participants would
be subject to greater risk of loss of their Partnership investment.
(See "- General Risks of the Oil and Gas Business - Risk of Loss From
Drilling Hazards," "Proposed Activities - Insurance" and "Tax Aspects -
Limitations on Passive Activities".)
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<PAGE> 14
POSSIBLE NONPERFORMANCE BY SUBCONTRACTORS. The Managing General
Partner, as Operator and general drilling contractor, will subcontract
some of the services to subcontractors. There is a risk that if the
subcontractors fail to pay for materials or services on the wells the
Partnership could incur excess costs. To reduce this risk the Managing
General Partner will attempt to use only subcontractors that have
previously performed similar activities for the Managing General
Partner in a satisfactory manner, will endeavor to ascertain the
financial condition of the subcontractors and attempt to secure lien
releases from the various subcontractors. (See "- Risk of Loss Because
of Unlimited Liability of Investor General Partners," above and
"Proposed Activities - Drilling and Completion Activities; Operation of
Producing Wells".)
RISK OF PREPAYMENT TO MANAGING GENERAL PARTNER. Advance payments by the
Partnership to the Managing General Partner and its Affiliates are
prohibited, other than advance payments which are required to secure the
tax benefits of prepaid drilling costs. Because the Partnership for tax
reasons will be required to immediately pay the entire contract price
for the Partnership Wells, these funds could be subject to claims of the
Managing General Partner's creditors. Currently, however, the Managing
General Partner is not aware of any existing creditors of it or its
Affiliates which would have a claim to prepaid Partnership funds. (See
"Financial Information Concerning the Managing General Partner and the
Partnership".)
POSSIBLE LEASEHOLD DEFECTS. The Working Interests in the Leases to be
assigned to the Partnership by the Managing General Partner will be
assigned without title insurance. There is a risk of title failure.
(See "Proposed Activities - Title to Properties".)
PARTNERSHIP BORROWINGS MAY REDUCE OR DELAY DISTRIBUTIONS. Although it is
not anticipated that the Partnership will borrow any funds, the Managing
General Partner is authorized to increase the working capital of the
Partnership by making advances to the Partnership. Borrowings by the
Partnership can result in delayed or reduced cash distributions while
the loan is being repaid. (See "Capitalization and Source of Funds and
Use of Proceeds" and "- Tax Risks - Possible Taxes in Excess of Cash
Distributions," below.)
MANAGING GENERAL PARTNER WILL RECEIVE BENEFIT FROM TRANSFER OF LEASES.
The Managing General Partner will contribute all the Leases to the
Partnership. The Leases will be contributed at the Cost of the Leases,
or fair market value if the Managing General Partner has cause to believe
Cost is materially more than fair market value.
Cost is a defined term and includes a portion of the Managing General
Partner's reasonable, necessary and actual expenses for geological,
geophysical, engineering, interest expense, legal, and other like
services allocated to the Partnership's Leases determined using industry
guidelines. The Managing General Partner will receive a benefit from
these transactions.
In addition, the contribution of the Leases could create conflicts of
interest for the Managing General Partner. In the Partnership's primary
area of interest the wells will be drilled to test the Clinton /Medina
geologic formation, a blanket geological formation prevalent in Ohio and
Pennsylvania. A Prospect will be deemed to consist of the drilling or
spacing unit on which the well will be drilled if the Clinton/Medina
geological formation to which the well will be drilled contains Proved
Reserves and the drilling or spacing unit protects against drainage.
The development of wells on this acreage may provide the Managing
General Partner with offset sites by allowing it to ascertain at the
Partnership's expense the value of adjacent acreage in which the
Partnership would not have any right to participate in developing. (See
"Conflicts of Interest - Conflicts Involving the Acquisition of Leases,"
"Conflicts of Interest - Other Activities of the Managing General
Partner, the Operator and their Affiliates" and "Proposed Activities".)
RISK OF OTHER CIRCUMSTANCES CAUSING DISTRIBUTIONS TO BE REDUCED OR
DELAYED. Although the Managing General Partner intends to distribute the
cash quarterly, distributions may be deferred to the extent revenues are
used for cost overruns, costs related to completing and Fracturing some
of the wells in a third zone, remedial work to improve a well's
producing capability or if a productive gas well is Shut-In for an
indeterminate time awaiting an acceptable market for the production. In
addition, the Operator pursuant to the Drilling and Operating Agreement
has reserved the right at any time after three years from the date a
Partnership Well has been placed into production to withhold revenues of
the well of up to $200 per month to establish a reserve for the
estimated costs of eventually plugging and abandoning the well, although
historically the Managing General Partner has never done so after only
three years. There can be no assurance that cash distributions will be
regularly paid or that they will exceed the amount of the taxes payable
by a Participant with respect to his investment in the Units. (See "-
Tax Risks - Possible Taxes in Excess of Cash Distributions".)
RISKS ARISING FROM CONFLICTS OF INTEREST BETWEEN MANAGING GENERAL
PARTNER AND THE PARTNERSHIP. There are conflicts of interest between
the Managing General Partner and its Affiliates and the Partnership
including, but not limited to: the compensation paid by the Partnership
to the Managing General Partner and the terms of the offering which have
been determined solely by the Managing General Partner; the Managing
General Partner may have conflicts of interest in allocating management
time, services and other functions (which are allocated on an as-needed
basis consistent with its fiduciary duties) among the Partnership and
its other Programs; and conflicts of interest may arise concerning which
Leases the Managing General Partner will assign to the Partnership for
drilling, and which Leases the Managing General Partner will assign to
its other Programs. Other than certain guidelines set forth in
"Conflicts of Interest", the Managing General Partner has no established
procedures to resolve a conflict of interest. (See " - Risks Regarding
Marketing of Gas" above, and "Conflicts of Interest".)
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<PAGE> 15
RISK REGARDING PARTICIPATION WITH THIRD PARTIES. It is anticipated that
the Partnership will own 100% of the Working Interest in the wells.
However, the Partnership has reserved the right to take as little as 25%
of the Working Interest and it is possible that other Working Interest
owners will participate with the Partnership in drilling of some of the
wells. Additional financial risks are inherent in any operation when
the cost of drilling, equipping, completing and operating wells is
shared by more than one person. If the Partnership pays its share of
the costs, but another Working Interest owner does not, the Partnership
would have to pay the costs of the defaulting party. (See "- Risk of
Loss Because of Unlimited Liability of Investor General Partners,"
above, and "Proposed Activities".)
RISK THAT DISSOLUTION OF THE PARTNERSHIP OR WITHDRAWAL OR REMOVAL OF THE
MANAGING GENERAL PARTNER MAY HAVE ADVERSE EFFECTS. At any time after
ten years (and the Partnership's primary drilling activities), the
Managing General Partner may voluntarily withdraw as Managing General
Partner without Participant consent upon giving 120 days' written notice
of withdrawal to the Participants. In addition, the Managing General
Partner may be removed at any time upon sixty days' advance written
notice to the outgoing Managing General Partner, by the affirmative vote
of Participants whose Agreed Subscriptions equal a majority of the
Partnership Subscription (excluding any Units purchased by the Managing
General Partner or its Affiliates). If the Managing General Partner
would withdraw or be removed and the Participants did not elect to
continue the Partnership and to designate a substituted Managing General
Partner of the Partnership, the Partnership would terminate and dissolve
which could result in adverse tax and other consequences.
If the Partnership was dissolved the Participants may receive a
distribution of direct property interests. As joint interest owners,
Limited Partners would have joint and several liability for the
obligations or liabilities arising out of joint owner operations. The
Limited Partners could find it desirable to obtain insurance protection
or dispose of the property interests. To reduce this risk the Managing
General Partner will attempt upon liquidation and dissolution to use its
best efforts to sell the Partnership's properties or to cause some type
of entity which would preserve the limited liability of the former
Limited Partners, such as a liquidating trust, to be established to hold
title to the Partnership's properties. However, even if the properties
were transferred to a liquidating trust upon dissolution of the
Partnership, it might be difficult for the liquidating trust to deal
with the assets and realize their full value. For example, to replace
the management provided by the Managing General Partner, the trustee of
the liquidating trust would need the services of professional operators.
Further, after dissolution and the completion of payments to third party
creditors, the Managing General Partner has priority in liquidation for
any claims of indebtedness before the Participants. The distributions
may also have adverse income tax consequences to the Participants. (See
"- Risk of Loss Because of Unlimited Liability of Investor General
Partners," above, and "Tax Aspects - Disposition of Partnership
Interests".)
RISK OF REDUCED DISTRIBUTIONS IF THE MANAGING GENERAL PARTNER IS
INDEMNIFIED. Under the Partnership Agreement the Managing General
Partner and its Affiliates may be indemnified by the Partnership for
losses or liabilities incurred in connection with the activities of the
Partnership. The Managing General Partner and its Affiliates must have
determined in good faith that the course of conduct which caused the
loss or liability was in the best interest of the Partnership, they were
acting on behalf of or performing services for the Partnership, and the
course of conduct was not the result of their negligence or misconduct.
Use of Partnership funds or assets for indemnification would reduce
amounts available for Partnership operations or for distribution to
Participants. (See "Fiduciary Responsibility of the Managing General
Partner".)
RISK OF LIMITED PARTNER LIABILITY FOR REPAYMENT OF CERTAIN
DISTRIBUTIONS. Under the Pennsylvania Revised Uniform Limited
Partnership Act (the "Partnership Act"), the liability of the Limited
Partners for the losses, debts and obligations of the Partnership will
generally be limited to their Agreed Subscription and their allocable
share of any undistributed net profits. However, under the Partnership
Act a Limited Partner may, for a period of two years, be required to
repay to the Partnership any Capital Contributions "wrongfully" returned
to a Limited Partner in violation of the Partnership Agreement or
Pennsylvania law, with interest thereon. This includes but is not
limited to any distribution to the Limited Partners to the extent that,
after giving effect to the distribution, all liabilities of the
Partnership (other than liabilities to the Participants on account of
their contributions and to the Managing General Partner) exceed
Partnership assets. Also, a Limited Partner will be liable for the
obligations of the Partnership if he takes part in the control of the
business of the Partnership or invests as an Investor General Partner.
(See "Summary of Partnership Agreement - Liability of Limited
Partners".)
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<PAGE> 16
POSSIBILITY OF UNAUTHORIZED ACTS OF INVESTOR GENERAL PARTNERS. Under the
Partnership Act a general partner may bind the partnership by his
action, unless the partner in fact has no authority to act for the
partnership and the person with whom he is dealing has knowledge that he
has no authority. Under the Partnership Act, knowledge may be actual
knowledge of the lack of authority or knowledge of other facts which in
the circumstances would show bad faith. Although there is a risk that an
Investor General Partner might bind the Partnership by his acts, the
Managing General Partner believes it will have exclusive control over
the conduct
of the business of the Partnership and it is unlikely a third party, in
the absence of bad faith, would deal with an Investor General Partner
concerning the Partnership's business.
RISKS THAT REPURCHASE OBLIGATION MAY NOT BE FUNDED AND REPURCHASE PRICE
MAY NOT REFLECT FULL VALUE. Subject to certain conditions, beginning in
2003 the Participants may present their interests to the Managing
General Partner for purchase. The Managing General Partner anticipates
purchasing the interests primarily through cash flow and secondarily
through corporate borrowings secured by the interests purchased. There
is a risk that the Managing General Partner, or its Affiliates, will not
have the necessary cash flow or be able to arrange financing for these
purposes on reasonable terms as determined by the Managing General
Partner in its sole discretion. In either event the Managing General
Partner is able to suspend its repurchase obligation. In addition, the
Managing General Partner has and will incur similar presentment
obligations in connection with other Programs which it or its Affiliates
may sponsor which increases the risk.
The purchase price to be paid to the Participant will be based upon the
Participant's share of the net assets and liabilities of the Partnership
based upon his Agreed Subscription. The purchase price will include:
(i) 70% of the present worth of future net revenues from the Proved
Reserves, (ii) cash on hand, (iii) prepaid expenses and accounts
receivable, and (iv) the estimated market value of all assets not
separately specified above, determined in accordance with standard
industry valuation procedures. The amount attributable to Partnership
reserves will be determined based on an engineering report prepared by
the Managing General Partner and reviewed by an Independent Expert. The
Participants will be provided a computation of the total oil and gas
reserves of the Partnership and the present worth thereof, employing a
discount rate equal to 10%, a constant price for the oil and basing the
price of gas upon the existing gas contract(s) at the time of the
repurchase. The reserve report must be within 120 days of the
commencement of the repurchase offer.
There will be deducted from the foregoing sum: (i) all Partnership debts
and other liabilities, and (ii) any distributions made to the
Participants between the date of the request and the actual payment;
(provided, however, that if any cash distributed was derived from the
sale, subsequent to the request, of oil, gas or other mineral production
or of a producing property, for purposes of determining the reduction of
the purchase price, the distributions will be discounted at the same
rate used to take into account the risk factors employed to determine
the present worth of the Partnership's reserves). The purchase price
may be further adjusted by the Managing General Partner for estimated
changes therein from the date of the reserve report to the date of
payment of the purchase price to the Participants: (i) by reason of
production or sales of, or additions to, reserves and lease and well
equipment, sale or abandonment of leases, and similar matters occurring
prior to payment of the purchase price to the selling Participant, and
(ii) by reason of any of the following occurring prior to payment of the
purchase price to the selling Participant: changes in well performance,
increases or decreases in the market price of oil, gas or other
minerals, revision of regulations relating to the importing of
hydrocarbons, changes in income, ad valorem and other tax laws (e.g.,
material variations in the provisions for depletion) and similar
matters.
Because of the difficulty in accurately estimating oil and gas reserves,
the purchase price may not reflect the full value of the Partnership
property to which it relates. The estimates are merely appraisals of
value and may not correspond to realizable value. There can be no
assurance that the purchase price paid for the interest and any revenues
received by the Participant prior to the repurchase will be equal to
the original price paid for the interests. On the other hand, a
Participant might realize a greater return if he retains the Units,
which the Participant may elect, rather than selling the Units to the
Managing General Partner. (See "Conflicts of Interest - Conflicts
Regarding Repurchase Obligation" and "Repurchase Obligation".)
POSSIBLE PARTICIPATION IN ROLL-UP. There is no assurance that at some
indeterminate time in the future the Partnership will not become
involved in a "Roll-Up" transaction. If there is a Roll-Up, there could
be changes in the rights, preferences, and privileges of the
Participants in the Partnership. These could include increasing the
compensation of the Managing General Partner, amending the voting rights
of the Participants, listing the Units on a national securities exchange
or on NASDAQ, changing the fundamental investment objectives of the
Partnership, or materially altering the duration of the Partnership.
However, any Participant who votes "no" on a Roll-Up proposal will be
offered a choice of: (i) accepting the securities of the Roll-Up Entity
offered in the proposed Roll-Up; (ii) remaining a Participant in the
Partnership and preserving his interests in the Partnership on the same
terms and conditions as existed previously; or (iii) receiving cash in
an amount equal to his pro-rata share of the appraised value of the
Partnership's net assets. (See "Conflicts of Interest - Policy Regarding
Roll-Ups" .)
GENERAL RISKS OF THE OIL AND GAS BUSINESS
RISK OF LOSS BECAUSE OF SPECULATIVE NATURE OF GAS BUSINESS. Gas
exploration is an inherently speculative activity. The Managing General
Partner cannot predict with accuracy the amount of gas recoverable from
any Prospect, the time it will take to recover the gas, or the price at
which the gas will be sold. Because of the risk involved, there can be
no guarantee that the Participants will recover all of their investment
or that their investment will be profitable. (See "Proposed Activities -
Intended Areas of Operations".)
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<PAGE> 17
RISKS OF LOSS BECAUSE OF DECREASE IN THE PRICE OF GAS. The price at
which the gas can be sold will depend on factors largely beyond the
control of the Partnership. During most of the 1980's and 1990's oil and
gas prices have been unstable. If there is a significant reduction in
the price of gas, it will materially reduce the Partnership's net
revenues from the wells. This could preclude or limit distributions to
the Participants. There is a substantial risk that the price of gas will
continue to be volatile and may decrease. (See "Proposed Activities -
Sale of Oil and Gas Production" and "Competition, Markets and Regulation
- - Competition and Markets".)
RISK OF LOSS FROM DRILLING HAZARDS. There are numerous natural hazards
involved in the drilling of wells. These include well blowouts,
craterings, explosions, uncontrollable flows of natural gas or well
fluids, fires, formations with abnormal pressures, and pipeline
ruptures or spills. Any of these hazards may result in damage to
property and third parties such as surface damage, bodily injury, damage
to and loss of equipment, reservoir damage, and loss of reserves.
The Partnership may also be subject to liability for pollution such as
release of toxic gas, accidental leakages, abuses of the environment
and other similar damages
incurred during drilling. Although the Partnership will maintain
insurance coverage in the amounts the Managing General Partner deems
appropriate, it is possible that insurance coverage may be insufficient.
Uninsured liabilities would reduce the funds available to the
Partnership, may result in the loss of Partnership properties, and may
create liability for Investor General Partners. (See "Proposed
Activities - Insurance".)
RISK CREATED BY COMPETITION IN MARKETING NATURAL GAS PRODUCTION. There
is competition for the most desirable Leases, and the Partnership will
encounter intense competition in the sale of its gas production. The
quantities of gas to be delivered by the Partnership may also be
affected by factors beyond its control. These include the inability of
the wells to deliver gas at pipeline quality and pressure, premature
exhaustion of reserves, changes in governmental regulations affecting
allowable production, and priority allocations and price limitations
imposed by federal and state regulatory agencies. (See " - Special Risks
of the Partnership - Risks Regarding Marketing of Gas", "Proposed
Activities - Sale of Oil and Gas Production" and "Competition, Markets
and Regulation".)
RISK OF NEW GOVERNMENTAL REGULATIONS ADVERSELY AFFECTING THE
PARTNERSHIP. Oil and gas operations in the United States, including
lease acquisitions and other energy-related activities, are subject to
extensive government regulation. They are also subject to interruption
or termination by governmental authorities because of ecological and
other considerations. Proposals concerning the regulation and taxation
of the oil and gas industry are constantly before Congress. It is
impossible to predict which proposals, if any, will be enacted into law
and, if enacted, their effect on the Partnership. (See "Competition,
Markets and Regulation".)
RISK OF POLLUTION AND ENVIRONMENTAL LIABILITIES. The Partnership may be
subject to liability for pollution and other damages due to hazards
which cannot be insured against or will not be insured against because
of prohibitive premium costs or for other reasons. Thus, the Investor
General Partners might become liable for obligations in excess of their
Agreed Subscriptions for environmental claims that arose during drilling
activities, but were not discovered until after the Investor General
Partners converted to Limited Partner status. Environmental regulatory
matters also could increase substantially the cost of doing business,
may cause delays in producing natural gas from the Partnership's wells,
or require the modification of operations in certain areas. (See
"Competition, Markets and Regulation".)
RISK THAT COSTS MAY INCREASE. There is a risk that over the term of the
Partnership there will be fluctuating or increasing costs in doing
business. This would directly affect the Managing General Partner's
ability to operate the Partnership's wells and property at acceptable
price levels. (See "Competition, Markets and Regulation - Competition
and Markets".)
YEAR 2000 RISKS. The "year 2000 issue" is the result of computer
programs being written using two digits, rather than four digits, to
identify the year in a date field. Any computer programs using such a
system, and which have date sensitive software, will not be able to
distinguish between the year 2000 and the year 1900. This could result
in miscalculations or an inability to process transactions, send
invoices or engage in similar normal business activities. Actions are
being taken by the Managing General Partner to respond to year 2000
remediation requirements. There can be no assurance that those actions
will be successful or adequate or that any additional year 2000 problems
that exist will be discovered or remedied in sufficient time. The
Managing General Partner and the Partnership are also vulnerable to
potential losses of revenue, goods or services caused by failures of
suppliers and customers or other persons to remedy their year 2000
problems.
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<PAGE> 18
TAX RISKS
TAX CONSEQUENCES MAY VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES. There
are various risks associated with the federal income tax aspects of an
investment in the Partnership. Each potential investor is urged to
consult his own tax advisor concerning the effects of federal income tax
law and regulations and interpretations thereof, on his own tax
situation. (See "Tax Aspects".)
RISK OF CHANGES IN THE LAW. The Partnership and the Participants could
be adversely affected by changes in the tax laws that may result through
future Congressional action, Tax Court or other judicial decisions, or
interpretations by the IRS. (See "Tax Aspects".)
NO ADVANCE RULING FROM THE IRS ON TAX CONSEQUENCES. The Managing General
Partner has received an opinion of counsel that, more likely than not,
the Partnership will be classified as a partnership for federal income
tax purposes and not as a corporation or a publicly traded partnership.
The opinion of counsel is not binding on the IRS and is based upon
certain factual assumptions which may or may not prove to be true. No
advance ruling on this or any other tax consequence of an investment in
the Partnership will be requested. (See "Tax Aspects - Partnership
Classification".) Nevertheless, Special Counsel's tax opinion includes
its opinion that the significant tax benefits of the Partnership, in the
aggregate, more likely than not will be realized as contemplated by this
Prospectus. (See "Tax Aspects - Summary of Tax Opinion".)
POSSIBLE TAXES IN EXCESS OF CASH DISTRIBUTIONS. A Participant's share of
Partnership revenues applied to principal on any Partnership loans from
the Managing General Partner will be included in his taxable income.
Although Partnership income may be offset in part by depletion or other
deductions, interest on Partnership borrowings will be subject to
certain restrictions on the deduction of "investment interest" and the
limitation on passive activity losses in the case of Limited Partners
and no deductions will be allowed for repayments of principal. Thus, a
Participant may become subject to income tax liability in excess of cash
actually received from the Partnership. However, to the extent the
Partnership has cash available for distribution it is the Managing
General Partner's policy that Partnership distributions will not be less
than the Participants' estimated income tax liability with respect to
Partnership income. (See "Tax Aspects - Limitations on Passive
Activities," "- Limitations on Deduction of Investment Interest," and "
- - Allocations".)
Under the Partnership Agreement, taxable income or gain may be allocated
to the Participants if there are deficits in the Participants' Capital
Accounts even though the Participants are not allocated a corresponding
amount of Partnership revenues. Also, there may be tax liability in
excess of cash distributions to the Participants because Partnership
production revenues are retained by the Operator beginning three years
after the wells are placed in production to establish a reserve for the
estimated costs of eventually plugging and abandoning Partnership Wells,
although historically the Managing General Partner has never done this
after only three years. In addition, the taxable disposition of
Partnership property or a Participant's interest in the Partnership may
result in income tax liability in excess of cash distributions. (See
"Tax Aspects - Sale of the Properties" and "- Disposition of Partnership
Interests".)
PARTNERSHIP ALLOCATIONS ARE SUBJECT TO CHALLENGE BY THE IRS IN THE EVENT
OF AN AUDIT. The allocations of Partnership costs, revenues and related
tax items between the Managing General Partner and the Participants are
subject to Treasury Regulations and the proper application of many
provisions of the regulations is currently unclear. Should the IRS
successfully challenge the allocation provisions contained in the
Partnership Agreement, Participants could incur a greater tax liability.
However, assuming the effect of the allocations set forth in the
Partnership Agreement is substantial in light of a Participant's tax
attributes that are unrelated to the Partnership, in Special Counsel's
opinion it is more likely than not that such allocations will govern
each Participant's distributive share to the extent they do not cause or
increase deficit balances in the Participants' Capital Accounts. (See
"Tax Aspects - Allocations".)
1998 TAX DEDUCTIONS ARE SUBJECT TO CHALLENGE BY THE IRS IN THE EVENT OF
AN AUDIT. The Managing General Partner anticipates that all of the
Partnership Subscription will be expended in 1998, and that the
Participants' allocable share of income and deductions generated thereby
will be reflected on the Participants' tax returns for that period. Any
net loss of the Partnership allocable to a Limited Partner (but not an
Investor General Partner) generally will be subject to the "passive
activity" loss limitation rules under the Tax Reform Act of 1986. In
addition, there is no guarantee that if the Partnership is audited the
IRS will not challenge the deductions claimed by the Partnership. The
time for assessment of tax resulting from adjustments to the
Partnership's information tax returns may extend beyond the time for
other assessments. (See "Tax Aspects - Limitations on Passive
Activities," " - 1998 Expenditures," "- Availability of Certain
Deductions" and " - Intangible Drilling and Development Costs".)
Depending primarily on when the Partnership Subscription is received, it
is anticipated that the Partnership will prepay in 1998 most, if not
all, of its Intangible Drilling Costs for wells the drilling of which
will be commenced in 1999. The deductibility in 1998 of such advance
payments cannot be guaranteed. (See "Tax Aspects - Drilling Contracts".)
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<PAGE> 19
POSSIBLE ALTERNATIVE MINIMUM TAX LIABILITY. Alternative minimum taxable
income of "independent producers," which includes most investors, cannot
be reduced by more than 40% by reason of the repeal of the preference
item for intangible drilling and development costs. (See "Tax Aspects -
Minimum Tax - Tax Preferences".)
INVESTMENT INTEREST DEDUCTIONS MAY BE LIMITED. Interest paid to acquire
or carry investment assets is deductible only to the extent of net
investment income. Because investment income includes income from
activities, such as the Partnership in the case of Investor General
Partners, which are not passive activities and in which the taxpayer
does not materially participate, losses from the Partnership will reduce
an Investor General Partner's investment income and may adversely affect
the deductibility of the Investor General Partner's investment interest
expense, if any. (See "Tax Aspects - Limitations on Deduction of
Investment Interest".)
LACK OF TAX SHELTER REGISTRATION. The Managing General Partner believes
that the Partnership will not be a tax shelter required to register with
the IRS and does not intend to cause the Partnership to register as such
with the IRS. If it is subsequently determined by the IRS that the
Partnership was required to be registered with the IRS as a tax shelter,
each Participant would be liable for a $250 penalty for failure to
include the tax registration number of the Partnership on his tax
return, unless such failure was due to reasonable cause. However, based
on the representations of the Managing General Partner, Special Counsel
has expressed the opinion that the Partnership, more likely than not,
is not required to be registered with the IRS as a tax shelter. (See
"Tax Aspects - Lack of Registration as a Tax Shelter".)
STATE AND LOCAL TAXES MAY APPLY. A Participant may incur tax liability
with respect to Partnership income in the state and locality in which he
resides as well as the states and localities where the Partnership's
Development Wells are situated. Participants should consult with their
own tax advisors concerning the state and local tax consequences of an
investment in the Partnership. (See "Tax Aspects - State and Local
Taxes.)
CAPITALIZATION AND SOURCE OF FUNDS AND USE OF PROCEEDS
IN GENERAL
Except in the case of Investor General Partner's as discussed herein,
the Units will not be subject to Assessments, and the Partnership will
not call upon the Participants for additional amounts of capital beyond
their Agreed Subscriptions. With respect to Investor General Partners,
if the insurance proceeds, Partnership assets, and the Managing General
Partner's indemnification of the Investor General Partners were not
sufficient to satisfy a Partnership liability for which the Investor
General Partners were also liable, the Managing General Partner could
call upon Investor General Partners to make additional Capital
Contributions to the Partnership from their personal assets to satisfy
the liability. Investor General Partners do not have an option to
refuse to contribute an additional Capital Contribution called by the
Managing General Partner to pay Partnership liabilities. (See "Summary
of Partnership Agreement - Liabilities of General Partners, Including
Investor General Partners.")
The drilling of the wells is expected to be funded entirely through the
Partnership Subscription and the Capital Contributions of the Managing
General Partner. If the Partnership requires additional funds for cost
overruns in the drilling or completion of wells (which the Managing
General Partner does not anticipate other than completing and Fracturing
some of the wells in a third zone), or additional development or
remedial work is subsequently required for a well, then these funds may
be provided by borrowings as discussed below in "- Subsequent Source of
Funds and Borrowings" or by the retention of Partnership revenues. The
Managing General Partner, however, does not anticipate that any
borrowings will be required before there are production revenues.
SOURCE OF FUNDS
Upon completion of the offering, the Capital Contributions to the
Partnership of the Participants will range from $1,000,000 to $8,000,000
unless the Managing General Partner in its sole discretion offers up to
400 additional Units and increases the Participants' Capital
Contributions to the Partnership to not more than $12,000,000. Assuming
all the Leases are situated in the Mercer County area the Capital
Contributions of the Managing General Partner will range from: (i)
$323,779 if the Capital Contributions of the Participants are
$1,000,000; (ii) to $2,592,000 if the Capital Contributions of the
Participants are $8,000,000; and (iii) to $3,887,825 if the Capital
Contributions of the Participants are $12,000,000. See the "- Managing
General Partner Capital" table below for a breakout of the costs paid by
the Managing General Partner.
The total amount of Capital Contributions available to the Partnership
from the Participants and the Managing General Partner would range from:
(i) $1,323,779 if 100 Units are sold; (ii) to $10,592,000 if 800 Units
are sold; and (iii) to $15,887,825 if 1,200 Units are sold.
USE OF PROCEEDS
The following tables present information for financing the Partnership
in three different circumstances: (1) if the minimum 100 Units
($1,000,000) are sold, (2) if 800 Units ($8,000,000) are sold, and (3)
if the maximum 1,200 Units ($12,000,000) are sold. Substantially all of
the Partnership Subscription available to the Partnership will be
expended for the following purposes and in the following manner:
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<PAGE>20
<TABLE>
<CAPTION>
PARTICIPANT CAPITAL
ENTITY
RECEIVING PAYMENT NATURE OF PAYMENT 100 UNITS % (1) 800 UNITS % (1) 1,200 UNITS % (1)
- ----------------- ----------------- ------------- ----- -------------- ---- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
TOTAL PARTICIPANT CAPITAL $1,000,000 100% $8,000,000 100% $12,000,000 100%
LESS: PUBLIC OFFERING EXPENSES
Broker-Dealers Dealer-Manager fee,
Sales Commissions,
and reimbursement
for bona fide
accountable due-
diligence expenses(2) - 0 - - 0 - - 0 - - 0 - - 0 - - 0 -
Various Organization Costs (2) - 0 - - 0 - - 0 - - 0 - - 0 - - 0 -
AMOUNT AVAILABLE FOR INVESTMENT:
The Managing
General Partner Capital available
for drilling and
completing wells $1,000,000 100% $8,000,000 100% $12,000,000 100%
The Managing
General Partner Leases (3) - 0 - - 0 - - 0 - - 0 - - 0 - - 0 -
- ----------------------------------------
(1) The percentage is based upon total Participants' Agreed
Subscriptions and excludes the Managing General Partner's Capital
Contribution.
(2) All Organization and Offering Costs will be paid by the Managing
General Partner. The Managing General Partner, however, will not be
credited with the payment of Organization and Offering Costs in
excess of 15% of the Partnership Subscription towards its required
Capital Contribution of 24.5% of all Partnership Capital
Contributions.
(3) Instead of making a contribution in cash for the Leases, the Leases
will be assigned to the Partnership by the Managing General Partner.
The Managing General Partner will then be credited with a Capital
Contribution for each Lease valued at its Cost or fair market value
if the Managing General Partner has cause to believe Cost is
materially more than fair market value. In the Mercer
County area, which is the Partnership's primary area of interest,
the Managing General Partner's Cost is $3,600 per Prospect. If all
the Prospects are situated in the Mercer County area, the Managing
General Partner will contribute approximately 4.9 Prospects if 100
Units are sold, 39.25 Prospects if 800 Units are sold, and 58.87
Prospects if 1,200 Units are sold.
MANAGING GENERAL PARTNER CAPITAL
ENTITY RECEIVING PAYMENT NATURE OF PAYMENT 100 UNITS % (1) 800 UNITS % (1) 1,200 UNITS % (1)
TOTAL MANAGING GENERAL PARTNER CAPITAL $323,779 100% $2,592,000 100% $3,887,825 100%
LESS: PUBLIC OFFERING EXPENSES
Broker-Dealers Dealer-Manager fee,
Sales Commissions,
and reimbursement
for bona fide
accountable due
diligence expenses(2)$105,000 32.4% $840,000 32.4% $1,260,000 32.4%
Various Organization Costs(2)$45,000 13.9% $360,000 13.9% $540,000 13.9%
AMOUNT AVAILABLE FOR INVESTMENT:
The Managing
General Partner Capital available for
drilling and
completing wells $156,139 48.3% $1,250,700 48.3% $1,875,893 48.3%
The Managing
General Partner Leases (3) $17,640 5.4% $141,300 5.4% $211,932 5.4%
</TABLE>
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<PAGE> 21
(1) The percentage is based upon the Managing General Partner's Capital
Contribution and excludes the Participants' Agreed Subscriptions.
(2) All Organization and Offering Costs will be paid by the Managing
General Partner. The Managing General Partner, however, will not be
credited with the payment of Organization and Offering Costs in
excess of 15% of the Partnership Subscription towards its required
Capital Contribution of 24.5% of all Partnership Capital
Contributions.
(3) Instead of making a contribution in cash for the Leases, the Leases
will be assigned to the Partnership by the Managing General Partner.
The Managing General Partner will then be credited with a Capital
Contribution for each Lease valued at its Cost or fair market value
if the Managing General Partner has cause to believe Cost is
materially more than fair market value. In the Mercer
County area, which is the Partnership's primary area of interest,
the Managing General Partner's Cost is $3,600 per Prospect. If all
the Prospects are situated in the Mercer County area, the Managing
General Partner will contribute approximately 4.9 Prospects if 100
Units are sold, 39.25 Prospects if 800 Units are sold, and 58.87
Prospects if 1,200 Units are sold.
SUBSEQUENT SOURCE OF FUNDS AND BORROWINGS
As indicated above, it is anticipated that substantially all the
Partnership's initial capital will be committed or expended following
the offering. Any additional funds which may subsequently be required
will be withheld from Partnership production revenues or borrowings by
the Partnership from the Managing General Partner or its Affiliates. The
Managing General Partner, however, is not contractually committed to
loan money to the Partnership. There will be no borrowings from third
parties.
The amount that may be borrowed by the Partnership from the Managing
General Partner and its Affiliates may not at any time exceed 5% of the
Partnership Subscription and must be without recourse to the
Participants. The Partnership's repayment of any borrowings would be
from Partnership production revenues and would reduce or delay cash
distributions to the Participants. See "Conflicts of Interest -
Procedures to Reduce Conflicts of Interest," paragraph (9), for the
terms of any loan with the Managing General Partner.
COMPENSATION
A narrative presentation of the items of compensation paid to the
Managing General Partner and its Affiliates from the Partnership is set
forth below. Following the narrative presentation is a tabular
presentation of the estimated Administrative Costs and Direct Costs to
be borne by the Partnership.
OIL AND GAS REVENUES. The Managing General Partner will be allocated 31%
of the oil and gas revenues of the Partnership in return for paying
Organization and Offering Costs equal to 15% of the Partnership
Subscription, 51% of Tangible Costs and contributing all Leases to the
Partnership at Cost, or fair market value if the Managing General
Partner has cause to believe that Cost is materially more than fair
market value. (See "Participation in Costs and Revenues.)
LEASE COSTS. The Managing General Partner will contribute to the
Partnership all the undeveloped Leases necessary to drill the
Partnership's wells. The Managing General Partner will receive a credit
to its Capital Account equal to the Cost of the Leases, or fair market
value if the Managing General Partner has cause to believe that Cost is
materially more than fair market value. The Cost of the Leases will
include a portion of the Managing General Partner's reasonable,
necessary and actual expenses for: (i) geological, geophysical and
engineering expenses; (ii) interest expense; (iii) legal expense; and
(iv) expenses for other like services allocated to the Partnership's
Leases determined using industry guidelines which are set forth in
"Proposed Activities - Acquisition of Leases". The Managing General
Partner will not retain any Overriding Royalty Interest for itself from
the Leases.
Assuming all the Leases are situated in the Mercer County area and the
Partnership acquires 100% of the Working Interest, the Managing General
Partner estimates that its credit for Lease costs will be: (i) $17,640
if the minimum Partnership Subscription of $1,000,000 is received (4.9
wells at $3,600 per Prospect); (ii) $141,300 if $8,000,000 is received
(39.25 wells at $3,600 per Prospect); and (iii) $211,932 if the offering
is increased to $12,000,000 (58.87 wells at $3,600 per Prospect). (See
"Proposed Activities - Acquisition of Leases".)
The contributions could also create conflicts of interest for the
Managing General Partner. The majority of the wells to be drilled will
test the Clinton/Medina geologic formation, a blanket geological
formation prevalent in Ohio and Pennsylvania. A Prospect will be deemed
to consist of the drilling or spacing unit on which the well will be
drilled if the Clinton/Medina geologic formation to which the well will
be drilled contains Proved Reserves and the drilling or spacing unit
protects against drainage. The development of wells on the acreage may
provide the Managing General Partner with offset drill sites by allowing
it to ascertain at the Partnership's expense the value of adjacent
acreage in which the Partnership would not have any right to participate
in developing. (See "Conflicts of Interest - Conflicts Involving the
Acquisition of Leases," "Conflicts of Interest - Other Activities of
the Managing General Partner, the Operator and their Affiliates" and
"Proposed Activities".)
ADMINISTRATIVE COSTS. The Managing General Partner and its Affiliates
will receive an unaccountable, fixed payment reimbursement for their
Administrative Costs which has been
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<PAGE> 22
determined by the Managing General Partner to be $75 per well per month.
This fee will be proportionately reduced to the extent the Partnership
acquires less than 100% of the Working Interest in the well. Also, this
fee will not be increased during the term of the Partnership, and will
not be received for plugged and abandoned wells. The Managing General
Partner will not be reimbursed for any additional Partnership
Administrative Costs other than the $75 per well per month. See
"Estimate of Administrative Costs and Direct Costs to Be Borne by the
Partnership" for an estimate of those costs in the first twelve months.
DRILLING CONTRACTS. The Partnership will enter into a drilling contract
with the Managing General Partner to drill and complete the Partnership
Wells at a competitive industry rate. For each well completed and
placed into production in the Appalachian Basin, the Partnership will
pay the Managing General Partner an amount equal to $39.15 per foot to
the depth of the well at its deepest penetration. For each well which
the Partnership elects not to complete, the Partnership will pay the
Managing General Partner an amount equal to $20.60 per foot to the depth
of the well.
The footage contract will cover all costs other than the cost of a
pumping unit for an oil well, which is not anticipated, and the cost of
a third completion and Frac. "Frac" means, in general, treating a
potentially productive geological formation in an attempt to enhance the
gas production from the well. (See "Definitions".) These costs will be
charged at Cost plus 10% if provided by third parties and at competitive
rates in the area if provided by the Managing General Partner or its
Affiliates. The cost of the well will be proportionately reduced to the
extent the Partnership acquires less than 100% of the Working Interest.
(See the Drilling and Operating Agreement, Exhibit (II) to the
Partnership Agreement.)
The amount of compensation which the Managing General Partner could earn
as a result of these arrangements is dependent upon many factors,
including the actual cost of the wells and the number of wells drilled.
The Managing General Partner anticipates that in the Mercer County area
of the Appalachian Basin it will have reimbursement of general and
administrative overhead of $3,600 per well and a profit of approximately
15% ($34,812) per well for a well drilled to a depth of 6,020 feet.
Assuming all the wells are situated in the Mercer County area, drilled
and completed to a depth of 6,020 feet, and the Partnership acquires
100% of the Working Interest, it is estimated that the Managing General
Partner's general and administrative overhead reimbursement and profit
will be: (i) $188,219 if $1,000,000 is received (4.9 wells at $38,412
profit and overhead per well); (ii) $1,507,671 if $8,000,000 is received
(39.25 wells at $38,412 profit and overhead per well); and (iii)
$2,261,314 if the offering is increased to $12,000,000 (58.87 wells at
$38,412 profit and overhead per well).
PER WELL CHARGES. When the wells begin producing the Managing General
Partner, as Operator, will be reimbursed at actual cost for all direct
expenses incurred on behalf of the Partnership and will receive well
supervision fees for operating and maintaining the wells during
producing operations at a competitive rate. In the Appalachian Basin
the competitive rate is currently $275 per well per month subject to an
annual adjustment for inflation. Assuming all the wells are drilled and
completed in the Appalachian Basin and the Partnership acquires 100% of
the Working Interest, the Managing General Partner estimates that it
will receive for the Partnership's first twelve months of operations:
(i) $16,170 if the minimum Partnership Subscription of $1,000,000 is
received (4.9 wells at $275 per well per month); (ii) $129,525 if
$8,000,000 is received (39.25 wells at $275 per well per month); and
(iii) $194,271 if the offering is increased to$12,000,000 (58.87 wells
at $275 per well per month). The well supervision fees will be
proportionately reduced to the extent the Partnership acquires less than
100% of the Working Interest in the well.
TRANSPORTATION AND MARKETING FEES. Mercer Gas Gathering, Inc., an
Affiliate of the Managing General Partner, will deliver natural gas
produced by the Partnership to either industrial end-users in the area
or interstate pipeline systems and local distribution companies. Atlas
Gas Marketing, Inc., an Affiliate of the Managing General Partner, will
provide marketing services to the Partnership. The Partnership will pay
a combined transportation and marketing charge at a competitive rate,
which is currently 29 cents per MCF. The actual amount to be paid
cannot be quantified because the amount of gas that will be produced
from the Wells cannot be predicted. (See "Management".)
DEALER-MANAGER FEES. The Dealer-Manager, Anthem Securities, will
receive from the Partnership on each Unit sold to an investor a 2.5%
Dealer-Manager fee, a 7.5% Sales Commission and a .5% reimbursement of
the Selling Agents' accountable due diligence expenses. If the minimum
Partnership Subscription of $1,000,000 is received the Dealer-Manager
will receive $105,000, if $8,000,000 is received the Dealer-Manager
will receive $840,000, and if the offering is increased to $12,000,000
the Dealer-Manager will receive $1,260,000. The 7.5% Sales Commission
and the .5% accountable due diligence expense will be reallowed to the
Selling Agents and the 2.5% Dealer-Manager fee will be reallowed to the
three wholesalers who are employees of the Managing General Partner and
associated with Anthem Securities.
OTHER COMPENSATION. The Managing General Partner or an Affiliate will
be reimbursed by the Partnership for any loan it or an Affiliate may
make to or on behalf of the Partnership and will have the right to
charge a competitive rate of interest on any loan. If the Managing
General Partner provides equipment, supplies and other services to the
Partnership it may do so at competitive industry rates. (See "Conflicts
of Interest".)
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<PAGE> 23
ESTIMATE OF ADMINISTRATIVE COSTS AND
DIRECT COSTS TO BE BORNE BY THE PARTNERSHIP
The Managing General Partner estimates that the unaccountable, fixed
payment reimbursement for Administrative Costs allocable to the
Partnership's first twelve months of operation will not exceed
approximately $4,410 if the minimum Partnership Subscription is received
(4.9 wells at $75 per well per month), approximately $35,325 if
$8,000,000 is received (39.25 wells at $75 per well per month), and
approximately $52,983 if the offering is increased to $12,000,000 (58.87
wells at $75 per well per month). Administrative Costs are all customary
and routine expenses incurred for the conduct of Partnership
administration, including: legal, finance, accounting, secretarial,
travel, office rent, telephone, data processing and other items of a
similar nature. No Administrative Costs charged will be duplicated under
any other category of expense or cost.
Minimum Maximum If Managing General
Partnership Partnership Partner Increases
Subscription Subscription Offering
($1,000,000) ($8,000,000) ($12,000,000)
------------ ----------- -------------
Unaccountable, fixed
payment reimbursement
for Administrative Costs $4,410 $35,325 $52,983
Direct Costs will be billed directly to and paid by the Partnership to
the extent practicable. The anticipated Direct Costs set forth below
for the Partnership's first twelve months of operation may vary from the
estimates shown for numerous reasons which cannot accurately be
predicted. These reasons include the number of Participants, the number
of wells drilled, the Partnership's degree of success in its activities,
the extent of any production problems, inflation and various other
factors involving the administration of the Partnership.
Minimum Maximum If Managing General
Partnership Partnership Partner Increases
Subscription Subscription Offering
($1,000,000) ($8,000,000) ($12,000,000)
---------- ---------- ----------
DIRECT COSTS
External Legal $ 6,000 $ 6,000 $6,000
Audit Fees 2,500 6,000 6,000
Independent Engineering
Reports 1,500 3,000 3,000
-------- ------- -------
TOTAL $10,000 $15,000 $15,000
======== ======= =======
TERMS OF THE OFFERING
SUBSCRIPTION TO THE PARTNERSHIP
The Partnership will offer a minimum of 100 Units and a maximum of 800
Units. However, if subscriptions for all 800 Units being offered are
obtained, the Managing General Partner, in its sole discretion, may
offer not more than 400 additional Units and increase the maximum
aggregate subscriptions with which the Partnership may be funded to not
more than 1,200 Units ($12,000,000). Units in the Partnership are
offered at a subscription price of $10,000 per Unit. The minimum
subscription per investor is one Unit; however, the Managing General
Partner, in its discretion, may accept one-half Unit ($5,000)
subscriptions. Larger Agreed Subscriptions will be accepted in $1,000
increments. Agreed Subscriptions are payable 100% in cash at the time
of subscribing.
The Managing General Partner will have exclusive management authority
for the Partnership. Subscribers who purchase Units as Investor General
Partners or as Limited Partners will serve as Participants of the
Partnership. See "Participation in Costs and Revenues - Allocation and
Adjustment Among Participants" regarding the Participants' share of
revenues, gains, costs, credits, expenses, losses and other charges and
liabilities.
The Managing General Partner has elected for the Partnership to be
governed by the partnership laws of Pennsylvania and has filed the
Certificate of Limited Partnership. The Managing General Partner will
take all other necessary actions to qualify the Partnership to do
business as a limited partnership or cause the limited partnership
status of the Partnership to be recognized in other jurisdictions.
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<PAGE> 24
PARTNERSHIP CLOSINGS AND ESCROW
The offering period will commence on the date of this Prospectus and
will terminate on a date to be determined by the Managing General
Partner, in its sole discretion. Subject to the receipt of the minimum
Partnership Subscription of $1,000,000, the Managing General Partner
may close the offering period on or before December 31, 1998 (the
"Offering Termination Date"). No subscriptions to the Partnership will
be accepted after receipt of the maximum Partnership Subscription
(including the additional 400 Units which may be offered) or the
Offering Termination Date, whichever event occurs first. If
subscriptions for $1,000,000 are not received by December 31, 1998, the
sums deposited in the escrow account will be returned to the
subscribers with interest thereon. Although the Managing General
Partner and its Affiliates may buy up to 10% of the Units, the Managing
General Partner currently does not anticipate that it and its
Affiliates will purchase any Units. Any Units purchased by the
Managing General Partner and its Affiliates will not be applied towards
the minimum Partnership Subscription required for the Partnership to
begin operations. (See "Conflicts of Interest - Conflicts Between
Participants.")
Subscription payments will be held in a separate interest bearing escrow
account at National City Bank of Pennsylvania pending the receipt of the
minimum Partnership Subscription. Subject to the receipt of the minimum
partnership Subscription, there will be two closings which are
tentatively set for December 1, 1998 ("Initial Closing Date"), and
December 31, 1998. The Partnership will begin all activities, including
drilling, after the Initial Closing Date. After the Initial Closing Date
the Partnership funds and additional subscription payments will be paid
directly to the Partnership account and will continue to earn interest
until the Offering Termination Date.
A Participant will receive interest on his Agreed Subscription up until
the Offering Termination Date at National City Bank of Pennsylvania's
variable market rate for short-term deposits. Any interest earned on
Agreed Subscriptions will be credited to the accounts of the respective
subscribers and paid approximately eight weeks after the Offering
Termination Date. Subscriptions will not be commingled with the funds
of the Managing General Partner or its Affiliates nor will
subscriptions be subject to the claims of their creditors.
Subscription proceeds will be invested during the escrow period only in
institutional investments comprised of or secured by securities of the
United States government. The funds in the Partnership account, pending
their use for Partnership operations, may be temporarily invested in
income producing short-term, highly liquid investments, in which there
is appropriate safety of principal, such as U.S. Treasury Bills. If the
Managing General Partner determines that the Partnership may be deemed
an investment company under the Investment Company Act of 1940, the
investment activity will cease.
ACCEPTANCE OF SUBSCRIPTIONS
The execution of the Subscription Agreement by a subscriber constitutes
a binding offer to buy Units in the Partnership and an agreement to
hold the offer open until the Agreed Subscription is accepted or
rejected by the Managing General Partner. Once an investor subscribes
he will not have any revocation rights. The Managing General Partner
has the discretion to refuse to accept any Agreed Subscription without
liability to the subscriber. Agreed Subscriptions will be accepted or
rejected by the Partnership within thirty days of their receipt; if
rejected, all funds will be returned to the subscriber immediately.
Upon the original sale of Units, the investors will be admitted as
Partners not later than fifteen days after the release from escrow of
the investors' funds to the Partnership. Thereafter, investors will be
admitted into the Partnership not later than the last day of the
calendar month in which their Agreed Subscriptions were accepted by the
Partnership.
The execution of the Subscription Agreement and its acceptance by the
Managing General Partner also constitutes the execution of the
Partnership Agreement and an agreement to be bound by the terms thereof
as a Participant. This includes the granting of a special power of
attorney to the Managing General Partner appointing it as the
Participant's lawful representative and attorney in-fact to make,
execute, sign, swear to and file an Amended Certificate of Limited
Partnership from time to time, governmental reports and certifications,
and other matters. (See the Partnership Agreement, Exhibit (A) to this
Prospectus.)
DRILLING PERIOD
Although it is anticipated that the Partnership will spend the entire
Partnership Subscription soon after the Offering Termination Date, the
Partnership will have a period of one year from the termination of the
offering period to use or commit funds to drilling activities. If,
within the one year period, the Partnership has not used, or committed
for use, as evidenced by a written agreement, the net subscription
proceeds, then the Managing General Partner will cause the remainder of
the net subscription proceeds, except for necessary operating capital
and amounts reserved for identified activities, to be distributed pro
rata to the Participants in the ratio of their Agreed Subscriptions as a
return of capital, together with interest earned thereon after the
Offering Termination Date. The Managing General Partner will also
reimburse the Participants for selling or other offering expenses
allocable to the return of capital.
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<PAGE> 25
SUITABILITY STANDARDS
IN GENERAL. It is the obligation of persons selling Units
and the Managing General Partner to make every
reasonable effort to assure that the Units are suitable for investors,
based on the investor's investment objectives and financial situation,
regardless of the investor's income or net worth. This is not an
appropriate investment for IRAs, Keogh plans and qualified retirement
plans. The Managing General Partner will maintain during the term of
the Partnership and for at least six years thereafter a record of each
investor's suitability.
Units will be sold only to an investor who has:
(i) a minimum net worth of $225,000; or
(ii) a minimum net worth of $60,000 and had during the last tax
year or estimates that he will have during the current tax year
"taxable income" as defined in Section 63 of the Code of at
least $60,000 without regard to an investment in Units.
Net worth will be determined exclusive of home, home furnishings and
automobiles. Additional suitability requirements are applicable to
residents of certain states. (See "- Purchasers of Limited Partner
Units" and "- Purchasers of Investor General Partner Units", below.)
PURCHASERS OF LIMITED PARTNER UNITS. A resident of California must:
(i) have a net worth of not less than $250,000 (exclusive of home,
furnishings, and automobiles) and expect to have gross income
in the current tax year of $65,000 or more; or
(ii) have a net worth of not less than $500,000 (exclusive of
home, furnishings, and automobiles); or
(iii) have a net worth of not less than $1,000,000; or
(iv) expect to have gross income in the current tax year of not
less than $200,000.
A Michigan or North Carolina resident must have either:
(i) a net worth of not less than $225,000 (exclusive of home,
furnishings, and automobiles); or
(ii) a net worth of not less than $60,000 (exclusive of home,
furnishings, and automobiles) and estimated current tax year
taxable income as defined in Section 63 of the Internal Revenue
Code of 1986 of $60,000 or more without regard to an investment
in the Partnership.
In addition, a resident of Michigan, Ohio or Pennsylvania shall not make
an investment in the Partnership in excess of 10% of his net worth
(exclusive of home, furnishings and automobiles).
PURCHASERS OF INVESTOR GENERAL PARTNER UNITS. A resident of Alabama,
Maine, Massachusetts, Minnesota, North Carolina, Pennsylvania, Tennessee
or Texas must represent that he:
(i) has an individual or joint net worth with his or her spouse of
$225,000 or more, without regard to the investment in the
Partnership (exclusive of home, furnishings, and automobiles),
and a combined gross income of $100,000 or more for the current
year and for the two previous years; or
(ii) has an individual or joint net worth with his or her spouse
in excess of $1,000,000, inclusive of home, home furnishings
and automobiles; or
(iii) has an individual or joint net worth with his or her spouse
in excess of $500,000, exclusive of home, home furnishings, and
automobiles; or
(iv) has a combined "gross income" as defined in Code Section 61
in excess of $200,000 in the current year and the two previous
years.
A resident of Arizona, Indiana, Iowa, Kansas, Kentucky, Michigan,
Mississippi, Missouri, New Hampshire, New Mexico, Ohio, Oklahoma,
Oregon, South Dakota, Vermont or Washington must represent that he:
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<PAGE> 26
(i) has an individual or joint net worth with his or her spouse of
$225,000 or more, without regard to the investment in the
Partnership (exclusive of home, furnishings, and automobiles),
and a combined "taxable income" of $60,000 or more for the
previous year and expects to have a combined "taxable income"
of $60,000 or more for the current year and for the succeeding
year; or
(ii) has an individual or joint net worth with his or her spouse
in excess of $1,000,000, inclusive of home, home furnishings
and automobiles; or
(iii) has an individual or joint net worth with his or her spouse
in excess of $500,000, exclusive of home, home furnishings, and
automobiles; or
(iv) has a combined "gross income" as defined in Code Section 61
in excess of $200,000 in the current year and the two previous
years.
In addition, a resident of Michigan, Ohio or Pennsylvania shall not make
an investment in the Partnership in excess of 10% of his net worth
(exclusive of home, furnishings and automobiles).
A resident of California must represent that he:
(i) has a net worth of not less than $250,000 (exclusive of home,
furnishings, and automobiles) and expects to have gross income
in the current tax year of $120,000 or more; or
(ii) has a net worth of not less than $500,000 (exclusive of home,
furnishings, and automobiles); or
(iii) has a net worth of not less than $1,000,000; or
(iv) expects to have gross income in the current tax year of not
less than $200,000.
MISCELLANEOUS. In the case of sales to fiduciary accounts, all the
suitability standards set forth above and for the appropriate state must
be met by the beneficiary, the fiduciary account, or by the donor or
grantor who directly or indirectly supplies the funds to purchase the
Partnership interests if the donor or grantor is the fiduciary.
Investors are required to execute their own Subscription Agreements. The
Managing General Partner will not accept any Subscription Agreement that
has been executed by someone other than the investor, unless the person
has been given the legal power of attorney to sign on the investor's
behalf and the investor meets all of the conditions herein.
The Managing General Partner may not complete a sale of Units to an
investor until at least five business days after the date the investor
receives a final prospectus. In addition, the Managing General Partner
will send each investor a confirmation of purchase.
Transferees of Units seeking to become substituted Partners must meet
the requirements imposed by the Partnership Agreement. Also, the
transferability of Participants' interest is limited, by the provisions
of state and federal securities laws. (See "Risk Factors - Special
Risks of the Partnership - Risk Created by the Illiquidity and the
Restrictions on Transferability of the Units.") For example, California
residents generally may not transfer Units without the consent of the
California Commissioner of Corporations, and the Commissioner of
Securities of Missouri classifies the Units as being ineligible for any
transactional exemption under the Missouri Uniform Securities Act
(Section 409.402(b), RSMo. 1969). Therefore, unless the Units are again
registered, the offer for sale or resale of Units by a Participant in
the State of Missouri may be subject to the sanctions of the act. Other
state securities law limitations on the transferability of Participants'
interests will be applicable in other states.
SUBSCRIPTION BY MANAGING GENERAL PARTNER
The Managing General Partner is required to make certain contributions
to the Partnership. The Managing General Partner and its officers and
directors and Affiliates may also subscribe for Units in the Partnership
on the same basis as Limited Partners or Investor General Partners,
except that they are not required to pay the Dealer-Manager fee, Sales
Commissions and due diligence reimbursements. Although the Managing
General Partner and its Affiliates may buy up to 10% of the Units, the
Managing General Partner currently does not anticipate that it and its
Affiliates will purchase any Units. Any Units purchased by the Managing
General Partner and its Affiliates will not be applied towards the
minimum Partnership Subscription required for the Partnership to begin
operations. Subject to the foregoing, any subscription by the Managing
General Partner or its officers, directors or Affiliates will dilute the
voting rights of the Participants; however, they are prohibited from
voting with respect to certain matters. (See "Summary of Partnership
Agreement - Voting Rights.")
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<PAGE> 27
CONFLICTS OF INTEREST
IN GENERAL
Conflicts of interest are inherent in oil and gas drilling programs
involving non-industry participants because the transactions are entered
into without arms' length negotiation. The interests of the Participants
and those of the Managing General Partner and its Affiliates may be
inconsistent in some respects or in certain instances. The following
discussion describes certain possible conflicts of interest that may
arise for the Managing General Partner and its Affiliates in the course
of the Partnership and certain limitations which are designed to reduce,
but which will not eliminate, the conflicts. The following discussion,
however, is not intended to be inclusive and other transactions or
dealings may arise in the future that could result in conflicts of
interest for the Managing General Partner and its Affiliates.
The Managing General Partner is accountable to the Partnership as a
fiduciary and has a duty to exercise good faith and to deal fairly with
the Participants in handling the affairs of the Partnership. Although
the Managing General Partner will attempt to avoid conflicts of
interest, conflicts may occur and the actions of the Managing General
Partner may not be most advantageous to the Partnership. Because the
Managing General Partner makes a significant Capital Contribution to the
Partnership, conflicts will be reduced. Nevertheless, if the Managing
General Partner breaches its fiduciary responsibilities, a Participant
is entitled to an accounting and the recovery of any economic loss
caused by the breach. (See "Fiduciary Responsibility of the Managing
General Partner".)
TRANSACTIONS WITH THE MANAGING GENERAL PARTNER AND ITS AFFILIATES
Although the Managing General Partner and its Affiliates believe that
the items of compensation and reimbursement that it and its Affiliates
will receive in connection with the Partnership are reasonable, the
items of compensation have been determined solely by the Managing
General Partner. The terms are not the result of any negotiation or
agreement between the Managing General Partner and any third party
dealing at arms' length and not having an affiliation with the Managing
General Partner. The Managing General Partner will be entitled to
receive items of compensation and reimbursement in connection with the
Partnership even though it is possible that the Partnership's activities
could result in little or no profit, or a loss to Participants. Although
the fees must be competitive with the prices of other unaffiliated
persons in the same geographic area engaged in similar businesses, the
entity or person providing the services or equipment can be expected to
profit from the transactions. It may be to the best interests of the
Managing General Partner to first enter into contracts with itself and
its Affiliates and second with nonaffiliated parties even though the
contract terms, or skill and experience, offered by the nonaffiliated
parties to the Partnership may be comparable to that available from the
Managing General Partner and its Affiliates.
The Managing General Partner and any Affiliate will not render to the
Partnership any oil field, equipage or other services nor sell or lease
to the Partnership any equipment or related supplies unless the
following two conditions are met. First, the Managing General partner
and any Affiliate is engaged, independently of the Partnership and as an
ordinary and ongoing business, in the business of rendering the services
or selling or leasing the equipment and supplies to a substantial extent
to other persons in the oil and gas industry in addition to the
partnerships in which the Managing General Partner or an Affiliate has
an interest. Second, the compensation, price or rental therefor will be
competitive with the compensation, price or rental of other persons in
the area engaged in the business of rendering comparable services or
selling or leasing comparable equipment and supplies which could
reasonably be made available to the Partnership. If the Managing General
Partner and any Affiliate is not engaged in such a business then the
compensation, price or rental will be its Cost of the services,
equipment or supplies or the competitive rate which could be obtained in
the area, whichever is less.
Any services not otherwise described in this Prospectus for which the
Managing General Partner or any of its Affiliates are to be compensated
will be set forth in a written contract which precisely describes the
services to be rendered and the compensation to be paid. The
compensation, if any, will be reported to Participants in the
Partnership's annual and semiannual reports and a copy of the contract
will be provided to a Participant upon request pursuant to the Partnership
Agreement. The contracts are cancelable without penalty upon sixty days
written notice by Participants whose Agreed Subscriptions equal a
majority of the Partnership Subscription. With respect to Units owned
by the Managing General Partner or its Affiliates, the Managing General
Partner and its Affiliates may not vote or consent regarding any
transactions between the Partnership and the Managing General Partner or
its Affiliates, and their Units will not be included for purposes of
determining a majority of the Partnership Subscription with respect to
such contracts.
CONFLICT REGARDING THE DRILLING AND OPERATING AGREEMENT
It is anticipated that all the wells developed by the Partnership will
be drilled and operated pursuant to the Drilling and Operating
Agreement. The Managing General Partner will be required to monitor and
enforce, on behalf of the Partnership, its own compliance with the
provisions of the Drilling and Operating Agreement, which creates a
continuing conflict of interest. (See "Proposed Activities".)
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<PAGE> 28
CONFLICTS REGARDING SHARING OF COSTS AND REVENUES
The share of revenues that the Managing General Partner will receive
pursuant to the Partnership Agreement will be "Carried" because the
Managing General Partner will contribute total Capital Contributions to
the Partnership in an amount less than the Partnership's revenues which
it will receive. This may create a conflict of interest between the
Managing General Partner and the Participants regarding the
determination of which Leases will be acquired by the Partnership and
the profit potential associated with the Leases.
In addition, the allocation of all the Intangible Drilling Costs to the
Participants and a portion of the Tangible Costs to the Managing General
Partner creates conflicts of interest between the Participants and the
Managing General Partner when completion of a marginally productive well
might prove beneficial to the Participants but not to the Managing
General Partner. When a completion decision is made the Participants
will have already paid the majority of their costs so they will want to
complete the well if there is any opportunity to recoup any of their
costs. On the other hand, the Managing General Partner will not have
paid any money prior to this time and it will only want to pay the costs
if it is assured of recouping its money and making a profit. Based upon
its past experience, however, the Managing General Partner anticipates
that all Partnership Wells in the Clinton/Medina geological formation
will be required to be completed before a determination can be made as
to the well's productivity. In any event, the Managing General Partner
will not cause any well to be plugged and abandoned by the Partnership
without a completion attempt having been made unless the Managing
General Partner determines that the well should be plugged and abandoned
in accordance with the generally accepted and customary oil and gas
field practices and techniques then prevailing in the geographic area of
the well location.
TAX MATTERS PARTNER
The Managing General Partner will also serve as the Partnership's "Tax
Matters Partner", and will have broad authority to act on behalf of the
Partnership and the Participants in any administrative or judicial
proceeding involving the IRS. The possession of this authority by the
Tax Matters Partner may involve conflicts of interest. This includes
whether or not to expend Partnership funds to contest a proposed
adjustment by the IRS, if any, to the amount of the Partnership's
deduction for Intangible Drilling Costs, which is allocated 100% to the
Participants, or to contest a proposed decrease by the IRS, if any, in
the amount of the Managing General Partner's credit to its Capital
Account for contributing the Leases to the Partnership which would
decrease the Managing General Partner's Distribution Interest in the
Partnership. There also may be conflicts of interest with respect to
the Partnership's reimbursement of expenses incurred by the Managing
General Partner in its role as the Partnership's Tax Matters Partner.
(See "Tax Aspects".)
OTHER ACTIVITIES OF THE MANAGING GENERAL PARTNER, THE OPERATOR AND THEIR
AFFILIATES
The Managing General Partner will be required to devote to the
Partnership the time and attention which it considers necessary or
appropriate for the proper supervision and management of the operations
and activities of the Partnership. The Managing General Partner,
however, has sponsored and continues to manage other Programs (see
"Prior Activities"), and the Managing General Partner expects to
organize and manage additional Programs, which may be concurrent.
Additionally, the Managing General Partner and its Affiliates may engage
in other oil and gas related business activities, either for their own
account or on behalf of other Programs, partnerships, joint ventures,
corporations or other entities in which they have an interest. Thus,
they will have conflicts of interest in allocating management time,
services and other functions among the Partnership and these other oil
and gas Programs, partnerships and ventures.
Subject to its fiduciary duties, the Managing General Partner will not
be restricted in any manner from participating in other businesses or
activities, even though these other businesses or activities may be
competitive with the operations and activities of the Partnership and
may operate in the same areas as the Partnership. Notwithstanding, the
Managing General Partner and its Affiliates may pursue business
opportunities that are consistent with the Partnership's investment
objectives for their own account only after they have determined that
the opportunity either cannot be pursued by the Partnership because of
insufficient funds or because it is not appropriate for the Partnership
under the existing circumstances.
CONFLICTS INVOLVING THE ACQUISITION OF LEASES
The Managing General Partner will select, in its sole discretion, the
Prospects to be drilled by the Partnership. Conflicts of interest may
arise concerning which Prospects the Managing General Partner will
assign to the Partnership and which the Managing General Partner will
assign to other Programs to be organized by the Managing General Partner
or in which it serves as driller/operator. It may be in the Managing
General Partner's or its Affiliates' advantage to have the Partnership
bear the costs and risks of drilling a particular Prospect rather than
another Program. These potential conflicts of interest will be increased
to some extent because the Managing General Partner expects to be
organizing and allocating Prospects to more than one Program at a time
including a year-end Program in which Affiliates of the Managing General
Partner invest. There can be no assurance that the activities of the
Partnership and those of other Programs to be organized by the Managing
General Partner will not conflict. To lessen this conflict of interest
the Managing General Partner generally takes a similar interest in other
Programs when it serves as Managing General Partner and/or
driller/operator.
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<PAGE> 29
In Pennsylvania and Ohio the assignments of the Leases will be limited
to a depth of from the surface through the Clinton/Medina geological
feature to the top of the Queenston formation. The Managing General
Partner will retain the drilling rights below the Clinton/Medina
geological formation. Although the retention of the deep drilling rights
may create a conflict of interest between the Partnership and the
Managing General Partner, the Managing General Partner
believes that the Partnership's drilling to
the Clinton/Medina geological formation will not provide any geologic
information that would prove up or assist in evaluating drilling to
formations deeper than the Clinton/Medina geological formation. Further,
the amount of the credit the Managing General Partner receives for the
Partnership Leases does not include any value allocable to the deep
drilling rights retained by it.
No procedures, other than the guidelines set forth below, have been
established by the Managing General Partner to resolve any of the
conflicts which may arise. The Managing General Partner, however, owes a
fiduciary duty to the Participants in the operation and management of
the Partnership and is restricted from engaging in certain transactions
with Affiliates and others under the terms of the Partnership Agreement.
The Managing General Partner, its Affiliates and the Partnership will
abide by the guidelines set forth below.
(1) FAIR AND REASONABLE. Neither the Managing General Partner nor any
Affiliate will sell, transfer, or convey any property to or purchase
any property from the Partnership, directly or indirectly, except
pursuant to transactions that are fair and reasonable, nor take any
action with respect to the assets or property of the Partnership
which does not primarily benefit the Partnership.
(2) TRANSFERS AT COST. The Leases acquired from the Managing General
Partner or its Affiliates will be contributed to the Partnership at
the Cost of the Lease, unless the Managing General Partner has cause
to believe that Cost is materially more than the fair market value
of the property, in which case the credit for the contribution will
be made for a price not in excess of its fair market value. A
determination of fair market value must be supported by an appraisal
from an Independent Expert. The opinion and any associated
supporting information must be maintained in the Partnership's
records for at least six years.
(3) LIMITATIONS ON ACTIVITIES OF THE MANAGING GENERAL PARTNER AND ITS
AFFILIATES ON LEASES ACQUIRED BY THE PARTNERSHIP. During a period of
five years from the Offering Termination Date of the Partnership, if
the Managing General Partner or any of its Affiliates (excluding
another Program in which the interest of the Managing General
Partner or its Affiliates is substantially similar to or less than
their interest in the Partnership) proposes to acquire an interest
from an unaffiliated person, in a Prospect in which the Partnership
possesses an interest or in a Prospect in which the Partnership's
interest has been terminated without compensation within one year
preceding the proposed acquisition, the following conditions shall
apply:
(i) if the Managing General Partner or the Affiliate (excluding
another Program in which the interest of the Managing General
Partner or its Affiliates is substantially similar to or less
than their interest in the Partnership) does not currently own
property in the Prospect separately from the Partnership, then
neither the Managing General Partner nor the Affiliate shall be
permitted to purchase an interest in the Prospect; and
(ii) if the Managing General Partner or the Affiliate
(excluding another Program in which the interest of the
Managing General Partner or its Affiliates is
substantially similar to or less than their interest in
the Partnership) currently owns a proportionate interest
in the Prospect separately from the Partnership, then the
interest to be acquired shall be divided between the
Partnership and the Managing General Partner or the
Affiliate in the same proportion as is the other property
in the Prospect; provided, however, if cash or financing
is not available to the Partnership to enable it to
consummate a purchase of the additional interest to which
it is entitled, then neither the Managing General Partner
nor the Affiliate shall be permitted to purchase any
additional interest in the Prospect.
(4) TRANSFER OF LESS THAN THE MANAGING GENERAL PARTNER'S AND ITS
AFFILIATE'S ENTIRE INTEREST. A sale, transfer or a conveyance to the
Partnership of less than all of the ownership of the Managing
General Partner or an Affiliate (excluding another Program in which
the interest of the Managing General Partner or its Affiliates is
substantially similar to or less than their interest in the
Partnership) in any Prospect will not be made unless the interest
retained by the Managing General Partner or the Affiliate is as
follows:
(i) a proportionate Working Interest;
(ii) the respective obligations of the Managing General Partner or
its Affiliates and the Partnership are substantially the same
after the sale of the interest by the Managing General Partner
or its Affiliates; and
(iii) the Managing General Partner's interest in revenues does not
exceed the amount proportionate to its retained Working
Interest.
Neither the Managing General Partner nor any Affiliate will retain
any Overriding Royalty Interests or other burdens on an interest
sold by it to the Partnership.
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- -
<PAGE> 30
With respect to its retained interest the Managing General Partner
will not Farmout a Lease for the primary purpose of avoiding payment
of its costs relating to drilling the Lease. This paragraph does not
prevent the Managing General Partner or its Affiliates from
subsequently dealing with their retained interest as they may choose
with unaffiliated parties or Affiliated partnerships.
(5) EQUAL PROPORTIONATE INTEREST. When the Managing General Partner or
an Affiliate (excluding another Program in which the interest of the
Managing General Partner or its Affiliates is substantially similar
to or less than their interest in the Partnership) sells, transfers
or conveys any oil, gas or other mineral interests or property to
the Partnership, it must, at the same time, sell, transfer or convey
to the Partnership an equal proportionate interest in all its other
property in the same Prospect. Notwithstanding, a Prospect shall be
deemed to consist of the drilling or spacing unit on which the well
will be drilled by the Partnership:
(i) if the geological feature to which such well will be drilled
contains Proved Reserves; and
(ii) the drilling or spacing unit protects against drainage.
With respect to an oil and gas Prospect located in Ohio and
Pennsylvania on which a well will be drilled by the Partnership to
test the Clinton/Medina geologic formation, a Prospect shall be
deemed to consist of the drilling and spacing unit if it meets the
test in the preceding sentence.
It is anticipated that most of the Prospects developed by the
Partnership will develop the Clinton/Medina geologic formation. The
drilling of wells on the acreage may provide the Managing General
Partner with offset sites by allowing it to ascertain at the
Partnership's expense the value of adjacent acreage in which the
Partnership would not have any right to participate in developing.
See the Production Map in "Proposed Activities - Information
Regarding Currently Proposed Prospects" for the acreage owned by the
Managing General Partner in the area surrounding the currently
proposed Prospects. To lessen this conflict of interest neither the
Managing General Partner nor its Affiliates may drill any well
within 1,650 feet of an existing Partnership Well in the
Clinton/Medina formation in Pennsylvania, or within 1,100 feet of an
existing Partnership Well in Ohio, within five years of the drilling
of the Partnership Well. If the Partnership abandons its interest in
a well, this restriction will continue for one year following the
abandonment.
(6) SUBSEQUENTLY ENLARGING PROSPECT. If the area constituting the
Partnership's Prospect is subsequently enlarged to encompass any
area wherein the Managing General Partner or an Affiliate (excluding
another Program in which the interest of the Managing General
Partner or its Affiliates is substantially similar to or less than
their interest in the Partnership) owns a separate property
interest, the separate property interest or a portion thereof will
be sold, transferred or conveyed to the Partnership in accordance
with Sections 2, 4 and 5, above, if the activities of the
Partnership were material in establishing the existence of Proved
Undeveloped Reserves which are attributable to the separate property
interest.
Notwithstanding, Prospects in the Clinton/Medina geological
formation will not be enlarged or contracted if the Prospect was
limited to the drilling or spacing unit because the well was being
drilled to Proved Reserves in the Clinton/Medina geological
formation and the drilling or spacing unit protected against
drainage.
(7) NO SALE OF LEASES TO THE MANAGING GENERAL PARTNER. The Managing
General Partner and its Affiliates will not purchase any producing
or non-producing oil and gas properties from the Partnership.
(8) NO TRANSFER OF LEASES BETWEEN AFFILIATED LIMITED PARTNERSHIPS. The
Partnership will not purchase properties from or sell properties to
any other Affiliated partnership. This prohibition, however, does
not apply to joint ventures among Affiliated partnerships, provided
that the respective obligations and revenue sharing of all parties
to the transaction are substantially the same and the compensation
arrangement or any other interest or right of either the Managing
General Partner or its Affiliates is the same in each Affiliated
partnership, or, if different, the aggregate compensation of the
Managing General Partner or the Affiliate is reduced to reflect the
lower compensation arrangement.
(9) NO FARMOUTS. The Partnership shall not Farmout its Leases.
(10) LEASES WILL BE ACQUIRED ONLY FOR STATED PURPOSE OF THE PARTNERSHIP.
The Partnership will acquire only Leases reasonably expected to meet
the stated purposes of the Partnership. No Leases will be acquired
for the purpose of a subsequent sale unless the acquisition is made
after a well has been drilled to a depth sufficient to indicate that
such an acquisition would be in the Partnership's best interest.
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<PAGE> 31
CONFLICTS BETWEEN PARTICIPANTS
The Managing General Partner and its officers and directors and
Affiliates may also subscribe for Units in the Partnership on the same
basis as Limited Partners or Investor General Partners, except that they
are not required to pay Dealer-Manager fees, Sales Commissions or due
diligence reimbursements. Also, the Managing General Partner and its
Affiliates may buy up to 10% of the Units, which will not be applied
towards the minimum Partnership Subscription required for the
Partnership to begin operations, although the Managing General Partner
currently does not anticipate that it and its Affiliates will purchase
any Units. Any subscription by the Managing General Partner or its
officers, directors or Affiliates will dilute the voting rights of the
Participants and there may be a conflict with respect to certain
matters. The Managing General Partner and its officers, directors and
Affiliates, however, are prohibited from voting with respect to certain
matters. (See "Summary of Partnership Agreement - Voting Rights.")
LACK OF INDEPENDENT UNDERWRITER AND DUE DILIGENCE INVESTIGATION
The terms of this offering, the Partnership Agreement and the Drilling
and Operating Agreement were determined by the Managing General Partner
without arms' length negotiations. Prospective Participants have not
been separately represented by legal counsel, who might have negotiated
more favorable terms for the Participants in the offering and the
agreements. Although Anthem Securities, which is affiliated with the
Managing General Partner, as Dealer-Manager will receive reimbursement
of accountable due diligence expenses for certain due diligence
investigations conducted by the Selling Agents which will be reallowed
to the Selling Agents, the Dealer-Manager's due diligence examination
concerning this offering cannot be considered to be independent. Also,
there was not an extensive in-depth "due diligence" investigation of
the existing and proposed business activities of the Partnership and
the Managing General Partner which would be provided by independent
underwriters. However, Anthem Securities has contracted with
Nationwide Financial Network, a due diligence entity, to prepare and
maintain an independent due diligence report for their network of
independent broker-dealers which may request it. (See "Plan of
Distribution".)
CONFLICTS CONCERNING LEGAL COUNSEL
It is anticipated that legal counsel to the Managing General Partner
will also serve as legal counsel to the Partnership and that this dual
representation will continue in the future. However, should a future
dispute arise between the Participants and the Managing General Partner,
or should counsel advise the Managing General Partner that counsel
reasonably believes its representation of the Partnership will be
adversely affected by counsel's responsibilities to the Managing General
Partner, the Managing General Partner will cause the Participants to
retain separate counsel for these matters.
CONFLICTS REGARDING REPURCHASE OBLIGATION
The Participants' right to present their Units to the Managing General
Partner for repurchase creates a conflict of interest between the
Participants and the Managing General Partner in the suspension of the
repurchase obligation and in arriving at the amount which will be paid
by the Managing General Partner for the Participants' interests. The
Managing General Partner may suspend its repurchase obligation if it
does not have the necessary cash flow or it cannot borrow the funds on
terms which the Managing General Partner deems reasonable, both of which
are subjective determinations. The Managing General Partner will also
determine the repurchase price based upon a reserve report prepared by
the Managing General Partner and reviewed by an Independent Expert
chosen by the Managing General Partner. The formula for arriving at the
repurchase price has some subjective determinations within the control
of the Managing General Partner. (See "Repurchase Obligation".)
OTHER CONFLICTS
A conflict of interest is created with the Participants by the Managing
General Partner's right to hypothecate its interest or withdraw an
interest in the Partnership Wells with respect to the Managing General
Partner's subordination obligation. A further conflict of interest is
created by the Managing General Partner's right to determine the order
of priority and the construction of pipelines which may be required in
order to connect certain Prospects into the the Managing General
Partner's transmission network. (See "Risk Factors - Special Risks of
the Partnership - Risk That Borrowings by the Managing General Partner
Could Reduce Funds Available for Its Subordination Obligation" and
"Summary of Partnership Agreement - Withdrawal of Managing General
Partner".)
PROCEDURES TO REDUCE CONFLICTS OF INTEREST
The Managing General Partner and its Affiliates have adopted the
following procedures and conditions to reduce some of the conflicts of
interest inherent in oil and gas Programs and to assure that
transactions between the Managing General Partner or its Affiliates and
the Partnership are fair and reasonable. The Managing General Partner
has no other conflict of interest resolution procedures. Consequently,
conflicts of interest between the Managing General Partner and the
Participants may not necessarily be resolved in the best interests of
the Participants.
(1) NO COMMINGLING. The funds of the Partnership will be kept in
separate accounts and will not be commingled with the funds of the
Managing General Partner, any Affiliate or any other entity.
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<PAGE> 32
(2) NO COMPENSATING BALANCES. Neither the Managing General Partner nor
any Affiliate will use the Partnership's funds as compensating
balances for its own benefit.
(3) FUTURE PRODUCTION. Neither the Managing General Partner nor any
Affiliate will commit the future production of a well developed by
the Partnership exclusively for its own benefit.
(4) MARKETING ARRANGEMENTS. All benefits from marketing arrangements or
other relationships affecting property of the Managing General
Partner or its Affiliates and the Partnership will be fairly and
equitably apportioned according to the respective interests of each
in the property. The Managing General Partner will treat all wells
in a geographic area equally concerning to whom and at what price
the Partnership's gas will be sold and to whom and at what price the
gas of other oil and gas Programs which the Managing General Partner
has sponsored or will sponsor will be sold. The Managing General
Partner calculates a weighted average selling price for all the gas
sold in a geographic area by taking all money received from the sale
of all the gas sold to its customers in a geographic area and
dividing by the volume of all gas sold from the wells in that
geographic area.
Notwithstanding, the Managing General Partner and its Affiliates
are parties to, and contract for, the sale of natural gas with
industrial end-users and will continue to enter into these contracts
on their own behalf, and the Partnership will not be a party to
these contracts. The Managing General Partner and its Affiliates
also have a substantial interest in certain pipeline facilities and
compression facilities, which it is anticipated will be used to
transport the Partnership's gas production as well as Affiliated
partnership and third-party gas production, and the Partnership will
not receive any interest in the Managing General Partner's and its
Affiliates' pipeline or gathering system or compression facilities.
(See "Proposed Activities - Sale of Oil and Gas Production - In
General".)
(5) ADVANCE PAYMENTS. Advance payments by the Partnership to the
Managing General Partner and its Affiliates are prohibited, except
where advance payments are required to secure tax benefits of
prepaid drilling costs and for a business purpose. These payments,
if any, will not include nonrefundable payments for completion costs
prior to the time that a decision is made that the well or wells
warrant a completion attempt.
(6) NO PROFIT IN CONTRAVENTION OF FIDUCIARY DUTY. The Managing General
Partner will not profit by drilling in contravention of its
fiduciary obligation to the Participants.
(7) DISCLOSURE. Any agreement or arrangement which binds the Partnership
must be fully disclosed in the Prospectus.
(8) NO LOANS FROM THE PARTNERSHIP. The Partnership will not loan money
to the Managing General Partner or any Affiliate.
(9) LOANS TO THE PARTNERSHIP. Neither the Managing General Partner nor
any Affiliate will loan money to the Partnership:
(i) if the interest to be charged exceeds the Managing General
Partner's or the Affiliate's interest cost; or
(ii) if the interest to be charged exceeds that which would be
charged to the Partnership (without reference to the Managing
General Partner's or the Affiliate's financial abilities or
guarantees) by unrelated lenders, on comparable loans for the
same purpose.
Further, neither the Managing General Partner nor any Affiliate will
receive points or other financing charges or fees, regardless of the
amount, although the actual amount of the charges incurred from
third-party lenders may be reimbursed to the Managing General
Partner or the Affiliate.
(10) NO REBATES. No rebates or give-ups may be received by the Managing
General Partner or any Affiliate nor may the Managing General
Partner or any Affiliate participate in any reciprocal business
arrangements which would circumvent these guidelines.
(11) SALE OF ASSETS. The sale of all or substantially all of the assets
of the Partnership (including without limitation, Leases, wells,
equipment and production) can only be made with the consent of
Participants (including the Managing General Partner and its
Affiliates with respect to any Units purchased by them) whose Agreed
Subscriptions equal a majority of the Partnership Subscription.
(12) PARTICIPATION IN OTHER PARTNERSHIPS. If the Partnership participates
in other partnerships or joint ventures (multi-tier arrangements),
the terms of any such arrangements will not result in the
circumvention of any of the requirements or prohibitions contained
in the Partnership Agreement, including the following:
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<PAGE> 33
(i) there will be no duplication or increase in organization and
offering expenses, the Managing General Partner's compensation,
Partnership expenses or other fees and costs;
(ii) there will be no substantive alteration in the fiduciary and
contractual relationship between the Managing General Partner
and the Participants; and
(iii) there will be no diminishment in the voting rights of the
Participants.
(13) INVESTMENTS. Partnership funds may not be invested in the
securities of another person except in the following instances:
(i) investments in Working Interests or undivided Lease interests
made in the ordinary course of the Partnership's business;
(ii) temporary investments in income producing short-term highly
liquid investments, where there is appropriate safety of
principal, such as U.S. Treasury Bills;
(iii) multi-tier arrangements meeting the requirements of (12)
above;
(iv) investments involving less than 5% of the Partnership
Subscription which are a necessary and incidental part of a
property acquisition transaction; and
(v) investments in entities established solely to limit the
Partnership's liabilities associated with the ownership or
operation of property or equipment, provided, in such instances
duplicative fees and expenses shall be prohibited.
POLICY REGARDING ROLL-UPS
It is possible at some indeterminate time in the future that the
Partnership will become involved in a "Roll-Up". The complete definition
of "Roll-Up" is set forth in "Definitions." In general, a Roll-Up means
a transaction involving the acquisition, merger, conversion, or
consolidation of the Partnership with or into another partnership,
corporation or other entity (the "Roll-Up Entity") and the issuance of
securities by the Roll-Up Entity to Participants. A Roll-Up will also
include any change in the rights, preferences, and privileges of the
Participants in the Partnership. These changes could include the
following:
(i) increasing the compensation of the Managing General Partner;
(ii) amending the voting rights of the Participants;
(iii) listing the Units on a national securities exchange or on
NASDAQ;
(iv) changing the fundamental investment objectives of the
Partnership; or
(v) materially altering the duration of the Partnership.
The Partnership Agreement provides various policies if a Roll-Up should
occur in the future. These policies include:
(i) an appraisal of all Partnership assets will be acquired from a
competent Independent Expert, and a summary of the appraisal
will be included in a report to the Participants in connection
with a proposed Roll-Up;
(ii) any Participant who votes "no" on the proposal will be
offered a choice of:
(a) accepting the securities of the Roll-Up Entity offered in
the proposed Roll-Up;
(b) remaining a Participant in the Partnership and preserving
his interests in the Partnership on the same terms and
conditions as existed previously; or
(c) receiving cash in an amount equal to his pro-rata share
of the appraised value of the Partnership's net assets;
and
(iii) the Partnership will not participate in a proposed Roll-Up:
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<PAGE> 34
(a) which would result in the diminishment of a Participant's
voting rights under the Roll-Up Entity's chartering
agreement;
(b) in which the Participants' right of access to the records
of the Roll-Up Entity would be less than those provided by
the Partnership Agreement; or
(c) in which any of the costs of the transaction would be
borne by the Partnership if the proposed Roll-Up is not
approved by 75% in interest of the Participants.
The Partnership Agreement further provides that the Partnership will not
participate in a Roll-Up transaction unless the Roll-Up transaction is
approved by Participants whose Agreed Subscriptions equal 75% of the
Partnership Subscription. With respect to Units owned by the Managing
General Partner and its Affiliates, the Managing General Partner and its
Affiliates will not vote or consent with respect to a proposed Roll-Up,
and in determining the required percentage interest of Units necessary
to approve any proposed Roll-Up, any Units owned by the Managing General
Partner and its Affiliates will not be included.
CERTAIN TRANSACTIONS
As of July 15, 1998, previous limited partnerships sponsored by the
Managing General Partner and its Affiliates had made payments to the
Managing General Partner and its Affiliates as set forth below.
PROSPECTIVE INVESTORS SHOULD NOT ASSUME THAT THE PAST PERFORMANCE OF
PRIOR PROGRAMS IS INDICATIVE OF THE FUTURE RESULTS OF THE PARTNERSHIP.
<TABLE>
<CAPTION>
Leasehold Cumulative
Non- Drilling Cumulative Reimbursement
recurring and Operato's General and
Program Subscriptions Management Completion Administrative
Investor Fee Costs (1) Charges Overhead
- ---------------------- ---------- ----- ----------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Atlas L.P. #1-1985 $600,000 0 600,000 $164,823 $36,500
A.E. Partners 1986 631,250 0 631,250 125,005 51,477
A.E. Partners 1987 721,000 0 721,000 131,250 52,737
A.E. Partners 1988 617,050 0 617,050 105,668 48,671
A.E. Partners 1989 550,000 0 550,000 89,860 46,743
A.E. Partners 1990 887,500 0 887,500 140,860 50,466
A.E. Nineties-10 2,200,000 0 2,200,000 313,591 50,411
A.E. Nineties-11 750,000 0 761,802(2) 120,654 76,487
A.E. Partners 1991 868,750 0 867,500 112,983 63,025
A.E. Nineties-12 2,212,500 0 2,272,017(2) 343,673 73,994
A.E. Nineties-JV 92 4,004,813 0 4,157,700(2) 514,087 110,812
A.E. Partners 1992 600,000 0 600,000 64,701 29,475
A.E. Nineties-Public #1 2,988,960 0 3,026,348(2) 247,730 61,096
A.E. Nineties-1993 Ltd. 3,753,937 0 3,480,656(2) 376,233 72,146
A.E. Partners 1993 700,000 0 689,940 69,921 22,538
A.E. Nineties-Public #2 ,323,920 0 3,324,668(2) 249,159 48,457
A.E. Nineties-14 9,940,045 0 9,512,015(2) 823,502 158,240
A.E. Partners 1994 892,500 0 892,500 47,416 20,999
A.E. Nineties-Public #3 5,801,025 0 5,799,750 327,036 66,252
A.E. Nineties-15 10,954,715 0 9,859,244(2) 580,328 115,372
A.E. Partners 1995 600,000 0 600,000 27,616 5,288
A.E. Nineties-Public #4 6,991,350 0 6,991,350 326,161 59,340
A.E. Nineties-16 10,955,465 0 10,955,465 341,029 53,614
A.E. Partners 1996 800,000 0 800,000 23,916 4,356
A.E. Nineties-Public #5 7,992,240 0 7,992,240 191,916 33,448
A.E. Nineties-17 8,813,488 0 8,813,488 105,689 17,351
A.E. Partners 1997 506,250 0 506,250 883 188
A.E. Nineties-Public #6 9,901,025 0 9,901,025 13,788 2,664
</TABLE>
(2) Excluding the Managing General Partner's Capital Contributions.
(3) Includes additional drilling costs paid with production revenues.
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<PAGE> 35
FIDUCIARY RESPONSIBILITY OF THE MANAGING GENERAL PARTNER
GENERAL
The Managing General Partner has the power and authority to manage the
Partnership and its assets. Thus, it is accountable to the Participants
as a fiduciary and must exercise good faith and act with integrity in
handling the affairs of the Partnership. The Managing General Partner
has a fiduciary responsibility for the safekeeping and use of all funds
and assets of the Partnership whether or not in the Managing General
Partner's possession or control. Also, the Managing General Partner may
not employ, or permit another to employ, the funds or assets in any
manner except for the exclusive benefit of the Partnership. Neither the
Partnership Agreement nor any other agreement between the Managing
General Partner and the Partnership may contractually limit any
fiduciary duty owed to the Participants by the Managing General Partner
under applicable law except as set forth in 4.01, 4.02, 4.04, 4.05 and
4.06 of the Partnership Agreement. This is a rapidly expanding and
changing area of the law and Participants who have questions concerning
the duties of the Managing General Partner should consult their own
counsel.
LIMITATIONS ON MANAGING GENERAL PARTNER LIABILITY AS FIDUCIARY
Under the terms of the Partnership Agreement, the Managing General
Partner, the Operator and their Affiliates will not be liable to the
Partnership or the Participants for any loss suffered by the Partnership
or Participants which arises out of any action or inaction of the
Managing General Partner, the Operator or their Affiliates:
(i) if the Managing General Partner, the Operator and their
Affiliates determined in good faith that the course of conduct
was in the best interest of the Partnership;
(ii) the Managing General Partner, the Operator and their
Affiliates were acting on behalf of, or performing services
for, the Partnership; and
(iii) the course of conduct did not constitute negligence or
misconduct of the Managing General Partner, the Operator or
their Affiliates.
Participants, therefore, may have a more limited right of action than
they would have had absent these limitations in the Partnership
Agreement. These limitations, however, do not apply to Participants'
rights under the federal securities laws, and Participants whose
Agreed Subscriptions equal a majority of the Partnership Subscription
may vote to remove the Managing General Partner and/or the Operator.
(See "Summary of Partnership Agreement - Voting Rights" and "- Removal
of Operator.")
In addition, the Partnership Agreement provides for indemnification of
the Managing General Partner, the Operator and their Affiliates by the
Partnership against any losses, judgements, liabilities, expenses and
amounts paid in settlement of any claims sustained by them in connection
with the Partnership provided that:
(i) the Managing General Partner, the Operator and their
Affiliates determined in good faith that the course of conduct
which caused the loss or liability was in the best interest of
the Partnership;
(ii) the Managing General Partner, the Operator and their
Affiliates were acting on behalf of, or performing services for
the Partnership; and
(iii) the course of conduct was not the result of negligence or
misconduct of the Managing General Partner, the Operator or
their Affiliates.
Payments arising from the indemnification or agreement to hold harmless
are recoverable only out of the tangible net assets of the Partnership
including insurance proceeds.
Notwithstanding the above, the Managing General Partner, the Operator
and their Affiliates and any person acting as a broker-dealer may not be
indemnified for any losses, liabilities, or expenses arising from or out
of an alleged violation of federal or state securities laws unless:
(i) there has been a successful adjudication on the merits of each
count involving alleged securities law violations as to a
particular indemnitee;
(ii) the claims have been dismissed with prejudice on the merits
by a court of competent jurisdiction as to a particular
indemnitee; or
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<PAGE> 36
(iii) a court of competent jurisdiction approves a settlement of
the claims as to a particular indemnitee and finds that
indemnification of the settlement and related costs should be
made, and the court considering the request for indemnification
has been advised of the position of the Securities and Exchange
Commission, the Massachusetts Securities Division, the states
which are specifically set forth in the Partnership Agreement,
and the position of any state securities regulatory authority
in which the plaintiff claims he was offered or sold
Partnership Units, with respect to the issue of indemnification
for violation of securities laws.
LIMITATIONS ON MANAGING GENERAL PARTNER INDEMNIFICATION
To the extent that any indemnification provision in the Partnership
Agreement purports to include indemnification for liabilities arising
under the Securities Act of 1933, as amended, Participants should be
aware that, in the opinion of the Securities and Exchange Commission,
this indemnification is contrary to public policy and therefore
unenforceable. In any event, Participants and their advisers should
review closely the provisions of the Partnership Agreement concerning
exculpation and indemnification of the Managing General Partner and
consult their own attorneys if they have any questions.
The Partnership will not incur the cost of the portion of any insurance
which insures any party against any liability for which the party is
prohibited from being indemnified.
The advancement of Partnership funds to the Managing General Partner or
its Affiliates for legal expenses and other costs incurred as a result
of any legal action for which indemnification is being sought is
permissible only if the Partnership has adequate funds available and the
following conditions are satisfied:
(i) the legal action relates to acts or omissions with respect to
the performance of duties or services on behalf of the
Partnership;
(ii) the legal action is initiated by a third party who is not a
Participant, or the legal action is initiated by a Participant
and a court of competent jurisdiction specifically approves the
advancement; and
(iii) the Managing General Partner or its Affiliates undertake to
repay the advanced funds to the Partnership, together with the
applicable legal rate of interest thereon, if the party is
found not to be entitled to indemnification.
PRIOR ACTIVITIES
The following tables, other than Table 5, reflect certain historical
data with respect to twenty-two private drilling Programs which raised a
total of $62,559,263, and six public drilling Programs which raised a
total of $36,998,485, which the Managing General Partner has sponsored.
FOR SEVERAL REASONS, INCLUDING DIFFERENCES IN PROGRAM STRUCTURE,
PROPERTY LOCATIONS, PROGRAM SIZE AND ECONOMIC CONSIDERATIONS, IT SHOULD
NOT BE ASSUMED THAT PARTICIPANTS IN THE OFFERING COVERED BY THIS
PROSPECTUS WILL EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE
EXPERIENCED BY INVESTORS IN THE PRIOR DRILLING PROGRAMS. THE RESULTS OF
THE PRIOR DRILLING PROGRAMS SHOULD BE VIEWED ONLY AS A MEASURE OF THE
LEVEL OF ACTIVITY AND EXPERIENCE OF THE MANAGING GENERAL PARTNER WITH
RESPECT TO DRILLING PROGRAMS.
- ---------------------------------------------------------------------
<PAGE> 37
<TABLE>
<CAPTION>
Table 1 sets forth certain sales information of previous Development Drilling limited partnerships sponsored
by the Managing General Partner and its Affiliates. PROSPECTIVE INVESTORS SHOULD NOT ASSUME THAT THE PAST
PERFORMANCE OF PRIOR PROGRAMS IS INDICATIVE OF THE FUTURE RESULTS OF THE PARTNERSHIP.
TABLE 1
EXPERIENCE IN RAISING FUNDS
As of July 15, 1998
Date of
Com- Years
mence- Date of Wells
Number Investor Atlas ment of First In
of Subscrip- Invest- Total Operaions Distri- Produc- Previous
Program Investors tions ment Capital butions tion Assessments
- -------------------- ---- ----------- -------- --------- ---------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <S>
Atlas L.P. #1-1985 19 $600,000 $114,800 $714,800 12/31/85 07/02/86 12.55 -0-
A.E. Partners 1986 24 631,250 120,400 751,650 12/31/86 04/02/87 11.55 -0-
A.E. Partners 1987 17 721,000 158,269 879,269 12/31/87 04/02/88 10.55 -0-
A.E. Partners 1988 21 617,050 135,450 752,500 12/31/88 04/02/89 9.55 -0-
A.E. Partners 1989 21 550,000 120,731 670,731 12/31/89 04/02/90 8.55 -0-
A.E. Partners 1990 27 887,500 244,622 1,132,122 12/31/90 04/02/91 7.55 -0-
A.E. Nineties-10 60 2,200,000 484,380 2,684,380 12/31/90 03/31/91 7.33 -0-
A.E. Nineties-11 25 750,000 268,003 1,018,003 09/30/91 01/31/92 6.50 -0-
A.E. Partners 1991 26 868,750 318,063 1,186,813 12/31/91 04/02/92 6.33 -0-
A.E. Nineties-12 87 2,212,500 791,833 3,004,333 12/31/91 04/30/92 6.25 -0-
A.E. Nineties-JV 92 155 4,004,813 1,414,917 5,419,730 10/28/92 04/05/93 5.08 -0-
A.E. Partners 1992 21 600,000 176,100 776,100 12/14/92 07/02/93 5.58 -0-
A.E. Nineties-Public #1 221 2,988,960 528,934 3,517,894 12/31/92 07/15/93 4.83 -0-
A.E. Nineties-1993 Ltd. 125 3,753,937 1,264,183 5,018,120 10/08/93 02/10/94 4.50 -0-
A.E. Partners 1993 21 700,000 219,600 919,600 12/31/93 07/02/94 4.25 -0-
A.E. Nineties-Public #2 269 3,323,920 587,340 3,911,260 12/31/93 06/15/94 4.00 -0-
A.E. Nineties-14 263 9,940,045 3,584,027 13,524,072 08/11/94 01/10/95 3.50 -0-
A.E. Partners 1994 23 892,500 231,500 1,124,000 12/31/94 07/02/95 3.25 -0-
A.E. Nineties-Public #3 391 5,801.025 928,546 6,728,296 12/31/94 06/05/95 3.25 -0-
A.E. Nineties-15 244 10,954,715 3,435,936 14,390,651 09/12/95 02/07/96 2.42 -0-
A.E. Partners 1995 23 600,000 244,725 844,725 12/31/95 01/02/96 2.00 -0-
A.E. Nineties-Public #4 324 6,991,350 1,287,752 8,279,102 12/31/95 07/08/96 2.25 -0-
A.E. Nineties-16 274 10,955,465 1,643,320 12,598,785 07/31/96 01/12/97 1.58 -0-
A.E. Partners 1996 21 800,000 367,416 1,167,416 12/31/96 07/02/97 1.25 -0-
A.E. Nineties-Public #5 378 7,992,240 1,654,740 9,646,980 12/31/96 06/08/97 1.25 -0-
A.E. Nineties-17 217 8,813,488 1,133,917 9,947,405 08/29/97 12/12/97 0.67 -0-
A.E. Partners 1997 13 506,250 231,050 737,300 12/31/97 07/02/98 0.25 -0-
A.E. Nineties-Public #6 393 9,901,025 1,950,345 11,851,370 12/31/97 06/08/98 0.25 -0-
- ------------------------------------------------------------------------------------------------------------
<PAGE> 38
Table 2 reflects the drilling activity of previous Development Drilling limited partnerships sponsored by
the Managing General Partner and its Affiliates. All the wells were Development Wells. PROSPECTIVE
INVESTORS SHOULD NOT ASSUME THAT THE PAST PERFORMANCE OF PRIOR PROGRAMS IS INDICATIVE OF THE FUTURE RESULTS
OF THE PARTNERSHIP.
TABLE 2
-------
WELL STATISTICS - DEVELOPMENT WELLS
As of July 15, 1998
Gross Wells(l) Net Wells(2)
-------------------- -----------------------
Program Oil Gas Dry(3) Oil Gas Dry (3)
Atlas L.P. #1-1985 (4) 0 7 1 0 3.15 0.25
A.E. Partners 1986 0 8 0 0 3.50 0.00
A.E. Partners 1987 0 9 0 0 4.10 0.00
A.E. Partners 1988 0 9 0 0 3.80 0.00
A.E. Partners 1989 0 10 0 0 3.30 0.00
A.E. Partners 1990 0 12 0 0 5.00 0.00
A.E. Nineties-10 0 12 0 0 11.50 0.00
A.E. Nineties-11 0 14 0 0 4.30 0.00
A.E. Partners 1991 0 12 0 0 4.95 0.00
A.E. Nineties-12 0 14 0 0 12.50 0.00
A.E. Nineties-JV 92 0 52 0 0 24.44 0.00
A.E. Partners 1992 0 7 0 0 3.50 0.00
A.E. Nineties-Public #1 0 14 0 0 14.00 0.00
A.E. Nineties-1993 Ltd. (4)0 20 2 0 19.40 2.00
A.E. Partners 1993 0 8 0 0 4.00 0.00
A.E. Nineties-Public #2 0 16 0 0 15.31 0.00
A.E. Nineties-14 (4) 0 55 1 0 55.00 1.00
A.E. Partners 1994 (4) 0 12 0 0 5.00 0.00
A.E. Nineties-Public #3 0 27 0 0 26.00 0.00
A.E. Nineties-15 (4) 0 61 0 0 55.50 0.00
A.E. Partners 1995 0 6 0 0 3.00 0.00
A.E. Nineties-Public #4 0 31 0 0 30.50 0.00
A.E. Nineties-16 (4) 0 57 0 0 47.50 0.00
A.E. Partners 1996 0 13 0 0 4.84 0.00
A.E. Nineties-Public #5 0 36 0 0 35.91 0.00
A.E. Nineties-17 0 52 2 0 42.00 1.50
A.E. Partners 1997 0 5 0 0 2.81 0.00
A.E. Nineties-Public #6 0 49 0 0 44.45 0.00
-- --- -- -- ------ ----
TOTALS 0 628 6 0 489.26 4.75
== === == == ====== ====
- --------------------------------------------------------------------------
(1) A "gross well" is one in which a leasehold interest is owned.
(2) A "net well" equals the actual leasehold interest owned in one gross well divided by one hundred.
Example: a 50% leasehold interest in a well is one gross well, but a .50 net well.
(3) For purposes of this Table only, a "Dry Hole" means a well which is plugged and abandoned without a
completion attempt because the Operator has determined that it will not be productive of gas and/or oil
in commercial quantities.
(4) (i) Atlas L.P. #1-1985 had 1 gross well (.25 net well) which was completed but non-commercial; (ii) A.E.
Nineties-1993 Ltd. had 1 gross well (1 net well) which was completed but non-commercial; (iii) A.E.
Nineties-14 had 2 gross wells (2 net wells) which were completed but non-commercial; (iv) A.E. Partners-
1994 had 1 gross well (.25 net well) which was completed but non-commercial; (v) A.E. Nineties-15 had 1
gross well (1 net well) which was completed but non-commercial; and (vi) A.E. Nineties-16 had 5 gross
wells (4.5 net wells) which were completed but non-commercial.
- ---------------------------------------------------------------------
<PAGE> 39
(5) Table 3 provides information concerning the operating results of previous Development Drilling limited
partnerships sponsored by the Managing General Partner and its Affiliates. PROSPECTIVE INVESTORS SHOULD
NOT ASSUME THAT THE PAST PERFORMANCE OF PRIOR PROGRAMS IS INDICATIVE OF THE FUTURE RESULTS OF THE
PARTNERSHIP.
TABLE 3
-------
INVESTOR OPERATING RESULTS - INCLUDING EXPENSES
As of July 15, 1998
Cash
Total Costs -on- Average Latest Quarterly
----------------------------- Cash Cash Yearly Cash Distribution
Program Capitalization(1)Operating Admin. Direct Distributions(2) Return Return As of Date of Table
- -------------------- ----------- --------- ------- ------ --------------- ----- ------- -------------------
Atlas L.P. #1-1985 $ 600,000 $138,452 $30,660 $6,970 $1,266,001 211% 17% $8,257
A.E. Partners 1986 631,250 105,004 43,241 5,872 597,859 95% 8% 5,610
A.E. Partners 1987 721,000 101,876 40,934 5,993 496,265 69% 7% 2,418
A.E. Partners 1988 617,050 79,927 36,815 5,583 448,188 73% 8% 4,263
A.E. Partners 1989 550,000 73,685 38,329 4,400 590,180 107% 13% 4,431
A.E. Partners 1990 887,500 105,645 50,466 5,147 720,149 81% 11% 12,988
A.E. Nineties-10 2,200,000 235,193 50,411 19,190 1,282,790 58% 8% 1,738
A.E. Nineties-11 750,000 84,458 53,541 32,483 773,937 103% 16% 15,533
A.E. Partners 1991 868,750 84,737 63,025 13,273 756,687 87% 14% 20,060
A.E. Nineties-12 2,212,500 240,571 51,796 101,020 1,460,985 66% 11% 32,480
A.E. Nineties-JV 92 4,004,813 344,438 74,244 189,235 2,620,121 (3) 65% 13% 94,729
A.E. Partners 1992 600,000 48,526 29,475 3,365 531,009 89% 16% 14,672
A.E. Nineties-Public #1 2,988,960 188,275 46,433 73,550 1,542,658 52% 11% 43,658
A.E. Nineties-1993 Ltd. 3,753,937 263,363 50,502 27,852 1,667,803 44% 10% 42,630
A.E. Partners 1993 700,000 52,441 22,538 2,775 562,670 80% 19% 21,377
A.E. Nineties-Public #2 3,323,920 189,361 36,827 32,698 1,310,883 39% 10% 47,976
A.E. Nineties-14 9,940,045 551,746 106,021 16,921 3,433,145 35% 10% 180,947
A.E. Partners 1994 892,500 35,562 20,999 2,153 478,201 54% 16% 27,788
A.E. Nineties-Public #3 5,801,025 245,277 49,689 36,739 2,081,688 36% 11% 115,168
A.E. Nineties-15 10,954,715 406,230 80,760 14,115 3,441,844 31% 13% 205,208
A.E. Partners 1995 600,000 20,712 5,288 1,593 203,653 34% 17% 10,255
A.E. Nineties-Public #4 6,991,350 244,621 44,505 26,981 1,509,706 22% 10% 109,706
A.E. Nineties-16 10,955,465 267,708 42,087 28,057 1,742,464 16% 10% 214,817
A.E. Partners 1996 800,000 17,937 4,356 38,648 104,489 13% 10% 26,078
A.E. Nineties-Public #5 7,992,240 143,937 25,086 15,737 1,085,520 14% 11% 231,767
A.E. Nineties-17 8,813,488 77,681 12,753 34,732 685,438 8% 12% 292,680
A.E. Partners 1997 506,250 662 188 4,643 2,618 1% 4% 2,618
A.E. Nineties-Public #6 9,901,025 10,341 1,998 8,090 99,726 1% 4% 99,726
(1) There have been no Partnership borrowings other than from Atlas. The approximate principal amounts of
such borrowings were as follows: (i) A.E. Nineties-10 - $330,000; (ii) A.E. Nineties-11 - $112,500; and
(iii) A.E. Nineties-12 - $331,875. A portion of each program's cash distributions was used to repay that
program's loan.
(2) All cash distributions were from the sale of gas, and not sales of properties.
(3) A portion of the cash distributions was used to drill three reinvestment wells at a cost of $333,860 in
accordance with the terms of the offering.
- -------------------------------------------------------------------------------------------------------------
<PAGE> 40
Table 3A provides information concerning the operating results of previous Development Drilling limited
partnerships sponsored by the Managing General Partner and its Affiliates. PROSPECTIVE INVESTORS SHOULD NOT
ASSUME THAT THE PAST PERFORMANCE OF PRIOR PROGRAMS IS INDICATIVE OF THE FUTURE RESULTS OF THE PARTNERSHIP.
TABLE 3A
----------
MANAGING GENERAL PARTNER
OPERATING RESULTS - INCLUDING EXPENSES
As of July 15, 1998
Cash
Total Costs on Cash
-------------------------- Cash Cash Distribution
Program Capitalization Operating Admin. Direct Distributions(1)Return As of
- ---------------------- ----------- ------- ------ ------ ----------- ------ ------------
Atlas L.P. #1-1985 $ 114,800 $26,372 $5,840 $1,328 $239,693 209% $1,573
A.E. Partners 1986 120,400 20,001 8,236 1,118 114,207 95% 1,069
A.E. Partners 1987 158,269 29,374 11,803 1,728 125,350 79% 697
A.E. Partners 1988 135,450 25,741 11,856 1,798 110,078 81% 1,373
A.E. Partners 1989 120,731 16,175 8,414 966 135,183 112% 973
A.E. Partners 1990 244,622 35,215 0 0 277,699 114% 4,929
A.E. Nineties-10 484,380 78,398 0 0 450,797 93% 7,803
A.E. Nineties-11 268,003 36,196 22,946 8,863 324,962 121% 6,657
A.E. Partners 1991 318,063 28,246 0 0 331,509 104% 7,512
A.E. Nineties-12 791,833 103,102 22,198 17,787 626,136 79% 13,920
A.E. Nineties-JV 92 1,414,917 169,649 36,568 11,666 794,372 56% 0
A.E. Partners 1992 176,100 16,175 0 0 256,703 146% 5,341
A.E. Nineties-Public #1 528,934 59,455 14,663 11,119 419,336 79% 13,787
A.E. Nineties-1993 Ltd. 1,264,183 112,870 21,644 8,354 317,836 25% 0
A.E. Partners 1993 219,600 17,480 0 0 208,460 95% 7,426
A.E. Nineties-Public #2 587,340 59,798 11,630 10,326 248,932 42% 15,150
A.E. Nineties-14 3,584,027 271,756 52,219 8,334 1,110,930 31% 0
A.E. Partners 1994 231,500 11,854 0 0 167,763 72% 9,731
A.E. Nineties-Public #3 928,546 81,759 16,563 12,246 693,896 75% 38,389
A.E. Nineties-15 3,435,936 174,098 34,612 6,049 1,474,975 43% 89,526
A.E. Partners 1995 244,725 6,904 0 0 56,058 23% 3,643
A.E. Nineties-Public #4 1,287,752 81,540 14,835 8,994 463,099 36% 19,360
A.E. Nineties-16 1,643,320 73,321 11,527 2,879 443,854 27% 60,844
A.E. Partners 1996 367,416 5,979 0 0 49,164 13% 9,037
A.E. Nineties-Public #5 1,654,740 47,979 8,362 5,246 361,840 22% 77,256
A.E. Nineties-17 1,133,917 28,008 4,598 1,759 257,894 23% 116,288
A.E. Partners 1997 231,050 221 0 0 2,483 1% 2,483
A.E. Nineties-Public #6 1,968,637 3,447 666 2,697 17,599 1% 17,599
- -----------------------------------
(1) All cash distributions were from the sale of gas and not sales of properties.
- ---------------------------------------------------------------------------------------------------------------
<PAGE> 41
Table 4 sets forth the aggregate cash distributions and estimated federal tax savings to investors in the
Managing General Partner's prior Development Drilling limited partnerships, based on the maximum marginal tax
rate in each year, as reported in the partnerships' tax returns and such share of tax deductions as a
percentage of their subscriptions. PROSPECTIVE SUBSCRIBERS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS
CONCERNING THEIR SPECIFIC TAX SITUATIONS AND SHOULD NOT ASSUME THAT THE PAST PERFORMANCE OF PRIOR PROGRAMS IS
INDICATIVE OF THE FUTURE RESULTS OF THE PARTNERSHIP.
TABLE 4
---------
SUMMARY OF INVESTOR TAX BENEFITS AND CASH DISTRIBUTION RETURNS
As of July 15, 1998
Cumulative
Estimated Federal Tax Savings From (1): Cash Investors Cah
1st Year Eff. 1st Year Section Dist. Total Cash Di
Investor Tax Tax I.D.C. Depletion 29 Tax As of Dist. and Ta
Program Capital Deduct.(2) Rate Deduct(3) Allowance(3) Dep(3)Credit(4) Total 7/15/98(5) Tax Savings to
Atlas L.P. #1-1985 $ 600,000 99.0% 50.0% $ 298,337 $107,218 N/A $55,915 $ 461,470 $1,266,001 $1,727,471 288%
A.E. Partners 1986 631,250 99.0% 50.0% 312,889 57,384 N/A 13,507 383,780 597,859 981,639 156%
A.E. Partners 1987 721,000 99.0% 38.5% 356,895 42,173 N/A N/A 399,068 496,265 895,333 124%
A.E. Partners 1988 617,050 99.0% 33.0% 244,351 37,873 N/A N/A 282,224 448,188 730,412 118%
A.E. Partners 1989 550,000 99.0% 33.0% 179,685 53,229 N/A N/A 232,914 590,180 823,094 150%
A.E. Partners 1990 887,500 99.0% 33.0% 275,125 67,276 N/A 199,284 541,685 720,149 1,261,834 142%
A.E. Nineties-10 2,200,000 100.0% 33.0% 726,000 123,376 N/A 363,433 1,212,809 1,282,790 2,495,599 113%
A.E. Nineties-11 750,000 100.0% 31.0% 232,500 71,215 N/A 233,719 537,434 773,937 1,311,371 175%
A.E. Partners 1991 868,750 100.0% 31.0% 269,313 78,022 N/A 218,241 565,576 756,687 1,322,263 152%
A.E. Nineties-12 2,212,500 100.0% 31.0% 685,875 147,470 N/A 433,443 1,266,788 1,460,985 2,727,773 123%
A.E. Nineties-JV 92 4,004,813 92.5% 31.0% 1,313,629 233,027 N/A 622,640 2,169,296 2,620,121 4,789,417 120%
A.E. Partners 1992 600,000 100.0% 31.0% 186,000 59,113 N/A 162,291 407,404 531,009 938,413 156%
A.E. Nineties-Public #1 2,988,960 80.5% 36.0% 877,511 149,917 201,203 N/A 1,228,631 1,542,658 2,771,289 93%
A.E. Nineties-1993 Ltd. 3,753,937 92.5% 39.6% 1,378,377 154,440 N/A N/A 1,532,817 1,667,803 3,200,620 85%
A.E. Partners 1993 700,000 100.0% 39.6% 273,216 55,297 N/A N/A 328,513 562,670 891,183 127%
A.E. Nineties-Public #2 3,323,920 78.7% 39.6% 1,036,343 114,163 209,324 N/A 1,359,830 1,310,883 2,670,713 80%
A.E. Nineties-14 9,940,045 95.0% 39.6% 3,739,445 299,852 N/A N/A 4,039,297 3,433,145 7,472,442 75%
A.E. Partners 1994 892,500 100.0% 39.6% 353,430 39,917 N/A N/A 393,347 478,201 871,548 98%
A.E. Nineties-Public #3 5,799,750 76.2% 39.6% 1,752,761 185,567 337,229 N/A 2,275,557 2,081,688 4,357,245 75%
A.E. Nineties-15 10,954,715 90.0% 39.6% 3,904,261 313,942 N/A N/A 4,218,203 3,441,844 7,660,047 70%
A.E. Partners 1995 600,000 100.0% 39.6% 237,600 11,875 N/A N/A 249,475 203,653 453,128 76%
A.E. Nineties-Public #4 6,991,350 80.0% 39.6% 2,214,860 126,373 314,230 N/A 2,655,463 1,509,706 4,165,169 60%
A.E. Nineties-16 10,955,465 86.8% 39.6% 3,361,289 142,337 414,720 N/A 3,918,346 1,742,464 5,660,810 52%
A.E. Partners 1996 800,000 100.0% 39.6% 316,800 11,182 N/A N/A 327,982 104,489 432,471 54%
A.E. Nineties-Public #5 7,992,240 84.9% 39.6% 2,530,954 87,436 146,747 N/A 2,765,137 1,085,520 3,850,657 48%
A.E. Nineties-17 8,813,488 85.2% 39.6% 2,966,366 56,212 134,055 N/A 3,156,633 685,438 3,842,071 44%
A.E. Partners 1997 506,250 100.0% 39.6% 200,475 561 N/A N/A 201,036 2,618 203,654 40%
A.E. Nineties-Public #6 9,901,025 82.4% 39.6% 3,166,406 7,069 58,330 N/A 3,231,805 99,726 3,331,531 34%
- ----------------------------------------------------------------------------------------------------------------
(1) These columns reflect the savings in taxes which would have been paid by an investor, assuming full use of
deductions available to the investor.
(2) It is anticipated that approximately 85% of an Investor General Partner's subscription to the Partnership
will be deductible in 1998.
(3) The I.D.C. Deductions, Depletion Allowance and MACRS depreciation deductions have been reduced to credit
equivalents.
(4) The Section 29 tax credit is not available with respect to wells drilled after December 31, 1992. N/A means
not applicable.
(5) These distributions were all from production revenues. See footnotes 1 and 3 of Table 3.
- ---------------------------------------------------------------------
<PAGE> 42
Table 5 sets forth programs in which the Managing General Partner and Atlas Energy served as operator and/or
drilling contractor for third party general partners as well as the partnerships in which Atlas served as
managing general partner. The table includes the Managing General Partner's share of costs and revenues set
forth in Table 3A, above. The Managing General Partner and its Affiliates have drilled more than 1,650 wells
over the 26 year period from 1972 to 1998. In the current primary area of interest in Mercer County the
Managing General Partner and its Affiliates have completed 97% of approximately 810 wells drilled. These
results are summarized below.
TABLE 5
--------
ATLAS RESOURCES, INC. AND ITS AFFILIATES' HISTORICAL PRODUCTION RECORD
As of July 15, 1998 (4)
Last 3 Mo.
Year Wells Total Total Amount Total Distribution
Were Placed Total MCF's Invested In Amount Cum % Return Ending As of
On line Wells(l) Produced Wells(2) Returned(2) Cash-On-Cash(3) Date of Table
1973 6 2,487,852 $ 576,000 $ 3,979,386 691% $20,260
1974 18 2,915,623 2,387,200 3,879,670 163% 26,364
1975 21 4,171,722 2,814,200 6,596,487 234% 38,970
1976 14 2,867,302 1,819,200 4,348,057 239% 12,413
1977 26 9,162,702 3,912,600 16,153,584 413% 69,004
1978 78 7,825,049 12,399,900 18,959,413 153% 63,500
1979 46 9,155,329 7,404,000 19,598,474 265% 117,414
1980 41 5,715,884 6,561,100 13,559,047 207% 84,667
1981 77 6,326,575 15,382,850 17,041,985 111% 111,419
1982 63 2,465,276 12,438,500 5,772,217 46% 42,558
1983 22 1,275,067 6,725,480 2,995,648 45% 27,468
1984 47 4,624,400 10,663,250 10,199,496 96% 92,706
1985 39 4,828,137 8,971,200 10,141,064 113% 60,688
1986 45 5,509,266 9,649,100 10,572,047 110% 133,975
1987 12 1,530,667 2,425,800 2,683,692 111% 25,310
1988 37 3,775,325 7,688,386 6,829,010 89% 720,446
1989 48 3,852,253 9,967,768 6,874,329 69% 155,342
1990 46 4,927,530 9,038,238 8,960,427 99% 117,371
1991 79 8,284,417 16,034,382 15,286,002 95% 789,683
1992 64 7,713,566 14,250,032 13,926,232 98% 716,512
1993 107 9,976,780 21,958,681 16,592,460 76% 459,781
1994 94 6,002,505 20,418,366 9,825,677 48% 372,485
1995 105 5,915,230 22,350,889 10,148,894 45% 533,269
1996 114 4,123,234 25,396,708 7,232,392 28% 619,616
1997 96 1,854,370 19,871,839 3,440,755 17% 884,307
1998 54 194,537 10,958,336 368,821 3% 353,693
- ----------------------------------------------------------------------------------
TOTAL 1,399 127,480,598 $282,064,005 $245,965,266 87% $6,649,221
===== =========== =========== ============ === =========
- -----------------------------------------------------------------------------------
(1) The above numbers do not include information for: (a) 87 wells drilled for General Motors from 1971 to
1973 which were subsequently purchased by General Motors; (b) 25 wells successfully drilled in 1981 and
1982 for an industrial customer which requested that the wells be capped and not placed into production;
(c) 127 wells drilled from 1980 to 1985 which were sold in 1993 and are no longer operated by the
Managing General Partner; and (d) wells which were drilled recently but are not yet in production.
(2) The column "Total Amount Invested in Wells" only includes funds paid to the Managing General Partner or
Atlas Energy as operator and/or drilling contractor for drilling and completing the designated wells.
This column does not include all of the costs paid by investors to the third party managing general
partner and/or sponsor of the program because such information is generally not available to the
Managing General Partner or Atlas Energy. Similarly, the column "Total Amount Returned" only includes
amounts paid by the Managing General Partner or Atlas Energy as operator of the wells to the third
party managing general partner and/or sponsor of the program. This column does not set forth the
revenues which were actually received by the investors from the third party managing general partner
and/or sponsor because such information is generally not available to the Managing General Partner or
Atlas Energy. Notwithstanding, the columns "Total Amount Invested in Wells" and "Total Amount Returned"
also include the partnerships in which Atlas serves as managing general partner and are presented on the
same basis as the third party partnerships.
(3) This column reflects total cash distributions beginning with the first production from the well, as a
percentage of the total amount invested in the well, and includes the return of the investors' capital.
(4) THE RESULTS OF TABLE 5 SHOULD BE VIEWED ONLY AS A MEASURE OF THE LEVEL OF ACTIVITY AND EXPERIENCE OF THE
MANAGING GENERAL PARTNER WITH RESPECT TO DEVELOPMENT DRILLING PROGRAMS.
</TABLE>
- ---------------------------------------------------------------------
<PAGE> 43
MANAGEMENT
MANAGING GENERAL PARTNER AND OPERATOR
The Managing General Partner, Atlas, a Pennsylvania corporation, was
incorporated in 1979, and Atlas Energy, an Ohio corporation, was
incorporated in 1973. As of December 31, 1997, the Managing General
Partner and Atlas Energy operated approximately 1,242 oil or natural
gas wells located in Ohio and Pennsylvania. The Managing General
Partner and Atlas Energy have acted as operator with respect to the
drilling of a total of approximately 1,685 gas wells, approximately
1,624 of which were capable of production in commercial quantities.
The Managing General Partner and certain of its Affiliates' primary
offices are located at 311 Rouser Road, Moon Township,
Pennsylvania 15108, near the Pittsburgh International Airport.
The Managing General Partner has previously sponsored six public and
twenty-two private Development Drilling Programs formed since 1985 to
conduct natural gas drilling and development activities in Pennsylvania
and Ohio. In addition, as operator, the Managing General Partner acted
as general contractor with respect to the drilling and completion of
the Programs' natural gas wells located in Pennsylvania and is
responsible for operating these wells. Atlas Energy acted in the same
capacity as operator of the Programs' wells located in Ohio. (See
"Prior Activities".)
Recent Merger of Managing General Partner's Parent Company, Atlas Group
On September 29, 1998, Atlas Group, the former parent company of the
Managing General Partner, merged into Atlas America, Inc. ("AAI"), a newly
formed wholly-owned subsidiary of Resource America, Inc., ("RAI"). RAI
is a publicly-traded company principally engaged in real estate finance,
equipment leasing and oil and gas operations. Total consideration paid
to shareholders of Atlas Group at closing was in the form of approximately
$39 million of newly issued RAI stock and the assumption of Atlas Group
debt of $23,964,000 (See " - Transactions with Management and
Affiliates.")
AAI will continue the existing business of Atlas Group. AAI will be
headquartered in Atlas Group's existing suburban Pittsburgh offices.
A new Board of Directors for AAI will be elected which will include4
Mr. James R. O'Mara, Mr. Bruce M. Wolf, and Mr. Tony C. Banks. See
" - Officers, Directors and Key Personnel," below, for biographical
information on these individuals. Also, there may be changes in the
future in the directors and executive officers of the Managing General
Partner. However, Mr. O'Mara will continue to serve the Managing
General Partner, as well as AAI, as President and Chief Executive
Officer pursuant to a one-year employment agreement which can be renewed
upon the expiration of its term. Additionally, it is anticipated that
current RAI, AAI and/or Resource Energy staff and directors of RAI will
assume a variety of new operating responsibilities in AAI, including
serving on AAI's Board of Directors.
The Managing General Partner and Atlas Energy are wholly owned
subsidiaries of AIC, Inc. a corporation formed in July, 1995. AIC, Inc.
and its subsidiaries employ a total of
approximately ninety-nine persons, consisting of three geologists (one
of whom is an exploration geologist), five landmen, five engineers,
thirty-three operations staff, eight accounting, one legal, eight gas
marketing, and eighteen administrative personnel. The balance of the
personnel are engineering, pipeline and field supervisors.
AIC, Inc. and its subsidiares have constructed for
their use over 600 miles of gas transmission lines. They produce in
excess of eleven billion cubic feet of natural gas annually from wells
they operate, which they market directly to end users or to interstate
pipelines and local distribution companies. They also purchase an
additional seven billion cubic feet of natural gas annually from third
party producers locally and in the south/southwest United States and
resell the production to more than 100 customers.
AIC, Inc. is a wholly owned subsidiary of AAI, which is a wholly owned
subsidiary of RAI. Before the merger of The Atlas Group, Inc.
into AAI, AIC, Inc. was a wholly owned subsidiary of The Atlas Group, Inc.
The other subsidiaries of AIC, Inc. are:
(i) Atlas Gas Marketing, Inc., a gas marketing company;
(ii) Mercer Gas Gathering, Inc., a gas gathering company which
gathers gas from the Managing General Partner's wells in
Mercer County, Pennsylvania, and delivers the gas directly to
industrial end-users or to interstate pipelines and local
distribution companies;
(iii) Pennsylvania Industrial Energy, Inc., which sells natural
gas to industrial end-users in Pennsylvania;
(iv) Transatco, Inc., which owns a 50% interest in Topico which
operates a pipeline in Ohio;
(v) Atlas Energy Corporation, which serves as managing general
partner of exploratory programs and driller and operator;
(vi) Anthem Securities, which is a registered broker-dealer and
became an NASD member firm in April, 1997. Anthem Securities
is the Dealer-Manager of the offering in all states other than
Minnesota and New Hampshire. Anthem Securities was formed for
the purpose of serving as Dealer-Manager of Atlas sponsored
Programs; and
(vii) Atlas Information Management, L.L.C., which markets
information and technology services.
In addition, the Managing General Partner is the sole owner of ARD
Investments, Inc., a corporation formed in July, 1995, and Atlas
Energy is the sole owner of AED Investments, Inc., a corporation formed
in July, 1995. Prior to July, 1995, the Managing General Partner and
all of its Affiliates were wholly owned by Atlas Energy. The purpose
of forming Atlas Group, AIC, Inc., ARD Investments, Inc. and AED
Investments, Inc. was to achieve more efficient concentration of funds
of the Affiliates, thereby minimizing transaction costs and maximizing
returns on investment vehicles. (See " - Proposed Merger of Managing
General Partner's Parent Company, Atlas Group", below.)
- --------------------------------------------------------------------
<PAGE> 44
Organizational Diagram
<TABLE>
<CAPTION>
This Organizational Diagram does not include all of the subsidiaries
of Resource America, Inc.
Resource America, Inc.
Atlas America, Inc.
:
AIC, INC
:
....................................................................................................................
: : : : : : : : :
ATLAS MERCER GAS PENNSYLVANIA ATLAS ENERGY TRANSATCO ATLAS GAS ANTHEM ATLAS ENERGY ATLAS
RESOURCES GATHERING INDUSTRIAL CORPORATION INC.,WHICH MARKETING SECURITIES INC GROUP, INC. INFORMATION
(MANAGING INC., (GAS ENERGY,INC. (DRILLER AND OWNS 50% OF INC. (REG BROKER/ (DRILLER AND MG'MENT LLC
GENERAL GATHERING ("PIE") OPERATOR IN TOPICO (MARKETS DEALER AND OPERATOR IN (MARKETS INFO
PARTNER, COMPANY) (SELLS GAS TO WV AND (OPERATES NATURAL DEALER-MANAGER OHIO AND TECH SERV)
DRILLER PENNSYLVANIA MANAGING PIPELINE GAS) :
AND OPERATOR) INDUSTRY) GENERAL IN OHIO :
: :
: :
ARD AED
INVESTMENTS, INC. INVESTMENTS, INC.
<C> <C> <C> <C> <C> <C> <C>
1 2 3 4 5 6 6
</TABLE>
As a result of the merger there may, in the future, be a consolidation
of existing entities.
The audited financial statements of the Managing General Partner, as of
July 31, 1997 and 1996, are included in "Financial Information
Concerning the Managing General Partner and the Partnership".
OFFICERS, DIRECTORS AND KEY PERSONNEL
The directors of the Managing General Partner serve until the Managing
General Partner's next annual meeting of stockholders in October, 1998,
or until their successors are elected. All officers serve until the
regular meeting of directors immediately following the annual meeting of
stockholders and until their successors are elected. (See " - Recent
Merger of Managing General Partner's Parent Company, Atlas Group,"
above.)
The officers, directors and key personnel of the Managing General
Partner, who are also officers, directors and key personnel of Atlas
Group and Atlas Energy, are as follows
NAME AGE POSITION OR OFFICE
- ----------------- --- ----------------------------------------
Charles T. Koval 64 Chairman of the Board and a Director
James R. O'Mara 54 President, Chief Executive Officer and a
Director
Bruce M. Wolf 49 General Counsel, Secretary and a Director
James J. Kritzo 63 Vice President of the Land Department
Donald P. Wagner 56 Vice President of Operations
Frank P. Carolas 38 Vice President of Geology
Tony C. Banks 43 Vice President of Finance and Chief Financial
Officer
Barbara J. Krasnicki 53 Vice President of Administration
Jacqueline B. Poloka 47 Controller
John A. Ranieri 38 Director of Gas Marketing
Eric D. Koval 33 President of Anthem Securities, Inc.
Joseph R. Sadowski 67 Director
CHARLES T. KOVAL. Chairman of the Board and a director. From 1955 to
1963, Mr. Koval served as a pilot in the U.S. Marine Corps and the
Pennsylvania National Guard, attaining the rank of captain. He co-
founded Atlas Energy. Prior to the formation of Atlas Energy, he was
involved in the securities business initially with a national firm,
Federated Investors, and then with his own firm, Allegheny Planned
Income, both headquartered in Pittsburgh, Pennsylvania. Mr. Koval is
serving and has served as a director of Imperial Harbors since 1980.
Mr. Koval received a Bachelor of Science Degree from Pennsylvania State
University in 1955.
JAMES R. O'MARA. President, chief executive officer and a director.
Mr. O'Mara served with the United States Army Security Agency (ASA) and
is a Vietnam veteran. Mr. O'Mara is a Certified Public Accountant and
had been associated with Coopers and Lybrand, a national accounting
firm, and Teledyne, Inc., a large conglomerate, before joining Atlas
Energy in 1975. He is a member of the Pennsylvania Institute of
Certified Public Accountants and the President of Mercer Gas Gathering,
Inc. Mr. O'Mara received a Bachelor of Science Degree in Accounting
from Gannon University in 1968.
- ----------------------------------------------------------------------
<PAGE> 45
BRUCE M. WOLF. General Counsel, Secretary and a director. Mr. Wolf
received a Bachelor of Arts Degree from Washington and Jefferson
College in 1970 and his law degree in 1975 from the University of
Pittsburgh. From 1975 until his association with Atlas Energy in
January, 1980, he was a member of the staff of Price Waterhouse and
Company, a national accounting firm. Mr. Wolf is a member of the Bars
of Pennsylvania, the U.S. Tax Court, the Allegheny County Bar
Association and its respective taxation and natural resources sections.
He is also a member of the Board of Trustees of the Independent Oil and
Gas Association of Pennsylvania, a trade association representing
Pennsylvania natural gas producers, and serves on the Board of
Governors of the Independent Petroleum Association of America ("IPAA").
Mr. Wolf is the President of Atlas Gas Marketing, Inc., AIC, Inc., ARD
Investments, Inc. and AED Investments, Inc.
JAMES J. KRITZO. Vice President of the Land Department. Mr. Kritzo
attended Indiana University of Pennsylvania. From 1956 to 1963 he was
employed by R.J. Reynolds Company in sales and marketing. In 1964 he
joined the Sherwin Williams Company as a Regional Sales Representative,
later being appointed Operations Manager of the Pittsburgh District
Service Center. In 1979 he joined the Land Department of Atlas Energy.
Mr. Kritzo is a member of the Association of Petroleum Landmen and the
Benedum Chapter of the A.A.P.L.
DONALD P. WAGNER. Vice President of Operations. Mr. Wagner, who has
over 32 years experience in all phases of gas and oil field operations,
was President of Energy Well Services, Inc., from 1971 through 1979
when he joined Atlas Energy. Mr. Wagner is a member of the Society of
Petroleum Engineers and the Pennsylvania Oil and Gas Association.
FRANK P. CAROLAS. Vice President of Geology. Mr. Carolas is a
certified petroleum geologist and has been with Atlas Energy since
1981. He received a Bachelor of Science Degree in Geology from
Pennsylvania State University in 1981 and is an active member of the
American Association of Petroleum Geologists.
TONY C. BANKS. Vice President and Chief Financial Officer. Mr. Banks
has over twenty years of finance, accounting and administrative
experience in the oil and gas industry, all with various subsidiaries
of Consolidated Natural Gas Company. He started as an accounting clerk
with CNG's parent company in 1974 and progressed through various
positions with CNG's Appalachian producer, northeast gas marketer and
southwest producer to his last position as Treasurer of CNG's
national energy marketing subsidiary. Mr. Banks served on CNG's
corporate-wide Financial Accounting and Planning, Energy Price Risk and
Information Services Steering committees and has chaired the Financial
Advisory and Accounting Research committees. In 1989, Mr. Banks was a
seminar instructor for the University of Tulsa, and over the years has
given presentations to industry groups on topics including energy
derivatives, accounting for Appalachian gas imbalances and post
regulation credit review and evaluation. He received a Bachelor of
Science Degree in Accounting/Computers from Point Park College in
Pittsburgh and passed the Pennsylvania Certified Public Accountant
examination in 1988. Mr. Banks joined Atlas Group in 1995 and is Vice
President of AIC,Inc, ARD Investments, Inc. and AED Investments, Inc.
BARBARA J. KRASNICKI. Vice President of Administration. Ms. Krasnicki
has been with Atlas Energy since its inception in 1971. She was the
Office and Personnel Manager for Atlas Energy during that time. She
served as Office Manager of Allegheny Planned Income from 1965 to 1971.
Ms. Krasnicki has an Associate in Science Degree from Point Park
College, Pittsburgh, Pennsylvania.
JACQUELINE B. POLOKA. Controller. Ms. Poloka began her career with
Atlas Energy in 1980 as Administrative Assistant. She was promoted to
Production Accounting Manager in 1987 and subsequently to Controller
in 1994. Ms. Poloka graduated from Carlow College, Pittsburgh,
Pennsylvania with a Bachelor of Science Degree in Accounting. Ms.
Poloka is a member of the American Society of Women Accountants,
Independent Oil and Gas Associations Tax Committee, Delta Epsilon Sigma
Honor Society and Strathmore's Who's Who.
JOHN A. RANIERI. Director of Gas Marketing for Atlas Gas Marketing,
Inc. Mr. Ranieri graduated from Northwestern University in 1981 with a
Bachelor of Science Degree in Chemical Engineering. He joined the
Columbia Gas Distribution Companies as a marketing engineer; first in
Charleston, West Virginia, and later in Mansfield, Ohio. In 1984, he
was promoted to Gas Procurement Manager of Columbia Gas of
Pennsylvania with responsibility for all Appalachian purchases. In
1988 he helped start a new marketing affiliate for the parent company
and remained with that organization until joining Atlas in July, 1990.
ERIC D. KOVAL. President of Anthem Securities, Inc. Mr. Koval
graduated from Pennsylvania State University with a degree in Petroleum
and Natural Gas Engineering in 1987. While attending Penn State, he
was employed by Mobil Oil Company in Oklahoma, and Union Oil of
California (UNOCAL), offshore Santa Barbara, California. His
experience also includes working five years for Marathon Oil Company
(USX-Marathon) in various production and reservoir
- ---------------------------------------------------------------------
<PAGE> 46
engineering assignments in four different basins throughout the United
States. He has graduate credits from Ball State University, Indiana,
and Bowling Green State University, Ohio, in their Masters of Business
Degree programs. Mr. Koval joined Atlas in 1993 as a production
engineer specializing in acquisitions and dispositions. He
subsequently moved into the Investor Relations Department in 1994. Mr.
Koval is a registered Broker/Dealer Principal, member of the Society of
Petroleum Engineers, and lifetime member of Penn State Alumni
Association. Mr. Koval is the son of Charles Koval.
JOSEPH R. SADOWSKI. A director. He co-founded Atlas Energy and served
as an executive officer until he resigned as such in 1996. Mr. Sadowski
has been involved in the securities business with Revere Management and
Oppenheimer Management Company. From 1966 until 1971, he managed his
own brokerage firm, Whitman Securities in Cherry Hill, New Jersey. Mr.
Sadowski has served as a director of Dixon Ticonderoga since 1987 and
is a past director of Northeast Ohio Operating Companies, Inc.,
Canonsburg Hospital Foundation and the Verland Foundation. Mr. Sadowski
received a Bachelor of Arts Degree in Industrial Management from
LaSalle College in 1954 and attended Temple University from September,
1957 to June, 1958.
The officers and directors of AIC, Inc., which owns 100% of the common
stock of the Managing General Partner, are as follows: Bruce M. Wolf,
President and a director, Tony C. Banks, Vice President, Secretary and
a director, and Norman J. Shuman, Vice President, Treasurer and a
director. The biographies of Messrs. Wolf and Banks are set forth
above.
REMUNERATION
No officer or director of the Managing General Partner will receive any
direct remuneration or other compensation from the Partnership. These
persons will receive compensation solely from the Managing General
Partner and its Affiliated companies.
The aggregate remuneration paid during the fiscal year ended July 31,
1997, to the five most highly compensated persons who are executive
officers of the Managing General Partner and whose aggregate
remuneration exceeded $100,000 and to all executive officers of the
Managing General Partner as a group, for services in all capacities
while acting as executive officers of the Managing General Partner and
its Affiliates, was as follows:
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
NAME OF
INDIVIDUAL OR CAPACITIES IN CASH COMPENSATION AGGREGATE OF
NUBER OF WHICH SERVED(4) COMPENSATION PURSUANT TO CONTINGENT FORMS
PERSONS IN PLANS(2) OF REMUNERATION
GROUP (3)
- -----------------------------------------------------------------------------------
<S> <C> <S> <C> <C> <C> <S>
James R. O'Mara President, $305,300 $12,066 -
Chief Executive Officer
and a Director
Charles T. Koval Chairman of the Board $296,500 $5,281 -
and a Director
Bruce M. Wolf General Counsel, 217,150 $11,735 -
Secretary and a
Director
Donald P. Wagner Vice President of $125,604 $5,281 -
Operations
Tony C. Banks Vice President and $124,000 $3,926 -
Chief Financial Officer
Executive Officers as a Group (8 persons)$1,383,530 $70,703 -
(1) The amounts indicated were composed of salaries and all cash
bonuses for services rendered to the Managing General Partner and
its Affiliates during the last fiscal year, including compensation
that would have been paid in cash but for the fact the payment of
the compensation was deferred.
(2)Atlas Group and its Affiliates had an Employee Stock Ownership Plan
("ESOP") for the benefit of its employees, other than Messrs. Koval
and Sadowski, to which it contributed approximately 6% of annual
compensation in the form of shares of Atlas Group, and a 401(K) plan
which allowed employees
to contribute the lesser of 15% of their compensation or $10,000
for the calendar year 1997 or $9,500 for the calendar year 1996.
Atlas Energy contributed an amount equal to 50% of each employee's
contribution for the calendar years 1997 and 1996.
- --------------------------------------------------------------------
<PAGE> 47
(3) There were no stock options granted or exercised during the
fiscal year ended July 31, 1997, to the above individuals. (See "
- - Security Ownership of Certain Beneficial Owners - Agreements
Affecting Ownership of Atlas Group Stock," below.)
(4) During the fiscal year ended July 31, 1997, each director was
paid a director's fee of $12,000 for the year. There are no other
arrangements for remuneration of directors.
Transactions with Management and Affiliates
Prior to the merger, Atlas Group owned 100% of the common stock of
AIC, Inc., which owns 100%
of the common stock of the Managing General Partner. The following
table sets forth, as of June 30, 1998, which was before the merger
of Atlas Group in AAI, information as to the
beneficial ownership of common stock of Atlas Group by each person
known to Atlas Group to own beneficially 5% or more of the outstanding
common stock of Atlas Group, by directors and nominees, naming them
individually, and by all directors and officers of Atlas Group as a
group.
SHARES OF COMMON PERCENT OF CLASS
Charles T. Koval 109,391 26.445%
Joseph R. Sadowski 109,142 26.384%
James R. O'Mara 95,164 (1) 23.005%
Bruce M. Wolf 44,710 (2) 10.808%
Directors and Officers
as a Group (9 persons) 377,654 (1)(2) 91.344%
- ------------------------------------------------------------
(1) Includes 22,164 shares of Atlas Group issuable upon the grant and
exercise of stock options held by Mr. O'Mara. This option was
exercised on July 6, 1998, by Mr. O'Mara for 19,783 shares and he
released his option on the remaining shares.
(2) Includes 14,210 shares of Atlas Group issuable upon the grant and
exercise of stock options held by Mr. Wolf. This option was
exercised on July 6, 1998, by Mr. Wolf for 13,091 shares and he
released his option on the remaining shares.
Atlas Group had an Employee Stock Ownership Plan ("ESOP") for
the benefit of its employees, other than Messrs. Koval and Sadowski,
to which it contributed annually approximately 6% of annual
compensation in the form of shares of Atlas Group. Pursuant to the
merger, the shareholders of Atlas Group, including ESOP and the officers
set forth above, exchanged their Atlas Group shares for RAI stock. In
addition, in November, 1990, Atlas Group and its shareholders had
entered into agreements with Messrs. Sadowski and Koval to gradually
liquidate a majority of their stock ownership in Atlas Group. By the year
2003 the stock ownership of Atlas group by Messrs. Koval and Sadowski
was to be reduced through a series of stock redemptions to approximately
15% each. The stock redemptions required Atlas Group to execute
promissory notes, from time to time, in favor of Messrs. Koval and
Sadowski. The first promissory notes had a principal amount of
$4,974,340 each, plus interest at 13.5%. Pursuant to the merger,
Atlas Group accelerated the promissory notes issued in the redemption,
together with notes issued in a prior redemption of shares owned by
Messrs. Koval and Sadowski, and these notes were paid in full at the time
of closing of the merger.
The Managing General Partner and its officers, directors, and Affiliates
have in the past invested, and may in the future invest, as participants
in Programs sponsored by the Managing General Partner on the same terms
as unrelated investors. The Managing General Partner and its
officers and directors and Affiliates may also subscribe for Units
in the Partnership on the same basis as Limited Partners or Investor
General Partners, except that they are not required to pay the Dealer-
Manager fees, Sales Commissions or accountable due diligence reimbursements.
Although the Managing General Partner and its Affiliates may buy up to 10%
of the Units, the Managing General Partner currently does not anticipate
that it and its Affiliates will purchase any Units. Any Units
purchased by the Managing General Partner and its Affiliates will not be
applied towards the minimum Partnership Subscription required for the
Partnership to begin operations. Any subscription by the Managing
General Partner or its officers, directors or Affiliates will dilute the
voting rights of the Participants; however, the Managing General Partner
or its officers, directors and Affiliates are prohibited from voting
with respect to certain matters. (See "Summary of Partnership Agreement -
Voting Rights.")
The Managing General Partner and its officers, directors and Affiliates
have also participated in the past and may in the future participate,
as working interest owners in wells in which the Managing General Partner
or its programs have an interest. Frequently, this participation has been
on more favorable terms than the terms which were available to unrelated
investors and Atlas Group has loaned to its officers and directors
amounts in excess of $60,000 from time to time as necessary for participation
in these wells or programs. Prior to 1996, these loans either were
non-interest bearing or accrued interest at variable rates, but since
1995 all new loans for these purposes have been required to bear interest.
Currently, no such loans are outstanding. (See " - Conflicts of Interest -
Certain Transactions" for further information concerning prior activities
between these programs and the Managing General Partner and its
Affiliates.)
INVESTMENT OBJECTIVES
Except for the historical information contained herein, the matters
discussed below are forward looking statements that involve risks and
uncertainties, including the risk that the wells are productive but do
not produce enough revenue to return the investment made, Dry Holes,
uncertainties concerning the price of gas, and the other risks detailed
below. The actual results that the Partnership achieves may differ
materially from the objectives set forth below due to such risks and
uncertainties. The Partnership's principal investment objectives are
to invest the Partnership Subscription in natural gas Development Wells
which will:
- ---------------------------------------------------------------------
<PAGE> 49
(1) Provide quarterly cash distributions until the wells are
depleted, (historically 20+ years) with a preferred annual cash flow
of 10% during the first five years based on the original
subscription amount. (See "Risk Factors - Special Risks of the
Partnership - Risk of Unproductive Wells in Development Drilling,"
"Prior Activities" and "Participation in Costs and Revenues -
Subordination of Portion of Managing General Partner's Net Revenue
Share".)
(2) Obtain tax deductions in 1998 from intangible drilling and
development costs to offset a portion of the Participants' taxable
income (subject to the passive activity rules in the case of Limited
Partners). One Unit will produce a 1998 tax deduction of $8,500
(85%) against ordinary income for Investor General Partners and
against passive income for Limited Partners. For an investor in
either the 39.6% or 36% tax bracket, one Unit will save $3,366 or
$3,060 respectively in federal taxes this year. Most states also
allow this type of a deduction against the state income tax.
(3) Offset a portion of any taxable income generated by the
Partnership with tax deductions from percentage depletion, presently
17% (estimated to be 19% on net revenue). The Managing General Partner
estimates that this
feature should reduce an investor's effective tax rate from 39.6% to
32.1% (i.e., 81% of 39.6%) on Partnership net revenues.
(4) Obtain tax deductions of the remaining 15% of the initial
investment from 1999 through 2006. The investor will receive an
additional $1,500 tax deduction per Unit generated through the
remaining depreciation over a seven-year cost recovery period of the
Partnership's equipment costs for the wells.
ATTAINMENT OF THE PARTNERSHIP'S INVESTMENT OBJECTIVES WILL DEPEND ON
MANY FACTORS, INCLUDING THE ABILITY OF THE MANAGING GENERAL PARTNER TO
SELECT SUITABLE PROSPECTS WHICH WILL BE PRODUCTIVE AND PRODUCE ENOUGH
REVENUE TO RETURN THE INVESTMENT MADE. THE SUCCESS OF THE PARTNERSHIP
DEPENDS LARGELY ON FUTURE ECONOMIC CONDITIONS, ESPECIALLY THE FUTURE
PRICE OF NATURAL GAS WHICH IS VOLATILE AND MAY DECREASE.
THERE CAN BE NO GUARANTEE THAT THE FOREGOING OBJECTIVES WILL BE
ATTAINED.
PROPOSED ACTIVITIES
IN GENERAL
The Partnership will be funded to drill Development Wells which are
located primarily in the Mercer County area of Pennsylvania. The
Managing General Partner, however, has reserved the right to use up to
15% of the Partnership Subscription to drill Development Wells in other
areas of the United States. The Managing General Partner anticipates
that all the Partnership's wells will be classified as gas wells which
may produce a small amount of oil. (See "- Information Regarding
Currently Proposed Prospects" and "Prior Activities".)
The Development Wells drilled by the Partnership will primarily test the
Clinton/Medina geological formation in Pennsylvania and Ohio. It is
anticipated that the Clinton/Medina formation to be tested by the
Partnership will normally be found between 5,900 to 6,800 feet in depth.
The number of Development Wells drilled by the Partnership will depend
on the amount of the Partnership Subscription received and the
Partnership's aggregate percentage of the Working Interest in the
wells. Assuming the Partnership acquires 100% of the Working Interest
in the wells and all wells are situated in the Mercer County area, the
Participants would participate in drilling approximately 4.9 wells if
the minimum Partnership Subscription of $1,000,000 is received, 39.25
wells if $8,000,000 is received, and 58.87 wells if the size of the
offering is increased to $12,000,000. The actual amount of the Working
Interest in each well drilled by the Partnership and the number of wells
drilled by the Partnership may vary from these estimates.
The Managing General Partner may not, without the vote of Participants
whose Agreed Subscriptions equal a majority of the Partnership
Subscription, change the investment and business purpose of
the Partnership or cause the Partnership to engage in activities outside
the stated business purposes of the Partnership through joint ventures
with other entities.
INTENDED AREAS OF OPERATIONS
Prospects located in Pennsylvania and drilled to the Clinton/Medina
geological formation will consist of approximately 50 acres, subject to
adjustment to take into account Lease boundaries. Wells in Pennsylvania
will not be drilled closer than approximately 1,650 feet to each other,
which is greater than the minimum area permitted by state law (660 feet)
or local practice to protect against drainage from adjacent wells.
Prospects located in Ohio and drilled to the Clinton/Medina geological
formation will consist of approximately 40 acres subject to adjustment
to take into account Lease boundaries, and will not be drilled closer
than approximately 1,100 feet to each other.
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<PAGE> 50
Additionally, the assignments will be limited to a depth of from the
surface to the top of the Queenston formation, and the Managing General
Partner will retain the drilling rights below the Clinton/Medina
geological feature. The Partnership will not acquire the deep drilling
rights because it is a Development Drilling Program which will not
allocate any money to seismic activity or to drilling Exploratory Wells
which would be the case with Horizons deeper than the Clinton/Medina.
Notwithstanding, in the future seismic could be run on the Horizons
below the Clinton/Medina geological feature which might provide a basis
for the Managing General Partner drilling an Exploratory Well. The
Partnership would not share in the profits, if any, from these
activities. (See "- Acquisition of Leases" and "- Information Regarding
Currently Proposed Prospects", below.)
The wells in Pennsylvania and Ohio will test the Clinton/Medina
geological formation, a blanket sandstone found throughout most of the
northwestern edge of the Appalachian Basin. The Clinton/Medina is
described in petroleum industry terms as a "tight" sandstone with
porosity ranging from 6% to 12% and with very low permeability. Porosity
is the percentage of void space between sand grains that is available
for occupancy by either liquids or gases. Permeability is the property
of porous rock that allows fluids or gas to flow through it. Geological
features such as structure and faulting are not generally factors in
finding productive Clinton/Medina deposits. Instead, sand quality in
terms of net pay zone thickness, porosity, and the effectiveness of
fracture stimulation appear to be the governing factors in generating
commercial production. A well drilled in the Clinton/Medina usually
requires hydraulic Fracturing of the formation to stimulate productive
capacity. Based on the Managing General Partner's experience, it is
anticipated that all the Partnership's Wells will be completed and
Fraced in two different zones of the Clinton/Medina geological feature.
Generally, gas from Clinton/Medina wells is produced at rates which
decline rapidly during the first few years of operation. Although
Clinton/Medina wells can produce for many years, a proportionately
larger amount of the production can be expected within the first several
years. See "- Information Regarding Currently Proposed Prospects" and
the model decline curve included in the geological report prepared by
United Energy Development Consultants, Inc. ("UEDC"), an independent
geological and engineering firm, ("UEDC Geological Report").
The Managing General Partner also has reserved the right to use up to
15% of the Partnership Subscription to drill Development Wells in other
areas of the United States.
ACQUISITION OF LEASES
The Managing General Partner will have the right, in its sole
discretion, to select the Prospects which the Partnership will
participate in developing. The currently proposed Prospects are set
forth in "- Information Regarding Currently Proposed Prospects." The
Prospects represent the necessary Prospects if 80% of the potential
maximum Partnership Subscription of $12,000,000 is raised and the
Partnership takes 100% of the Working Interest. It is anticipated that
the Prospects will be transferred to the Partnership, but not
immediately recorded, beginning upon or after the Initial Closing Date
subject to the Managing General Partner's right of substitution of the
Prospects depending upon various considerations. These include:
(i) the amount of the Partnership Subscription;
(ii) the latest geological data available;
(iii) potential title problems;
(iv) approvals by federal and state departments or agencies;
(v) agreements with other Working Interest owners;
(vi) continuing review of other properties which may be available; and
(vii) if no other circumstances occur which in the Managing General
Partner's opinion diminish the relative attractiveness of the
Prospects.
It is not anticipated that the Prospects will be selected in the order
in which they are set forth. The Managing General Partner has the right,
in its sole discretion, to substitute other unidentified Prospects, if
they meet the same general criteria for development potential as the
currently proposed Prospects. Most of the Partnership's Development
Wells will have as their objective the Clinton/Medina formation
discussed in the UEDC Geological Report and will be located in areas
where the Managing General Partner or its Affiliates have previously
conducted drilling operations. However, the Managing General Partner
has reserved the right to use up to 15% of the Partnership Subscription
to drill wells in other areas of the United States.
If any of the currently proposed Prospects are substituted, the
Partnership takes a lesser percentage of the Working Interest in the
Prospects, more than $8,000,000 is raised, and/or the Managing General
Partner decides to drill in other areas of the United States, the
Prospects will be selected by the Managing General Partner primarily
from Leases included in the existing leasehold inventory of the Managing
General
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<PAGE> 51
Partner or its Affiliates. To a lesser extent, the Managing General
Partner would select Prospects from Leases hereafter acquired by it or
its Affiliates or from Leases owned by independent third parties.
Consequently, for additional or substituted Prospects prospective
investors will not be able to evaluate for themselves the relevant
geological, economic or other information regarding those Prospects. The
Managing General Partner has not authorized any person to make any
representations concerning the possible inclusion of any other Prospects
in the Partnership and a prospective investor should rely only on the
information in this Prospectus.
As of the date of this Prospectus, the Managing General Partner and its
Affiliates owned approximately 80,500 net and gross acres of undeveloped
leasehold acreage in Pennsylvania, 18,000 net acres and 20,000 gross
acres of undeveloped lease acreage in western West Virginia, and 14,300
net acres and 16,100 gross acres of undeveloped lease acreage in
eastern Kentucky. Most, if not all, of the leases in eastern Kentucky
and western West Virginia are held by production. The Managing General
Partner and its Affiliates are continually engaged in acquiring
additional leasehold acreage in Pennsylvania and other areas of the
United States. The Managing General Partner believes that it and its
Affiliates' leasehold inventory will be sufficient to provide all the
Prospects to be developed by the Partnership.
Before selecting a Prospect to be drilled by the Partnership, the
Managing General Partner will review all available geologic data
including logs, completion reports and plugging reports for wells
located in the vicinity of the proposed Prospect. The Managing General
Partner has obtained the UEDC Geological Report with respect to the
development of the Clinton/Medina geological formation in the primary
area where the Partnership will conduct its activity. It has been the
Managing General Partner's experience that oil and gas production from
wells drilled to the Clinton/Medina geologic formation is reasonably
consistent within close proximity, although from time to time great
disparity in well performance can occur in wells located in close
proximity. (See "Conflicts of Interest - Conflicts Involving the
Acquisition of Leases".)
Production information relating to the wells which are in the general
area of the proposed Prospects is set forth in "- Information Regarding
Currently Proposed Prospects". The Managing General Partner believes
that the production information is reliable, although as to certain of
the Prospects the production information is incomplete because there was
a third party operator and production information is not available.
Also, some of the wells which have been drilled by the Managing General
Partner's other Programs have only been producing for a short period of
time or are not yet completed or on-line. In reviewing the production
information, prospective investors are cautioned to carefully read the
general comments set forth in "- Information Regarding Currently
Proposed Prospects" regarding the production information.
The Leases comprising each Prospect will be acquired from the Managing
General Partner or its Affiliates and credited to the Managing General
Partner as a part of its required Capital Contribution. The credit to
the Managing General Partner will be at the Managing General Partner's
Cost unless it has reason to believe that Cost is materially more than
the fair market value of the property in which case the credit will not
exceed the fair market value of the property.
Production and revenues from a well drilled on a Prospect will be net of
the applicable Landowner's Royalty Interest (typically 1/8th (12.5%) of gross
production), and any other applicable Overriding Royalty Interests.
It is anticipated that the Partnership will have an 87.5% Net Revenue
Interest in each Lease in the Mercer County area as shown by the summary
of the Royalty and Overriding Royalty Interests burdening each Lease
location for all of the currently proposed Prospects set forth in "-
Information Regarding Currently Proposed Prospects". However, it is possible
that subsituted or additional prospects in the Mercer County area could have
a net revenue interest to the Partnership as low as 84.375%. Neither
the Managing General Partner nor its Affiliates will receive any Royalty
or overriding Royalty interest on any prospect (See " - Interests of
Parties," below.)
The Leases in other areas of the United States may be subject to greater
Overriding Royalty Interests, third party net profits interests, carried
interests, production payments, reversionary interests or other retained
or carried interests. There is no minimum Net Revenue Interest which the
Partnership is required to own prior to participation in the drilling of
the well in areas outside of the Mercer County area. With respect to
certain conflicts of interest between the Managing General Partner and
the Partnership with respect to the acquisition of Leases, see
"Conflicts of Interest - Conflicts Involving Acquisition of Leases".
Because the Managing General Partner will assign to the Partnership only
the number of Prospects which it believes are necessary for the drilling
operations of the Partnership, the Partnership will not Farmout any
undeveloped Prospects.
INTERESTS OF PARTIES. The Managing General Partner, Participants and
unaffiliated third parties (including landowners) share revenues from
the gas production from wells in which the Partnership has an interest.
The following chart expresses the interests in gross revenues derived
from the wells based on all of the currently proposed Prospects set
forth below in " - Information Regarding Currently Proposed Prospects".
If the partnership acquires less than a 100% Working Interest, the
percentages available to the Partnership will decrease proportionately.
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<PAGE> 52
THIRD PARTY ROYALTIES
AND OVERRIDING
Royalty Interest
PARTNERSHIP 87.5% PARTNERSHIP NET
ENTITY INTEREST REVENUE INTEREST (1)(2)
- ---------------- -------------- ---------------------- -------------
Managing General
Partner 31% Partnership Interest 27.125%
Participants 69% Partnership Interest 60.375%
Third Parties 12.5% Landowner Royalty 12.500%
100.00%
------------------------------------------
(1) It is possible that substituted or additionalProspects in the Mercer
County area could have a Net Revenue Interest to the Partnership as low as
84.375%, which would reduce the Participants' interest to 58.219%.
(2) The Leases in areas of the United States other than the Mercer
County area may also be subject to Overriding Royalty Interests,
third party net profits interests, carried interests, production
payments, reversionary interests or other retained or carried
interests. There is no minimum Net Revenue Interest which the
Partnership is required to own prior to participation in the
drilling of the well in areas outside of the Mercer County area.
TITLE TO PROPERTIES
Title to all Leases acquired by the Partnership will be held in the name
of the Partnership. However, title to the Leases may initially be held
in the name of the Managing General Partner, its Affiliates, or in the
name of any nominee designated by the Managing General Partner, to
facilitate the acquisition of the Leases. Title to the Leases will be
transferred to the Partnership from time to time after the Initial
Closing Date, and filed for record following drilling.
It is not the practice in the oil and gas industry to obtain title
insurance on Leases and the Managing General Partner will not obtain
title insurance with respect to the Working Interests in the Leases to
be assigned to the Partnership. Also, in the oil and gas industry
leasehold assignments generally do not contain a warranty as to the
title to the leasehold. However, a favorable formal title opinion with
respect to the Working Interest in each Lease composing the acreage on
which the well is situated will be obtained before each well is drilled.
Nevertheless, if the title to the Working Interest in a Lease is
defective, the Partnership will not have the right to recover against
the transferor (the Managing General Partner or its Affiliates) on a
title warranty theory. There is no assurance that the Partnership will
not experience losses from title defects excluded from or not disclosed
by the formal title opinion. The Managing General Partner will take the
steps it deems necessary to assure that the Partnership has acceptable
title for its purposes. The Managing General Partner, however, may use
its own judgment in waiving title requirements and will not be liable
for any failure of title of Leases transferred to the Partnership.
FORMATION OF THE PARTNERSHIP AND POWERS OF THE MANAGING GENERAL PARTNER
The Managing General Partner will serve as the Operator of the wells in
Pennsylvania, Atlas Energy will serve as the Operator of any wells in
Ohio, and the Managing General Partner or an Affiliate will serve as
Operator of any wells located in other areas of the United States. The
Managing General Partner's authority in conducting the affairs of the
Partnership is virtually unlimited. Participants, however, are expressly
granted certain rights and certain express restrictions are placed on
the Managing General Partner by the Partnership Agreement. As to the
removal of the Managing General Partner and the Operator, and the
appointment of successors, see "Summary of Partnership Agreement" and
"Summary of Drilling and Operating Agreement".
DRILLING AND COMPLETION ACTIVITIES; OPERATION OF PRODUCING WELLS
Under the Drilling and Operating Agreements the responsibility for
drilling and completing (or plugging) Partnership Wells will be on the
Managing General Partner as the general drilling contractor on Prospects
located in Pennsylvania, Atlas Energy on Prospects located in Ohio and
the Managing General Partner or an Affiliate on any Prospects located in
other areas of the United States. The Partnership will pay the drilling
and completion costs to the Managing General Partner, Atlas Energy or an
Affiliate as incurred, except that the Partnership is permitted to make
advance payments to the Managing General Partner, Atlas Energy or an
Affiliate if necessary to secure tax benefits of prepaid intangible
drilling and development costs and there is a valid business reason.
Wells will be drilled at competitive industry rates to a depth
sufficient to test thoroughly the objective geological formation. The
Partnership will bear its proportionate share of the cost of drilling
and completing or drilling and abandoning the Partnership's Wells. In
the Appalachian Basin the Partnership will pay for each well completed
and placed into production an amount equal to the depth of the well in
feet at its deepest penetration as recorded by the drilling contractor
multiplied by $39.15 per foot or, for
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<PAGE> 53
each well which the Partnership elects not to complete, an amount equal
to $20.60 per foot multiplied by the depth of the well, as specified
above. To the extent that the Partnership acquires less than 100% of a
Prospect, its drilling and completion costs of that well will be
proportionately decreased. If the foregoing rates exceed competitive
rates available from other non-affiliated persons in the area engaged
in the business of rendering or providing comparable services or
equipment, the foregoing rates will be adjusted to an amount equal to
that competitive rate. The Managing General Partner may not benefit by
interpositioning itself between the Partnership and the actual provider
of drilling contractor services. (See "Compensation".)
The footage price includes all ordinary costs of drilling, testing and
completing the well. This includes the cost of a second completion and
Frac when the Managing General Partner considers it to be justified and
installing gathering lines and other necessary facilities for the
production of natural gas. Although the following costs are possible, it
is not anticipated that these costs will be incurred, and the footage
rate will not include the cost of completion procedures, equipment or
any facilities necessary or appropriate for the production and sale of
oil or other liquids and equipment or materials (except salt water
collection tanks, separators, siphon string and tubing, which are
included) necessary or appropriate to collect, lift or dispose of
liquids for efficient gas production. The footage rate will also not
include the cost of a third completion and Frac which means, in
general, treating a third potentially productive geological formation in
an attempt to enhance the gas production from the well. (See
"Definitions".) These extra costs will be charged at the Operator's
standard charges for services performed directly by it (exclusive of
services in supervision of third party services) or the Operator's
invoice costs of third party services performed and materials and
equipment purchased plus 10% to cover supervisory services and overhead.
The Managing General Partner expects to subcontract some of the actual
drilling and completion of Partnership Wells to third parties selected
by it.
The Managing General Partner, as Operator, will determine whether or not
to complete each well. A well, however, may be completed only if the
Managing General Partner determines in good faith that there is a
reasonable probability of obtaining commercial quantities of gas. Based
upon its past experience, the Managing General Partner anticipates that
all Partnership Wells drilled to the Clinton/Medina geological formation
will be required to be completed before a determination can be made as
to the well's productivity. If the Managing General Partner determines
that a well should not be completed, the well will be plugged and
abandoned and the footage rate will be adjusted.
The Managing General Partner's duties as Operator will include:
(i) making necessary arrangements for the drilling and completing
of Partnership Wells and related facilities for which it has
responsibility under the Drilling and Operating Agreement;
(ii) managing and conducting all field operations in connection
with the drilling, testing, equipping, operating and producing
of the wells;
(iii) making technical decisions required in drilling, completing
and operating the wells;
(iv) maintaining the wells, equipment and facilities in good
working order during the useful life thereof; and
(v) performing necessary accounting and administrative functions.
During producing operations the Managing General Partner, as Operator,
will receive a monthly well supervision fee at competitive rates for
each producing well for which it has responsibility under the Drilling
and Operating Agreement. In the Appalachian Basin the well supervision
fee will be $275 for each producing well and will be proportionately
reduced to the extent the Partnership does not acquire 100% of the
Working Interest. This fee may be adjusted on the first day of January
of each year beginning January 1, 2000, by an amount which does not
exceed the percentage increase since the previous adjustment date in
average earnings of oil and gas industry workers as published by a
bureau of the U.S. Department of Labor. If the foregoing rates exceed
competitive rates available from other non-affiliated persons in the
area engaged in the business of rendering or providing comparable
services or equipment, the foregoing rates will be adjusted to an amount
equal to that competitive rate. The Managing General Partner may not
benefit by interpositioning itself between the Partnership and the
actual provider of operator services. In no event will any
consideration received for operator services be duplicative of any
consideration or reimbursement received pursuant to the Partnership
Agreement. (See "Compensation".)
The well supervision fee covers all normal and regularly recurring
operating expenses for the production, delivery and sale of gas, such
as:
(i) well tending, routine maintenance and adjustment;
(ii) reading meters, recording production, pumping, maintaining
appropriate books and records;
(iii) preparing reports to the Partnership and to government
agencies; and
(iv) collecting and disbursing revenues.
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<PAGE> 54
The well supervision fees do not include costs and expenses related to
the production and sale of oil, purchase of equipment, materials or
third party services, brine disposal, and rebuilding of access roads.
These costs will be billed at the invoice cost of the materials
purchased or the third party services performed. The Drilling and
Operating Agreement contains a number of other material provisions which
should be carefully reviewed and understood by prospective investors.
(See "Summary of Drilling and Operating Agreement".)
In the unlikely event that the Managing General Partner, Atlas Energy or
an Affiliate is not the actual operator of the well during producing
operations, the Managing General Partner, without receiving well
supervision fees, will review the performance of the third party
operator. This includes reviewing the costs and expenses charged by the
third party operator, and monitoring the accounting and production
records for the Partnership. The actual operator of the wells will
perform services for each well which are customarily performed to
operate a gas well in the same general area as where the well is
located. The third party operator will be reimbursed for its direct
costs and will receive either reimbursement of its administrative
overhead or well supervision fees pursuant to an operating agreement.
These fees will be subject to an annual adjustment for inflation and
will be proportionately reduced to the extent the Partnership does not
acquire 100% of the Working Interest.
It is anticipated that the Partnership generally will own 100% of the
Working Interest in each Prospect, but the Partnership has reserved the
right to own as little as 25% of the Working Interest. Therefore, it is
possible that the Partnership may engage in joint activities on some of
the Prospects with third parties. This would decrease the Partnership's
Working Interest in the well but increase the diversification of the
Partnership's drilling activities. Any other Working Interest owner in
the Prospect may have a separate agreement with the Managing General
Partner with respect to the drilling and operating of a well thereon
with differing terms and conditions from those contained in the
Drilling and Operating Agreement. However, the Managing General Partner
will be the operator or have the right to replace the operator of most,
if not all, Partnership Wells and will control all drilling and
producing operations on those wells.
SALE OF OIL AND GAS PRODUCTION
IN GENERAL. The Managing General Partner is responsible for selling the
Partnership's gas and oil production. The Managing General Partner's
policy is to treat all wells in a given geographic area equally. This
reduces certain potential conflicts of interest among the owners of the
various wells, including the Partnership, concerning to whom and at what
price the gas will be sold. The Managing General Partner calculates a
weighted average selling price for all of the gas sold in the geographic
area, such as the Mercer County area. To arrive at the average weighted
selling price the money received from the sale of all of the gas sold to
customers is divided by the volume of all gas sold from the wells in the
area. For gas sold in the Mercer County area the Managing General
Partner received an average selling price after deducting all expenses,
including transportation expenses, of $2.29 per MCF in 1996 and $2.39
per MCF in 1997. On occasion, the Managing General Partner has reduced
the amount of production it normally sells on the spot market until the
spot market price increased. The Managing General Partner, however, has
not voluntarily restricted its gas production in the past two years
because of a lack of a profitable market.
In the Mercer County area the Managing General Partner estimates that a
portion of the Partnership's gas will be transported through its own
pipeline system and sold directly to industrial end-users in the area
where the wells will be drilled. It is anticipated that approximately
10% to 30% of the gas produced by the Partnership and the Managing
General Partner's previous Programs, in the Mercer County area will be
sold to industrial end-users. This will generally result in the
Partnership receiving higher prices for the gas than if the gas were
transported a farther distance through interstate pipelines because of
increased transportation charges. The remainder of the Partnership's gas
will be transported through the Managing General Partner's pipelines to
the interconnection points maintained with Tennessee Gas Transmission
Co., National Fuel Gas Supply Corporation, National Fuel Gas
Distribution Company, East Ohio Natural Gas Company, and Peoples Natural
Gas Company. These delivery points are utilized by Atlas Gas Marketing,
Inc. to service its end-user markets in the northeast United States
which include in excess of 100 customers. The Managing General Partner
and its Affiliates are currently delivering an average 27,000 MCF of
natural gas per day from the Mercer County area to all of the
aforementioned markets and have the capacity of delivering 33,000 MCF
per day from the Mercer County area. The Managing General Partner
anticipates that Wheatland Tube Company and Carbide Graphite will each
purchase approximately 10% to 15% of the Partnership's gas production in
1998 pursuant to gas contracts between them and an Affiliate of the
Managing General Partner. It is further possible that other purchasers
of the Partnership's gas production may account for 10% or more of the
Partnership's gas sales revenues in 1998.
In order to optimize the price it receives for the sale of natural gas,
the Managing General Partner markets portions of the gas through long
term contracts, short term contracts and monthly spot sales. The
marketing of natural gas production has been influenced by the
availability of certain financial instruments, such as gas futures
contracts, options and swaps which, when properly utilized as hedge
instruments, provide producers or consumers of gas with the ability to
lock in the price which will ultimately be paid for the future
deliveries of gas. The Managing General Partner is utilizing financial
instruments to hedge the price risk of a portion of its Programs' gas
production, which would include the Partnership. To assure that the
financial instruments will be used solely for hedging price risks and
not for speculative
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<PAGE> 55
purposes, the Managing General Partner has established an Energy Price
Risk Committee composed of the President, General Counsel, Chief
Financial Officer (chairperson) and Director of Marketing, whose
responsibility will be to ascertain that all financial trading is done
in compliance with hedging policies and procedures. The Managing General
Partner does not intend to contract for positions that it cannot offset
with actual production.
TRANSPORTATION OF GAS. One factor in determining the return to the
Partnership is the proximity of the well to the industrial end-user, an
existing pipeline system, or local distribution company. It is
anticipated that Mercer Gas Gathering, Inc., an Affiliate of the
Managing General Partner, will transport and compress the natural gas
produced by the Partnership into the various pipelines or directly to
industrial end-users. In addition, Atlas Gas Marketing, Inc., an
Affiliate of the Managing General Partner, will have the responsibility
to market that portion of gas delivered to the various interconnection
points maintained with the interstate pipelines and local distribution
companies to its 100 customer base. The Partnership will pay a combined
transportation and marketing charge for these services at a competitive
rate, which is currently 29 cents per MCF. (See "Compensation" and
"Management".)
MARKETING OF GAS PRODUCTION FROM WELLS IN OTHER AREAS OF THE UNITED
STATES. For wells drilled in areas of the United States other than the
Mercer County area, the Managing General Partner expects that gas
produced from these wells will be supplied to industrial end-users,
local distribution companies and/or interstate pipelines.
CRUDE OIL. Any crude oil produced from the wells will flow directly into
storage tanks where it will be picked up by the oil company, a common
carrier or pipeline companies acting for the oil company which is
purchasing the crude oil. Therefore, crude oil usually does not present
any transportation problem. The Managing General Partner anticipates
selling any oil produced by the wells in the Mercer County area to
Ergon in spot sales. Previously, The
Managing General Partner was receiving approximately $21.50 per barrel
in December, 1996, and approximately $15.20 per barrel in December,
1997, from Quaker State Oil Refining Company for oil produced in the
Mercer County area. Over the past eight years, the price of oil has
ranged from approximately $38
to as low as $10 per barrel. There can be no assurance as to the price
of oil during the term of the Partnership and the actions of OPEC.
INSURANCE
Since 1972, the Managing General Partner and its Affiliates have been
involved in the drilling of more than 1,600 wells in Ohio, Pennsylvania
and other areas of the Appalachian Basin without a blow-out, fire or
similar hazard occurring to any of these wells. Thus, the Managing
General Partner and its Affiliates have not made any insurance claims in
Ohio, Pennsylvania and other areas of the Appalachian Basin for these
hazards.
The Managing General Partner will obtain and maintain for the benefit of
itself and the Partnership insurance coverage in amounts, with
provisions for deductible amounts and for purposes, which would be
carried by a reasonable, prudent general contractor and operator in
accordance with industry standards. The Partnership will be named as an
additional insured under these policies. In addition, the Managing
General Partner requires all of its subcontractors to certify that they
have acceptable insurance coverage for worker's compensation and
general, auto and excess liability coverage. Major subcontractors are
required to carry general and auto liability insurance with a minimum of
$1,000,000 combined single limit for bodily injury and property damage
in any one occurrence or accident. The Managing General Partner's
current insurance coverage satisfies the following specifications:
(i) worker's compensation insurance in full compliance with
the laws of the Commonwealth of Pennsylvania and any
other applicable state laws;
(ii) liability insurance (including automobile) which has a
$1,000,000 combined single limit for bodily injury and
property damage in any one occurrence or accident and in
the aggregate; and
(iii) excess liability insurance as to bodily injury and
property damage with combined limits of $50,000,000
during drilling operations, per occurrence or accident
and in the aggregate. This includes $250,000 of seepage,
pollution and contamination insurance which protects and
defends the insured against property damage or bodily
injury claims from third parties (other than a co-owner
of the Working Interest) alleging seepage, pollution or
contamination damage resulting from an accident. The
excess liability insurance will be in place and effective
no later than the Initial Closing Date.
The excess liability insurance will be for the benefit of the
Partnership and the Managing General Partner's other Programs until the
Investor General Partners are converted to Limited Partners, at which
time the Partnership will continue to enjoy the benefit of the Managing
General Partner's $11,000,000 liability insurance on the same basis as
the Managing General Partner and its Affiliates, including the Managing
General Partner's other Programs. (See "Competition, Markets and
Regulation - State Regulations" and "- Environmental Regulation".)
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<PAGE> 56
These policies will have terms, including exclusions, standard for the
oil and gas industry. (See "Risk Factors - General Risks of the Oil and
Gas Business - Risk of Loss From Drilling Hazards".) Upon the request
of any prospective investor, the Managing General Partner will provide
to the prospective investor or his representatives a copy of its
insurance policies. The Managing General Partner will use its best
efforts to maintain insurance coverage which meets or exceeds its
current coverage but may ultimately be unsuccessful in its efforts
because the coverage may become unavailable or cost prohibitive.
The Managing General Partner will notify all Participants at least
thirty days prior to the effective date of any adverse material change
in the Partnership's insurance coverage. If the insurance coverage will
be materially reduced, which is not anticipated, the Investor General
Partners will have the right to convert their Units into Limited Partner
interests prior to the reduction by giving written notice to the
Managing General Partner. (See "Tax Aspects - Limitations on Passive
Activities".)
USE OF CONSULTANTS AND SUBCONTRACTORS
Although not anticipated with respect to producing operations in the
Mercer County area, the Partnership Agreement authorizes the Managing
General Partner to employ and utilize the services of independent
outside consultants and subcontractors. These persons will normally be
compensated through payment on a per diem or other cash fee basis. The
services will be charged to the Partnership as a Direct Cost or as a
direct expense pursuant to the Drilling and Operating Agreement,
attached as Exhibit (II) to the Partnership Agreement. These changes
will be in addition to the unaccountable, fixed payment reimbursement
paid to the Managing General Partner and its Affiliates for
Administrative Costs, and well supervision fees paid to the Managing
General Partner as Operator. (See "Compensation" and "Management".)
INFORMATION REGARDING CURRENTLY PROPOSED PROSPECTS
Set forth below is information relating to Prospects which have been
currently proposed for assignment to the Partnership upon the Initial
Closing Date and from time to time thereafter subject to the Managing
General Partner's right to withdraw the Prospects and to substitute
other Prospects. The specified Prospects represent the necessary
Prospects if approximately $8,000,000 is raised and the Partnership
takes 100% of the Working Interest. The Managing General Partner has not
proposed any other Prospects if more than this amount is raised, if the
Partnership takes a lesser Working Interest in the Prospects, if the
Prospects are substituted and/or if Prospects will be drilled in other
areas of the United States.
The assignment of the currently proposed Prospects will be dependent on
the non-materialization of any circumstances occurring which, in the
Managing General Partner's opinion, would diminish the relative
attractiveness of the Prospects. Any substituted and/or additional
Prospects will meet the same general criteria for development potential
as the currently proposed Prospects. Most of the Partnership's wells
will have as their objective the Clinton/Medina geological formation
discussed in the UEDC Geological Report and will be located in areas
where the Managing General Partner or its Affiliates have previously
conducted drilling operations. However, prospective investors will not
have the opportunity to evaluate for themselves the relevant
geophysical, geological, economic or other information regarding the
Prospects. (See "- Acquisition of Leases".)
The purpose of the information regarding the currently proposed
Prospects is to assist prospective investors in analyzing and evaluating
the currently proposed Prospects, including production information for
wells in the general area. The Managing General Partner believes that
production information for wells in the general area is an important
indicator in evaluating the economic potential of any well to be
drilled. There, however, can be no assurance that a well drilled by the
Partnership will experience production comparable to the production
experienced by wells in the surrounding area since the geological
conditions in the Clinton/Medina geological formation can change in a
short distance.
Prospective investors are cautioned and urged to analyze carefully all
production information for each well offsetting or in the general area
of a specified Prospect and, in the process of doing so, to take the
factors set forth below into consideration.
1. The length of time which the well has been on line and
the period of time for which production information is
shown.
2. The impact of "flush" production of a well which
usually occurs in the early period of well operations. This
period can vary depending on the location of the well and
the manner in which the well is operated.
3. Production declines at various rates throughout the life of
a well and decline curves vary depending on the geological
location of the well and the manner in which the well is
operated.
- --------------------------------------------------------------
<PAGE> 57
4. The production information with respect to some wells
is incomplete and with other wells very limited. The
designation "N/A" means the production was not available to
the Managing General Partner or if the Managing General
Partner was the Operator then the well was not completed or
on line as of the date of the report.
5. Production information for wells located in close
proximity to a Prospect tends to be more relevant than
production information for wells located at a great
distance from a Prospect, although from time to time great
disparity in well performance can occur in wells located in
close proximity.
6. Consistency in production among wells tends to confirm
the reliability and predictability of the production.
All the specified Prospects are subject to the factors set forth below:
1. There are no Overriding Royalty Interests or other
burdens in favor of the Managing General Partner or its
Affiliates.
2. The Managing General Partner or its Affiliates will act
as driller and operator for all the wells pursuant to the
Drilling and Operating Agreement. It is anticipated that
the Partnership generally will be transferred 100% of the
Working Interest but the Partnership has reserved the right
to take as little as 25% of the Working Interest.
3. The Managing General Partner and its Affiliates own
acreage in the vicinity of the Prospects. (See "Conflicts
of Interest - Conflicts Involving Acquisition of Leases".)
4. The Leases are being contributed to the Partnership at
the Managing General Partner's Cost of the Lease, unless
the Managing General Partner has cause to believe that
Cost is materially more than the fair market value of the
property, in which case the price will not exceed the fair
market value.
5. All wells will be drilled through the Clinton/Medina
formation to the top of the Queenston formation. The wells
will have no secondary objectives.
6. All the wells will be gas wells. See the Production
Map for the location of the Managing General Partner's
pipeline. Also, see "- Sale of Oil and Gas Production"
concerning a discussion of the marketing arrangements for
the Partnership's gas.
Included for the Prospects is certain information set forth below which
is designed to assist the prospective subscriber in becoming familiar
with the Prospect location.
1. A map of western Pennsylvania and eastern Ohio showing
their counties.
2. Prospect Lease information.
3. A Location and Production Map showing the Prospects and
the wells in the area.
4. Production data.
5. United Energy Development Consultants, Inc.'s
geological report. See "Experts" in the Prospectus.
- ---------------------------------------------------------------------
MAP OF WESTERN PENNSYLVANIA
AND
EASTERN OHIO
Map showing portions of Pulaski, Wilmington, Hickory, and
Neshannock Twps of Lawrence Co., PA., as well as Shenango, Wilmington,
Lackawannock, East Lackawannock, Jefferson, Findley, Coolspring,
Fairview, Jackson, and Deer Creek Twps. of Mercer Co., PA.
These maps illustrate the thirty-nine (39)prospective sites.
- ---------------------------------------------------------------------
<PAGE> 60
</TABLE>
<TABLE>
<CAPTION>
PROSPECT LEASE INFORMATION
EXHIBIT A
ATLAS-ENERGY FOR THE NINETIES - - PUBLIC #7 LTD
Acres to be
Net Assigned
Prospect Effective Expiration Landowner Revenue Net to
Name County Date Date Royalty Interest Acres Partnership
<C> <S> <C> <S> <C> <C> <C> <C> <C> <C>
1. Byler #33 Lawrence 9/30/97 9/30/00 12.50% 87.50% 76.5 50
2. Byler #38 Lawrence 9/11/97 9/11/00 12.50% 87.50% 87 50
3. Byler #40 Lawrence 9/17/97 9/17/00 12.50% 87.50% 9835 50
4. Byler #43 Lawrence 3/5/98 3/5/01 12.50% 87.50% 85 50
5. Byler #51 Lawrence 9/25/97 9/25/00 12.50% 87.50% 90 50
6. Byler #56 Lawrence 10/17/97 10/17/00 12.50% 87.50% 115 50
7. Fisher Unit #2 Lawrence 10/4/97 10/4/02 12.50% 87.50% 184 50
8. Foreman #1 Lawrence 10/2/97 10/2/02 12.50% 87.50% 91 50
9. Gibson #1 Lawrence 10/21/96 10/21/99* 12.50% 87.50% 62 50
10. Hostetler #7 Lawrence 9/11/97 9/11/00 12.50% 87.50% 120 50
11. Hostetler #8 Lawrence 9/11/97 9/11/00 12.50% 87.50% 120 50
12. Kempf #2 Lawrence 3/23/98 3/23/01 12.50% 87.50% 78 50
13. McFarland #9 Lawrence 7/29/98 7/29/01 12.50% 87.50% 153 50
14. Shannon #4 Lawrence 10/3/97 10/3/00 12.50% 87.50% 111 50
15. Ailius #1 Mercer 2/3/98 2/3/01 12.50% 87.50% 50 50
16. Byler #48 Mercer 1/7/98 1/7/01 12.50% 87.50% 52 50
17. Cameron #2 Mercer 4/3/98 4/3/01 12.50% 87.50% 52 50
18. Campbell #5 Mercer 8/6/97 8/6/00 12.50% 87.50% 156 50
19. Campbell #6 Mercer 8/6/97 8/6/00 12.50% 87.50% 156 50
20. Docl #2 Mercer 4/18/98 4/18/01 12.50% 87.50% 115 50
21. Hostetler #9 Mercer 10/1/97 10/1/00 12.50% 87.50% 55 50
22. Kennedy #3 Mercer 8/28/95 8/28/98* 12.50% 87.50% 76 50
23. Lapinski #4 Mercer 7/25/97 7/25/00* 12.50% 87.50% 225 50
24. Maranuck #1 Mercer 12/20/96 12/20/99 12.50% 87.50% 65 50
25. Martin #1 Mercer 5/24/97 5/24/00* 12.50% 87.50% 286 50
26. McFarland #5 Mercer 10/24/97 10/24/00 12.50% 87.50% 88 50
27. McFarland #6 Mercer 10/8/97 10/8/00 12.50% 87.50% 195 50
28. Michaels #1 Mercer 5/3/96 5/3/99 12.50% 87.50% 48 48
29. Minner #1 Mercer 5/7/98 5/7/01 12.50% 87.50% 65 50
- ------------------------------------------------------------------------------------------
30. North #4 Mercer 10/9/96 10/9/99* 12.50% 87.50% 34 34
31. Paglia #2 Mercer 3/19/98 3/19/01 12.50% 87.50% 130 50
32. Slater #2 Mercer 11/26/96 11/26/99 12.50% 87.50% 51 50
33. Swaney #1 Mercer 5/20/97 5/20/00 12.50% 87.50% 55 50
34. Swaney #3 Mercer 5/20/97 5/20/00 12.50% 87.50% 40 40
35. Thompson #7 Mercer 9/25/97 9/25/00 12.50% 87.50% 260 50
36. Thompson #8 Mercer 9/25/97 9/25/00 12.50% 87.50% 260 50
37. Wengerd #3 Mercer 10/15/97 10/15/00 12.50% 87.50% 63 50
38. Wiese #1 Mercer 1/9/97 1/9/00 12.50% 87.50% 75 50
39. Yoder #4 Mercer 2/6/98 2/6/01 12.50% 87.50% 70 50
- HBP - Held by Production
</TABLE>
- ----------------------------------------------------------------------------
<PAGE> 62-63 LOCATION AND PRODUCTION MAP
Map showing portions of Pulaski, Wilmington, Hickory, and
Neshannock Twps of Lawrence Co., PA., as well as Shenango, Wilmington,
Lackawannock, East Lackawannock, Jefferson, Findley, Coolspring,
Fairview, Jackson, and Deer Creek Twps. of Mercer Co., PA.
These maps illustrate the thirty-nine (39)prospective sites.
- -----------------------------------------------------------------------
<PAGE> 64-67
<TABLE>
<CAPTION>
PRODUCTION DATA
THE PRODUCTION DATA PROVIDED IN THE TABLE BELOW IS NOT INTENDED TO IMPLY
THAT THE WELLS TO BE DRILLED BY THE PARTNERSHIP WILL HAVE THE SAME
RESULTS, ALTHOUGH IT IS AN IMPORTANT INDICATOR IN EVALUATING THE
ECONOMIC POTENTIAL OF ANY WELL TO BE DRILLED BY THE PARTNERSHIP.
Date: July 31, 1998
TOTAL LATEST
ID MONTHS LOGGERS 30
NUMBER OPERATOR WELL NAME DATE COMPLT'D ON LINE TOT MCF DEPTH DAY PROD.
- ------ --------------------- -------------- ----------- ---- ------ ------ ------
<C> <S> <C> <S> <C> <C> <C> <C> <C> <C>
20157 Atlas Resources, Inc. Hostetler #3 02/20/97 16 36569 6195' 1611
20159 Atlas Resources, Inc. Kurtz #2 02/28/97 16 38868 6235' 1494
20161 Atlas Resources, Inc. Byler #14 03/07/97 16 30819 6200' 1060
20165 Atlas Resources, Inc. Kurtz #4 08/27/97 10 33135
20166 Atlas Resources, Inc. Gibson #2 03/08/98 3 11385 6278' 3860
20170 Atlas Resources, Inc. Gibson #3 09/16/97 9 28281 6261' 2990
20172 Atlas Resources, Inc. Byler #17 09/21/97 9 27217 6094' 2792
20174 Atlas Resources, Inc. Kurtz Unit #3 02/07/98 4 11466 6167' 3185
20175 Atlas Resources, Inc. Byler #18 12/21/97 6 18829 6239' 3728
20176 Atlas Resources, Inc. Byler #19 12/31/97 6 13377 6305' 1897
20177 Atlas Resources, Inc. Byler Unit #20 01/17/98 5 16667 6193' 3958
20178 Atlas Resources, Inc. Malaniak Unit #1 01/08/98 5 11414 6134' 1683
20183 Atlas Resources, Inc. Byler #24 03/08/98 3 7445 6124' 3600
20184 Atlas Resources, Inc. Hostetler #5 03/16/98 3 7158 6104' 2720
20187 Atlas Resources, Inc. Wengerd Unit #2A 03/22/98 1 1760 6075' N/A
20696 Viking Resources Worley #1 07/01/85 N/A N/A 5734' N/A
20699 Atlas Resources, Inc. Struthers #1 07/10/85 P/A P/A 5832' N/A
21121 Capital Oil & Gas Hostetler, .#1 11/11/90 N/A N/A 6140' N/A
212142 Atwood Energy McFall Unit #4 02/28/91 N/A N/A 5718' N/A
21223 Atwood Energy McFall Unit #3 02/09/91 N/A N/A 5689' N/A
21231 Capital Oil & Gas Cox, Joan #1 12/23/91 N/A N/A 6100' N/A
21237 Atwood Energy McFall Unit #2 02/20/91 N/A N/A 5700' N/A
21314 Atlas Resources, Inc. Miller #4 08/13/91 80 19891 5840' 214
21315 Atlas Resources, Inc. Kelson Unit #2 08/11/91 82 91374 5786' 683
21327 Atlas Resources, Inc. Cresswell #1 08/28/91 82 86020 5688' 686
21337 Atlas Resources, Inc. Monske #1 08/19/91 82 62640 5620' 2080
21349 Quaker State Bromley #1 09/04/91 N/A N/A 5591' N/A
21369 Quaker State Breese #1 09/22/91 N/A N/A 5504' N/A
- -----------------------------------------------------------------------------------------------
21508 Capital Oil & Gas Cox, J. #2 12/17/92 N/A N/A 6035' N/A
21680 Atlas Resources, Inc. Edeburn Unit #1 11/14/93 55 38258 6060' 477
22121 Atlas Resources, Inc. Duffola Unit #1 09/04/95 32 52213 5929' 784
22123 Atlas Resources, Inc. Philson #2 11/21/95 29 95169 5887' 1872
22127 Atlas Resources, Inc. Eagle #1 08/30/95 32 67396 5938' 1271
22129 Atlas Resources, Inc. Rabold #4 10/29/95 29 48813 5838' 1124
22151 Atlas Resources, Inc. Polick #3 02/12/96 28 32920 5969' 730
22156 Atlas Resources, Inc. Kalasky #1 02/18/96 28 33256 5971' 623
22172 Atlas Resources, Inc. Irwin #1 01/24/96 28 20124 5965' 371
22180 Atlas Resources, Inc. Philson #3 01/28/96 29 26991 5948' 568
22188 Atlas Resources, Inc. Vogan #2 02/23/96 27 73742 5911' 2216
22194 Atlas Resources, Inc. Vogan #1 08/25/96 21 91186 5837' 3750
22205 Petroleum Dev. Corp. Kacir #1 03/04/96 N/A N/A 5832' N/A
22207 Atlas Resources, Inc. Kloos #2 03/11/96 28 38397 5882' 913
22213 Atlas Resources, Inc. Hamilton #3 03/16/96 27 21444 5971' 358
22216 Atlas Resources, Inc. Baun Unit #3 07/03/96 21 32565 5992' 823
22255 Atlas Resources, Inc. McDowell #9 08/07/96 21 45751 5821' 1588
22267 Atlas Resources, Inc. Kloos #1 10/31/96 20 8725 5899' 335
22308 Atlas Resources, Inc. Kloos #4 01/08/97 18 60794 5955' 2934
22319 Atlas Resources, Inc. Babcock #1 01/26/97 17 23550 5791' 1258
22320 Atlas Resources, Inc. Steele #1 01/18/97 17 19367 5797' 714
22321 Atlas Resources, Inc. Kelly #2 02/23/97 16 27391 5769' 1220
22328 Atlas Resources, Inc. Black #2 02/16/97 16 20711 5806' 743
22330 Atlas Resources, Inc. McCullough #11 01/27/97 17 27141 5897' 860
22350 Atlas Resources, Inc. Mong #1 03/07/97 15 33307 5873' 1771
22354 Atlas Resources, Inc. North #2 08/01/97 10 42684 5798' 4686
22356 Atlas Resources, Inc. McDowell #14 03/12/97 15 13900 5949' 683
22374 Atlas Resources, Inc. Jones #2 08/29/97 9 23869 5739' 2126
22377 Atlas Resources, Inc. McDowell #15 10/29/97 7 13054 5885' 1685
22391 Atlas Resources, Inc. King #3 02/26/98 4 11407 5574' 3420
- ------------------------------------------------------------------------------------------------
22397 Atlas Resources, Inc. Babcock #2 08/18/97 10 15409 5823' 1006
22406 Atlas Resources, Inc. Kelly #3 10/13/97 8 24073 5852' 3099
22415 Atlas Resources, Inc. Plantation Park1 10/13/97 8 16817 5795' 1616
22416 Atlas Resources, Inc. Ewig #1 10/01/97 7 18882 5978' 2723
22461 Atlas Resources, Inc. North #3 04/01/98 3 7809 5831' 3900
22435 Atlas Resources, Inc. Ferris #1 02/01/98 4 9187 6108' 1987
22444 Atlas Resources, Inc. Bentley #1 02/08/98 4 9821 5676' 2529
22445 Atlas Resources, Inc. Kurtz #5 02/26/98 1 912 6010' N/A
22449 Atlas Resources, Inc. Byler #21 02/18/98 1 952 6096' N/A
22463 Atlas Resources, Inc. Kennedy #2 03/12/98 3 7980 5750' 3262
22464 Atlas Resources, Inc. Martin #2 02/21/98 2 4934 5873' 3125
22465 Atlas Resources, Inc. Byler #29 03/03/98 1 4556 6071' N/A
22466 Atlas Resources, Inc. Byler #31 03/12/98 2 7677 6034' 6282
22470 Atlas Resources, Inc. Lapinski #3 02/14/98 3 8736 5894' 4593
22471 Atlas Resources, Inc. Winder #3 03/14/98 3 3188 5800 1664
22482 Atlas Resources, Inc. Byler Unit #26 03/21/98 3 8821 5904' 4678
22483 Atlas Resources, Inc. Seamans #3 03/14/98 1 1927 5960' N/A
22484 Atlas Resources, Inc. Seamans #2 03/31/98 1 1829 5982' N/A
22489 Atlas Resources, Inc. Bentley Unit #2 02/28/98 4 6492 5724' 1669
22496 Atlas Resources, Inc. Byers #2 03/19/98 1 103 5893' N/A
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 68
GEOLOGICAL REPORT
FOR THE
CURRENTLY PROPOSED PROSPECTS
- ------------------------------------
<PAGE> 69
GEOLOGIC EVALUATION
OF
ATLAS - ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
DRILLING PROGRAM
SOUTHWESTERN MERCER PROSPECT AREA,
PENNSYLVANIA
PROGRAM PROPOSED BY:
ATLAS RESOURCES, INC.
311 ROUSER ROAD
PO BOX 611
MOON TOWNSHIP, PA 15108
REPORT SUBMITTED BY:
UEDC
UNITED ENERGY DEVELOPMENT CONSULTANTS, INC.
1715 CRAFTON BLVD.
PITTSBURGH, PA 15205-3101
- -----------------------------------------------------------
<PAGE> (2)
LOCATION MAP - AREA OF INTEREST
Map showing the westerly section of Mercer and Lawrence
Counties, Pennsylvania
TABLE OF CONTENTS
INVESTIGATION SUMMARY 3
OBJECTIVE 3
AREA OF INVESTIGATION 3
METHODOLOGY 3
SOUTHWESTERN MERCER PROSPECT AREA 3
DRILLING ACTIVITY 3
GEOLOGY 4
STRATIGRAPHY, LITHOLOGY & DEPOSITION 4
RESERVIOR CHARACTERISTICS 6
PRODUCTION CURVE 8
POTENTIAL MARKETS AND PIPELINES 8
STATEMENTS 9
CONCLUSION 9
DISCLAIMER 9
NON-INTEREST 9
- ---------------------------------------------------------
<PAGE> (3)
INVESTIGATION SUMMARY
OBJECTIVE
The purpose of the following investigation is to evaluate the
geologic feasibility and further development of the Southwestern Mercer
Prospect Area (consisting of Lawrence and Mercer Counties) as proposed
by Atlas Resources, Inc.
AREA OF INVESTIGATION
A portion of this prospect area, herein identified as the Atlas-
Energy for the Nineties-Public #7 Ltd. Drilling Program, contains
acreage in Jackson, Coolspring, Deer Creek, Fairview, Lackawannock,
East Lackawannock, Wilmington and Shenango Townships in Mercer County,
and Pulaski, Wilmington, Hickory, Mahoning and Neshannock Townships in
Lawrence County. All counties are located in Pennsylvania. Forty-one
(41) drilling prospects designated for this program will be targeted to
produce natural gas from Clinton-Medina Group reserviors, found at
depths ranging from approximately 5,900 to 6,200 feet beneath the
earth's surface.
METHODOLOGY
The data incorporated into this report was provided by Atlas
Resources, Inc. and the in-house archives of UEDC, Inc. Geological
mapping and the interpretations by Atlas geologists were also examined.
Available "electric" log, completion, and production data on wells
offsetting prospect locations and other "key" wells within and adjacent
to the defined prospect area were utilized to determine productive and
depositional trends.
SOUTHWESTERN MERCER PROSPECT AREA
DRILLING ACTIVITY
The proposed drilling area lies within a region of northwestern
Pennsylvania which has been very active for the past decade in terms of
exploration for, and exploitation of natural gas reserves. Development
- --------------------------------------------------------------------
<PAGE>(4)
within and adjacent to the Southwestern Mercer Prospect Area has
escalated since 1986, with Atlas Resources, Inc. and it's affiliates
drilling over nine hundred (900) wells during this period. Atlas
Resources, Inc. has encountered favorable drilling and production
results while solidifying a strong acreage position, as Atlas
Resources, Inc. continues to identify and extend productive trends.
Drilling is ongoing as of the date of this report with recent wells
displaying favorable initial drilling and completion results.
Competitive activity has begun both south and east of the prospect
area, confirming the Clinton-Medina Group of Lower Silurian age as a
viable target for the further development of economic quantities of
natural gas.
GEOLOGY
STRATIGRAPHY, LITHOLOGY & DEPOSITION
Regionally, the Clinton-Medina Group was deposited in tide-
dominated shoreline, deltaic, and shelf environments and is
lithologically comprised of alternating sandstones, siltstones and
shales. Productive sandstones are composed of siliceous to dolomitic
subarkoses, sublitharenites, and quartz arenites. Reservior quality
sands occur throughout the delta-complex from eastern Ohio through
northwestern Pennsylvania and western New York. The Clinton-Medina
Group, deposited during the Lower Silurian, overlies the Upper
Ordovician age Queenston shale and is capped by the Middle Silurian
Reynales Formation. This dolomitic limestone "cap" is known locally to
drillers as the "Packer Shell".
Stratigraphically, in descending order, the potentially productive
units of the Clinton-Medina Group consist of the:
1) Thorold, 2) Grimsby, 3) Cabot Head, and
4) Whirlpool members. These stratigraphic relationships are
illustrated in the following diagram:
MIDDLE SILURIAN:
: ROCHESTER
: IRONDEQUOIT
: REYNALES
:
LOWER SILURIAN : THROLD--------|
: GRIMSBY-------|
: CABOT HEAD----|CLINTON-MEDINA GROUP
: WHIRLPOOL-----|
ORDOVICIAN :
: QUEESNTON
The WHIRLPOOL is a light gray quartzose sandstone to siltstone
ranging in thickness from five (5) to twenty (20) feet. Average porosity
values for this sand member range from five (5) to ten (10) percent
regionally. Within the area of investigation, porosities in excess of
twelve (12) percent occur within localized trends targeted for further
development.
The CABOT HEAD is a dark green to black shale, most likely of
marine origin. Within the investigated area a CABOT HEAD SANDSTONE has
been encountered in numerous wells. This formation has been found to
contribute natural gas when reservior characteristics, including
evidence of enhanced permeability, warrant completion. This sand
member is considered a secondary target.
The GRIMSBY is the thickest sandstone member of the Clinton-Medina
Group. Sand development ranges from ten (10) to forty-five (45) feet
- --------------------------------------------------------------------
<PAGE>(6)
within an interval comprised of fine to very fine, light gray to red
sandstones and siltstones broken up by thin dark gray silty shale
layers. Average porosity values for the Grimsby are approximately six
(6) to (10) percent over the pay interval regionally. Permeability may
be enhanced locally by the presence of naturally occurring micro-
fractures. Future development focuses on established production
trends.
The THOROLD sandstone is the uppermost producing interval of the
Clinton-Medina sequence. This interbedded ferric sand, silt and shale
interval averages forty (40) feet. Where pay sand development occurs,
porosities are in the typical Clinton-Medina group range of six (6) to
(10) percent. Permeability may be enhanced locally by the presence of
naturally occurring micro-fractures.
RESERVIOR CHARACTERISTICS
Petroleum reservoirs are formed by the presence of an impermeable
barrier trapping natural gas of commercial quantities in a more
permeable medium. In the Clinton-Medina, this occurs either
stratigraphically when a permeable sand containing hydrocarbons
encounters an impermeable shale or when a permeable sand changes
gradually into a non-permeable sand by a cementation process known as
"diagenesis". Thus, this type of trap represents cemented-in
hydrocarbon accumulations.
Electric well logs can be used in conjunction with production to
interpret reservior parameters. When sandstones in the Thorold,
Grimsby, Cabot Head or Whirlpool develop porosity in excess of 6%, or a
bulk density of 2.55 or less, the permeability of the reservoir (which
ranges from <0.l to >0.2 mD) can become great enough to allow
commercial production of natural gas. Small, naturally occurring
cracks in the formation, referred to as micro-fractures, can also
enhance permeability. A gamma, bulk density, density porosity and
neutron log suite showing sand development in the Grimsby, Cabot Head
and Whirlpool is illustrated on the following page.
- ---------------------------------------------------------------
<PAGE>(7)
(Graphic) Well log showing gamma, bulk density, density porosity and
neutron logs, showing sand development in the Grimsby, Cabot Head
and Whirlpool.
Two other phenomena detected by well logs can occur which are
indicators of enhanced permeability. These indicators used to detect
productive intervals are:
* Mudcake buildup across the zone of interest - after loading the wellbore
with brine fluid and circulating, an interval with enhanced
permeability will accept fluid, filtering out the solids and
leaving behind a buildup (or mudcake) on the formation wall. This
is detectable with a caliper log.
* Invasion profile - during circulation, a brine that has a high
conductivity (or low resistivity) that is accepted into the
formation (as described above) will change the electrical
conductivity of the reservoir rock near and around the wellbore.
The resistivity will be low nearest to the wellbore and will
increase away from the wellbore. A dual laterolog can be used to
detect this profile created by a permeable zone - it records
resistivity near the wellbore as well as deeper into the
formation. A zone with enhanced permeability will show a
separation between the shallow and deep laterologs, while a zone
with little or no permeability would cause the two resistivity
measurements to read exactly the same. An example follows:
- -------------------------------------------------------------
<PAGE>(8)
(Graphic) GAMMA RAY LOG (Graphic) RESISTIVITY LOG
PRODUCTION CURVE
A model decline curve for the Southeastern Mercer Prospect Area
was created, based on production histories from over 200 wells in the
mature portion of the field. The percentage of gas recovery per year
is illustrated by the diagram below:
In the area of this drilling program, there are a number of
potential purchasers and transporters of natural gas. These include
Wheatland Tube Company, Tenneco, National Fuel Supply, National Fuel
Distribution and the People's Natural Gas Company.
- -----------------------------------------------------------------------------
<PAGE>(9)
STATEMENTS
CONCLUSION
UEDC has conducted a geologic feasibility study of the ATLAS-
ENERGY FOR THE NINETIES-PUBLIC #7 LTD. DRILLING PROGRAM, which will
consist of developmental drilling of the Clinton-Medina Group sands in
Mercer and Lawrence Counties, Pennsylvania. It is the professional
opinion of UEDC that the drilling of wells within this program is
supported by sufficient geologic and engineering data.
DISCLAIMER
For the purpose of this evaluation, UEDC did not visit any
leaseholds or inspect any of the associated production equipment.
Likewise, UEDC has no knowledge as to the validity of title,
liabilities, or corporate matters affecting these properties. UEDC
does not warrant individual well performance.
NON-INTEREST
We hereby confirm that UEDC is an independent consulting firm and
that neither this firm or any of it's employees, contract consultants,
or officers has, or is committed to acquire any interest, directly or
indirectly, in Atlas Resources, Inc.; nor is this firm, or any
employee, contract consultant, or officer thereof, otherwise affiliated
with Atlas Resources, Inc. We also confirm that neither the employment
of, nor payment of compensation received by UEDC in connection with
this report, is on a contingent basis.
Respectfully submitted,
UEDC, INC.
- ---------------------------------------------------------------------
<PAGE> 78
COMPETITION, MARKETS AND REGULATION
COMPETITION AND MARKETS
There are many companies, partnerships and individuals engaged in
natural gas exploration, development and operations in the areas where
the Partnership is expected to conduct its activities. The industry is
highly competitive in all phases, including acquiring suitable
properties for development and the marketing of natural gas. The
Partnership will be competing with other companies, and the sale of the
production from the wells in the Mercer County area will compete with
the sale of production from the other wells that have already been
drilled or are being operated by the Managing General Partner in the
area. However, to reduce and/or eliminate this conflict of interest it
is the Managing General Partner's policy to treat all wells in a
geographic area equally as to pipeline access and access to the Managing
General Partner's gas supply agreements. (See "Proposed Activities -
Sale of Oil and Gas Production".)
Current economic conditions indicate that the costs of exploration and
development are increasing gradually; however, the oil and gas industry
historically has experienced periods of rapid cost increases from time
to time.
Natural gas and oil, if any, produced by the Partnership Wells must be
marketed in order for the Participants to realize revenues from the
production. In recent years natural gas and oil prices have been
volatile. The marketing of natural gas and oil production, if any, will
be affected by numerous factors beyond the control of the Partnership
and the effect of which cannot be accurately predicted. These factors
include:
(i) the availability and proximity of adequate pipeline or other
transportation facilities;
(ii) the amount of domestic production and foreign imports of oil
and gas;
(iii) competition from other energy sources such as coal and
nuclear energy;
(iv) local, state and federal regulations regarding production and
the cost of complying with applicable environmental
regulations; and
(v) fluctuating seasonal supply and demand.
For example, the demand for natural gas is greater in the winter months
than in the summer months, which is reflected in a higher spot market
price paid for the gas. Also, increased imports of oil and natural gas
have occurred and are expected to continue. The free trade agreement
between Canada and the United States has eased restrictions on imports
of Canadian gas to the United States. Additionally, the passage in
November, 1993, of the North American Free Trade Agreement ("NAFTA")
will have some impact on the American gas industry by eliminating trade
and investment barriers in the United States, Canada and Mexico. In the
past the reduced demand for natural gas and/or an excess supply of gas
has resulted in a lower price paid for the gas. It has also resulted in
some purchasers curtailing or restricting their purchases of natural
gas, renegotiating existing contracts to reduce both take-or-pay levels
and the price paid for delivered gas, and other difficulties in the
marketing of production. (See "Proposed Activities - Sale of Oil and Gas
Production".)
Although the transportation and sale of gas in interstate commerce
remains heavily regulated, the Federal Energy Regulatory Commission
("FERC") has sought to promote greater competition in natural gas
markets by encouraging open access transportation by interstate
pipelines. The goal is to expand the opportunities for producers to
contract directly with local distribution companies and end-users.
Traditionally, natural gas has been sold by producers to pipeline
companies, which then resold the gas to end-users. FERC Orders No. 436
and 500 alter this market structure by requiring interstate pipelines
that transport gas for others to provide transportation service to
producers, distributors and all other shippers of natural gas on a
nondiscriminatory, "first-come, first-served" basis ("open access
transportation"). This permits producers and other shippers to sell
natural gas directly to end-users.
FERC Order 636 which became effective May 18, 1992, requires gas
pipeline companies to, among other things, separate their sales services
from their transportation services; and provide an open access
transportation service that is comparable in quality for all gas
suppliers. The premise behind FERC Order 636 was that the gas
pipeline companies had an unfair advantage over other gas suppliers
because they could bundle their sales and transportation services
together. FERC Order 636 is designed to create a regulatory environment
in which no gas seller has a competitive advantage over another gas
seller because it also provides transportation services.
The Clean Air Act Amendments of 1990 contain incentives for the future
development of "clean alternative fuel," which includes natural gas and
liquefied petroleum gas for "clean-fuel vehicles". The Managing General
Partner believes the amendments ultimately will have a beneficial
effect on natural gas markets and prices.
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CRUDE OIL REGULATION
Although, the price of oil is not regulated, it is subject to supply,
demand, competitive factors, the gravity of the crude oil, sulfur
content differentials and other factors. Also, certain federal
reporting requirements are still in effect under U. S. Department of
Energy regulations.
FEDERAL GAS REGULATION
The sale of natural gas is subject to regulation of production and
transportation by governmental regulatory agencies. Generally, the
regulatory agency in the state where a producing natural gas well is
located supervises production activities and the transportation of
natural gas sold into intrastate markets. FERC regulates the interstate
transportation of natural gas, but under the Wellhead Decontrol Act of
1989 FERC may not regulate the price of gas. The deregulated gas
production may be sold at market prices determined by supply, demand,
BTU content, pressure, location of the wells, and other factors. The
Managing General Partner anticipates that all of the gas produced by
the Partnership Wells will be price decontrolled gas and will be sold
at fair market value.
STATE REGULATIONS
Oil and gas operations are regulated in Pennsylvania by the Department
of Environmental Resources, and any other states where Partnership Wells
may be situated will impose a comprehensive statutory and regulatory
scheme for oil and gas operations. Among other things, these regulations
involve:
(i) new well permit and well registration requirements, procedures
and fees;
(ii) minimum well spacing requirements;
(iii) restrictions on well locations and underground gas storage;
(iv) certain well site restoration, groundwater protection and
safety measures;
(v) landowner notification requirements;
(vi) certain bonding or other security measures;
(vii) various reporting requirements;
(viii) well plugging standards and procedures; and
(ix) broad enforcement powers.
These state regulatory agencies have been granted broad regulatory and
enforcement powers which are likely to create additional financial and
operational burdens on oil and gas operations like those of the
Partnership. Pennsylvania and the other states also have in place
pollution and environmental control laws which have become increasingly
burdensome in recent years. Enforcement efforts with respect to oil and
gas operations have recently increased and it can be anticipated that
this regulation will expand and have a greater impact on future oil and
gas operations.
ENVIRONMENTAL REGULATION
Various federal, state and local laws covering the discharge of
materials into the environment, or otherwise relating to the protection
of the environment, may affect the Partnership's operations. The
Partnership may generally be liable for cleanup costs to the United
States Government under the Federal Clean Water Act for oil or hazardous
substance pollution and under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("CERCLA" or Superfund) for
hazardous substance contamination. The liability is unlimited in cases
of willful negligence or misconduct, and there is no limit on liability
for environmental cleanup costs or damages with respect to claims by the
state or private persons or entities. Additionally, the Environmental
Protection Agency ("EPA") will require the Partnership to prepare and
implement spill prevention control and countermeasure plans relating to
the possible discharge of oil into navigable waters. The EPA will
further require permits to authorize the discharge of pollutants into
navigable waters. State and local permits or approvals will also be
needed with respect to wastewater discharges and air pollutant
emissions.
Violations of environment-related Lease conditions or environmental
permits can result in substantial civil and criminal penalties as well
as potential court injunctions curtailing operations. The enforcement
liabilities can result from either governmental or citizen prosecution.
Compliance with these statutes and regulations may cause delays in
producing natural gas and oil from the wells and may substantially
increase the cost of producing the natural gas and oil. However, these
laws and regulations are constantly being revised and changed, and the
Managing General Partner is unable to predict the ultimate costs of
complying with present and future environmental laws and regulations.
See "Risk Factors - Special Risks of the Partnership - Risk of Loss
Because of Unlimited Liability of Investor General Partners" and
"Proposed Activities - Insurance," concerning the Managing General
Partner's inability to obtain insurance to protect against environmental
claims.
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<PAGE> 80
PROPOSED REGULATION
From time to time there are a number of proposals considered in Congress
and in the legislatures and agencies of various states that if enacted
would significantly and adversely affect the oil and natural gas
industry. The proposals involve, among other things, the imposition of
new taxes on natural gas and limiting the disposal of waste water from
wells. It is impossible to accurately predict what proposals, if any,
will be enacted by Congress or the legislatures and agencies of various
states and what effect any proposals which are enacted will have on the
activities of the Partnership.
PARTICIPATION IN COSTS AND REVENUES
IN GENERAL
A tabular summary of the following discussion appears below. Please
refer to "Definitions" for a description of the items of revenue and
cost included in the terms used herein.
COSTS
1. ORGANIZATION AND OFFERING COSTS. Organization and Offering Costs
will be allocated and charged 100% to the Managing General Partner.
Notwithstanding, Organization and Offering Costs in excess of 15% of
the Partnership Subscription will be paid by the Managing General
Partner, without recourse to the Partnership, and the Managing
General Partner will not be credited with this amount towards its
required Capital Contribution.
2. LEASE COSTS. The Leases will be contributed to the Partnership by
the Managing General Partner at its Cost, unless the Managing General
Partner has cause to believe that Cost is materially more than fair
market value, in which case the credit for the contribution will be
made at a price not in excess of fair market value.
3. INTANGIBLE DRILLING COSTS AND TANGIBLE DRILLING COSTS.
Intangible Drilling Costs will be allocated and charged 100% to the
Participants. Tangible Costs will be allocated and charged 51% to
the Managing General Partner and 49% to the Participants.
Intangible Drilling Costs and the Participants' share of Tangible
Costs of a well or wells to be drilled and completed with the
proceeds of a Partnership closing will be charged 100% to the
Participants who are admitted to the Partnership in the closing and
will not be reallocated to take into account other Partnership
closings. Although the proceeds of each Partnership closing will be
used to pay the costs of drilling different wells, each Participant
will pay the same amount of the costs regardless of when he
subscribes.
4. OPERATING COSTS, DIRECT COSTS, ADMINISTRATIVE COSTS AND ALL OTHER
COSTS. Operating Costs, Direct Costs, Administrative Costs and all
other Partnership costs not specifically allocated will be allocated
and charged 69% to the Participants and 31% to the Managing General
Partner. However, if the Managing General Partner has to subordinate
a part of its Partnership revenues in an amount up to 12.4% of the
Partnership Net Production Revenues, Operating Costs, Direct Costs,
Administrative Costs and all other Partnership costs not specifically
allocated will be charged to the parties in the same ratio as the
related production revenues are being credited. (See "-
Subordination of Portion of Managing General Partner's Net Revenue
Share," below.)
The Managing General Partner's aggregate Capital Contributions to the
Partnership (including its credit for the Cost of the Leases
contributed) will not be less than 24.5% of all Capital Contributions
to the Partnership. Any payments by the Managing General Partner in
excess of the other costs charged to it under the Partnership
Agreement will be used to pay Partnership costs which would otherwise
be charged to the Participants. These Capital Contributions must be
paid by the Managing General Partner at the time the costs are
required to be paid by the Partnership, but, in no event, later than
December 31, 1999.
REVENUES
1. PROCEEDS FROM THE SALE OF LEASES. If the Partners' Capital
Accounts are adjusted under the Partnership Agreement to reflect the
simulated depletion of an oil or gas property of the Partnership, the
portion of the total amount realized by the Partnership upon the
taxable disposition of the property that represents recovery of its
simulated tax basis therein is allocated to the Partners in the same
proportion as the aggregate adjusted tax basis of the property was
allocated to the Partners (or their predecessors in interest). If the
Partners' Capital Accounts are adjusted under the Partnership
Agreement to reflect the actual depletion of an oil or gas property
of the Partnership, the portion of the total amount realized by the
Partnership upon the taxable disposition of the property that equals
the Partners' aggregate remaining adjusted tax basis therein is
allocated to the Partners in proportion to their respective
remaining adjusted tax bases in the property. In addition, proceeds
will be allocated to the Managing General Partner to the extent of
the pre-contribution appreciation in value of the property, if any.
Any excess will be credited to the parties in the ratio in which oil
and gas production revenues of the Partnership are credited as
provided in 4, below.
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<PAGE> 81
2. INTEREST PROCEEDS. Interest earned on Agreed Subscriptions
before the Offering Termination Date will be credited to the accounts
of the respective subscribers and paid approximately eight weeks
after the Offering Termination Date. If a subscription is refunded
any interest allocated thereto will also be refunded. After the
Offering Termination Date and until proceeds from the offering are
invested in the Partnership's oil and gas operations any interest
income from temporary investments will be allocated pro rata to the
Participants providing the Agreed Subscription. All other interest
income, including interest earned on the deposit of production
revenues, will be credited as provided in 4, below.
3. EQUIPMENT PROCEEDS. Proceeds from the sale or other disposition
of equipment will be credited to the parties charged with the costs
of the equipment in the ratio in which the costs were charged.
4. PRODUCTION REVENUES. All other revenues of the Partnership,
including production revenues, will be credited 69% to the
Participants and 31% to the Managing General Partner.
Also, if the Managing General Partner has to subordinate a portion
of its share of Partnership Net Production Revenues then Operating
Costs, Direct Costs, Administrative Costs and all other Partnership
costs not specifically allocated will be charged to the parties in
the same ratio as the related production revenues are being credited.
(See " - Subordination of Portion of Managing General Partner's Net
Revenue Share", below and "Tax Aspects".)
The revenues from all Partnership Wells will be commingled, so
regardless of when a Participant subscribes he will share in the
revenues from all wells on the same basis as the other Participants.
5. LIQUIDATION PROCEEDS. Upon liquidation of the Partnership each
Participant will receive his Distribution Interest in the
Partnership. "Distribution Interest" means an undivided interest in
the assets of the Partnership after payments to creditors of the
Partnership or the creation of a reasonable reserve therefor, in the
ratio the positive balance of a party's Capital Account bears to the
aggregate positive balance of the Capital Accounts of all of the
parties determined after taking into account all Capital Account
adjustments for the taxable year during which liquidation occurs
(other than those made pursuant to liquidating distributions or
restoration of deficit Capital Account balances); provided, however,
after the Capital Accounts of all of the parties have been reduced to
zero, such interest in the remaining assets of the Partnership will
equal a party's interest in the related revenues of the Partnership
as set forth in 5.01 and its subsections of the Partnership
Agreement.
Any in kind property distributions to the Participants must be made to a
liquidating trust or similar entity for the benefit of the Participants,
unless at the time of the distribution:
(i) the Managing General Partner offers the individual
Participants the election of receiving in kind property
distributions and the Participants accept such offer
after being advised of the risks associated with the
direct ownership; or
(ii) there are alternative arrangements in place which
assure the Participants that they will not, at any time,
be responsible for the operation or disposition of the
Partnership properties.
It will be presumed that a Participant has refused his consent if the
Managing General Partner has not received his consent within thirty days
after the Managing General Partner mailed the request for the consent.
Any Partnership asset which would otherwise be distributed in kind to a
Participant, but for the failure or refusal of the Participant to give
his written consent to the distribution, may instead be sold by the
Managing General Partner at the best price reasonably obtainable from an
independent third party who is not an Affiliate of the Managing General
Partner.
SUBORDINATION OF PORTION OF MANAGING GENERAL PARTNER'S NET REVENUE SHARE
The Partnership is structured to provide preferred cash distributions to
the Participants equal to a minimum of 10% of their Agreed Subscriptions
in each of the first five twelve-month periods of Partnership
operations. To help insure the Participants achieve this investment
feature, the Managing General Partner will subordinate up to 40% of its
31% share of Partnership Net Production Revenues (i.e. up to 12.4% of
the Partnership Net Production Revenues) to the receipt by Participants
of cash distributions from the Partnership equal to 10% of their Agreed
Subscriptions in each of the first five twelve-month periods of
Partnership operations. (Partnership Net Production Revenues means gross
revenues after deduction of the related Operating Costs, Direct Costs,
Administrative Costs and all other Partnership costs not specifically
allocated.) The subordination will be determined commencing with the
first distribution of revenues to the Participants by debiting or
crediting current period Partnership revenues to the Managing General
Partner as may be necessary to provide the distributions to the
Participants. See 5.01(b)(4) of the Partnership Agreement for details
on the subordination.
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<PAGE> 82
The Managing General Partner anticipates that the Participants will
benefit from the subordination if the price of gas received by the
Partnership and/or the results of the Partnership's drilling activities
are unable to provide the required return to the Participants.
Notwithstanding, if the wells produce gas in small volumes and/or the
price of gas declines then even with subordination the cash flow to the
Participants may be very small and they may not receive a return of
their entire investment. (See "Risk Factors - Special Risks of the
Partnership - Risk That Borrowings by the Managing General Partner Could
Reduce Funds Available for Its Subordination Obligation".)
PARTICIPATION IN COSTS AND REVENUES
The following table sets forth the participation in costs and revenues
of the Partnership between the Managing General Partner and the
Participants. Gross revenues from the sale of the Partnership's gas
will be reduced by Landowner Royalties and any other burdens on the
Leases. (See "Proposed Activities - Acquisition of Leases - Interest of
Parties" and "Definitions".)
MANAGING
GENERAL
PARTNER (1) PARTICIPANTS (1)
------------ ----------------
PARTNERSHIP COSTS
Organization and Offering Costs (2) 100% 0%
Lease Costs (3) 100% 0%
Intangible Drilling Costs (4) 0% 100%
Tangible Costs (4) 51% 49%
Operating Costs, Administrative Costs,
Direct Costs and
All Other Costs (5)(6)(10) 31% 69%
PARTNERSHIP REVENUES
Interest Income (7) (7)
Equipment Proceeds (8) (8)
All other Revenues including
Production Revenues (5)(9)(11) 31% 69%
PARTICIPATION IN DEDUCTIONS
Intangible Drilling Costs 0% 100%
Depreciation 51% 49%
Depletion Allowances 31% 69%
(1) Although the Managing General Partner and its Affiliates may buy up
to 10% of the Units, the Managing General Partner currently does not
anticipate that it and its Affiliates will purchase any Units. Any
Units purchased by the Managing General Partner and its Affiliates
will not be applied towards the minimum Partnership Subscription
required for the Partnership to begin operations. To the extent of
any optional subscriptions the Managing General Partner and its
Affiliates are deemed Participants in the Partnership. (See "Terms
of the Offering".)
(2) If the Managing General Partner pays any Organization and Offering
Costs in excess of 15% of the Partnership Subscription, these
payments will be without recourse to the Partnership, and the
Managing General Partner will not be credited with these amounts
towards its required Capital Contribution.
(3) Leases will be contributed to the Partnership by the Managing
General Partner at its Cost, unless the Managing General Partner has
cause to believe that Cost is materially more than fair market
value, in which case the credit for the contribution will be made at
a price not in excess of fair market value, and applied towards its
required Capital Contribution to the Partnership.
(4) More specifically, Intangible Drilling Costs and the Participants'
share of Tangible Costs of a well or wells to be drilled and
completed with the proceeds of a Partnership closing will be charged
100% to the Participants who are admitted to the Partnership in the
closing and will not be reallocated to take into account other
Partnership closings. Although the proceeds of each Partnership
closing will be used to pay the costs of drilling different wells,
each Participant will pay the same amount of the costs regardless of
when he subscribes.
(5) If the Managing General Partner has to subordinate a portion of its
Partnership revenues then Operating Costs, Direct Costs,
Administrative Costs and all other Partnership costs not
specifically allocated will be charged to the parties in the same
ratio as the related production revenues are being credited. (See "-
Subordination of Portion of Managing General Partner's Net Revenue
Share," above and "Risk Factors - Special Risks of the Partnership
- - Risk That Borrowings by the Managing General Partner Could Reduce
Funds Available for Its Subordination Obligation".)
(6) Includes any other Partnership costs which are not otherwise
specifically allocated.
(7) Interest earned on Agreed Subscriptions before the Offering
Termination Date will be credited to the accounts of the respective
subscribers and paid approximately eight weeks after the Offering
Termination Date. If a subscription is refunded any interest
allocable thereto will also be refunded. After the Offering
Termination Date and until proceeds from the offering are invested
in the
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<PAGE> 83
Partnership's oil and gas operations any interest income from temporary
investments will be allocated pro rata to the Participants providing
the Agreed Subscription. All other interest income, including interest
earned on the deposit of operating revenues, will be credited as oil
and gas production revenues are credited.
(8) Proceeds from the sale or other disposition of equipment will be
credited to the parties charged with the costs of such equipment in
the ratio in which such costs were charged.
(9) (See "- Revenues - Proceeds from the Sale of Leases" and "-
Subordination of Portion of Managing General Partner's Net Revenue
Share," above and "- Allocation and Adjustment Among Participants,"
below.)
(10) The Managing General Partner's aggregate Capital Contributions to
the Partnership (including Leases contributed) will not be less than
24.5% of all Capital Contributions to the Partnership. Any payments
by the Managing General Partner in excess of the other costs charged
to it under the Partnership Agreement will be used to pay
Partnership costs which would otherwise be charged to the
Participants. These Capital Contributions must be paid by the
Managing General Partner at the time the costs are required to be
paid by the Partnership, but, in no event, later than December 31,
1999.
(11) The revenues from all Partnership Wells will be commingled, so
regardless of when a Participant subscribes he will share in the
revenues from all wells on the same basis as the other Participants.
Sales proceeds of Leases are subject to special provisions. (See "-
Revenues - Proceeds from the Sale of Leases", above.)
ALLOCATION AND ADJUSTMENT AMONG PARTICIPANTS
The Participants' share of revenues, gains, credits, costs, expenses,
losses and other charges and liabilities will be charged and credited,
as among them, pro rata in accordance with their respective Agreed
Subscriptions taking into account any Investor General Partner's status
as a defaulting Investor General Partner. (See "Summary of the
Offering - Actions to be Taken by Managing General Partner to Reduce
Risks of Additional Payments by Investor General Partners" and
"Capitalization and Source of Funds and Use of Proceeds".)
Subscription proceeds from each Partnership closing generally will be
used to drill different wells, however, each Participant will pay the
same amount of the costs regardless of when he subscribes. Also,
production revenues from all Partnership Wells will be commingled and
the Participants' share of the revenues will be allocated among all
Participants in accordance with their Agreed Subscriptions regardless
of which wells were paid for by the respective Participants. (See 5.01
of the Partnership Agreement.)
DISTRIBUTIONS
The Managing General Partner will review the accounts of the Partnership
at least quarterly to determine whether cash distributions are
appropriate and the amount to be distributed, if any. The Partnership
will distribute funds to the Managing General Partner and the
Participants allocated to their accounts which the Managing General
Partner deems unnecessary to be retained by the Partnership. In no event
will funds be advanced or borrowed for purposes of distributions, if the
amount of the distributions would exceed the Partnership's accrued and
received revenues for the previous four quarters, less paid and accrued
Operating Costs with respect to the revenues.
The determination of the revenues and costs will be made in accordance
with generally accepted accounting principles, consistently applied.
Cash distributions from the Partnership to the Managing General Partner
will only be made in conjunction with distributions to Participants and
only out of funds properly allocated to the Managing General Partner's
account. (See "Summary of Drilling and Operating Agreement.")
TAX ASPECTS
SUMMARY OF TAX OPINION
The Managing General Partner has received the tax opinion of Special
Counsel, Kunzman & Bollinger, Inc., Oklahoma City, Oklahoma, which is
included as Exhibit (8) to the Registration Statement. While Special
Counsel has prepared this section of the Prospectus entitled "Tax
Aspects," the opinion of Special Counsel will be limited to those
opinions set forth in its Tax Opinion which are summarized below. The
Tax Opinion represents only Special Counsel's best legal judgment, and
has no binding effect or official status. No assurance can be given that
the conclusions expressed in the opinion would be upheld by a court if
challenged by the IRS. The tax opinion is based upon Special Counsel's
review of the Registration Statement for Atlas-Energy for the Nineties-
Public #7 Ltd., corporate records, certificates, agreements, instruments
and other documents, existing statutes, rulings and regulations (which
are subject to change and could result in different tax consequences),
and certain representations from the Managing General Partner. Included
among such representations are the following:
(1) The Partnership Agreement will be duly executed and recorded.
(2) No election will be made for the Partnership to be excluded from
the application of the partnership provisions of the Code or
classified as a corporation for tax purposes.
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<PAGE> 84
(3) The Partnership will own record or legal title to the Working
Interest in all of its Prospects.
(4) The respective amounts that will be paid to the Managing General
Partner or its Affiliates pursuant to the Partnership Agreement
and the Drilling and Operating Agreement are amounts that would
ordinarily be paid for similar services in similar transactions
between Persons having no affiliation and dealing with each other
"at arms' length."
(5) The Partnership will elect to deduct currently all intangible
drilling and development costs.
(6) The Partnership will have a calendar year taxable year.
(7) The Drilling and Operating Agreement and any amendments thereto
entered into by and between the Managing General Partner and the
Partnership will be duly executed and will govern the drilling
and, if warranted, the completion and operation of the wells in
accordance with its terms.
(8) Based upon the Managing General Partner's experience and the
intended operations of the Partnership, the Managing General
Partner reasonably believes that the aggregate deductions,
including depletion deductions, and 350% of the aggregate
credits, if any, which will be claimed by the Managing General
Partner and the Participants, will not during the first five tax
years following the funding of the Partnership exceed twice the
amounts invested by the Managing General Partner and the
Participants, respectively.
(9) The Investor General Partner Units will not be converted to
Limited Partner interests before substantially all of the
Partnership Wells have been drilled and completed.
(10) The Units will not be traded on an established securities market.
In rendering its opinions, Special Counsel has further assumed that: (1)
each of the Participants has an objective to carry on the business of
the Partnership for profit; (2) any amount borrowed by a Participant and
contributed to the Partnership will not be borrowed from a Person who
has an interest in the Partnership (other than as a creditor) or a
related person, as defined in 465 of the Code, to a person (other than
the Participant) having such interest and the Participant will be
severally, primarily, and personally liable for such amount; and (3) no
Participant will have protected himself from loss for amounts
contributed to the Partnership through nonrecourse financing,
guarantees, stop loss agreements or other similar arrangements.
Special Counsel believes that its opinion letter addresses all material
federal income tax issues associated with an investment in the Units by
an individual Participant who is a resident citizen of the United
States. Special Counsel considers material those issues which would
affect significantly a Participant's deductions, credits or losses
arising from his investment in the Units and with respect to which,
under present law, there is a reasonable possibility of challenge by
the IRS, or those issues which are expected to be of fundamental
importance to a Participant but as to which a challenge by the IRS is
unlikely. The issues which involve a reasonable possibility of
challenge by the IRS have not been definitely resolved by statute,
rulings or regulations, as interpreted by judicial or administrative
bodies. Subject to the foregoing, however, in Special Counsel's opinion
it is more likely than not that the following tax treatment will be
upheld if challenged by the IRS and litigated.
PARTNERSHIP CLASSIFICATION. The Partnership will be classified as a
partnership for federal income tax purposes, and not as an association
taxable as a corporation; the Partnership, as such, will not pay any
federal income taxes; and all items of income, gain, loss, deduction,
and credit of the Partnership will be reportable by the Partners in the
Partnership. (See "- Partnership Classification".)
INTANGIBLE DRILLING AND DEVELOPMENT COSTS. Intangible drilling and
development costs ("Intangible Drilling Costs") paid by the Partnership
under the terms of bona fide drilling contracts for the Partnership's
wells will be deductible in the taxable year in which the payments are
made and the drilling services are rendered, assuming such amounts are
fair and reasonable consideration and subject to certain restrictions
summarized below (including basis and "at risk" limitations and the
passive activity loss limitation with respect to the Limited Partners).
(See "- Intangible Drilling and Development Costs" and "- Drilling
Contracts".)
PREPAYMENTS OF INTANGIBLE DRILLING AND DEVELOPMENT COSTS. Depending
primarily on when the Partnership Subscription is received, it is
anticipated that the Partnership will prepay in 1998 most, if not all,
of the intangible drilling and development costs related to Partnership
Wells the drilling of which will be commenced in 1999. Assuming that
such amounts are fair and reasonable, and based in part on the factual
assumptions set forth below, such prepayments of intangible drilling and
development costs will be deductible for the 1998 taxable year even
though all Working Interest owners in the well may not be required to
prepay such amounts, subject to certain restrictions summarized below
(including basis and "at risk" limitations, and the passive activity
loss limitation with respect to the Limited Partners). (See "- Drilling
Contracts".)
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<PAGE> 85
The foregoing opinion is based in part on the assumptions that: (1)
such costs will be required to be prepaid in 1998 for specified wells
pursuant to the Drilling and Operating Agreement; (2) pursuant to the
Drilling and Operating Agreement the wells are required to be, and
actually are, Spudded on or before March 31, 1999, and continuously
drilled thereafter until completed, if warranted, or abandoned; and (3)
the required prepayments are not refundable to the Partnership and any
excess prepayments are applied to intangible drilling and development
costs of substitute wells.
NOT A PUBLICLY TRADED PARTNERSHIP. Assuming that no more than 10% of the
Units are transferred in any taxable year of the Partnership (other than
in private transfers described in Treas. Reg. 1.7704-1(e)), it is more
likely than not that the Partnership will not be treated as a "publicly
traded partnership" under the Code. (See "- Limitations on Passive
Activities".)
PASSIVE ACTIVITY CLASSIFICATION. Oil and gas production income generated
by the Partnership's oil and gas properties held as Working Interests,
together with gain, if any, from the disposition of such properties and
allocable to Limited Partners who are individuals, estates, trusts,
closely held corporations or personal service corporations more likely
than not will be characterized as income from a passive activity which
may be offset by passive activity losses. Income or gain attributable to
investments of working capital of the Partnership will be characterized
as portfolio income, which cannot be offset by passive activity losses.
To the extent the Partnership's oil and gas properties are held as
Working Interests, it is more likely than not that the passive activity
limitations on losses under 469 will not be applicable to Investor
General Partners prior to the conversion of Investor General Partner
Units to Limited Partner interests. (See "- Limitations on Passive
Activities".)
TAX BASIS OF PARTICIPANT'S INTEREST. Each Participant's adjusted tax
basis in his Partnership interest will be increased by his total Agreed
Subscription. (See "- Tax Basis of Participants' Interests".)
AT RISK LIMITATION ON LOSSES. Each Participant initially will be "at
risk" to the full extent of his Agreed Subscription. (See "- `At Risk'
Limitation For Losses".)
DEPLETION ALLOWANCE, The greater of cost depletion or percentage
depletion will be available to qualified Participants as a current
deduction against Partnership income from oil and gas production
revenues on properties of the Partnership, subject to certain
restrictions summarized below. (See "- Depletion Allowance".)
MACRS. The Partnership's reasonable costs for recovery property
(tangible depreciable property used in a trade or business or held for
the production of income) which cannot currently be deducted but must be
capitalized will be eligible for cost recovery deductions under the
Modified Accelerated Cost Recovery System, generally over a seven year
"cost recovery period," subject to certain restrictions summarized below
(including basis and "at risk" limitations, and the passive activity
loss limitation in the case of the Limited Partners). (See "-
Depreciation - Modified Accelerated Cost Recovery System".)
AVAILABILITY OF CERTAIN DEDUCTIONS. Business expenses, including
payments for personal services actually rendered in the taxable year in
which accrued, which are reasonable, ordinary and necessary and do not
include amounts for items such as Lease acquisition costs, organization
and syndication fees and other items which are required to be
capitalized, are currently deductible. (See " - 1998 Expenditures," " -
Availability of Certain Deductions" and " - Partnership Organization and
Syndication Fees".)
ALLOCATIONS. Assuming the effect of the allocations of income, gain,
loss, deduction and credit (or items thereof) set forth in the
Partnership Agreement, including the allocations of basis and amount
realized with respect to oil and gas properties, is substantial in light
of a Participant's tax attributes that are unrelated to the Partnership,
it is more likely than not that such allocations will have "substantial
economic effect" and will govern each Participant's distributive share
of such items to the extent such allocations do not cause or increase
deficit balances in the Participants' Capital Accounts. (See "-
Allocations".)
AGREED SUBSCRIPTION. No gain or loss will be recognized by the
Participants on payment of their Agreed Subscriptions.
PROFIT MOTIVE. Based on the Managing General Partner's representation
that the Partnership will be conducted as described in the Prospectus,
it is more likely than not that the Partnership will possess the
requisite profit motive and will not be properly characterized as a tax
shelter for purposes of the tax shelter registration requirement. (See
"- Disallowance of Deductions Under Section 183 of the Code".)
IRS ANTI-ABUSE RULE. Based on the Managing General Partner's
representation that the Partnership will be conducted as described in
the Prospectus, it is more likely than not that the Partnership will not
be subject to the anti-abuse rule set forth in Treas. Reg. 1.701-2.
(See "- IRS Anti-Abuse Rule".)
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OVERALL EVALUATION OF TAX BENEFITS. Based on Special Counsel's
conclusion that substantially more than half of the material tax
benefits of the Partnership, in terms of their financial impact on a
typical investor, more likely than not will be realized if challenged by
the IRS, the tax benefits of the Partnership, in the aggregate, which
are a significant feature of an investment in the Partnership by a
typical original Participant more likely than not will be realized as
contemplated by the Prospectus.
IN GENERAL
The following is a summary of some of the principal features under
present federal income tax law which will apply to the Partnership and
typical Participants. However, there is no assurance that the present
laws or regulations will not be changed and adversely affect a
Participant. The IRS may challenge the deductions claimed by the
Partnership or a Participant, or the taxable year in which such
deductions are claimed, and no guaranty can be given that any such
challenge would not be upheld if litigated. The practical utility of the
tax aspects of any investment depends largely on the income tax position
of the particular Participant in the year in which items of income,
gain, loss, deduction or credit are properly taken into account in
computing his federal income tax liability. In addition, except as
otherwise noted, different tax considerations may apply to foreign
persons, corporations, partnerships, trusts and other prospective
Participants which are not treated as individuals for federal income tax
purposes. EACH PROSPECTIVE PARTICIPANT SHOULD SATISFY HIMSELF AS TO THE
TAX CONSEQUENCES OF PARTICIPATING IN THE PARTNERSHIP BY OBTAINING ADVICE
FROM HIS OWN TAX ADVISOR.
PARTNERSHIP CLASSIFICATION
For federal income tax purposes, a partnership is not a taxable entity
but rather a conduit through which all items of income, gain, loss,
deduction, credit and tax preference are passed through to the partners
and are required to be reported on their federal income tax returns for
the taxable years in which or with which the partnership's taxable year
ends. The Managing General Partner has received the opinion of Special
Counsel that, under currently existing laws, rules and regulations, all
of which are subject to change with or without retroactive application,
the Partnership will be treated as a partnership for federal income tax
purposes and not as an association taxable as a corporation. A
business entity with two or more members is classified for federal tax
purposes as either a corporation or a partnership. The term
corporation includes a business entity organized under a State statute
which describes the entity as a corporation, body corporate, body
politic, joint-stock company or joint-stock association. The
Partnership was formed under the Pennsylvania Revised Uniform Limited
Partnership Act which describes the Partnership as a "partnership".
Consequently, the Partnership is not required to be classified as a
corporation and will automatically be classified as a partnership
unless it affirmatively elects to be classified as a corporation. In
this regard, the Managing General Partner has represented that no
election for the Partnership to be classified as a corporation will be
filed with the IRS.
LIMITATIONS ON PASSIVE ACTIVITIES
Under the passive activity rules, all income of a taxpayer who is
subject to the rules is categorized as: (i) income from passive
activities such as limited partners' interests in a business; (ii)
active income (e.g., salary, bonuses, etc.); or (iii) portfolio income
(e.g., dividends, royalties and interest not derived in the ordinary
course of a trade or business). Losses generated by "passive
activities" can offset only passive income and cannot be applied against
active income or portfolio income.
Passive activities include any trade or business in which the taxpayer
does not materially participate. Material participation is defined as
involvement in the operations of the activity on a regular, continuous,
and substantial basis. Under the Partnership Agreement, Limited Partners
will not have material participation in the Partnership and generally
will be subject to the passive activity rules.
A taxpayer who holds a working interest in an oil and gas property that
is burdened with the cost of developing and operating the property is
excepted from the passive activity rules, whether or not he materially
participates in the activity. However, a taxpayer who holds a working
interest directly or indirectly through an entity (e.g., a limited
partnership interest or S corporation shares) which limits the liability
of the taxpayer with respect to such interest is not treated as owning a
working interest. Consequently, the exception is not available to
Limited Partners in the Partnership, but more likely than not the
exception will be available to Investor General Partners prior to their
conversion to Limited Partners to the extent the Partnership acquires
Working Interests in its Leases, except as noted above. Contractual
limitations on the liability of Investor General Partners under the
Partnership Agreement (e.g. insurance, limited indemnification, etc.)
will not prevent Investor General Partners from claiming deductions
under the working interest exception to the passive activity rules.
Suspended losses and credits may be carried forward (but not back) and
used to offset future years' passive activity income. A suspended loss
(but not a credit) is allowed in full when the entire interest is sold
to an unrelated third party in a taxable transaction. Upon such
disposition the excess of suspended losses and any loss from the
activity for the tax year (plus any loss on the sale) over net income or
gain for the tax year from all passive activities (determined without
regard to such losses) is not treated as a passive loss. Capital losses
are limited to the amount of capital gain, plus $3,000 (in the case of
married individuals filing joint returns).
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Net losses and credits of a partner from each publicly traded
partnership are suspended and carried forward to be netted against
income from that publicly traded partnership only. In addition, net
losses from other passive activities may not be used to offset net
income from a publicly traded partnership. However, it is more likely
than not that the Partnership will not be characterized as a publicly
traded partnership under the Code so long as no more than 10% of the
Units are transferred in any taxable year of the Partnership (other than
in private transfers described in Treas. Reg 1.7704-1(e)).
CHARACTERIZATION OF THE PARTNERSHIP'S INCOME. Income (e.g., interest)
earned on working capital is treated as portfolio income which cannot be
offset with passive losses by Limited Partners. "Portfolio income"
consists of (i) interest, dividends and royalties (unless earned in the
ordinary course of a trade or business); and (ii) gain or loss not
derived in the ordinary course of a trade or business on the sale of
property that generates portfolio income or is held for investment.
In the opinion of Special Counsel, it is more likely than not that the
Partnership's income from the Leases (excluding income attributable to
investment of working capital), held as Working Interests, together with
gain, if any, from the disposition of such property, will be
characterized as passive income rather than portfolio income with
respect to Limited Partners subject to the passive activity limitations.
CONVERSION FROM INVESTOR GENERAL PARTNER TO LIMITED PARTNER. Investor
General Partner Units will be converted to Limited Partner interests
after substantially all of the Partnership Wells have been drilled and
completed, which is anticipated to be in the late summer of 1999.
Thereafter, each Investor General Partner will be deemed a Limited
Partner in the Partnership and will enjoy the limited liability provided
to limited partners under the Revised Uniform Limited Partnership Act of
Pennsylvania with respect to his interest in the Partnership's oil and
gas properties.
Concurrently, the Investor General Partner will lose the availability of
the working interest exception to the passive activity limitations.
Except as provided below, an Investor General Partner's conversion of
his Partnership interest into a Limited Partner interest should not have
adverse tax consequences unless the Investor General Partner's share of
any Partnership liabilities is reduced as a result of the conversion. A
reduction in a partner's share of liabilities is treated as a
constructive distribution of cash to such partner, which reduces the
basis of the partner's interest in the partnership and is taxable to the
extent it exceeds such basis.
In addition, any net income from a Partnership Well allocable to an
Investor General Partner will continue to be characterized as non-
passive income which cannot be offset with passive losses, even after
such Investor General Partner has converted to Limited Partner status.
TAXABLE YEAR
The Partnership intends to adopt a calendar year taxable year.
1998 EXPENDITURES
It is anticipated that all of the Partnership's subscription proceeds
will be expended in 1998 and that the income and deductions generated
pursuant thereto will be reflected on the Participants' federal income
tax returns for that period. (See "Capitalization and Source of Funds
and Use of Proceeds" and "Participation in Costs and Revenues".)
Depending primarily on when the Partnership Subscription is received, it
is anticipated that the Partnership will prepay in 1998 most, if not
all, of the intangible drilling and development costs for wells the
drilling of which will be commenced in 1999. The deductibility in 1998
of such advance payments cannot be guaranteed. (See "- Drilling
Contracts," below.)
AVAILABILITY OF CERTAIN DEDUCTIONS
The ordinary and necessary expenses of carrying on any trade or
business, including a reasonable allowance for salaries or other
compensation for personal services actually rendered, are deductible in
the year incurred. The Managing General Partner has represented to
counsel that the amounts payable to the Managing General Partner and its
Affiliates, including the amounts paid to the Managing General Partner
or its Affiliates as general drilling contractor, are the amounts which
would ordinarily be paid for similar services in similar transactions.
(See "- Drilling Contracts," below.) The fees paid to the Managing
General Partner and its Affiliates will not be currently deductible to
the extent it is determined that they are in excess of reasonable
compensation, are properly characterized as organization or syndication
fees, other capital costs such as the acquisition cost of the Leases, or
not "ordinary and necessary" business expenses, or the services were
rendered in tax years other than the tax year in which such fees were
deducted by the Partnership. (See "- Partnership Organization and
Syndication Fees," below.) In the event of an audit, payments to the
Managing General Partner and its Affiliates by the Partnership will be
scrutinized by the IRS to a greater extent than payments to an unrelated
party.
INTANGIBLE DRILLING AND DEVELOPMENT COSTS
Assuming a proper election and subject to the passive activity loss
rules in the case of Limited Partners, each Participant will be entitled
to deduct his share of intangible drilling and development costs
("Intangible
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<PAGE> 88
Drilling Costs") which include items which do not have salvage value,
such as labor, fuel, repairs, supplies and hauling necessary to the
drilling of a well. (See "Participation in Costs and Revenues" and "-
Limitations on Passive Activities," above.) Such costs generally will be
subject to ordinary income recapture if a property is sold at a gain and
the amount to be recaptured is not reduced by the amount of additional
depletion that could have been claimed if such costs had been
capitalized and amortized. (See " - Sale of the Properties," below.)
The amount of the deduction for intangible drilling and development
costs is limited for integrated oil companies, i.e., (i) those taxpayers
who directly or through a related person engage in the retail sale of
oil or gas and whose gross receipts for the calendar year from such
activities exceed $5,000,000, or (ii) those taxpayers and related
persons who have refinery production in excess of 50,000 barrels on any
day during the taxable year. Also, productive-well intangible drilling
and development costs may subject a Participant to an alternative
minimum tax in excess of regular tax unless an election is made to
deduct them on a straight line basis over a 60 month period. (See "-
Minimum Tax - Tax Preferences," below.)
In the preparation of the Partnership's informational tax returns, the
Managing General Partner will allocate Partnership costs paid by the
Managing General Partner and the Participants among Intangible Drilling
Costs, Tangible Costs, Direct Costs, Administrative Costs, Organization
and Offering Costs and Operating Costs based upon guidance from advisors
to the Managing General Partner. The Managing General Partner has
allocated approximately 73.5% of the footage price to be paid by the
Partnership for a completed well in the Appalachian Basin to intangible
drilling and development costs. The IRS could challenge the
characterization of costs claimed by the Partnership to be deductible
intangible drilling and development costs and recharacterize such costs
as some other item which may be non-deductible; however, this would have
no effect on the allocation and payment of such costs under the
Partnership Agreement. Where a Lease is acquired subject to an
obligation to pay an excessive drilling price, such excess amounts may
not qualify as deductible intangible drilling and development costs but
may be treated as Lease acquisition costs or some other non-deductible
expense.
DRILLING CONTRACTS
The Partnership will enter into the Drilling and Operating Agreement
with the Managing General Partner or its Affiliates, as a third-party
general drilling contractor, to drill and complete the Partnership's
Development Wells on a footage basis of $39.15 per foot for each well
that is drilled and completed in the Appalachian Basin, and at a
competitive rate for wells, if any, drilled in other areas of the United
States. Under the footage drilling contracts for wells situated in the
Mercer County area of the Appalachian Basin, the Managing General
Partner anticipates that it will have reimbursement of general and
administrative overhead of $3,600 per well and a profit of approximately
15% per well assuming the well is drilled to 6,020 feet. However, the
actual cost of the drilling of the wells may be more or less than the
estimated amount, due primarily to the uncertain nature of drilling
operations. The Managing General Partner believes the Drilling and
Operating Agreement is at competitive rates in the proposed areas of
operation. Nevertheless, the amount of the profit realized by the
Managing General Partner under the drilling contract, if any, could be
challenged by the IRS as unreasonable and disallowed as a deductible
intangible drilling and development cost. (See "- Intangible Drilling
and Development Costs," above, "Proposed Activities" and
"Compensation".)
Depending primarily on when the Partnership Subscription is received, it
is anticipated that the Partnership will prepay in 1998 most, if not
all, of the intangible drilling and development costs for Partnership
Wells the drilling of which will be commenced in 1999. In Keller v.
Commissioner, 79 T.C. 7 (1982), aff'd. 725 F.2d 1173 (8th Cir. 1984),
the Tax Court applied a two-part test for the current deductibility of
prepaid intangible drilling and development costs: (1) the expenditure
must be a payment rather than a refundable deposit; and (2) the
deduction must not result in a material distortion of income taking into
substantial consideration the business purpose aspects of the
transaction. The Partnership will attempt to comply with the guidelines
set forth in Keller with respect to any prepaid intangible drilling
and development costs. The Drilling and Operating Agreement will require
the Partnership to prepay in 1998 intangible drilling and development
costs for specified wells the drilling of which will be commenced in
1999. Although the Partnership is not required to prepay completion
costs of a well prior to the time a decision has been made to complete
the well, it is anticipated that all Partnership Wells will be required
to be completed before an evaluation can be made as to their potential
productivity. Prepayments should not result in a loss of current
deductibility where there is a legitimate business purpose for the
required prepayment, the contract is not merely a sham to control the
timing of the deduction and there is an enforceable contract of economic
substance. The Drilling and Operating Agreement will require the
Partnership to prepay the intangible drilling and development costs of
the wells in order to enable the Operator to commence site preparation
for the wells, obtain suitable subcontractors at the then current prices
and insure the availability of equipment and materials. Under the
Drilling and Operating Agreement excess prepaid amounts, if any, will
not be refundable to the Partnership but will be applied to intangible
drilling and development costs to be incurred in drilling substitute
wells. Under Keller, such a provision for substitute wells should not
result in the prepayments being characterized as refundable deposits.
The likelihood that prepayments will be challenged by the IRS on the
grounds that there is no business purpose for the prepayment is
increased in the event prepayments are not required with respect to 100%
of the Working Interest. It is possible that less than 100% of the
Working Interest will be acquired by the Partnership in one or more
wells and prepayments may not be required of all holders of the Working
Interest. However, in the view of Special Counsel, a legitimate business
purpose for the required prepayments may exist under the guidelines set
forth in Keller, even though prepayment is not required, or actually
received, by the drilling contractor with respect to a portion of the
Working Interest.
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<PAGE> 89
In addition to the foregoing, a current deduction for prepaid intangible
drilling and development costs is available only if the drilling of the
wells is commenced before the close of the 90th day after the close of
the taxable year. The Managing General Partner will attempt to cause
prepaid Partnership Wells to be Spudded on or before March 31, 1999.
However, the Spudding of any Partnership Well may be delayed due to
circumstances beyond the control of the Partnership or the drilling
contractor. Such circumstances include the unavailability of drilling
rigs, weather conditions, inability to obtain drilling permits or access
right to the drilling site, or title problems. Due to the foregoing
factors, no guaranty can be given that all prepaid Partnership Wells
required by the Drilling and Operating Agreement to be Spudded on or
before March 31, 1999, will actually be commenced by such date. In that
event, deductions claimed in 1998 for prepaid intangible drilling and
development costs would be disallowed and deferred to the 1999 taxable
year.
No assurance can be given that on audit the IRS will not disallow the
current deductibility of a portion or all of any prepayments of
intangible drilling and development costs under the Partnership's
drilling contracts, thereby decreasing the amount of deductions
allocable to the Participants for the current taxable year, or that such
a challenge would not ultimately be sustained. In the event of
disallowance, the deduction will be available in the year the work is
actually performed.
DEPLETION ALLOWANCE
Proceeds from the sale of oil and gas production will constitute
ordinary income. A certain portion of such income will not be taxable by
virtue of the depletion allowance which permits the deduction from gross
income for federal income tax purposes of either the percentage
depletion allowance or the cost depletion allowance, whichever is
greater.
Cost depletion for any year is determined by dividing the adjusted tax
basis for the property by the total units of gas or oil expected to be
recoverable therefrom and then multiplying the resultant quotient by the
number of units actually sold during the year. Cost depletion cannot
exceed the adjusted tax basis of the property to which it relates.
Percentage depletion generally is available to taxpayers other than
integrated oil companies. (See "- Intangible Drilling and Development
Costs," above.) Percentage depletion generally is based on the
Participant's share of gross income from the oil and gas producing
property. Generally, percentage depletion is available with respect to 6
million cubic feet of average daily production of natural gas or 1,000
barrels of average daily production of domestic crude oil. The rate of
percentage depletion is 15%. However, percentage depletion for marginal
production increases 1% (up to a maximum increase of 10%) for each whole
dollar that the domestic wellhead price of crude oil for the immediately
preceding year is less than $20 per barrel (without adjustment for
inflation). The term "marginal production" includes oil and gas produced
from a domestic stripper well property, which is defined as any
property which produces a daily average of 15 or less equivalent
barrels of oil (90 MCF of natural gas) per producing well on the
property in the calendar year. The rate of percentage depletion for
marginal production presently is 17%. (See the model decline curve
included in the UEDC Geological Report in "Proposed Activities -
Information Regarding Currently Proposed Prospects".)
Also, percentage depletion may not exceed 100% of the net income from
each oil and gas property before the deduction for depletion and is
limited to 65% of the taxpayer's taxable income for a year computed
without regard to deductions for percentage depletion, net operating
loss carrybacks and capital loss carrybacks. With respect to marginal
properties, however, the 100% of net income property limitation is
suspended for 1998 and 1999. On disposition of an oil and gas property
there is recapture of the lesser of: (i) the amounts that were deducted
as intangible drilling and development costs rather than added to basis,
plus depletion deductions that reduced the basis of the property; or
(ii) the amount realized in the case of a sale, exchange or involuntary
conversion or fair market value in all other cases, minus the property's
adjusted basis.
Availability of percentage depletion must be computed separately for
each Participant and not by the Partnership, or for Participants as a
whole. Potential Participants are urged to consult their own tax
advisors with respect to the availability of percentage depletion to
them.
DEPRECIATION - MODIFIED ACCELERATED COST RECOVERY SYSTEM
Tangible Costs and the related depreciation deductions are allocated and
charged under the Partnership Agreement 51% to the Managing General
Partner and 49% to the Participants. The cost of most equipment placed
in service by the Partnership will be recovered through depreciation
deductions over a seven year cost recovery period, using the 200%
declining balance method, with a switch to straight-line to maximize
the deduction. Only a half-year of depreciation is allowed for the year
recovery property is placed in service or disposed of and in the case of
a short tax year, the MACRS deduction is prorated on a 12-month basis.
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<PAGE> 90
No distinction is made between new and used property and salvage value
is disregarded. An alternative depreciation system is used to compute
the depreciation preference subject to the alternative minimum tax
(using the 150% declining balance method, switching to straight-line,
for most personal property). (See " - Minimum Tax - Tax Preferences,"
below.) A taxpayer may elect to recover the cost of assets using the
straight-line method or the alternative depreciation system for regular
tax purposes to avoid creating a tax preference. All gain on a
disposition of tangible personal property is treated as ordinary income
to the extent of MACRS deductions claimed by the taxpayer and deductions
allowed under 179 of the Code, which provides an election to expense up
to $18,500 of the cost of certain tangible personal property placed in
service in 1998. The deductible amount is reduced by the cost of
qualifying property in excess of $200,000 and cannot exceed the taxable
income derived from the active conduct by the taxpayer of the trade or
business in which the property is used. These limitations are applied at
both the partnership and the partner level.
LEASEHOLD COSTS AND ABANDONMENT
The costs of acquiring oil and gas Lease interests, together with the
related cost depletion deduction and any abandonment loss, are allocated
under the Partnership Agreement 100% to the Managing General Partner,
which will contribute the Leases to the Partnership as a part of its
Capital Contribution.
TAX BASIS OF PARTICIPANTS' INTERESTS
The adjusted basis for federal income tax purposes of a Participant's
interest in the Partnership will be adjusted (but not below zero) for
any gain or loss to the Participant from a disposition by the
Partnership of an oil or gas property, and will be increased by his cash
subscription payment and his share of Partnership income.
The adjusted basis of a Participant's interest in the Partnership will
be reduced by: his share of Partnership losses; his depletion deduction
(but not below zero); and cash distributions from the Partnership to
him. The reduction in a Participant's share of Partnership liabilities
is considered a cash distribution. Should cash distributions exceed the
tax basis of the Participant's interest in the Partnership, taxable gain
would result to the extent of the excess.
A Participant's distributive share of Partnership loss is allowable only
to the extent of the adjusted basis of such Participant's interest in
the Partnership at the end of the Partnership's taxable year.
DISTRIBUTIONS FROM A PARTNERSHIP
Generally, a cash distribution from a partnership to a partner in excess
of the adjusted basis of such partner's interest in the partnership
immediately before the distribution is treated as gain from the sale or
exchange of his interest in the partnership to the extent of the excess.
No loss is recognized by the partners on these types of distributions.
Other distributions of cash, disproportionate distributions of
property, and liquidating distributions may result in taxable gain
or loss. (See "- Disposition of Partnership Interests" and "-
Termination of a Partnership," below.)
SALE OF THE PROPERTIES
Generally, net long-term capital gains of a noncorporate taxpayer on
the sale of assets held more than a year are taxed at a maximum rate of
20% (10% if they would be subject to tax at a rate of 15% if they were
not eligible for long-term capital gains treatment). These rates also
apply for purposes of the alternative minimum tax. (See " - Minimum
Tax - Tax Preferences", below.) The annual capital loss limitation for
noncorporate taxpayers is the amount of capital gains plus the lesser
of $3,000 ($1,500 for married persons filing separate returns) or the
excess of capital losses over capital gains.
Gains or losses from sales of oil and gas properties held for more than
twelve months would be, except to the extent of depreciation recapture
on equipment and recapture of any intangible drilling and development
costs, depletion deductions and certain other losses, treated as a long-
term capital gain, while a net loss will be an ordinary deduction. Other
gains and losses on sales of oil and gas properties will generally
result in ordinary gains or losses.
DISPOSITION OF PARTNERSHIP INTERESTS
The sale or exchange of all or part of a Participant's interest in the
Partnership held by him for more than twelve months will generally
result in a recognition of long-term capital gain or loss except to the
extent of ordinary income or loss, if any, from Partnership 751 assets
(which consist of unrealized receivables or inventory). See " - Sale of
the Properties," above, for the tax rates on capital gains. In the
event the interest is held for twelve months or less, such gain or loss
will generally be short-term gain or loss. The recapturable portions of
depreciation, depletion and intangible drilling and development costs
constitute ordinary income. In addition to gain from a passive
activity, a portion of any gain recognized by a Limited Partner on the
sale or other disposition of his interest in the Partnership will be
characterized as portfolio income under the passive activity rules to
the extent the gain is itself attributable to portfolio income (e.g.
interest on investment of working capital). A Participant's pro rata
share of the Partnership's nonrecourse liabilities, if any, as of the
date of the sale or exchange must be included in the amount realized.
Therefore, the gain recognized may result in a tax liability greater
than the cash proceeds, if any, from such disposition. A gift of an
interest in the Partnership may result in federal and/or state income
tax and gift tax liability of the donor.
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<PAGE> 91
A Participant who sells or exchanges all or part of his interest in the
Partnership is required by the Code to notify the Partnership within 30
days or by January 15 of the following year, if earlier. Other
dispositions of a Participant's interest, including a repurchase of the
interest by the Managing General Partner, may or may not result in
recognition of taxable gain. However, no gain should be recognized by an
Investor General Partner whose interest in the Partnership is converted
to a Limited Partner interest so long as there is no change in his
share of the Partnership's liabilities or certain Partnership assets as
a result of the conversion. No disposition of an interest in the
Partnership (including repurchase of the interest by the Managing
General Partner) should be made by any Participant prior to consultation
with his tax advisor.
MINIMUM TAX - TAX PREFERENCES
For taxpayers other than integrated oil companies (see "- Intangible
Drilling and Development Costs"), the 1992 National Energy Bill
repealed: (1) the preference for excess intangible drilling and
development costs; and (2) the excess percentage depletion preference
for oil and gas. The repeal of the excess intangible drilling and
development costs preference, however, may not result in more than a 40%
reduction in the amount of the taxpayer's alternative minimum taxable
income computed as if the excess intangible drilling and development
costs preference had not been repealed. These rules are summarized
below.
The alternative minimum tax is intended to insure that no one with
substantial income can avoid tax liability by using deductions and
credits, including the deductions for intangible drilling and
development costs and accelerated depreciation. Generally, the
alternative minimum tax rate for individuals is 26% on alternative
minimum taxable income up to $175,000 ($87,500 for married individuals
filing separate returns) and 28% thereafter. See " - Sale of the
Properties," above, for the tax rates on capital gains. Regular tax
personal exemptions are not available for purposes of the alternative
minimum tax, however, alternative minimum taxable income may be reduced
by certain itemized deductions, exemption amounts and net operating
losses.
Under the prior rules, the amount of intangible drilling and development
costs which is not deductible for alternative minimum tax purposes is
the excess of the "excess intangible drilling costs" over 65% of net
income from oil and gas properties. Excess intangible drilling costs is
the regular intangible drilling and development costs deduction minus
the amount that would have been deducted under 120-month straight-line
amortization, or (at the taxpayer's election) under the cost depletion
method. There is no preference for costs of nonproductive wells and with
respect to productive wells taxpayers can elect to amortize the year's
intangible drilling and development costs ratably over a 60 month period
for all tax purposes and then such costs are not treated as an item of
tax preference.
The likelihood of a Participant incurring, or increasing, any minimum
tax liability by virtue of an investment in the Partnership must be
determined on an individual basis, and requires consultation by a
prospective Participant with his personal tax advisor.
LIMITATIONS ON DEDUCTION OF INVESTMENT INTEREST
Investment interest is deductible by a noncorporate taxpayer only to the
extent of net investment income each year (with an indefinite
carryforward of disallowed investment interest). An Investor General
Partner's share of any interest expense incurred by the Partnership will
be subject to the investment interest limitation. In addition, an
Investor General Partner's income and losses (including intangible
drilling and development costs) from the Partnership will be considered
investment income and losses. Losses allocable to an Investor General
Partner will reduce his net investment income and may affect the
deductibility of his investment interest expense, if any.
No item of income or expense subject to the passive activity loss rules
is treated as investment income or investment expense.
ALLOCATIONS
The Partnership Agreement allocates to each Partner his share of the
income, gains, credits and deductions (including the deductions for
intangible drilling and development costs and depreciation) generated by
the Partnership. (See "Participation in Costs and Revenues".) The
Capital Accounts of the Partners are adjusted to reflect such
allocations and the Capital Accounts, as adjusted, will be given effect
in distributions made to the Partners upon liquidation of the
Partnership or any Partner's interest in the Partnership. Generally, a
Participant's Capital Account is increased by the amount of money he
contributes to the Partnership and allocations to him of income and
gain, and decreased by the value of property or cash distributed to him
and allocations to him of loss and deductions.
It should be noted that each Partner's share of Partnership items of
income, gain, loss, deduction and credit must be taken into account
whether or not there is any distributable cash. A Participant's share of
Partnership revenues applied to the repayment of loans or the reserve
for plugging wells will be included in his gross income in a manner
analogous to an actual distribution of the income to him. Thus, a
Participant may have taxable income from the Partnership for a
particular year in excess of any cash distributions from the Partnership
to him with respect to that year. To the extent the Partnership has cash
available for distribution, however, it is the Managing General
Partner's policy that Partnership distributions will not be less than
the Participants' estimated income tax liability with respect to
Partnership income.
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No assurance can be given that, on audit, the IRS will not take the
position that a portion of the deductions allocable to the Participants
is not allowable to them. If such a position is taken, there can be no
assurance that any resulting deficiency will not ultimately be
sustained. However, assuming the effect of the special allocations set
forth in the Partnership Agreement is substantial in light of a
Participant's tax attributes that are unrelated to the Partnership, in
the opinion of Special Counsel it is more likely than not that such
allocations will govern each Participant's distributive share of such
items to the extent such allocations do not cause or increase deficit
balances in the Participants' Capital Accounts.
If any allocation under the Partnership Agreement is not recognized for
federal income tax purposes, each Participant's distributive share of
the items subject to such allocation generally will be determined in
accordance with his interest in the Partnership, determined by
considering relevant facts and circumstances. To the extent such
deductions, as allocated by the Partnership Agreement, exceed deductions
which would be allowed pursuant to such a reallocation Participants may
incur a greater tax burden.
"AT RISK" LIMITATION FOR LOSSES
Subject to the limitations on "passive losses" generated by the
Partnership in the case of Limited Partners and a Participant's basis in
the Partnership, each Participant may use his share of the Partnership's
losses to offset income from other sources. (See "- Limitations on
Passive Activities" and " - Tax Basis of Participants' Interests,"
above.) However, any individual taxpayer who sustains a loss in
connection with the Partnership may deduct the loss only to the extent
of the amount he has "at risk" in the Partnership at the end of a
taxable year. The amount "at risk" is limited to the amount of money and
the adjusted basis of other property the taxpayer has contributed to the
activity, and any amount he has borrowed with respect thereto for which
he is personally liable or with respect to which he has pledged property
other than property used in the activity; limited, however, to the net
fair market value of his interest in the pledged property. However,
amounts borrowed will not be considered "at risk" if the amounts are
borrowed from any person who has an interest (other than as a creditor)
in the activity or from a related person to a person (other than the
taxpayer) having such an interest.
In addition, the amount the taxpayer has "at risk" may not include the
amount of any loss that the taxpayer is protected against through
nonrecourse loans, guarantees, stop loss agreements, or other similar
arrangements. The amount of any loss that is disallowed in any taxable
year will be carried over to the first succeeding taxable year, to the
extent a Participant is "at risk." Further, a taxpayer's "at risk"
amount in subsequent taxable years with respect to the activity involved
will be reduced by that portion of the loss which is allowable as a
deduction.
Participants' Agreed Subscriptions are funded by a payment of cash
(usually "at risk").
PARTNERSHIP ORGANIZATION AND SYNDICATION FEES
Expenses connected with the sale of interests in a partnership are not
deductible. Although certain organization expenses of a partnership may
be deducted and amortized over a period of not less than 60 months, such
expenses are charged 100% to the Managing General Partner as part of the
Partnership's Organization and Offering Costs and any related deductions
will be allocated to the Managing General Partner.
TAX ELECTIONS
The Code permits partnerships to elect to adjust the basis of
partnership property on the transfer of an interest in a partnership by
sale or exchange or on the death of a partner, and on the distribution
of property by the partnership to a partner (the 754 election). The
general effect of such an election is that transferees of the
partnership interests are treated, for purposes of depreciation and
gain, as though they had acquired a direct interest in the partnership
assets and the partnership is treated for such purposes, upon certain
distributions to partners, as though it had newly acquired an interest
in the partnership assets and therefore acquired a new cost basis for
such assets. The Partnership Agreement provides that the Partnership may
make the 754 election. Taxpayers may elect to capitalize and amortize
"start-up expenditures" over a 60-month period. Such items include
amounts: (1) paid or incurred in connection with: (i) investigating and
creating an active trade or business; or (ii) any activity engaged in
for profit and for the production of income before the day on which the
active trade or business begins, in anticipation of such activity
becoming an active trade or business; and (2) which would be allowed as
a deduction if paid or incurred in connection with the expansion of an
existing business. Start-up expenditures do not include amounts paid or
incurred in connection with the sale of partnership interests. If it is
ultimately determined that any of the Partnership's expenses constituted
start-up expenditures and not deductible business expenses, the
Partnership's deductions would be reduced.
DISALLOWANCE OF DEDUCTIONS UNDER SECTION 183 OF THE CODE
A Participant's ability to deduct his share of the Partnership's losses
could be lost if the Partnership lacks the appropriate profit motive as
determined from an examination of all facts and circumstances at the
time. There is a presumption that an activity is engaged in for profit,
if, in any three of five consecutive taxable years, the gross income
derived from such activity exceeds the deductions attributable to such
activity. Thus, if the Partnership fails to show a profit in at least
three out of five consecutive years, this presumption will not be
available. In that instance, the possibility that the IRS could
successfully challenge the deductions claimed by a Participant would be
substantially increased.
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The fact that the possibility of ultimately obtaining profits is
uncertain, standing alone, does not appear to be sufficient grounds for
the denial of losses. Based on the Managing General Partner's
representation that the Partnership will be conducted as described in
this Prospectus, in the opinion of Special Counsel it is more likely
than not that the Partnership will possess the requisite profit motive.
TERMINATION OF A PARTNERSHIP
A partnership will be considered as terminated for federal income tax
purposes if within a twelve month period there is a sale or exchange of
50% or more of the total interest in partnership capital and profits. A
partner will realize taxable gain on a termination of the partnership to
the extent that money regarded as distributed to him exceeds the
adjusted basis of his partnership interest. The conversion of Investor
General Partner Units to Limited Partner interests will not result in a
termination of the Partnership.
LACK OF REGISTRATION AS A TAX SHELTER
An organizer of a "tax shelter" must obtain an identification number
which must be included on the tax returns of investors in the tax
shelter. For this purpose, a "tax shelter" includes investments with
respect to which any person could reasonably infer that the ratio that
(1) the aggregate amount of the potentially allowable deductions and
350% of the potentially allowable credits with respect to the investment
during the first five years of the investment bears to (2) the amount of
money and the adjusted basis of property contributed to the investment
exceeds 2 to 1, determined without reduction for gross income derived
from the investment.
The Managing General Partner does not believe that the Partnership will
have a tax shelter ratio greater than 2 to 1. Also, because the purpose
of the Partnership is to locate, produce and market natural gas on an
economic basis, the Managing General Partner does not believe that the
Partnership will be a "potentially abusive tax shelter." Accordingly,
the Managing General Partner does not intend to cause the Partnership to
register with the IRS as a tax shelter.
If it is subsequently determined that the Partnership was required to be
registered with the IRS as a tax shelter, the Managing General Partner
would be subject to certain penalties and each Participant would be
liable for a $250 penalty for failure to include the tax shelter
registration number on his tax return, unless such failure was due to
reasonable cause. A Participant also would be liable for a penalty of
$100 for failing to furnish the tax shelter registration number to any
transferee of his interest in the Partnership. However, based on the
representations of the Managing General Partner, Special Counsel has
expressed the opinion that the Partnership, more likely than not, is not
required to register with the IRS as a tax shelter.
Issuance of a registration number does not indicate that an investment
or the claimed tax benefits have been reviewed, examined, or approved by
the IRS.
INVESTOR LISTS. Any person who organizes a tax shelter required to be
registered with the IRS must maintain a list of each investor in the tax
shelter. For the reasons described above, the Managing General Partner
does not believe the Partnership is a tax shelter for this purpose. If
this determination is wrong there is a penalty of $50 for each person,
unless the failure is due to reasonable cause.
TAX RETURNS AND AUDITS
IN GENERAL. The tax treatment of all partnership items is generally
determined at the partnership, rather than the partner, level; and the
partners are generally required to treat partnership items on their
individual returns in a manner which is consistent with the treatment of
such partnership items on the partnership return.
Generally, the IRS must conduct an administrative determination as to
partnership items at the partnership level before conducting deficiency
proceedings against a partner, and the partners must file a request for
an administrative determination before filing suit for any credit or
refund. The period for assessing tax against a Partner attributable to a
partnership item may be extended as to all partners by agreement between
the IRS and the Managing General Partner, which will serve as the
Partnership's representative ("Tax Matters Partner") in all
administrative and judicial proceedings conducted at the partnership
level. The Tax Matters Partner generally may enter into a settlement on
behalf of, and binding upon, partners owning less than a 1% profits
interest in partnerships having more than 100 partners. In addition, a
partnership with at least 100 partners may elect to be governed under
simplified tax reporting and audit rules as an "electing large
partnership". These rules also facilitate the matching of partnership
items with individual partner tax returns by the IRS. The Managing
General Partner does not anticipate that the Partnership will make this
election. By executing the Partnership Agreement, each Participant
agrees that he will not form or exercise any right as a member of a
notice group and will not file a statement notifying the IRS that the
Tax Matters Partner does not have binding settlement authority.
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TAX RETURNS. The preparation and filing of each Participant's federal,
state and local income tax returns are the responsibility of the
Participant. The Partnership will provide each Participant with the tax
information applicable to his investment in the Partnership necessary to
prepare such returns; however, the treatment of the tax attributes of
the Partnership may vary among Participants. The Managing General
Partner, its Affiliates and Special Counsel assume no responsibility for
the tax consequences of this transaction to a Participant, nor for the
disallowance of any proposed deductions. EACH PARTICIPANT IS URGED TO
SEEK QUALIFIED, PROFESSIONAL ASSISTANCE IN THE PREPARATION OF HIS
FEDERAL, STATE AND LOCAL TAX RETURNS.
PENALTIES AND INTEREST
IN GENERAL. Interest (based on the applicable Federal short-term rate
plus 3 percentage points) is charged on underpayments of tax and various
civil and criminal penalties are included in the Code.
PENALTY FOR NEGLIGENCE OR DISREGARD OF RULES OR REGULATIONS. If any
portion of an underpayment of tax is attributable to negligence or
disregard of rules or regulations, 20% of such portion is added to the
tax. Negligence is strongly indicated if a partner fails to treat
partnership items on his tax return in a manner that is consistent with
the treatment of such items on the partnership's return or to notify the
IRS of the inconsistency.
VALUATION MISSTATEMENT PENALTY. There is an addition to tax of 20% of
the amount of any underpayment of tax of $5,000 or more which is
attributable to a substantial valuation misstatement. There is a
substantial valuation misstatement if the value or adjusted basis of any
property claimed on a return is 200% or more of the correct amount; or
if the price for any property or services (or for the use of property)
claimed on a return is 200% or more (or 50% or less) of the correct
price. If there is a gross valuation misstatement (400% or more of the
correct value or adjusted basis or the undervaluation is 25% or less of
the correct amount) the penalty is 40%.
SUBSTANTIAL UNDERSTATEMENT PENALTY. There is also an addition to tax of
20% of any underpayment if the difference between the tax required to be
shown on the return over the tax actually shown on the return, exceeds
the greater of 10% of the tax required to be shown on the return, or
$5,000.
The amount of any understatement generally will be reduced to the extent
it is attributable to the tax treatment of an item supported by
substantial authority, or adequately disclosed on the taxpayer's return
and there is a reasonable basis for the tax treatment of such item by
the taxpayer. However, in the case of "tax shelters," the understatement
may be reduced only if the tax treatment of an item attributable to a
tax shelter was supported by substantial authority and the taxpayer
established that he reasonably believed that the tax treatment claimed
was more likely than not the proper treatment. A "tax shelter" for this
purpose is any entity which has as a significant purpose the avoidance
or evasion of federal income tax.
IRS ANTI-ABUSE RULE. Under Treas. Reg. 1.701-2, if a principal purpose
of a partnership is to reduce substantially the partners' federal income
tax liability in a manner that is inconsistent with the intent of the
partnership rules of the Code, based on all the facts and circumstances,
the IRS is authorized to remedy the abuse. For illustration purposes,
the following factors may indicate that a partnership is being used in a
prohibited manner: (i) the partners' aggregate federal income tax
liability is substantially less than had the partners owned the
partnership's assets and conducted its activities directly; (ii) the
partners' aggregate federal income tax liability is substantially less
than if purportedly separate transactions are treated as steps in a
single transaction; (iii) one or more partners are needed to achieve the
claimed tax results and have a nominal interest in the partnership or
are substantially protected against risk; (iv) substantially all of the
partners are related to each other; (v) income or gain are allocated to
partners who are not expected to have any federal income tax liability;
(vi) the benefits and burdens of ownership of property nominally
contributed to the partnership are retained in substantial part by the
contributing party; and (vii) the benefits and burdens of ownership of
partnership property are in substantial part shifted to the distributee
partners before or after the property is actually distributed to the
distributee partners. Based on the Managing General Partner's
representation that the Partnership will be conducted as described in
this Prospectus, in the opinion of Special Counsel it is more likely
than not that the Partnership will not be subject to the anti-abuse
rule set forth in Treas. Reg. 1.701-2.
STATE AND LOCAL TAXES
The Partnership will operate in states and localities which impose a tax
on its assets or its income, or on each Participant. Deductions which
are available to Participants for federal income tax purposes may not be
available for state or local income tax purposes.
Under Pennsylvania law, the Partnership is required to withhold state
income tax at the rate of 2.8% of Partnership income allocable to
Participants who are not residents of Pennsylvania. Prospective
Participants should consult with their own tax advisors concerning the
possible effect of various state and local taxes on their personal tax
situations.
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SEVERANCE, FRANCHISE, AND AD VALOREM (REAL ESTATE) TAXES
The Partnership may incur various ad valorem or severance taxes imposed
by state or local taxing authorities. Currently, there is no such tax
liability in Mercer County, Pennsylvania.
SOCIAL SECURITY BENEFITS AND SELF-EMPLOYMENT TAX
A Limited Partner's share of income or loss from the Partnership is
excluded from the definition of "net earnings from self-employment." No
increased benefits under the Social Security Act will be earned by
Limited Partners and if any Limited Partners are currently receiving
Social Security benefits, their shares of Partnership taxable income
will not be taken into account in determining any reduction in benefits
because of "excess earnings." An Investor General Partner's share of
income or loss from the Partnership will constitute "net earnings from
self-employment" for these purposes. For 1998 the ceiling for social
security tax of 12.4% is $68,400 and there is no ceiling for medicare
tax of 2.9%. Self-employed individuals can deduct one-half of their
self-employment tax.
FOREIGN PARTNERS
The Partnership will be required to withhold and pay to the IRS tax at
the highest rate under the Code applicable to Partnership income
allocable to foreign partners, even if no cash distributions are made
to such partners. A purchaser of a foreign Partner's Units may be
required to withhold a portion of the purchase price and the Managing
General Partner may be required to withhold with respect to taxable
distributions of real property to a foreign Partner. The withholding
requirements described above do not obviate United States tax return
filing requirements for foreign Partners. In the event of
overwithholding, a foreign Partner must file a United States tax return
to obtain a refund.
ESTATE AND GIFT TAXATION
There is no federal tax on lifetime or testamentary transfers of
property between spouses. The gift tax annual exclusion is $10,000 per
donee. The maximum estate and gift tax rate is 55% (subject to a 5%
surtax on amounts in excess of $10,000,000); and estates of $625,000
(which increases in stages to $1,000,000 by 2006) or less generally are
not subject to federal estate tax. In the event of the death of a
Participant, the fair market value of his interest as of the date of
death (or as of the alternate valuation date) will be included in his
estate for federal estate tax purposes. The decedent's heirs will, for
federal income tax purposes, take as their basis for the interest the
value as so determined for federal estate tax purposes.
CHANGES IN LAW
The Partnership and the Participants could be adversely affected by any
further changes in tax laws that may result through future Congressional
action, Tax Court or other judicial decisions, or interpretations by the
IRS. The Managing General Partner cannot predict what, if any, changes
in the tax law may become law in the future or even if adopted, would
apply to the Partnership.
THE FOREGOING ANALYSIS IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX
PLANNING. IT IS NOT POSSIBLE TO PREDICT THE EFFECT OF THE TAX LAWS ON
INDIVIDUAL PARTICIPANTS. ACCORDINGLY, EACH PARTICIPANT IS URGED TO SEEK,
AND SHOULD DEPEND UPON, THE ADVICE OF HIS OWN TAX ADVISORS WITH RESPECT
TO HIS INVESTMENT IN THE PARTNERSHIP WITH SPECIFIC REFERENCE TO HIS OWN
TAX SITUATION AND POTENTIAL CHANGES IN THE APPLICABLE LAW.
DEFINITIONS
TERMS DEFINED
As used in this Prospectus, the following terms have the meanings
hereinafter set forth:
(1) "Administrative Costs" means all customary and routine expenses
incurred by the Sponsor for the conduct of Partnership
administration, including: legal, finance, accounting, secretarial,
travel, office rent, telephone, data processing and other items of a
similar nature. No Administrative Costs charged will be duplicated
under any other category of expense or cost. No portion of the
salaries, benefits, compensation or remuneration of controlling
persons of the Managing General Partner will be reimbursed by the
Partnership as Administrative Costs. Controlling persons include
directors, executive officers and those holding five percent or more
equity interest in the Managing General Partner or a person having
power to direct or cause the direction of the Managing General
Partner, whether through the ownership of voting securities, by
contract, or otherwise.
(2) "Administrator" means the official or agency administering the
securities laws of a state.
(3) "Affiliate" means with respect to a specific person:
(i) any person directly or indirectly owning, controlling, or
holding with power to vote ten percent or more of the
outstanding voting securities of such specified person;
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<PAGE> 96
(ii) any person ten percent or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or
held with power to vote, by such specified person;
(iii) any person directly or indirectly controlling, controlled by,
or under common control with such specified person;
(iv) any officer, director, trustee or partner of such specified
person; and
(v) if such specified person is an officer, director, trustee or
partner, any person for which such person acts in any such
capacity.
(4) "AIC, Inc." means AIC, Inc., a wholly owned subsidiary of Atlas
Group and the sole shareholder of Atlas, whose principal executive
offices are located at 311 Rouser Road, Moon Township, Pennsylvania,
15108.
(5) "Agreed Subscription" means that amount so designated on the
Subscription Agreement executed by the Participant, or, in the case
of the Managing General Partner, its subscription under 3.03(b) and
its subsections of the Partnership Agreement.
(6) "Anthem Securities" means Anthem Securities, Inc. whose principal
executive offices are located at 311 Rouser Road, P.O. Box 926,
Coraopolis, Pennsylvania 15108-0926.
(7) "Assessments" means additional amounts of capital which may be
mandatorily required of or paid voluntarily by a Participant beyond
his subscription commitment.
(8) "Atlas" means Atlas Resources, Inc., a Pennsylvania corporation,
whose principal executive offices are located at 311 Rouser Road,
Moon Township, Pennsylvania 15108.
(9) "Atlas America, Inc." means Atlas America, Inc., a Pennsylvania
Corporation, whose principal executive offices are located at 311
Rouser Road, Moon Township, Pennsylvania 15108.
(10) "Atlas Group" means The Atlas Group, Inc., a Pennsylvania
corporation, whose principal executive offices are located at 311
Rouser Road, Moon Township, Pennsylvania 15108. Atlas Group was
formerly known as AEGH or AEG Holdings, Inc.
(11) "Atlas Group" means The Atlas Group, Inc., a Pennsylvania Corporation
which was formerly known as AEGH, or AEG Holding, Inc., and has been merged
into "Atlas America, Inc.".
(12) "Capital Account" or "account" means the account established for
each party to the Partnership Agreement, maintained as provided in
5.02 and its subsections of the Partnership Agreement.
(13) "Capital Contribution" means the amount agreed to be contributed to
the Partnership by a party pursuant to 3.04 and 3.05 and their
subsections of the Partnership Agreement.
(14) "Carried Interest" means an equity interest in a program issued to a
person without consideration, in the form of cash or tangible
property, in an amount proportionately equivalent to that received
from Participants.
(15) "Code" means the Internal Revenue Code of 1986, as amended.
(16) "Cost", when used with respect to the sale of property to the
Partnership, means:
(i) the sum of the prices paid by the seller to an unaffiliated
person for such property, including bonuses;
(ii) title insurance or examination costs, brokers' commissions,
filing fees, recording costs, transfer taxes, if any, and like
charges in connection with the acquisition of such property;
(iii) a pro rata portion of the seller's actual necessary and
reasonable expenses for seismic and geophysical services; and
(iv) rentals and ad valorem taxes paid by the seller with respect to
such property to the date of its transfer to the buyer,
interest and points actually incurred on funds used to acquire
or maintain such property, and such portion of the seller's
reasonable, necessary and actual expenses for geological,
engineering, drafting, accounting, legal and other like
services allocated to the property cost in conformity with
generally accepted accounting principles and industry
standards, except for expenses in connection with the past
drilling of wells which are not producers of sufficient
quantities of oil or gas to make commercially reasonable their
continued operations, and provided that the expenses enumerated
in this subsection (iv) shall have been incurred not more than
36 months prior to the purchase by the Partnership.
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<PAGE> 97
"Cost", when used with respect to services, means the reasonable,
necessary and actual expense incurred by the seller on behalf of the
Partnership in providing such services, determined in accordance
with generally accepted accounting principles.
As used elsewhere, "Cost" means the price paid by the seller in an
arm's-length transaction.
(17) "Dealer-Manager" means Anthem Securities, an Affiliate of the
Managing General Partner and the broker-dealer which will manage the
offering and sale of the Units in all states other than Minnesota
and New Hampshire, and Bryan Funding, Inc., the broker-dealer which
will manage the offering and sale of Units in Minnesota and New
Hampshire.
(18) "Development Drilling" means drilling a Development Well.
(19) "Development Well" means a well drilled within the proved area of
an oil or gas reservoir to the depth of a stratigraphic Horizon
known to be productive.
(20) "Direct Costs" means all actual and necessary costs directly
incurred for the benefit of the Partnership and generally
attributable to the goods and services provided to the Partnership
by parties other than the Sponsor or its Affiliates. Direct Costs
shall not include any cost otherwise classified as Organization and
Offering Costs, Administrative Costs, Intangible Drilling Costs,
Tangible Costs, Operating Costs or costs related to the Leases.
Direct Costs may include the cost of services provided by the
Sponsor or its Affiliates if the services are provided pursuant to
written contracts and in compliance with 4.03(d)(7) of the
Partnership Agreement.
(21) "Drilling and Operating Agreement" means the proposed Drilling and
Operating Agreement between the Managing General Partner, Atlas
Energy or an Affiliate as Operator, and the Partnership as
Developer, a copy of the proposed form of which is attached as
Exhibit (II) to the Partnership Agreement.
(22) "Dry Hole" means a well which is plugged and abandoned with or
without a completion attempt because the Operator has determined
that it will not be productive of gas and/or oil in commercial
quantities.
(23) "Exploratory Drilling" means drilling an Exploratory Well.
(24) "Exploratory Well" means a well drilled to find commercially
productive hydrocarbons in an unproved area, to find a new
commercially productive Horizon in a field previously found to be
productive of hydrocarbons at another Horizon, or to significantly
extend a known prospect.
(25) "Farmout" means an agreement whereby the owner of the leasehold or
Working Interest agrees to assign his interest in certain specific
acreage to the assignees, retaining some interest such as an
Overriding Royalty Interest, an oil and gas payment, offset acreage
or other type of interest, subject to the drilling of one or more
specific wells or other performance as a condition of the
assignment.
(26) "Final Terminating Event" means any one of the following:
(i) the expiration of the fixed term of the Partnership;
(ii) the giving of notice to the Participants by the Managing
General Partner of its election to terminate the affairs of the
Partnership;
(iii) the giving of notice by the Participants to the Managing
General Partner of their similar election through the
affirmative vote of Participants whose Agreed Subscriptions
equal a majority of the Partnership Subscription; or
(iv) the termination of the Partnership under 708(b)(1)(A) of the
Code or the Partnership ceases to be a going concern.
(27) "Fracturing" or "Frac" means a treatment to a potentially productive
geological formation intended to enhance the ability of oil or gas
to migrate through the formation to the well hole. Fracturing may
involve the application of hydraulic pressure to the reservoir
formation or the use of explosive devices to create or enlarge
fractures through which oil or gas may move.
(28) "Horizon" means a zone of a particular formation; that part of a
formation of sufficient porosity and permeability to form a
petroleum reservoir.
(29) "Independent Expert" means a person with no material relationship to
the Sponsor or its Affiliates who is qualified and who is in the
business of rendering opinions regarding the value of oil and gas
properties based upon the evaluation of all pertinent economic,
financial, geologic and engineering information available to the
Sponsor or its Affiliates.
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<PAGE> 98
(30) "Initial Closing Date" means the date, on or before the Offering
Termination Date, but after the minimum Partnership Subscription has
been received, that the Managing General Partner, in its sole
discretion, elects for the Partnership to begin business activities,
including the drilling of wells. It is anticipated that this date
will be December 1, 1998.
(31) "Intangible Drilling Costs" or "Non-Capital Expenditures" means
those expenditures associated with property acquisition and the
drilling and completion of oil and gas wells that under present law
are generally accepted as fully deductible currently for federal
income tax purposes; and includes all expenditures made with respect
to any well prior to the establishment of production in commercial
quantities for wages, fuel, repairs, hauling, supplies and other
costs and expenses incident to and necessary for the drilling of
such well and the preparation thereof for the production of oil or
gas, that are currently deductible pursuant to Section 263(c) of the
Code and Treasury Reg. Section 1.612-4, which are generally termed
"intangible drilling and development costs," including the expense
of plugging and abandoning any well prior to a completion attempt.
(32) "Interim Closing Date" means such date(s) after the Initial Closing
Date of the Partnership, but prior to the Offering Termination Date,
that the Managing General Partner, in its sole discretion, applies
additional Agreed Subscriptions to additional Partnership
activities, including drilling activities.
(33) "Investor General Partners" means the persons signing the
Subscription Agreement as Investor General Partners and the Managing
General Partner to the extent of any optional subscription under
3.03(b)(2) of the Partnership Agreement. All Investor General
Partners will be of the same class and have the same rights.
(34) "IRS" means the United States Internal Revenue Service.
(35) "Landowner's Royalty Interest" means an interest in production, or
the proceeds therefrom, to be received free and clear of all costs
of development, operation, or maintenance, reserved by a landowner
upon the creation of an oil and gas Lease.
(36) "Leases" means full or partial interests in oil and gas leases, oil
and gas mineral rights, fee rights, licenses, concessions, or other
rights under which the holder is entitled to explore for and produce
oil and/or gas, and further includes any contractual rights to
acquire any such interest.
(37) "Limited Partners" means the persons signing the Subscription
Agreement as Limited Partners, the Managing General Partner to the
extent of any optional subscription under 3.03(b)(2) of the
Partnership Agreement, the Investor General Partners upon the
conversion of their Investor General Partner Units to Limited
Partner interests pursuant to 6.01 (c) of the Partnership
Agreement, and any other persons who are admitted to the Partnership
as additional or substituted Limited Partners. All Limited Partners
will be of the same class and have the same rights; provided,
however, Limited Partners who were formerly Investor General
Partners remain liable for Partnership obligations incurred prior to
the conversion of their Investor General Partner Units to Limited
Partner interests in the Partnership, as set forth in the
Partnership Agreement.
(38) "Managing General Partner" means Atlas Resources, Inc. or any Person
admitted to the Partnership as a general partner other than as an
Investor General Partner pursuant to the Partnership Agreement who
is designated to exclusively supervise and manage the operations of
the Partnership.
(39) "MCF" means one thousand cubic feet of natural gas.
(40) "Net Revenue Interest" means that percentage of revenues
attributable to the oil and gas rights subject to a particular
Lease which a party acquiring a Lease is entitled to receive by
virtue of its interest therein.
(41) "Offering Termination Date" means the date after the minimum
Partnership Subscription has been received on which the Managing
General Partner determines, in its sole discretion, the
Partnership's subscription period is closed and the acceptance of
subscriptions ceases, which shall not be later than December 31,
1998.
(42) "Operating Costs" means expenditures made and costs incurred in
producing and marketing oil or gas from completed wells, including,
in addition to labor, fuel, repairs, hauling, materials, supplies,
utility charges and other costs incident to or therefrom, ad valorem
and severance taxes, insurance and casualty loss expense, and
compensation to well operators or others for services rendered in
conducting such operations. Subject to the foregoing, Operating
Costs also include reworking, workover, subsequent equipping and
similar expenses relating to any well.
(43) "Operator" means the Managing General Partner, as operator of
Partnership Wells in Pennsylvania, Atlas Energy as operator of
Partnership Wells in Ohio and the Managing General Partner or an
Affiliate as operator of Partnership Wells in other areas of the
United States.
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<PAGE> 99
(44) "Organization Costs" means all costs of organizing the offering,
including, but not limited to, expenses for printing, engraving,
mailing, charges of transfer agents, registrars, trustees, escrow
holders, depositaries, engineers and other experts, expenses of
qualification of the sale of the securities under Federal and State
law, including taxes and fees, accountants' and attorneys' fees and
other front-end fees.
(45) "Organization and Offering Costs" means all costs of organizing and
selling the offering including, but not limited to, total
underwriting and brokerage discounts and commissions (including fees
of the underwriters' attorneys), expenses for printing, engraving,
mailing, salaries of employees while engaged in sales activities,
charges of transfer agents, registrars, trustees, escrow holders,
depositaries, engineers and other experts, expenses of qualification
of the sale of the securities under federal and state law, including
taxes and fees, accountants' and attorneys' fees and other front-end
fees.
(46) "Overriding Royalty Interest" means an interest in the oil and gas
produced pursuant to a specified oil and gas lease or leases, or the
proceeds from the sale thereof, carved out of the Working Interest,
to be received free and clear of all costs of development,
operation, or maintenance.
(47) "Participants" means the Managing General Partner to the extent of
its optional subscription under 3.03(b)(2) of the Partnership
Agreement, the Limited Partners and the Investor General Partners.
(48) "Partners" means the Managing General Partner, the Investor General
Partners and the Limited Partners.
(49) "Partnership" means Atlas-Energy for the Nineties-Public #7 Ltd.,
the Pennsylvania limited partnership formed pursuant to the
Partnership Agreement.
(50) "Partnership Agreement" means the Amended and Restated Certificate
and Agreement of Limited Partnership, including all Exhibits
thereto, as set forth in Exhibit (A) to this Prospectus.
(51) "Partnership Net Production Revenues" means gross revenues after
deduction of the related Operating Costs, Direct Costs,
Administrative Costs and all other Partnership costs not
specifically allocated.
(52) "Partnership Subscription" means the aggregate Agreed Subscriptions
of the parties to the Partnership Agreement; provided, however, with
respect to Participant voting rights under the Partnership
Agreement, the term "Partnership Subscription" shall be deemed not
to include the Managing General Partner's required subscription
under 3.03(b)(1) of the Partnership Agreement.
(53) "Partnership Well" means a well, some portion of the revenues from
which is received by the Partnership.
(54) "Person" means a natural person, partnership, corporation,
association, trust or other legal entity.
(55) "Program" means one or more limited or general partnerships or other
investment vehicles formed, or to be formed, for the primary purpose
of exploring for oil, gas and other hydrocarbon substances or
investing in or holding any property interests which permit the
exploration for or production of hydrocarbons or the receipt of such
production or the proceeds thereof.
(56) "Prospect" means an area covering lands which are believed by the
Managing General Partner to contain subsurface structural or
stratigraphic conditions making it susceptible to the accumulations
of hydrocarbons in commercially productive quantities at one or more
Horizons. The area, which may be different for different Horizons,
shall be designated by the Managing General Partner in writing prior
to the conduct of Partnership operations and shall be enlarged or
contracted from time to time on the basis of subsequently acquired
information to define the anticipated limits of the associated
hydrocarbon reserves and to include all acreage encompassed therein.
A "Prospect" with respect to a particular Horizon may be limited to
the minimum area permitted by state law or local practice, whichever
is applicable, to protect against drainage from adjacent wells if
the well to be drilled by the Partnership is to a Horizon containing
Proved Reserves. Subject to the foregoing sentence, with respect to
the Clinton/Medina geological formation in Ohio and Pennsylvania
"Prospect" shall be deemed the drilling or spacing unit.
(57) "Proved Developed Oil and Gas Reserves" means reserves that can be
expected to be recovered through existing wells with existing
equipment and operating methods. Additional oil and gas expected to
be obtained through the application of fluid injection or other
improved recovery techniques for supplementing the natural forces
and mechanisms of primary recovery should be included as "proved
developed reserves" only after testing by a pilot project or after
the operation of an installed program has confirmed through
production response that increased recovery will be achieved.
(58) "Proved Reserves" means the estimated quantities of crude oil,
natural gas, and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future
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<PAGE> 100
years from known reservoirs under existing economic and operating
conditions, i.e., prices and costs as of the date the estimate is made.
Prices include consideration of changes in existing prices provided only
by contractual arrangements, but not on escalations based upon future
conditions.
(i) Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation
test. The area of a reservoir considered proved includes:
(a) that portion delineated by drilling and defined by gas-
oil and/or oil-water contacts, if any; and
(b) the immediately adjoining portions not yet drilled, but
which can be reasonably judged as economically productive
on the basis of available geological and engineering data.
In the absence of information on fluid contacts, the lowest
known structural occurrence of hydrocarbons controls the lower
proved limit of the reservoir.
(ii) Reserves which can be produced economically through application
of improved recovery techniques (such as fluid injection) are
included in the "proved" classification when successful testing
by a pilot project, or the operation of an installed program in
the reservoir, provides support for the engineering analysis on
which the project or program was based.
(iii) Estimates of proved reserves do not include the following:
(a) oil that may become available from known reservoirs but
is classified separately as "indicated additional
reserves";
(b) crude oil, natural gas, and natural gas liquids, the
recovery of which is subject to reasonable doubt because
of uncertainty as to geology, reservoir characteristics,
or economic factors;
(c) crude oil, natural gas, and natural gas liquids, that may
occur in undrilled prospects; and
(d) crude oil, natural gas, and natural gas liquids, that may
be recovered from oil shales, coal, gilsonite and other
such sources.
(59) "Proved Undeveloped Reserves" means reserves that are expected to
be recovered from new wells on undrilled acreage, or from existing
wells where a relatively major expenditure is required for
recompletion. Reserves on undrilled acreage shall be limited to
those drilling units offsetting productive units that are reasonably
certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated
with certainty that there is continuity of production from the
existing productive formation. Under no circumstances should
estimates for proved undeveloped reserves be attributable to any
acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques
have been proved effective by actual tests in the area and in the
same reservoir.
(60) "Roll-Up" means a transaction involving the acquisition, merger,
conversion or consolidation, either directly or indirectly, of the
Partnership and the issuance of securities of a Roll-Up Entity. Such
term does not include:
(i) a transaction involving securities of the Partnership that
have been listed for at least twelve months on a national
exchange or traded through the National Association of
Securities Dealers Automated Quotation National Market System;
or
(ii) a transaction involving the conversion to corporate, trust or
association form of only the Partnership if, as a consequence
of the transaction, there will be no significant adverse change
in any of the following: voting rights, the term of existence
of the Partnership, the Managing General Partner's compensation
and the Partnership's investment objectives.
(61) "Roll-Up Entity" means a partnership, trust, corporation or other
entity that would be created or survive after the successful
completion of a proposed roll-up transaction.
(62) "Sales Commissions" means all underwriting and brokerage discounts
and commissions incurred in the sale of Units in the Partnership
payable to registered broker-dealers, excluding the Dealer-Manager
fee, reimbursement for bona fide accountable due diligence expenses
and wholesaling fees.
(63) "Selling Agents" means those broker-dealers selected by the Dealer-
Manager which will participate in the offer and sale of the Units.
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<PAGE> 101
(64) "Sponsor" means any person directly or indirectly instrumental in
organizing, wholly or in part, a program or any person who will
manage or is entitled to manage or participate in the management or
control of a program. "Sponsor" includes the managing and
controlling general partner(s) and any other person who actually
controls or selects the person who controls 25% or more of the
exploratory, development or producing activities of the program, or
any segment thereof, even if that person has not entered into a
contract at the time of formation of the program. "Sponsor" does not
include wholly independent third parties such as attorneys,
accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of
units. Whenever the context so requires, the term "sponsor" shall be
deemed to include its affiliates.
(65) "Spud" means with respect to any well the commencement of the first
boring of the hole for the well for which a "spudding bit" may be
used, or such other meaning as is generally accepted in the oil and
gas industry.
(66) "Shut-In" means temporary cessation of operation of a producing
well; such as down time for repair and maintenance or due to the
lack of market for production or as a result of a decrease in the
price of gas the Managing General Partner has ceased producing all
or a portion of the gas from the well.
(67) "Subscription Agreement" means an execution and subscription
instrument in the form attached as Exhibit (I-B) to the Partnership
Agreement.
(68) "Subordinated Interest" means an equity interest in a program issued
to a person, without payment of full consideration, after the
attainment of certain specified performance by the program.
(69) "Tangible Costs"or "Capital Expenditures" means those costs
associated with the drilling and completion of oil and gas wells
which are generally accepted as capital expenditures pursuant to the
provisions of the Internal Revenue Code; and includes all costs of
equipment, parts and items of hardware used in drilling and
completing a well, and those items necessary to deliver acceptable
oil and gas production to purchasers to the extent installed
downstream from the wellhead of any well and which are required to
be capitalized pursuant to applicable provisions of the Code and
regulations promulgated thereunder.
(70) "Tax Matters Partner" means the Managing General Partner.
(71) "Units" or "Units of Participation" means the Limited Partner
interests and the Investor General Partner interests purchased by
Participants in the Partnership under the provisions of 3.03 and
its subsections of the Partnership Agreement.
(72) "Working Interest" means an interest in an oil and gas leasehold
which is subject to some portion of the Cost of development,
operation, or maintenance.
SUMMARY OF PARTNERSHIP AGREEMENT
NOTE: THE RIGHTS AND OBLIGATIONS OF THE MANAGING GENERAL PARTNER AND THE
PARTICIPANTS ARE GOVERNED BY THE PARTNERSHIP AGREEMENT, A COPY OF WHICH
IS ATTACHED AS EXHIBIT (A) TO THIS PROSPECTUS. NO PROSPECTIVE
PARTICIPANT SHOULD SUBSCRIBE TO THE PARTNERSHIP WITHOUT FIRST THOROUGHLY
REVIEWING THE PARTNERSHIP AGREEMENT. THE FOLLOWING IS A SUMMARY OF
CERTAIN PROVISIONS IN THE PARTNERSHIP AGREEMENT NOT COVERED ELSEWHERE IN
THIS PROSPECTUS.
RESPONSIBILITY OF MANAGING GENERAL PARTNER
The Managing General Partner will have the exclusive management and
control of all aspects of the business of the Partnership. (See 4.02(b)
of the Partnership Agreement.) No Participant, including the Investor
General Partners, will have any voice in the day-to-day business
operations of the Partnership. (See 4.03(a)(2) of the Partnership
Agreement.)
The Managing General Partner is authorized to delegate and subcontract
its duties under the Partnership Agreement to others, including entities
related to it. (See 4.02(c)(3)(a) of the Partnership Agreement.)
LIABILITIES OF GENERAL PARTNERS, INCLUDING INVESTOR GENERAL PARTNERS
General Partners, including Investor General Partners, will not be
protected by limited liability for Partnership activities. The Investor
General Partners will be jointly and severally liable for all
obligations and liabilities to creditors and claimants, whether arising
out of contract or tort, in the conduct of Partnership operations. (See
4.05(b) of the Partnership Agreement.)
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<PAGE> 102
If an Investor General Partner is called upon to pay an additional
Capital Contribution to the Partnership and fails to pay the required
Capital Contribution when due, the remaining Investor General Partners,
pro rata, must pay the defaulting Investor General Partner's share of
Partnership liabilities and obligations. In that event, the remaining
Investor General Partners:
(i) will have a first and preferred lien on the defaulting
Investor General Partner's interest in the Partnership to
secure payment of the amount in default plus interest at the
legal rate;
(ii) will be entitled to receive 100% of the defaulting Investor
General Partner's cash distributions directly from the
Partnership until the amount in default is recovered in full
plus interest at the legal rate; and
(iii) may commence legal action to collect the amount due plus
interest at the legal rate. (See 3.05(b) of the Partnership
Agreement.)
The Managing General Partner maintains general liability insurance. (See
4.02(c)(1)(vi) of the Partnership Agreement.) In addition, the Managing
General Partner has agreed to indemnify each of the Investor General
Partners for obligations related to casualty and business losses which
exceed available insurance coverage and Partnership net assets. (See
4.05(b) of the Partnership Agreement.)
LIABILITY OF LIMITED PARTNERS
The Partnership will be governed by the Pennsylvania Revised Uniform
Limited Partnership Act under which a Limited Partner generally will not
be liable to third parties for the obligations of the Partnership. There
are exceptions if the Limited Partner is also an Investor General
Partner or, in addition to the exercise of his rights and powers as a
Limited Partner, the person takes part in the control of the business of
the Partnership. (See 4.05(c) of the Partnership Agreement.)
Under Pennsylvania law, the Limited Partners should have no liability to
the Partnership in excess of their respective Capital Contributions to
the Partnership and their share of the Partnership's assets and
undistributed income, except generally to the extent of the following:
(i) a failure to make a required Capital Contribution; and
(ii) for a period of two years, any Capital Contributions
"wrongfully" returned to a Limited Partner in violation of the
Partnership Agreement or Pennsylvania law, with interest
thereon. This includes but is not limited to any distribution
to the Limited Partners to the extent that, after giving effect
to the distribution, all liabilities of the Partnership (other
than liabilities to the Participants on account of their
contributions and to the Managing General Partner) exceed
Partnership assets.
Participants will not be obligated to restore any negative balances
which exist in their Capital Accounts after liquidation of their
interests in the Partnership. (See 3.04(a) of the Partnership
Agreement.)
AMENDMENTS
Amendments to the Partnership Agreement may be:
(i) proposed in writing by the Managing General Partner, and adopted
with the
consent of Participants whose Agreed Subscriptions equal a majority of
the Partnership Subscription: or
(ii) proposed in writing by Participants whose Agreed Subscriptions
equal 10% or more of the Partnership Subscription and approved by an
affirmative vote of Participants whose Agreed Subscriptions equal
a majority of the Partnership Subscription.
The Partnership Agreement may also be amended by the Managing General
Partner for certain purposes, but no amendment materially and
adversely affecting the Participants can be made without the consent
of the affected Participants. In addition, the Managing General
Partner may not, without the affirmative vote of Participants whose
Agreed Subscriptions equal a majority of the Partnership Subscription,
change the investment and business purpose of the Partnership or cause
the Partnership to engage in activities outside the stated business
purposes of the Partnership through joint ventures with other entities.
(See 1.04 and 8.05 of the Partnership Agreement.)
NOTICE
Notice to Participants runs from the date of mailing and is binding on
the Participants irrespective of whether or not the notice is in fact
received by them. The notice periods are frequently quite short (a
minimum of 15 business days) and apply to matters which may seriously
affect the Participants' rights. Except when the Partnership Agreement
expressly requires affirmative approval, any Participant who fails to
timely respond to a request by the Managing General Partner for approval
of or concurrence in a proposed action will conclusively be deemed to
have approved the action. (See 8.01 of the Partnership
Agreement.)
VOTING RIGHTS
Generally, Participants will be entitled to vote with respect to any and
all Partnership matters at any time a meeting of the Partners is called
by the Managing General Partner or Participants owning 10% or more of
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<PAGE> 103
the Partnership Subscription. However, except for the special voting
rights discussed below, the exercise by Limited Partners of these voting
rights is subject to either the prior legal determination that the
limited liability of the Limited Partners will not be adversely affected
or in the opinion of counsel to the Partnership the legal determination
is not necessary to maintain the limited liability of the Limited
Partners. Notwithstanding, the Investor General Partners may exercise
these rights, whether or not the Limited Partners can participate in the
vote, if they represent the requisite percentage of the Participants
necessary to take the action. (See 4.03(c) of the Partnership
Agreement.)
Each Unit is entitled to one vote on all matters, and each fractional
Unit is entitled to that fraction of one vote equal to the fractional
interest in the Unit. At any time upon the request of Participants whose
Agreed Subscriptions equal 10% or more of the Partnership Subscription,
Participants whose Agreed Subscriptions equal a majority of the
Partnership Subscription may, without the concurrence of the Managing
General Partner or its Affiliates, vote without a meeting to:
(i) amend the Partnership Agreement; provided however, any
amendment may not increase the duties or liabilities of any
Participant or the Managing General Partner or increase or
decrease the profit or loss sharing or required Capital
Contribution of any Participant or the Managing General Partner
without the approval of the Participant or the Managing General
Partner. Furthermore, any amendment may not affect the
classification of Partnership income and loss for federal
income tax purposes without the unanimous approval of all
Participants;
(ii) dissolve the Partnership;
(iii) remove the Managing General Partner and elect a new Managing
General Partner;
(iv) elect a new Managing General Partner if the Managing General
Partner elects to withdraw from the Partnership;
(v) remove the Operator and elect a new Operator;
(vi) approve or disapprove the sale of all or substantially all of
the assets of the Partnership; and
(vii) cancel any contract for services with the Managing General
Partner, the Operator or their Affiliates without penalty upon
60 days notice.
The Managing General Partner and its officers and directors and
Affiliates may also subscribe for Units in the Partnership on the same
basis as Limited Partners or Investor General Partners, except that they
are not required to pay the Dealer-Manager fee, Sales Commissions or due
diligence reimbursements. Also, the Managing General Partner and its
Affiliates may buy up to 10% of the Units, which will not be applied
towards the minimum Partnership Subscription required for the
Partnership to begin operations, although the Managing General Partner
currently does not anticipate that it and its Affiliates will purchase
any Units. Any subscription by the Managing General Partner or its
officers, directors or Affiliates will dilute the voting rights of the
Participants. However, any Units owned by the Managing General Partner
or its Affiliates will not be included with respect to the issues set
forth in (iii) and (v) above, and any other transaction between the
Managing General Partner or its Affiliates and the Partnership. In
determining the requisite percentage in interest of Units necessary to
approve any Partnership matter on which the Managing General Partner and
its Affiliates may not vote or consent, any Units owned by the Managing
General Partner and its Affiliates will not be included. (See
4.03(c)(1) of the Partnership Agreement.)
ACCESS TO RECORDS
Participants will have access to all records of the Partnership
including a list of the Participants, after adequate notice, at any
reasonable time. However, logs, well reports and other drilling and
operating data may be kept confidential for reasonable periods of time.
A Participant's ability to obtain the Participant List is subject to
additional requirements set forth in the Partnership Agreement. (See
4.03(b)(5) and 4.03(b)(6)and 4.03 (b) (7) of the Partnership Agreement.)
WITHDRAWAL OF MANAGING GENERAL PARTNER
At any time ten years after the Offering Termination Date and the
Partnership's primary drilling activities, the Managing General Partner
may voluntarily withdraw as Managing General Partner for whatever reason
by giving 120 days' written notice of withdrawal to the Participants.
The withdrawing Managing General Partner is not required to provide a
substitute Managing General Partner. However, a new Managing General
Partner may be substituted by the affirmative vote of Participants whose
Agreed Subscriptions equal a majority of the Partnership Subscription.
If the Managing General Partner would withdraw as Managing General
Partner of the Partnership and the Participants failed to elect to
continue the Partnership and to designate a substituted Managing General
Partner of the Partnership, the Partnership would terminate and
dissolve.
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<PAGE> 104
If the Partnership was dissolved the Participants may receive a
distribution of direct property interests. As joint interest owners,
Limited Partners would have joint and several liability for the
obligations or liabilities arising out of joint owner operations and
might find it desirable but difficult to obtain insurance protection or
dispose of the property interests. To reduce this risk the Managing
General Partner will attempt upon liquidation and dissolution to use its
best efforts to sell the Partnership's properties or to cause some type
of entity which would preserve the limited liability of the former
Limited Partners, such as a liquidating trust, to be established to hold
the Partnership's properties. However, even if the properties were
transferred to a liquidating trust upon dissolution of the Partnership,
it might be difficult for the liquidating trust to deal with the assets
and realize their full value. For example, to replace the management
provided by the Managing General Partner, the trustee of the liquidating
trust would need the services of professional operators. Further, after
dissolution and the completion of payments to third party creditors, the
Managing General Partner has priority in liquidation for any claims of
indebtedness before the Participants. These distributions may also have
adverse income tax consequences to the Participants. (See Risk Factors
- - Special Risks of the Partnership - Risk of Loss Because of Unlimited
Liability of Investor General Partners" and "Tax Aspects - Disposition
of Partnership Interests".)
The Managing General Partner may partially withdraw a property interest
held by the Partnership in the form of a Working Interest in the
Partnership Wells equal to or less than its respective interest in the
revenues of the Partnership if the withdrawal is necessary to satisfy
the bona fide request of its creditors or approved by Participants whose
Agreed Subscriptions equal a majority of the Partnership Subscription.
(See 4.04(a)(3) and 6.03 of the Partnership Agreement.)
REMOVAL OF OPERATOR
The Operator may be replaced at any time upon 60 days advance written
notice to the outgoing Operator by the Managing General Partner acting
on behalf of the Partnership upon the affirmative vote of Participants
whose Agreed Subscriptions equal a majority of the Partnership
Subscription. (See 4.04(a)(4) of the Partnership Agreement and "Summary
of Drilling and Operating Agreement".)
TERM AND DISSOLUTION
The Partnership will continue in existence for 50 years unless it is
terminated earlier by certain Final Terminating Events. This includes an
election by the Managing General Partner or the affirmative vote of
Participants whose Agreed Subscriptions equal a majority of the
Partnership Subscription.
The Partnership may terminate on the occurrence of various events,
other than a Final Terminating Event, but a successor limited
partnership will automatically be formed under those circumstances. (See
7.01 and 7.02 of the Partnership Agreement.)
SUMMARY OF DRILLING AND OPERATING AGREEMENT
The Managing General Partner will serve as the Operator pursuant to the
Drilling and Operating Agreement, Exhibit (II) to the Partnership
Agreement, for wells situated in Pennsylvania, Atlas Energy will serve
as the Operator for any wells situated in Ohio and the Managing General
Partner or an Affiliate will serve as the Operator for any wells
situated in other areas of the United States. The Operator may be
replaced at any time upon sixty days advance written notice to the
outgoing Operator by the Managing General Partner acting on behalf of
the Partnership upon the affirmative vote of Participants whose Agreed
Subscriptions equal a majority of the Partnership Subscription.
The Drilling and Operating Agreement provides a number of material
provisions, including, without limitation, those set forth below.
(1) The right of the Operator to resign after five years.
(2) The right of the Operator of a Partnership Well beginning
three years after the well is placed into production to retain
$200 per month to cover future plugging and abandonment of the
well, although the Managing General Partner historically has
never done this after only three years.
(3) The grant of a first lien and security interest in the wells
and related production to secure payment of amounts due to the
Operator by the Partnership.
(4) The prescribed insurance coverage to be maintained by the
Operator.
(5) Limitations on the Operator's authority to incur extraordinary
costs with respect to producing wells in excess of $5,000 per
well.
(6) Restrictions on the Partnership's ability to transfer its
interest in fewer than all wells, unless the transfer is of an
equal undivided interest in all wells.
(7) The limitation of the Operator's liability except for
violations of law, negligence or misconduct by it, its
employees, agents or subcontractors and breach of the Drilling
and Operating Agreement.
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<PAGE> 105
(8) The excuse for nonperformance by the Operator due to force
majeure.
The foregoing is only a summary of some of the provisions of the
proposed form of Drilling and Operating Agreement. It is qualified in
its entirety by reference to the form attached to the Partnership
Agreement as Exhibit (II). No prospective investor should subscribe to
the Partnership without first thoroughly reviewing the Drilling and
Operating Agreement.
REPORTS TO INVESTORS
The Partnership will provide the reports set forth below to Participants
and to the state securities commissions which request the reports.
(1) Commencing with the 1998 calendar year, the Partnership will
provide each Participant an annual report within 120 days after
the close of the calendar year, and commencing with the 1999
calendar year, a report within 75 days after the end of the
first six months of its calendar year, containing, except as
otherwise indicated, at least the following information:
(a) Audited financial statements of the Partnership,
including a balance sheet and statements of income,
cash flow and Partners' equity prepared in accordance
with generally accepted accounting principles.
Semiannual reports need not be audited. (See
4.03(b)(1)(i) of the Partnership Agreement.)
(b) A summary of the total fees and compensation paid by
the Partnership to the Managing General Partner, the
Operator and their Affiliates. In addition,
Participants shall be provided the percentage that
the annual unaccountable, fixed payment
reimbursements for Administrative Costs bears to
annual Partnership revenues. (See 4.03(b)(1)(ii) of
the Partnership Agreement.)
(c) A description of each Prospect owned by the
Partnership, including the cost, location, number of
acres and the Working Interest except succeeding
reports need contain only material changes, if any.
(See 4.03(b)(1)(iii) of the Partnership Agreement.)
(d) A list of the wells drilled or abandoned by the
Partnership (indicating whether each of such wells
has or has not been completed), and a statement of
the cost of each well completed or abandoned. (See
4.03(b)(1)(iv) of the Partnership Agreement.)
(e) A description of all farmins and joint ventures. (See
4.03(b)(1)(v) of the Partnership Agreement.)
(f) A schedule reflecting:
(i) the total Partnership costs;
(ii) the costs paid by the Managing General Partner
and the costs paid by the Participants
(iii) the total Partnership revenues; and
(iv) the revenues received or credited to the
Managing General Partner and the revenues
received or credited to the Participants. (See
4.03(b)(1)(vi) of the Partnership Agreement.)
(2) The Partnership will, within 75 days after the end of each
fiscal year, transmit to each Partner the information needed
for the Partner to file his federal and state income tax
returns. (See 4.03(b)(2) of the Partnership Agreement.)
(3) Beginning January 1, 2000, and every year thereafter, the
Managing General Partner will provide a computation of the
total oil and gas Proved Reserves of the Partnership and the
dollar value thereof. The reserve computations will be based
upon engineering reports prepared by the Managing General
Partner and reviewed by an Independent Expert. (See 4.03(b)(3)
of the Partnership Agreement.)
(4) The cost of all the reports described above will be paid by the
Partnership as Direct Costs. (See 4.03(b)(4) of the
Partnership Agreement.)
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<PAGE> 106
REPURCHASE OBLIGATION
Beginning in 2003, Participants may present their interests for
repurchase by the Managing General Partner, but are not obligated to do
so. The Managing General Partner, however, will not purchase more than
5% of the Units in any calendar year, and may suspend its repurchase
obligation by notice to the Participants if it determines, in its sole
discretion, that it does not have the necessary cash flow or cannot
borrow funds for this purpose on terms it deems reasonable. Following
this notice, the Managing General Partner will not be contractually
obligated to purchase any interests presented for repurchase.
Additionally, the Managing General Partner's repurchase of Units may be
conditioned, in its sole discretion, on the receipt of an opinion of
counsel that these transfers will not cause the Partnership to be
treated as a "publicly traded partnership" under the Code.
The Managing General Partner will not purchase less than one Unit of a
Participant's interest unless the lesser amount represents the entire
amount of the Participant's interest. If less than all interests
presented at any time are to be purchased, the Participants whose
interests are to be purchased will be selected by lot and in any
calendar year the Managing General Partner will not purchase more than
5% of the Units. The Managing General Partner may waive these
limitations in its sole discretion, other than the limitation on its
purchasing more than 5% of the Units in any calendar year.
The Managing General Partner's obligation to purchase interests
presented may be discharged for its benefit by a third party or an
Affiliate. The selling Participant's interest will be transferred to the
party who pays for it. A selling Participant will be required to deliver
an executed assignment of his interest, together with any other
documentation that the Managing General Partner reasonably requests.
The Managing General Partner will make a written offer to repurchase a
Participant's interest in cash in every year beginning in 2003. The
repurchase offer must be within 120 days of the Partnership reserve
report (the "Reserve Report") discussed below, and in accordance with
Treas. Reg. 1.7704-1(f), no repurchase will occur until at least 60
calendar days after the Participant notifies the Partnership in writing
of the Participant's intention to exercise the repurchase right. A
Participant may accept the repurchase offer by a written acceptance.
However, no presentment will be considered effective until after the
payment has been made to the Participant in cash.
The amount attributable to Partnership reserves will be determined based
upon the last Reserve Report. Beginning in 2000 and every year
thereafter, the reserve computations will be based on an engineering
report prepared by the Managing General Partner and reviewed by an
Independent Expert. The Participants will be provided a computation of
the total oil and gas Proved Reserves of the Partnership and the present
worth thereof. In making this estimate of the present worth of future
net revenues, the Managing General Partner will employ a discount rate
equal to 10%, use a constant price for the oil and base the price of gas
upon the existing gas contract(s) at the time of the repurchase.
The purchase price to be paid to the Participant will be based upon the
Participant's share of the net assets and liabilities of the Partnership
and allocated pro rata to each Participant based upon his Agreed
Subscription. The purchase price will include the sum of the following
items:
(i) an amount based on 70% of the present worth of future net
revenues from the Partnership's Proved Reserves, determined as
described above;
(ii) Partnership cash on hand;
(iii) prepaid expenses and accounts receivable of the Partnership,
less a reasonable amount for doubtful accounts; and
(iv) the estimated market value of all assets of the Partnership not
separately specified above, determined in accordance with
standard industry valuation procedures.
There will be deducted from the foregoing sum the following items:
(i) an amount equal to all Partnership debts, obligations and other
liabilities, including accrued expenses; and
(ii) any distributions made to the Participants between the date of
the request and the actual payment. However, if any cash
distributed was derived from the sale, subsequent to the
request, of oil, gas or other mineral production or of a
producing property owned by the Partnership, for purposes of
determining the reduction of the purchase price, the
distributions will be discounted at the same rate used to take
into account the risk factors employed to determine the present
worth of the Partnership's Proved Reserves (see above).
The purchase price may be further adjusted by the Managing General
Partner for estimated changes therein from the date of the Reserve
Report to the date of payment of the purchase price to the Participants:
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<PAGE> 107
(i) by reason of production or sales of, or additions to, reserves
and lease and well equipment, sale or abandonment of Leases,
and similar matters occurring prior to payment of the purchase
price to the selling Participant; and
(ii) by reason of any of the following occurring prior to payment of
the purchase price to the selling Participant: changes in well
performance, increases or decreases in the market price of oil,
gas or other minerals, revision of regulations relating to the
importing of hydrocarbons, changes in income, ad valorem and
other tax laws (e.g., material variations in the provisions for
depletion) and similar matters.
Because of the difficulty in accurately estimating oil and gas reserves,
the purchase price may not reflect the full value of the Partnership
property to which it relates. These estimates are merely appraisals of
value and may not correspond to realizable value.
There can be no assurance that the revenues received by the Participant
prior to the repurchase offer and the purchase price paid for the
interests will be equal to the original price paid for the interests.
The Participants are not obligated to tender their Units for repurchase
and a Participant may receive a greater return if he retains rather than
sells the Units as provided herein. The Managing General Partner has
and will incur similar presentment obligations in connection with
other Programs which it or its Affiliates may sponsor. There can be no
assurance that the Managing General Partner will have any funds
available to repurchase any interests presented. Also, the sale of
interests pursuant to the Managing General Partner's repurchase
obligation will be a taxable event for the Participants, and gain or
loss generally will be recognized for federal income tax purposes. (See
"Tax Aspects - Disposition of Partnership Interests".)
TRANSFERABILITY OF UNITS
IN GENERAL
Transferability of the Units is restricted. The restrictions on
transferability are as follows:
(i) no sale, exchange, transfer or assignment may be made if it
would, in the opinion of counsel for the Partnership, result in
the termination of the Partnership within the meaning of
Section 708 of the Code, or would result in materially adverse
tax consequences to the Partnership or the Partners; and
(ii) no sale, assignment, pledge, hypothecation or transfer of a
Partnership interest other than by operation of law may be made
in the absence of an effective registration of the Units under
the Securities Act of 1933, as amended, and qualification under
applicable state securities law or an opinion of counsel
acceptable to the Managing General Partner that such
registration and qualification are not required.
The Managing General Partner and the Partnership have no obligation to
register the Units for resale by any Participant. The Managing General
Partner will not consent to a transfer and substitution of a Participant
if doing so would result in a violation of the securities laws or cause
the Partnership to be terminated or treated as a publicly traded
partnership for tax purposes. (See "Tax Aspects - Limitations on
Passive Activities" and " - Termination of a Partnership".)
Subject to the foregoing and to the consent of the Managing General
Partner the Partnership will recognize the assignment of one or more
whole Units unless the Participant owns less than a whole Unit, in which
case his entire fractional interest must be assigned. The Managing
General Partner may delay the recognition of the assignment until the
last day of the calendar month in which it is made.
The assignment must be properly executed by the assignor and assignee on
a form satisfactory to the Managing General Partner and its terms must
not contravene those of the Partnership Agreement. An assignee of Units
only has the right to receive all or part of the share of profit, loss,
income, gain, cash distributions or return of capital to which the
assignor of the Units would otherwise be entitled. The Costs associated
with a transfer or assignment are to be borne by the assignor Partner.
An assignee may become a substituted Limited Partner or Investor General
Partner only upon meeting certain further conditions, which include:
(i) the assignor gives the assignee the right;
(ii) the Managing General Partner consents to the substitution,
which consent will be in the Managing General Partner's
absolute discretion;
(iii) the assignee pays to the Partnership all costs and expenses
incurred in connection with the substitution; and
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<PAGE> 108
(iv) the assignee executes and delivers the instruments (in form and
substance satisfactory to the Managing General Partner)
necessary or desirable to effect the substitution and to
confirm the agreement of the assignee to be bound by all terms
and provisions of the Partnership Agreement.
A substitute Limited Partner or Investor General Partner is entitled to
all of the rights attributable to full ownership of the assigned Units,
including the right to vote.
The Partnership will amend its records at least once each calendar year
to effect the substitution of substituted Investor General Partners
and Limited Partners. Any transfer
permitted where the assignee does not become a substituted Limited
Partner or Investor General Partner will be effective as of midnight of
the last day of the calendar month in which it is made, or, at the
Managing General Partner's election, 7:00 A.M. of the following day.
CONVERSION OF UNITS BY INVESTOR GENERAL PARTNERS
The Investor General Partners will have their Units automatically
converted into Limited Partner interests and thereafter become Limited
Partners of the Partnership after substantially all of the Partnership
Wells have been drilled and completed. (See "Summary of the Offering -
Actions to be Taken by Managing General Partner to Reduce Risks of
Additional Payments by Investor General Partners".)
PLAN OF DISTRIBUTION
COMMISSIONS
The Units will be offered on a "best efforts" basis by Anthem
Securities, a registered broker-dealer which is a member of the NASD
and an Affiliate of the Managing General Partner, acting as Dealer-
Manager in all states other than Minnesota and New Hampshire, and by
other selected registered broker-dealers, which are members of the
NASD, acting as Selling Agents. Anthem Securities became an NASD
member firm in April, 1997, and has participated as Dealer-Manager in
two other Atlas sponsored Programs. Anthem Securities was formed for
the purpose of serving as Dealer-Manager of Atlas sponsored Programs.
Bryan Funding, Inc., a member of the NASD, will serve as Dealer-Manager
in the states of Minnesota and New Hampshire, and will receive the same
compensation as Anthem Securities with respect to sales in those
states. Best efforts means that the Dealer-Manager and broker-dealers
will not guarantee the sale of a certain amount of Units.
The Dealer-Manager will manage and oversee the offering of the Units as
described above and will receive from the Partnership on each Unit sold
to investors based on the amount of the Agreed Subscription
a 2.5% Dealer-Manager fee, a 7.5% Sales Commission and a
.5% reimbursement of the Selling Agents' bona fide accountable due
diligence expenses. The
7.5% Sales Commission and the .5% reimbursement of accountable due
diligence expenses will be reallowed to the Selling Agents. The
Managing General Partner is also utilizing the services of three
wholesalers: Mr. Eric Koval, Mr. Bruce Bundy and Mr. Robert Gourlay who
are employees of the Managing General Partner and associated with Anthem
Securities. The 2.5% Dealer-Manager fee will be reallowed to the
wholesalers for Agreed Subscriptions obtained through the wholesalers'
effort.
The offering will be made in compliance with Rule 2810 of the NASD
Conduct Rules and all compensation to broker-dealers and wholesalers,
regardless of the source, will be limited to 10% of the gross proceeds
of the offering, plus the reimbursement for bona fide accountable due
diligence expenses of .5% on each Agreed Subscription.
All Dealer-Manager fees, Sales Commissions, due diligence reimbursements
and wholesaling fees will be aggregated and paid by the Managing General
Partner as a part of Organization and Offering Costs and will not be
deducted from subscription proceeds. Notwithstanding, the broker-dealers
and officers and directors of the Managing General Partner may purchase
Units in the offering on the same terms and conditions as other
investors net of Dealer-Manager fees, Sales Commissions, due diligence
reimbursements and wholesaling fees. Any Units purchased by the Managing
General Partner and its Affiliates will be held for investment and not
for resale.
Subject to the receipt of the minimum Partnership Subscription and the
checks having cleared the banking system, Dealer-Manager fees, Sales
Commissions and accountable due diligence reimbursements will be paid
to the broker-dealers approximately every two weeks until the Offering
Termination Date. (See "Terms of the Offering - Partnership Closings and
Escrow".)
INDEMNIFICATION
The Dealer-Managers may be deemed underwriters as that term is defined
in the Securities Act of 1933, as amended, and the Sales Commissions and
Dealer-Manager fees may be deemed underwriting compensation. The
Managing General Partner and the Dealer-Managers have agreed to
indemnify each other, and it is anticipated that the Dealer-Managers and
each Selling Agent will agree to indemnify each other against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
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<PAGE> 109
SALES MATERIAL
The Managing General Partner will utilize sales material in addition to
the Prospectus in connection with the offering of the Units. The sales
material will consist of a brochure entitled "Atlas-Energy for the
Nineties-Public #7 Ltd." and the Managing General Partner's corporate
profile. (See "Management".) The Managing General Partner has not
authorized the use of other sales material and the offering of Units is
made only by means of this Prospectus. Sales material must be preceded
or accompanied by this Prospectus. Although the information contained in
the sales material does not conflict with any of the information set
forth herein, this material does not purport to be complete. Sales
material should not be considered a part of or incorporated into this
Prospectus or the Registration Statement of which this Prospectus is a
part.
In addition, supplementary materials (including prepared presentations
for group meetings) will be submitted to the Administrator in advance
of use, and its use must either be preceded by or accompanied with an
effective Prospectus. Also, all advertisements of, and oral or
written invitations to, "seminars" or other group meetings at which
Units are to be described, offered, or sold will clearly indicate
that the purpose of the meeting is to offer the Units for sale, the
minimum purchase price of the Units, the suitability standards to be
employed, and the name of the person selling the Units. No cash,
merchandise or other items of value will be offered as an inducement
to any prospective investor to attend any such meeting. All written
or prepared audiovisual presentations (including scripts prepared
in advance for oral presentations) to be made at such meetings must
be submitted to the Administrator within a prescribed reveiw
period. These provisions, however, will not apply to meetings consisting
only of representatives of broker-dealers.
THE MANAGING GENERAL PARTNER ALSO HAS NOT AUTHORIZED ANY PERSON TO MAKE
ANY REPRESENTATION OR STATEMENT TO BROKER-DEALERS, CONSULTANTS, ANY
PROSPECTIVE SUBSCRIBER OR ANY OTHER PERSON WHICH IS NOT CONSISTENT WITH
THIS PROSPECTUS. ACCORDINGLY, PROSPECTIVE SUBSCRIBERS SHOULD NOT BASE
ANY INVESTMENT DECISION ON ANY SUCH REPRESENTATION BY ANY PERSON.
LEGAL OPINIONS
Kunzman & Bollinger, Inc., has issued its opinion to the Managing
General Partner regarding the validity and due issuance of the Units
offered hereby and its opinion on material tax consequences to
individual investors in the Partnership, including an opinion that,
under current federal income tax law, it is more likely than not that
the Partnership will be classified as a partnership for federal income
tax purposes and not as an association taxable as a corporation.
Notwithstanding, the factual statements herein are those of the Managing
General Partner, and counsel has not given any opinions with respect to
any of the tax or other legal aspects of this offering except as
expressly set forth above.
EXPERTS
The financial statements included in this Prospectus for the Partnership
and for the Managing General Partner as of July 31, 1997 and 1996, have
been audited by McLaughlin & Courson, as of the date indicated in their
reports thereon which appear elsewhere herein. The financial statements
have been included in reliance on their reports given on their authority
as experts in auditing and accounting.
The geological report of United Energy Development Consultants, Inc.,
which is not affiliated with the Managing General Partner and its
Affiliates, appearing in "Proposed Activities - Information Regarding
Currently Proposed Prospects" has been included herein in reliance upon
the authority of United Energy Development Consultants, Inc. as an
expert with respect to the matters covered by such report and in the
giving of such report.
LITIGATION
The Managing General Partner knows of no litigation pending or
threatened to which the Managing General Partner or the Partnership is
subject or may be a party, which it believes would have a material
adverse effect upon the Partnership or its business, and no such
proceedings are known to be contemplated by governmental authorities or
other parties.
Notwithstanding, on November 22, 1995, Winston Management Services
Corporation ("Winston") and Professional Planning & Technologies, Inc.
("PPT") filed a complaint in the United States District Court for the
District of Rhode Island against Atlas Resources, Inc., Atlas Energy
Group, Inc., and others. The gist of the complaint is for the alleged
breach of contract relating to the interpretation of broker-dealer
agreements entered into between Winston and PPT and Atlas and Atlas
Energy for the marketing of interests in limited partnerships in 1987,
1988, 1989 and 1990. The complaint seeks compensatory damages in an
unspecified amount in excess of $50,000 plus an unspecified amount of
punitive damages together with interest and costs of the lawsuit. The
Managing General Partner intends to fight the lawsuit vigorously.
ADDITIONAL INFORMATION
A Registration Statement (together with amendments thereto, hereinafter
referred to as the "Registration Statement") on Form SB-2 with respect
to the Units offered hereby has been filed on behalf of the Partnership
with the Securities and Exchange Commission, Washington, D.C. 20549,
under the Securities Act of 1933, as amended. This Prospectus does not
contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted pursuant to the rules and
regulations of the Securities
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<PAGE> 110
and Exchange Commission. Reference is made to such Registration
Statement, including exhibits, for further information. Statements
contained in this Prospectus as to the contents of any document are not
necessarily complete, and, in each instance, reference is hereby made to
the copy of such document filed as an exhibit to the Registration
Statement for full statements of the provisions thereof, and each such
statement in this Prospectus is qualified in all respects by this
reference. Copies of any materials filed as a part of the Registration
Statement, including the Tax Opinion as set forth on Exhibit 8, may be
obtained from the Securities and Exchange Commission by payment of the
requisite fees therefor and may be examined in the offices of the
Commission without charge. In addition, a copy of the Tax Opinion may be
obtained by prospective investors or their advisors from the Managing
General Partner at no cost. The delivery of this Prospectus at any time
does not imply that the information contained herein is correct as of
any time subsequent to the date hereof.
The Managing General Partner is fully aware of its obligations under
Rule 13e-4 of the Securities Exchange Act of 1934. It is fully the
intention of the Managing General Partner to comply with Rule 13e-4 and
to cause the Partnership to comply with Rule 13e-4.
FINANCIAL INFORMATION CONCERNING THE MANAGING GENERAL
PARTNER AND THE PARTNERSHIP
Financial information concerning the Partnership and the Managing
General Partner is reflected in the following financial statements. (See
"Management".)
THE SECURITIES OFFERED BY THIS PROSPECTUS ARE NOT SECURITIES OF, NOR IS
THE INVESTOR ACQUIRING AN INTEREST IN THE MANAGING GENERAL PARTNER, ITS
AFFILIATES, OR ANY OTHER ENTITY OTHER THAN THE PARTNERSHIP.
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<PAGE> 111
AUDITED FINANCIAL STATEMENT
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
A PENNSYLVANIA LIMITED PARTNERSHIP
JULY 16, 1998
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<PAGE> 112
McLaughlin & Courson
Certified Public Accountants
2002 Law & Finance Building
Pittsburgh, PA 15219
-------------
Phone: 412/261-0630
FAX : 412/261-3582
INDEPENDENT AUDITORS' REPORT
To the Partners
Atlas-Energy for the Nineties-Public #7 Ltd.
A Pennsylvania Limited Partnership
We have audited the accompanying statement of assets and
partner's capital of Atlas-Energy for the Nineties-Public #7 Ltd.,
A Pennsylvania Limited Partnership as of July 16, 1998. This
financial statement is the responsibility of the Partnership's
management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statement. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statement referred to above
presents fairly, in all material respects, the financial position
of Atlas-Energy for the Nineties-Public #7 Ltd., A Pennsylvania
Limited Partnership as of July 16, 1998 in conformity with
generally accepted accounting principles.
/s/McLaughlin & Courson
Pittsburgh, Pennsylvania
July 28, 1998
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<PAGE> 113
BALANCE SHEET
--------------
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
A PENNSYLVANIA LIMITED PARTNERSHIP
JULY 16, 1998
ASSETS
------
Receivable from managing general partner $100
====
PARTNER'S CAPITAL
-----------------
Partner's capital $100
====
See notes to financial statement
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<PAGE> 114
NOTES TO FINANCIAL STATEMENT
ORGANIZATION AND DESCRIPTION OF BUSINESS
Atlas-Energy for the Nineties-Public #7 Ltd. (the "Partnership"),
is a Pennsylvania limited partnership. Atlas Resources, Inc. ("Atlas")
of Pittsburgh, Pennsylvania, serves as Managing General Partner and
Operator, and the subscribers to Units will be either Limited Partners
or Investor General Partners depending upon their election.
The Partnership will be funded to drill Development Wells which are
located primarily in the Mercer County area of Pennsylvania, although
the Managing General Partner has reserved the right to use up to 15% of
the Partnership Subscription to drill wells in other areas of the United
States.
Subscriptions at a cost of $10,000 per unit will be sold through
wholesalers and broker-dealers including Anthem Securities, Inc. an
affiliated company which will be compensated in an amount equal to 10%
of the subscription plus a .5% accountable due diligence expense.
Commencement of Partnership operations is subject to the receipt of
minimum Partnership subscriptions of $1,000,000 (to a maximum of
$12,000,000) by December 31, 1998.
PROPOSED ACCOUNTING POLICIES
Financial statements are to be prepared in accordance with
generally accepted accounting principles.
The Partnership proposes to use the successful efforts method of
accounting for oil and gas producing activities. Costs to acquire
mineral interests in oil and gas properties and to drill and equip wells
are capitalized.
Capitalized costs are to be expensed at unit cost rates calculated
annually based on the estimated volume of recoverable gas and the
related costs.
FEDERAL INCOME TAXES
The Partnership is not treated as a taxable entity for federal
income tax purposes. Any item of income, gain, loss, deduction or
credit flows through to the partners as though each partner had incurred
such item directly. As a result, each partner must take into account
his pro rata share of all items of partnership income and deductions in
computing his federal income tax liability. Many provisions of the
federal income tax laws are complex and subject to various
interpretations.
PARTICIPATION IN REVENUES AND COSTS
Atlas and the other partners will generally participate in revenues
and costs in the following manner:
OTHER
ATLAS PARTNERS
Organization and offering costs 100 % 0 %
Lease costs 100 % 0 %
Revenues 31 % 69 %
Direct operating costs 31 % 69 %
Intangible drilling costs 0 % 100 %
Tangible costs 51 % 49 %
Tax deductions:
Intangible drilling
and development costs 0 % 100 %
Depreciation 51 % 49 %
Depletion allowances 31 % 69 %
TRANSACTIONS WITH ATLAS AND ITS AFFILIATES
The Partnership intends to enter into the following significant
transactions with Atlas and its affiliates for wells in the Mercer
County Area.
Drilling contracts to drill and complete Partnership wells at
an anticipated cost of $39.15 per foot on completed wells.
Administrative costs at $75 per well per month
Well supervision fees initially of $275 per well per month
plus the cost of third party materials and services
Gas transportation and marketing charges at competitive rates
which currently is 29 cents per MCF
Anthem Securities is an affiliated company.
PURCHASE COMMITMENT
Subject to certain conditions, investor partners may present their
interests beginning in 2003 for purchase by Atlas. Atlas is not
obligated to purchase more than 5% of the units in any calendar year.
SUBORDINATION OF MANAGING GENERAL PARTNER'S REVENUE SHARE
Atlas will subordinate a part of its partnership revenues in an
amount up to 12.4% of production revenues of the Partnership net of
related operating costs, administrative costs and well supervision fees
to the receipt by participants of cash distributions from the
Partnership equal to at least 10% of their agreed subscriptions,
determined on a cumulative basis, in each of the first five years of
Partnership operations, commencing with the first distribution of
revenues to the Participants.
INDEMNIFICATION
In order to limit the potential liability of the investor general
partners, Atlas Resources, Inc. has agreed to indemnify each investor
general partner from any liability incurred which exceeds such partner's
share of Partnership assets.
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<PAGE> 115
AUDITED CONSOLIDATED FINANCIAL STATEMENTS PRIVATE
ATLAS RESOURCES, INC.
JULY 31, 1997
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<PAGE> 116
McLaughlin & Courson
Certified Public Accountants
2002 Law & Finance Building
Pittsburgh, PA 15219
-------------
Phone: 412/261-0630
FAX : 412/261-3582
INDEPENDENT AUDITORS' REPORT
Board of Directors
Atlas Resources, Inc.
Coraopolis, Pennsylvania
We have audited the accompanying consolidated balance sheets of
Atlas Resources, Inc. and subsidiary as of July 31, 1997 and 1996 and
the related consolidated statements of income and retained earnings and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Atlas
Resources, Inc. as of July 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/McLaughlin & Courson
Pittsburgh, Pennsylvania
October 20, 1997
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<PAGE> 117
CONSOLIDATED BALANCE SHEETS
ATLAS RESOURCES, INC.
JULY 31, 1997 AND 1996
ASSETS
----------
1997 1996
CURRENT ASSETS
Cash $ 4,558,609 $ 9,303,958
Trade accounts and notes receivable 2,305,193 2,080,317
Costs in excess of billings of $119,752 in 1997
and $-0- in 1996 on uncompleted contracts 588,167 244,856
Inventories 175,635 449,193
Prepaid expenses and other current assets 141,634 214,174
TOTAL CURRENT ASSETS 7,769,238 12,292,498
OIL AND GAS PROPERTIES
Oil and gas wells and leases 31,349,247 28,359,364
Less accumulated depreciation, depletion and
amortization 11,549,806 9,108,310
19,799,441 19,251,054
PROPERTY, PLANT AND EQUIPMENT
Land 271,985 161,000
Building 2,598,926 1,636,990
Equipment 949,677 778,844
Gathering lines 1,067,173 983,560
4,887,761 3,560,394
Less accumulated depreciation 2,216,060 2,022,300
2,671,701 1,538,094
$30,240,380 $33,081,646
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,367,318 $ 2,053,489
Working interests and royalties payable 3,812,805 3,501,547
Billings in excess of costs of $205,943 in 1997
and $1,851,449 in 1996 ,uncompleted contracts 6,187,494 10,405,362
Current maturities on long-term debt 185,714 185,714
TOTAL CURRENT LIABILITIES 11,553,331 16,146,112
LONG-TERM DEBT, net of current maturities 742,857 928,572
OTHER LONG-TERM LIABILITIES 205,500 191,804
ADVANCES FROM PARENT COMPANY 2,629,702 4,491,561
STOCKHOLDERS' EQUITY
Capital stock - stated value $10 per share:
Authorized - 500 shares;
issued and outstanding - 200 shares 2,000 2,000
Retained earnings 15,106,990 11,321,597
15,108,990 11,323,597
$30,240,380 $33,081,646
See notes to consolidated financial statements
- ------------------------------------------------------------------------------
<PAGE> 118
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
ATLAS RESOURCES, INC.
YEARS ENDED JULY 31, 1997 AND 1996
1997 1996
INCOME
Sales - gas wells $22,354,389 $20,482,825
Purchased gas revenues 2,896 1,822
Well operating fees 2,590,710 2,255,595
Working interests and royalties 4,191,485 4,014,196
Interest 78,079 101,788
Non-recurring income -0- 3,216,724
Other 50,981 105,115
29,268,540 30,178,065
COSTS OF SALES AND OTHER EXPENSES
Costs of sales - gas wells 17,207,650 15,846,983
Cost of purchased gas 2,728 1,694
Well operating expense 452,867 255,654
General and administrative 3,648,771 4,124,142
Interest 83,982 112,864
Depreciation, depletion and amortization 2,635,257 2,837,764
Impairment of assets -0- 1,700,000
24,031,255 24,879,101
INCOME BEFORE INCOME TAXES 5,237,285 5,298,964
FEDERAL AND STATE INCOME TAXES 1,451,892 1,164,000
NET INCOME 3,785,393 4,134,964
RETAINED EARNINGS AT BEGINNING OF YEAR 11,321,597 7,186,633
RETAINED EARNINGS AT END OF YEAR $15,106,990 $11,321,597
See notes to consolidated financial statements
- --------------------------------------------------------------------------------
<PAGE> 119
CONSOLIDATED STATEMENTS OF CASH FLOWS
ATLAS RESOURCES, INC.
YEARS ENDED JULY 31, 1997 AND 1996
1997 1996
Cash flows from operating activities:
Net income $ 3,785,393 $ 4,134,964
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 2,635,257 2,837,764
Impairment of assets -0- 1,700,000
Other, net -0- 14,700
Change in assets and liabilities:
Receivables (224,876) (441,043)
Inventories 273,558 45,870
Prepaid expenses and other current assets 72,540 (68,572)
Accounts payable and accrued expenses and
working interests and royalties payable(374,913) 1,385,427
Uncompleted contract billings, net (4,561,179) 4,996,530
Long-term liabilities 13,696 150,924
Net cash provided by operating
activities 1,619,476 14,756,564
Cash flows used in investing activities:
Investment in oil and gas wells and leases (2,989,884) (6,863,689)
Gathering line additions (83,613) (4,681)
Other property additions (1,243,754) (607)
Other -0- 16,074
Net cash used in investing activities (4,317,251) (6,852,903)
Cash flows used in financing activities:
Net repayments of advances from Parent (1,861,859) (56,887)
Principal payments on other term notes -0- (75,000
Principal payments on long-term borrowings (185,715) (185,714)
Net cash used in financing activities (2,047,574) (317,601)
Net (decrease) increase in cash and cash equivalents(4,745,349) 7,586,060
Cash and cash equivalents at beginning of year 9,303,958 1,717,898
Cash and cash equivalents at end of year $ 4,558,609 $ 9,303,958
Additional Cash Flow Information:
Cash paid during the year for:
Interest $ 83,982 $ 112,864
See notes to consolidated financial statements
- --------------------------------------------------------------------------------
<PAGE> 120
NOTES TO AUDITED CONSOLIDATED BALANCE SHEETS
ATLAS RESOURCES, INC.
1. DESCRIPTION OF BUSINESS
Atlas Resources, Inc. (the Company) and its subsidiary ARD
Investments, are engaged in the exploration for development, production,
and marketing of natural gas and oil primarily in the Appalachian Basin
Area. In addition, the Company performs contract drilling and well
operation services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Affiliated companies
Atlas Resources, Inc. is a wholly owned subsidiary of AIC,
Inc. which is a wholly owned subsidiary of The Atlas Group, Inc.
(formerly AEG Holdings, Inc.) (parent company) and is affiliated with
other companies controlled by The Atlas Group, Inc. The Company's
operations are dependent upon the resources and services provided by
the parent company.
Cost of sales - gas wells, cost of purchased gas and general
and administration expenses include allocations made by the parent
company and its affiliates.
Inventories
Inventories, consisting of oil and gas field materials and
supplies, are stated at the lower of first-in, first-out cost or
market.
Method of accounting for oil and gas properties
The Company uses the successful efforts method of accounting
for oil and gas producing activities. Property acquisition costs are
capitalized when incurred. Geological and geophysical costs and delay
rentals are expensed when incurred. Development costs, including
equipment and intangible drilling costs related to both producing
wells and developmental dry holes, are capitalized. All capitalized
costs are generally depreciated and depleted on the unit-of-production
method using estimates of proven reserves. Oil and gas properties are
periodically assessed and when unamortized costs exceed expected
future net cash flows, a loss is recognized by recording a charge to
income.
On the sale or retirement of oil and gas properties, the cost
and related accumulated depreciation, depletion and amortization are
eliminated from the property accounts, and the resultant gain or loss
is recognized.
For tax purposes, intangible drilling costs are being written
off as incurred. The greater of cost or percentage depletion as
defined by the Internal Revenue Code, is used as a deduction from
income.
Property, plant and equipment
Land, building, equipment and gathering lines are recorded at
cost. Major additions and betterments are charged to the property
accounts while replacements, maintenance and repairs which do not
improve or extend the life of the respective assets are expensed
currently. As property is retired or otherwise disposed of, the cost
of the property is removed from the asset account, accumulated
depreciation is charged with an amount equivalent to the depreciation
provided, and the difference, if any, is charged or credited to
income. Depreciation is computed over the estimated useful life of
the assets generally by the straight-line method.
Revenue recognition
The Company sells interests in oil and gas wells and retains
therefrom a working interest and/or an overriding royalty in the
producing wells. The income from the working interests and royalties
is recorded when the natural gas and oil are produced.
The Company also contracts to drill oil and gas wells. The
income from these contracts is recorded upon substantial completion of
the well.
Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs, and depreciation costs. General and
administrative costs are charged to expense as incurred. Provisions
for estimated losses on uncompleted contracts are made in the period
in which such losses are determined.
Costs in excess of amounts billed are classified as current
assets under costs in excess of billings on uncompleted contracts.
Billings in excess of costs are classified under current liabilities
as billings in excess of costs on uncompleted contracts. Contract
retentions are included in accounts receivable.
Working interests and royalties
Revenues from working interests and royalties are reported net
of all landowner royalty and lease operating expenses and are
recognized when the natural gas and oil are produced. For the year
ended July 31, 1997, the Company recognized working interest income of
$3,626,194 and royalty income of $565,291. Working interest and
royalty income during the year ended July 31, 1996 amounted to
$3,448,669 and $565,527, respectively.
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<PAGE> 121
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash Equivalents
For purposes of the statements of cash flows, the Company
considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
Use of estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could
differ from those estimates.
3. AFFILIATED OIL AND GAS PARTNERSHIPS
In connection with the sponsorship of oil and gas
partnerships, the Company is reimbursed by the partnerships for
certain operating and overhead costs incurred on their behalf. These
reimbursements totalled approximately $370,000 and $320,000 during the
years ended July 31, 1997 and 1996, respectively. In addition, as
part of its duties as well operator, the Company receives proceeds
from the sale of oil and gas and makes distributions to investors
according to their working interest in the related oil and gas
properties.
4. INCOME TAXES
Atlas Resources, Inc. and its subsidiary file a consolidated
federal income tax return with The Atlas Group, Inc. (parent company).
Federal and state income taxes are allocated by the parent company
based upon consolidated tax rates and are included in advances from
parent company.
5. LONG-TERM DEBT
Long-term debt on Atlas Resources, Inc.'s books at July 31, 1997
and 1996 consists of the following:
1997 1996
Note payable to bank in monthly installments
through August 2002 of $15,476, plus interest
at or below prime rate plus one-half percent
(1/2%) (8.25% and 7.88% at July 31, 1997
and 1996, respectively). Secured by building and
equipment having a net book value of $1,158,741
at July 31, 1997. $ 928,571 $1,114,286
Less current maturities (185,714) (185,714)
$ 742,857 $ 928,572
========== ==========
Aggregate maturities on long-term debt are as follows:
Year Ending July 31
1998 $185,714
1999 185,714
2000 185,714
2001 185,715
--------
$742,857
========
6. REVOLVING CREDIT AND TERM LOAN AGREEMENT
A revolving credit and term loan agreement enables the Company or
The Atlas Group, Inc. to borrow $5,000,000 on a revolving credit basis
until November 1, 1997. A commitment fee at a rate of three-eights of
one percent (3/8%) is charged on the unused portion. During the
revolving credit period, loans bear interest at or below prime rate plus
one-quarter percent (1/4%). The interest rate at July 31, 1997 was
8.75%. The Atlas Group, Inc. may convert any outstanding borrowings
into a 5-year term loan, repayable in equal monthly installments, plus
interest at or below prime rate plus one-half percent (1/2%). At July
31, 1997 The Atlas Group, Inc. (parent company) had borrowed $4,750,000
under the revolving credit line.
The revolving credit line and term loan agreements are secured by
certain assets of the Company.
7. OPTION ON BUILDING
The Atlas Group, Inc. (parent company) has granted the majority
shareholders of The Atlas Group, Inc. an option to acquire the land and
building (having a net book value of $1,031,069 at July 31, 1997)
utilized as the Company's headquarters for a period of six months
commencing on August 15, 2003 and ending February 15, 2004 for $500,000.
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<PAGE> 122
8. COMMITMENTS
Atlas Resources, Inc., as general partner in several oil and gas
limited partnerships, and The Atlas Group, Inc. have agreed to indemnify
each investor general partner from any liability incurred which exceeds
such partner's share of partnership assets. Management believes that
any such liabilities that may occur will be covered by insurance and, if
not covered by insurance, will not result in a significant loss to The
Atlas Group, Inc. and its subsidiaries.
Subject to certain conditions, investor general partners in certain
oil and gas limited partnerships may present their interests beginning
in 1997 for purchase by Atlas Resources, Inc., as managing general
partner. Atlas Resources, Inc. is not obligated to purchase more than
5% of the units in any calendar year.
Atlas Resources, Inc., as managing general partner in certain gas
limited partnerships, has also agreed to subordinate its share of
production revenues to the receipt by investor partners of cash
distributions equal to at least 10% of their subscriptions in each of
the first five years of partnership operations.
9. NON-RECURRING INCOME
The non-recurring income item pertains to a settlement of certain
claims with Columbia Gas Transmission Corporation.
10. FUTURES CONTRACTS
The Company enters into natural gas futures contracts to hedge its
exposure to changes in natural gas prices. At any point in time, such
contracts may include regulated NYMEX futures contracts and non-
regulated over-the-counter futures contracts with qualified
counterparties. The futures contracts employed by the Company are
commitments to purchase or sell natural gas at a future date and
generally cover one month periods for up to 18 months in the future.
Realized gains (losses) are recorded in the income accounts in the
month(s) that the futures contracts are intended to hedge. Unrealized
gains (losses) are deferred until realized. Deferred gains (losses)
were $9,530 and $115,240 at July 31, 1997 and 1996, respectively.
11. IMPAIRMENT OF ASSETS
In 1996 the Company evaluated the carrying value of long-lived
assets for impairment of value in accordance with the Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The
Company recognized a noncash write-down in the carrying value of oil and
gas properties of $1,700,000 which primarily was a result of the
sustained decrease in gas and oil prices. The write-down was determined
based upon the estimated future net cash flows from the properties.
12. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED)
The supplementary information summarized below presents the results
of natural gas and oil activities in accordance with SFAS No. 69,
"Disclosures About Oil and Gas Producing Activities."
The parent company has revised its method of calculating its
consolidated reserves to reflect a component for the profit on
intercompany transportation charges by a consolidated company.
Accordingly the reserves of ARI have been adjusted to reflect the
effects of this change and amounts for prior years have been restated.
(1) Production Costs
The following table presents the costs incurred relating to natural
gas and oil production activities:
1997 1996
Capitalized costs at July 31:
Capitalized costs $ 31,349,247 $28,359,364
Accumulated depreciation and depletion (11,549,806) (9,108,310)
------------- ------------
Net capitalized costs $ 19,799,441 $19,251,054
============= ============
Costs incurred during the year ended July 31:
Property acquisition costs - proved undeveloped properties
$ 76,000 $ 15,000
=========== ===========
Development costs $ 2,913,883 $ 6,863,689
============ ===========
Property acquisition costs include costs to purchase, lease or
otherwise acquire a property. Development costs include costs to gain
access to and prepare development well locations for drilling, to drill
and equip development wells and to provide facilities to extract, treat,
gather and store oil and gas.
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<PAGE> 123
12. NATURAL GAS AND OIL PRODUCING ACTIVITIES (UNAUDITED) (CONTINUED)
(2) Results of Operations for Producing Activities
The following table presents the results of operations related to
natural gas and oil production for the years ended July 31, 1997 and
1996:
1997 1996
Revenues $ 4,191,485 $ 4,011,924
Production costs (423,837) (357,191)
Depreciation and depletion (2,441,496) (2,653,982)
Income tax expense (292,233) (81,330)
Results of operations from producing ----------- -----------
activities $ 1,033,919 $ 919,421
=========== ===========
Depreciation, depletion and amortization of natural gas and oil
properties are provided on the unit-of-production method.
(3) Reserve Information
The information presented below represents estimates of proved
natural gas reserves. Proved developed reserves represent only those
reserves expected to be recovered from existing wells and support
equipment. Proved undeveloped reserves represent proved reserves
expected to be recovered from new wells after substantial development
costs are incurred. All reserves are located in Eastern Ohio and
Western Pennsylvania.
NATURAL GAS (MCF)
1997 1996
Proved developed and undeveloped reserves:
Beginning of period 58,630,940 58,503,784
Revision of previous estimates (1,717,784) 2,276,567
Extensions, discoveries and
other additions 31,465,627 13,496,560
Production (2,273,253) (2,519,882)
Sales of minerals in place (12,886,785) (13,126,089)
------------ ------------
End of period 73,218,745 58,630,940
Proved developed reserves: ============ ============
Beginning of period 22,048,062 18,670,907
============ ============
End of period 21,999,701 22,048,062
============ ============
(4) Standard Measure of Discounted Future Cash Flows
Management cautions that the standard measure of discounted future
cash flows should not be viewed as an indication of the fair market
value of natural gas and oil producing properties, nor of the future
cash flows expected to be generated therefrom. The information
presented does not give recognition to future changes in estimated
reserves, selling prices or costs and has been discounted at an
arbitrary rate of 10%. Estimated future net cash flows from natural gas
and oil reserves based on selling prices and costs at July 31, 1997 and
July 31, 1996 price levels are as follows:
1997 1996
Future cash inflows $170,904,434 $123,195,446
Future production costs (25,420,614) (15,909,398)
Future development costs (51,246,286) (34,814,000)
Future income tax expense (26,586,590) (17,900,322)
------------- ------------
Future net cash flow 67,650,944 54,571,726
10% annual discount for estimated
timing of cash flows (50,642,016) (39,654,517)
------------- -------------
Standardized measure of discounted
future net cash flows $ 17,008,928 $ 14,917,209
============= ============
Summary of changes in the standardized measure of discounted future
net cash flows:
1997 1996
Sales of gas and oil produced - net $ (3,010,102) $ (3,407,144)
Net changes in prices, production and
development costs 1,612,558 1,829,515
Extensions, discoveries, and improved
recovery, less related costs 1,174,604 120,065
Development costs incurred 3,453,339 4,973,198
Revisions of previous quantity estimates (1,113,904) 1,381,844
Sales of minerals in place (114,509) (34,124)
Accretion of discount 1,505,602 1,727,950
Net change in income taxes (1,415,869) (2,039,011)
------------- -------------
Net increase 2,091,719 4,552,293
Beginning of period 14,917,209 10,364,916
-------------- -------------
End of period $ 17,008,928 $ 14,917,209
============== ============
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<PAGE> 124
ATLAS RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS 5/31/98 7/31/97
CURRENT ASSETS
Cash and cash equivalents $ 191,852 $ 4,558,609
Trade accounts receivable 2,269,627 2,305,193
Costs in excess of billings on
uncompleted contracts - 588,167
Inventories 270,651 175,635
Other current assets 788,738 141,634
TOTAL CURRENT ASSETS 3,520,868 7,769,238
OIL AND GAS PROPERTIES
Oil and gas wells and leases 34,776,037 31,349,247
Less accumulated depreciation,
depletion and amortization 13,276,644 11,549,806
NET OIL & GAS PROPERTIES 21,499,393 19,799,441
PROPERTY, PLANT AND EQUIPMENT
Land 271,985 271,985
Buildings 2,637,128 2,598,926
Equipment 997,370 949,677
Gathering Lines 1,062,439 1,067,173
Sub-total 4,968,922 4,887,761
Less accumulated depreciation 2,400,459 2,216,060
NET PROPERTY, PLANT & EQUIPMENT 2,568,463 2,671,701
TOTAL ASSETS $ 27,588,724 $ 30,240,380
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses $ 1,171,868 $ 1,367,318
Working interests and royalties payable 5,960,178 3,812,805
Billings in excess of costs on
uncompleted contracts 928,852 6,187,494
Current maturities on long-term debt: 185,714 185,714
Income taxes payable 217,107 -
TOTAL CURRENT LIABILITIES 8,463,719 11,553,331
LONG-TERM DEBT, net of current maturities 588,095 742,857
OTHER LONG-TERM LIABILITIES 136,530 205,500
ADVANCES FROM PARENT COMPANY 595,268 2,629,702
STOCKHOLDERS' EQUITY
Capital stock, stated value $10.00:
Authorized - 500 shs; Issued - 200 shs. 2,000 2,000
Retained earnings 17,803,112 15,106,990
TOTAL STOCKHOLDERS' EQUITY 17,805,112 15,108,990
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 27,588,724 $ 30,240,380
- ---------------------------------------------------------------------
<PAGE> 125
ATLAS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
TEN MONTHS ENDED MAY 31
1998 1997
INCOME
Sales-gas wells $ 17,021,218 $ 16,682,188
Purchased gas revenues 13,144 3,765
Well operating fees 1,908,564 1,707,477
Working interest and royalties 3,738,584 3,778,551
Interest Income 23,792 72,635
Other 210,213 351,404
TOTAL INCOME 22,915,515 22,596,020
COST OF SALES AND OTHER EXPENSES
Costs of sales-gas wells 14,530,033 13,278,965
Cost of purchased gas 42,761 2,189
Well operating expense 1,193,436 744,887
Exploration expense 412,140 232,610
General and administrative 846,887 660,387
Interest expense 235,246 133,192
Depreciation, depletion and amortization 1,911,237 2,200,745
TOTAL COST OF SALES AND OTHER EXPENSES 19,171,740 17,252,975
INCOME BEFORE INCOME TAXES 3,743,775 5,343,045
INCOME TAXES 1,047,653 1,503,230
NET INCOME $ 2,696,122 $ 3,839,815
ATLAS RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
TEN MONTHS ENDED MAY 31
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 2,696,122 $ 3,839,815
Adjustments to reconcile net income
to net cash provided,
by (used in) operating activities:
Depreciation, depletion and amortization 1,911,237 2,200,745
(Increase) Decrease in Current Assets (118,387) (2,212,351)
Increase (Decrease) in Current Liabilities (3,089,612) (5,958,958)
Other assets and liabilities, net (68,970) (162,629)
Net cash provided by (used in)
operating activities) 1,330,390 (2,293,378)
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in oil and gas wells and leases (3,426,790) (3,093,277)
Investment in other property, plant
& equipment (81,161) -
Net cash used in investing activities (3,507,951) (3,093,277)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Repayment of bank notes (154,762) (154,762)
Repayment of advances from affiliates (2,034,434) (2,841,561)
Dividends to parent company - (500,000)
Net cash used in financing activities (2,189,196) (3,496,323)
Net increase (decrease) in cash and cash equivalents
(4,366,757) (8,882,978)
Cash and cash equivalents at beginning of year 4,558,609 9,303,958
Cash and cash equivalents at end of period $ 191,852 $ 420,980
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<PAGE> 126
ATLAS RESOURCES, INC.
NOTE TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MAY 31, 1998
1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements as of May 31, 1998 and for the
ten months then ended have been prepared by the management of the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
omitted pursuant to such rules and regulations, although the Company
believes that the disclosures are adequate to make the information
presented not misleading. These consolidated financial statements
should be read in conjunction with the audited July 31, 1997 and 1996
consolidated financial statements. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) considered
necessary for presentation have been included.
2. PROPOSED MERGER
The Atlas Group, Inc., the parent company of Atlas Resources, Inc., has
reached an agreement in principle to merge with Atlas America, Inc., a
newly formed wholly-owned subsidiary of Resource America, Inc. Total
consideration paid to shareholders of The Atlas Group will be in the
form of approximately $47 million of newly issued Resource America
stock and the assumption of The Atlas Group debt.
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<PAGE> 127
+++++++++++++++++++++++++++++++++++++++
EXHIBIT (A)
AMENDED AND RESTATED CERTIFICATE
AND
AGREEMENT OF LIMITED PARTNERSHIP
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
- -------------------------------------------------------------------
TABLE OF CONTENTS
SECTION NO. DESCRIPTION PAGE
I. FORMATION
1.01 Formation 1
1.02 Certificate of Limited
Partnership 1
1.03 Name, Principal Office and
Residence 1
1.04 Purpose 1
II. DEFINITION OF TERMS
2.01 Definitions 1
III. SUBSCRIPTIONS AND FURTHER CAPITAL CONTRIBUTIONS
3.01 Designation of Managing
General Partner and
Participants 7
3.02 Participants 8
3.03 Subscriptions to the
Partnership 8
3.04 Capital
Contributions 9
3.05 Payment of
Subscriptions 10
3.06 Partnership
Funds 11
IV. CONDUCT OF OPERATIONS
4.01 Acquisition of Leases 11
4.02 Conduct of Operations 12
4.03 General Rights and
Obligations of the
Participants and Restricted
and Prohibited Transactions
16
4.04 Designation, Compensation
and Removal of Managing
General Partner
and Removal of Operator 23
4.05 Indemnification and
Exoneration 25
4.06 Other Activities 26
V. PARTICIPATION IN COSTS AND REVENUES,
CAPITAL ACCOUNTS,ELECTIONS AND DISTRIBUTIONS
5.01 Participation in Costs and
Revenues 27
5.02 Capital Accounts and
Allocations
Thereto 29
5.03 Allocation of Income,
Deductions and
Credits 30
5.04 Elections 32
5.05 Distributions 32
VI. TRANSFER OF INTERESTS
6.01 Transferability 33
6.02 Special Restrictions on
Transfers 33
6.03 Right of Managing General
Partner to Hypothecate
and/or Withdraw Its
Interests 34
6.04 Repurchase Obligation 35
VII. DURATION, DISSOLUTION, AND WINDING UP
7.01 Duration 36
7.02 Dissolution
and Winding Up 36
VIII. MISCELLANEOUS PROVISIONS
8.01 Notices 37
8.02 Time 37
8.03 Applicable Law 37
8.04 Agreement in
Counterparts 37
8.05 Amendment 37
8.06 Additional Partners 38
8.07 Legal Effect 38
EXHIBITS
EXHIBIT (I-A) - Managing General Partner
Signature Page
EXHIBIT (I-B) - Subscription Agreement
EXHIBIT (II) - Drilling and Operating
Agreement
======================================================================
<PAGE> 1
AMENDED AND RESTATED CERTIFICATE AND
AGREEMENT OF LIMITED PARTNERSHIP
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
THIS AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED
PARTNERSHIP ("AGREEMENT"), amending and restating the original
Certificate of Limited Partnership, is made and entered into as
of , 1998, by and among Atlas Resources, Inc.,
hereinafter referred to as "Atlas" or the "Managing General
Partner", and the remaining parties from time to time signing a
Subscription Agreement for Limited Partner Units, these parties
hereinafter sometimes referred to as "Limited Partners," or for
Investor General Partner Units, these parties hereinafter
sometimes referred to as "Investor General Partners".
ARTICLE I
FORMATION
1.01. FORMATION. The parties hereto form a limited
partnership pursuant to the Pennsylvania Revised Uniform Limited
Partnership Act, upon the terms and conditions set forth herein.
1.02. CERTIFICATE OF LIMITED PARTNERSHIP. This document shall
constitute not only the agreement among the parties hereto, but
also shall constitute the Amended and Restated Certificate and
Agreement of Limited Partnership of the Partnership. This
document shall be filed or recorded in the public offices
required under applicable law or deemed advisable in the
discretion of the Managing General Partner. Amendments to the
certificate of limited partnership shall be filed or recorded in
the public offices required under applicable law or deemed
advisable in the discretion of the Managing General Partner.
1.03. NAME, PRINCIPAL OFFICE AND RESIDENCE.
1.03(a). NAME. The name of the Partnership is Atlas-Energy for
the Nineties-Public #7 Ltd.
1.03(b). RESIDENCE. The residence of the Managing General Partner
shall be its principal place of business at 311 Rouser Road, Moon
Township, Pennsylvania 15108, which shall also serve as the
principal place of business of the Partnership. The residence of
each Participant shall be as set forth on the Subscription
Agreement executed by each party. All addresses shall be subject
to change upon notice to the parties.
1.03(c). AGENT FOR SERVICE OF PROCESS. The name and address of
the agent for service of process shall be Mr. J.R. O'Mara at
Atlas Resources, Inc., 311 Rouser Road, Moon Township,
Pennsylvania 15108.
1.04. PURPOSE. The Partnership shall engage in all phases of the
oil and gas business. This includes, without limitation,
exploration for, development and production of oil and gas upon
the terms and conditions hereinafter set forth and any other
proper purpose under the Pennsylvania Revised Uniform Limited
Partnership Act.
The Managing General Partner may not, without the affirmative
vote of Participants whose Agreed Subscriptions equal a majority
of the Partnership Subscription, change the investment and
business purpose of the Partnership or cause the Partnership to
engage in activities outside the stated business purposes of the
Partnership through joint ventures with other entities.
ARTICLE II
DEFINITION OF TERMS
2.01. DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings hereinafter set forth:
1. "Administrative Costs" shall mean all customary and
routine expenses incurred by the Sponsor for the conduct
of Partnership administration, including: legal, finance,
accounting, secretarial, travel, office rent, telephone,
data processing and other items of a similar nature. No
Administrative Costs charged shall be duplicated under
any other category of expense or cost. No portion of the
salaries, benefits, compensation or remuneration of
controlling persons of the Managing General Partner will
be reimbursed by the Partnership as Administrative Costs.
Controlling persons include directors, executive officers
and those holding five percent or more equity interest in
the Managing General Partner or a person having power to
direct or cause the direction of the Managing General
Partner, whether through the ownership of voting
securities, by contract, or otherwise.
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2. "Administrator" shall mean the official or agency
administering the securities laws of a state.
3. "Affiliate" shall mean with respect to a specific person:
(i) any person directly or indirectly owning,
controlling, or holding with power to vote ten
percent or more of the outstanding voting
securities of such specified person;
(ii) any person ten percent or more of whose outstanding
voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such
specified person;
(iii) any person directly or indirectly controlling,
controlled by, or under common control with such
specified person;
(iv) any officer, director, trustee or partner of such
specified person; and
(v) if such specified person is an officer, director,
trustee or partner, any person for which such
person acts in any such capacity.
4. "Agreed Subscription" shall mean that amount so
designated on the Subscription Agreement executed by the
Participant, or, in the case of the Managing General
Partner, its subscription under 3.03(b) and its
subsections.
5. "Agreement" shall mean this Amended and Restated
Certificate and Agreement of Limited Partnership,
including all exhibits hereto.
6. "Assessments" shall mean additional amounts of capital
which may be mandatorily required of or paid voluntarily
by a Participant beyond his subscription commitment.
7. "Atlas" shall mean Atlas Resources, Inc., a Pennsylvania
corporation, whose principal executive offices are
located at 311 Rouser Road, Moon Township, Pennsylvania
15108.
8. "Atlas America, Inc." shall mean Atlas America, Inc., a Pennsylvania
Corporation, whose principal executive offices are located at 311
Rouser Road, Moon Township, Pennsylvania 15108.
9. "Atlas Energy" shall mean Atlas Energy Group, Inc., an
Ohio corporation, whose principal executive offices are located at 311
Rouser Road, Moon Township, Pennsylvania 15108.
10. "Atlas Group" shall mean The Atlas Group, Inc., a
Pennsylvania corporation, which was formerly known as
AEGH or AEG Holdings, Inc., and has been merged into Atlas America, Inc.
11. "Capital Account" or "account" shall mean the account
established for each party hereto, maintained as provided
in 5.02 and its subsections.
12. "Capital Contribution" shall mean the amount agreed to be
contributed to the Partnership by a party pursuant to
3.04 and 3.05 and their subsections.
13. "Carried Interest" shall mean an equity interest in the
Partnership issued to a Person without consideration, in
the form of cash or tangible property, in an amount
proportionately equivalent to that received from the
Participants.
14. "Code" shall mean the Internal Revenue Code of 1986, as
amended.
15. "Cost", when used with respect to the sale of property to
the Partnership, shall mean:
(i) the sum of the prices paid by the seller to an
unaffiliated person for such property, including
bonuses;
(ii) title insurance or examination costs, brokers'
commissions, filing fees, recording costs, transfer
taxes, if any, and like charges in connection with
the acquisition of such property;
(iii) a pro rata portion of the seller's actual necessary
and reasonable expenses for seismic and geophysical
services; and
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(iv) rentals and ad valorem taxes paid by the seller
with respect to such property to the date of its
transfer to the buyer, interest and points actually
incurred on funds used to acquire or maintain such
property, and such portion of the seller's
reasonable, necessary and actual expenses for
geological, engineering, drafting, accounting,
legal and other like services allocated to the
property cost in conformity with generally accepted
accounting principles and industry standards,
except for expenses in connection with the past
drilling of wells which are not producers of
sufficient quantities of oil or gas to make
commercially reasonable their continued operations,
and provided that the expenses enumerated in this
subsection (iv) shall have been incurred not more
than 36 months prior to the purchase by the
Partnership.
"Cost", when used with respect to services, shall mean
the reasonable, necessary and actual expense incurred by
the seller on behalf of the Partnership in providing
such services, determined in accordance with generally
accepted accounting principles.
As used elsewhere, "cost" shall mean the price paid by
the seller in an arm's-length transaction.
16. "Dealer-Manager" shall mean Anthem Securities, Inc., an
Affiliate of the Managing General Partner and the broker-
dealer which will manage the offering and sale of the
Units in all states except Minnesota and New Hampshire,
and Bryan Funding, Inc., the broker-dealer which will
manage the offering and sale of Units in Minnesota and
New Hampshire.
17. "Development Well" shall mean a well drilled within the
proved area of an oil or gas reservoir to the depth of a
stratigraphic Horizon known to be productive.
18. "Direct Costs" shall mean all actual and necessary costs
directly incurred for the benefit of the Partnership and
generally attributable to the goods and services provided
to the Partnership by parties other than the Sponsor or
its Affiliates. Direct Costs shall not include any cost
otherwise classified as Organization and Offering Costs,
Administrative Costs, Intangible Drilling Costs, Tangible
Costs, Operating Costs or costs related to the Leases.
Direct Costs may include the cost of services provided by
the Sponsor or its Affiliates if such services are
provided pursuant to written contracts and in compliance
with 4.03(d)(7).
18. "Distribution Interest" shall mean an undivided interest
in the assets of the Partnership after payments to
creditors of the Partnership or the creation of a
reasonable reserve therefor, in the ratio the positive
balance of a party's Capital Account bears to the
aggregate positive balance of the Capital Accounts of all
of the parties determined after taking into account all
Capital Account adjustments for the taxable year during
which liquidation occurs (other than those made pursuant
to liquidating distributions or restoration of deficit
Capital Account balances). Provided, however, after the
Capital Accounts of all of the parties have been reduced
to zero, such interest in the remaining assets of the
Partnership shall equal a party's interest in the related
revenues of the Partnership as set forth in 5.01 and its
subsections of this Agreement.
20. "Drilling and Operating Agreement" shall mean the
proposed Drilling and Operating Agreement between the
Managing General Partner, Atlas Energy or an Affiliate as
Operator, and the Partnership as Developer, a copy of the
proposed form of which is attached hereto as Exhibit
(II).
21. "Exploratory Well" shall mean a well drilled to find
commercially productive hydrocarbons in an unproved area,
to find a new commercially productive Horizon in a field
previously found to be productive of hydrocarbons at
another Horizon, or to significantly extend a known
prospect.
22. "Farmout" shall mean an agreement whereby the owner of
the leasehold or Working Interest agrees to assign his
interest in certain specific acreage to the assignees,
retaining some interest such as an Overriding Royalty
Interest, an oil and gas payment, offset acreage or other
type of interest, subject to the drilling of one or more
specific wells or other performance as a condition of the
assignment.
23. "Final Terminating Event" shall mean any one of the
following:
(i) the expiration of the fixed term of the
Partnership;
(ii) the giving of notice to the Participants by the
Managing General Partner of its election to
terminate the affairs of the Partnership;
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(iii) the giving of notice by the Participants to the
Managing General Partner of their similar election
through the affirmative vote of Participants whose
Agreed Subscriptions equal a majority of the
Partnership Subscription; or
(iv) the termination of the Partnership under
708(b)(1)(A) of the Code or the Partnership ceases
to be a going concern.
24. "Horizon" shall mean a zone of a particular formation;
that part of a formation of sufficient porosity and
permeability to form a petroleum reservoir.
25. "Independent Expert" shall mean a person with no material
relationship to the Sponsor or its Affiliates who is
qualified and who is in the business of rendering
opinions regarding the value of oil and gas properties
based upon the evaluation of all pertinent economic,
financial, geologic and engineering information available
to the Sponsor or its Affiliates.
26. "Initial Closing Date" shall mean the date, on or before
the Offering Termination Date, but after the minimum
Partnership Subscription has been received, that the
Managing General Partner, in its sole discretion, elects
for the Partnership to begin business activities,
including the drilling of wells. It is anticipated that
this date will be December 1, 1998.
27. "Intangible Drilling Costs"or "Non-Capital Expenditures"
shall mean those expenditures associated with property
acquisition and the drilling and completion of oil and
gas wells that under present law are generally accepted
as fully deductible currently for federal income tax
purposes; and includes all expenditures made with respect
to any well prior to the establishment of production in
commercial quantities for wages, fuel, repairs, hauling,
supplies and other costs and expenses incident to and
necessary for the drilling of such well and the
preparation thereof for the production of oil or gas,
that are currently deductible pursuant to Section 263(c)
of the Code and Treasury Reg. Section 1.612-4, which are
generally termed "intangible drilling and development
costs," including the expense of plugging and abandoning
any well prior to a completion attempt.
28. "Interim Closing Date" shall mean those date(s) after the
Initial Closing Date of the Partnership, but prior to the
Offering Termination Date, that the Managing General
Partner, in its sole discretion, applies additional
Agreed Subscriptions to additional Partnership
activities, including drilling activities.
29. "Investor General Partners" shall mean the persons
signing the Subscription Agreement as Investor General
Partners and the Managing General Partner to the extent
of any optional subscription under 3.03(b)(2). All
Investor General Partners shall be of the same class and
have the same rights.
30. "Landowner's Royalty Interest" shall mean an interest in
production, or the proceeds therefrom, to be received
free and clear of all costs of development, operation, or
maintenance, reserved by a landowner upon the creation of
an oil and gas Lease.
31. "Leases" shall mean full or partial interests in oil and
gas leases, oil and gas mineral rights, fee rights,
licenses, concessions, or other rights under which the
holder is entitled to explore for and produce oil and/or
gas, and further includes any contractual rights to
acquire any such interest.
32. "Limited Partners" shall mean the persons signing the
Subscription Agreement as Limited Partners, the Managing
General Partner to the extent of any optional
subscription under 3.03(b)(2), the Investor General
Partners upon the conversion of their Investor General
Partner Units to Limited Partner interests pursuant to
6.01(c), and any other persons who are admitted to the
Partnership as additional or substituted Limited
Partners. Except as provided in 3.05(b), with respect to
the required additional Capital Contributions of Investor
General Partners, all Limited Partners shall be of the
same class and have the same rights.
33. "Managing General Partner" shall mean Atlas Resources,
Inc. or any Person admitted to the Partnership as a
general partner other than as an Investor General Partner
pursuant to this Agreement who is designated to
exclusively supervise and manage the operations of the
Partnership.
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34. "Managing General Partner Signature Page" shall mean an
execution and subscription instrument in the form
attached as Exhibit (I-A) to this Agreement, which is
incorporated herein by reference.
35. "Offering Termination Date" shall mean the date after the
minimum Partnership Subscription has been received on
which the Managing General Partner determines, in its
sole discretion, the Partnership's subscription period is
closed and the acceptance of subscriptions ceases, which
shall not be later than December 31, 1998.
36. "Operating Costs" shall mean expenditures made and costs
incurred in producing and marketing oil or gas from
completed wells, including, in addition to labor, fuel,
repairs, hauling, materials, supplies, utility charges
and other costs incident to or therefrom, ad valorem and
severance taxes, insurance and casualty loss expense, and
compensation to well operators or others for services
rendered in conducting such operations. Subject to the
foregoing, Operating Costs also include reworking,
workover, subsequent equipping and similar expenses
relating to any well.
37. "Operator" shall mean the Managing General Partner, as
operator of Partnership Wells in Pennsylvania, Atlas
Energy as operator of Partnership Wells in Ohio and the
Managing General Partner or an Affiliate as Operator of
Partnership Wells in other areas of the United States.
38. "Organization and Offering Costs" shall mean all costs of
organizing and selling the offering including, but not
limited to, total underwriting and brokerage discounts
and commissions (including fees of the underwriters'
attorneys), expenses for printing, engraving, mailing,
salaries of employees while engaged in sales activities,
charges of transfer agents, registrars, trustees, escrow
holders, depositaries, engineers and other experts,
expenses of qualification of the sale of the securities
under federal and state law, including taxes and fees,
accountants' and attorneys' fees and other front-end
fees.
39. "Overriding Royalty Interest" shall mean an interest in
the oil and gas produced pursuant to a specified oil and
gas lease or leases, or the proceeds from the sale
thereof, carved out of the working interest, to be
received free and clear of all costs of development,
operation, or maintenance.
40. "Participants" shall mean the Managing General Partner to
the extent of its optional subscription under
3.03(b)(2); the Limited Partners, and the Investor
General Partners.
41. "Partners" shall mean the Managing General Partner, the
Investor General Partners and the Limited Partners.
42. "Partnership" shall mean Atlas-Energy for the
Nineties-Public #7 Ltd., the Pennsylvania limited
partnership formed pursuant to this Agreement.
43. "Partnership Net Production Revenues" shall mean gross
revenues after deduction of the related Operating Costs,
Direct Costs, Administrative Costs and all other
Partnership costs not specifically allocated.
44. "Partnership Subscription" shall mean the aggregate
Agreed Subscriptions of the parties to this Agreement;
provided, however, with respect to Participant voting
rights under this Agreement, the term "Partnership
Subscription" shall be deemed not to include the Managing
General Partner's required subscription under
3.03(b)(1).
45. "Partnership Well" shall mean a well, some portion of the
revenues from which is received by the Partnership.
46. "Person" shall mean a natural person, partnership,
corporation, association, trust or other legal entity.
47. "Program" shall mean one or more limited or general
partnerships or other investment vehicles formed, or to
be formed, for the primary purpose of exploring for oil,
gas and other hydrocarbon substances or investing in or
holding any property interests which permit the
exploration for or production of hydrocarbons or the
receipt of such production or the proceeds thereof.
48. "Prospect" shall mean an area covering lands which are
believed by the Managing General Partner to contain
subsurface structural or stratigraphic conditions making
it susceptible to the accumulations of hydrocarbons in
commercially productive quantities at one or more
Horizons. The area, which may be different for different
Horizons, shall be designated by the Managing General
Partner in writing prior to the conduct of Partnership
operations and shall be enlarged or contracted from time
to time on the basis of subsequently acquired information
to define the anticipated limits of the associated
hydrocarbon reserves and to include all acreage
encompassed therein. A "Prospect" with respect to a
particular Horizon may be limited to the minimum area
permitted by state law or local
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practice, whichever is applicable, to protect against drainage from adjacent
wells if the well to be drilled by the Partnership is to
a Horizon containing Proved Reserves. Subject to the
foregoing sentence, with respect to the Clinton/Medina
geological formation in Ohio and Pennsylvania "Prospect"
shall be deemed the drilling or spacing unit.
49. "Proved Developed Oil and Gas Reserves" shall mean
reserves that can be expected to be recovered through
existing wells with existing equipment and operating
methods. Additional oil and gas expected to be obtained
through the application of fluid injection or other
improved recovery techniques for supplementing the
natural forces and mechanisms of primary recovery should
be included as "proved developed reserves" only after
testing by a pilot project or after the operation of an
installed program has confirmed through production
response that increased recovery will be achieved.
50. "Proved Reserves" shall mean the estimated quantities of
crude oil, natural gas, and natural gas liquids which
geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and
operating conditions, i.e., prices and costs as of the
date the estimate is made. Prices include consideration
of changes in existing prices provided only by
contractual arrangements, but not on escalations based
upon future conditions.
(i) Reservoirs are considered proved if economic
producibility is supported by either actual
production or conclusive formation test. The area of
a reservoir considered proved includes:
(a) that portion delineated by drilling and defined
by gas-oil and/or oil-water contacts, if any;
and
(b) the immediately adjoining portions not yet
drilled, but which can be reasonably judged as
economically productive on the basis of
available geological and engineering data.
In the absence of information on fluid contacts, the
lowest known structural occurrence of hydrocarbons
controls the lower proved limit of the reservoir.
(ii) Reserves which can be produced economically
through application of improved recovery techniques
(such as fluid injection) are included in the
"proved" classification when successful testing by a
pilot project, or the operation of an installed
program in the reservoir, provides support for the
engineering analysis on which the project or program
was based.
(iii) Estimates of proved reserves do not include the
following:
(a) oil that may become available from known
reservoirs but is classified separately as
"indicated additional reserves";
(b) crude oil, natural gas, and natural gas liquids,
the recovery of which is subject to reasonable
doubt because of uncertainty as to geology,
reservoir characteristics, or economic factors;
(c) crude oil, natural gas, and natural gas liquids,
that may occur in undrilled prospects; and
(d) crude oil, natural gas, and natural gas
liquids, that may be recovered from oil shales,
coal, gilsonite and other such sources.
51. "Proved Undeveloped Reserves" shall mean reserves that
are expected to be recovered from new wells on undrilled
acreage, or from existing wells where a relatively major
expenditure is required for recompletion. Reserves on
undrilled acreage shall be limited to those drilling
units offsetting productive units that are reasonably
certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be
demonstrated with certainty that there is continuity of
production from the existing productive formation. Under
no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an
application of fluid injection or other improved recovery
technique is contemplated, unless such techniques have
been proved effective by actual tests in the area and in
the same reservoir.
52. "Roll-Up" shall mean a transaction involving the
acquisition, merger, conversion or consolidation, either
directly or indirectly, of the Partnership and the
issuance of securities of a Roll-Up Entity. Such term
does not include:
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(i) a transaction involving securities of the
Partnership that have been listed for at least
twelve months on a national exchange or traded
through the National Association of Securities
Dealers Automated Quotation National Market System;
or
(ii) a transaction involving the conversion to
corporate, trust or association form of only the
Partnership if, as a consequence of the
transaction, there will be no significant adverse
change in any of the following: voting rights; the
term of existence of the Partnership; the Managing
General Partner's compensation; and the
Partnership's investment objectives.
53. "Roll-Up Entity" shall mean a partnership, trust,
corporation or other entity that would be created or
survive after the successful completion of a proposed
roll-up transaction.
54. "Sales Commissions" shall mean all underwriting and
brokerage discounts and commissions incurred in the sale
of Units in the Partnership payable to registered
broker-dealers, excluding the Dealer-Manager fee, the
reimbursement for bona fide accountable due diligence
expenses and wholesaling fees.
55. "Selling Agents" shall mean those broker-dealers
selected by the Dealer-Manager which will participate in
the offer and sale of the Units.
56. "Sponsor" shall mean any person directly or indirectly
instrumental in organizing, wholly or in part, a program
or any person who will manage or is entitled to manage or
participate in the management or control of a program.
"Sponsor" includes the managing and controlling general
partner(s) and any other person who actually controls or
selects the person who controls 25% or more of the
exploratory, development or producing activities of the
program, or any segment thereof, even if that person has
not entered into a contract at the time of formation of
the program. "Sponsor" does not include wholly
independent third parties such as attorneys, accountants,
and underwriters whose only compensation is for
professional services rendered in connection with the
offering of units. Whenever the context so requires, the
term "sponsor" shall be deemed to include its affiliates.
57. "Subscription Agreement" shall mean an execution and
subscription instrument in the form attached as Exhibit
(I-B) to this Agreement, which is incorporated herein by
reference.
58. "Tangible Costs"or "Capital Expenditures" shall mean
those costs associated with the drilling and completion
of oil and gas wells which are generally accepted as
capital expenditures pursuant to the provisions of the
Internal Revenue Code; and includes all costs of
equipment, parts and items of hardware used in drilling
and completing a well, and those items necessary to
deliver acceptable oil and gas production to purchasers
to the extent installed downstream from the wellhead of
any well and which are required to be capitalized
pursuant to applicable provisions of the Code and
regulations promulgated thereunder.
59. "Tax Matters Partner" shall mean the Managing General
Partner.
60. "Units" or "Units of Participation" shall mean the
Limited Partner interests and the Investor General
Partner interests purchased by Participants in the
Partnership under the provisions of 3.03 and its
subsections.
61. "Working Interest" shall mean an interest in an oil and
gas leasehold which is subject to some portion of the
Cost of development, operation, or maintenance.
ARTICLE III
SUBSCRIPTIONS AND FURTHER CAPITAL CONTRIBUTIONS
3.01. DESIGNATION OF MANAGING GENERAL PARTNER AND PARTICIPANTS.
Atlas shall serve as Managing General Partner of the Partnership.
Atlas shall further serve as a Participant to the extent of any
subscription made by it pursuant to 3.03(b)(2).
Limited Partners and Investor General Partners, including
Affiliates of the Managing General Partner, shall serve as
Participants. The Limited Partners shall not be bound by the
obligations of the Partnership other than as provided under the
Pennsylvania Revised Uniform Limited Partnership Act.
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3.02. PARTICIPANTS.
3.02(a). LIMITED PARTNER AT FORMATION. Atlas Energy Group, Inc.,
as Original Limited Partner, has acquired one Unit and has made a
Capital Contribution of $100. Upon the admission of Limited
Partners and Investor General Partners pursuant to 3.02(c)
below, the Partnership shall return to the Original Limited
Partner its Capital Contribution and shall reacquire its Unit.
The Original Limited Partner shall then cease to be a Limited
Partner in the Partnership with respect to the Unit.
3.02(b). OFFERING OF INTERESTS. The Partnership is authorized to
admit to the Partnership after the receipt of the minimum
Partnership Subscription and at or prior to the Offering
Termination Date additional Limited Partners and Investor General
Partners whose Agreed Subscriptions for Units are accepted by the
Managing General Partner if, after the admission of the
additional Limited Partners and Investor General Partners, the
Agreed Subscriptions of all Limited Partners and Investor General
Partners do not exceed the number of Units set forth in
3.03(c)(1). The Managing General Partner may refuse to admit any
person as a Limited Partner or Investor General Partner for any
reason whatsoever pursuant to 3.03(d).
3.02(c). ADMISSION OF LIMITED PARTNERS AND/OR INVESTOR GENERAL
PARTNERS. No action or consent by the Participants shall be
required for the admission of additional Limited Partners and
Investor General Partners pursuant to 3.02(b).
All subscribers' funds shall be held by an independent interest
bearing escrow holder and shall not be released to the
Partnership until the receipt of the minimum Partnership
Subscription in 3.03(c)(2). Thereafter, subscriptions may be
paid directly to the Partnership Account.
3.02(d). DURATION OF THE OFFERING AND MINIMUM CAPITALIZATION.
3.02(d)(1). DURATION OF OFFERING. The offering of Units shall
be terminated not later than the earlier of:
(i) December 31, 1998; or
(ii) at such time as Agreed Subscriptions for the maximum
Partnership Subscription set forth in 3.03(c)(1) shall
have been received and accepted by the Managing General
Partner.
The offering may be terminated earlier at the option of the
Managing General Partner.
3.02(d)(2). MINIMUM CAPITALIZATION. If at the time of
termination Agreed Subscriptions for fewer than 100 Units have
been received and accepted, all monies deposited by subscribers
shall be promptly returned to them with the interest earned
thereon from the date the monies were deposited in escrow through
the date of refund.
3.03. SUBSCRIPTIONS TO THE PARTNERSHIP.
3.03(a). SUBSCRIPTIONS BY PARTICIPANTS.
3.03(a)(1). AGREED SUBSCRIPTION. A Participant's Agreed
Subscription to the Partnership shall be the amount so designated
on his Subscription Agreement.
3.03(a)(2). SUBSCRIPTION PRICE AND MINIMUM AGREED SUBSCRIPTION.
The subscription price of a Unit in the Partnership shall be
$10,000, payable as set forth herein. The minimum Agreed
Subscription per Participant shall be one Unit ($10,000);
however, the Managing General Partner, in its discretion, may
accept one-half Unit ($5,000) subscriptions. Larger Agreed
Subscriptions shall be accepted in $1,000 increments.
3.03(a)(3). EFFECT OF SUBSCRIPTION. Execution of a Subscription
Agreement shall serve as an agreement by the Limited Partner or
Investor General Partner to be bound by each and every term of
this Agreement.
3.03(b). SUBSCRIPTIONS BY MANAGING GENERAL PARTNER.
3.03(b)(1). MANAGING GENERAL PARTNER'S REQUIRED SUBSCRIPTION.
The Managing General Partner, as a general partner and not as a
Limited Partner or Investor General Partner, shall contribute to
the Partnership the Leases which will be drilled by the
Partnership on the terms set forth in 4.01(a)(4) and shall pay
the costs charged to it pursuant to 5.01(a). These amounts shall
be paid as set forth in 3.05(a).
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3.03(b)(2). MANAGING GENERAL PARTNER'S OPTIONAL ADDITIONAL
SUBSCRIPTION. In addition to the Managing General Partner's
required subscription under 3.03(b)(1), the Managing General
Partner may subscribe to up to 10% of the Units on the same basis
as a Participant may subscribe to Units under the provisions of
3.03(a) and its subsections, and, subject to the limitations on
voting rights set forth in 4.03(c)(1), to that extent shall be
deemed a Participant in the Partnership for all purposes under
this Agreement. Notwithstanding the foregoing, broker-dealers
and the Managing General Partner and its officers and directors
and Affiliates shall not be required to pay the Dealer-Manager
fee, any Sales Commission or any reimbursement of accountable due
diligence expenses.
3.03(b)(3). EFFECT OF AND EVIDENCING SUBSCRIPTION. The Managing
General Partner has executed a Managing General Partner Signature
Page which evidences the Managing General Partner's required
subscription under 3.03(b)(1) and which may be amended to
reflect the amount of any optional subscription under
3.03(b)(2). Execution of the Managing General Partner Signature
Page serves as an agreement by the Managing General Partner to be
bound by each and every term of this Agreement.
3.03(c). MAXIMUM AND MINIMUM PARTNERSHIP SUBSCRIPTION.
3.03(c)(1). MAXIMUM PARTNERSHIP SUBSCRIPTION. The maximum
Partnership Subscription excluding the Managing General Partner's
required subscription under 3.03(b)(1) may not exceed $8,000,000
(800 Units). However, if subscriptions for all 800 Units being
offered are obtained, the Managing General Partner, in its sole
discretion, may offer not more than 400 additional Units and
increase the maximum aggregate subscriptions with which the
Partnership may be funded to not more than 1,200 Units
($12,000,000).
3.03(c)(2). MINIMUM PARTNERSHIP SUBSCRIPTION. The minimum
Partnership Subscription shall equal at least $1,000,000 (100
Units). The Managing General Partner and its Affiliates may
purchase up to 10% of the Partnership Subscription, none of which
shall be applied to satisfy the $1,000,000 minimum.
The Partnership shall begin drilling operations after the receipt
of the minimum Partnership Subscription and the Initial Closing
Date.
3.03(d). ACCEPTANCE OF SUBSCRIPTIONS.
3.03(d)(1). DISCRETION BY THE MANAGING GENERAL PARTNER. Acceptance
of subscriptions shall be discretionary with the Managing General
Partner. The Managing General Partner may reject any
subscription for any reason it deems appropriate.
3.03(d)(2). TIME PERIOD IN WHICH TO ACCEPT SUBSCRIPTIONS. A
Participant's subscription to the Partnership and the Managing
General Partner's acceptance thereof shall be evidenced by the
execution of a Subscription Agreement by the Limited Partner or
the Investor General Partner and by the Managing General Partner.
Agreed Subscriptions shall be accepted or rejected by the
Partnership within thirty days of their receipt; if rejected, all
funds shall be returned to the subscriber immediately.
3.03(d)(3). ADMISSION TO THE PARTNERSHIP. Upon the original sale of
Units, the Participants shall be admitted as Partners not later
than fifteen days after the release from escrow of Participants'
funds to the Partnership. Thereafter, Participants shall be
admitted into the Partnership not later than the last day of the
calendar month in which their Agreed Subscriptions were accepted
by the Partnership.
3.04. CAPITAL CONTRIBUTIONS.
3.04(a). PARTICIPANT CAPITAL CONTRIBUTIONS. Each Participant
shall make a Capital Contribution to the Partnership equal to the
sum of:
(i) the Agreed Subscription of the Participant; and
(ii) in the case of Investor General Partners, but not the
Limited Partners, the additional Capital Contributions
required in 3.05(b).
Participants shall not be required to restore any deficit
balances in their Capital Accounts except as set forth in
5.03(h).
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3.04(b). ADDITIONAL MANAGING GENERAL PARTNER CAPITAL
CONTRIBUTIONS.
3.04(b)(1). ADDITIONAL CAPITAL CONTRIBUTIONS OF THE MANAGING
GENERAL PARTNER. In addition to any Capital Contribution required
of the Managing General Partner as provided in 3.03(b)(1) and
any optional Capital Contribution as a Participant as provided in
3.03(b)(2), the Managing General Partner shall further
contribute cash sufficient to pay all costs charged to it under
this Agreement to the extent the costs exceed:
(i) its Capital Contribution pursuant to 3.03(b); and
(ii) its share of undistributed revenues.
These Capital Contributions shall be paid by the Managing General
Partner at the time the costs are required to be paid by the
Partnership, but, in no event, later than December 31, 1999.
3.04(b)(2). MINIMUM AMOUNT OF MANAGING GENERAL PARTNER'S
REQUIRED CONTRIBUTION.
In any
event, the Managing General Partner's aggregate Capital
Contributions to the Partnership (including Leases contributed
pursuant to 3.03(b)(1)) shall not be less than 24.5% of all
Capital Contributions to the Partnership. Any payments by the
Managing General Partner in excess of the costs set forth in
3.03(b)(1) shall be used to pay Partnership costs which would
otherwise be charged to the Participants.
3.04(b)(3). UPON LIQUIDATION THE MANAGING GENERAL PARTNER MUST
CONTRIBUTE DEFICIT BALANCE IN ITS CAPITAL ACCOUNTS. Upon
liquidation of the Partnership or its interest in the
Partnership, the Managing General Partner shall contribute to the
Partnership any deficit balance in its Capital Account. This
shall be determined after taking into account all adjustments for
the Partnership's taxable year during which the liquidation
occurs (other than adjustments made pursuant to this
requirement), by the end of the taxable year in which its
interest in the Partnership is liquidated or, if later, within 90
days after the date of such liquidation. This amount shall be
paid to creditors of the Partnership or distributed to the other
parties hereto in accordance with 7.02 upon liquidation of the
Partnership.
The Managing General Partner shall maintain a minimum Capital
Account balance equal to 1% of total positive Capital Account
balances for the Partnership.
3.04(b)(4). INTEREST FOR CONTRIBUTIONS. The interest of the
Managing General Partner in the capital and revenues of the
Partnership is in consideration for, and is the only
consideration for, its Capital Contribution to the Partnership.
3.04(c). LIMITATION ON AMOUNT OF REQUIRED CAPITAL CONTRIBUTIONS
OF LIMITED PARTNERS. In no event shall a Limited Partner be
required to make contributions to the Partnership greater than
his required Capital Contribution under 3.04(a).
3.05. PAYMENT OF SUBSCRIPTIONS.
3.05(a). MANAGING GENERAL PARTNER'S SUBSCRIPTIONS. The Managing
General Partner shall contribute to the Partnership the Leases
pursuant to 3.03(b)(1) and pay the costs charged to it when
incurred by the Partnership, subject to 3.04(b)(1).
Any optional subscription under 3.03(b)(2) shall be paid by the
Managing General Partner in the same manner as provided for the
payment of Participant subscriptions under 3.05(b).
3.05(b). PARTICIPANT SUBSCRIPTIONS AND ADDITIONAL CAPITAL
CONTRIBUTIONS OF THE INVESTOR GENERAL PARTNERS.
3.05(b)(1). PAYMENT OF AGREED SUBSCRIPTIONS. A Participant
shall pay his Agreed Subscription 100% in cash at the time of
subscribing. A Participant shall receive interest on his Agreed
Subscription up until the Offering Termination Date.
3.05(b)(2). ADDITIONAL REQUIRED CAPITAL CONTRIBUTIONS OF THE
INVESTOR GENERAL PARTNERS. Investor General Partners are
obligated to make Capital Contributions to the Partnership when
called by the Managing General Partner, in addition to their
Agreed Subscriptions, for their pro rata share of any Partnership
obligations and liabilities which are recourse to the Investor
General Partners and are represented by their ownership of Units
prior to the conversion of Investor General Units to Limited
Partner interests pursuant to 6.01(c).
3.05(b)(3). DEFAULT PROVISIONS. The failure of an Investor
General Partner to timely make a required additional Capital
Contribution pursuant to this section results in his personal
liability to the other Investor General Partners for the amount
in default. The remaining Investor General Partners, pro rata,
must pay the defaulting Investor General Partner's share of
Partnership liabilities and obligations. In that event, the
remaining Investor General Partners:
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<PAGE> 11
(ii) shall have a first and preferred lien on the defaulting
Investor General Partner's interest in the Partnership
to secure payment of the amount in default plus interest
at the legal rate;
(iii) shall be entitled to receive 100% of the defaulting
Investor General Partner's cash distributions directly
from the Partnership until the amount in default is
recovered in full plus interest at the legal rate; and
(iv) may commence legal action to collect the amount due plus
interest at the legal rate.
3.06. PARTNERSHIP FUNDS.
3.06(a). FIDUCIARY DUTY. The Managing General Partner shall have
a fiduciary responsibility for the safekeeping and use of all
funds and assets of the Partnership, whether or not in the
Managing General Partner's possession or control. The Managing
General Partner shall not employ, or permit another to employ,
the funds and assets in any manner except for the exclusive
benefit of the Partnership. Neither this Agreement nor any other
agreement between the Managing General Partner and the
Partnership shall contractually limit any fiduciary duty owed to
the Participants by the Managing General Partner under applicable
law, except as provided in 4.01, 4.02, 4.04, 4.05 and 4.06 of
this Agreement.
3.06(b). SPECIAL ACCOUNT AFTER THE RECEIPT OF THE MINIMUM
PARTNERSHIP SUBSCRIPTION. Following the receipt of the minimum
Partnership Subscription, the funds of the Partnership shall be
held in a separate interest-bearing account maintained for the
Partnership and shall not be commingled with funds of any other
entity.
3.06(c). INVESTMENT.
3.06(c)(1). INVESTMENTS IN OTHER ENTITIES. Partnership funds
may not be invested in the securities of another person except in
the following instances:
(i) investments in Working Interests or undivided Lease
interests made in the ordinary course of the
Partnership's business;
(ii) temporary investments made as set forth in 3.06(c)(2);
(iii) multi-tier arrangements meeting the requirements of
4.03(d)(15);
(iv) investments involving less than 5% of the Partnership
Subscription which are a necessary and incidental part
of a property acquisition transaction; and
(v) investments in entities established solely to limit the
Partnership's liabilities associated with the ownership
or operation of property or equipment, provided, in such
instances duplicative fees and expenses shall be
prohibited.
3.06(c)(2). PERMISSIBLE INVESTMENTS PRIOR TO INVESTMENT IN
PARTNERSHIP ACTIVITIES. After the Offering Termination Date and
until proceeds from the public offering are invested in the
Partnership's operations, the proceeds may be temporarily
invested in income producing short-term, highly liquid
investments, in which there is appropriate safety of principal,
such as U.S. Treasury Bills.
ARTICLE IV
CONDUCT OF OPERATIONS
4.01. ACQUISITION OF LEASES.
4.01(a). ASSIGNMENT TO PARTNERSHIP.
4.01(a)(1). IN GENERAL. The Managing General Partner shall
select, acquire and assign or cause to have assigned to the
Partnership full or partial interests in Leases, by any method
customary in the oil and gas industry, subject to the terms and
conditions set forth below. The Partnership shall acquire only
Leases reasonably expected to meet the stated purposes of the
Partnership. No Leases shall be acquired for the purpose of a
subsequent sale unless the acquisition is made after a well has
been drilled to a depth sufficient to indicate that such an
acquisition would be in the Partnership's best interest.
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<PAGE> 12
4.01(a)(2). FEDERAL AND STATE LEASES. The Partnership is
authorized to acquire Leases on federal and state lands.
4.01(a)(3). MANAGING GENERAL PARTNER'S DISCRETION AS TO TERMS
AND BURDENS OF ACQUISITION. Subject to the provisions of 4.03(d)
and its subsections, the acquisitions of Leases or other property
may be made under any terms and obligations, including any
limitations as to the Horizons to be assigned to the Partnership,
and subject to any burdens, as the Managing General Partner deems
necessary in its sole discretion.
4.01(a)(4). COST OF LEASES. All Leases shall be acquired from
the Managing General Partner, the Operator or their Affiliates
and shall be credited towards the Managing General Partner's
required Capital Contribution set forth in 3.03(b)(1) at the
Cost of the Lease, unless the Managing General Partner shall have
cause to believe that Cost is materially more than the fair
market value of the property, in which case the credit for the
contribution will be made at a price not in excess of the fair
market value. A determination of fair market value must be
supported by an appraisal from an Independent Expert. This
opinion and any associated supporting information must be
maintained in the Partnership's records for six years.
4.01(a)(5). THE MANAGING GENERAL PARTNER, OPERATOR OR THEIR
AFFILIATES' RIGHTS IN THE REMAINDER INTERESTS. To the extent the
Partnership does not acquire a full interest in a Lease from the
Managing General Partner, the Operator or their Affiliates, the
remainder of the interest in the Lease may be held by the
Managing General Partner, the Operator or their Affiliates which
may either retain and exploit it for its own account or sell or
otherwise dispose of all or a part of the remaining interest.
Profits from the exploitation and/or disposition shall be for
the benefit of the Managing General Partner, the Operator or
their Affiliates to the exclusion of the Partnership.
4.01(a)(6). NO BREACH OF DUTY. Subject to the provisions of
4.03 and its subsections, acquisition of Leases from the
Managing General Partner, the Operator or their Affiliates shall
not be considered a breach of any obligation owed by the Managing
General Partner, the Operator, or their Affiliates to the
Partnership or the Participants.
4.01(b). NO OVERRIDING ROYALTY INTERESTS. Neither the Managing
General Partner, the Operator nor any Affiliate shall acquire or
retain any Overriding Royalty Interest on the Lease interests
acquired by the Partnership.
4.01(c). TITLE AND NOMINEE ARRANGEMENTS.
4.01(c)(1). LEGAL TITLE. Legal title to all Leases acquired by
the Partnership shall be held on a permanent basis in the name of
the Partnership. However, Partnership properties may be held
temporarily in the name of the Managing General Partner, the
Operator or their Affiliates or in the name of any nominee
designated by the Managing General Partner to facilitate the
acquisition of the properties.
4.01(c)(2). MANAGING GENERAL PARTNER'S DISCRETION. The Managing
General Partner shall take the steps as are necessary in its best
judgment to render title to the Leases to be acquired by the
Partnership acceptable for the purposes of the Partnership. The
Managing General Partner shall be free, however, to use its own
best judgment in waiving title requirements. The Managing
General Partner shall not be liable to the Partnership or to the
other parties for any mistakes of judgment; nor shall the
Managing General Partner be deemed to be making any warranties
or representations, express or implied, as to the validity or
merchantability of the title to the Leases assigned to the
Partnership or the extent of the interest covered thereby except
as otherwise provided in the Drilling and Operating Agreement.
4.01(c)(3). COMMENCEMENT OF OPERATIONS. No operation shall be
commenced on the Leases acquired by the Partnership unless the
Managing General Partner is satisfied that necessary title
requirements have been satisfied.
4.02. CONDUCT OF OPERATIONS.
4.02(a). IN GENERAL. The Managing General Partner shall
establish a program of operations for the Partnership. Subject to
the limitations contained in Article III of this Agreement
concerning the maximum Capital Contribution which can be required
of a Limited Partner, the Managing General Partner, the Limited
Partners, and the Investor General Partners agree to participate
in the program so established by the Managing General Partner.
4.02(b). MANAGEMENT. Subject to any restrictions contained in
this Agreement, the Managing General Partner shall exercise full
control over all operations of the Partnership.
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<PAGE> 13
4.02(c). GENERAL POWERS OF THE MANAGING GENERAL PARTNER.
4.02(c)(1). IN GENERAL. Subject to the provisions of 4.03 and
its subsections, and to any authority which may be granted the
Operator under 4.02(c)(3)(b), the Managing General Partner shall
have full authority to do all things deemed necessary or
desirable by it in the conduct of the business of the
Partnership. Without limiting the generality of the foregoing,
the Managing General Partner is expressly authorized to engage
in:
(i) the making of all determinations of which Leases, wells
and operations will be participated in by the
Partnership, which Leases are developed and which Leases
are abandoned, or at its sole discretion, sold or
assigned to other parties, including other investor
ventures organized by the Managing General Partner, the
Operator or any of their Affiliates;
(ii) the negotiation and execution on any terms deemed
desirable in its sole discretion of any contracts,
conveyances, or other instruments, considered useful to
the conduct of the operations or the implementation of
the powers granted it under this Agreement, including,
without limitation, the making of agreements for the
conduct of operations or the furnishing of equipment,
facilities, supplies and material, services, and
personnel and the exercise of any options, elections, or
decisions under any such agreements;
(iii) the exercise, on behalf of the Partnership or the
parties, in such manner as the Managing General Partner
in its sole judgment deems best, of all rights,
elections and options granted or imposed by any
agreement, statute, rule, regulation, or order;
(iv) the making of all decisions concerning the desirability
of payment, and the payment or supervision of the
payment, of all delay rentals and shut-in and minimum or
advance royalty payments;
(v) the selection of full or part-time employees and outside
consultants and contractors and the determination of
their compensation and other terms of employment or
hiring;
(vi) the maintenance of such insurance for the benefit of the
Partnership and the parties as it deems necessary, but,
subject to 6.01(c), in no event less in amount or type
than the following:
(a) worker's compensation insurance in full compliance
with the laws of the Commonwealth of Pennsylvania
and any other applicable state laws;
(b) liability insurance (including automobile) which has
a $1,000,000 combined single limit for bodily injury
and property damage in any one accident or
occurrence and in the aggregate; and
(c) such excess liability insurance as to bodily injury
and property damage with combined limits of
$50,000,000, per occurrence or accident and in the
aggregate, which includes $250,000 of seepage,
pollution and contamination insurance which protects
and defends the insured against property damage or
bodily injury claims from third parties (other than
a co-owner of the Working Interest) alleging
seepage, pollution or contamination damage resulting
from an accident. The excess liability insurance
shall be in place and effective no later than the
Initial Closing Date and shall continue until the
Investor General Partners are converted to Limited
Partners, at which time the Partnership shall
continue to enjoy the benefit of the Managing
General Partner's $11,000,000 liability insurance on
the same basis as the Managing General Partner and
its Affiliates, including the Managing General
Partner's other Programs;
(vii) the use of the funds and revenues of the Partnership,
and the borrowing on behalf of, and the loan of money
to, the Partnership, on any terms it sees fit, for any
purpose, including without limitation the conduct or
financing, in whole or in part, of the drilling and
other activities of the Partnership or the conduct of
additional operations, and the repayment of any such
borrowings or loans used initially to finance such
operations or activities;
(viii) the disposition, hypothecation, sale, exchange,
release, surrender, reassignment or abandonment of any
or all assets of the Partnership (including, without
limitation, the Leases, wells, equipment and production
therefrom) provided that the sale of all or
substantially all of the assets of the Partnership shall
only be made as provided in 4.03(d)(6);
(ix) the formation of any further limited or general
partnership, tax partnership, joint venture, or other
relationship which it deems desirable with any parties
who it, in its sole and absolute discretion, selects,
including any of its Affiliates;
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<PAGE> 14
(x) the control of any matters affecting the rights and
obligations of the Partnership, including the employment
of attorneys to advise and otherwise represent the
Partnership, the conduct of litigation and other
incurring of legal expense, and the settlement of claims
and litigation;
(xi) the operation of producing wells drilled on the Leases
owned by the Partnership, or on a Prospect which
includes any part of the Leases;
(xii) the exercise of the rights granted to it under the power
of attorney created pursuant to this Agreement; and
(xiii) the incurring of all costs and the making of all
expenditures in any way related to any of the foregoing.
4.02(c)(2). SCOPE OF POWERS. The Managing General Partner's
powers shall extend to any operation participated in by the
Partnership or affecting its Leases, or other property or assets,
irrespective of whether or not the Managing General Partner is
designated operator of the operation by any outside persons
participating therein.
4.02(c)(3). DELEGATION OF AUTHORITY.
4.02(c)(3)(a). IN GENERAL. The Managing General Partner may
subcontract and delegate all or any part of its duties hereunder
to any entity chosen by it, including an entity related to it.
The party shall have the same powers in the conduct of the duties
as would the Managing General Partner. The delegation, however,
shall not relieve the Managing General Partner of its
responsibilities hereunder.
4.02(c)(3)(b). DELEGATION TO OPERATOR. The Managing General
Partner is specifically authorized to delegate any or all of its
duties to the Operator by executing the Drilling and Operating
Agreement. This delegation shall not relieve the Managing
General Partner of its responsibilities hereunder.
In no event shall any consideration received for operator
services be in excess of the competitive rates or duplicative of
any consideration or reimbursements received pursuant to this
Agreement. The Managing General Partner may not benefit by
interpositioning itself between the Partnership and the actual
provider of operator services.
4.02(c)(4). RELATED PARTY TRANSACTIONS. Subject to the
provisions of 4.03 and its subsections, any transaction which
the Managing General Partner is authorized to enter into on
behalf of the Partnership under the authority granted in this
section and its subsections, may be entered into by the Managing
General Partner with itself or with any other general partner,
the Operator or any of their Affiliates.
4.02(d). ADDITIONAL POWERS. In addition to the powers granted
the Managing General Partner under 4.02(c) and its subsections
or elsewhere in this Agreement, the Managing General Partner,
when specified, shall have the following additional express
powers.
4.02(d)(1). DRILLING CONTRACTS. Partnership Wells drilled in
Pennsylvania and other areas of the Appalachian Basin may be
drilled pursuant to the Drilling and Operating Agreement on a
per-foot basis with the Managing General Partner or its
Affiliates based on $39.15 per foot or, with respect to a well
which the Partnership elects not to complete, $20.60 per foot.
Partnership Wells in other areas of the United States shall be
drilled at competitive rates and in no event shall the Managing
General Partner or its Affiliates, as drilling contractor,
receive a per foot rate which is not competitive with the rates
charged by unaffiliated contractors in the same geographic
region. No turnkey drilling contracts shall be made between the
Managing General Partner or its Affiliates and the Partnership.
Neither the Managing General Partner nor its Affiliates shall
profit by drilling in contravention of its fiduciary obligations
to the Partnership. The Managing General Partner may not benefit
by interpositioning itself between the Partnership and the actual
provider of drilling contractor services.
4.02(d)(2). POWER OF ATTORNEY.
4.02(d)(2)(a). IN GENERAL. Each party hereto hereby makes,
constitutes and appoints the Managing General Partner his true
and lawful attorney-in-fact for him and in his name, place and
stead and for his use and benefit, from time to time:
(i) to create, prepare, complete, execute, file, swear to,
deliver, endorse and record any and all documents,
certificates or other instruments required or necessary
to amend this Agreement as authorized under the terms of
this Agreement, or to qualify the Partnership as a
limited partnership or partnership in commendam and to
conduct business under the laws of any jurisdiction in
which the Managing General Partner elects to qualify the
Partnership or conduct business; and
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<PAGE> 15
(ii) to create, prepare, complete, execute, file, swear to,
deliver, endorse and record any and all instruments,
assignments, security agreements, financing statements,
certificates and other documents as may be necessary
from time to time to implement the borrowing powers
granted under this Agreement.
4.02(d)(2)(b). FURTHER ACTION. Each party hereto hereby
authorizes such attorney-in-fact to take any further action which
such attorney-in-fact shall consider necessary or advisable in
connection with any of the foregoing. Each party acknowledges
that the power of attorney granted under this section is a
special power of attorney coupled with an interest and is
irrevocable and shall survive the assignment by a party of the
whole or a portion of his interest in the Partnership; except
when the assignment is of such party's entire interest in the
Partnership and the purchaser, transferee or assignee thereof,
with the consent of the Managing General Partner, is admitted as
a successor Limited Partner or Investor General Partner, the
power of attorney shall survive the delivery of the assignment
for the sole purpose of enabling such attorney-in-fact to
execute, acknowledge and file any agreement, certificate,
instrument or document necessary to effect the substitution.
4.02(d)(2)(c). POWER OF ATTORNEY TO OPERATOR. The Managing
General Partner is hereby authorized to grant a Power of Attorney
to the Operator on behalf of the Partnership.
4.02(e). BORROWINGS AND USE OF PARTNERSHIP REVENUES.
4.02(e)(1). POWER TO BORROW OR USE PARTNERSHIP REVENUES.
4.02(e)(1)(a). IN GENERAL. If additional funds over the
Partners' Capital Contributions are needed for Partnership
operations, the Managing General Partner may:
(i) use Partnership revenues allocable to the accounts of
the Partners on whose behalf such Partnership revenues
are expended for such purposes; or
(ii) the Managing General Partner and its Affiliates may
advance to the Partnership the funds necessary pursuant
to 4.03(d)(8)(b).
4.02(e)(1)(b). LIMITATION ON BORROWING. The borrowings (other
than credit transactions on open account customary in the
industry to obtain goods and services) shall be without recourse
to the Investor General Partners and the Limited Partners except
as otherwise provided herein. Also, the amount that may be
borrowed at any one time (other than credit transactions on open
account customary in the industry to obtain goods and services)
shall not exceed an amount equal to 5% of the Partnership
Subscription. Notwithstanding, the Managing General Partner and
it Affiliates shall not be obligated to advance the funds to the
Partnership.
4.02(e)(2). IMPLEMENTATION OF BORROWING PROVISIONS.
4.02(e)(2)(a). INDEMNIFICATION AND HOLD HARMLESS. Each party
hereto for whose account an interest in Partnership assets is
mortgaged, pledged or otherwise encumbered hereby indemnifies and
agrees to hold harmless every other party from any loss resulting
from the mortgage, pledge or encumbrance, limited to the amount
of his agreed Capital Contribution.
4.02(e)(2)(b). FORECLOSURE. Should a foreclosure of a mortgage,
pledge or security interest permitted hereunder occur, any
revenues, proceeds and all taxable gain or loss resulting from
the foreclosure shall be allocated entirely to the party for
whose account the interest was pledged. The party's interest in
the remaining revenues of the Partnership shall be reduced to
take into account the foreclosure of the interests foreclosed.
4.02(f). TAX MATTERS PARTNER.
4.02(f)(1). DESIGNATION OF TAX MATTERS PARTNER. The Managing
General Partner is hereby designated the Tax Matters Partner of
the Partnership pursuant to 6231(a)(7) of the Code. The Managing
General Partner is authorized to act in this capacity on behalf
of the Partnership and the Participants and to take any action,
including settlement or litigation, which it in its sole
discretion deems to be in the best interest of the Partnership.
4.02(f)(2). COSTS INCURRED BY TAX MATTERS PARTNER. Costs
incurred by the Tax Matters Partner shall be considered a Direct
Cost of the Partnership.
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<PAGE> 16
4.02(f)(3). NOTICE TO PARTICIPANTS OF IRS PROCEEDINGS. The Tax
Matters Partner shall notify all Participants of any partnership
administrative proceedings commenced by the Internal Revenue
Service, and thereafter shall furnish all Participants periodic
reports at least quarterly on the status of the proceedings.
4.02(f)(4). PARTICIPANT RESTRICTIONS. Each Partner agrees as
follows:
(i) he will not file the statement described in Section
6224(c)(3)(B) of the Code prohibiting the Managing
General Partner as the Tax Matters Partner for the
Partnership from entering into a settlement on his
behalf with respect to partnership items (as such term
is defined in Section 6231(a)(3) of Code) of the
Partnership;
(ii) he will not form or become and exercise any rights as a
member of a group of Partners having a 5% or greater
interest in the profits of the Partnership under Section
6223(b)(2) of the Code; and
(iii) the Managing General Partner is authorized to file a
copy of this Agreement (or pertinent portions hereof)
with the Internal Revenue Service pursuant to Section
6224(b) of the Code if necessary to perfect the waiver
of rights under this subsection 4.02(f)(4).
4.03. GENERAL RIGHTS AND OBLIGATIONS OF THE PARTICIPANTS AND
RESTRICTED AND PROHIBITED TRANSACTIONS.
4.03(a)(1). LIMITED LIABILITY OF LIMITED PARTNERS. Limited
Partners shall not be bound by the obligations of the
Partnership. Limited Partners shall not be personally liable for
any debts of the Partnership or any of the obligations or losses
thereof beyond the amount of their agreed Capital Contributions,
except to the extent the Limited Partners also subscribe to the
Partnership as Investor General Partners, or, in the case of the
Managing General Partner if it purchases Limited Partner Units.
4.03(a)(2). NO MANAGEMENT AUTHORITY OF PARTICIPANTS.
Participants, as such, shall have no power over the conduct of
the affairs of the Partnership. No Participant, as such, shall
take part in the management of the business of the Partnership,
or have the power to sign for or to bind the Partnership.
4.03(b). REPORTS AND DISCLOSURES.
4.03(b)(1). ANNUAL REPORTS AND AUDITED FINANCIAL STATEMENTS.
Commencing with the 1998 calendar year, the Partnership shall
provide each Participant an annual report within 120 days after
the close of the calendar year, and commencing with the 1999
calendar year, a report within 75 days after the end of the first
six months of its calendar year, containing, except as otherwise
indicated, at least the information set forth below:
(i) Audited financial statements of the Partnership,
including a balance sheet and statements of income, cash
flow and Partners' equity, which shall be prepared in
accordance with generally accepted accounting principles
and accompanied by an auditor's report containing an
opinion of an independent public accountant selected by
the Managing General Partner stating that his audit was
made in accordance with generally accepted auditing
standards and that in his opinion the financial
statements present fairly the financial position,
results of operations, partners' equity and cash flows
in accordance with generally accepted accounting
principles. Semiannual reports need not be audited.
(ii) A summary itemization, by type and/or classification of
the total fees and compensation including any
unaccountable, fixed payment reimbursements for
Administrative Costs and Operating Costs, paid by the
Partnership, or indirectly on behalf of the Partnership,
to the Managing General Partner, the Operator and their
Affiliates. In addition, Participants shall be provided
the percentage that the annual unaccountable, fixed fee
reimbursement for Administrative Costs bears to annual
Partnership revenues.
(iii) A description of each Prospect in which the Partnership
owns an interest, including the cost, location, number
of acres under lease and the Working Interest owned
therein by the Partnership, except succeeding reports
need contain only material changes, if any, regarding
the Prospects.
(iv) A list of the wells drilled or abandoned by the
Partnership during the period of the report (indicating
whether each of the wells has or has not been
completed), and a statement of the cost of each well
completed or abandoned. Justification shall be included
for wells abandoned after production has commenced.
(v) A description of all farmins and joint ventures, made
during the period of the report, including the Managing
General Partner's justification for the arrangement and
a description of the material terms.
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<PAGE> 17
(vi) A schedule reflecting:
(a) the total Partnership costs;
(b) the costs paid by the Managing General Partner and
the costs paid by the Participants;
(c) the total Partnership revenues;
(d) the revenues received or credited to the Managing
General Partner and the revenues received and
credited to the Participants; and
(e) a reconciliation of the expenses and revenues in
accordance with the provisions of Article V.
4.03(b)(2). TAX INFORMATION. The Partnership shall, by March 15
of each year, prepare, or supervise the preparation of, and
transmit to each Partner the information needed for the Partner
to file his federal income tax return, any required state income
tax return and any other reporting or filing requirements imposed
by any governmental agency or authority.
4.03(b)(3). RESERVE REPORT. Annually, beginning January 1,
2000, a computation of the total oil and gas Proved Reserves of
the Partnership and the present worth of the reserves determined
using a discount rate of 10%, a constant price for the oil and
basing the price of gas upon the existing gas contracts shall be
provided to each Participant along with each Participant's
interest therein. The reserve computations shall be based upon
engineering reports prepared by the Managing General Partner and
reviewed by an Independent Expert. There shall also be included
an estimate of the time required for the extraction of the
reserves and a statement that because of the time period required
to extract the reserves the present value of revenues to be
obtained in the future is less than if immediately receivable.
In addition to the foregoing computation and required estimate,
as soon as possible, and in no event more than ninety days after
the occurrence of an event leading to reduction of the reserves
of the Partnership of 10% or more, excluding reduction as a
result of normal production, sales of reserves or product price
changes, a computation and estimate shall be sent to each
Participant.
4.03(b)(4). COST OF REPORTS. The cost of all reports described
in this 4.03(b) shall be paid by the Partnership as Direct
Costs.
4.03(b)(5). PARTICIPANT ACCESS TO RECORDS. The Participants
and/or their representatives shall be permitted access to all
records of the Partnership, after adequate notice, at any
reasonable time and may inspect and copy any of them. The
Managing General Partner will provide a copy of this Agreement or
other documents to the Participants after the Partnership's
documents have been filed with the Commonwealth of Pennsylvania
upon request.
Notwithstanding the foregoing, the Managing General Partner may
keep logs, well reports and other drilling and operating data
confidential for reasonable periods of time. The Managing General
Partner may release information concerning the operations of the
Partnership to the sources that are customary in the industry or
required by rule, regulation, or order of any regulatory body.
4.03(b)(6). REQUIRED LENGTH OF TIME TO HOLD RECORDS. The
Managing General Partner shall maintain and preserve during the
term of the Partnership and for six years thereafter all
accounts, books and other relevant documents. This includes a
record that a Participant meets the suitability standards
established in connection with an investment in the Partnership
and of fair market value as set forth in 4.01(a)(4).
4.03(b)(7). PARTICIPANT LISTS. The following provisions apply
regarding access to the list of Participants:
(i) an alphabetical list of the names, addresses and
business telephone numbers of the Participants along
with the number of Units held by each of them (the
"Participant List") shall be maintained as a part of the
books and records of the Partnership and shall be
available for inspection by any Participant or its
designated agent at the home office of the Partnership
upon the request of the Participant;
(ii) the Participant List shall be updated at least quarterly
to reflect changes in the information contained therein;
(iii) a copy of the Participant List shall be mailed to any
Participant requesting the Participant List within ten
days of the written request. The copy of the Participant
List shall be printed in alphabetical order, on white
paper, and in a readily readable type size (in no event
smaller than 10-point type). A reasonable charge for
copy work shall be charged by the Partnership;
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<PAGE> 18
(iv) the purposes for which a Participant may request a copy
of the Participant List include, without limitation,
matters relating to Participant's voting rights under
this Agreement and the exercise of Participant's rights
under the federal proxy laws; and
(v) if the Managing General Partner neglects or refuses to
exhibit, produce, or mail a copy of the Participant List
as requested, the Managing General Partner shall be
liable to any Participant requesting the list for the
costs, including attorneys fees, incurred by that
Participant for compelling the production of the
Participant List, and for actual damages suffered by any
Participant by reason of such refusal or neglect. It
shall be a defense that the actual purpose and reason
for the requests for inspection or for a copy of the
Participant List is to secure the list of Participants
or other information for the purpose of selling such
list or information or copies thereof, or of using the
same for a commercial purpose other than in the interest
of the applicant as a Participant relative to the
affairs of the Partnership. The Managing General Partner
shall require the Participant requesting the Participant
List to represent in writing that the list was not
requested for a commercial purpose unrelated to the
Participant's interest in the Partnership. The remedies
provided hereunder to Participants requesting copies of
the Participant List are in addition to, and shall not
in any way limit, other remedies available to
Participants under federal law, or the laws of any
state.
4.03(b)(8). STATE FILINGS. Concurrently with their transmittal
to Participants, and as required, the Managing General Partner
shall file a copy of each report provided for in this 4.03(b)
with the California Commissioner of Corporations and with the
securities commissions of other states which request the report.
4.03(c). MEETINGS OF PARTICIPANTS.
4.03(c)(1). PROCEDURE FOR A PARTICIPANT MEETING.
4.03(c)(1)(a). MEETINGS MAY BE CALLED BY MANAGING GENERAL
PARTNER OR PARTICIPANTS. Meetings of the Participants may be
called by the Managing General Partner or by Participants whose
Agreed Subscriptions equal 10% or more of the Partnership
Subscription for any matters for which Participants may vote.
The call for a meeting shall be deemed to have been made upon
receipt by the Managing General Partner of a written request from
holders of the requisite percentage of Agreed Subscriptions
stating the purpose(s) of the meeting.
4.03(c)(1)(b). NOTICE REQUIREMENT. The Managing General Partner
shall deposit in the United States mail within fifteen days after
the receipt of the request, written notice to all Participants of
the meeting and the purpose of the meeting. The meeting shall be
held on a date not less than thirty days nor more than sixty days
after the date of the mailing of the notice, at a reasonable time
and place. Notwithstanding, the date for notice of the meeting
may be extended for a period of up to sixty days, if in the
opinion of the Managing General Partner the additional time is
necessary to permit preparation of proxy or information
statements or other documents required to be delivered in
connection with the meeting by the Securities and Exchange
Commission or other regulatory authorities.
4.03(c)(1)(c). MAY VOTE BY PROXY. Participants shall have the
right to vote in person or by proxy at any meetings of the
Participants.
4.03(c)(2). SPECIAL VOTING RIGHTS. At the request of
Participants whose Agreed Subscriptions equal 10% or more of the
Partnership Subscription, the Managing General Partner shall call
for a vote by Participants. Each Unit is entitled to one vote on
all matters, and each fractional Unit is entitled to that
fraction of one vote equal to the fractional interest in the
Unit. Participants whose Agreed Subscriptions equal a majority of
the Partnership Subscription may, without the concurrence of the
Managing General Partner or its Affiliates, vote to:
(i) amend this Agreement; provided however, any amendment
may not increase the duties or liabilities of any
Participant or the Managing General Partner or increase
or decrease the profit or loss sharing or required
Capital Contribution of any Participant or the Managing
General Partner without the approval of the Participant
or the Managing General Partner. Furthermore, any
amendment may not affect the classification of
Partnership income and loss for federal income tax
purposes without the unanimous approval of all
Participants;
(ii) dissolve the Partnership;
(iii) remove the Managing General Partner and elect a new
Managing General Partner;
(iv) elect a new Managing General Partner if the Managing
General Partner elects to withdraw from the Partnership;
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<PAGE> 19
(v) remove the Operator and elect a new Operator;
(vi) approve or disapprove the sale of all or substantially
all of the assets of the Partnership; and
(vii) cancel any contract for services with the Managing
General Partner, or the Operator or their Affiliates,
without penalty upon sixty days notice.
4.03(c)(3). RESTRICTIONS ON MANAGING GENERAL PARTNER'S VOTING
RIGHTS. With respect to Units owned by the Managing General
Partner or its Affiliates, the Managing General Partner and its
Affiliates may not vote or consent on the matters set forth in
4.03(c)(2)(iii) and (v) above, or regarding any transaction
between the Partnership and the Managing General Partner or its
Affiliates. In determining the requisite percentage in interest
of Units necessary to approve any Partnership matter on which the
Managing General Partner and its Affiliates may not vote or
consent, any Units owned by the Managing General Partner and its
Affiliates shall not be included.
4.03(c)(4). RESTRICTIONS ON LIMITED PARTNER VOTING RIGHTS. The
exercise by the Limited Partners of the rights granted
Participants under 4.03(c), except for the special voting
rights granted Participants under 4.03(c)(2), shall be subject
to the prior legal determination that the grant or exercise of
the powers will not adversely affect the limited liability of
Limited Partners, unless in the opinion of counsel to the
Partnership, the legal determination is not necessary under
Pennsylvania law to maintain the limited liability of the Limited
Partners. A legal determination under this paragraph may be made
either pursuant to an opinion of counsel, the counsel being
independent of the Partnership and selected upon the vote of
Limited Partners whose Agreed Subscriptions equal a majority of
the Agreed Subscriptions held by Limited Partners, or a
declaratory judgment issued by a court of competent jurisdiction.
The Investor General Partners may exercise the rights granted to
the Participants whether or not the Limited Partners can
participate in the vote if the Investor General Partners
represent the requisite percentage of the Participants necessary
to take the action.
4.03(d). TRANSACTIONS WITH THE MANAGING GENERAL PARTNER.
4.03(d)(1). TRANSFER OF EQUAL PROPORTIONATE INTEREST. When the
Managing General Partner or an Affiliate (excluding another
Program in which the interest of the Managing General Partner or
its Affiliates is substantially similar to or less than their
interest in the Partnership) sells, transfers or conveys any oil,
gas or other mineral interests or property to the Partnership, it
must, at the same time, sell, transfer or convey to the Partnership an equal
proportionate interest in all its other property in the same
Prospect. Notwithstanding, a Prospect shall be deemed to consist
of the drilling or spacing unit on which the well will be drilled
by the Partnership if the geological feature to which the well
will be drilled contains Proved Reserves and the drilling or
spacing u nit protects against drainage.
With respect to an oil
and gas Prospect located in Ohio and Pennsylvania on which a well
will be drilled by the Partnership to test the Clinton/Medina
geologic formation a Prospect shall be deemed to consist of the
drilling and spacing unit if it meets the test in the preceding
sentence. Neither the Managing General Partner nor its
Affiliates may drill any well within 1,650 feet of an existing
Partnership Well in the Clinton/Medina formation in Pennsylvania
or within 1,100 feet of an existing Partnership Well in Ohio
within five years of the drilling of the Partnership Well. If the
Partnership abandons its interest in a well, this restriction
will continue for one year following the abandonment.
If the area constituting the Partnership's Prospect is
subsequently enlarged to encompass any area wherein the Managing
General Partner or an Affiliate (excluding another Program in
which the interest of the Managing General Partner or its
Affiliates is substantially similar to or less than their
interest in the Partnership) owns a separate property interest,
the separate property interest or a portion thereof shall be
sold, transferred or conveyed to the Partnership as set forth in
4.01(a)(4), 4.03(d)(1) and 4.03(d)(2) if the activities of the
Partnership were material in establishing the existence of Proved
Undeveloped Reserves which are attributable to the separate
property interest. Notwithstanding, Prospects in the
Clinton/Medina geological formation shall not be enlarged or
contracted if the Prospect was limited to the drilling or spacing
unit because the well was being drilled to Proved Reserves in the
Clinton/Medina geological formation and the drilling or spacing
unit protected against drainage.
4.03(d)(2). TRANSFER OF LESS THAN THE MANAGING GENERAL PARTNER'S
AND ITS AFFILIATES' ENTIRE INTEREST. A sale, transfer or a
conveyance to the Partnership of less than all of the ownership
of the Managing General Partner or an Affiliate (excluding
another Program in which the interest of the Managing General
Partner or its Affiliates is substantially similar to or less
than their interest in the Partnership) in any Prospect shall not
be made unless:
(i) the interest retained by the Managing General Partner or
the Affiliate is a proportionate Working Interest;
(ii) the respective obligations of the Managing General
Partner or its Affiliates and the Partnership are
substantially the same after the sale of the interest by
the Managing General Partner or its Affiliates; and
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<PAGE> 20
(iii) the Managing General Partner's interest in revenues does
not exceed the amount proportionate to its retained
Working Interest.
Neither the Managing General Partner nor any Affiliate shall
retain any Overriding Royalty Interests or other burdens on an
interest sold or transferred by it to the Partnership. With
respect to its retained interest the Managing General Partner
shall not Farmout a Lease for the primary purpose of avoiding
payment of its costs relating to drilling the Lease. This section
does not prevent the Managing General Partner or its Affiliates
from subsequently dealing with their retained interest as they
may choose with unaffiliated parties or Affiliated partnerships.
4.03(d)(3). NO SALE OF LEASES TO THE MANAGING GENERAL PARTNER.
The Managing General Partner and its Affiliates shall not
purchase any producing or non-producing oil and gas properties
from the Partnership.
4.03(d)(4). LIMITATIONS ON ACTIVITIES OF THE MANAGING GENERAL
PARTNER AND ITS AFFILIATES ON LEASES ACQUIRED BY THE PARTNERSHIP.
During a period of five years from the Offering Termination Date
of the Partnership, if the Managing General Partner or any of its
Affiliates (excluding another Program in which the interest of
the Managing General Partner or its Affiliates is substantially
similar to or less than their interest in the Partnership)
proposes to acquire an interest, from an unaffiliated person, in
a Prospect in which the Partnership possesses an interest or in a
Prospect in which the Partnership's interest has been terminated
without compensation within one year preceding such proposed
acquisition, the following conditions shall apply:
(i) if the Managing General Partner or the Affiliate
(excluding another Program in which the interest of the
Managing General Partner or its Affiliates is
substantially similar to or less than their interest in
the Partnership) does not currently own property in the
Prospect separately from the Partnership, then neither
the Managing General Partner nor the Affiliate shall be
permitted to purchase an interest in the Prospect; and
(ii) if the Managing General Partner or the Affiliate
(excluding another Program in which the interest of the
Managing General Partner or its Affiliates is
substantially similar to or less than their interest in
the Partnership) currently owns a proportionate interest
in the Prospect separately from the Partnership, then
the interest to be acquired shall be divided between the
Partnership and the Managing General Partner or the
Affiliate in the same proportion as is the other
property in the Prospect. Provided, however, if cash or
financing is not available to the Partnership to enable
it to consummate a purchase of the additional interest
to which it is entitled, then neither the Managing
General Partner nor the Affiliate shall be permitted to
purchase any additional interest in the Prospect.
4.03(d)(5). TRANSFER OF LEASES BETWEEN AFFILIATED LIMITED
PARTNERSHIPS. The Partnership shall not purchase properties from
or sell properties to any other Affiliated partnership. This
prohibition, however, shall not apply to joint ventures among
Affiliated partnerships, provided that the respective obligations
and revenue sharing of all parties to the transaction are
substantially the same and the compensation arrangement or any
other interest or right of either the Managing General Partner or
its Affiliates is the same in each Affiliated partnership, or, if
different, the aggregate compensation of the Managing General
Partner or the Affiliate is reduced to reflect the lower
compensation arrangement.
4.03(d)(6). SALE OF ALL ASSETS. The sale of all or substantially
all of the assets of the Partnership (including, without
limitation, Leases, wells, equipment and production therefrom)
shall be made only with the consent of Participants whose Agreed
Subscriptions equal a majority of the Partnership Subscription.
4.03(d)(7). SERVICES.
4.03(d)(7)(a). COMPETITIVE RATES. The Managing General Partner
and any Affiliate shall not render to the Partnership any oil
field, equipage or other services nor sell or lease to the
Partnership any equipment or related supplies unless:
(i) the person is engaged, independently of the Partnership
and as an ordinary and ongoing business, in the business
of rendering such services or selling or leasing such
equipment and supplies to a substantial extent to other
persons in the oil and gas industry in addition to the
partnerships in which the Managing General Partner or an
Affiliate has an interest; and
(ii) the compensation, price or rental therefor is
competitive with the compensation, price or rental of
other persons in the area engaged in the business of
rendering comparable services or selling or leasing
comparable equipment and supplies which could reasonably
be made available to the Partnership.
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<PAGE> 21
If the person is not engaged in such a business then such
compensation, price or rental shall be the Cost of the services,
equipment or supplies to the person or the competitive rate which
could be obtained in the area, whichever is less.
4.03(d)(7)(b). IF NOT DISCLOSED IN THE PROSPECTUS THEN SERVICES
BY THE MANAGING GENERAL PARTNER MUST BE DESCRIBED IN A SEPARATE
CONTRACT AND CANCELLABLE. Any services for which the Managing
General Partner or an Affiliate is to receive compensation other
than those described in this Prospectus shall be embodied in a
written contract which precisely describes the services to be
rendered and all compensation to be paid. These contracts are
cancellable without penalty upon sixty days written notice by
Participants whose Agreed Subscriptions equal a majority of the
Partnership Subscription.
4.03(d)(8). LOANS.
4.03(d)(8)(a). NO LOANS FROM THE PARTNERSHIP. No loans or
advances shall be made by the Partnership to the Managing General
Partner or any Affiliate.
4.03(d)(8)(b). LOANS TO THE PARTNERSHIP. Neither the Managing
General Partner nor any Affiliate shall loan money to the
Partnership when the interest to be charged exceeds the Managing
General Partner's or the Affiliate's interest cost or when the
interest to be charged exceeds that which would be charged to the
Partnership (without reference to the Managing General Partner's
or the Affiliate's financial abilities or guarantees) by
unrelated lenders, on comparable loans for the same purpose.
Neither the Managing General Partner nor any Affiliate shall
receive points or other financing charges or fees, regardless of
the amount, although the actual amount of the charges incurred
from third-party lenders may be reimbursed to the Managing
General Partner or the Affiliate.
4.03(d)(9). NO FARMOUTS. The Partnership shall not Farmout its
Leases.
4.03(d)(10). NO COMPENSATING BALANCES. Neither the Managing
General Partner nor any Affiliate shall use the Partnership's
funds as compensating balances for its own benefit.
4.03(d)(11). FUTURE PRODUCTION. Neither the Managing General
Partner nor any Affiliate shall commit the future production of a
well developed by the Partnership exclusively for its own
benefit.
4.03(d)(12). MARKETING ARRANGEMENTS. All benefits from marketing
arrangements or other relationships affecting the property of the
Managing General Partner or its Affiliates and the Partnership
shall be fairly and equitably apportioned according to the
respective interests of each in the property. The Managing
General Partner shall treat all wells in a geographic area
equally concerning to whom and at what price the Partnership's
gas will be sold and to whom and at what price the gas of other
oil and gas Programs which the Managing General Partner has
sponsored or will sponsor will be sold. The Managing General
Partner calculates a weighted average selling price for all the
gas sold in a geographic area by taking all money received from
the sale of all the gas sold to its customers in a geographic
area and dividing by the volume of all gas sold from the wells in
that geographic area.
Notwithstanding, the Managing General Partner and its Affiliates
are parties to, and contract for, the sale of natural gas with
industrial end-users and will continue to enter into such
contracts on their own behalf, and the Partnership will not be a
party to such contracts. The Managing General Partner and its
Affiliates also have a substantial interest in certain pipeline
facilities and compression facilities which access interstate
pipeline systems, which it is anticipated will be used to
transport the Partnership's gas production as well as Affiliated
partnership and third-party gas production, and the Partnership
will not receive any interest in the Managing General Partner's
and its Affiliates' pipeline or gathering system or compression
facilities.
4.03(d)(13). ADVANCE PAYMENTS. Advance payments by the
Partnership to the Managing General Partner and its Affiliates
are prohibited, except when advance payments are required to
secure the tax benefits of prepaid drilling costs and for a
business purpose. These advance payments, if any, shall not
include nonrefundable payments for completion costs prior to the
time that a decision was made that the well or wells warrant a
completion attempt.
4.03(d)(14). NO REBATES. No rebates or give-ups may be received
by the Managing General Partner or any Affiliate nor may the
Managing General Partner or any Affiliate participate in any
reciprocal business arrangements which would circumvent these
guidelines.
4.03(d)(15). PARTICIPATION IN OTHER PARTNERSHIPS. If the
Partnership participates in other partnerships or joint ventures
(multi-tier arrangements), the terms of any such arrangements
shall not result in the circumvention of any of the requirements
or prohibitions contained in this Agreement, including the
following:
(i) there shall be no duplication or increase in
organization and offering expenses, the Managing General
Partner's compensation, Partnership expenses or other
fees and costs;
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<PAGE> 22
(ii) there shall be no substantive alteration in the
fiduciary and contractual relationship between the
Managing General Partner and the Participants; and
(iii) there shall be no diminishment in the voting rights of
the Participants.
4.03(d)(16). ROLL-UP LIMITATIONS. In connection with a proposed
Roll-Up, the following shall apply:
4.03(d)(16)(a). REQUIREMENT FOR APPRAISAL AND ITS ASSUMPTIONS. In
connection with a proposed Roll-Up, an appraisal of all
Partnership assets shall be obtained from a competent
Independent Expert. If the appraisal will be included in a
prospectus used to offer securities of a Roll-Up Entity, the
appraisal shall be filed with the Securities and Exchange
Commission and the Administrator as an exhibit to the
registration statement for the offering. Accordingly, an issuer
using the appraisal shall be subject to liability for violation
of Section 11 of the Securities Act of 1933 and comparable
provisions under state law for any material misrepresentations or
material omissions in the appraisal.
Partnership assets shall be appraised on a consistent basis. The
appraisal shall be based on all relevant information, including
current reserve estimates prepared by an independent petroleum
consultant, and shall indicate the value of the Partnership's
assets as of a date immediately prior to the announcement of the
proposed Roll-Up transaction. The appraisal shall assume an
orderly liquidation of the Partnership's assets over a twelve
month period. The terms of the engagement of the Independent
Expert shall clearly state that the engagement is for the benefit
of the Partnership and the Participants. A summary of the
independent appraisal, indicating all material assumptions
underlying the appraisal, shall be included in a report to the
Participants in connection with a proposed Roll-Up.
4.03(d)(16)(b). RIGHTS OF PARTICIPANTS WHO VOTE AGAINST PROPOSAL. In
connection with a proposed Roll-Up, Participants who vote "no" on
the proposal shall be offered the choice of:
(i) accepting the securities of the Roll-Up Entity offered
in the proposed Roll-Up;
(ii) remaining as Participants in the Partnership and
preserving their interests therein on the same terms and
conditions as existed previously; or
(iii) receiving cash in an amount equal to the Participants'
pro rata share of the appraised value of the net assets
of the Partnership.
4.03(d)(16)(c). NO ROLL-UP IF DIMINISHMENT OF VOTING RIGHTS. The
Partnership shall not participate in any proposed Roll-Up which,
if approved, would result in the diminishment of any
Participant's voting rights under the Roll-Up Entity's chartering
agreement. In no event shall the democracy rights of
Participants in the Roll-Up Entity be less than those provided
for under 4.03(c) and 4.03(c)(2) of this Agreement. If the
Roll-Up Entity is a corporation, the democracy rights of
Participants shall correspond to the democracy rights provided
for in this Agreement to the greatest extent possible.
4.03(d)(16)(d). NO ROLL-UP IF ACCUMULATION OF SHARES WOULD BE IMPEDED.
The Partnership shall not participate in any proposed Roll-Up
transaction which includes provisions which would operate to
materially impede or frustrate the accumulation of shares by any
purchaser of the securities of the Roll-Up Entity (except to the
minimum extent necessary to preserve the tax status of the
Roll-Up Entity). The Partnership shall not participate in any
proposed Roll-Up transaction which would limit the ability of a
Participant to exercise the voting rights of its securities of
the Roll-Up Entity on the basis of the number of Units held by
that Participant.
4.03(d)(16)(e). NO ROLL-UP IF ACCESS TO RECORDS WOULD BE LIMITED. The
Partnership shall not participate in a Roll-Up in which
Participants' rights of access to the records of the Roll-Up
Entity will be less than those provided for under 4.03(b)(5)
4.03(b)(6) and 4.03(b)(7) of this Agreement.
4.03(d)(16)(f). COST OF ROLL-UP. The Partnership shall not participate in
any proposed Roll-Up transaction in which any of the costs of the
transaction would be borne by the Partnership if Participants
whose Agreed Subscription equal 75% of the Partnership
Subscription do not vote to approve the proposed Roll-Up.
4.03(d)(16)(g). ROLL-UP APPROVAL. The Partnership shall not
participate in a Roll-Up transaction unless the Roll-Up
transaction is approved by Participants whose Agreed
Subscriptions equal 75% of the Partnership Subscription.
4.03(d)(17). DISCLOSURE OF BINDING AGREEMENTS. Any agreement or
arrangement which binds the Partnership must be disclosed in the
Prospectus.
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<PAGE> 23
4.03(d)(18) TRANSACTIONS MUST BE FAIR AND REASONABLE. Neither
the Managing General Partner nor any Affiliate will sell,
transfer, or convey any property to or purchase any property from
the Partnership, directly or indirectly, except pursuant to
transactions that are fair and reasonable, nor take any action
with respect to the assets or property of the Partnership which
does not primarily benefit the Partnership.
4.04. DESIGNATION, COMPENSATION AND REMOVAL OF MANAGING GENERAL
PARTNER AND REMOVAL OF OPERATOR.
4.04(a). MANAGING GENERAL PARTNER.
4.04(a)(1). TERM OF SERVICE. Atlas shall serve as the Managing
General Partner of the Partnership until it is removed pursuant
to 4.04(a)(3).
4.04(a)(2). COMPENSATION OF MANAGING GENERAL PARTNER.
4.04(a)(2)(a). CHARGES MUST BE NECESSARY AND REASONABLE. Charges by the
Managing General Partner for goods and services must be fully
supportable as to the necessity thereof and the reasonableness of
the amount charged. All actual and necessary expenses incurred by
the Partnership may be paid out of the Partnership Subscription
and out of Partnership revenues.
In addition to the compensation set forth in 4.01(a)(4) and
4.02(d)(1), the Managing General Partner shall be credited
pursuant to 5.01(a) for Organization and Offering Costs not
exceeding 15% of the Partnership Subscription.
4.04(a)(2)(b). DIRECT COSTS. The Managing General Partner shall be
reimbursed for all Direct Costs. Direct Costs, however, shall be
billed directly to and paid by the Partnership to the extent
practicable.
4.04(a)(2)(c). ADMINISTRATIVE COSTS. The Managing General Partner
shall receive an unaccountable, fixed payment reimbursement for
its Administrative Costs of $75 per well per month, which shall
be proportionately reduced to the extent the Partnership acquires
less than 100% of the Working Interest in the well. The
unaccountable, fixed payment reimbursement of $75 per well per
month shall not be increased in amount during the term of the
Partnership. Further, the Managing General Partner shall not be
reimbursed for any additional Partnership Administrative Costs
and the unaccountable, fixed payment reimbursement of $75 per
well per month shall be the entire payment to reimburse the
Managing General Partner for the Partnership's Administrative
Costs. Finally, the Managing General Partner shall not receive
the unaccountable, fixed payment reimbursement of $75 per well
per month for plugged or abandoned wells.
4.04(a)(2)(d). GAS TRANSPORTATION AND MARKETING. The Managing General
Partner and its Affiliates shall receive a combined
transportation and marketing fee at a competitive rate for
transporting and marketing the Partnership's gas.
4.04(a)(2)(e). DEALER-MANAGER FEE. The Dealer-Manager will receive
from the Partnership on each Unit sold to investors, a 2.5%
Dealer-Manager fee, a 7.5% Sales Commission and a .5%
reimbursement of the Selling Agents' bona fide accountable due
diligence expenses.
4.04(a)(2)(f). DRILLING AND OPERATING AGREEMENT. The Managing General
Partner and its Affiliates shall receive compensation as set
forth in the Drilling and Operating Agreement.
4.04(a)(2)(g). OTHER TRANSACTIONS. The Managing General Partner and
its Affiliates may enter into transactions pursuant to
4.03(d)(7) with the Partnership and shall be entitled to
compensation pursuant to such section.
4.04(a)(3). REMOVAL OF MANAGING GENERAL PARTNER.
4.04(a)(3)(a). IN GENERAL. The Managing General Partner may be
removed at any time upon sixty days advance written notice to the
outgoing Managing General Partner, by the affirmative vote of
Participants whose Agreed Subscriptions equal a majority of the
Partnership Subscription. Should Participants vote to remove the
Managing General Partner from the Partnership, Participants must
elect by an affirmative vote of Participants whose Agreed
Subscriptions equal a majority of the Partnership Subscription
either to terminate, dissolve and wind up the Partnership or to
continue as a successor limited partnership under all the terms
of this Partnership Agreement, as provided in 7.01(c).
If the Participants elect to continue as a successor limited
partnership, the Managing General Partner shall not be removed
until a substituted Managing General Partner has been selected by
an affirmative vote of Participants whose Agreed Subscriptions
equal a majority of the Partnership Subscription and installed as
such.
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<PAGE> 24
4.04(a)(3)(b). VALUATION OF MANAGING GENERAL PARTNER'S INTEREST
IN THE PARTNERSHIP. If the Managing General Partner is removed,
the Managing General Partner's interest in the Partnership shall
be determined by appraisal by a qualified Independent Expert.
The Independent Expert shall be selected by mutual agreement
between the removed Managing General Partner and the incoming
Managing General Partner. The appraisal shall take into account
an appropriate discount, to reflect the risk of recovery of oil
and gas reserves, but not less than that utilized in the most
recent repurchase offer, if any. The cost of the appraisal shall
be borne equally by the removed Managing General Partner and the
Partnership.
4.04(a)(3)(c). INCOMING MANAGING GENERAL PARTNER'S OPTION TO
PURCHASE. The incoming Managing General Partner shall have the
option to purchase 20% of the removed Managing General Partner's
interest for the value determined by the Independent Expert.
4.04(a)(3)(d). METHOD OF PAYMENT. The method of payment for the
removed Managing General Partner's interest must be fair and must
protect the solvency and liquidity of the Partnership. The method
of payment shall be as follows:
(i) when the termination is voluntary, the method of payment
shall be a non-interest bearing unsecured promissory
note with principal payable, if at all, from
distributions which the Managing General Partner
otherwise would have received under the Partnership
Agreement had the Managing General Partner not been
terminated; and
(ii) when the termination is involuntary, the method of
payment shall be an interest bearing promissory note
coming due in no less than five years with equal
installments each year. The interest rate shall be that
charged on comparable loans.
4.04(a)(3)(e). TERMINATION OF CONTRACTS. The removed Managing
General Partner, at the time of its removal shall cause, to the
extent it is legally possible, its successor to be transferred or
assigned all its rights, obligations and interests as Managing
General Partner of the Partnership in contracts entered into by
it on behalf of the Partnership. In any event, the removed
Managing General Partner shall cause its rights, obligations and
interests as Managing General Partner of the Partnership in any
such contract to terminate at the time of its removal.
Notwithstanding any other provision in this Agreement, the
Partnership or the successor Managing General Partner shall not
be a party to any gas purchase agreement that the Managing
General Partner or its Affiliates enters into with a third party
and shall not have any rights pursuant to such gas purchase
agreement. Further, the Partnership or the successor Managing
General Partner shall not receive any interest in the Managing
General Partner's and its Affiliates' pipeline or gathering
system or compression facilities.
4.04(a)(3)(f). THE MANAGING GENERAL PARTNER'S RIGHT TO
VOLUNTARILY WITHDRAW. At any time beginning ten years after the
Offering Termination Date of the Partnership and the
Partnership's primary drilling activities, the Managing General
Partner may voluntarily withdraw as Managing General Partner upon
giving 120 days' written notice of withdrawal to the
Participants. The Managing General Partner's interest in the
Partnership shall be determined as provided above with respect to
removal. The interest shall be distributed to the Managing
General Partner as described above with respect to voluntary
removal, subject to the option of any successor Managing General
Partner to purchase 20% of the interest at the value determined
as described above with respect to removal.
4.04(a)(3)((g). THE MANAGING GENERAL PARTNER'S RIGHT TO WITHDRAW
PROPERTY INTEREST. The Managing General Partner has the right at
any time to withdraw a property interest held by the Partnership
in the form of a Working Interest in the Partnership Wells equal
to or less than its respective interest in the revenues of the
Partnership pursuant to the conditions set forth in 6.03. The
Managing General Partner shall fully indemnify the Partnership
against any additional expenses which may result from a partial
withdrawal of its interests and the withdrawal may not result in
a greater amount of Direct Costs or Administrative Costs being
allocated to the Participants. The expenses of withdrawing shall
be borne by the withdrawing Managing General Partner.
4.04(a)(4). REMOVAL OF OPERATOR. The Operator may be removed and
a new Operator may be substituted at any time upon 60 days
advance written notice to the outgoing Operator by the Managing
General Partner acting on behalf of the Partnership upon the
affirmative vote of Participants whose Agreed Subscriptions equal
a majority of the Partnership Subscription. The Operator shall
not be removed until a substituted Operator has been selected by
an affirmative vote of Participants whose Agreed Subscriptions
equal a majority of the Partnership Subscription and installed as
such.
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<PAGE> 25
4.05. INDEMNIFICATION AND EXONERATION.
4.05(a)(1). STANDARDS FOR THE MANAGING GENERAL PARTNER NOT
INCURRING LIABILITY TO THE PARTNERSHIP OR PARTICIPANTS. The
Managing General Partner, the Operator and their Affiliates shall
have no liability whatsoever to the Partnership or to any
Participant for any loss suffered by the Partnership or
Participants which arises out of any action or inaction of the
Managing General Partner, the Operator or their Affiliates if:
(i) the Managing General Partner, the Operator and their
Affiliates, determined in good faith that the course of
conduct was in the best interest of the Partnership;
(ii) the Managing General Partner, the Operator and their
Affiliates were acting on behalf of or performing
services for the Partnership; and
(iii) the course of conduct did not constitute negligence or
misconduct of the Managing General Partner, the Operator
or their Affiliates.
4.05(a)(2). STANDARDS FOR MANAGING GENERAL PARTNER
INDEMNIFICATION. The Managing General Partner, the Operator and
their Affiliates shall be indemnified by the Partnership against
any losses, judgments, liabilities, expenses and amounts paid in
settlement of any claims sustained by them in connection with the
Partnership, provided that:
(i) the Managing General Partner, the Operator and their
Affiliates determined in good faith that the course of
conduct which caused the loss or liability was in the
best interest of the Partnership;
(ii) the Managing General Partner, the Operator and their
Affiliates were acting on behalf of or performing
services for the Partnership; and
(iii) the course of conduct was not the result of negligence
or misconduct of the Managing General Partner, the
Operator or their Affiliates.
Provided, however, payments arising from such indemnification or
agreement to hold harmless are recoverable only out of the
tangible net assets of the Partnership, including any insurance
proceeds.
4.05(a)(3). STANDARDS FOR SECURITIES LAW INDEMNIFICATION.
Notwithstanding anything to the contrary contained in the above,
the Managing General Partner, the Operator and their Affiliates
and any person acting as a broker-dealer shall not be indemnified
for any losses, liabilities or expenses arising from or out of an
alleged violation of federal or state securities laws by such
party unless:
(i) there has been a successful adjudication on the merits
of each count involving alleged securities law
violations as to the particular indemnitee;
(ii) the claims have been dismissed with prejudice on the
merits by a court of competent jurisdiction as to the
particular indemnitee; or
(iii) a court of competent jurisdiction approves a settlement
of the claims against a particular indemnitee and finds
that indemnification of the settlement and the related
costs should be made, and the court considering the
request for indemnification has been advised of the
position of the Securities and Exchange Commission, the
Massachusetts Securities Division, and the position of
any state securities regulatory authority in which
plaintiffs claim they were offered or sold Partnership
Units, with respect to the issue of indemnification for
violation of securities laws.
4.05(a)(4). STANDARDS FOR ADVANCEMENT OF FUNDS TO THE MANAGING
GENERAL PARTNER AND INSURANCE. The advancement of Partnership
funds to the Managing General Partner or its Affiliates for legal
expenses and other costs incurred as a result of any legal action
for which indemnification is being sought is permissible only if
the Partnership has adequate funds available and the following
conditions are satisfied:
(i) the legal action relates to acts or omissions with
respect to the performance of duties or services on
behalf of the Partnership;
(ii) the legal action is initiated by a third party who is
not a Participant, or the legal action is initiated by a
Participant and a court of competent jurisdiction
specifically approves the advancement; and
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<PAGE 26>
(iii) the Managing General Partner or its Affiliates undertake
to repay the advanced funds to the Partnership, together
with the applicable legal rate of interest thereon, in
cases in which such party is found not to be entitled to
indemnification.
The Partnership shall not bear the cost of that portion of
insurance which insures the Managing General Partner, the
Operator or their Affiliates for any liability for which the
Managing General Partner, the Operator or their Affiliates could
not be indemnified pursuant to 4.05(a)(1) and 4.05(a)(2).
4.05(b). LIABILITY OF PARTNERS. Pursuant to the Pennsylvania
Revised Uniform Limited Partnership Act the Investor General
Partners are liable jointly and severally for all liabilities and
obligations of the Partnership. Notwithstanding the foregoing, as
among themselves, the Investor General Partners hereby agree that
each shall be solely and individually responsible only for his
pro rata share of the liabilities and obligations of the
Partnership.
In addition, the Managing General Partner agrees to use its
corporate assets and not the assets of the Partnership to
indemnify each of the Investor General Partners against all
Partnership related liabilities which exceed the Investor General
Partner's interest in the undistributed net assets of the
Partnership and insurance proceeds, if any. Further, the Managing
General Partner agrees to indemnify each Investor General Partner
against any personal liability as a result of the unauthorized
acts of another Investor General Partner.
Upon such indemnification by the Managing General Partner, each
Investor General Partner who has been indemnified shall and does
hereby transfer and subrogate his rights for contribution from
or against any other Investor General Partner to the Managing
General Partner.
4.05(c). ORDER OF PAYMENT OF CLAIM. Claims shall be paid as
follows:
(i) first out of any insurance proceeds;
(ii) second out of the assets and revenues of the
Partnership; and
(iii) last by the Managing General Partner as provided in
3.05(b) and 4.05(b).
No Limited Partner shall be required to reimburse the Managing
General Partner, the Operator or their Affiliates or the Investor
General Partners for any liability in excess of his agreed
Capital Contribution, except for a liability resulting from the
Limited Partner's unauthorized participation in Partnership
management, or from some other breach by the Limited Partner of
this Agreement.
4.05(d). AUTHORIZED TRANSACTIONS ARE NOT DEEMED TO BE A BREACH.
No transaction entered into or action taken by the Partnership or
the Managing General Partner, the Operator or their Affiliates,
which is authorized by this Agreement to be entered into or taken
with such party shall be deemed a breach of any obligation owed
by the Managing General Partner, the Operator or their Affiliates
to the Partnership or the Participants.
4.06. OTHER ACTIVITIES.
4.06(a). THE MANAGING GENERAL PARTNER MAY PURSUE OTHER OIL AND
GAS ACTIVITIES FOR ITS OWN ACCOUNT. The Managing General
Partner, the Operator and their Affiliates are now engaged, and
will engage in the future, for their own account and for the
account of others, including other investors, in all aspects of
the oil and gas business. This includes without limitation, the
evaluation, acquisition and sale of producing and nonproducing
Leases, and the exploration for and production of oil, gas, and
other minerals.
The Managing General Partner is required to devote only so much
of its time as is necessary to manage the affairs of the
Partnership. Except as expressly provided to the contrary in this
Agreement, and subject to fiduciary duties, the Managing General
Partner, the Operator and their Affiliates may do the following:
(i) may continue such activities, or initiate further such
activities, individually, jointly with others, or as a
part of any other limited or general partnership, tax
partnership, joint venture, or other entity or activity
to which they are or may become a party, in any locale
and in the same fields, areas of operation or prospects
in which the Partnership may likewise be active;
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<PAGE> 27
(ii) may reserve partial interests in Leases being assigned
to the Partnership or any other interests not expressly
prohibited by this Agreement;
(iii) may deal with the Partnership as independent parties or
through any other entity in which they may be
interested;
(iv) may conduct business with the Partnership as set forth
herein; and
(v) may participate in such other investor operations, as
investors or otherwise.
The Managing General Partner and its Affiliates shall not be
required to permit the Partnership or the Participants to
participate in any such operations in which they may be
interested or share in any profits or other benefits therefrom.
However, except as otherwise provided herein, the Managing
General Partner and any of its Affiliates may pursue business
opportunities that are consistent with the Partnership's
investment objectives for their own account only after they have
determined that such opportunity either cannot be pursued by the
Partnership because of insufficient funds or because it is not
appropriate for the Partnership under the existing circumstances.
4.06(b). MANAGING GENERAL PARTNER MAY MANAGE MULTIPLE
PARTNERSHIPS. The Managing General Partner or its Affiliates may
manage multiple Programs simultaneously.
4.06(c). PARTNERSHIP HAS NO INTEREST IN GAS CONTRACTS OR
PIPELINES AND GATHERING SYSTEMS. Notwithstanding any other
provision in this Agreement, the Partnership shall not be a party
to any gas supply agreement that the Managing General Partner or
its Affiliates enters into with a third party and shall not have
any rights pursuant to such gas supply agreement. Further, the
Partnership shall not receive any interest in the Managing
General Partner's and its Affiliates' pipeline or gathering
system or compression facilities.
ARTICLE V
PARTICIPATION IN COSTS AND REVENUES,
CAPITAL ACCOUNTS, ELECTIONS AND DISTRIBUTIONS
5.01. PARTICIPATION IN COSTS AND REVENUES. Except as otherwise
provided in this Agreement, costs and revenues shall be charged
and credited to the Managing General Partner and the Participants
as set forth in this 5.01 and its subsections.
5.01(a). COSTS. Costs shall be charged as set forth below.
5.01(a)(1). ORGANIZATION AND OFFERING COSTS. Organization and
Offering Costs shall be charged 100% to the Managing General
Partner. For purposes of sharing in revenues, pursuant to
5.01(b)(4), the Managing General Partner shall be credited with
Organization and Offering Costs up to and including 15% of the
Partnership Subscription which were paid by the Managing General
Partner. Notwithstanding, Organization and Offering Costs in
excess of 15% of the Partnership Subscription shall be charged
100% to the Managing General Partner without recourse to the
Partnership and the Managing General Partner shall not be
credited with such amounts towards its required Capital
Contribution.
5.01(a)(2). INTANGIBLE DRILLING COSTS. Intangible Drilling
Costs shall be charged 100% to the Participants.
5.01(a)(3). TANGIBLE COSTS. Tangible Costs shall be charged 51%
to the Managing General Partner and 49% to the Participants.
5.01(a)(4). OPERATING COSTS, DIRECT COSTS, ADMINISTRATIVE COSTS
AND ALL OTHER COSTS. Operating Costs, Direct Costs,
Administrative Costs and all other Partnership costs not
specifically allocated shall be charged 69% to the Participants
and 31% to the Managing General Partner.
Provided, however, if a portion of the Managing General Partner's
Partnership Net Production Revenues are subordinated pursuant to
5.01(b)(4), all such Operating Costs, Direct Costs,
Administrative Costs and all other Partnership costs not
specifically allocated shall be charged between the Managing
General Partner and the Participants in the same ratio as the
related production revenues are being credited.
5.01(a)(5). ALLOCATION OF INTANGIBLE DRILLING COSTS AND TANGIBLE
COSTS AT PARTNERSHIP CLOSINGS. Intangible Drilling Costs and the
Participants' share of Tangible Costs of a well or wells to be
drilled and completed with the proceeds of a Partnership closing
shall be charged 100% to the Participants who are admitted to the
Partnership in such closing and shall not be reallocated to take
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<PAGE> 28
into account other Partnership closings. Although the proceeds
of each Partnership closing will be used to pay the costs of
drilling different wells, each Participant will pay the same
amount of the costs regardless of when he subscribes.
5.01(b). REVENUES. Revenues of the Partnership from all sources
and wells shall be commingled and credited as set forth below.
5.01(b)(1). ALLOCATION OF REVENUES UPON DISPOSITION OF PROPERTY.
If the Partners' Capital Accounts are adjusted to reflect the
simulated depletion of an oil or gas property of the Partnership,
the portion of the total amount realized by the Partnership upon
the taxable disposition of such property that represents recovery
of its simulated tax basis therein shall be allocated to the
Partners in the same proportion as the aggregate adjusted tax
basis of such property was allocated to such Partners (or their
predecessors in interest). If the Partners' Capital Accounts are
adjusted to reflect the actual depletion of an oil or gas
property of the Partnership, the portion of the total amount
realized by the Partnership upon the taxable disposition of such
property that equals the Partners' aggregate remaining adjusted
tax basis therein shall be allocated to the Partners in
proportion to their respective remaining adjusted tax bases in
such property. Thereafter, any excess shall be allocated to the
Managing General Partner in an amount equal to the difference
between the fair market value of the Lease at the time it was
contributed to the Partnership and its simulated or actual
adjusted tax basis at such time. Finally, any excess shall be
credited to the parties in accordance with the sharing ratios
provided in 5.01(b)(4), below. In the event of a sale of
developed oil and gas properties with equipment thereon, the
Managing General Partner may make any reasonable allocation of
proceeds between the equipment and the Leases.
5.01(b)(2). INTEREST. Interest earned on Agreed Subscriptions
before the Offering Termination Date pursuant to 3.05(b) shall
be credited to the accounts of the respective subscribers who
paid the subscriptions to the Partnership and paid approximately
eight weeks after the Offering Termination Date. After the
Offering Termination Date and until proceeds from the offering
are invested in the Partnership's oil and gas operations, any
interest income from temporary investments shall be allocated pro
rata to the Participants providing such Agreed Subscriptions. All
other interest income, including interest earned on the deposit
of production revenues, shall be credited as provided in
5.01(b)(4), below.
5.01(b)(3). SALE OR DISPOSITION OF EQUIPMENT. Proceeds from the
sale or disposition of equipment shall be credited to the parties
charged with the costs of such equipment in the ratio in which
such costs were charged.
5.01(b)(4). OTHER REVENUES. All other revenues of the
Partnership shall be credited 69% to the Participants and 31% to
the Managing General Partner.
Notwithstanding, the Managing General Partner shall subordinate
up to 40% of its 31% share of Partnership Net Production Revenues
(i.e. up to 12.4% of the Partnership Net Production Revenues), to
the receipt by Participants of cash distributions from the
Partnership equal to 10% of their Agreed Subscriptions in each of
the first five twelve-month periods of Partnership operations
commencing with the first distribution of revenues to the
Participants. In this regard, however, the Managing General
Partner shall not subordinate an amount greater than 40% of its
31% share of Partnership Net Production Revenues net of the
related costs as provided in 5.01(a)(4) in any such distribution
period. The subordination shall be determined by:
(i) carrying forward to subsequent twelve-month periods the
amount, if any, by which cumulative cash distributions
to Participants (including any subordination payments)
are less than 10% of Participants' Agreed Subscriptions
in the first twelve-month period, 20% of Participants'
Agreed Subscriptions in the second twelve-month period,
30% of Participants' Agreed Subscriptions in the third
twelve-month period, or 40% of Participants' Agreed
Subscriptions in the fourth twelve-month period (no
carry forward is required if such distributions are less
than 50% of Participants' Agreed Subscriptions in the
fifth twelve-month period because the Managing General
Partner's subordination obligation terminates upon the
expiration of the fifth twelve-month period) ; and
(ii) reimbursing the Managing General Partner for any
previous subordination payments to the extent cumulative
cash distributions to Participants (including any
subordination payments) would exceed 10% of
Participants' Agreed Subscriptions in the first twelve-
month period, 20% of Participants' Agreed Subscriptions
in the second twelve-month period, 30% of Participants'
Agreed Subscriptions in the third twelve-month period,
40% of Participants' Agreed Subscriptions in the fourth
twelve-month period, or 50% of Participants' Agreed
Subscriptions in the fifth twelve-month period.
The Managing General Partner's subordination obligation shall be
determined and paid at the time of each Partnership distribution
during the subordination period, and may be prorated in the
Managing General Partner's discretion (e.g. in the case of a
quarterly distribution, the Managing General Partner will not
have any subordination obligation if the distributions to
Participants equal 2.5% or more of their Agreed Subscriptions
assuming there is no subordination owed for any preceding
periods). The Managing General
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<PAGE> 29
Partner shall not be required to return Partnership distributions previously
received by it, even though a subordination obligation arises subsequent
to such distributions, and no subordination payments to Participants or
reimbursements to the Managing General Partner shall be made
after the expiration of the fifth twelve-month subordination
period. Subject to the foregoing provisions of this 5.01(b)(4),
only Partnership revenues in the current distribution period
shall be debited or credited to the Managing General Partner as
may be necessary to provide, to the extent possible, such
distributions to the Participants and reimbursements to the
Managing General Partner.
5.01(b)(5). COMMINGLING OF REVENUES FROM ALL PARTNERSHIP WELLS.
The revenues from all Partnership wells will be commingled, so
regardless of when a Participant subscribes he will share in the
revenues from all wells on the same basis as the other
Participants.
5.01(c). ALLOCATIONS.
5.01(c)(1). ALLOCATIONS AMONG PARTICIPANTS. Except as provided
otherwise in this Agreement, costs and revenues charged or
credited to the Participants as a group shall be allocated among
the Participants (including the Managing General Partner to the
extent of any optional subscription pursuant to 3.03(b)(2)) in
the ratio of their respective Agreed Subscriptions.
5.01(c)(2). COSTS AND REVENUES NOT DIRECTLY ALLOCABLE TO A
PARTNERSHIP WELL. Costs and revenues not directly allocable to a
particular Partnership Well or additional operation shall be
allocated among the Partnership Wells or additional operations in
any manner the Managing General Partner in its reasonable
discretion, shall select, and shall then be charged or credited
in the same manner as costs or revenues directly applicable to
such Partnership Well or additional operation are being charged
or credited.
5.01(c)(3). MANAGING GENERAL PARTNER'S DISCRETION IN MAKING
ALLOCATIONS FOR FEDERAL INCOME TAX PURPOSES. In determining the
proper method of allocating charges or credits among the parties,
or in making any other allocations hereunder, the Managing
General Partner may adopt any method of allocation which it, in
its reasonable discretion, selects, if, in its sole discretion
based on advice from its legal counsel or accountants, a revision
to such allocations is required for such allocations to be
recognized for federal income tax purposes either because of the
promulgation of Treasury Regulations or other developments in the
tax law. Any new allocation provisions shall be provided by an
amendment to this Agreement and shall be made in a manner that
would result in the most favorable aggregate consequences to the
Participants as nearly as possible consistent with the original
allocations described herein.
5.02. CAPITAL ACCOUNTS AND ALLOCATIONS THERETO.
5.02(a). CAPITAL ACCOUNTS FOR EACH PARTY TO THE AGREEMENT. A
single, separate Capital Account shall be established for each
party to this Agreement, regardless of the number of interests
owned by such party, the class of the interests and the time or
manner in which such interests were acquired.
5.02(b). CHARGES AND CREDITS.
5.02(b)(1). GENERAL STANDARD. Except as otherwise provided in
this Agreement, the Capital Account of each party shall be
determined and maintained in accordance with Treas. Reg.
1.704-l(b)(2)(iv) and shall be increased by:
(i) the amount of money contributed by him to the
Partnership;
(ii) the fair market value of property contributed by him
(without regard to 7701(g) of the Code) to the
Partnership (net of liabilities secured by the
contributed property that the Partnership is considered
to assume or take subject to under 752 of the Code);
and
(iii) allocations to him of Partnership income and gain (or
items thereof), including income and gain exempt from
tax and income and gain described in Treas. Reg.
1.704-l(b)(2)(iv)(g), but excluding income and gain
described in Treas. Reg. 1.704-l(b)(4)(i);
and shall be decreased by:
(iv) the amount of money distributed to him by the
Partnership;
(v) the fair market value of property distributed to him
(without regard to 7701(g) of the Code) by the
Partnership (net
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<PAGE> 30
of liabilities secured by the
distributed property that he is considered to assume or
take subject to under 752 of the Code);
(vi) allocations to him of Partnership expenditures described
in 705(a)(2)(B) of the Code; and
(vii) allocations to him of Partnership loss and deduction (or
items thereof), including loss and deduction described
in Treas. Reg. 1.704-l(b)(2)(iv)(g), but excluding
items described in (vi) above, and loss or deduction
described in Treas. Reg. 1.704-l(b)(4)(i) or (iii).
5.02(b)(2). EXCEPTION. If Treas. Reg. 1.704-l(b)(2)(iv) fails
to provide guidance, Capital Account adjustments shall be made
in a manner that:
(i) maintains equality between the aggregate governing
Capital Accounts of the Partners and the amount of
Partnership capital reflected on the Partnership's
balance sheet, as computed for book purposes;
(ii) is consistent with the underlying economic arrangement
of the Partners; and
(iii) is based, wherever practicable, on federal tax
accounting principles.
5.02(c). PAYMENTS TO THE MANAGING GENERAL PARTNER. The Capital
Account of the Managing General Partner shall be reduced by
payments to it pursuant to 4.04(a)(2) only to the extent of the
Managing General Partner's distributive share of any Partnership
deduction, loss, or other downward Capital Account adjustment
resulting from such payments.
5.02(d). DISCRETION OF MANAGING GENERAL PARTNER IN THE METHOD OF
MAINTAINING CAPITAL ACCOUNTS. Notwithstanding any other
provisions of this Agreement, the method of maintaining Capital
Accounts may be changed from time to time, in the discretion of
the Managing General Partner, to take into consideration 704 and
other provisions of the Code and such rules, regulations and
interpretations relating thereto as may exist from time to time.
5.02(e). REVALUATIONS OF PROPERTY. In the discretion of the
Managing General Partner the Capital Accounts of the Partners may
be increased or decreased to reflect a revaluation of Partnership
property, including intangible assets such as goodwill, (on a
property-by-property basis except as otherwise permitted under
704(c) of the Code and the regulations thereunder) on the
Partnership's books, in accordance with Treas. Reg.
1.704-l(b)(2)(iv)(f).
5.02(f). AMOUNT OF BOOK ITEMS. In cases where 704(c) of the
Code or 5.02(e) applies, Capital Accounts shall be adjusted in
accordance with Treas. Reg. 1.704-l(b)(2)(iv)(g) for allocations
of depreciation, depletion, amortization and gain and loss, as
computed for book purposes, with respect to such property.
5.03. ALLOCATION OF INCOME, DEDUCTIONS AND CREDITS.
5.03(a). IN GENERAL.
5.03(a)(1). DEDUCTIONS ARE ALLOCATED TO PARTY CHARGED WITH
EXPENDITURE. To the extent permitted by law and except as
otherwise provided in this Agreement, all deductions and credits,
including, but not limited to, intangible drilling and
development costs and depreciation, shall be allocated to the
party who has been charged with the expenditure giving rise to
the deductions and credits; and to the extent permitted by law,
these parties shall be entitled to the deductions and credits in
computing taxable income or tax liabilities to the exclusion of
any other party.
5.03(a)(2). INCOME AND GAIN ALLOCATED IN ACCORDANCE WITH
REVENUES. Except as otherwise provided in this Agreement, all
items of income and gain, including gain on disposition of
assets, shall be allocated in accordance with the related revenue
allocations set forth in 5.01(b) and its subsections.
5.03(b). TAX BASIS OF EACH PROPERTY. Subject to 704(c) of the
Code, the tax basis of each oil and gas property for computation
of cost depletion and gain or loss on disposition shall be
allocated and reallocated when necessary based upon the capital
interest in the Partnership as to the property and the capital
interest in the Partnership for this purpose as to each property
shall be considered to be owned by the parties hereto in the
ratio in which the expenditure giving rise to the tax basis of
the property has been charged as of the end of the year.
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<PAGE> 31
5.03(c). GAIN OR LOSS ON OIL AND GAS PROPERTIES. Each party
shall separately compute its gain or loss on the disposition of
each oil and gas property in accordance with the provisions of
613A(c)(7)D) of the Code, and the calculation of the gain or
loss shall consider the party's adjusted basis in his property
interest computed as provided in 5.03(b) and the party's
allocable share of the amount realized from the disposition of
the property.
5.03(d). GAIN ON DEPRECIABLE PROPERTY. Gain from each sale or
other disposition of depreciable property shall be allocated to
each party whose share of the proceeds from the sale or other
disposition exceeds its contribution to the adjusted basis of the
property in the ratio that the excess bears to the sum of the
excesses of all parties having an excess.
5.03(e). LOSS ON DEPRECIABLE PROPERTY. Loss from each sale,
abandonment or other disposition of depreciable property shall be
allocated to each party whose contribution to the adjusted basis
of the property exceeds its share of the proceeds from the sale,
abandonment or other disposition in the proportion that the
excess bears to the sum of the excesses of all parties having an
excess.
5.03(f). ALLOCATION IF RECAPTURE TREATED AS ORDINARY INCOME. Any
recapture treated as an increase in ordinary income by reason of
1245, 1250, or 1254 of the Code shall be allocated to the
parties in the amounts in which the recaptured items were
previously allocated to them; provided that to the extent
recapture allocated to any party is in excess of the party's gain
from the disposition of the property, the excess shall be
allocated to the other parties but only to the extent of the
other parties' gain from the disposition of the property.
5.03(g). TAX CREDITS. If a Partnership expenditure (whether or
not deductible) that gives rise to a tax credit in a Partnership
taxable year also gives rise to valid allocations of Partnership
loss or deduction (or other downward Capital Account adjustments)
for the year, then the Partners' interests in the Partnership
with respect to the credit (or the cost giving rise thereto)
shall be in the same proportion as the Partners' respective
distributive shares of the loss or deduction (and adjustments).
Identical principles shall apply in determining the Partners'
interests in the Partnership with respect to tax credits that
arise from receipts of the Partnership (whether or not taxable).
5.03(h). DEFICIT CAPITAL ACCOUNTS AND QUALIFIED INCOME OFFSET.
Notwithstanding any provisions of this Agreement to the contrary,
an allocation of loss or deduction which would result in a
Participant having a deficit Capital Account balance as of the
end of the taxable year to which the allocation relates, if
charged to the Participant, (to the extent the Participant is not
required to restore the deficit to the Partnership), taking into
account:
(i) adjustments that, as of the end of the year, reasonably
are expected to be made to the Participant's Capital
Account for depletion allowances with respect to the
Partnership's oil and gas properties;
(ii) allocations of loss and deduction that, as of the end of
such year, reasonably are expected to be made to the
Participant pursuant to 704(e)(2) and 706(d) of the
Code and Treas. Reg. 1.751-1(b)(2)(ii); and
(iii) distributions that, as of the end of such year,
reasonably are expected to be made to the Participant to
the extent they exceed offsetting increases to the
Participant's Capital Account (assuming for this purpose
that the fair market value of Partnership property
equals its adjusted tax basis) that reasonably are
expected to occur during (or prior to) the Partnership
taxable years in which the distributions reasonably are
expected to be made,
shall be charged to the Managing General Partner. Further, the
Managing General Partner shall be credited with an additional
amount of Partnership income or gain equal to the amount of such
loss or deduction as quickly as possible (to the extent such
chargeback does not cause or increase deficit balances in the
Participants' Capital Accounts which are not required to be
restored to the Partnership).
Notwithstanding any provisions of this Agreement to the contrary,
if a Participant unexpectedly receives an adjustment, allocation,
or distribution described in (i), (ii), or (iii) above, or any
other distribution, which causes or increases a deficit balance
in the Participant's Capital Account which is not required to be
restored to the Partnership, the Participant shall be allocated
items of income and gain (consisting of a pro rata portion of
each item of Partnership income, including gross income, and gain
for such year) in an amount and manner sufficient to eliminate
such deficit balance as quickly as possible.
5.03(i). PARTNERS' ALLOCABLE SHARES. Except as otherwise
provided in this Agreement, each Partner's allocable share of
Partnership income, gain, loss, deductions and credits shall be
determined by the use of any method prescribed or permitted by
the Secretary of the Treasury by regulations or other guidelines
and selected by the Managing General Partner which takes into
account the varying interests of the Partners in the Partnership
during the taxable year. In the absence of such regulations or
guidelines, except as otherwise provided in this Agreement, such
allocable share shall be based on actual income, gain, loss,
deductions and credits
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<PAGE> 32
economically accrued each day during the taxable year in proportion to each
Partner's varying interest in the Partnership on each day during the
taxable year.
5.04. ELECTIONS.
5.04(a). ELECTION TO DEDUCT INTANGIBLE COSTS. The Partnership's
federal income tax return shall be made in accordance with an
election under the option granted by the Code to deduct
intangible drilling and development costs.
5.04(b). NO ELECTION OUT OF SUBCHAPTER K. No election shall be
made by the Partnership, any Partner, or the Operator for the
Partnership to be excluded from the application of the provisions
of Subchapter K of the Code.
5.04(c). CONTINGENT INCOME. If it is determined that any taxable
income results to any party by reason of its entitlement to a
share of profits or revenues of the Partnership before such
profit or revenue has been realized by the Partnership, the
resulting deduction as well as any resulting gain, shall not
enter into Partnership net income or loss but shall be separately
allocated to such party.
5.04(d). 754 ELECTION. In the event of the transfer of an
interest in the Partnership, or upon the death of an individual
party hereto, or in the event of the distribution of property to
any party hereto, the Managing General Partner may choose for the
Partnership to file an election in accordance with the applicable
Treasury Regulations to cause the basis of the Partnership's
assets to be adjusted for federal income tax purposes as provided
by 734 and 743 of the Code.
5.05. DISTRIBUTIONS.
5.05(a). IN GENERAL.
5.05(a)(1). QUARTERLY REVIEW OF ACCOUNTS. The Managing General
Partner shall review the accounts of the Partnership at least
quarterly to determine whether cash distributions are appropriate
and the amount to be distributed, if any.
5.05(a)(2). DISTRIBUTIONS. The Partnership shall distribute
funds to the Managing General Partner and the Participants
allocated to their accounts which the Managing General Partner
deems unnecessary to retain by the Partnership.
5.05(a)(3). NO BORROWINGS. In no event, however, shall funds be
advanced or borrowed for purposes of distributions, if the amount
of such distributions would exceed the Partnership's accrued and
received revenues for the previous four quarters, less paid and
accrued Operating Costs with respect to such revenues. The
determination of revenues and costs shall be made in accordance
with generally accepted accounting principles, consistently
applied.
5.05(a)(4). DISTRIBUTIONS TO THE MANAGING GENERAL PARTNER. Cash
distributions from the Partnership to the Managing General
Partner shall only be made in conjunction with distributions to
Participants and only out of funds properly allocated to the
Managing General Partner's account.
5.05(a)(5). RESERVE. At any time after three years from the
date each Partnership Well is placed into production, the
Managing General Partner shall have the right to deduct each
month from the Partnership's proceeds of the sale of the
production from the well up to $200 for the purpose of
establishing a fund to cover the estimated costs of plugging and
abandoning the well. All such funds shall be deposited in a
separate interest bearing account for the benefit of the
Partnership, and the total amount so retained and deposited shall
not exceed the Managing General Partner's reasonable estimate of
such costs.
5.05(b). DISTRIBUTION OF UNCOMMITTED SUBSCRIPTION PROCEEDS. Any
net subscription proceeds not expended or committed for
expenditure, as evidenced by a written agreement, by the
Partnership within twelve months of the Offering Termination Date
of the Partnership, except necessary operating capital, shall be
distributed pro rata to the Participants in the ratio of their
Agreed Subscriptions to the Partnership, as a return of capital.
The Managing General Partner shall reimburse the Participants for
the selling or other offering expenses allocable to the return
of capital. For purposes of this subsection, "committed for
expenditure" shall mean contracted for, actually earmarked for or
allocated by the Managing General Partner to the Partnership's
drilling operations, and "necessary operating capital" shall mean
those funds which, in the opinion of the Managing General
Partner, should remain on hand to assure continuing operation of
the Partnership.
5.05(c). DISTRIBUTIONS ON WINDING UP. Upon the winding up of the
Partnership distributions shall be made as provided in 7.02.
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<PAGE> 33
5.05(d). INTEREST AND RETURN OF CAPITAL. It is agreed among the
parties hereto that no party shall under any circumstances be
entitled to any interest on amounts retained by the Partnership.
Each Participant shall look only to his share of distributions,
if any, from the Partnership for a return of his Capital
Contribution.
ARTICLE VI
TRANSFER OF INTERESTS
6.01. TRANSFERABILITY.
6.01(a). IN GENERAL.
6.01(a)(1). CONSENT REQUIRED. In addition to other restrictions
on transferability provided in this Agreement, interests in the
Partnership (and any rights to income or other attributes of
Units in the Partnership) shall be nontransferable except:
(i) transfers to or with the consent of the Managing General
Partner when the transfer of a Participant's interest is
involved; and
(ii) except as otherwise provided in this Agreement, the
consent of Participants whose Agreed Subscriptions equal
a majority of the Partnership Subscription when a
transfer by the Managing General Partner is involved.
6.01(a)(2). RIGHTS OF ASSIGNEE. Unless an assignee becomes a
substituted Partner in accordance with the provisions set forth
below, he shall not be entitled to any of the rights granted to a
Partner hereunder, other than the right to receive all or part of
the share of the profits, losses, income, gain, credits and cash
distributions or returns of capital to which his assignor would
otherwise be entitled.
6.01(b). OBJECTIONS TO TRANSFER. Failure to notify the
transferring party of an objection to any proposed or completed
transfer of the transferor's interest hereunder within thirty
days following the receipt of notice thereof shall conclusively
serve as a consent to the transfer.
6.01(c). CONVERSION OF INVESTOR GENERAL PARTNER UNITS TO LIMITED
PARTNER INTERESTS.
6.01(c)(1). AUTOMATIC CONVERSION. After substantially all of
the Partnership Wells have been drilled and completed the
Managing General Partner shall file an amended certificate of
limited partnership with the Secretary of State of the
Commonwealth of Pennsylvania for the purpose of converting the
Investor General Partner Units to Limited Partner interests. Upon
conversion the Investor General Partners shall be Limited
Partners entitled to limited liability; however, they shall
remain liable to the Partnership for any additional Capital
Contribution required for their proportionate share of any
Partnership obligation or liability arising before the conversion
of their Units as provided in 3.05(b).
The conversion shall not affect the allocation to any Partner of
any item of Partnership income, gain, loss, deduction or credit
or other item of special tax significance (other than Partnership
liabilities, if any). Further, the conversion shall not affect
any Partner's interest in the Partnership's oil and gas
properties and unrealized receivables.
6.01(c)(2). RIGHT TO CONVERT IF REDUCTION OF INSURANCE.
Notwithstanding the foregoing, the Managing General Partner shall
notify all Participants at least thirty days before the effective
date of any adverse material change in the Partnership's
insurance coverage. If the insurance coverage is to be materially
reduced, the Investor General Partners shall have the right to
convert their Units into Limited Partner interests before the
reduction by giving written notice to the Managing General
Partner.
6.02. SPECIAL RESTRICTIONS ON TRANSFERS.
6.02(a). IN GENERAL. Only whole Units may be assigned unless the
Participant owns less than a whole Unit, in which case his entire
fractional interest must be assigned. The costs and expenses
associated with the assignment must be paid by the assignor
Partner and the assignment must be in a form satisfactory to the
Managing General Partner. The terms of the assignment must not
contravene those of this Agreement. Transfers of interest in the
Partnership are subject to the following additional restrictions.
6.02(a)(1). SECURITIES LAWS RESTRICTION. Subject to transfers
permitted by 6.04 and transfers by operation of law, no interest
in the Partnership shall be sold, assigned, pledged, hypothecated
or transferred in the absence of an effective registration of the
Units under the Securities Act of 1933, as amended and
qualification under applicable state securities laws or an
opinion of counsel
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<PAGE> 34
acceptable to the Managing General Partner
that such registration and qualification are not required.
Transfers are also subject to any conditions contained in the
Subscription Agreement and Exhibit (B) to the Prospectus.
6.02(a)(2). TAX LAW RESTRICTIONS. No sale, exchange, transfer or
assignment shall be made which, in the opinion of counsel to the
Partnership, would result in the Partnership being considered to
have been terminated for purposes of Section 708 of the Code or
would result in materially adverse tax consequences to the
Partnership or the Partners.
6.02(a)(3). SUBSTITUTE PARTNER.
6.02(a)(3)(a). PROCEDURE TO BECOME SUBSTITUTE PARTNER. An
assignee of a Limited Partner's or Investor General Partner's
interest in the Partnership shall become a substituted Limited
Partner or Investor General Partner entitled to all the rights of
a Limited Partner or Investor General Partner, as the case may
be, if, and only if:
(i) the assignor gives the assignee the right;
(ii) the Managing General Partner consents to the
substitution, which consent shall be in the Managing
General Partner's absolute discretion;
(iii) the assignee pays to the Partnership all costs and
expenses incurred in connection with the substitution;
and
(iv) the assignee executes and delivers the instruments (in
form and substance satisfactory to the Managing General
Partner) necessary or desirable to effect the
substitution and to confirm the agreement of the
assignee to be bound by all of the terms and provisions
of this Agreement.
6.02(a)(3)(b). RIGHTS OF SUBSTITUTE PARTNER. A substitute
Limited Partner or Investor General Partner is entitled to all of
the rights attributable to full ownership of the assigned Units
including the right to vote.
6.02(b). EFFECT OF TRANSFER.
6.02(b)(1). AMENDMENT OF RECORDS. The Partnership shall amend
its records at least once each calendar quarter to effect the
substitution of substituted Participants.
Any transfer permitted hereunder where the assignee does not
become a substituted Limited Partner or Investor General Partner
shall be effective as of midnight of the last day of the calendar
month in which it is made, or, at the Managing General Partner's
election, 7:00 A.M. of the following day.
6.02(b)(2). TRANSFER DOES NOT RELIEVE TRANSFEROR OF CERTAIN
COSTS. No transfer (including a transfer of less than all of a
party's rights hereunder or the transfer of rights hereunder to
more than one party) shall relieve the transferor of its
responsibility for its proportionate part of any expenses,
obligations and liabilities hereunder related to the interest so
transferred, whether arising prior or subsequent to the transfer.
6.02(b)(3). TRANSFER DOES NOT REQUIRE AN ACCOUNTING. No
transfer shall require an accounting by the Managing General
Partner. No transfer shall grant rights hereunder as between the
transferring parties and the remaining parties hereto, including
the exercise of any elections hereunder, to more than one party
unanimously designated by the transferees and, if he should have
retained an interest hereunder, the transferor.
6.02(b)(4). NOTICE. Until the Managing General Partner receives
a proper designation acceptable to it the Managing General
Partner shall continue to account only to the person to whom it
was furnishing notices prior to the time pursuant to 8.01 and
its subsections. That party shall continue to exercise all
rights applicable to the entire interest previously owned by the
transferor.
6.03. RIGHT OF MANAGING GENERAL PARTNER TO HYPOTHECATE AND/OR
WITHDRAW ITS INTERESTS. The Managing General Partner shall have
the authority (without the consent of the Participants and
without affecting the allocation of costs and revenues received
or incurred hereunder), to hypothecate, pledge, or otherwise
encumber, on any terms it sees fit, its Partnership interest (or
an undivided interest in the assets of the Partnership equal to
or less than its respective interest in the revenues of the
Partnership) to obtain funds for use by it for its own general
purposes. All repayments of such borrowings and costs and
interest or other charges related thereto shall be borne and paid
separately by the Managing General Partner. In no event shall
the repayments, costs, interest, or other charges related to the
borrowing be charged to the account of the Participants.
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<PAGE> 35
In addition, subject to a required participation of not less than
1% of the Partnership Subscription, the Managing General Partner
may withdraw a property interest held by the Partnership in the
form of a Working Interest in the Partnership Wells equal to or
less than its respective interest in the revenues of the
Partnership if:
(i) the withdrawal is necessary to satisfy the bona fide
request of its creditors; or
(ii) approved by Participants whose Agreed Subscriptions
equal a majority of the Partnership Subscription.
6.04. REPURCHASE OBLIGATION.
6.04(a). IN GENERAL. Participants shall have the right to
present their interests to the Managing General Partner subject
to the conditions and limitations set forth in this section. The
Managing General Partner shall not purchase more than 5% of the
Units in any calendar year and shall not purchase less than one
Unit of a Participant's interests in the Partnership unless such
lesser amount represents the entire amount of the Participant's
interest. The Managing General Partner may waive these
limitations in its sole discretion other than the limitation that
it shall not purchase more than 5% of the Units in any calendar
year. The Participant is not obligated to accept such repurchase
offer.
The Managing General Partner shall offer to repurchase a
Participant's interest in cash in every year beginning in 2003.
The commencement of the offer must be made within 120 days of the
reserve report set forth in 4.03(b)(3). A Participant may accept
the repurchase offer by a written acceptance. No repurchase shall
be considered effective until after the payment has been made to
the Participant in cash. In addition, in accordance with Treas.
Reg. 1.7704-1(f), no repurchase shall occur until at least 60
calendar days after the Participant notifies the Partnership in
writing of the Participant's intention to exercise the repurchase
right.
6.04(b). REQUIREMENT FOR INDEPENDENT PETROLEUM CONSULTANT. The
amount attributable to Partnership reserves shall be determined
based upon the last reserve report of the Partnership prepared by
the Managing General Partner and reviewed by the Independent
Expert.
The Managing General Partner shall estimate the present worth of
future net revenues attributable to the Partnership's interest in
the Proved Reserves, and in making this estimate, it shall employ
a discount rate equal to 10%, use a constant price for the oil
and base the price of gas upon the existing gas contracts at the
time of the repurchase. The calculation of the repurchase price
shall be as set forth in 6.04(c).
6.04(c). CALCULATION OF REPURCHASE PRICE. The purchase price
shall be based upon the Participant's share of the net assets and
liabilities of the Partnership and allocated pro rata to each
Participant based upon his Agreed Subscription. The repurchase
price shall include the sum of the following items:
(i) an amount based on 70% of the present worth of future
net revenues from the Partnership's Proved Reserves
determined as described in 6.04(b);
(ii) Partnership cash on hand;
(iii) prepaid expenses and accounts receivable of the
Partnership, less a reasonable amount for doubtful
accounts; and
(iv) the estimated market value of all assets of the
Partnership, not separately specified above, determined
in accordance with standard industry valuation
procedures.
There shall be deducted from the foregoing sum the following
items:
(i) an amount equal to all Partnership debts,
obligations, and other liabilities, including accrued
expenses; and
(ii) any distributions made to the Participants between
the date of the request and the actual payment;
provided, however, that if any cash distributed was
derived from the sale, subsequent to the request, of
oil, gas or other mineral production, or of a producing
property owned by the Partnership, for purposes of
determining the reduction of the purchase price, such
distributions shall be discounted at the same rate used
to take into account the risk factors employed to
determine the present worth of the Partnership's Proved
Reserves.
6.04(d). FURTHER ADJUSTMENT MAY BE ALLOWED. The purchase price
may be further adjusted by the Managing General Partner for
estimated changes therein from the date of such report to the
date of payment of the purchase price to the Participants:
(i) by reason of production or sales of, or additions to,
reserves and lease and well equipment, sale or
abandonment of Leases, and similar matters occurring
prior to the request for repurchase; and
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<PAGE> 36
(ii) by reason of any of the following occurring prior to
payment of the purchase price to the selling
Participants: changes in well performance, increases or
decreases in the market price of oil, gas, or other
minerals, revision of regulations relating to the
importing of hydrocarbons, changes in income, ad
valorem, and other tax laws (e.g. material variations in
the provisions for depletion) and similar matters.
6.04(e). SELECTION BY LOT. If less than all interests presented
at any time are to be purchased, the Participants whose interests
are to be purchased will be selected by lot.
The Managing General Partner's obligation to purchase such
interests may be discharged for the benefit of the Managing
General Partner by a third party or an Affiliate. The interests
of the selling Participant will be transferred to the party who
pays for it. A selling Participant will be required to deliver an
executed assignment of his interest, together with such other
documentation as the Managing General Partner may reasonably
request.
6.04(f). NO OBLIGATION OF THE MANAGING GENERAL PARTNER TO
ESTABLISH A RESERVE. The Managing General Partner shall have no
obligation to establish any reserve to satisfy the repurchase
obligations under this section.
6.04(g). SUSPENSION OF REPURCHASE OBLIGATION. The Managing
General Partner may suspend its repurchase obligation at any time
if it does not have sufficient cash flow or is unable to borrow
funds for such purpose on terms it deems reasonable, by so
notifying the Participants. In addition, the Managing General
Partner's repurchase obligation may be conditioned, in the
Managing General Partner's sole discretion, on the Managing
General Partner's receipt of an opinion of counsel that such
transfers will not cause the Partnership to be treated as a
"publicly traded partnership" under the Code.
The Managing General Partner shall hold such repurchased Units
for its own account and not for resale.
ARTICLE VII
DURATION, DISSOLUTION, AND WINDING UP
7.01. DURATION.
7.01(a). FIFTY YEAR TERM. The Partnership shall continue in
existence for a term of fifty years from the effective date of
this Agreement unless sooner terminated as hereinafter set forth.
7.01(b). TERMINATION. The Partnership shall terminate following
the occurrence of a Final Terminating Event, or upon the
occurrence of any event which under the Pennsylvania Revised
Uniform Limited Partnership Act causes the dissolution of a
limited partnership.
7.01(c). CONTINUANCE OF PARTNERSHIP EXCEPT UPON FINAL
TERMINATING EVENT. Except upon the occurrence of a Final
Terminating Event, the Partnership or any successor limited
partnership shall not be wound up, but shall be continued by the
parties and their respective successors as a successor limited
partnership under all the terms of this Agreement. Such
successor limited partnership shall succeed to all of the assets
of the Partnership. As used throughout this Agreement, the term
"Partnership" shall include such successor limited partnerships
and the parties thereto.
7.02. DISSOLUTION AND WINDING UP.
7.02(a). FINAL TERMINATING EVENT. Upon the occurrence of a
Final Terminating Event, the affairs of the Partnership shall be
wound up and there shall be distributed to each of the parties
its Distribution Interest in the remaining assets of the
Partnership.
7.02(b). TIME OF LIQUIDATING DISTRIBUTION. To the extent
practicable and in accordance with sound business practices in
the judgment of the Managing General Partner, liquidating
distributions shall be made by the end of the taxable year in
which liquidation occurs (determined without regard to
706(c)(2)(A) of the Code) or, if later, within ninety days after
the date of such liquidation. Provided, however, amounts withheld
for reserves reasonably required for liabilities of the
Partnership and installment obligations owed to the Partnership
need not be distributed within the foregoing time period so long
as such withheld amounts are distributed as soon as practicable.
7.02(c). IN-KIND DISTRIBUTIONS. Any in kind property
distributions to the Participants shall be made to a liquidating
trust or similar entity for the benefit of the Participants,
unless at the time of the distribution:
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<PAGE> 37
(i) the Managing General Partner shall offer the individual
Participants the election of receiving in kind property
distributions and the Participants accept the offer
after being advised of the risks associated with such
direct ownership; or
(ii) there are alternative arrangements in place which assure
the Participants that they will not, at any time, be
responsible for the operation or disposition of
Partnership properties.
It shall be presumed that a Participant has refused his consent
if the Managing General Partner has not received the consent
within thirty days after the Managing General Partner mailed the
request for consent.
7.02(d). SALE IF NO CONSENT. Any Partnership asset which would
otherwise be distributed in kind to a Participant, except for the
failure or refusal of the Participant to give his written consent
to the distribution, may instead be sold by the Managing General
Partner at the best price reasonably obtainable from an
independent third party who is not an Affiliate of the Managing
General Partner.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.01. NOTICES.
8.01(a). METHOD. Any notice required hereunder shall be in
writing, and given by mail or wire addressed to the party to
receive the notice at the address designated in 1.03.
8.01(b). CHANGE IN ADDRESS. The address of any party hereto may
be changed by written notice to the other parties hereto in the
event of a change of address by the Managing General Partner or
to the Managing General Partner in the event of a change of
address by a Participant. In the event of a transfer of rights
hereunder, no notice to any such transferee shall be required,
nor shall such transferee have any rights hereunder, until notice
thereof shall have been given to the Managing General Partner.
Any transfer of rights hereunder shall not increase the duty to
give notice, and in the event of a transfer of rights hereunder
to more than one party, notice to any owner of any interest in
such rights shall be notice to all owners thereof.
8.01(c). TIME NOTICE DEEMED GIVEN. Any notice shall be
considered given, and any applicable time shall run, from the
date the notice is placed in the mails or delivered to the
telegraph company as to any notice given by the Managing General
Partner and when received as to any notice given by any
Participant.
8.01(d). EFFECTIVENESS OF NOTICE. Any notice to a party other
than the Managing General Partner, including a notice requiring
concurrence or nonconcurrence, shall be effective, and any
failure to respond binding, irrespective of whether or not the
notice is actually received, and irrespective of any disability
or death on the part of the noticee, even if known to the party
giving the notice.
8.01(e). FAILURE TO RESPOND. Except when this Agreement
expressly requires affirmative approval of a Participant, any
Participant who fails to respond in writing within the time
specified for the response (which time shall be not less than
fifteen business days from the date of mailing of the request) to
a request by the Managing General Partner for approval of or
concurrence in a proposed action shall be conclusively deemed to
have approved the action.
8.02. TIME. Time is of the essence of each part of this
Agreement.
8.03. APPLICABLE LAW. The terms and provisions hereof shall be
construed under the laws of the Commonwealth of Pennsylvania,
provided, however, this 8.03 shall not be deemed to limit causes
of action for violations of federal or state securities law to
the laws of the Commonwealth of Pennsylvania. Neither this
Agreement nor the Subscription Agreement shall require mandatory
venue or mandatory arbitration of any or all claims by
Participants against the Sponsor.
8.04. AGREEMENT IN COUNTERPARTS. This Agreement may be executed
in counterpart and shall be binding upon all parties executing
this or similar agreements from and after the date of execution
by each party.
8.05. AMENDMENT.
8.05(a). PROCEDURE FOR AMENDMENT. No changes herein shall be
binding unless:
(i) proposed in writing by the Managing General Partner, and
adopted with the consent of Participants whose Agreed
Subscriptions equal a majority of the Partnership
Subscription; or
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<PAGE> 38
(ii) proposed in writing by Participants whose Agreed
Subscriptions equal 10% or more of the Partnership
Subscription and approved by an affirmative vote of
Participants whose Agreed Subscriptions equal a majority
of the Partnership Subscription.
8.05(b). CIRCUMSTANCES UNDER WHICH THE MANAGING GENERAL PARTNER
ALONE MAY AMEND. The Managing General Partner is authorized to
amend this Agreement and its exhibits without the consent of
Participants in any way deemed necessary or desirable by it:
(i) to add or substitute (in the case of an assigning party)
additional Limited Partners or Investor General
Partners;
(ii) to enhance the tax benefits of the Partnership to the
parties; and
(iii) to satisfy any requirements, conditions, guidelines,
options, or elections contained in any opinion,
directive, order, ruling, or regulation of the
Securities and Exchange Commission, the Internal Revenue
Service, or any other federal or state agency, or in any
federal or state statute, compliance with which it deems
to be in the best interest of the Partnership.
Notwithstanding the foregoing, no amendment materially and
adversely affecting the interests or rights of Participants shall
be made without the consent of the Participants whose interests
will be so affected.
8.06. ADDITIONAL PARTNERS. Each Participant hereby consents to
the admission to the Partnership of additional Limited Partners
or Investor General Partners as the Managing General Partner, in
its discretion, chooses to admit.
8.07. LEGAL EFFECT. This Agreement shall be binding upon and
inure to the benefit of the parties, their heirs, devisees,
personal representatives, successors and assigns, and shall run
with the interests subject hereto. The terms "Partnership,"
"Limited Partner," "Investor General Partner," "Participant,"
"Partner," "Managing General Partner," "Operator," or "parties"
shall equally apply to any successor limited partnership, and any
heir, devisee, personal representative, successor or assign of a
party.
IN WITNESS WHEREOF, the parties hereto set their hands and seal
as of the day and year hereinabove shown.
ATLAS: ATLAS RESOURCES, INC.
Managing General Partner
By:_____________________
Attest:
_____________________
(SEAL) Secretary
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
EXHIBIT (I-A)
MANAGING GENERAL PARTNER SIGNATURE PAGE
- --------------------------------------------------------------------
EXHIBIT (I-A)
MANAGING GENERAL PARTNER SIGNATURE PAGE
Attached to and made a part of the AMENDED AND RESTATED CERTIFICATE AND
AGREEMENT OF LIMITED PARTNERSHIP of ATLAS-ENERGY FOR THE
NINETIES-PUBLIC #7 LTD.
The undersigned agrees:
1. to serve as the Managing General Partner of ATLAS-ENERGY FOR THE
NINETIES-PUBLIC #7 LTD. (the "Partnership"), and hereby executes,
swears to and agrees to all the terms of the Partnership Agreement;
2. to pay the required subscription of the Managing General Partner
under 3.03(b)(1) of the Partnership Agreement; and
3. to subscribe to the Partnership as follows:
(a) $___________________ [________] Unit(s)] under 3.03(b)(2) of
the Partnership Agreement as a Limited Partner; or
(b) $___________________ [________] Unit(s)] under 3.03(b)(2) of
the Partnership Agreement as an Investor General Partner.
MANAGING GENERAL PARTNER:
Atlas Resources, Inc. Address:
By: ______________________________________ 311 Rouser Road
J.R. O'Mara, President and CEO Moon Township, Pennsylvania 15108
ACCEPTED this ________ day of __________________ , 1998.
ATLAS RESOURCES, INC.
MANAGING GENERAL PARTNER
By: ______________________________________
J.R. O'Mara, President and CEO
Attest
______________________________________________
(SEAL) Secretary
- ------------------------------------------------------------------
<PAGE>
EXHIBIT (I-B)
SUBSCRIPTION AGREEMENT
- -------------------------------------------------------------
<PAGE> 1
ATLAS-ENERGY FOR THE NLNETLES-PUBLLC #7 LTD.
SUBSCRIPTION AGREEMENT
The undersigned hereby offers to purchase Units of Atlas-Energy for the
Nineties-Public #7 Ltd. in the amount set forth on the Signature Page
of this Subscription Agreement and on the terms described in the
current Prospectus for Atlas-Energy for the Nineties-Public #7 Ltd. (as
supplemented or amended from time to time). The undersigned
acknowledges and agrees that his execution of this Subscription
Agreement also constitutes his execution of the Amended and Restated
Certificate and Agreement of Limited Partnership (the "Partnership
Agreement") the form of which is attached as Exhibit (A) to the
Prospectus and the undersigned agrees to be bound by all of the terms
and conditions of the Partnership Agreement if his Agreed Subscription
is accepted by the Managing General Partner. The undersigned
understands and agrees that this offer may not be assigned or withdrawn
by the undersigned. The undersigned hereby irrevocably constitutes and
appoints Atlas Resources, Inc. (and its duly authorized agents) the
undersigned's agent and attorney-in-fact, in the undersigned's name,
place and stead, to make, execute, acknowledge, swear to, file, record
and deliver the Amended and Restated Certificate and Agreement of
Limited Partnership and any certificates related thereto.
In order to induce the Managing General Partner to accept this
subscription, the undersigned hereby represents, warrants, covenants
and agrees as follows:
INVESTOR'S INITIALS
_____ The undersigned has received the Prospectus.
_____ The undersigned (other than Minnesota residents)
recognizes that prior to this offering there has been no public market
for the Units and that it is not likely that after the offering there
will be any such market. In addition, the undersigned understands that
the transferability of the Units is restricted and that he cannot
expect to be able to readily liquidate his investment in the Units in
case of emergency or other change in circumstances.
_____ The undersigned is purchasing the Units for his own
account, for investment purposes and not for the account of others and
he is not purchasing the Units with the present intention of reselling
them.
_____ The undersigned, if he is an individual, is a citizen of
the United States of America and is at least twenty-one years of age,
or, if a partnership, corporation or trust, the members, stockholders
or beneficiaries thereof are citizens of the United States and each is
at least twenty-one years of age.
_____ The undersigned, if he is not an individual, is
empowered and duly authorized under a governing document, trust
instrument, pension plan, charter, certificate of incorporation,
by-law provision or the like to enter into this Subscription
Agreement and to perform the transactions contemplated by the
Prospectus, including the exhibits thereto.
_____ (a) The undersigned has:
a net worth of at least $225,000 (exclusive of home, furnishings and
automobiles); or
a net worth (exclusive of home, furnishings and automobiles) of at
least $60,000 and had during the last tax year, or estimates that he
will have during the current tax year, "taxable income" as defined in
Section 63 of the Code of at least $60,000, without regard to an
investment in the Partnership.
(B) IN ADDITION, IF A RESIDENT OF ALABAMA, ARIZONA,
CALIFORNIA, INDIANA, IOWA, KANSAS, KENTUCKY, MAINE, MASSACHUSETTS,
MICHIGAN, MINNESOTA, MISSISSIPPI, MISSOURI, NEW HAMPSHIRE, NEW MEXICO,
NORTH CAROLINA, OHIO, OKLAHOMA, OREGON, PENNSYLVANIA, SOUTH DAKOTA,
TENNESSEE, TEXAS, VERMONT OR WASHINGTON, THE UNDERSIGNED REPRESENTS
THAT HE IS AWARE OF AND MEETS THAT STATE'S QUALIFICATIONS AND
SUITABILITY STANDARDS SET FORTH IN EXHIBIT (B) TO THE PROSPECTUS.
(c) If a fiduciary, I am purchasing for a person or
entity having the appropriate income and/or net worth specified in (a)
or (b) above.
- ----------------------------------------------------------------------
<PAGE>2
(d) If a resident of Michigan, Ohio or Pennsylvania the
undersigned's investment does not exceed 10% of his net
worth (exclusive of home, furnishings and automobiles).
INVESTOR'S INITIALS
_____ An Investor General Partner will have unlimited joint and
several liability for Partnership obligations and liabilities including
amounts in excess of his Agreed Subscription to the extent such
obligations and liabilities exceed the Partnership's insurance
proceeds, the Partnership's assets and indemnification by the Managing
General Partner. Insurance may be inadequate to cover these liabilities
and there is no insurance coverage for certain claims.
_____ Partnership losses allocable to a Limited Partner generally
may be used only to the extent of his net passive income from passive
activities in such year, with any excess losses being deferred.
THE ABOVE REPRESENTATIONS DO NOT CONSTITUTE A WAIVER OF ANY RIGHTS THAT
I MAY HAVE UNDER THE ACTS ADMINISTERED BY THE SECURITIES AND EXCHANGE
COMMISSION OR BY ANY STATE REGULATORY AGENCY ADMINISTERING STATUTES
BEARING ON THE SALE OF SECURITIES.
No state or federal governmental authority has made any finding or
determination relating to the fairness for public investment of the
Units and no state or federal governmental authority has recommended or
endorsed or will recommend or endorse the Units.
The Soliciting Dealer or registered representative is required to
inform potential investors of all pertinent facts relating to the
Units, including the following:
the risks involved in the offering, including the speculative nature of
the investment and the speculative nature of drilling for oil and gas;
the financial hazards involved in the offering, including the risk of
losing the entire investment;
the lack of liquidity of this investment;
the restrictions on transferability of the Units;
the background of the Managing General Partner and the Operator;
the tax consequences of the investment; and
the unlimited joint and several liability of the Investor General
Partners.
Investors are required to execute their own Subscription Agreements.
The Managing General Partner will not accept any Subscription Agreement
that has been executed by someone other than the investor unless the
person has been given the legal power of attorney to sign on the
investor's behalf and the investor meets all of the conditions herein.
In the case of sales to fiduciary accounts, the minimum standards set
forth herein shall be met by the beneficiary, the fiduciary account,
or by the donor or grantor who directly or indirectly supplies the
funds to purchase the Partnership interests if the donor or grantor is
the fiduciary.
The execution of the Subscription Agreement by a subscriber constitutes
a binding offer to buy Units in the Partnership and an agreement to
hold the offer open until the Agreed Subscription is accepted or
rejected by the Managing General Partner. Once an investor subscribes
he will not have any revocation rights. The Managing General Partner
has the discretion to refuse to accept any Agreed Subscription without
liability to the subscriber. Agreed Subscriptions will be accepted or
rejected by the Partnership within thirty days of their receipt; if
rejected, all funds will be returned to the subscriber immediately.
Upon the original sale of Units, the Participants will be admitted as
Partners not later than fifteen days after the release from escrow of
Participants' funds to the Partnership. Thereafter, Participants will
be admitted into the Partnership not later than the last day of the
calendar month in which their Agreed Subscriptions were accepted by the
Partnership.
The Managing General Partner may not complete a sale of Units to an
investor until at least five business days after the date the investor
receives a final Prospectus. In addition, the Managing General Partner
will send each investor a confirmation of purchase.
NOTICE TO CALIFORNIA RESIDENTS: This offering deviates in certain
respects from various requirements of Title 10 of the California
Administrative Code. These deviations include, but are not limited to
the following: the definition of Prospect in the Prospectus, unlike
Rule 260.140.127.2(b) and Rule 260.140.121(1) does not require
enlarging or contracting of the size of the area on the basis of
geological data in all cases.
If a resident of California the undersigned acknowledges the receipt of
California Rule 260.141.11 set forth in Exhibit (B) to the Prospectus.
- -------------------------------------------------------------
SIGNATURE PAGE OF SUBSCRIPTION AGREEMENT
The undersigned agrees to purchase ________ Units of Participation at
$10,000 per Unit in ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD. (the
"Partnership") as (check one):
* INVESTOR GENERAL PARTNER AGREED SUBSCRIPTION
* LIMITED PARTNER $ ___________________________
(______________________# Units)
Make check payable to: "Atlas Public #7 Ltd., Escrow Agent, National
City Bank of PA"
Minimum Subscription: one Unit ($10,000), however, the Managing General
Partner, in its discretion, may accept one-half Unit ($5,000)
subscriptions; and Additional Subscriptions in $1,000 increments.
Subscriber (All individual investors must personally Address
sign this Signature Page.)
_________________________________________________
___________________________________________________
Print Name
_________________________________________________
___________________________________________________
Signature
_________________________________________________
___________________________________________________
Print Name
_________________________________________________
Signature
_________________________________________________
Name of Entity if a Trust, Corporation or Partnership is
Subscribing
Address for Distributions if Different from Above
___________________________________________________
___________________________________________________
Date: __________________ Telephone No.: Business
______________________________ Home _________________________
Tax I.D. No. (Social Security No.):
_______________________________________________________________________
______
(CHECK ONE): Calendar Year Taxpayer __________ Fiscal Year
Taxpayer __________
(CHECK ONE): OWNERSHIP -
Tenants-in-Common
Partnership
Joint Tenancy C Corporation
Individual S Corporation
Trust Community Property
Other
- ---------------------------------------------------------------------
<PAGE> 4
TO BE COMPLETED BY REGISTERED REPRESENTATIVE (FOR COMMISSION AND OTHER
PURPOSES)
I hereby represent that I have discharged my affirmative obligations
under Rule 2810(b)(2)(B) and (b)(3)(D) of the NASD's Conduct Rules
and specifically have obtained information from the above-named
subscriber concerning his/her age, net worth, annual income, federal
income tax bracket, investment objectives, investment portfolio and
other financial information and have determined that an investment in
the Partnership is suitable for such subscriber, that such subscriber
is or will be in a financial position to realize the benefits of this
investment, and that such subscriber has a fair market net worth
sufficient to sustain the risks for this investment. I have also
informed the subscriber of all pertinent facts relating to the
liquidity and marketability of an investment in the Partnership, of the
risks of unlimited liability regarding an investment as an Investor
General Partner, and of the passive loss limitations for tax purposes
of an investment as a Limited Partner.
_________________________________________________
Registered Representative Name and Number Name of Broker-Dealer
Registered Representative Office Address:
Company Name (if other than Broker-Dealer Name)
Phone Number; Facsimile Number
NOTICE TO BROKER-DEALER:
Send complete and signed DOCUMENTS
and THE CHECK to:
Mr. Eric D. Koval
Anthem Securities, Inc.
P.O. Box 911
Coraopolis, Pennsylvania 15108-0911
(412) 262-1680
FACSIMILE: (412) 262-7430
TO BE COMPLETED BY THE MANAGING GENERAL PARTNER
- -------------------------------------------------------------
ACCEPTED THIS ______ day
of _________________ , 1998
Attest
- ------------------------
(SEAL) Secretary
ATLAS RESOURCES, INC.,
MANAGING GENERAL PARTNER
By:---------------------
J.R. O'Mara, President
- --------------------------------------------------------------------
EXHIBIT (II)
DRILLING AND OPERATING AGREEMENT
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
(THIS DRILLING AND OPERATING AGREEMENT WILL BE APPROPRIATELY
MODIFIED FOR OTHER AREAS OF THE UNITED STATES.)
- ---------------------------------------------------------------------
<PAGE>
INDEX
SECTION PAGE
1. Assignment of Well Locations; Representations; Designation of
Additional Well Locations;
Outside Activities 1
2. Drilling of Wells; Interest of Developer; Right of Substitution
2
3. Operator - Responsibilities in General; Term 3
4. Operator's Charges for Drilling and Completing Wells; Completion
Determination 4
5. Title Examination of Well Locations; Liability for Title Defects
5
6. Operations Subsequent to Completion of the Wells; Price
Determinations; Plugging and Abandonment 5
7. Billing and Payment Procedure with Respect to Operation of
Wells; Records, Reports and Information 6
8. Operator's Lien 8
9. Successors and Assigns; Transfers; Appointment of Agent 8
10. Insurance; Operator's Liability 9
11. Internal Revenue Code Election, Relationship of Parties; Right
to Take Production in Kind 9
12. Force Majeure 10
13. Term 10
14. Governing Law and Invalidity 10
15. Integration 11
16. Waiver of Default or Breach 11
17. Notices 11
18. Interpretation 12
19. Counterparts 12
Signature Page 12
Exhibit A Description of Leases and Initial Well Locations
Exhibits A-l through A-___ Maps of Initial Well Locations
Exhibit B Form of Assignment
Exhibit C Form of Addendum
- -------------------------------------------------------------
<PAGE>1
DRILLING AND OPERATING AGREEMENT
THIS AGREEMENT made this ______ day of _______________, 1998, by and
between ATLAS RESOURCES, INC., a Pennsylvania corporation (hereinafter
referred to as "Atlas" or "Operator"),
and
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD., a Pennsylvania limited
partnership, (hereinafter referred to as the "Developer").
WITNESSETH THAT:
WHEREAS, the Operator , by virtue of the Oil and Gas Leases (the
"Leases") described on Exhibit A attached hereto and made a part
hereof, has certain rights to develop the ____________ (______) initial
well locations identified on the maps attached hereto as Exhibits A-l
through A-______ (the "Initial Well Locations");
WHEREAS, the Developer, subject to the terms and conditions hereof,
desires to acquire certain of Atlas' rights to develop the aforesaid
____________ (______) Initial Well Locations and to provide for the
development upon the terms and conditions herein set forth of
additional well locations ("Additional Well Locations") which the
parties may from time to time designate; and
WHEREAS, the Operator is in the oil and gas exploration and development
business, and the Developer desires that Operator, as its independent
contractor, perform certain services in connection with its efforts to
develop the aforesaid Initial and Additional Well Locations
(hereinafter collectively referred to as the "Well Locations") and to
operate the wells completed thereon, on the terms and conditions herein
set forth;
NOW THEREFORE, in consideration of the mutual covenants herein
contained and subject to the terms and conditions hereinafter set
forth, the parties hereto, intending to be legally bound, hereby agree
as follows:
1. Assignment of Well Locations; Representations; Designation of
Additional Well Locations; Outside Activities.
(a) The Operator shall execute an assignment of an undivided
percentage of Working Interest in the Well Location acreage for each
well to the Developer as shown on Exhibit A attached hereto, which
assignment shall be limited to a depth from the surface to the top of
the Queenston formation in Mercer County, Pennsylvania and Ohio.
The assignment shall be substantially in the form of Exhibit B attached
hereto and made a part hereof. The amount of acreage included in each
Initial Well Location and the configuration thereof are indicated on
the maps attached hereto as Exhibits A-l through A-______. The amount
of acreage included in each Additional Well Location and the
configuration thereof shall be indicated on the maps to be attached as
exhibits to the applicable addendum as provided in sub-section (c)
below.
(b) As of the date hereof, the Operator represents and warrants to
the Developer that the Operator is the lawful owner of said Lease and
rights and interest thereunder and of the personal property thereon or
used in connection therewith; that the Operator has good right and
authority to sell and convey the same, and that said rights, interest
and property are free and clear from all liens and encumbrances, and
that all rentals and royalties due and payable thereunder have been
duly paid. The foregoing representations and warranties shall also be
made by the Operator at the time of each recorded assignment of the
acreage included in each Initial Well Location and at the time of each
recorded assignment of the acreage included in each Additional Well
Location designated pursuant to sub-section (c) below, such
representations and warranties to be included in each recorded
assignment substantially in the manner set forth in the form of
assignment attached hereto and made a part hereof as Exhibit B. The
Operator agrees to indemnify, protect and hold the
Developer and its successors and assigns harmless from and against all
costs (including but not limited to reasonable attorneys' fees),
liabilities, claims, penalties, losses, suits, actions, causes of
action, judgments or decrees resulting from the breach of any of the
aforesaid representations and warranties. It is understood and agreed
that, except as specifically set forth above, the Operator
makes no warranty or representation, express or implied, as to
its title or the title of the lessors in and to the lands or oil and
gas interests covered by said Leases.
(c) In the event that the parties hereto desire to designate
Additional Well Locations to be developed in accordance with the terms
and conditions of this Agreement, each of said parties shall execute an
addendum substantially in the form of Exhibit C attached hereto and
made a part hereof specifying the undivided percentage of Working
Interest and the Oil and Gas Leases to be included as Leases hereunder,
specifying the amount and configuration of acreage included in each
such Additional Well Location on maps attached as exhibits to such
addendum and setting forth their agreement that such Additional Well
Locations shall be developed in accordance with the terms and
conditions of this Agreement.
- ----------------------------------------------------------------------
<PAGE> 2
(d) It is understood and agreed that the assignment of rights under
the Leases and the oil and gas development activities contemplated by
this Agreement relate only to the Initial Well Locations described
herein and to the Additional Well Locations designated pursuant to
sub-section (c) above. Nothing contained in this Agreement shall be
interpreted to restrict in any manner the right of each of the parties
hereto to conduct without the participation of any other party hereto
any additional activities relating to exploration, development,
drilling, production or delivery of oil and gas on lands adjacent to or
in the immediate vicinity of the aforesaid Initial and Additional Well
Locations or elsewhere.
2. Drilling of Wells; Interest of Developer; Right of Substitution.
(a) Operator, as Developer's independent contractor, agrees to
drill, complete (or plug) and operate ____________ (_____) natural gas
wells on the ____________ (______) Initial Well Locations in accordance
with the terms and conditions of this Agreement. Developer, as a
minimum commitment, agrees to participate in and pay the Operator's
charges for drilling and completing the wells and any extra costs
pursuant to Section 4 hereof in proportion to the share of the Working
Interest owned by the Developer in the wells with respect to all
___________ (______) initial wells, it being expressly understood and
agreed that, subject to sub-section (e) below, Developer does not
reserve the right to decline participation in the drilling of any of
the ____________ (______) initial wells to be drilled hereunder.
(b) Operator will use its best efforts to commence drilling the
first well within thirty (30) days after the date of this Agreement and
to commence the drilling of each of said ______________ (_____) initial
wells for which payment is made pursuant to Section 4(b) of this
Agreement, on or before March 31, 1999. Subject to the foregoing time
limits, Operator shall determine the timing of and the order of the
drilling of said ____________ (______) Initial Well Locations.
(c) The ____________ (______) initial wells to be drilled on the
Initial Well Locations designated pursuant to this Agreement and any
additional wells drilled hereunder on any Additional Well Locations
designated pursuant to Section l(c) above shall be drilled and
completed (or plugged) in accordance with the generally accepted and
customary oil and gas field practices and techniques then prevailing in
the geographical area of the Well Locations and shall be drilled to a
depth sufficient to test thoroughly the objective formation or the
deepest assigned depth, whichever is less.
(d) Except as otherwise provided herein, all costs, expenses and
liabilities incurred in connection with the drilling and other
operations and activities contemplated by this Agreement shall be borne
and paid, and all wells, gathering lines of up to approximately 1,500
feet on the Prospect, equipment, materials, and facilities acquired,
constructed or installed hereunder shall be owned, by the Developer in
proportion to the share of the Working Interest owned by the Developer
in the wells. Subject to the payment of lessor's royalties and other
royalties and overriding royalties, if any, production of oil and gas
from the wells to be drilled hereunder shall be owned by the Developer
in proportion to the share of the Working Interest owned by the
Developer in the wells.
(e) Notwithstanding the provisions of sub-section (a) above, in the
event the Operator or Developer determines in good faith, with respect
to any Well Location, before operations commence hereunder with respect
to such Well Location, based upon the production (or failure of
production) of any other wells which may have been recently drilled in
the immediate area of such Well Location, or upon newly discovered
title defects, or upon such other evidence with respect to the Well
Location as may be obtained, that it would not be in the best interest
of the parties hereto to drill a well on such Well Location, then the
party making the determination shall notify the other party hereto of
such determination and the basis therefor and, unless otherwise
instructed by Developer, such well shall not be drilled.
If such well is not drilled, Operator shall promptly propose a new well
location (including such information with respect thereto as Developer
may reasonably request) within Pennsylvania or Ohio to be substituted
for such original Well Location. Developer shall thereafter have the
option for a period of seven (7) business days to either reject or
accept the proposed new well location. If the new well location is
rejected, Operator shall promptly propose another substitute well
location pursuant to the provisions hereof.
- ----------------------------------------------------------------------
<PAGE>3
Once the Developer accepts a substitute well location or does not
reject it within said seven (7) day period, this Agreement shall
terminate as to the original Well Location and the substitute well
location shall become subject to the terms and conditions hereof.
3. Operator - Responsibilities in General; Term.
(a) Atlas shall be the Operator of the wells and Well Locations
subject to this Agreement and, as the Developer's
independent contractor, shall, in addition to its other
obligations hereunder:
make the necessary arrangements for the drilling and completion of
wells and the installation of the necessary gas gathering line systems
and connection facilities;
make the technical decisions required in drilling, testing, completing
and operating such wells;
manage and conduct all field operations in connection with the
drilling, testing, completing, equipping, operating and producing of
the wells;
maintain all wells, equipment, gathering lines and facilities in good
working order during the useful life thereof; and
perform the necessary administrative and accounting functions.
In the performance of work contemplated by this Agreement, Operator is
an independent contractor with authority to control and direct the
performance of the details of the work.
(b) Operator covenants and agrees that:
it shall perform and carry on (or cause to be performed and carried on)
its duties and obligations hereunder in a good, prudent, diligent and
workmanlike manner using technically sound, acceptable oil and gas
field practices then prevailing in the geographical area of the
aforesaid Well Locations;
all drilling and other operations conducted by, for and under the
control of Operator hereunder shall conform in all respects to federal,
state and local laws, statutes, ordinances, regulations, and
requirements;
unless otherwise agreed in writing by the Developer, all work performed
hereunder pursuant to a written estimate shall conform to the technical
specifications set forth in such written estimate and all equipment and
materials installed or incorporated in the wells and facilities
hereunder shall be new or used and of good quality;
in the course of conducting operations hereunder, it shall comply with
all terms and conditions of the Leases (and any related assignments,
amendments, subleases, modifications and supplements) other than any
minimum drilling commitments contained therein;
it shall keep the Well Locations subject to this Agreement and all
wells, equipment and facilities located thereon, free and clear of all
labor, materials and other liens or encumbrances arising out of
operations hereunder;
it shall file all reports and obtain all permits and bonds required to
be filed with or obtained from any governmental authority or agency in
connection with the drilling or other operations and activities which
are the subject of this Agreement; and
it will provide competent and experienced personnel to supervise the
drilling, completing (or plugging), and operating of the wells and use
the services of competent and experienced service companies to provide
any third party services necessary or appropriate in order to perform
its duties hereunder.
(c) Atlas shall serve as Operator hereunder until the earliest of:
the termination of this Agreement pursuant to Section 13 hereof;
- ----------------------------------------------------------------
<PAGE> 4
the termination of Atlas as Operator by the Developer which may be
effected by the Developer at any time in its discretion, with or
without cause; upon sixty (60) days advance written notice to the
Operator; or
the resignation of Atlas as Operator hereunder which may occur upon
ninety (90) days' written notice to the Developer at any time after
five (5) years from the date hereof, it being expressly understood and
agreed that Atlas shall have no right to resign as Operator hereunder
prior to the expiration of the aforesaid five-year period.
Any successor Operator hereunder shall be selected by the Developer.
Nothing contained in this sub-section (c) shall relieve or release
Atlas or the Developer from any liability or obligation hereunder which
accrued or occurred prior to Atlas' removal or resignation as Operator
hereunder. Upon any change in Operator pursuant to this provision, the
then present Operator shall deliver to the successor Operator
possession of all records, equipment, materials and appurtenances used
or obtained for use in connection with operations hereunder and owned
by the Developer.
4. Operator's Charges for Drilling and Completing Wells; Completion
Determination.
(a) All natural gas wells which are drilled and completed
hereunder shall be drilled and completed on a footage basis
for a price of $39.15 per foot to the depth of the well at
its deepest penetration as recorded by Operator. The
aforesaid footage price for each of said natural gas wells
shall be set forth in an AFE which shall be attached to this
Agreement as an Exhibit, and shall cover all ordinary costs
which may be incurred in drilling and completing each such
well for production of natural gas, including without
limitation, site preparation, permits and bonds, roadways,
surface damages, power at the site, water, Operator's
overhead and profit, rights-of-way, drilling rigs, equipment
and materials, costs of title examination, logging,
cementing, fracturing, casing, meters (other than utility
purchase meters), connection facilities, salt water
collection tanks, separators, siphon string, rabbit, tubing,
an average of 1,500 feet of gathering line per well,
geological and engineering services and completing two (2)
zones. Such footage price shall not include the cost of:
completing more than two (2) zones;
completion procedures, equipment, or any facilities necessary or
appropriate for the production and sale of oil and/or
natural gas liquids; and
equipment or materials necessary or appropriate to collect, lift or
dispose of liquids for efficient gas production, except that
the cost of saltwater collection tanks, separators, siphon
string and tubing shall be included in the aforesaid footage
price.
Any such extra costs shall be billed to Developer in proportion to the
share of the Working Interest owned by the Developer in the
wells on a direct cost basis equal to the sum of:
Operator's invoice costs of third party services performed and
materials and equipment purchased plus ten percent (10%) to
cover supervisory services and overhead; and
Operator's standard charges for services performed directly by it.
(b) In order to enable Operator to commence site preparation for
________________ (______) initial wells, to obtain suitable
subcontractors for the drilling and completion of such wells at
currently prevailing prices, and to insure the availability of
equipment and materials, the Developer shall pay to Operator, in
proportion to the share of the Working Interest owned by the Developer
in the wells, one hundred percent (100%) of the estimated price for all
_________________ (______) initial wells upon execution of this
Agreement. The payment to be nonrefundable in all events, except that
Developer shall not be required to pay completion costs prior to the
time that a decision is made that the well warrants a completion
attempt and the share of such payments of the Managing General Partner
of the Developer shall be paid within five (5) business days of notice
from Operator that such costs have been incurred.
With respect to each additional well drilled on the Additional Well
Locations, if any, in order to enable Operator to commence site
preparation, to obtain suitable subcontractors for the drilling and
completion of such wells at currently prevailing prices, and to insure
the availability of equipment and materials, Developer shall pay
Operator, in proportion to the share of the Working Interest owned by
the Developer in the wells, one hundred percent (100%) of the estimated
price for such well upon execution of the applicable addendum pursuant
to Section l(c) above. The payment shall be nonrefundable in all
events, however, the Developer shall not be required to pay completion
costs prior to the time that a decision is made that the well warrants
a completion attempt and the share of such payments of the Managing
General Partner of the Developer shall be paid within five (5) business
days of notice from Operator that such costs have been incurred.
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<PAGE> 5
With respect to each well, Developer shall pay to Operator, in
proportion to the share of the Working Interest owned by the Developer
in the wells, all other costs for such well within five (5) business
days of receipt of notice from Operator that such well has been drilled
to the objective depth and logged and is to be completed. Developer
shall pay, in proportion to the share of the Working Interest owned by
the Developer in the wells, any extra costs incurred with respect to
each well pursuant to sub-section (a) above within ten (10) business
days of its receipt of Operator's statement therefor.
(c) Operator shall determine whether or not to run the production
casing for an attempted completion or to plug and abandon
any well drilled hereunder; provided, however, that a well
shall be completed only if Operator has made a good faith
determination that there is a reasonable possibility of
obtaining commercial quantities of oil and/or gas.
(d) If Operator determines at any time during the drilling or
attempted completion of any well hereunder, in accordance with the
generally accepted and customary oil and gas field practices and
techniques then prevailing in the geographic area of the well location,
that such well should not be completed, it shall promptly and properly
plug and abandon the same. In such event, such well shall be deemed a
dry hole and the dry hole footage price for each well drilled hereunder
shall be $20.60 per foot multiplied by the depth of the well, as
specified in sub-section (a) above, and shall be charged to the
Developer in proportion to the share of the Working Interest owned by
the Developer in the well. Any amounts paid by the Developer with
respect to such dry hole which exceed the aforesaid dry hole footage
price shall be retained by Operator and shall be applied to the costs
for an additional well or wells to be drilled on the Additional Well
Locations.
5. Title Examination of Well Locations; Liability for Title
Defects.
(a) The Developer hereby acknowledges that Operator has furnished
Developer with the title opinions identified on Exhibit A, and other
documents and information which Developer or its counsel has requested
in order to determine the adequacy of the title to the Initial Well
Locations and leased premises subject to this Agreement. The Developer
hereby accepts the title to said Initial Well Locations and leased
premises and acknowledges and agrees that, except for any loss,
expense, cost or liability caused by the breach of any of the
warranties and representations made by the Operator in Section l(b)
hereof, any loss, expense, cost or liability whatsoever caused by or
related to any defect or failure of such title shall be the sole
responsibility of and shall be borne entirely by the Developer.
(b) Prior to commencing the drilling of any well on any Additional
Well Location designated pursuant to this Agreement, Operator shall
conduct, or cause to be conducted, a title examination of such
Additional Well Location, in order to obtain appropriate abstracts,
opinions and certificates and other information necessary to determine
the adequacy of title to both the applicable Lease and the fee title of
the lessor to the premises covered by such Lease. The results of such
title examination and such other information as is necessary to
determine the adequacy of title for drilling purposes shall be
submitted to the Developer for its review and acceptance, and no
drilling shall be commenced until such title has been accepted in
writing by the Developer. After any title has been accepted by the
Developer, any loss, expense, cost or liability whatsoever, caused by
or related to any defect or failure of such title shall be the sole
responsibility of and shall be borne entirely by the Developer, unless
such loss, expense, cost or liability was caused by the breach of any
of the warranties and representations made by the Operator in Section
l(b) of this Agreement.
6. Operations Subsequent to Completion of the Wells; Price
Determinations; Plugging and Abandonment.
(a) Commencing with the month in which a well drilled hereunder
begins to produce, Operator shall be entitled to an
operating fee of $275 per month for each well being operated
under this Agreement, proportionately reduced to the extent
the Developer owns less than 100% of the Working Interest in
the wells. This fee shall be in lieu of any direct charges
by Operator for its services or the provision by Operator of
its equipment for normal superintendence and maintenance of
such wells and related pipelines and facilities. Such
operating fees shall cover all normal, regularly recurring
operating expenses for the production, delivery and sale of
natural gas, including without limitation well tending,
routine maintenance and adjustment, reading meters,
recording production, pumping, maintaining appropriate books
and records, preparing reports to the Developer and
government agencies, and collecting and disbursing revenues.
The operating fees shall not cover costs and expenses
related to the:
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<PAGE> 6
production and sale of oil;
collection and disposal of salt water or other liquids produced by the
wells;
rebuilding of access roads; and
purchase of equipment, materials or third party services, which,
subject to the provisions of sub-section (c) of this Section 6, shall
be paid by the Developer in proportion to the share of the Working
Interest owned by the Developer in the wells.
Any well which is temporarily abandoned or shut-in continuously for the
entire month shall not be considered a producing well for purposes of
determining the number of wells in such month subject to the aforesaid
operating fee.
(b) The monthly operating fee set forth in sub-section (a) above
may in the following manner be adjusted annually as of the first day of
January (the "Adjustment Date") each year beginning January l, 2000.
Such adjustment, if any, shall not exceed the percentage increase in
the average weekly earnings of "Crude Petroleum, Natural Gas, and
Natural Gas Liquids" workers, as published by the U.S. Department of
Labor, Bureau of Labor Statistics, and shown in Employment and Earnings
Publication, Monthly Establishment Data, Hours and Earning Statistical
Table C-2, Index Average Weekly Earnings of "Crude Petroleum, Natural
Gas, and Natural Gas Liquids" workers, SIC Code #131-2, or any
successor index thereto, since January l, 1997, in the case of the
first adjustment, and since the previous Adjustment Date, in the case
of each subsequent adjustment.
(c) Without the prior written consent of the Developer, pursuant to
a written estimate submitted by Operator, Operator shall not undertake
any single project or incur any extraordinary cost with respect to any
well being produced hereunder reasonably estimated to result in an
expenditure of more than $5,000, unless such project or extraordinary
cost is necessary to safeguard persons or property or to protect the
well or related facilities in the event of a sudden emergency. In no
event, however, shall the Developer be required to pay for any project
or extraordinary cost arising from the negligence or misconduct of
Operator, its agents, servants, employees, contractors, licensees or
invitees. All extraordinary costs incurred and the cost of projects
undertaken with respect to a well being produced hereunder shall be
billed at the invoice cost of third party services performed or
materials purchased together with a reasonable charge by Operator for
services performed directly by it, in proportion to the share of the
Working Interest owned by the Developer in the wells. Operator shall
have the right to require the Developer to pay in advance of
undertaking any such project all or a portion of the estimated costs
thereof in proportion to the share of the Working Interest owned by the
Developer in the wells.
(d) Developer shall have no interest in the pipeline gathering
system, which gathering system shall remain the sole property of
Operator and shall be maintained at Operator's sole cost and expense.
(e) Notwithstanding anything herein to the contrary, the Developer
shall have full responsibility for and bear all costs in proportion to
the share of the Working Interest owned by the Developer in the wells
with respect to obtaining price determinations under and otherwise
complying with the Natural Gas Policy Act of 1978 and the implementing
state regulations. Such responsibility shall include, without
limitation, preparing, filing, and executing all applications,
affidavits, interim collection notices, reports and other documents
necessary or appropriate to obtain price certification, to effect sales
of natural gas, or otherwise to comply with said Act and the
implementing state regulations. Operator agrees to furnish such
information and render such assistance as the Developer may reasonably
request in order to comply with said Act and the implementing state
regulations without charge for services performed by its employees.
(f) The Developer shall have the right to direct Operator to plug
and abandon any well which has been completed hereunder as a producer.
In addition, Operator shall not plug and abandon any such well prior
to obtaining the written consent of the Developer. However, if the
Operator in accordance with the generally accepted and customary oil
and gas field practices and techniques then prevailing in the
geographic area of the well location, determines that any such well
should be plugged and abandoned and makes a written request to the
Developer for authority to plug and abandon any such well and the
Developer fails to respond in writing to such request within forty-five
(45) days following the date of such request, then the Developer shall
be deemed to have consented to the plugging and abandonment of such
well(s). All costs and expenses related to plugging and abandoning the
wells which have been drilled and completed as producing wells
hereunder shall be borne and paid by the Developer in proportion to the
share of the Working Interest owned by the Developer in the wells.
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<PAGE> 7
At any time after three (3) years from the date each well drilled and
completed hereunder is placed into production, Operator shall have the
right to deduct each month from the proceeds of the sale of the
production from the well operated hereunder up to $200, in proportion
to the share of the Working Interest owned by the Developer in the
wells, for the purpose of establishing a fund to cover the estimated
costs of plugging and abandoning said well. All such funds shall be
deposited in a separate interest bearing escrow account for the account
of the Developer, and the total amount so retained and deposited shall
not exceed Operator's reasonable estimate of such costs.
7. Billing and Payment Procedure with Respect to Operation of
Wells; Records, Reports and Information.
(a) Operator shall promptly and timely pay and discharge on behalf
of the Developer, in proportion to the share of the Working
Interest owned by the Developer in the wells, all severance
taxes, royalties, overriding royalties, operating fees,
pipeline gathering charges and other expenses and
liabilities payable and incurred by reason of its operation
of the wells in accordance with this Agreement. Operator
shall also pay, in proportion to the share of the Working
Interest owned by the Developer in the wells, on or before
the due date any third party invoices rendered to Operator
with respect to such costs and expenses. Operator, however,
shall not be required to pay and discharge as aforesaid any
such costs and expenses which are being contested in good
faith by Operator.
Operator shall deduct the foregoing costs and expenses from the
Developer's share of the proceeds of the oil and/or gas sold from the
wells operated hereunder and shall keep an accurate record of the
Developer's account hereunder, showing expenses incurred and charges
and credits made and received with respect to each well. In the event
that such proceeds are insufficient to pay said costs and expenses,
Operator shall promptly and timely pay and discharge the same, in
proportion to the share of the Working Interest owned by the Developer
in the wells, and prepare and submit an invoice to the Developer each
month for said costs and expenses. The invoice shall be accompanied
by the form of statement specified in sub-section (b) below. Any such
invoice shall be paid by the Developer within ten (10) business days of
its receipt.
(b) Operator shall disburse to the Developer, on a quarterly basis,
the Developer's share of the proceeds received from the sale of oil
and/or gas sold from the wells operated hereunder, less:
the amounts charged to the Developer under sub-section (a) hereof; and
such amount, if any, withheld by Operator for future plugging costs
pursuant to sub-section (f) of Section 6.
Each such disbursement made and/or invoice submitted pursuant to sub-
section (a) above shall be accompanied by a statement itemizing with
respect to each well:
the total production of oil and/or gas since the date of the last
disbursement or invoice billing period, as the case may be, and the
Developer's share thereof;
the total proceeds received from any sale thereof, and the Developer's
share thereof;
the costs and expenses deducted from said proceeds and/or being billed
to the Developer pursuant to sub-section (a) above;
the amount withheld for future plugging costs; and
such other information as Developer may reasonably request, including
without limitation copies of all third party invoices listed thereon
for such period.
Operator agrees to deposit all proceeds from the sale of oil and/or gas
sold from the wells operated hereunder in a separate checking account
maintained by Operator. This account shall be used solely for the
purpose of collecting and disbursing funds constituting proceeds from
the sale of production hereunder.
(c) In addition to the statements required under sub-section (b)
above, Operator, within seventy-five (75) days after the
completion of each well drilled hereunder, shall furnish the
Developer with a detailed statement itemizing with respect
to such well the total costs and charges under Section 4(a)
hereof and the Developer's share thereof, and such
information as is necessary to enable the Developer:
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<PAGE> 8
to allocate any extra costs incurred with respect to such well between
tangible and intangible; and
to determine the amount of investment tax credit, if applicable.
(d) Upon request, Operator shall promptly furnish the Developer
with such additional information as it may reasonably request,
including without limitation geological, technical and financial
information, in such form as may reasonably be requested, pertaining to
any phase of the operations and activities governed by this Agreement.
The Developer and its authorized employees, agents and consultants,
including independent accountants shall, at Developer's sole cost and
expense:
upon at least ten (10) days' written notice have access during normal
business hours to all of Operator's records pertaining to operations
hereunder, including without limitation, the right to audit the books
of account of Operator relating to all receipts, costs, charges and
expenses under this Agreement; and
have access, at its sole risk, to any wells drilled by Operator
hereunder at all times to inspect and observe any machinery, equipment
and operations.
8. Operator's Lien.
(a) The Developer hereby grants Operator a first and preferred lien
on and security interest in the interest of the Developer covered by
this Agreement, and in the Developer's interest in oil and gas produced
and the proceeds thereof, and upon the Developer's interest in
materials and equipment, to secure the payment of all sums due from
Developer to Operator under the provisions of this Agreement.
(b) In the event that the Developer fails to pay any amount owing
hereunder by it to the Operator within the time limit for payment
thereof, Operator, without prejudice to other existing remedies, is
authorized at its election to collect from any purchaser or purchasers
of oil or gas and retain the proceeds from the sale of the Developer's
share thereof until the amount owed by the Developer, plus twelve
percent (12%) interest on a per annum basis and any additional costs
(including without limitation actual attorneys' fees and costs)
resulting from such delinquency, has been paid. Each purchaser of oil
or gas shall be entitled to rely upon Operator's written statement
concerning the amount of any default.
9. Successors and Assigns; Transfers; Appointment of Agent.
(a) This Agreement shall be binding upon and shall inure to the
benefit of the undersigned parties and their respective successors and
permitted assigns; provided, however, that Operator may not assign,
transfer, pledge, mortgage, hypothecate, sell or otherwise dispose of
any of its interest in this Agreement, or any of the rights or
obligations hereunder, without the prior written consent of the
Developer, except that such consent shall not be required in connection
with:
the assignment of work to be performed for Operator by subcontractors,
it being understood and agreed, however, that any such assignment to
Operator's subcontractors shall not in any manner relieve or release
Operator from any of its obligations and responsibilities under this
Agreement;
\
any lien, assignment, security interest, pledge or mortgage arising
under or pursuant to Operator's present or future financing
arrangements, or
the liquidation, merger, consolidation or sale of substantially all of
the assets of Operator or other corporate reorganization.
Further, in order to maintain uniformity of ownership in the wells,
production, equipment, and leasehold interests covered by this
Agreement, and notwithstanding any other provisions to the contrary,
the Developer shall not, without the prior written consent of Operator,
sell, assign, transfer, encumber, mortgage or otherwise dispose of any
of its interest in the wells, production, equipment or leasehold
interests covered hereby unless such disposition encompasses either:
the entire interest of the Developer in all wells, production,
equipment and leasehold interests subject hereto; or
an equal undivided interest in all such wells, production, equipment,
and leasehold interests.
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<PAGE> 9
(b) Subject to the provisions of sub-section (a) above, any sale,
encumbrance, transfer or other disposition made by the
Developer of its interests in the wells, production,
equipment, and/or leasehold interests covered hereby shall
be made:
expressly subject to this Agreement;
without prejudice to the rights of the other party; and
in accordance with and subject to the provisions of the Lease.
(c) If at any time the interest of the Developer is divided among
or owned by co-owners, Operator may, at its discretion, require such
co-owners to appoint a single trustee or agent with full authority to
receive notices, reports and distributions of the proceeds from
production, to approve expenditures, to receive billings for and
approve and pay all costs, expenses and liabilities incurred
hereunder, to exercise any rights granted to such co-owners under this
Agreement, to grant any approvals or authorizations required or
contemplated by this Agreement, to sign, execute, certify, acknowledge,
file and/or record any agreements, contracts, instruments, reports, or
documents whatsoever in connection with this Agreement or the
activities contemplated hereby, and to deal generally with, and with
power to bind, such co-owners with respect to all activities and
operations contemplated by this Agreement; provided, however, that all
such co-owners shall continue to have the right to enter into and
execute all contracts or agreements for their respective shares of the
oil and gas produced from the wells drilled hereunder in accordance
with sub-section (c) of Section 11 hereof.
10. Insurance; Operator's Liability.
(a) Operator shall obtain and maintain at its own expense so long
as it is Operator hereunder all required Workmen's Compensation
Insurance and comprehensive general public liability insurance in
amounts and coverage not less than $1,000,000 per person per occurrence
for personal injury or death and $1,000,000 for property damage per
occurrence, which insurance shall include coverage for blow-outs and
total liability coverage of not less than $10,000,000.
Subject to the aforesaid limits, the Operator's general public
liability insurance shall be in all respects comparable to that
generally maintained in the industry with respect to services of the
type to be rendered and activities of the type to be conducted under
this Agreement; Operator's general public liability insurance shall, if
permitted by Operator's insurance carrier:
name the Developer as an additional insured party; and
provide that at least thirty (30) days' prior notice of cancellation
and any other adverse material change in the policy shall be given to
the Developer.
Provided, that the Developer shall reimburse Operator for the
additional cost, if any, of including it as an additional insured party
under the Operator's insurance.
Current copies of all policies or certificates thereof shall be
delivered to the Developer upon request. It is understood and agreed
that Operator's insurance coverage may not adequately protect the
interests of the Developer hereunder and that the Developer shall carry
at its expense such excess or additional general public liability,
property damage, and other insurance, if any, as the Developer deems
appropriate.
(b) Operator shall require all of its subcontractors to carry all
required Workmen's Compensation Insurance and to maintain such other
insurance, if any, as Operator in its discretion may require.
(c) Operator's liability to the Developer as Operator hereunder
shall be limited to, and Operator shall indemnify the Developer and
hold it harmless from, claims, penalties, liabilities, obligations,
charges, losses, costs, damages or expenses (including but not limited
to reasonable attorneys' fees) relating to, caused by or arising out
of:
the noncompliance with or violation by Operator, its employees, agents,
or subcontractors of any local, state or federal law, statute,
regulation, or ordinance;
the negligence or misconduct of Operator, its employees, agents or
subcontractors; or
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<PAGE> 10
the breach of or failure to comply with any provisions of this
Agreement.
11. Internal Revenue Code Election; Relationship of Parties; Right
to Take Production in Kind.
(a) With respect to this Agreement, each of the parties hereto
elects, under the authority of Section 761(a) of the
Internal Revenue Code of 1986, as amended, to be excluded
from the application of all of the provisions of Subchapter
K of Chapter 1 of Sub Title A of the Internal Revenue Code
of 1986, as amended. If the income tax laws of the state or
states in which the property covered hereby is located
contain, or may hereafter contain, provisions similar to
those contained in the Subchapter of the Internal Revenue
Code of 1986, as amended, referred to under which a similar
election is permitted, each of the parties agrees that such
election shall be exercised. Beginning with the first
taxable year of operations hereunder, each party agrees that
the deemed election provided by Section 1.761-2(b)(2)(ii) of
the Regulations under the Internal Revenue Code of 1986, as
amended, will apply; and no party will file an application
under Section 1.761-2 (b)(3)(i) and (ii) of said Regulations
to revoke such election. Each party hereby agrees to execute
such documents and make such filings with the appropriate
governmental authorities as may be necessary to effect such
election.
(b) It is not the intention of the parties hereto to create, nor
shall this Agreement be construed as creating, a mining or
other partnership or association or to render the parties
liable as partners or joint venturers for any purpose.
Operator shall be deemed to be an independent contractor and
shall perform its obligations as set forth herein or as
otherwise directed by the Developer.
(c) Subject to the provisions of Section 8 hereof, the Developer
shall have the exclusive right to sell or dispose of its proportionate
share of all oil and gas produced from the wells to be drilled
hereunder, exclusive of production which may be used in development and
producing operations, production unavoidably lost, and production used
to fulfill any free gas obligations under the terms of the applicable
Lease or Leases; and Operator shall not have any right to sell or
otherwise dispose of such oil and gas. The Developer shall have the
exclusive right to execute all contracts relating to the sale or
disposition of its proportionate share of the production from the wells
drilled hereunder. Developer shall have no interest in any gas purchase
agreements of Operator, except the right to receive Developer's share
of the proceeds received from the sale of any gas or oil from wells
developed hereunder. The Developer agrees to designate Operator or
Operator's designated bank agent as the Developer's collection agent in
any such contract. Upon request, Operator shall render assistance in
arranging such sale or disposition and shall promptly provide the
Developer with all relevant information which comes to Operator's
attention regarding opportunities for sale of production.
In the event Developer shall fail to make the arrangements necessary to
take in kind or separately dispose of its proportionate share of the
oil and gas produced hereunder, Operator shall have the right, subject
to the revocation at will by the Developer, but not the obligation, to
purchase such oil and gas or sell it to others at any time and from
time to time, for the account of the Developer at the best price
obtainable in the area for such production, however, Operator shall
have no liability to Developer should Operator fail to market such
production.
Any such purchase or sale by Operator shall be subject always to the
right of the Developer to exercise at any time its right to take in
kind, or separately dispose of, its share of oil and gas not previously
delivered to a purchaser. Any purchase or sale by Operator of any other
party's share of oil and gas shall be only for such reasonable periods
of time as are consistent with the minimum needs of the Industry under
the particular circumstance, but in no event for a period in excess of
one (1) year.
12. Force Majeure.
(a) If Operator is rendered unable, wholly or in part, by force
majeure (as hereinafter defined) to carry out its obligations under
this Agreement, the Operator shall give to the Developer prompt
written notice of the force majeure with reasonably full particulars
concerning it; thereupon, the obligations of the Operator, so far as it
is affected by the force majeure, shall be suspended during but no
longer than, the continuance of the force majeure. Operator shall use
all reasonable diligence to remove the force majeure as quickly as
possible to the extent the same is within reasonable control.
(b) The term "force majeure" shall mean an act of God, strike,
lockout, or other industrial disturbance, act of the public enemy, war,
blockade, public riot, lightning, fire, storm, flood, explosion,
governmental restraint, unavailability of equipment or materials, plant
shut-downs, curtailments by purchasers and any other causes whether of
the kind specifically enumerated above or otherwise, which directly
precludes Operator's performance hereunder and is not reasonably within
the control of the Operator.
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<PAGE> 12
(c) The requirement that any force majeure shall be remedied with
all reasonable dispatch shall not require the settlement of strikes,
lockouts, or other labor difficulty affecting the Operator, contrary to
its wishes. The method of handling all such difficulties shall be
entirely within the discretion of the Operator.
13. Term.
This Agreement shall become effective when executed by Operator
and the Developer. Except as provided in sub-section (c) of Section 3,
the Agreement shall continue and remain in full force and effect for
the productive lives of the wells being operated hereunder.
14. Governing Law and Invalidity.
This Agreement shall be governed by, construed and interpreted in
accordance with the laws of the Commonwealth of Pennsylvania.
The invalidity or unenforceability of any particular provision of
this Agreement shall not affect the other provisions hereof, and this
Agreement shall be construed in all respects as if such invalid or
unenforceable provision were omitted.
15. Integration.
This Agreement, including the Exhibits hereto, constitutes and
represents the entire understanding and agreement of the parties with
respect to the subject matter hereof and supersedes all prior
negotiations, understandings, agreements, and representations relating
to the subject matter hereof.
No change, waiver, modification, or amendment of this Agreement
shall be binding or of any effect unless in writing duly signed by the
party against which such change, waiver, modification, or amendment
is sought to be enforced.
16. Waiver of Default or Breach.
No waiver by any party hereto to any default of or breach by any
other party under this Agreement shall operate as a waiver of any
future default or breach, whether of like or different character or
nature.
17. Notices.
Unless otherwise provided herein, all notices, statements,
requests, or demands which are required or contemplated by this
Agreement shall be in writing and shall be hand-delivered or sent by
registered or certified mail, postage prepaid, to the following
addresses until changed by certified or registered letter so addressed
to the other party:
(i) If to the Operator, to:
Atlas Resources, Inc.
311 Rouser Road
Moon Township, Pennsylvania 15108
Attention: President
(ii) If to Developer, to:
Atlas-Energy for the Nineties-Public #7 Ltd.
c/o Atlas Resources, Inc.
311 Rouser Road
Moon Township, Pennsylvania 15108
Notices which are served by registered or certified mail upon the
parties hereto in the manner provided in this Section shall be deemed
sufficiently served or given for all purposes under this Agreement at
the time such notice shall be mailed as provided herein in any post
office or branch post office regularly maintained by the United States
Postal Service or any successor to the functions thereof. All payments
hereunder shall be hand-delivered or sent by United States mail,
postage prepaid to the addresses set forth above until changed by
certified or registered letter so addressed to the other party.
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<PAGE> 12
18. Interpretation.
Whenever this Agreement makes reference to "this Agreement" or to
any provision "hereof," or words to similar effect, the reference shall
be construed to refer to the within instrument unless the context
clearly requires otherwise. The titles of the Sections herein have been
inserted as a matter of convenience of reference only and shall not
control or affect the meaning or construction of any of the terms and
provisions hereof. As used in this Agreement, the plural shall include
the singular and the singular shall include the plural whenever
appropriate.
19. Counterparts.
The parties hereto may execute this Agreement in any number of
separate counterparts, each of which, when executed and delivered by
the parties hereto, shall have the force and effect of an original; but
all such counterparts shall be deemed to constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement under their respective seals as of the day and year first
above written.
Attest ATLAS RESOURCES, INC.
- ------------------------ By:-------------------
Secretary President
[Corporate Seal]
ATLAS-ENERGY FOR NINETIES-PUBLIC #7 LTD.
Attest By its Managing General Partner:
- ------------------------ ATLAS RESOURCES, INC.
Secretary
[Corporate Seal] By:------------------
President
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DESCRIPTION OF LEASES AND INITIAL WELL LOCATIONS
[To be completed as information becomes available]
1. WELL LOCATION
(a) Oil and Gas Lease from ______________________________________
dated _____________________ and recorded in Deed Book Volume
__________, Page __________ in the Recorder's Office of County,
____________, covering approximately _________ acres in
____________________________ Township, ___________________ County,
__________________________.
(b) The portion of the leasehold estate constituting the
____________________________________________ No. __________ Well
Location is described on the map attached hereto as Exhibit A-l.
(c) Title Opinion of _________________________________,
____________________________________,
________________________________________,
________________________________________, dated ___________________,
19_____.
(d) The Developer's interest in the leasehold estate constituting
this Well Location is an undivided % Working Interest to
those oil and gas rights from the surface to the bottom of the
Medina/Whirlpool Formation, subject to the landowner's royalty interest
and Overriding Royalty Interests.
Exhibit A
(Page 1)
- --------------------------------------------------------------------
EXHIBIT B
WELL NAME, TWP.
COUNTY, STATE
ASSIGNMENT OF OIL AND GAS LEASE
STATE OF ________________
COUNTY OF ______________
KNOW ALL MEN BY THESE PRESENTS:
THAT the undersigned
___________________________________________________________
(hereinafter called Assignor), for and in consideration of
One Dollar and other valuable consideration ($1.00 ovc), the receipt
whereof is hereby acknowledged, does hereby sell, assign, transfer and
set over unto
_______________________________________________________________________
_____________________
(hereinafter called Assignee), an undivided ___________________________
in, and to, the oil and gas lease described as follows:
together with the rights incident thereto and the personal property
thereto, appurtenant thereto, or used, or obtained, in connection
therewith.
And for the same consideration, the assignor covenants with the
said assignee his or its heirs, successors, or assigns that assignor is
the lawful owner of said lease and rights and interest thereunder and
of the personal property thereon or used in connection therewith; that
the undersigned has good right and authority to sell and convey the
same, and that said rights, interest and property are free and clear
from all liens and encumbrances, and that all rentals and royalties due
and payable thereunder have been duly paid.
In Witness Whereof, The undersigned owner ____ and assignor ____
ha____ signed and sealed this instrument the ______ day of
_______________, 19____.
Signed and acknowledged in presence of
___________________________________
_________________________________
___________________________________
_________________________________
___________________________________
ACKNOWLEDGEMENT BY INDIVIDUAL
STATE OF ___________________
BEFORE ME, A NOTARY PUBLIC, IN AND FOR SAID
COUNTY OF _________________
County and State, on this day personally appeared
_________________________________who acknowledged to me that ___he___
did sign the foregoing instrument and that the same is ___________ free
act and deed.
In testimony whereof, I have hereunto set my hand and official
seal, at __________________, this _____ day of _____________, A.D.,
19____.
___________________________________
Notary Public
CORPORATION ACKNOWLEDGEMENT
STATE OF ___________________
BEFORE ME, A NOTARY PUBLIC, IN AND FOR SAID
COUNTY OF _________________
County and State, on this day personally appeared
___________________________________ known to me to be the person and
officer whose name is subscribed to the foregoing instrument and
acknowledged that the same was the act of the said
___________________________________________, a corporation, and that he
executed the same as the act of such corporation for the purposes and
consideration therein expressed, and in the capacity therein stated.
In testimony whereof, I have herewith set my hand and official
seal at __________________, this ______ day of ____________, A.D.,
19____.
__________________________________________
Notary Public
This instrument prepared by:
Atlas Resources, Inc.
311 Rouser Road
P.O. Box 611
Moon Township, PA 15108
- -------------------------------------------------------------
<PAGE> c-1
EXHIBIT C
ADDENDUM NO. __________
TO DRILLING AND OPERATING AGREEMENT
DATED ___________________ , 1998
THIS ADDENDUM NO. __________ made and entered into this ______ day of
________________, 1998, by and between ATLAS RESOURCES, INC., a
Pennsylvania corporation (hereinafter referred to as "Operator"),
and
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD., a Pennsylvania limited
partnership, (hereinafter referred to as the Developer).
WITNESSETH THAT:
WHEREAS, Operator and the Developer have entered into a Drilling and
Operating Agreement dated ___________________, 1998, (the "Agreement"),
which Agreement relates to the drilling and operating of
________________ (______) natural gas wells on the ________________
(______) Initial Well Locations in Mercer County, Pennsylvania,
identified on the maps attached as Exhibits A-l through A-______ to
said Agreement, and provides for the development upon the terms and
conditions therein set forth of such Additional Well Locations as the
parties may from time to time designate; and
WHEREAS, pursuant to Section l(c) of said Agreement, Operator and
Developer presently desire to designate ________________ Additional
Well Locations hereinafter described to be developed in accordance with
the terms and conditions of said Agreement.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and intending to be legally bound hereby, the parties hereto
agree as follows:
1. Pursuant to Section l(c) of the aforesaid Agreement, the
Developer hereby authorizes Operator to drill, complete (or plug) and
operate, upon the terms and conditions set forth in said Agreement and
this Addendum No.__________, ________________ additional natural gas
wells on the ________________ Additional Well Locations described on
Exhibit A hereto and on the maps attached hereto as Exhibits A-______
through A-______.
2. Operator, as Developer's independent contractor, agrees to
drill, complete (or plug) and operate said additional natural gas wells
on said Additional Well Locations in accordance with the terms and
conditions of said Agreement and further agrees to use its best efforts
to commence drilling the first such additional well within thirty (30)
days after the date hereof and to commence drilling all said
________________ additional wells on or before March 31, 1999.
3. Developer hereby acknowledges that Operator has furnished
Developer with the title opinions identified on Exhibit A hereto, and
such other documents and information which Developer or its counsel has
requested in order to determine the adequacy of the title to the
aforesaid Additional Well Locations. The Developer hereby accepts the
title to the aforesaid Additional Well Locations and leased premises in
accordance with the provisions of Section 5 of the Agreement.
4. The drilling and operation of said ________________ additional
natural gas wells on the aforesaid ________________ Additional Well
Locations shall be in accordance with and subject to the terms and
conditions set forth in the aforesaid Agreement as supplemented by this
Addendum No. __________ and except as previously supplemented, all
terms and conditions of the aforesaid Agreement shall remain in full
force and effect as originally written.
5. This Addendum No. __________ shall be legally binding upon, and
shall inure to the benefit of, the parties hereto and their respective
heirs, personal representatives, successors and assigns.
Exhibit C
(Page 1)
- ----------------------------------------------------------------------
<PAGE> c2
WITNESS the due execution hereof on the day and year first above
written.
Attest: ATLAS RESOURCES, INC.
________________________________________ By ___________________
Secretary President
[Corporate Seal]
ATLAS ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
By its Managing General Partner:
ATLAS RESOURCES, INC.
Attest:
_________________________By ____________________
Secretary President
[Corporate Seal]
- -----------------------------------------------------------------------
EXHIBIT (B)
SPECIAL SUITABILITY REQUIREMENTS
AND DISCLOSURES TO INVESTORS
- -------------------------------------------------------------
<PAGE> 1
SPECIAL SUITABILITY REQUIREMENTS AND DISCLOSURES TO INVESTORS
Prospective investors, if a resident of one of the following states,
must meet that state's qualification and suitability standards as
follows:
SUBSCRIBERS TO LIMITED PARTNER UNITS.
If a Michigan or North Carolina resident: (i) a net worth of not less
than $225,000 (exclusive of home, furnishings and automobiles); or (ii)
a net worth of not less than $60,000 (exclusive of home, furnishings
and automobiles) and estimated current year taxable income as defined
in Section 63 of the Internal Revenue Code of 1986 of $60,000 or more
without regard to an investment in the Partnership. In addition, a
resident of Michigan, Ohio or Pennsylvania shall not make an investment
in the Partnership in excess of 10% of his net worth (exclusive of
home, furnishings and automobiles).
If a resident of California: (i) a net worth of not less than $250,000
(exclusive of home, furnishings and automobiles) and expects to have
gross income in the current year of $65,000 or more; or (ii) a net
worth of not less than $500,000 (exclusive of home, furnishings and
automobiles); or (iii) a net worth of not less than $1,000,000, or (iv)
expects to have gross income in the current year of not less than
$200,000.
PENNSYLVANIA INVESTORS: Because the minimum closing amount is less
than $1,200,000 you are cautioned to carefully evaluate the
Partnership's ability to fully accomplish its stated objectives and
inquire as to the current dollar volume of Partnership subscriptions.
SUBSCRIBERS TO INVESTOR GENERAL PARTNER UNITS.
If a resident of California:
a net worth of not less than $250,000 (exclusive of home, furnishings
and automobiles) and expects to have annual gross income in the current
year of $120,000 or more; or
a net worth of not less than $500,000 (exclusive of home, furnishings
and automobiles); or
a net worth of not less than $1,000,000; or
expects to have gross income in the current year of not less than
$200,000.
If a resident of Alabama, Maine, Massachusetts, Minnesota, North
Carolina, Pennsylvania, Tennessee, or Texas:
an individual or joint net worth with my spouse of $225,000 or more,
without regard to the investment in the Partnership, (exclusive of
home, home furnishings and automobiles) and a combined gross income of
$100,000 or more for the current year and for the two previous years;
or
an individual or joint net worth with my spouse in excess of
$1,000,000, inclusive of home, home furnishings and automobiles; or
an individual or joint net worth with my spouse in excess of $500,000,
exclusive of home, home furnishings and automobiles; or
a combined "gross income" as defined in Section 61 of the Internal
Revenue Code of 1986, as amended, in excess of $200,000 in the current
year and the two previous years.
If a resident of Arizona, Indiana, Iowa, Kansas, Kentucky, Michigan,
Mississippi, Missouri, New Hampshire, New Mexico, Ohio, Oklahoma,
Oregon, South Dakota, Vermont, or Washington:
an individual or joint net worth with my spouse of $225,000 or more,
without regard to the investment in the Partnership, (exclusive of
home, home furnishings and automobiles) and a combined "taxable income"
of $60,000 or more for the previous year and expects to have a combined
"taxable income" of $60,000 or more for the current year and for the
succeeding year; or
an individual or joint net worth with my spouse in excess of
$1,000,000, inclusive of home, home furnishings and automobiles; or
an individual or joint net worth with my spouse in excess of $500,000,
exclusive of home, home furnishings and automobiles; or
a combined "gross income" as defined in Section 61 of the Internal
Revenue Code of 1986, as amended, in excess of $200,000 in the current
year and the two previous years.
- ----------------------------------------------------------------------
<PAGE> 2
In addition, a resident of Michigan, Ohio or Pennsylvania shall not
make an investment in the Partnership in excess of 10% of his net worth
(exclusive of home, furnishings and automobiles).
If a resident of Missouri, I am aware that:
THESE SECURITIES ARE NOT ELIGIBLE FOR ANY TRANSACTIONAL EXEMPTION UNDER
THE MISSOURI UNIFORM SECURITIES ACT (SECTION 409.402(B), R.S.MO.(1978).
UNLESS THESE SECURITIES ARE AGAIN REGISTERED UNDER THE ACT, THEY MAY
NOT BE REOFFERED FOR SALE OR RESOLD IN THE STATE OF MISSOURI (SECTION
409.301, R.S.MO.(1978)).
If a resident of California, I am aware that:
IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT
THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES.
As a condition of qualification of the Units for sale in the State of
California, the following rule is hereby delivered to each California
purchaser.
CALIFORNIA ADMINISTRATIVE CODE, TITLE 10, CH. 3, RULE 260.141.11.
RESTRICTION ON TRANSFER.
The issuer of any security upon which a restriction on transfer has
been imposed pursuant to Sections 260.102.6, 260.141.10 and 260.534
shall cause a copy of this section to be delivered to each issuee or
transferee of such security at the time the certificate evidencing the
security is delivered to the issuee or transferee.
It is unlawful for the holder of any such security to consummate a sale
or transfer of such security, or any interest therein, without the
prior written consent of the Commissioner (until this condition is
removed pursuant to Section 260.141.12 of these rules), except:
to the issuer;
pursuant to the order or process of any court;
to any person described in Subdivision (i) of Section 25102 of the Code
or Section 260.105.14 of these rules;
to the transferor's ancestors, descendants or spouse, or any custodian
or trustee for the account of the transferor's ancestors, descendants
or spouse, or to a transferee by a trustee or custodian for the account
of the transferee or the transferee's ancestors, descendants or spouse;
to holders of securities of the same class of the same issuer;
by way of gift or donation inter vivos or on death;
by or through a broker-dealer licensed under the Code (either acting as
such or as a finder) to a resident of a foreign state, territory or
country who is neither domiciled in this state to the knowledge of the
broker-dealer, nor actually present in this state if the sale of such
securities is not in violation of any securities law of the foreign
state, territory or country concerned;
to a broker-dealer licensed under the Code in a principal transaction,
or as an underwriter or member of an underwriting syndicate or selling
group;
- ---------------------------------------------------------------------
<PAGE>3
if the interest sold or transferred is a pledge or other lien given by
the purchaser to the seller upon a sale of the security for which the
Commissioner's written consent is obtained or under this rule not
required;
by way of a sale qualified under Sections 25111, 25112, 25113 or 25121
of the Code, of the securities to be transferred, provided that no
order under Section 25140 or Subdivision (a) of Section 25143 is in
effect with respect to such qualification;
by a corporation or wholly-owned subsidiary of such corporation, or by
a wholly-owned subsidiary of a corporation to such corporation;
by way of an exchange qualified under Sections 25111, 25112 or 25113 of
the Code, provided that no order under Section 25140 or Subdivision (a)
of Section 25143 is in effect with respect to such qualification;
between residents of foreign states, territories or countries who are
neither domiciled nor actually present in this state;
to the State Controller pursuant to the Unclaimed Property Law or to
the administrator of the unclaimed property law of another state;
by the State Controller pursuant to the Unclaimed Property Law or by
the administrator of the unclaimed property law of another state if, in
either such case, such person (i) discloses to potential purchasers at
the sale that transfer of the securities is restricted under this rule,
(ii) delivers to each purchaser a copy of this rule, and (iii) advises
the Commissioner of the name of each purchaser;
by a trustee to a successor trustee when such transfer does not involve
a change in the beneficial ownership of the securities;
by way of an offer and sale of outstanding securities in an issuer
transaction that is subject to the qualification requirement of Section
25110 of the Code but exempt from that qualification requirement by
subdivision (f) of Section 25102;
provided that any such transfer is on the condition that any
certificate evidencing the security issued to such
transferee shall contain the legend required by this
section.
The certificates representing all such securities subject to such a
restriction on transfer, whether upon initial issuance or upon any
transfer thereof, shall bear on their face a legend, prominently
stamped or printed thereon in capital letters of not less than 10-point
size, reading as follows:
"IT IS UNLAWFUL TO CONSUMMATE A SALE OR TRANSFER OF THIS SECURITY, OR
ANY INTEREST THEREIN, OR TO RECEIVE ANY CONSIDERATION THEREFOR, WITHOUT
THE PRIOR WRITTEN CONSENT OF THE COMMISSIONER OF CORPORATIONS OF THE
STATE OF CALIFORNIA, EXCEPT AS PERMITTED IN THE COMMISSIONER'S RULES."
IF A RESIDENT OF NORTH CAROLINA, I AM AWARE THAT:
IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE
TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE
SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES
COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING
AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY
OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
PENNSYLVANIA INVESTORS: Because the minimum closing amount is less
than $1,200,000 you are cautioned to carefully evaluate the
Partnership's ability to fully accomplish its stated objectives and
inquire as to the current dollar volume of Partnership subscriptions.
=====================================================================
TABLE OF CONTENTS
Page
Summary of the Offering 1
Risk Factors 9
Capitalization and Source of Funds and Use of
Proceeds 19
Compensation 21
Terms of the Offering 23
Conflicts of Interest 27
Fiduciary Responsibility of the Managing
General Partner 35
Prior Activities 36
Management 43
Investment Objectives 48
Proposed Activities 49
Competition, Markets and Regulation 82
Participation in Costs and Revenues 84
Tax Aspects 87
Definitions 99
Summary of Partnership Agreement 105
Summary of Drilling and Operating Agreement 108
Reports to Investors 109
Repurchase Obligation 110
Transferability of Units 111
Plan of Distribution 112
Sales Material 113
Legal Opinions 113
Experts 113
Litigation 113
Additional Information 113
Financial Information Concerning the Managing
General Partner and the Partnership 114
EXHIBIT (A) - Amended and Restated Certificate
and Agreement of Limited Partnership
EXHIBIT (I-A) - Managing General Partner
Signature Page
EXHIBIT (I-B) - Subscription Agreement
EXHIBIT (II) - Drilling and Operating Agreement
EXHIBIT (B) - Special Suitability Requirements and
Disclosures to Investors
No dealer, salesman or other person has been authorized to give any
information or make any representations other than those contained in
this Prospectus in connection with this offering, and if given or made,
such information or representations must not be relied upon as having
been authorized by the Managing General Partner. The delivery of this
Prospectus at any time does not imply that the information herein is
correct as of any time subsequent to its date of issue. This Prospectus
does not constitute an offer to buy any of these securities in any
State to any person to whom it is unlawful to make such offer or
solicitation in such State.
ATLAS-ENERGY FOR
THE NINETIES -
PUBLIC #7 LTD.
PROSPECTUS
October 7, 1998
Until December 31, 1998, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be
required to deliver a prospectus. This is in addition to the dealers'
obligation to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
- ----------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 1741 et seq. of the Pennsylvania Business Corporation Law
provides for indemnification of officers, directors, employees and
agents by a corporation subject to certain limitations.
Under Section 4.05 of the Amended and Restated Certificate and
Agreement of Limited Partnership, the Participants, within the limits
of their Capital Contributions, and the Partnership, generally agree to
indemnify and exonerate the Managing General Partner, the Operator and
their Affiliates from claims of liability to any third party arising
out of operations of the Partnership provided that they determined in
good faith that the course of conduct which caused the loss or
liability was in the best interest of the Partnership, they were acting
on behalf of or performing services for the Partnership, and such
course of conduct was not the result of their negligence or misconduct.
Paragraph 11 of the Dealer-Manager Agreement provides for the
indemnification of the Managing General Partner, the Partnership and
control persons under specified conditions by the Dealer-Manager and/or
Selling Agent.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses to be incurred in connection with the issuance and
distribution of the securities to be registered, other than
underwriting discounts, commissions and expense allowances, are
estimated to be as follows:
Accounting $ 2,000.00 *
Legal Fees (including Blue Sky) 50,000.00 *
Printing 95,000.00 *
SEC Registration Fee 3,540.00
Blue Sky Filing Fees (excluding legal fees) 25,988.00 *
NASD Filing Fee 1,700.00
Miscellaneous 361,772.00 *
-------------
Total $540,000.00 *
=============
*Estimated
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
None by the Registrant.
Atlas Resources, Inc. ("Atlas"), an Affiliate of the Registrant, has
made sales of unregistered and registered securities within the last
three years. See the section of the Prospectus captioned "Prior
Activities" regarding the sale of limited and general partner
interests. In the opinion of Atlas, the foregoing unregistered
securities in each case have been and/or are being offered and sold in
compliance with exemptions from registration provided by the Securities
Act of 1933, as amended, including the exemptions provided by Section
4(2) of that Act and certain rules and regulations promulgated
thereunder. The securities in each case have been and/or are being
offered and sold to a limited number of persons who had the
sophistication to understand the merits and risks of the investment and
who had the financial ability to bear such risks. The units of limited
and general partner interests were sold to persons who were Accredited
Investors, as that term is defined in Regulation D (17 CFR 230.501(a)),
or who had, at the time of purchase, a net worth of at least $225,000
(exclusive of home, furnishings and automobiles) or a net worth
(exclusive of home, furnishings and automobiles) of at least $125,000
and gross income of at least $75,000, or otherwise satisfied Atlas that
the investment was suitable.
ITEM 27. EXHIBITS.
1(a) Proposed form of Dealer-Manager Agreement with Anthem
Securities, Inc.
1(b) Proposed form of Dealer-Manager Agreement with Bryan
Funding, Inc.
3(a) Articles of Incorporation of Atlas Resources, Inc.
3(b) Bylaws of Atlas Resources, Inc.
4(a) Certificate of Limited Partnership for Atlas-Energy
for the Nineties-Public #7 Ltd.
4(b) Amended and Restated Certificate and Agreement of
Limited Partnership for Atlas-Energy for the Nineties-
Public #7 Ltd. (See Exhibit (A) to Prospectus)
4(c) Release from Shareholders
5 Opinion of Kunzman & Bollinger, Inc. as to the legality
of the Units registered hereby
8 Opinion of Kunzman & Bollinger, Inc. as to tax matters
10(a) Proposed Form of Escrow Agreement
10(b) Drilling and Operating Agreement (See Exhibit (II) to
the Amended and Restated Certificate and Agreement of
Limited Partnership, Exhibit (A) to Prospectus)
24(a) Consent of McLaughlin & Courson
24(b) Consent of United Energy Development Consultants,
Inc.
24(c) Consent of Kunzman & Bollinger, Inc. (See Exhibits 5
and 8)
25 Power of Attorney
ITEM 28. UNDERTAKINGS.
(a) As required by Item 512(a) of Regulation S-B and Rule 415,
the undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a Post-Effective Amendment to this Registration
Statement to:
(i) include any Prospectus required by Section 10(a)(3)
of the Securities Act of 1933;
(ii) reflect in the Prospectus any facts or events
arising after the effective date of the Registration
Statement (or of the most recent Post-Effective
Amendment thereof) which, individually or together,
represent a fundamental change in the information set
forth in the Registration Statement; and
(iii) include any material information with respect to
the plan of distribution not previously disclosed in
the Registration Statement or any material change to
such information in the Registration Statement;
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such Post-Effective
Amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a Post-
Effective Amendment any of the securities being registered
which remain unsold at the termination of the offering.
(e) The undersigned Registrant undertakes:
(1) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 (the "Act") may be
permitted to Atlas and its directors, officers and
controlling persons pursuant to the foregoing provisions,
or otherwise, Atlas and the Registrant have been advised
that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of
expenses incurred or paid by Atlas and its directors,
officers and controlling persons in the successful defense
of any action, suit or proceeding) is asserted by such
party in connection with the securities being registered,
Registrant will unless in the opinion of its counsel the
matter has been settled by controlling precedent submit to
a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as
expressed in the Act, and will be governed by final
adjudication of such issue.
=====================================================================
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form SB-2 and has
authorized this Registration Statement to be signed on its behalf by
the undersigned, thereto duly authorized, in Moon Township,
Pennsylvania, on the 7th day of October, 1998.
ATLAS-ENERGY FOR THE NINETIES-
PUBLIC #7 LTD.
(Registrant)
James R. O'Mara and Bruce M. Wolf,pursuant to the Registration Statement
have been granted Power of Attorney and are signing on behalf of the
names shown below, in the capacities indicated.
By: Atlas Resources, Inc.,
Managing General Partner
By: /s/ James R. O'Mara
James R. O'Mara, President,
Chief Executive Officer and
Director
By: /s/ Bruce M. Wolf
Bruce M. Wolf, General Counsel,
Secretary and Director
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Dated
- ----------------- ---------------------------------------------- ------
Charles T. Koval Chairman of the Board and a Director 10/7/98
James R. O'Mara President, Chief Executive Officer and Director 10/7/98
Bruce M. Wolf General Counsel, Secretary and a Director 10/7/98
Donald P. Wagner Vice President of Operations 10/7/98
James J. Kritzo Vice President of the Land Department 10/7/98
Tony C. Banks Vice President of Finance and Chief Financial Officer10/7/98
Frank P. Carolas Vice President of Geology 10/7/98
Barbara J. Krasnicki Vice President of Administration 10/7/98
Joseph R. Sadowski Director 10/7/98
============================================================================
end
J.Breznai 10/7/98
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
- -------------------------------------------------------------
As filed with the Securities and Exchange Commission on Ovtober 7, 1998
Registration No. 333-62167
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________________________
EXHIBITS
TO
PRE-EFFECTIVE AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------------------------------------------------------------
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
(Exact name of Registrant as Specified in its Charter)
-----------------------------------------------------------------------
JAMES R. O'MARA, PRESIDENT
ATLAS RESOURCES, INC.
311 ROUSER ROAD, MOON TOWNSHIP, PENNSYLVANIA 15108
(412) 262-2830
(Name, Address and Telephone Number of Agent for Service)
----------------------------------------------------------------------
Copies to:
WALLACE W. KUNZMAN, JR., ESQ. JAMES R. O'MARA
KUNZMAN & BOLLINGER, INC. ATLAS RESOURCES, INC.
5100 N. BROOKLINE, SUITE 600 311 ROUSER ROAD
OKLAHOMA CITY, OKLAHOMA 73112 MOON TOWNSHIP, PENNSYLVANIA 15108
==========================================================================
EXHIBIT INDEX
Exhibit No. Description Page
1(a) Proposed form of Dealer-Manager Agreement for Anthem Securities, Inc. *
1(b) Proposed form of Dealer-Manager Agreement for Bryan Funding, Inc. *
3(a) Articles of Incorporation of Atlas Resources, Inc. *
3(b) Bylaws of Atlas Resources, Inc. *
4(a) Certificate of Limited Partnership for Atlas-Energy for the
Nineties-Public #7 Ltd. *
4(b) Amended and Restated Certificate and Agreement of Limited
Partnership for Atlas-Energy for the Nineties-Public #7 Ltd.
(See Exhibit (A) to Prospectus) *
4(c) Release from Shareholders *
5 Opinion of Kunzman & Bollinger, Inc. as to the legality of the Units
registered hereby *
8 Opinion of Kunzman & Bollinger, Inc. as to tax matters *
10(a Escrow Agreement *
10(b) Proposed form of Drilling and Operating Agreement
(See Exhibit (II) to the Amended and Restated Certificate and
Agreement of Limited Partnership, Exhibit (A) to Prospectus)
24(a) Consent of McLaughlin & Courson *
24(b) Consent of United Energy Development Consultants, Inc. *
24(c) Consent of Kunzman & Bollinger, Inc. (See Exhibits 5 and 8) *
25 Power of Attorney *
*= PREVIOUSLY SUBMITTED
<R/>
=========================================================================
Exhibit 24(a)
CONSENT OF INDEPENDENT AUDITOR
ATLAS-ENERGY FOR THE NINETIES-PUBLIC #7 LTD.
The firm, as Independent Certified Public Accountants, hereby consents
to the use of the audit report dated July 28, 1998, on the balance
sheet of Atlas-Energy for the Nineties-Public #7 Ltd. as of July 16,
1998, and the audit report dated October 20, 1997, on the consolidated
audited balance sheets as of July 31, 1997 and 1996 of
Atlas Resources, and subsidiary and the related consolidated statements
of income and retained earnings and consolidated statements of cash flows
for the years then ended in the Registration Statement, Pre-Effective
Amendment No. 1 to the Registration Statement, and any supplements
thereto, including post-effective amendments, for Atlas-Energy for the
Nineties-Public #7 Ltd. In addition, the firm hereby consents to all
references to it as having prepared such reports and to the reference
to the firm under the caption "Experts".
McLaughlin & Courson
Certified Public Accountants
___________________________________
October 5, 1998
Pittsburgh, Pennsylvania
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