As filed with the Securities and Exchange Commission on September 26, 1996
Registration No. 333- _______
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Energy Search, Incorporated
(Name of Small Business Issuer in its charter)
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Tennessee 1381 62-1423071
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
280 Fort Sanders West Blvd. 280 Fort Sanders West Blvd. Richard S. Cooper
Suite 200 Suite 200 280 Fort Sanders West Blvd.
Knoxville, TN 37922 Knoxville, TN 37922 Suite 200
(423) 531-6562 Knoxville, TN 37922
(Address and telephone (423) 531-6562
number of principal (Address of principal (Name, address,
executive offices) place of business or and telephone number
indended principal place of agent for service)
of business)
Copies to:
Patrick R. Sughroue Thomas W. Hughes, Esq.
Patrick R. Sughroue, P.C. Winstead Sechrest &
3777 Sparks Dr. Minick P.C.
Suite 130 5400 Renaissance Tower
Grand Rapids, MI 49546 1201 Elm Street
Phone (616) 940-3399 Phone (214) 745-5400
Fax (616) 940-3592 Fax (214) 745-5390
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Approximate date of proposed sale to the public: As soon as practicable
after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462 (b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. ______________
If this Form is a post-effective amendment filed pursuant to Rule 462
(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. ____________
If the delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box.
Calculation of the Registration Fee appears on the next page.
The Registrant hereby amends this Registration Statement on such date
or 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 the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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(Registration Statement cover page cont'd)
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Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Registered Offering Price per Unit Aggregate Offering Price Registration Fee
(1) (1)
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Units 1,150,000 $10.00 $11,500,000 $3,965.52
Common Stock, no par
value (2) 1,150,000 (2) (2) (2)
Redeemable Series A Common
Stock Purchase Warrants (2) 1,150,000 (2) (2) (2)
Common Stock, no par
value (3) 1,150,000 $12.00 $13,800,000 $4,758.62
Underwriter's Warrants (4) 100,000 $.001 $100.00 $0.03
Units Underlying the
Underwriter's Warrants 100,000 $12.00 $1,200,000 $413.79
Common Stock, no par
value (5) 100,000 (5) (5) (5)
Redeemable Series A Common
Stock Purchase Warrants 100,000 (5) (5) (5)
Common Stock, no par
value (6) 100,000 $12.00 $1,200,000 $413.79
Total $9,551.76
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(1) Estimated solely for the purpose of calculating the registration fee.
(2) Included in the Units. No additional registration fee is required.
(3) Issuable upon exercise of Redeemable Series A Common Stock Purchase
Warrants. Pursuant to Rule 416 there are also registered an indeterminate
number of shares of Common Stock, which may be issued pursuant to the
anti-dilution provisions applicable to the Redeemable Series A Common Stock
Purchase Warrants, the Underwriters' Warrants and the Redeemable Series A
Common Stock Purchase Warrants issuable under the Underwriters' Warrants.
(4) Underwriters' Warrants to purchase up to 100,000 Units, consisting of an
aggregate of 100,000 shares of Common Stock and 100,000 Redeemable Series A
Common Stock Purchase Warrants.
(5) Included in the Units Underlying the Underwriters' Warrants. No additional
registration fee is required.
(6) Issuable upon exercise of Redeemable Series A Common Stock Purchase
Warrants underlying the Underwriters' Units.
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ENERGY SEARCH, INCORPORATED
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
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Form SB-2 Item Number and Caption Location In Prospectus
1. Front of Registration Statement and
Outside Front Cover of Prospectus....................................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus..................................................... Inside Front Cover Page; Outside
Back Cover Page; Additional
Information
3. Summary Information and Risk Factors.................................... Prospectus Summary; Risk Factors
4. Use of Proceeds......................................................... Use of Proceeds
5. Determination of Offering Price......................................... Outside Front Cover Page; Risk
Factors; Underwriting
6. Dilution................................................................ Dilution
7. Selling Security Holders................................................ Not Applicable
8. Plan of Distribution.................................................... Outside Front Cover Page; Risk
Factors; Underwriting
9. Legal Proceedings....................................................... Business and Properties -- Legal
Proceedings
10. Directors, Executive Officers, Promoters
and Control Persons..................................................... Management -- Directors and
Executive Officers
11. Security Ownership of Certain Beneficial
Owners and Management................................................... Principal Stockholders
12. Description of Securities............................................... Description of Securities
13. Interest of Named Experts and Counsel................................... Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................................................. Description of Securities;
Underwriting
15. Organization Within Last Five Years..................................... Not Applicable
16. Description of Business................................................. Business and Properties
17. Management's Discussion and Analysis
or Plan of Operation.................................................... Management's Discussion and
Analysis of Financial Condition
and Results of Operations
18. Description of Property................................................. Business and Properties
19. Certain Relationships and Related
Transactions............................................................ Certain Relationships and Related
Transactions
20. Market for Common Equity and Related
Stockholder Matters..................................................... Risk Factors; Description of
Securities; Dividend Policy;
Shares Eligible for Future Sale;
Underwriting
21. Executive Compensation.................................................. Management--Executive
Compensation; Management
--Employment Agreements
22. Financial Statements.................................................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure.............................................................. Not Applicable
24. Indemnification of Directors and Officers .............................. Management
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Subject to Completion, Dated September 26, 1996
Energy Search, Incorporated
1,000,000 Units
Each Unit consisting of One Share of Common Stock and
One Redeemable Series A Common Stock Purchase Warrant
Energy Search, Incorporated (the "Company") is hereby offering 1,000,000
units (the "Units") , each Unit consisting of one share of Common Stock (the
"Common Stock") , no par value per share, and one Redeemable Series A Common
Stock Purchase Warrant (the "Series A Warrants"). The Units, the Common Stock
and the Series A Warrants are sometimes referred to as the "Securities." The
Common Stock and the Series A Warrants included in the Units may not be
separately traded until ____ 1997[six months after the date of this prospectus]
unless earlier separated upon three days' prior written notice from La Jolla
Securities Corporation (the "Representative") to the Company at the discretion
of the Representative. Each Series A Warrant entitles the holder thereof to
purchase one share of Common Stock (a "Warrant Share") at an exercise price of
120% of the offering price per unit at any time commencing on ____, 1997 [13
months after the closing of this offering] until ______, 2001, unless earlier
redeemed. The Series A Warrants are subject to redemption by the Company at a
price of $0.05 per Warrant at any time commencing 18 months after the date of
this Prospectus, on thirty days prior written notice, provided that the closing
sale price per share for the Common Stock has equalled or exceeded 200% of the
offering price per unit for twenty consecutive trading days within the
thirty-day period immediately preceeding such notice. See "Description of
Securities" and "Underwriting."
Prior to this Offering, there has been no public market for the Securities,
and there can be no assurance that an active market will develop. It is
currently anticipated that the initial public offering price of the Units will
be $10.00 per Unit. See "Underwriting" for information relating to the factors
to be considered in determining the initial public offering price. The Company
has applied for listing of the Units, Common Stock and Series A Warrants on the
______ Stock Exchange subject to official notice of issuance, under the symbols
"____", "____" and "____," respectively.
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE
SUBSTANTIAL DILUTION FROM THE PUBLIC OFFERING PRICE. PROSPECTIVE INVESTORS
SHOULD CAREFULLY CONSIDER THE SECTIONS ENTITLED "RISK FACTORS" BEGINNING ON PAGE
15 AND "DILUTION" CONCERNING THE COMPANY AND THIS OFFERING.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Underwriting
Price to Discounts and Proceeds to
Public Commissions (1) Company (2)
Per Unit (3).... $ $ $
Total........... $ $ $
(1) Does not include compensation in the form of a non-accountable expense
allowance equal to 3.0% of the gross proceeds of this offering. The Company
has also agreed to sell to the Underwriters warrants (the "Underwriters'
Warrants")exercisable for four years commencing one year from the date
hereof to purchase 100,000 Units at 120% of the offering price per Unit.
For information concerning indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting estimated offering expenses of $485,000 payable by the
Company.
(3) The Company has granted to the Underwriters a 45-day option beginning on
the date of this Prospectus to purchase up to 150,000 additional Units at
the Price to Public less the Underwriting Discount solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, the Underwriting Discounts and Commissions and Proceeds to
the Company will be $______, $______ and $______ respectively. See
"Underwriting."
The Securities are being offered, subject to prior sale, when, as and
if delivered to and accepted by the Representative, and subject to approval of
certain legal matters by counsel and other conditions. The Representative
reserves the right to reject any order, in whole or in part. It is expected that
delivery of the certificates representing the Shares and Warrants will be made
against payment therefor at the offices of La Jolla Securities Corporation in
Dallas, Texas on or about _________.
La Jolla Securities
Corporation
The date of this Prospectus is _________.
Information contained herein is subject to completion or amendment. A
Registration Statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the Registration Statement becomes
effective. This Prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including notes thereto) appearing
elsewhere in this Prospectus. Unless otherwise indicated, the information in
this Prospectus assumes that the Underwriters' Over-allotment Option, as defined
below, will not be exercised. The shares of Common Stock offered hereby involve
a high degree of risk. Investors should carefully consider the information set
forth under "Risk Factors." Certain terms relating to the oil and gas business
are defined under "Glossary of Terms" herein.
Unless specifically stated otherwise, the following summary assumes all
of the following: (1) with respect to the 450,000 shares of Preferred Stock
(Class A and Class B), all of such shares will be automatically converted to
shares of Common Stock on a one share - to - one share basis upon completion of
this Offering; (2) all currently outstanding Common Stock purchase warrants
which must be exercised, if at all, within 90 days after completion of this
Offering, will be exercised and 21,290 shares of Common Stock will be issuable
as a result thereof; and (3) all shares of Common Stock outstanding as of the
date of this Prospectus, as well as the 450,000 shares of Common Stock into
which the currently outstanding 450,000 shares of Preferred Stock are
convertible, as well as the 21,290 shares of Common Stock issuable pursuant to
presently outstanding Common Stock purchase warrants (all of which are assumed
will be exercised), will be split two - for - one immediately prior to
completion of this Offering.
The Company
Energy Search, Incorporated ("Energy Search" or the "Company") is an
independent oil and gas development and production company focusing primarily on
developmental drilling and production of natural gas reserves in the Appalachian
Basin and elsewhere in the mid-continent region of the United States. The
Company historically has developed oil and gas properties primarily by drilling
natural gas wells in joint ventures with Tennessee limited partnerships for
which the Company serves as managing general partner (the "Affiliated Drilling
Partnerships"). These Affiliated Drilling Partnerships were syndicated by the
Company's affiliate, Equity Financial Corporation ("EFC"), an NASD-member
broker-dealer, and capitalized with investor funds raised in various private
offerings. The Company also operates an approximately 60-mile gas gathering
system servicing its primary areas of operation in southeastern Ohio (the "Gas
Gathering System"). The Gas Gathering System is owned by a Tennessee limited
partnership (the "Pipeline Operating Partnership") which is comprised of the
Company, as managing general partner owning a 28.74% general partner interest,
and a single limited partner which is another Tennessee limited partnership (the
"Pipeline Income Partnership") for which the Company also serves as managing
general partner. The Pipeline Income Partnership was syndicated by EFC and
capitalized with investor funds raised in a private offering conducted in 1992
and 1993. Through the date of this Prospectus, approximately $46,600,000 had
been raised and applied by the Company for various activities including oil and
gas development and production activities in connection with Affiliated Drilling
Partnerships; formation of the Pipeline Income Partnership and the Pipeline
Operating Partnership and acquisition and operation of the Gas Gathering System
which services gas wells owned and operated by the Company in co-ownership with
Affiliated Drilling Partnerships; and for the Company's working capital.
The Company's principal operations include evaluating, acquiring and
developing gas and oil leases, sponsoring the organization and offering of
Affiliated Drilling Partnerships, serving as driller-operator on wells drilled
in joint ventures with Affiliated Drilling Partnerships and for its own account,
and operating the Gas Gathering System as general partner of the Pipeline
Operating Partnership.
2
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The Company's principal assets include direct ownership of natural gas
and oil properties with predominantly natural gas reserves, tangible well
equipment, its varying equity interests as managing general partner of all of
the Affiliated Drilling Partnerships formed since 1992, a 28.74% equity interest
in the Pipeline Operating Partnership and a 1% equity interest in the Pipeline
Income Partnership. The Company currently owns approximately 55,000 gas and oil
leasehold acres. The Company currently operates approximately 166 wells in
southeastern Ohio and nine wells in West Virginia. The Company's primary
revenues are derived from fees for services in connection with drilling and
production operations with Affiliated Drilling Partnerships and industry
partners, management fees from the Pipeline Operating Partnership, partnership
revenue from its 28.74% interest in the Pipeline Operating Partnership,
management and administrative fees received from Affiliated Drilling
Partnerships pursuant to various agreements governing the joint drilling,
development and operation of wells between the various Affiliated Drilling
Partnerships and the Company (the "JDOA[s]"), partnership revenue from its
varying equity interests in the Affiliated Drilling Partnerships formed since
1992, and production revenues attributable to its owned working interests in
wells. While the Company's primary focus historically has been the drilling of
development natural gas wells in the area known as the Bartlett and Torch Fields
in southeastern Ohio, it has recently begun to expand its activities into West
Virginia. In late 1995, the Company acquired nine producing wells and 1,403
acres of undeveloped acreage in Wood County, West Virginia. In July of 1996, the
Company acquired 17,000 acres of proved undeveloped acreage in Raleigh County,
West Virginia (the "Beaver Coal Company Lease").
The Company's business plan is to increase its oil and gas reserves
primarily by continued developmental drilling in southeastern Ohio in the area
serviced by the Gas Gathering System, as well as to continue primarily
developmental drilling in Wood and Raleigh Counties, West Virginia. These areas
in West Virginia are well serviced by third parties operating gas gathering and
transportation systems. The Company may also undertake activities elsewhere in
the Appalachian Basin and the mid-continent region of the United States. It
plans to drill an increasing number of wells for its own account, while, at the
same time continuing to drill wells with future Affiliated Drilling Partnerships
to be syndicated on a private placement basis by its affiliate, EFC.
At December 31, 1995, the Company's proved natural gas reserves were
3,564.53 Mmcf and its proved oil reserves were 22,340 Bbl for a total of 616,428
BOE. At such date the Company had interests in 154 gross (21.17 net) productive
natural gas wells and 12 gross (1.46 net) productive oil wells. At June 30,
1996, the Company had interests in 160 gross (22.38 net) productive natural gas
wells and 12 gross (1.46 net) productive oil wells.
The Company was organized as a Tennessee corporation in 1990. The
Company's principal executive offices are located at 280 Fort Sanders West
Blvd., Suite 200, Knoxville, Tennessee 37922.
The Company's telephone number at that location is (800) 551-5810.
3
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The Offering
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Securities offered.......................... 1,000,000 Units, each Unit consisting of one share of
Common Stock and one Series A Warrant, each Series A
Warrant entitling the holder to purchase one share of
Common Stock at a price of 120% of the offering price
per share exercisable on ________, 199_ [thirteen months
after the closing of this Offering] until _________,
2001, unless earlier redeemed. See "Description of
Securities."
Series A Warrants........................... Each Series A Warrant will entitle the holder thereof to
purchase one share of Common Stock. The Series A
Warrants are exercisable commencing on
_____________________, 199_ [thirteen months after
closing of this Offering] until _______________, 199_,
unless earlier redeemed, for one share of Common Stock
each, at an exercise price of 120% of the offering price
per Unit in this Offering. The Series A Warrants may not
be separately traded until ________________, 1997 [six
months after the date of this Prospectus], unless
earlier separated upon three days prior written notice
by La Jolla Securities Corporation (the
"Representative") to the Company at the discretion of
the Representative. The Series A Warrants are
redeemable by the Company at $0.05 per Warrant at any
time commencing eighteen months after the date of this
Prospectus, on thirty days prior written notice,
provided that the closing sale price per share for the
Common Stock has equaled or exceeded 200% of the
offering price per Unit for twenty consecutive trading
days within the thirty-day period immediately preceding
such notice. See "Description of Securities."
Common Stock to be Outstanding
after the Offering........................ 3,021,290 shares(1)
Series A Warrants to be Outstanding
after the Offering....................... 1,000,000 Series A Warrants(2)
Use of Proceeds............................. Approximately $_________ will be available to the
Company after deducting offering expenses of $______
and non-accountable expense allowance equal to 3.0% of
the gross proceeds of this Offering. See "Use of
Proceeds."
Risk Factors................................ The Securities offered hereby are speculative and
involve a high degree of risk and should not be
purchased by investors who cannot afford the loss of
their entire investment. See "Risk Factors."
__________ Stock Exchange Symbols
Units................................... __________
Common Stock............................ __________
Series A Warrants....................... __________
__________ Small Cap Market Symbols
Units................................... __________
Common Stock............................ __________
Series A Warrants....................... __________
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(1) Does not include 1,000,000 shares issuable upon the exercise of the Series A
Warrants, 100,000 shares underlying the 100,000 Units issuable upon exercise of
the Underwriters' Warrants, or 150,000 shares underlying the 150,000 Series A
Warrants issuable upon the exercise of the Underwriters' Over-allotment Option.
See "Management," "Principal Stockholders" and "Underwriting."
(2) Does not include 150,000 Series A Warrants issuable upon exercise of the
Underwriters' Over-allotment Option.
4
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Summary Financial Information
(in thousands, except per share data)
(unaudited)
Six Months
Ended
Year Ended December 31, June 30,
Operating Data: 1994 1995 1996
---- ---- ----
Net Revenue............................ $1,458 $2,492 $1,080
Gross Profit........................... 3,409 4,168 1,959
Operating income (loss)................ (1,160) 284 (149)
Net income (loss)...................... (1,203) 269 (145)
Net income (loss) per common share (1) (1,002) 224 (120)
Weighted average shares outstanding (1) 1,200 1,200 1,200
(unaudited)
at December 31, at June 30,
Balance Sheet Data: 1995 1996
---- ----
Working capital................. $(2,530) $(1,816)
Total assets.................... 5,812 5,397
Long-term debt.................. 2,286 75
Shareholders' equity (deficit).. (365) 2,911
- ------------------------
(1) Computed in accordance with generally accepted accounting procedures.
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5
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RISK FACTORS
AN INVESTMENT IN SHARES OF THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH
DEGREE OF RISK. PROSPECTIVE INVESTORS SHOULD CONSIDER THE FOLLOWING FACTORS IN
ADDITION TO THE OTHER INFORMATION SET FORTH IN THE PROSPECTUS BEFORE PURCHASING
SHARES OF THE COMMON STOCK OFFERED HEREBY.
Risks Associated with the Company
The Company's Fiduciary Responsibility to its Related Partnerships. The
Company owes a fiduciary duty to each Affiliated Drilling Partnership, the
Pipeline Income Partnership, the Pipeline Operating Partnership, and any future
partnership in which the Company is the managing general partner, or serves in a
similar capacity. Accordingly, the Company has been, and will continue to be,
obligated to exercise good faith, reasonable business judgment and integrity in
handling each such Partnership's business and funds. If the Company were to
violate its above-described duties, the Company could be subject to legal
redress which could result in liability.
Conflicts of Interest. The nature of the Company's activities in the
oil and gas business results in many situations in which conflicts of interest
may arise. In general, conflicts of interest are inherent in oil and gas
drilling programs involving non-industry participants because transactions are
entered into without arms-length negotiation. The interests of the investors, on
one hand, and those of the Company, as managing general partner and
driller-operator, on the other hand, may be inconsistent in some respects or in
certain instances. Situations involving conflicts of interest include, but are
not limited to: the determination of JDOA or limited partnership agreement terms
(particularly relating to compensation of the Company) in syndicated Affiliated
Drilling Partnerships; the selection and allocation of drillsites as between the
Company and various Affiliated Drilling Partnerships; allocation of overhead
among related parties or affiliates; handling the "proving-up" by an Affiliated
Drilling Partnership of unproven acreage which such partnership has no
contractual right to drill; use of Company personnel or resources; structuring
of gas marketing arrangements; related-party transactions and similar
circumstances. The Company, as managing general partner of the Affiliated
Drilling Partnerships, the Pipeline Operating Partnership and the Pipeline
Income Partnership, is accountable to investor partners therein as a fiduciary
and must, therefore, exercise good faith and integrity in handling the affairs
of the various partnerships. This is particularly true in the handling of
conflicts between the Company's activity for its own account, and its activity
on behalf of partnerships it manages. The Company, in recognition of its
fiduciary responsibilities to investor partners, must endeavor to resolve any
and all such conflicts on a basis which the Company believes to be fair and
equitable and otherwise in or not opposed to the best interests of such investor
partners. With respect to the selection of drilling prospects and drillsites,
the Company is not obligated under the terms of the relevant limited partnership
agreements or JDOA's to offer to Affiliated Drilling Partnerships the prior
right to drill any acreage "proved up" by the drilling of any Partnership well.
Each of the Affiliated Drilling Partnerships, as well as the Pipeline Income
Partnership and the Pipeline Operating Partnership, present numerous situations
or circumstances which do, or could, result in a conflict of interest on the
part of the Company. Failure to adequately resolve such conflicts of interest
appropriately could result in liability or other adverse consequences to the
Company. The Company presently has no formal procedure to deal with conflicts of
interest but instead handles the evaluation and resolution of them on a
case-by-case basis taking into account all relevant facts and circumstances.
Limited Capital; Need for Significant Additional Financing. The Company
anticipates, based on the current plans and assumptions relating to its
operations, that the net proceeds of this Offering will be sufficient to satisfy
its operating cash requirements for approximately 18 to 24 months following the
consummation of this Offering. There can be no assurance, however, that the
Company will not require additional financing sooner than currently anticipated.
6
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The net proceeds of this Offering may not be sufficient to develop
fully the Company's oil and gas properties or otherwise carry out the Company's
business plan. Development of the Company's oil and gas properties and execution
of the Company's business plan may require capital resources substantially
greater than the net proceeds of this Offering or resources otherwise currently
available to the Company. The Company's current arrangements for additional
sources of capital include its working capital revolving line of credit with
Bank One, Texas, N.A. (the "Bank One Credit Facility") and its contemplated
future offerings, on a private placement basis, of Affiliated Drilling
Partnerships. See "Business and Properties -- Affiliated Drilling Partnerships."
There can be no assurance that these, or any other, sources of capital will be
available to the Company on acceptable terms, or at all, in the future. The
inability to obtain additional financing would have a material adverse effect on
the Company, including requiring the Company to curtail significantly or
farm-out its development of its oil and gas properties. Any additional financing
may involve substantial dilution to the interests of the Company's then existing
shareholders.
Financing the Company's Growth Through Private Placement Securities
Offerings. The capital needs of the Company have increased materially since its
inception. Prior to 1996, substantially all of the Company's drilling capital
has been raised through the offering of investment interests, on a private
placement basis, in Affiliated Drilling Partnerships. These Affiliated Drilling
Partnerships have been sponsored by principals of the Company, as well as by the
Company, and have been marketed by Equity Financial Corporation ("EFC"), an
NASD-member broker-dealer and an affiliate of the Company. See "Business and
Properties -- Affiliated Drilling Partnerships." It is anticipated that a
portion of the Company's drilling capital in the future will continue to be
raised by the offering of investment interests, on a private placement basis, in
future Affiliated Drilling Partnerships. To the extent the Company may depend on
capitalization through syndication of future Affiliated Drilling Partnerships,
there can be no assurance that future offerings will be successful or will raise
adequate capital for desired Company activities. Also, there is no assurance
that any other sources of capital will be available to the Company.
From 1991 through 1992 the Company raised working capital by the
offering of limited partnership interests, on a private placement basis, in
Tennessee limited partnerships which loaned the proceeds of investor
subscriptions to the Company. All of these loans from limited partnerships have
been repaid in full as of the date of this Prospectus. The Company has also
raised capital to finance the Gas Gathering System which services its wells in
southeastern Ohio by sponsoring and offering to investors limited partnership
interests, on a private placement basis, in the Pipeline Income Partnership.
Management believes, and is advised by its legal counsel, that these private
placement offerings, together with the Affiliated Drilling Partnerships, were
exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance on the "private offering" exemption contained in
Section 4(2) of the Securities Act and Rule 506 promulgated thereunder. The
availability of this exemption is dependent upon a number of factors, including
the manner of offering the investment, the information furnished to investors,
their investment experience, the method of placing the securities, and the
possible integration of several offerings. For the most part, these placements
have been made to "accredited investors" as that term is defined under Rule
501(a) of the Securities Act. The Company has taken all steps recommended by
securities legal counsel to assure that it has complied with the various federal
and state requirements with respect to these private placements. In the unlikely
event that the Company is determined not to have complied with those
requirements, however, the Company could be subject to legal claims for
rescission, regulatory enforcement actions or penalties.
Risk of Oil and Gas Operations. The Company's operations are subject to
all of the risks normally incident to the operation and development of oil and
gas properties and the drilling of oil and gas wells, including encountering
unexpected formations or pressures, blowouts, cratering and fires, which could
result in personal injuries, loss of life, pollution damage and other damage to
the properties of the Company or others. Oil and gas operations present risks of
environmental contamination from drilling operations and leakage from oil field
storage or transportation facilities. The Company has never experienced a
significant environmental mishap, but spills of oil and other liquids could
occur which could create material liability to the Company for clean-up
expenses. See "Business and Properties -- Insurance" for a discussion of the
Company's insurance coverage.
7
<PAGE>
Dependence on Key Personnel. The Company depends to a large extent on the
abilities and continued participation of certain key employees, including
Charles P. Torrey, Jr., its Chief Executive Officer, Richard S. Cooper, its
President, Robert L. Remine, its Secretary/Treasurer, and John M. Johnston, Vice
President - Exploration and Production. The loss of any of these officers or
other key employees could have a material adverse effect on the Company's
business. In an effort to address this risk, the Company has purchased $500,000
"key man" term life insurance policies on the lives of each of Messrs. Torrey,
Remine and Cooper, and has entered into employment contracts with Messrs.
Torrey, Remine, Cooper and Johnston. See "Management."
Development of Additional Reserves. The Company's future success
depends upon its ability to find or acquire additional natural gas and oil
reserves that are economically recoverable. Except to the extent that the
Company conducts successful exploration or development activities or acquires
properties containing proved reserves, the proved reserves of the Company will
generally decline as reserves are produced. There can be no assurance that the
Company will be able to discover and exploit additional commercial quantities of
oil and gas, or that the Company will have success drilling productive wells or
acquiring underdeveloped properties at low finding costs.
Limited Diversification of the Company's Activities and Properties. The
Company is engaged exclusively in the business of exploration for and production
and marketing of natural gas and oil. A large part of the Company's field
operations and activities are located in Washington, Athens and Meigs Counties,
Ohio, and in Raleigh and Wood Counties, West Virginia. See "Business and
Properties -- Properties -- Leasehold Acreage." It is likely that, for the
foreseeable future, the Company's activities and primary area of field
operations will not change materially.
Undeveloped Acreage May be Lost. The Company has certain oil and gas
leases that require the drilling of wells, payment of minimum royalties or delay
rentals or the continued production of oil or gas in order for the leases not to
lapse. Lease termination or expiration clauses are specific to each lease. The
Company has recently acquired an approximately 17,000 acre lease in Raleigh
County, West Virginia (the "Beaver Coal Company Lease") which requires that the
Company pay a minimum royalty to the lessor in order to continue to hold all of
the acreage on the lease. See "Business and Properties -- Properties --
Leasehold Acreage." If production from the Beaver Coal Company Lease does not
generate the minimum royalty and the Company does not pay such minimum royalty
out of its other funds, the Company may lose the acreage under the portion of
the lease not held by production.
Geologist's Estimates of Reserves and Future Net Revenue. This
Prospectus contains estimates of the Company's oil and gas reserves and the
future net revenues therefrom which have been prepared by a certified
independent geologist. See "Business and Properties -- Oil and Gas Operations --
Oil and Gas Reserves." These estimates are based on various assumptions and,
therefore, are inherently imprecise indications of future revenues. Actual
future revenues, development expenditures, operating expenses and quantities of
recoverable oil and gas reserves may vary substantially from the estimates. In
addition, the Company's reserves may be subject to downward or upward revision,
based on production history, results of future exploration and development,
prevailing oil and gas prices and other factors.
Properties Pledged to Secure Debt. Substantially all of the Company's
properties are pledged to secure the Bank One Credit Facility and an equipment
and vehicle loan from SunTrust Bank. A failure to pay the principal or accrued
interest on such secured obligations could cause the Company to lose its
interest in its principal properties. For further information on these secured
transactions, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and Notes to Financial Statements.
8
<PAGE>
Risks Associated with Oil and Gas Industry
Current Oil and Gas Markets. There is substantial uncertainty as to the
prices at which natural gas and oil produced by the Company may be sold, and it
is possible that under some market conditions the production and sale of oil and
gas from some or all of the Company's wells may not be economical. The
availability of a ready market for oil and gas and the prices obtained for oil
and gas depend upon numerous factors beyond the control of the Company,
including competition from other natural gas and oil suppliers and national and
international economic and political developments. The Company is not subject to
any gas price controls. Future changes in regulations may have an effect on the
Company's operations.
Reliance on Estimates of Proved Reserves and Future Net Revenues;
Depletion of Reserves; Price Volatility. There are numerous uncertainties
inherent in estimating quantities of proved reserves and in projecting rates of
production and timing of development expenditures, including many factors beyond
the control of the producer. The reserve data set forth in this Prospectus or
incorporated by reference herein represent only estimates. In addition, the
estimates of future net revenues from proved reserves of the Company and the
present value thereof are based on certain assumptions about future production
levels, prices, and costs that may not prove to be correct over time. The rate
of production from oil and gas properties declines as reserves are depleted.
Except to the extent the Company acquires additional properties containing
proved reserves, conducts successful exploration and development activities or,
through engineering studies, identifies additional behind-pipe zones or
secondary recovery reserves, the proved reserves of the Company will decline as
reserves are produced. Future oil and gas production is therefore highly
dependent upon the Company's level of success in acquiring or finding additional
reserves. See "Business and Properties -- Oil and Gas Operations -- Oil and Gas
Reserves." Oil and gas prices may be quite volatile, depending on numerous
factors, including steps taken by the Organization of Petroleum Exporting
Countries ("OPEC"), tensions in the Middle East and weather conditions. The
average gas prices received by the Company were $2.75, $2.34, and $3.19 per Mcf
in 1994, 1995 and 1996 (partial year), respectively, prior to reduction for
royalties, severance taxes and gathering and transportation charges. The average
oil prices received by the Company were $15.28, $16.48, and $18.40 per Bbl in
1994, 1995 and 1996 (partial year), respectively.
Risks of Oil and Gas Activities. Significant risks are inherent in the
oil and gas business, including the drilling of dry and unsuccessful wells,
operating hazards and uninsured risks, intense competition for attractive
properties, governmental regulations, volatile prices and other uncontrollable
factors. Furthermore, oil and gas drilling is speculative. The possibility
always exists that wells drilled will be non-productive. Even wells that are
completed may not produce enough natural gas or oil to pay out.
Exploration and Development Risks. Exploration and development drilling
activities are subject to much greater risks of failure than those associated
with the ownership of producing properties. The drilling of exploratory wells
involves the greatest risks, since such wells are located in unproved areas. The
drilling of development wells, although generally consisting of drilling in
proven areas, may result in dry holes or the failure to produce oil or gas in
commercial quantities. The drilling of development wells and exploratory wells
also involves the risk that unusual or unexpected formations and pressures will
be encountered, and other conditions will exist, that could result in the
Company incurring substantial losses as well as liabilities to third parties or
governmental entities. See "Business and Properties -- Regulation
- --Environmental Regulation."
9
<PAGE>
Operating Hazards and Uninsured Risks. The Company's operations will be
subject to all risks inherent in the exploration for, and development and
production of, oil and gas, including such natural hazards as blowouts,
cratering and fires, which could result in damage or injury to, or destruction
of, formations, producing facilities or other property, or could result in
personal injury, loss of life or pollution of the environment. Any such event
could result in substantial loss to the Company which could have a material
adverse effect upon the financial condition of the Company. Under the terms of
the operating agreements to be entered into with the operators of wells not
operated by the Company, it is anticipated that the operators will carry
insurance against certain of these risks. It is anticipated that the Company
will be required to pay its proportionate share of the premiums for insurance
provided by the operator and will be named as an insured under the policies.
However, the Company may not be fully insured against all risks, either because
such insurance is not available or because of premium costs. The Company has
purchased and plans to maintain additional insurance in the form of an umbrella
policy to protect it against uninsured risks or amounts in excess of the
insurance carried under its primary policies or by another operator. See
"Business and Properties -- Insurance." Although such operational risks and
hazards may be to some extent minimized, no combination of experience, knowledge
and scientific evaluation can eliminate the risk of investment or assure a
profit to any company engaged in oil and gas operations.
Competition and Markets. The oil and gas business is highly competitive
and has few barriers to entry. The Company will be competing with other oil and
gas companies and investment partnerships in the search for, and obtaining of,
future desirable prospects, the securing of contracts with third parties for the
development of oil and gas properties, the contracting for the purchase or
rental of drilling rigs and other equipment necessary for drilling operations,
and the purchase of equipment necessary for the completion of wells, as well as
in the marketing of any oil and gas which may be discovered. Many of the
Company's competitors are larger than the Company and have substantially greater
access to capital and technical resources than does the Company and may
therefore have a significant competitive advantage. Many of the Company's
competitors are capable of making a greater investment in a given area than is
the Company, although large and small companies alike are subject to the
economics of cost effectiveness. The prices at which the Company will be able to
sell any oil or gas production will have a substantial effect on its earnings,
if any. See "Business and Properties -- Competition."
Competition from Alternative Energy Sources. Natural gas competes with
coal, oil, propane, butane, nuclear power and other fuels in the heating and
energy generation markets. Numerous factors, all difficult to predict, affect
the relative desirability or demand at any point in time for any given fuel. The
extent to which public or legislative initiatives to develop and use alternative
fuels will, in the future, affect the demand for oil or natural gas cannot be
predicted at this time.
Industry Conditions. In recent decades, there have been periods of
worldwide overproduction and underproduction of hydrocarbons as well as periods
of increased and relaxed energy conservation efforts. Such conditions have
resulted in periods of excess supply of, and reduced demand for, crude oil on a
worldwide basis and natural gas on a domestic basis. These periods have been
followed by periods of short supply of, and increased demand for, crude oil and,
to a lesser extent, natural gas. The excess or short supply of crude oil and
natural gas has placed pressures on prices and has resulted in dramatic price
fluctuations.
Shut-In Wells and Curtailed Production. In the recent past, production
from oil and natural gas wells (particularly gas wells) in many geographic areas
of the United States had been curtailed due to lack of market demand, and it is
possible that such curtailments may resume in the future. Therefore, it is
possible that the Company's wells may have to be shut-in or that oil or gas
produced from the wells may have to be sold at less than favorable prices.
Production may also be delayed or wells shut-in in the event there is difficulty
in securing markets for production, logistical problems develop in the
transportation of natural gas from the wells or there are title problems
associated with the drillsites. Although it is anticipated that substantially
all natural gas from the Company's wells will be sold to the Pipeline Operating
Partnership, an affiliate of the Company, the agreement regarding the gathering
and marketing of natural gas between the Company, for itself and on behalf of
Affiliated Drilling Partnerships, and the Pipeline Operating Partnership
governing such arrangement will not protect the Company from market or price
risks.
10
<PAGE>
Regulation; General. Oil and gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by federal
and state agencies. Failure to comply with such rules and regulations can result
in substantial penalties. The regulatory burden on the oil and gas industry will
increase the Company's cost of doing business and will affect its profitability.
Because such rules and regulations are frequently amended or interpreted, the
Company is unable to predict the future cost or impact of complying with such
laws. Oil and gas operations are regulated by an agency of state government in
every state of the United States. Many state authorities require permits for
drilling operations, drilling bonds and reports concerning operation and impose
other requirements relating to the exploration and production of oil and gas.
Some states also have statutes or regulations addressing conservation matters,
including provisions for the pooling of oil and gas properties, the
establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. The statutes and
regulations may also limit the rate at which oil and gas can be produced from
certain properties.
In Ohio, where most of the Company's oil and gas properties are
located, such regulation is by the Ohio Department of Natural Resources. The
Ohio Department of Natural Resources has been granted broad regulatory and
enforcement powers which are likely to create additional financial and
operational burdens on gas and oil operations like those of the Company. Ohio
also has in place other pollution and environmental control laws which have
become increasingly burdensome in recent years. Enforcement efforts with respect
to gas and oil operations have recently increased and it can be anticipated that
such regulation will expand and have a greater impact on future gas and oil
operations. See "Business and Properties -- Regulation." There is no assurance
that laws and regulations enacted in the future will not adversely affect the
Company's exploration for, and production and transmission of, oil and natural
gas. Such legislation and/or actions of local, state and federal governments may
have a material effect on the Company in the future. See "Business and
Properties -- Regulation -- Proposed Regulation."
Environmental Regulation. The Company is subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, qualities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution resulting from the Company's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue. For instance, legislation has been proposed in Congress from time
to time that would reclassify certain oil and gas production wastes as
"hazardous wastes," which reclassification would make such wastes subject to
much more stringent handling, disposal and clean-up requirements. If such
legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
It is not anticipated that the Company will be required in the near future to
expend amounts that are material in relation to its total capital expenditure
program by reason of environmental laws and regulations, but because such laws
and regulations are frequently changed, the Company is unable to predict the
ultimate cost of such compliance. See "Business and Properties -- Regulation --
Environmental Regulation."
Environmental Risks and Liability. There are numerous natural hazards
involved in the drilling of wells, including unexpected or unusual formations,
pressures, blowouts involving possible damages to property and third parties,
surface damages, bodily injuries, damage to and loss of equipment, reservoir
damage and loss of reserves. Uninsured liabilities may result in the loss of
Company assets and may create theoretically unlimited liability for the Company.
Oil and gas operations present risks of environmental contamination from
drilling operations and leakage from oil field storage or transportation
facilities. The Company may be subject to liability for pollution, abuses of the
environment and other, similar damages. Although the Company will maintain
insurance coverage in amounts the Company believes are adequate, it is possible
that insurance coverage may exclude risks such as environmental contamination,
may be insufficient or subject to reduction or cancellation in the future. In
such event, the Company's assets may have to be utilized to pay costs of
controlling blowouts, replacing destroyed equipment, personal injury, property
damage and environmental contamination claims. Furthermore, oil and gas
activities can result in liability under federal, state and local environmental
regulations for activities involving, among other things, water pollution and
hazardous waste transportation, storage and disposal. Such liability can attach
not only to the operator of record of a well but also to other parties that may
be deemed to be current or prior operators or owners of a well or the equipment
involved. See "Business and Properties -- Regulation -- Environmental
Regulation."
11
<PAGE>
Risks Associated with Investment in Securities
Use of Proceeds to Redeem Preferred Stock. During 1996, the Company
offered and sold in a private placement 450,000 shares of class A and class B
preferred stock (the "Class A Preferred Stock" and the "Class B Preferred
Stock"). The Class A Preferred Stock was issued for $10 debt retirement per
share and the Class B Preferred Stock was issued for $10 cash per share. The
Class A and Class B Preferred Stock is redeemable, at the option of the holders
of Preferred Stock, upon completion of this Offering, at $10 per share of
Preferred Stock. Management has sent notice to all holders of Preferred Stock
announcing the occurrence of an event triggering their option to have their
Preferred Stock redeemed by the Company. This notice was sent contemporaneously
with the filing of the Registration Statement for this Offering. Holders of
Preferred Stock must provide written notice of election to have their Preferred
Stock redeemed within thirty days of the Company's notice announcing the
occurrence of an event triggering their option to have their Preferred Stock
redeemed by the Company (anticipated to be approximately November 1, 1996). Any
holders of Preferred Stock who do not timely elect to have their shares of
Preferred Stock redeemed will have their shares of Preferred Stock automatically
converted into shares of Common Stock on a one share-to-one share basis
contemporaneously with the planned two-for-one stock split to occur immediately
prior to completion of this Offering. While management does not believe any
holders of Preferred Stock will elect to have their shares of Preferred Stock
redeemed, it is possible that some or all of them may do so. In such event,
proceeds of this Offering will be used to redeem such shares of Preferred Stock.
The maximum potential Preferred Stock redemption obligation of the Company is
$4,500,000. Use of any of the proceeds of this Offering to redeem Preferred
Stock will reduce the amount available for working capital. See "Use of
Proceeds."
No Assurance of Public Market; Possible Volatility of Unit, Common
Stock, and Series A Warrant Prices; Disclosure Relating to Low-Priced Stock.
Prior to this Offering, there has been no public trading market for the Units,
Common Stock or Series A Warrants, and there can be no assurance that a trading
market for the Company's securities will develop after this Offering or that, if
developed, it will be sustained. The absence of a trading market may render an
investor unable to liquidate his investment in the Company. The initial public
offering price of the Units and the exercise price of the Series A Warrants have
been determined by negotiations between the Company and the Underwriter based on
several factors. The fact that such prices were negotiated does not ensure that
a market for the securities will develop or continue at that price or at any
price. The trading price for the Units, Common Stock and Series A Warrants may
be significantly affected by such factors as the operating results of the
Company, the United States and global economic conditions and various other
factors generally affecting the oil and gas products industry. Additionally, the
stock market has from time to time experienced extreme price and volume
fluctuations which have particularly affected the market price for small and
emerging growth companies. These extreme fluctuations, which often have been
unrelated to the operating performance of any particular company or to any group
of companies, may adversely affect the market price of the Units, Common Stock
and Series A Warrants. The Company has applied for listing of the Units, Common
Stock and Series A Warrants on the ___________ stock exchange. If, at any time,
the Company's securities are not quoted on a stock exchange, the Company's
securities would become subject to the "penny stock rules" adopted pursuant to
Section 15(g) of the Securities Exchange Act of 1934. The penny stock rules
apply to companies whose common stock trades at less than $5.00 per share or
which have tangible net worth of less than $5,000,000 ($2,000,000 if the company
has been operating for three or more years). Such rules require, among other
things, that brokers who trade "penny stock" to persons other than "established
customers" complete certain documentation, make suitability inquiries of
investors and provide investors with certain information concerning trading in
the security, including a risk disclosure document and quote information under
certain circumstances. Many brokers have decided not to trade "penny stocks"
because of the requirements of the penny stock rules and, as a result, the
number of broker-dealers willing to act as market markers in such securities is
limited. See "Description of Securities" and "Underwriting."
Dividend Policy. The Company has not paid or declared any cash
dividends with respect to its Common Stock, nor does it anticipate any such
payments or declarations in the foreseeable future. Any future dividends will be
declared at the discretion of the Board of Directors of the Company and will
depend, among other things, on the Company's earnings, if any, its financial
requirements for future operations and growth, and such other factors as the
Company may then deem appropriate. Prospective investors should not rely on the
receipt of dividends in the near future or at any time in the future when
evaluating the merits of an investment in the Units. See "Dividend Policy."
Current Prospectus and State Blue Sky Registration Required to Exercise
Series A Warrants. Purchasers of Units will be able to exercise the Series A
Warrants included therein only if a current Prospectus relating to the Common
Stock underlying the Series A Warrants is then in effect and only if the
purchase of such Common Stock is qualified for sale or exempt from qualification
under the applicable securities laws of the state in which such purchaser
resides. Although the Company has agreed to take all necessary steps to maintain
the effectiveness of a current registration statement covering the purchase of
the Common Stock, Series A Warrants and the qualification of the purchase of the
Company's Common Stock under applicable state securities laws, there can be no
assurance that the Company will be able to obtain or, if obtained, to maintain
the effectiveness of such registration statement or such state qualification.
The value of the Series A Warrants may be greatly reduced if a current
registration statement covering the Common Stock issuable upon the exercise of
the Series A Warrants is not kept effective or if such Common Stock is not
qualified or exempt from qualification in the states in which the holders of the
Series A Warrants reside. A current registration statement must also be kept
effective for the sale of Units, Common Stock and Series A Warrants. See
"Description of Securities -- Series A Warrants."
Potential Adverse Effect of Expiration of Series A Warrants. The Series
A Warrants automatically expire as of _________________________, 2001, unless
earlier redeemed. The expiration of the Series A Warrants could force the
holders thereof to exercise the Series A Warrants and pay the exercise price at
a time when it may be disadvantageous for the holders to do so. Alternatively,
the automatic expiration of the Series A Warrants could force the holders to
sell the Series A Warrants at the then current market price, which is likely to
be less than the market value of the Series A Warrants at the time of
expiration, when they might otherwise wish to hold the Series A Warrants. The
Company has agreed that it will attempt to maintain an effective registration
statement covering the shares of Common Stock to be issued upon the exercise of
the Series A Warrants on file with the Commission for as long as the Series A
Warrants remain outstanding. See "Description of Securities -- Series A
Warrants."
Warrants to Underwriter. Upon completion of this Offering, the Company
will sell to the Underwriter the Underwriters' Warrants. To the extent that the
Underwriter's Warrants are exercised, they would have a dilutive effect on the
percentage of outstanding shares held by stockholders purchasing Units in this
Offering. The exercise of the Underwriter's Warrants is likely to occur at a
time when the Company could probably obtain additional equity capital on terms
more favorable than those provided by the Underwriter's Warrants. See
"Underwriting."
12
<PAGE>
USE OF PROCEEDS
The net proceeds of this Offering are anticipated to be $8,515,000, after
deducting the Underwriters' discount, non-accountable expense allowance and
estimated offering expenses ($9,820,000 if the Underwriters Over-allotment
Option is exercised in full). No value has been assigned to the Series A
Warrants included in the Units. The Company intends to use the net proceeds of
this Offering as follows:
Approximate
Percent
Approximate Amount of Proceeds
Retirement of debt to officers (1) $250,000 2.5%
Dividends to Class A Preferred Stock (2) $48,000 .5%
Redemption of Preferred Stock (3)
Working Capital (4) $8,217,000 97%
----------- ----
Total $8,515,000 100%
=========== ====
- -----------------------------
(1) The Company currently owes Charles P. Torrey, Jr. $65,000.00, Richard S.
Cooper $65,000.00 and Robert L. Remine $120,000.00, each plus accrued interest
at 10%, pursuant to certain promissory notes. These promissory notes are
scheduled to mature on demand. The proceeds of these loans were used by the
Company for working capital.
(2) Accrued dividends at 5% on the Company's Class A Preferred Stock are payable
upon the completion of this Offering. At such time, all shares of Preferred
Stock will be either redeemed by the Company at $10.00 per share or
automatically converted to Common Stock on a one share-to-one share conversion
ratio. See footnote (3) below.
(3) The 450,000 shares of the Company's Preferred Stock (207,700 shares of Class
A Preferred Stock and 242,300 shares of Class B Preferred Stock) currently
outstanding are redeemable according to their terms, at the option of the
holders, for $10.00 per share upon completion of this Offering. Any holders of
Preferred Stock who do not elect to have their shares of Preferred Stock
redeemed will have their shares of Preferred Stock automatically converted to
shares of Common Stock on a one share-to-one share conversion ratio. This
conversion will occur contemporaneously with the two-for-one stock split planned
to occur immediately prior to completion of this Offering. For purposes of the
above table it is assumed that no holders of Preferred Stock will elect to have
their shares redeemed. If any do elect redemption, however, proceeds of this
Offering will be used to redeem such shares of Preferred Stock. The total
potential redemption obligation of the Company with respect to its Preferred
Stock is $4,500,000. The Company will have determined its total redemption
obligation within thirty days after it gives the holders of Preferred Stock
notice of the occurrence of an event giving rise to their right to have their
Preferred Stock redeemed. Notice of the event giving rise to the right of the
Preferred Stockholders to have their Preferred Stock redeemed has been mailed
contemporaneously with the filing of the Registration Statement for this
Offering. Holders of Preferred Stock must notify the Company within thirty days
(until approximately November 1, 1996) of such notice of their intent to have
their shares of Preferred Stock redeemed. Any Preferred Stock not timely
redeemed will be automatically converted to Common Stock.
(4) To be used to explore for, acquire and develop natural gas and oil reserves.
At this time, it is anticipated that some portion of the net proceeds will be
used by the Company for development of the Company's Beaver Coal Company Lease,
as well as for other exploration and development activities elsewhere in
southeastern Ohio and in West Virginia.
13
<PAGE>
The foregoing represents the best estimate by the Company of its use of
net proceeds based upon present planning and business conditions. The proposed
application of proceeds is subject to change as market and financial conditions
change. The Company, therefore, has reserved the right to vary its use of
proceeds in response to events which may arise and have not been anticipated.
Pending use, it is anticipated that the proceeds to the Company
resulting from this Offering will be primarily invested in short-term,
investment grade obligations or bank certificates of deposit. It is anticipated
that the net proceeds of this Offering will satisfy the financial needs of the
Company for 18 to 24 months following the date of this Prospectus. See "Business
- -- Business Plan" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
Management has not definitively identified the uses of the net proceeds
which are allocated to working capital reserves. While it is presently
anticipated that these funds will be used, in part, for development of the
Beaver Coal Company Lease, other developmental drilling activities elsewhere in
southeastern Ohio and West Virginia, or acquisitions of oil and gas properties.
The net proceeds will ultimately be applied as business opportunities present
themselves.
DIVIDEND POLICY
Since inception, the Company has not paid, and it has no current plans to
pay, cash dividends on the Common Stock. The Company intends to retain all
earnings to support the Company's operations and future growth. The payment of
any future dividends will be determined by the Board of Directors based upon the
Company's earnings, financial condition and cash requirements, possible
restrictions in future financing agreements, if any, business conditions and
such other factors deemed relevant. See "Risk Factors."
14
<PAGE>
DILUTION
As of June 30, 1996, the net tangible book value of the Company was
$2,911,210 or $1.46 per share of Common Stock. The net tangible book value of
the Company is the aggregate amount of its tangible assets less its total
liabilities. The net tangible book value per share represents the total tangible
assets of the Company, less total liabilities of the Company, divided by the
number of shares of Common Stock outstanding. After giving effect to the sale of
1,000,000 Units (comprised of 1,000,000 shares of Common Stock and 1,000,000
Series A Warrants) at an assumed offering price per Unit of $10 (none of which
will be attributable to the Series A Warrants), and the application of the
estimated net proceeds therefrom, the pro forma net tangible book value per
share would increase from $1.46 to $3.10. This represents an immediate increase
in net tangible book value of $2.34 per share to current holders of Common
Stock, including current holders of Preferred Stock, all of whom are assumed to
be converting their shares to Common Stock, and an immediate dilution of $6.20
per share, or 62%, to new investors, as illustrated in the following table.
Assumed public offering price per share $10.00
Net tangible book value per share before this Offering $1.46
Increase per share attributable to new investors $2.34
-----
Adjusted net tangible book value per share after this Offering $3.80
-----
Dilution per share to new investors $6.20
=====
Percentage dilution 62%
===
The following table summarizes, as of the date of this Prospectus, and
giving effect to the two-for-one stock split to be effected immediately prior to
completion of this Offering, the number of shares of Common Stock purchased from
the Company, the total consideration paid, and the average price per share paid
by the current Common Stockholders, the holders of Preferred Stock (assuming
conversion of the Preferred Stock into Common Stock), and the holders of Common
Stock purchase warrants (assuming exercise of such warrants), and the number of
shares of Common Stock purchased from the Company and the total consideration
paid by the new investors purchasing shares of Common Stock in this Offering at
an assumed initial public offering price of $10.00 per share before deduction of
the estimated underwriting discounts and commissions and offering expenses
payable by the Company:
<TABLE>
Shares Purchased(1) Total Consideration Average
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Current Common Stockholders(1) 1,100,000 36.41% $1,200 0.01% $0.0011
Current Preferred Stockholders(2) 900,000 29.79% $4,500,000(3) 30.9% $5.00
Current Common Stock
purchase warrant 21,290 0.70% $66,490 0.5% $3.13
holders(4)
New Investors 1,000,000 33.1% $10,000,000 68.6% $10.00
--------- ----- ----------- -----
Total 3,021,290 100.0% $14,567,690 100.0%
========= ====== =========== ======
</TABLE>
(1) The original holders of Common Stock of the Company were Messrs. Torrey,
Remine and Cooper. These original Common Stockholders have since transferred an
aggregate of 80,000 shares of Common Stock to key employees and advisors to the
Company.
(2) All shares of Preferred Stock are subject to redemption, at the option of
the holder of Preferred Stock, at $10.00 per share ($5.00 per share after giving
effect to the two-for-one stock split), upon completion of this Offering, or
automatically convertible to Common Stock on a one share-to-one share conversion
ratio. For purposes of this table it is assumed that all holders of Preferred
Stock will elect to convert their shares to Common Stock.
(3) Shares of Class A Preferred Stock were issued by the Company in May through
September of 1996 in consideration of retirement of $2,077,000 of the
Debentures. Shares of Class B Preferred Stock also were issued by the Company
during this time in consideration of $2,423,000 in cash.
(4) Currently employees of the Company and certain selling agents of the
Company's syndicated private offerings own warrants to purchase 13,290
(post-stock split) shares of Common Stock at $5.00 per share (post-stock split).
Included among these warrants are warrants to purchase 3,714 (post-stock split)
shares of Common Stock owned by Messrs. Torrey, Remine and Cooper. Also, certain
selling agents currently own warrants to purchase 8,000 (post-stock split)
shares of Common Stock at $.005 (post stock split) per share. All of these
warrants must be exercised, if at all, within 90 days after completion of this
Offering.
15
<PAGE>
CAPITALIZATION
The following table sets forth the audited capitalization of the
Company as of December 31, 1995, the unaudited capitalization of the Company as
of June 30, 1996, and the capitalization of the Company as adjusted as of June
30, 1996 to give effect to the sale of the 1,000,000 Units offered at a price of
$10.00 per Unit and the application of the estimated net proceeds therefrom.
<TABLE>
December 31, (unaudited) (unaudited)
1995 June 30, 1996 June 30, 1996 As
Actual Actual Adjusted (1)
<S> <C> <C> <C>
Short-term debt:
Current portion notes payable and
capital lease obligations................... $783,254 $652,635 $397,635
-------- -------- --------
Total short-term debt....................... $783,254 $652,635 $397,635
======== ======== ========
Long-term debt:
Notes payable and capital lease obligations. $2,285,592 $75,404 $75,404
========== ======= =======
Shareholders' equity (deficit):
Common Stock, no par value,
10,000,000 shares authorized,
3,000,000 shares issued and outstanding,
as adjusted, including conversion of $1,200 $0 $0
all....Preferred Shares (1) .................
Additional paid in capital ................. $0 $3,574,200 $13,574,200
Retained earnings (deficit)................. (366,163) (662,991) (662,991)
Total shareholders' equity (deficit)... (364,963) 2,911,209 12,911,209
--------- --------- ----------
Total capitalization................... $2,703,883 $3,639,248 $13,384,248
========== ========== ===========
</TABLE>
(1) The above table assumes that all outstanding shares of Preferred Stock will
be converted to Common Stock upon completion of this Offering. The table does
not assume that the currently outstanding Common Stock purchase warrants for
21,290 shares of Common Stock will be exercised, although management expects
that all such warrants will be exercised within 90 days from completion of this
Offering.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
The Company is an independent energy company engaged in the
acquisition, development, and exploration of natural gas and oil properties. The
Company was formed in 1990 to act primarily as the driller operator for
syndicated partnerships it sponsored. The Company is currently the general
partner for twelve drilling partnerships and as such operates approximately 166
wells in southeast Ohio. In November of 1995 the Company expanded its
developmental drilling operations into West Virginia by the acquisition of an
existing producing natural gas field (the "Dupont Field.") This field contains
significant reserves and a substantial number of additional inside developmental
drill sites.
Recently, two major factors have affected the financial condition of
the Company. First, in March of 1996 the Company began implementing a transition
from being primarily a driller-operator for syndicated Affiliated Drilling
Partnerships to an energy company developing reserves for its own account. The
Company raised $4.5 million in a private offering, the proceeds of which were
used to eliminate substantially all debt of the Company except its operating
line of credit (the "Bank One Credit Facility"), a short term equipment loan of
approximately $116,000 and certain notes payable.
Secondly, in July 1996 the Company negotiated its largest acreage
acquisition to date, expanding its operations into southern West Virginia. This
area, management believes, contains wells with higher reserves and less
production cost per cubic foot of gas recovered than the Company's current
prospects. The Company leased in excess of 17,000 acres from Beaver Coal Company
Ltd. (the "Beaver Coal Company Lease") on which there exist a significant number
of offsetting locations to producing wells, and which, according to independent
analysis, contains proved undeveloped reserves with a present value of
discounted net cash flows (SEC Method) of over $13,000,000. The Company believes
that this acreage may ultimately yield in excess of 130 drill sites, and that it
will be a major focus for development by the Company for the next three years.
The acreage is crossed by or is adjacent to numerous inter and intra state
pipeline systems, providing access to markets.
The Company has developed an infrastructure which includes experienced
personnel for well site evaluation, well drilling and completion and well
operations as well as computerized highly sophisticated technology to fully
exploit this opportunity. The Company's strategy is to raise capital by way of
this Offering, the proceeds of which will be used to develop the Beaver Coal
Company Lease and other promising acreage held by the Company through
developmental drilling.
Developments Since June 30, 1996
From March through September of 1996 the Company offered Class A and
Class B Preferred Stock in a private sale. This issue was partially sold as of
the June 30, 1996, Unaudited Interim Statement and has been completely sold out
as of the date of this Prospectus. The Class A Preferred Stock was issued in
exchange for financial retirement of the Company's variable rate subordinated
debentures (the "Debentures" or "Debenture Issue"). As of June 30, 1996, the
Debenture was partially retired but, as of the date of this Prospectus, the
Debenture has now been completely retired.
In 1991 and 1992 the Company offered in private sales interests in
certain partnerships known as Energy Loan Partnership, Energy Loan Limited
Partnership and Energy Loan 1992 Limited Partnership. These three Partnerships
loaned money to the Company. As of the June 30, 1996, Unaudited Interim
Financial Statement, the Company had amounts still owing to Energy Loan Limited
Partnership and Energy Loan 1992 Limited Partnership, which have been fully
retired as September 15, 1996. The Energy Loan Limited Partnership loan was paid
off in the normal course. Energy Loan 1992 Limited Partnership, was prepaid
without penalty.
The Company has acquired oil and gas leases with significant value
since the June 30, 1996, Unaudited Interim Financial Statement. On July 17,
1996, the Company executed an agreement to lease oil and gas property containing
approximately 17,000 acres from Beaver Coal Company, Ltd (the "Beaver Coal
Company Lease"). This property is estimated by independent analysis to contain
proven undeveloped oil and gas reserves with a net present value of discounted
net cash flows (SEC Method) in excess of $13,000,000.
17
<PAGE>
Six Months Ended June 30, 1996 and 1995
Financial Condition
Total assets increased $761,876 or 16.4% from June 30, 1995, to June
30, 1996, primarily due to an increase in investments in partnerships of
$367,196 or 32.4%, an increase in the net investment in oil and gas properties
of $289,650 or 10.5% and recognition of a deferred tax asset of $166,117 in 1996
resulting from a change of the Company's tax status from a subchapter "S"
corporation to a "C" corporation. Investments in partnerships are accounted for
by the equity method, and the increase in investment is due to contributions
made to certain Affiliated Drilling Partnerships and the net income (loss)
recognized during the period. The increase in net investment in oil and gas
properties results from acquisition of proved undeveloped oil and gas leases and
working interest in certain projects operated by other oil and gas operating
companies. Capitalized loan costs were written off during 1996 concurrent with
the payoff of the related debt as discussed below.
Total assets decreased $414,611 or 7.1% from December 31, 1995, to June
30, 1996, primarily due to a decrease in the net accounts receivable from
related partnerships of $959,262 and an increase in investments in related
partnerships of $275,211. This decrease in accounts receivable is due mostly to
the collection in 1996 of 1995-A Partnership drilling advances which were
expended in 1996 for the drilling and completion of 1995-A Partnership wells.
The increase in investments in related partnerships is due primarily to
additional contributions to the 1995-A and 1996 Partnerships.
Total current liabilities decreased $979,104 or 28.9% between June 30,
1995, and June 30, 1996, due to a decrease in drilling advances of $1,349,229 or
56.5% and an increase in accounts payable and accrued expenses of $381,130 or
112.8%. An increase in drilling activity caused these amounts to vary between
these periods.
Total long term debt decreased from June 30, 1995, to June 30, 1996, by
$1,690,398 or 95.7%. This decline in long-term debt is the result of the
conversion of substantially all of the Company's Debenture to Class A Preferred
Stock. The remaining unconverted Debenture balance of $117,500 was paid during
the same period.
Shareholders' equity increased $3,431,378 from June 30, 1995 to June
30, 1996, due to the issuance of Class A Preferred Stock as discussed above and
the Class B Preferred Stock for $1,521,000.
Results of Operations
During the six months ended June 30, 1996, the Company had a net loss
of $144,747 compared to a net income of $113,138 for the six months ended June
30, 1995. The net loss for the period ending June 30, 1996, is partially the
result of two one-time charges resulting from the stock issuance expense of
preferred stock of $82,080 and loss from extinguishment of long term debt during
1996. Interest expense was also $115,364 or 318.7% higher for the six months
ended 1996 as compared to the same period for 1995. This interest expense
variance was the result of interest accrued on the debenture of $2,169,500
bearing interest at 9% annually. The debenture was entirely converted to Class A
Preferred Stock or repaid in 1996.
Effective January 1, 1996, the Company terminated its Subchapter "S"
corporation election. As a result, net income of the Company will be taxed at
the corporate level at federal statutory rates for 1996 and future years. An
income tax benefit of $108,873 and federal and state deferred tax asset of
$166,117 were recorded in 1996 to reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for federal and state income tax
purposes.
18
<PAGE>
Twelve Months Ended December 31, 1995 and 1994
Financial Condition
Total assets of $5,811,806 at December 31, 1995, increased $629,769 or
12.1% from December 31, 1994. This increase is primarily due to an increase in
current assets of $258,563 or 23.4%, net increase in oil and gas properties of
$242,091 or 8.9% and an increase in other assets of $129,115 or 9.4%.
Current assets increased as a result of an increase in net accounts
receivable from related partnerships of approximately $250,000. Included in the
1995 amount due from related partnerships is $969,000 receivable from the 1995-A
Partnership, an Affiliated Drilling Partnership, for turnkey drilling contract
amounts under the JDOA which the 1995-A Partnership partners had subscribed to
but not paid in 1995. This balance of unpaid advances at December 31, 1995, was
approximately $314,000 higher than at December 31, 1994.
The increase in net oil and gas properties results from a significant
increase in drilling activity during 1995. Also during 1995, the Company
acquired certain proved undeveloped oil and gas leases and working interests in
certain projects operated by other oil and gas operating companies. Included in
proved properties are oil and gas leases and the Company's working interest in
producing oil and gas wells. The increase in oil and gas leases results from an
increase in acreage leased. The total acres leased increased from approximately
21,500 acres in 1994 to approximately 28,050 acres in 1995.
The increase in other assets results from an increase in the
investments in related partnerships of $230,170 or 23.1% and a decrease in
property and equipment of $136,325 or 64.1% which is due to the sale of the
company airplane. The increase in the investments is mainly due to the initial
capital contributions the Company made to the 1995 and the 1995-A Partnerships
in accordance with provisions in the respective placement memorandums, which
contributions were $172,000 and $125,800, respectively, at December 31, 1995.
Current and long-term debt at December 31, 1995, of $783,254 and
$2,285,592, respectively, increased $493,849 and $619,821, respectively from
December 31, 1994. The increase in long-term debt occurred largely as a result
of the issuance of additional Debentures. In 1994 the Company issued a total of
$1,145,000 in face value of Debentures. In 1995, the Company issued $1,024,500
face value in Debentures.
Drilling advances decreased $850,876 or 26.0% from December 31, 1994.
This is due to the Company drilling and completing more wells in 1995 than 1994.
Results of Operation
For the year ended December 31, 1995, the Company had net income of
$268,342 as compared to a net loss of $1,202,570 for the year ended December 31,
1994. The overall improvement in net earnings for 1995 was the result of an
increase in net turnkey revenues of $1,217,673 or 150.8% from 1994 combined with
a decrease in operating expenses of $409,316 or 15.6%.
The increase in turnkey revenues over 1994 was the result of
management's control over drilling activities and the recognition of turnkey
drilling profits. The Company was able to accomplish the drilling to total depth
of more wells in the fall of 1995 than in the same period of 1994, thereby
increasing the total number of wells for 1995 for which turnkey drilling
revenues were recognized.
The decrease in operating expenses was primarily due to a decrease in
production costs of $269,540 or 38.4% and a decrease in exploration costs of
$114,064 or 78.2%. Engineering exploration services were out-sourced in 1994
which resulted in a substantially larger exploration expense in 1994 than in
1995. The decreases in production costs are the result of an ongoing effort by
management to control and reduce these expenditures.
Liquidity and Capital Resources
The primary source of funds for both six month periods ending June 30,
1996, and 1995 have been from issuance of preferred stock and issuance of debt.
The primary source of funds for the years ended December 31, 1995 and 1994 was
from issuance of debt. Proceeds from this Offering will provide significant
funding for future development and have a material impact on the Company's
short-term liquidity. Management expects to see positive cash flow from
operating activities in 1997 and beyond. The Company expects to drill, operate
and own (for its own account) approximately 40 wells from the net proceeds of
this Offering. These wells, along with the profits anticipated to be earned on
turnkey drilling costs paid pursuant to JDOA's in connection with future
partnership drilling, will in management's view generate substantial positive
cash flows.
19
<PAGE>
BUSINESS AND PROPERTIES
General
The Company is an independent oil and gas development and production
company focusing primarily on developmental drilling and production of natural
gas reserves in the Appalachian Basin and elsewhere in the mid-continent region
of the United States. The Company historically has developed oil and gas
properties primarily by drilling natural gas wells in joint ventures with
Tennessee limited partnerships for which the Company serves as managing general
partner (the "Affiliated Drilling Partnerships"). These Affiliated Drilling
Partnerships were syndicated by the Company's affiliate, Equity Financial
Corporation ("EFC"), an NASD-member broker-dealer, and capitalized with investor
funds raised in various private offerings. The Company also operates an
approximately 60-mile gas gathering system servicing its primary areas of
operation in southeastern Ohio (the "Gas Gathering System"). The Gas Gathering
System is owned by a Tennessee limited partnership (the "Pipeline Operating
Partnership") which is comprised of the Company, as managing general partner
owning a 28.74% general partner interest, and a single limited partner which is
another Tennessee limited partnership (the "Pipeline Income Partnership") for
which the Company also serves as managing general partner. The Pipeline Income
Partnership was syndicated by EFC and capitalized with investor funds raised in
a private offering conducted in 1992 and 1993. Through the date of this
Prospectus, approximately $46,600,000 had been raised and applied by the Company
for various activities including oil and gas development and production
activities in connection with Affiliated Drilling Partnerships; formation of the
Pipeline Income Partnership and the Pipeline Operating Partnership and
acquisition and operation of the Gas Gathering System which services gas wells
owned and operated by the Company in co-ownership with Affiliated Drilling
Partnerships; and for the Company's working capital.
The Company's principal operations include evaluating, acquiring and
developing gas and oil leases, sponsoring the organization and offering of
Affiliated Drilling Partnerships, serving as driller-operator on wells drilled
in joint ventures with Affiliated Drilling Partnerships and for its own account,
and operating the Gas Gathering System as general partner of the Pipeline
Operating Partnership.
The Company's principal assets include direct ownership of natural gas
and oil properties with predominantly natural gas reserves, tangible well
equipment, its varying equity interests as managing general partner of all of
the Affiliated Drilling Partnerships formed since 1992, a 28.74% equity interest
in the Pipeline Operating Partnership and a 1% equity interest in the Pipeline
Income Partnership. The Company currently owns approximately 55,000 gas and oil
leasehold acres. The Company currently operates approximately 166 wells in
southeastern Ohio and nine wells in West Virginia. The Company's primary
revenues are derived from fees for services in connection with drilling and
production operations with Affiliated Drilling Partnerships and industry
partners, management fees from the Pipeline Operating Partnership, partnership
revenue from its 28.74% interest in the Pipeline Operating Partnership,
management and administrative fees received from Affiliated Drilling
Partnerships pursuant to various agreements governing the joint drilling,
development and operation of wells between the various Affiliated Drilling
Partnerships and the Company (the "JDOA[s]"), partnership revenue from its
varying equity interests in the Affiliated Drilling Partnerships formed since
1992, and production revenues attributable to its owned working interests in
wells. While the Company's primary focus historically has been the drilling of
development natural gas wells in the area known as the Bartlett and Torch Fields
in southeastern Ohio, it has recently begun to expand its activities into West
Virginia. In late 1995, the Company acquired nine producing wells and 1,403
acres of undeveloped acreage in Wood County, West Virginia. In July of 1996, the
Company acquired 17,000 acres of proved undeveloped acreage in Raleigh County,
West Virginia (the "Beaver Coal Company Lease").
The Company's business plan is to increase its oil and gas reserves
primarily by continued developmental drilling in southeastern Ohio in the area
serviced by the Gas Gathering System, as well as, in Wood and Raleigh Counties,
West Virginia. The Company may also undertake activities elsewhere in the
Appalachian Basin and the mid-continent region of the United States. It plans to
drill an increasing number of wells for its own account, while, at the same time
continuing to drill wells with future Affiliated Drilling Partnerships to be
syndicated on a private placement basis by its affiliate, EFC.
20
<PAGE>
Sponsorship of Affiliated Drilling Partnerships; Pipeline Operating Partnership
and Pipeline Income Partnership.
Following is a summary of the Company's involvement in Affiliated
Drilling Partnerships, the Pipeline Operating Partnership and the Pipeline
Income Partnership.
The Company has served as supervising operator for all wells in Equity
Financial Natural Gas/Tax Credit 1990 Limited Partnership (the "1990 Drilling
Program"). The Company served as primary driller-operator for Equity Financial
Natural Gas/Tax Credit 1991 Limited Partnership (the "1991 Drilling Program"),
Equity Financial Natural Gas/Tax Credit 1992 Limited Partnership (the "1992
Drilling Program"), Energy Search Natural Gas/Tax Credit 1992-A L.P. (the
"1992-A Drilling Program"), Energy Search Natural Gas 1993 L.P. (the "1993
Drilling Program"), Energy Search Natural Gas 1993-A L.P. (the "1993-A Drilling
Program"), Energy Search Natural Gas 1994, L.P. (the "1994 Drilling Program"),
Energy Search Natural Gas 1994-A, L.P. (the "1994-A Drilling Program"), Energy
Search Natural Gas 1995 L.P. (the "1995 Drilling Program") and Energy Search
Natural Gas 1995-A L.P. (the "1995-A Drilling Partnership"). The Company is also
managing general partner of the 1992-A Drilling Program, the 1993 Drilling
Program, the 1993-A Drilling Program, the 1994 Drilling Program, the 1994-A
Drilling Program and the 1995 Drilling Program. Charles P. Torrey, Jr. and
Robert L. Remine, both principal officers of the Company, were co-managing
general partners of Equity Financial Corporation Natural Gas/Tax Credit 1989
Limited Partnership (the "1989 Drilling Program"), the 1990 Drilling Program,
the 1991 Drilling Program and the 1992 Drilling Program. Richard S. Cooper,
principal-Affiliate of the Company, served as co-managing general partner of the
1991 Drilling Program and the 1992 Drilling Program. The Company, or its
principal affiliates, currently maintains an ownership interest and operates all
wells in the 1989 Drilling Program, the 1990 Drilling Program, the 1991 Drilling
Program, the 1992 Drilling Program, the 1992-A Drilling Program, the 1993
Drilling Program, the 1993-A Drilling Program, the 1994 Drilling Program, the
1994-A Drilling Program, the 1995 Drilling Program and the 1995-A Drilling
Program. The Company is currently offering, on a private placement basis, Energy
Search Natural Gas 1996 L.P.
anticipated to be organized in October 1996.
The Company also serves as managing general partner of Energy Search
Natural Gas Pipeline Income L.P. (the "Pipeline Income Partnership"), formed in
January 1993 to participate with the Company in the ESI Pipeline Operating L.P.
(the "Pipeline Operating Partnership") which owns and operates the natural gas
gathering system and pipeline servicing substantially all producing wells
operated by the Company. The Company manages the operation of the gathering and
pipeline system and is the managing general partner of the Pipeline Operating
Partnership.
Business Plan
The Company historically has engaged in the drilling and production of
developmental natural gas wells in southeastern Ohio. Its drilling activity has
largely been funded by the syndication of Affiliated Drilling Partnerships
marketed by EFC. The Company has served as managing general partner of the
Affiliated Drilling Partnerships, as well as turnkey driller-operator and joint
venture co-owner of the wells under all JDOA's between the Affiliated Drilling
Partnerships and the Company since 1992. With respect to Affiliated Drilling
Partnerships formed between 1989 and 1992, the Company has served as contract
manager and operator. The Company operates the Gas Gathering System, servicing
its primary areas of natural gas production in southeastern Ohio. The Company
serves as managing general partner, and maintains a 28.74% partnership interest,
in the Pipeline Operating Partnership, and is managing general partner and
maintains a 1% partnership interest in the Pipeline Income Partnership, which is
the sole limited partner of the Pipeline Operating Partnership. In late 1995,
the Company acquired nine producing wells and 1,403 acres of undeveloped acreage
in Wood County, West Virginia. In July of 1996, the Company acquired 17,000
acres of proved undeveloped acreage in Raleigh County, West Virginia (the
"Beaver Coal Company Lease").
The Company's business plan is to increase its oil and gas reserves
primarily by continued developmental drilling in southeastern Ohio in the area
serviced by the Gas Gathering System, as well as to continue primarily
developmental drilling in Wood and Raleigh Counties, West Virginia. These areas
in West Virginia are well serviced by third parties operating gas gathering and
transportation systems. The Company may also undertake activities elsewhere in
the Appalachian Basin and the mid-continent region of the United States. It
plans to drill an increasing number of wells for its own account, while, at the
same time continuing to drill wells with future Affiliated Drilling Partnerships
to be syndicated on a private placement basis by its affiliate, EFC. In
addition, the Company plans to evaluate and test, on a reasonable basis,
relevant technological advancements and new opportunities both on its own and,
potentially, with industry partners.
The Company has conducted exploration, development and production
activities, primarily concentrating on natural gas reserves in Washington,
Athens and Meigs Counties in southeastern Ohio, since 1990. Currently, the
Company partially owns and operates approximately 166 wells and over 60 miles of
gas gathering systems in this region. The Company has recently acquired nine
additional producing wells in the Dupont Field in West Virginia. Over the past
several years the Company has continued its growth in operations and has
undertaken a program to enhance its technology, personnel and efficiencies in
the areas of its geological, geophysical, operational and administrative
capabilities. The Company is currently actively engaged in oil and gas
exploration and production activities in Ohio and West Virginia. In addition,
the Company is currently evaluating opportunities in Tennessee, Kentucky,
Michigan, Texas, Oklahoma and Colorado in addition to Ohio and West Virginia,
the states in which it is presently active.
Recently, the Company has gained access to new technology which
includes GeoGraphix, two dimensional and three dimensional seismic applications
for exploration of deeper horizons including the Rose Run in the Appalachian
Basin, and the application of short radius horizontal drilling and completion
techniques designed to further increase production in new and existing wells
controlled by the Company.
Throughout the 1990's, the Company has averaged drilling approximately
25 to 35 wells per year. Substantially all of these wells were drilled in joint
ventures with Affiliated Drilling Partnerships. The business plan of the Company
anticipates drilling an average of approximately 30 to 50 wells per year over
the next five years both with Affiliated Drilling Partnerships and also with
internal sources of capital for its own account. Management believes that with
the proceeds of this Offering, its internal cash flow and its other sources of
capital, such as its Bank One Credit Facility, it can efficiently maintain this
level of drilling activity in the future. The proceeds of the Company's earlier
private Preferred Stock offering as well as of this Offering have, and are
expected to, reduce debt and increase working capital for internal drilling and
development activities of the Company for its own account. This, management
believes, will result in the growth of the Company's natural gas and oil
reserves, cash flow and value. As the Company's revenues and profits grow, the
Company intends to expand its drilling activities and the acquisition of natural
gas and oil properties, thereby further adding to the Company's growth.
21
<PAGE>
Oil and Gas Operations
Exploration and Production Activities. The Company has drilled over 200
wells with Affiliated Drilling Partnerships, 166 of which the Company continues
to operate. The primary geological formations which the Company has targeted in
southeastern Ohio for exploration and development are the Clinton Sandstone
(approximately 5,600 feet in depth), the Medina Sandstone (approximately 4,100
feet in depth), the Lockport Dolomite (approximately 4,600 feet in depth), the
Oriskany Sandstone (approximately 4,250 feet in depth) and the Berea Sandstone
(approximately 2,200 feet in depth). The Company drills primarily developmental
wells and, on occasion, exploratory wells. In late 1995, the Company completed
an acquisition of primarily natural gas proved developed and proved undeveloped
reserves consisting of approximately 3,000 leasehold acres in Wood County, West
Virginia (the "Dupont Field"). An additional 4,000 acres in this area are
available for lease by the Company or others. As of the date of this Prospectus,
the Company is in the process of leasing this acreage. On July 17, 1996, the
Company acquired another approximately 17,000 additional leasehold acres (the
"Beaver Coal Company Lease") of proved undeveloped reserves in Raleigh County,
West Virginia.
Substantially all of the Company's wells have been drilled in
co-ownership with twelve Affiliated Drilling Partnerships which the Company, or
its affiliate, EFC, has syndicated and sponsored. All of the Affiliated Drilling
Partnerships have engaged in primarily development drilling in Washington,
Athens and Meigs Counties, Ohio. All of the Affiliated Drilling Partnerships are
structured substantially the same way. The Affiliated Drilling Partnerships
typically enter into a joint venture with the Company to drill and develop the
wells. This joint venture is evidenced by a joint drilling and operating
agreement ("JDOA") between the Company, as participant, project manager and
driller-operator, and the Affiliated Drilling Partnership, as participant.
Pursuant to the JDOA, drillsites are selected by the Company from its lease
inventory. The Company is obligated to contribute drillsites to the joint
ventures evidenced by the JDOA for each Affiliated Partnership on a
drillsite-by-drillsite basis. No Affiliated Drilling Partnership has any right
to develop any acreage "proved up" by the drilling of a well on its drillsite.
See "Risk Factors -- Risks Associated With The Company -- Conflicts of
Interest." The Company, as driller-operator, has discretion under the JDOA to
select the target geological formation and depth of the wells to be drilled, and
to make all operational decisions regarding drilling, completion (if warranted)
or plugging and abandonment of the wells.
The Company has historically drilled its wells with Affiliated Drilling
Partnerships on a "functional allocation" basis. Pursuant to this arrangement,
the Affiliated Drilling Partnership contributes to the joint venture drilling
funds for intangible drilling costs in exchange for direct ownership of a
working interest in the wells. The Company, on the other hand, contributes the
drillsite, tangible well equipment, excess intangible drilling funds in the
event of cost overruns and services in exchange for direct ownership of a
working interest in the wells. The allocation of the percentage of the working
interest owned between the Affiliated Drilling Partnership and the Company
varies somewhat from program to program, but is generally based on the Company's
estimate of the relative value contributed. The Company's direct ownership of
the working interest of the well ranges in various Affiliate Drilling
Partnerships from approximately 7% to 20%. Under the JDOA, the Company, in its
capacity as driller-operator under the JDOA, agrees to drill and complete (if
warranted) or plug and abandon the wells on a "turnkey" basis for a "fixed
price" or "adjustable fixed price" (based on depth of the well and number of
zones stimulated). To the extent actual well development costs exceed the
"turnkey price" or "adjustable turnkey price," the Company may experience a loss
on drilling operations. However, to the extent actual drilling costs are less
than the "turnkey price" or "adjustable turnkey price" received, the Company may
realize a profit. Typically under a JDOA, the drilling funds are pre-paid to the
Company, in its capacity as driller-operator, to allow the Company the
opportunity to inventory drill sites, maintain a field office and line up
drilling rigs, related equipment and crews.
22
<PAGE>
After Company wells are drilled and completed in its primary field of
operations in southeastern Ohio, a flow line is constructed and the well is
hooked up to the Gas Gathering System so that natural gas produced from the
wells can be transported to market. The Company is responsible for managing all
production operations concerning the wells and the Gas Gathering System. Such
operations on the wells include equipment repairs and maintenance, well
swabbing, production chart reading, accounting and administration. For
performing such services, the Company generally receives a monthly,
per-producing-well "tending" fee and is reimbursed, generally at cost, for
equipment and generally charges standard rates for services provided to the
wells. With respect to the Gas Gathering System, the Company maintains and
repairs the equipment, monitors and reads gas meters, negotiates gas sales
contracts and otherwise manages the system. For performing these services, the
Company receives from the Pipeline Operating Partnership a monthly fee of $5,000
(subject to increase for inflation) and is reimbursed for materials, services
and administrative overhead contributed toward managing the system. The Company,
as the managing general partner in the Pipeline Operating Partnership, maintains
a 28.74% interest in such partnership entitling it to 28.74% of the net revenues
of the Pipeline Operating Partnership. For the year ended December 31, 1995, the
Company's share of Pipeline Operating Partnership net revenue was $37,959.
After a well has been completed and produced, and when a well is no
longer capable of production in commercial quantities, the Company, as operator
under the JDOA, is responsible for plugging the well and restoring the
drillsite. Costs of plugging and restoration are shared by the participants
under a JDOA according to the particular agreement. In substantially all cases,
the Company's ownership interest in the wells results from its furnishing of the
tangible well equipment. Accordingly, the Company is responsible, under the
JDOA, for paying reclamation costs allocable to such tangible well equipment and
is entitled to reclaim any salvageable tangible well equipment.
The Company is participating as a non-operator with Clinton Gas Company
in the development of two Rose Run/Trempeleau prospects in Ohio. The Company has
a 25% working interest in the Chatham project, located in Medina County, Ohio,
and a 25% working interest the Wayne East project, located in Wayne County,
Ohio. To date, the Company has expended approximately $158,360, substantially
all of which was spent in 1994 and 1995, in developing these projects. Thus far
three dry holes have been drilled and neither of these projects has resulted in
the completion of a commercial well. Management plans to expend no more than
$50,000 in fiscal 1996 and 1997 in continued development of these projects with
Clinton Gas Company. The Company has the option to continue its participation
with Clinton Gas Company on these projects in an identified area of mutual
interest comprised of approximately 5,000 acres in Medina and Wayne Counties,
Ohio. It currently plans to seriously evaluate its continued participation in
these projects, and there is no assurance that the Company will continue to
participate in either project.
In late 1995 and early 1996, the Company participated as a non-operator
with Vector Drilling Company for a 1% working interest in the re-entry and
attempted open hole completion of the Reed #3 well in Seminole County, Oklahoma.
This project featured the test of relatively new proprietary technology
involving short-radius re-entry, drilling and completion techniques. The Company
expended $14,000 for its participation in this project which, to date, has not
resulted in any commercial production from the well. The Company has the option
to participate with Vector Drilling Company on similar projects within an
approximate 10-mile radius of the Reed #3 well in the future, but currently has
no plans to do so.
The Company's primary revenues are derived from fees for services in
connection with drilling and production operations with Affiliated Drilling
Partnerships and industry partners, gas gathering and transportation revenues as
well as management fees from the Pipeline Operating Partnership, management and
administrative fees from Affiliated Drilling Partnerships and production
revenues attributable to its working interest in wells. For the year ended
December 31, 1995, the Company's average daily production of natural gas and oil
was over 2 million cubic feet (2MMcf) and its average monthly sale of oil during
1995 was 647 Bbls. For the six months ended June 30, 1996, the Company's average
daily production of natural gas was over 5.8 million cubic feet (5.8 MMcf) per
month of gas and its average monthly sale of oil was 796 Bbls.
23
<PAGE>
Oil and Gas Reserves
The Company's oil and gas reserves are located in Ohio, West Virginia,
and to a limited extent, in Oklahoma. Proved reserves represent estimated
quantities of crude oil and natural gas which geological and engineering data
demonstrate to be reasonably certain to be recoverable in the future from known
reservoirs under existing economic and operating conditions. Proved developed
oil and gas reserves are proved reserved that can be expected to be recovered
through existing wells using existing equipment and operating methods.
The oil and gas reserve estimates for the year at December 31, 1995 and
December 31, 1994 were reviewed and evaluated by Kim A. Walbe, independent
certified geologist.
The following tables summarize information with respect to the
estimated proved oil and gas reserves as reviewed and evaluated by the Company's
independent geologist attributable to the Company's interests in oil and gas
properties as of December 31, 1994 and 1995.
TOTAL ESTIMATED NET RESERVE QUANTITIES
Ohio at December 31,
1994 1995
---- ----
Total Proved Reserves: (1)
Oil (Bbls) 21,922 20,851
Natural Gas (Mcf) 747,993 2,594,209
------- ---------
Equivalent Bbls (BOE) 146,588 453,219
======= =======
Total Proved Developed Reserves: (1)
Oil (Bbls) 21,922 10,235
Natural Gas (Mcf) 747,993 792,640
Equivalent Bbls (BOE) 146,588 142,342
======= =======
- ----------------------
(1) Reserves are net to the Company's interest. Applicable royalties have been
deducted from these volumes. No risk factors have been applied to any of
these reserves.
(2) After conversion on the basis of 6 Mcf of natural gas to 1 barrel of crude
oil. This is based on a weighted average of prices at December 31, 1995.
A reason for the substantial difference in total proved reserves of
natural gas from 1994 to 1995 is that the Company did not include any proved
undeveloped reserves in its reserve calculations until 1995. In addition, the
Company acquired proved reserves with its Dupont Field acquisition in 1995.
West Virgina at December 31,
1994 1995
---- ----
Total Proved Reserves: (1)
Oil (Bbls) ..................... 0 0
Natural Gas (Mcf) .............. 0 970,318
------- -------
Equivalent Bbls (BOE) (2) .......... 0 161,720
======= =======
Total Proved Developed Reserves: (1)
Oil (Bbls) .................... 0 0
Natural Gas (Mcf) ............. 0 466,814
------- -------
Equivalent Bbls (BOE) (2) .......... 0 77,802
======= =======
- ----------------------------------
(1) Reserves are net to the Company's interest. Applicable royalties have been
deducted from these volumes. No risk factors have been applied to any of
these reserves.
(2) After conversion on the basis of 6 Mcf of natural gas to 1 barrel of crude
oil. This is based on a weighted average of prices at December 31, 1995.
Oklahoma at December 31,
1994 1995
---- ----
Total Proved Reserves: (1)
Oil (Bbls) ..................... 0 1,489
Natural Gas (Mcf) .............. 0 0
----- -----
Equivalent Bbls (BOE) (2) .......... 0 1,489
===== =====
Total Proved Developed Reserves: (1)
Oil (Bbls) ..................... 0 1,489
Natural Gas (Mcf) .............. 0 1,489
----- -----
Equivalent Bbls (BOE) (2) .......... 0 1,489
===== =====
- ----------------------
(1) Reserves are net to the Company's interest. Applicable royalties have been
deducted from these volumes. No risk factors have been applied to any of
these reserves.
(2) After conversion on the basis of 6 Mcf of natural gas to 1 barrel of crude
oil. This is based on a weighted average of prices at December 31, 1995.
24
<PAGE>
Discounted Present Value of Future Net Revenues
The following table represents the estimated future net revenues (SEC
Method) and the present value of the future estimated net reserves from the
proved developed producing, proved developed non-producing and proved
undeveloped reserves of the Company as of December 31, 1994 and as of December
31, 1995, as reviewed and evaluated by Kim A. Walbe, independent certified
geologist.
ESTIMATED DISCOUNTED PRESENT VALUE OF FUTURE NET CASH FLOWS FROM PROVED OIL AND
GAS RESERVES
Ohio at December 31,
1994 1995
---- ----
Proved Producing
Oil (Bbl) ............ 21,922 6,309
Natural Gas (Mcf) .... 747,993 579,777
Proved Non-Producing
Oil (Bbl) ............ 0 3,926
Natural Gas (Mcf) .... 0 212,863
---------- ----------
Estimated Future Net Cash Flows
Before Income Tax
Proved Producing ..... $1,346,085 $1,166,251
Proved Non-Producing . 0 401,898
---------- ----------
Total ................ $1,346,085 $1,568,149
========== ==========
Estimated Future Net Cash Flows
Before Income Taxes
Discounted at 10%
Proved Producing ..... $ 832,924 $ 686,962
Proved Non-Producing . 0 247,900
---------- ----------
Total ................ $ 832,924 $ 934,862
========== ==========
West Virginia at December 31,
1994 1995
---- ----
Proved Producing
Oil (Bbl) ............ 0 0
Natural Gas (Mcf) .... 0 389,796
Proved Non-Producing
Oil (Bbl) ............ 0 0
Natural Gas (Mcf) .... 0 77,018
Estimated Future Net Cash Flows
Before Income Tax
Proved Producing ..... 0 $901,119
Proved Non-Producing . 0 59,103
-------- --------
Total ................ $ 0 $960,222
======== ========
Estimated Future Net Cash Flows
Before Income Taxes
Discounted at 10%
Proved Producing ..... $ 0 $503,666
Proved Non-Producing . 0 31,847
-------- --------
Total ................ $ 0 $535,513
======== ========
25
<PAGE>
Oklahoma at December 31,
1994 1995
---- ----
Proved Producing
Oil (Bbl) ............ 0 1,489
Natural Gas (Mcf) .... 0 0
Proved Non-Producing
Oil (Bbl) ............ 0 0
Natural Gas (Mcf) .... 0 0
Estimated Future Net Cash Flows
Before Income Tax
Proved Producing ..... $ 0 $21,691
Proved Non-Producing . 0 0
------- -------
Total ................ $ 0 $21,691
======= =======
Estimated Future Net Cash Flows
Before Income Taxes
Discounted at 10%
Proved Producing ..... $ 0 $12,921
Proved Non-Producing . 0 0
------- -------
Total ................ $ 0 $12,921
======= =======
For additional information concerning the discounted future net cash
flows to be derived from the Company's reserves, see the Supplemental
Information to Financial Statements included elsewhere herein.
The Company has filed estimates of its reserves with the United States
Department of Energy, Annual Survey of Domestic Oil and Gas Reserves, for the
year ending December 31, 1995. In this filing the Company reported proved
reserves of 163,232 Bbl of oil and 9,336,403 Mcf of natural gas in gross. The
proved reserve information presented in this Prospectus at 22,340 Bbl of oil and
3,564,527 Mcf for natural gas are reported net to the Company's interest in
accordance with Securities and Exchange Commission guidelines.
There are numerous uncertainties inherent in estimating oil and gas
reserves and their values, including many factors beyond the control of the
producer. The reserve data set forth in this Prospectus represents estimates
only. The meaningfulness of such estimates is highly dependent upon the accuracy
of the assumptions upon which they were based. Reserve engineering and
evaluation is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact manner. The accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
of different engineers and geologists often vary. In addition, estimates of
reserves are subject to revision by the results of drilling, testing and
production subsequent to the date of such estimate. Accordingly, reserve
estimates are often different from the quantities of oil and gas that are
ultimately recovered. While the reserve estimate presented herein is believed to
be reasonable, it should be viewed with the understanding that subsequent
reservoir performance, the timing and success of future development drilling and
changes in pricing structure or market demand will affect the reserve estimate.
See "Risk Factors -- Risks Associated with the Company -- Geologists' Estimates
of Reserves and Future Net Revenue."
In general, the volume of production from oil and gas properties
declines as reserves are depleted. Except to the extent the Company acquires
properties containing proven reserves or conducts successful exploration and
development activities, or both, the proven reserves of the Company will decline
as reserves are produced. The Company's future oil and gas production is,
therefore, highly dependent upon its level of success in acquiring or developing
additional reserves.
Producing Wells
The following table sets forth certain information regarding the
Company's ownership, as of December 31, 1995, of productive wells in the areas
indicated. For purposes of this table, productive wells are producing wells and
wells capable of production. A gross well is a well in which a working interest
is owned by the Company. The number of gross wells is the total number of wells
in which the Company owns a working interest. A net well is deemed to exist when
the sum of the fractional ownership interests in gross wells equals one. The
number of net wells is the sum of the fractional working interests owned by the
Company in gross wells expressed as whole numbers and fractions thereof.
26
<PAGE>
PRODUCTIVE WELL SUMMARY
December 31, 1995
Oil Natural Gas Total
Gross Net Gross Net Gross Net
Ohio 10 1.17 147 16.73 157 17.90
West Virginia 2 .29 7 4.44 9 4.73
- --- - ---- - ----
Total 12 1.46 154 21.17 166 22.63
== ==== === ===== === =====
As of December 31, 1995, the Company owned four gross wells (.5312906
net wells) which were either awaiting completion or temporarily shut-in awaiting
rework.
The following table sets forth certain information regarding the
Company's ownership, as of June 30, 1996, of productive wells in the areas
indicated.
PRODUCTIVE WELL SUMMARY
June 30, 1996
Oil Natural Gas Total
Gross Net Gross Net Gross Net
Ohio 10 1.17 152 17.71 162 18.88
West Virginia 2 .29 8 4.67 10 4.96
- --- - ---- -- ----
Total 12 1.46 160 22.38 172 23.84
== ==== === ===== === =====
As of June 30, 1996, the Company owned four gross wells (.5312906 net
wells) which were either awaiting completion or temporarily shut-in awaiting
rework.
27
<PAGE>
Production Volumes; Average Prices and Production Costs
The following table sets forth certain information regarding the
production volumes of, average sales prices received for, and average production
costs associated with, the Company's sales of oil and gas for the periods
indicated.
at December 31,
1993 1994 1995
---- ---- ----
Net Production:
Oil (Bbls) 1,078 1,292 1,166
Natural Gas(Mcf) 140,489 99,587 91,119
Total 24,493 17,889.84 16,352.50
Average Sales Price:
Oil ($/Bbl) $17.32 $15.28 $16.48
Natural Gas ($/Mcf) $2.73 2.75 2.34
Average Production Lifting Cost:
($/BOE)(1) $6.05 $4.36 $4.92
---------------------
(1) Includes direct lifting costs (labor, repairs and maintenance, materials
and supplies) and property and severance taxes.
Development, Exploration and Acquisition Expenditures
The following table sets forth certain information regarding the costs
incurred by the Company in its development, exploration and acquisition
activities on its Ohio, West Virginia and Oklahoma properties during the periods
indicated.
Year Ended December 31,
1994 1995
---- ----
Development Costs $885,711 $695,758
Exploration Costs 145,785 31,721
Acquisition Costs
Proved Properties 124,768 195,118
------- -------
Total Capital
Expenditures $1,156,264 $922,597
========== ========
Recent Drilling Activities
The Company has drilled or participated in the drilling of wells in its
Ohio, West Virginia and Oklahoma properties as set out in the tables below for
the periods indicated.
Ohio
Development Wells
Year Ended December 31,
1993 1994 1995
---- ---- ----
Gross Net Gross Net Gross Net
Oil 3 .4366 1 .5000 0 0
Natural Gas 20 2.4179 20 3.7182 17 2.741222
Dry 2 .1515 1 .1544 1 .150000
- ----- - ----- - -------
Total 25 3.0060 22 4.3726 18 2.891222
== ====== == ====== == ========
28
<PAGE>
West Exploratory Wells
Virginia Year Ended December 31,
1993 1994 1995
---- ---- ----
Gross Net Gross Net Gross Net
Oil 0 0 0 0 0 0
Natural Gas 0 0 0 0 0 0
Dry 0 0 1 .25 2 .155
- - - --- - ----
Total 0 0 1 .25 2 .155
= = = === = ====
Oklahoma Exploratory Wells
Year Ended December 31,
1993 1994 1995
---- ---- ----
Gross Net Gross Net Gross Net
Oil 0 0 0 0 0 0
Natural Gas 0 0 0 0 0 0
Dry 0 0 0 0 1 .01
- - - - - ---
Total 0 0 0 0 1 .01
= = = = = ===
The Company has drilled 12 gross wells (2.3 net wells) year to date
through September 15, 1996. Five development wells drilled in 1996 are producing
from the Oriskany sand and five wells are producing from the Clinton/Medina
sands in southeastern Ohio. The producing wells have proved up an additional
three developmental drilling sites on acreage held by the Company. This acreage,
as of December 31, 1995, was not included as proved undeveloped reserves. Also
in 1996, the Company participated as a non-operator with industry partners in
two exploratory wells drilled to the Knox (Trempeleau) formation in southeastern
Ohio. These tests were dry holes.
29
<PAGE>
Properties
Leasehold Acreage. The Company currently maintains an inventory of oil
and gas leases of approximately 55,000 total acres. With respect to these
leases, approximately 25,260 acres are located in Washington County, Ohio,
approximately 17,000 acres are located in Raleigh County, West Virginia,
approximately 5,071 acres are located in Athens County, Ohio, approximately
4,307 acres are located in Meigs County, Ohio, approximately 1,403 acres are
located in Wood County, West Virginia, approximately 104 acres are located in
Noble County, Ohio, and approximately 43 acres are located in Morgan County,
Ohio. Substantially all the Company's Ohio and West Virginia leases are subject
to landowner royalties of 12.5% and, occasionally, subject to additional
overriding royalty interests of 3.125%. Thus, the net revenue interest of the
Company's Ohio and West Virginia leases generally ranges from 87.5% to 84.375%.
The Company recently completed an acquisition of approximately 3,000
leasehold acres, all held by production in western West Virginia (the "Dupont
Field"), across the Ohio River from the Company's principal area of operation in
southeastern Ohio. An additional 4,000 undeveloped acres in the area are
available for lease and are in the process of being acquired by the Company.
On July 16, 1996 the Company acquired its largest oil and gas
leasehold, a nearly contiguous 17,000 acre tract located in proximity to major
independent producer fields near Beckley, in Raleigh County, West Virginia (the
"Beaver Coal Company Lease"). This area is proximate to significant producing
wells. In order to hold this acreage, the Company is required to provide a
minimum royalty on the entire tract equal to $5 per acre, subject to reduction
by $1 per acre for every well drilled during the first year; provide that, at
such point as the Company has drilled 20 wells on the lease, the minimum
royalty, while still owed, is not a condition to retaining title to remaining
undrilled acreage.
The following table sets forth certain information regarding the
Company's developed and undeveloped leasehold acreage as of December 31, 1995.
Leasehold Acreage
Developed Undeveloped Total
Gross Net Gross Net Gross Net
Ohio 13,250 1,855 18,250 18,250 31,500 20,105
West Virginia 1,750 245 1,750 1,750 3,500 1,995
----- --- ----- ----- ----- -----
Total 15,000 2,100 20,000 20,000 35,000 22,100
====== ===== ====== ====== ====== ======
Note that the above table does not include the approximately 17,000
acre Beaver Coal Company Lease in Raleigh County, West Virginia which was
acquired on July 16, 1996.
30
<PAGE>
Competition
The exploration for and production of oil and natural gas is highly
competitive. In seeking to obtain desirable properties, leases and exploration
prospects, the Company faces competition from both major and independent oil and
natural gas companies, as well as from numerous individuals and drilling
programs. Extensive competition also exists in the market for natural gas
produced by the Company. Many of these competitors have financial and other
resources substantially greater than those available to the Company and,
accordingly, may be better positioned to acquire and exploit prospects, hire
personnel and market production. In addition, many of the Company's larger
competitors may be better able to respond to the factors which affect the demand
for oil and natural gas production such as changes in worldwide oil and natural
gas prices and levels of production, the cost and availability of alternative
fuels and the application of government regulations.
Markets
General. The revenues generated from the Company's oil and gas
operations are highly dependent upon the prices of and the demand for its oil
and gas production. The prices received by the Company for its oil and gas
production depend upon numerous factors beyond the Company's control. Future
decreases in the prices of oil and gas production depend upon numerous factors
beyond the Company's control. Future decreases in the prices of oil and gas
would have an adverse effect on the Company's proved reserves, revenues,
profitability and cash flow. See "Risk Factors -- Risks Associated With Oil and
Gas Industry."
Although the Company in the past has not entered into any crude oil or
natural gas price swaps or other similar hedging transactions for the purpose of
reducing its exposure to future price fluctuations, it may engage in such
transactions from time to time in the future as management deems it advisable to
do so.
Gas Sales. Natural gas produced from completed wells must be transported
through pipeline systems in order to get to market. In the Company's primary
fields of operations in southeastern Ohio (the "Bartlett Field" and the "Torch
Field," respectively) substantially all completed wells are connected to the Gas
Gathering System which collects the gas from wells in the field, sends it
through compressor stations to enhance transportability and delivers it to the
East Ohio Company interstate pipeline and to Columbia Gas Company interstate
pipeline. The Gas Gathering System is owned by the Pipeline Operating
Partnership, an affiliate of the Company. The Company, for its own account and
on behalf of the Affiliated Drilling Partnerships it manages, has entered into a
gas servicing agreement (the "Gas Servicing Agreement") with the Pipeline
Operating Company pursuant to which all natural gas produced from wells
connected to the Gas Gathering System is purchased by the Pipeline Operating
Partnership and subsequently resold. The price received by the Company for its
gas is a function of what the Pipeline Operating Company sells it for on the
market (i.e. the "Adjusted Gas Price Spread"). The Gas Servicing Agreement thus
provides for gas purchased from the Company and Affiliated Drilling Partnerships
on a "net back" basis. As of June 30, 1996, the Adjusted Gas Price Spread with
respect to the Gas Servicing Agreement was $0.41 per Mcf in the Company's
Bartlett Field and $0.36 per Mcf in the Company's Torch Field where no
compression is used.
Natural gas produced from the Company's wells is sold by the Pipeline
Operating Partnership pursuant to one or more gas sales contracts to gas
marketers, interstate or intrastate pipelines, local utilities or industrial end
users in the area. Over the twelve month period ended June 30, 1996, gross
natural gas prices received by the Company for its natural gas in Ohio ranged
from $ 2.28 to $ 3.99 per Mcf before royalties and gathering and transportation
costs.
The Company did not begin receiving production revenues for its West
Virginia production until August of 1996. The gross natural gas prices received
by the Company for its natural gas in West Virginia for August and September of
1996 were $3.13 per Mcf and $3.07 per Mcf, respectively.
Offices and Employees
The Company's administrative offices are located in Suite 200, 280 Fort
Sanders West Boulevard, Knoxville, Tennessee, 37922. At this office, all
executive management, financial, accounting and general administrative functions
for the Company and its related partnerships are performed. In addition to its
executive officers, Messrs. Torrey, Remine and Cooper, the Company has a
full-time controller and two full-time and one part-time administrative support
employees at the Knoxville office.
The Company's field offices are located in Washington County at 106
Front Street, Marietta, Ohio. Geological, engineering and exploration and
production activities are coordinated at this office. The Company employs one
geologist and one full-time and two part-time administrative support employees
at its field office. In addition, the Company employs five pumpers in the field
in southeastern Ohio. On an as-needed basis, the Company retains consulting
petroleum engineers and geologists. The Company's principal field operations,
its natural gas and oil wells and its Gas Gathering System are located in
Washington, Athens and Meigs Counties in southeastern Ohio.
31
<PAGE>
Regulation
General. Oil and gas exploration, production and related operations are
subject to extensive rules and regulations promulgated by federal and state
agencies. Failure to comply with such rules and regulations can result in
substantial penalties. The regulatory burden on the oil and gas industry will
increase the Company's cost of doing business and will affect its profitability.
Because such rules and regulations are frequently amended or interpreted, the
Company is unable to predict the future cost or impact of complying with such
laws. Many state authorities require permits for drilling operations, drilling
bonds and reports concerning operation and impose other requirements relating to
the exploration and production of oil and gas. Such states also have statutes or
regulations addressing conservation matters, including provisions for the
pooling of oil and gas properties, the establishment of maximum rates of
production from oil and gas wells and the regulation of spacing, plugging and
abandonment of such wells. The statutes and regulations may also limit the rate
at which oil and gas can be produced from certain properties.
Oil and gas operations are regulated by an agency of state government in
every state of the United States. In Ohio, where most of the Company's oil and
gas properties are located, such regulation is by the Ohio Department of Natural
Resources. Ohio imposes a comprehensive statutory and regulatory scheme with
respect to gas and oil operations. Among other things, such regulations involve
(a) a new well permit and well registration requirements, procedures and fees,
(b) minimum well spacing requirements, (c) restrictions on well locations and
underground gas storage, (d) certain well site restoration, groundwater
protection and safety measures, (e) landowner notification requirements, (f)
certain bonding or other security measures, (g) various reporting requirements,
(h) well plugging standards and procedures, and (i) broad enforcement powers.
The Company anticipates that such regulations could in some cases cause delays
in obtaining well permits; however, it does not expect that such regulation will
have a material adverse impact upon the proposed operations. The Ohio Department
of Natural Resources has been granted broad regulatory and enforcement powers
which are likely to create additional financial and operational burdens on gas
and oil operations like those of the Company. Ohio also has in place other
pollution and environmental control laws which have become increasingly
burdensome in recent years. Enforcement efforts with respect to gas and oil
operations have recently increased and it can be anticipated that such
regulation will expand and have a greater impact on future gas and oil
operations.
Environmental Regulation. The Company is subject to numerous laws and
regulations governing the discharge of materials into the environment or
otherwise relating to environmental protection. These laws and regulations may
require the acquisition of a permit before drilling commences, restrict the
types, qualities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution resulting from the Company's operations. Moreover, the recent trend
toward stricter standards in environmental legislation and regulation is likely
to continue. For instance, legislation has been proposed in Congress from time
to time that would reclassify certain oil and gas production wastes as
"hazardous wastes," which reclassification would make such wastes subject to
much more stringent handling, disposal and clean-up requirements. If such
legislation were to be enacted, it could have a significant impact on the
operating costs of the Company, as well as the oil and gas industry in general.
It is not anticipated that the Company will be required in the near future to
expend amounts that are material in relation to its total capital expenditure
program by reason of environmental laws and regulations, but because such laws
and regulations are frequently changed, the Company is unable to predict the
ultimate cost of such compliance.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
who are considered to have contributed to the release of a "hazardous substance"
into the environment. These persons include the owner or operator of the
disposal site or sites where the release occurred and companies that disposed or
arranged for the disposal of the hazardous substances under CERCLA and may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources. It is not uncommon for neighboring landowners and
other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment.
Crude Oil Regulation. Effective January 28, 1981, all federal controls
of the price of domestically produced oil were abolished and, therefore, the
price of oil sold after that date is subject only to supply, demand, competitive
factors, the gravity of the crude oil, sulfur content differentials and other
factors. 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, transportation and pricing 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 intrastate. The Federal Energy Regulatory Commission ("FERC"), which
has succeeded to the authority of the Federal Power Commission, historically has
regulated the interstate transportation of natural gas and pricing of natural
gas sold for resale interstate; however, under the Natural Gas Policy Act of
1978 ("NGPA"), the price of intrastate, as well as interstate natural gas, is
regulated by FERC.
32
<PAGE>
Price controls for natural gas production from new wells have been
deregulated under the NGPA. Such deregulated gas production may be sold at
market prices determined by supply, demand, BTU content, pressure, location of
the wells, and other factors. The remaining categories of natural gas production
were fully deregulated under the NGPA by January 1992, for existing wells.
However, in the event there may exist a surplus of natural gas, it may be
unlikely that the Company will receive in the near future substantial benefits
from the deregulation of natural gas from new wells of the Company.
Although the transportation and sale of gas in interstate commerce
remains heavily regulated, FERC has recently sought to promote greater
competition in natural gas markets by encouraging open access transportation by
interstate pipelines, with the goal of expanding opportunities for producers to
contract directly with local distribution companies and end-users. This policy,
initially set forth in FERC Order 436, was generally affirmed on appeal by the
United States Court of Appeals for the D.C. Circuit, but modifications were
required by such court principally to the effect of this order on the
significant "take-or-pay" liabilities of the pipeline industry.
In response to the decision of the court, FERC issued Order 500, which
provides that pipelines providing open access transportation service need not
transport gas which a producer owned on June 23, 1987 (subject to certain
exceptions), unless such producer signs a binding offer to credit gas volumes
transported by the pipeline against the pipelines' take-or-pay liability with
such producer under gas sales agreements with the pipelines which were effective
as of June 23, 1987. If a producer seeking to have its gas transported was not
the owner of such gas as of June 23, 1987, offers of take-or-pay credits must be
supplied, in most situations, by the owners of the gas on that date in order for
the gas to qualify for transportation under Order 500. The pipeline may, in its
discretion, apply such credits against its take-or-pay liabilities under any
contract containing a take-or-pay clause as of June 23, 1987, which it has with
the producer who requests transportation. Although this crediting process ended
December 31, 1990, the pipelines may apply credits already taken to offset
future take-or-pay liability on contracts which are still being performed. The
ultimate effect of Order 500 is difficult to assess at present, but it could
adversely impact the ability of natural gas producers to secure transportation
services necessary in connection with the sale of their product in interstate
commerce, the prices which could be obtained in such sales, as well as the
ability of such producers to retain the benefits of existing contracts
containing take-or-pay provisions.
On April 8, 1992, FERC issued Order 636, a comprehensive restructuring
of interstate natural gas pipeline services. Under Order 636 all gas suppliers,
including the interstate pipeline itself (in its role as merchant) will compete
for gas purchases on an equal basis. The long-term objective of Order 636 is to
promote fair competition among suppliers of gas to give consumers an adequate
and reliable supply of natural gas at the lowest reasonable price. Order 636
accomplishes this objective by equalizing the access to and cost of
transportation of gas sold by pipelines and non-pipelines; by providing
pipelines a mechanism to recover reasonable and prudent costs of the
restructuring; and by mandating a new type of pipeline transportation (the
no-notice transportation service) so that non-pipeline gas suppliers can provide
end users with gas supplies as dependably as can pipelines. The principal focus
of the new transportation Order 636 is to provide equal quality service, whether
the transporter is the pipeline as merchant, a non-pipeline seller or the buying
customer.
As a result of Order 636, major producers may have considerable
advantages over smaller producers because of their control over extensive
reserves of natural gas and the ability to give an attractive corporate warranty
as an assurance that long-term supplies will be forthcoming now that no-notice
firm transport service is mandated for firm shippers. A major producer might
expect a premium price for the assured security of supply. Since pipelines may
no longer be aggregating gas supplies for local development corporations
("LDC"s), major producers will face less competition in the market for
large-volume, long-term supplies at least until other credit-worthy entities
step in and fill the aggregation role.
Order 636 is new and complex. It will be in the process of
implementation over the next several years. Its direct and indirect impact on
the industry and the Company cannot be measured or estimated at this time.
Proposed Regulation. A number of proposals have recently been, and are
being, considered in Congress and in the legislatures and agencies of various
states which, if enacted, may significantly and adversely affect the oil and
natural gas industry. Such proposals involve, among other things, the imposition
of price controls on all categories of natural gas production, the imposition of
land use controls (such as prohibiting drilling activities on certain Federal
and state lands in roadless wilderness areas), the reinstatement of the windfall
profits tax and other measures. At the present time, it is impossible to
accurately predict which 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 Company.
33
<PAGE>
Insurance
General. For its oil and gas operations, the Company maintains extensive
insurance coverage (exceeding $10 million in the aggregate) to protect the
Company, the Affiliated Drilling Partnerships, the Pipeline Operating
Partnership and the Pipeline Income Partnership from liability and losses that
could arise in connection with drilling, production or natural gas
transportation activities involving gas or oil.
A brief discussion of the Company's insurance policies is set forth
below. The Company is the primary insured and the Affiliated Drilling
Partnerships, the Pipeline Operating Partnership and the Pipeline Income
Partnership are listed as an additional insured on the policies. Each of the
policies are subject to certain terms, conditions, exclusions and limitations
that may preclude the Company or an Affiliated Drilling Partnership from
recovering damages, expenses and liabilities suffered, including, typically,
damages and liabilities from or caused by (a) the violation of any Federal,
state, or local statute, ordinance or regulation or (b) fines, penalties and
punitive and exemplary damages or (c) war and terrorist acts (d) normal
operation, including wear and tear, (e) faulty design or (f) dishonesty of
employees, (g) professional liability, (h) failure to supply and (i) damage to
underground equipment. Certain other exclusions that are customary in the
insurance and oil and gas industries (such as the exclusion or limitation of
coverage for costs related to the loss of diamond drill bits and in-hole salvage
and fishing costs) may also apply. It is possible that the terms, conditions,
exclusions and limitations described above may prevent the Company or an
Affiliated Drilling Partnership from recovering the full amount of any damages,
expenses and liabilities suffered by the Company or an Affiliated Drilling
Partnership which arise from an accident.
Comprehensive General Liability. The Company maintains a comprehensive
general liability policy insured by The Federal Insurance Company with coverage
limits of $1,000,000 per occurrence for bodily injury and property damage and
$2,000,000 in the aggregate. Such policy provides coverage of $2,000,000 per
occurrence and in the aggregate with respect to products and completed
operations, $1,000,000 per occurrence and in the aggregate with respect to
underground resources, and $500,000 stop gap liability coverage. This policy
includes coverage for sudden and accidental seepage and pollution (subject to
limit of $250,000) care, custody and control, debris removal following a covered
loss, broad form property damage, waiver of subrogation, contractual liability,
non-operator working interest, blow-out and cratering, explosion, collapse and
underground property damage.
Automobile Liability. The Company maintains an automobile liability
policy with coverage limits of $1,000,000 per occurrence for bodily injury and
property damage and $1,000,000 in the aggregate.
Umbrella Liability. The Company maintains an umbrella liability policy
insured by The Federal Insurance Company with coverage limits of $10,000,000 per
occurrence or series of occurrences arising out of one (1) event and, subject to
certain limitations, in the aggregate. Such policy becomes effective only after
underlying coverage limits of $1,000,000 for comprehensive general liability,
$1,000,000 for automotive liability, and $500,000 for stop gap liability.
The Company requires subcontractors to carry liability insurance and
workers' compensation insurance as required by state law.
Since November 1990, when the Company assumed operation of its first oil
and gas wells, there have been no material claims against the Company's
liability insurance policies. In the opinion of the Company's management, the
Company's properties are adequately covered by insurance.
Legal Proceedings
Neither the Company, its properties, nor any of its directors or
officers, is involved in any material litigation or administrative proceedings,
nor do any of them have any knowledge that any such litigation or proceeding may
be contemplated.
34
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth certain information regarding the
Company's Directors and the executive officers.
<TABLE>
Name Age Position Tenure with Company
<S> <C> <C> <C>
Charles P. Torrey, Jr. 49 Chief Executive Officer, Director Since its inception in 1990
Richard S. Cooper 47 President, Director, Legal Counsel Since its inception in 1990
Robert L. Remine 48 Secretary, Treasurer, Director Since its inception in 1990
John M. Johnston 37 Vice President - Exploration/Development Since 1993
</TABLE>
Charles P. Torrey, Jr. - Chief Executive Officer; Director. Mr. Torrey is a
founder, stockholder and director of the Company. Mr. Torrey's primary
responsibilities at the Company include managing gas sales, capital formation
and financial operations. Since 1988, Mr. Torrey has monitored and managed oil
and gas investments for clients both as a fee-based monitor and/or as a managing
general partner in the 1989 Drilling Program, the 1990 Drilling Program, the
1991 Drilling Program, and the 1992 Drilling Program. Mr. Torrey is a registered
securities representative and stockholder, director and President of Equity
Financial Corporation ("EFC"). Equity Financial Corporation is an NASD member,
registered broker-dealer and investment advisor with the Securities Exchange
Commission and is a registered broker-dealer and investment advisor in the
States of Tennessee, Alabama, Georgia, Florida and Kentucky. As President of
EFC, Mr. Torrey has devised and implemented investment plans for individuals,
pension accounts and corporations and has managed over $40,000,000 in assets.
Mr. Torrey received his Bachelor of Arts degree in 1971 from East Carolina
University. In 1986, Mr. Torrey received his certification as a Certified
Financial Planner from the College of Financial Planning, Denver, Colorado.
Richard S. Cooper - President; Director. Mr. Cooper is a founder,
stockholder and director of the Company. Mr. Cooper's primary responsibilities
include all day-to-day management and administration of the Company. Mr. Cooper
is licensed to practice law in the State of Tennessee and, prior to assuming his
present position with the Company, engaged in the private practice of law in
Knoxville, Tennessee. Mr. Cooper currently serves as general counsel to the
Company, Messrs. Torrey and Remine, and EFC. Mr. Cooper serves as co-managing
general partner of the 1991 Drilling Program and the 1992 Drilling Program. Mr.
Cooper received his Bachelor of Science degree in business from the University
of Tennessee in 1971 and his Juris Doctor degree from the University of
Tennessee Law School in 1975.
Robert L. Remine - Secretary/Treasurer; Director. Mr. Remine is a founder,
stockholder and director of the Company. Mr. Remine is responsible for overview
of all financial, tax and accounting matters of the Company. Since 1988, Mr.
Remine has monitored and/or managed oil and gas investments for clients both as
a fee-based monitor and as a managing general partner in the 1989 Drilling
Program, the 1990 Drilling Program, the 1991 Drilling Program and the 1992
Drilling Program. Mr. Remine is a registered securities representative and
stockholder, director and Secretary/Treasurer of EFC. In his position with EFC,
Mr. Remine has developed and implemented investment plans for individuals,
pension accounts and corporations and has managed over $40,000,000 in assets.
Mr. Remine is a certified public accountant and received his Bachelor of Science
degree in accounting from the University of Tennessee in 1973.
John M. Johnston - Vice President - Exploration and Development. Mr.
Johnston joined the Company as a petroleum geologist in December 1993. Mr.
Johnston specializes in subsurface geological analysis, reservoir engineering,
wellsite geology, well completion design and supervision and production
maintenance. He also manages the use of advanced geologic (GeoGraphix) and
reservoir engineering (GEMS) computer programs. Prior to joining the Company,
from 1987 through December of 1993, Mr. Johnston served as manager of geology
and reservoir engineering for Halwell Company, Inc. of Marietta, Ohio and senior
geologist and project manager for Energy Omega, Inc. of Marietta, Ohio, an
affiliate of Halwell Company, Inc. From 1981 through 1986, Mr. Johnston worked
as a staff exploration geologist for Chevron U.S.A. and Gulf Oil Corp. Mr.
Johnston earned his Bachelor of Science degree in geology from the University of
Illinois in 1981 and is presently working on his thesis in connection with a
Masters of Science Degree in Geology at the University of Cincinnati. Mr.
Johnston was awarded a Chevron Fellowship, was a Marathon Oil Scholar and an
Edmund J. James Scholar. Mr. Johnston is currently Vice-President of the Ohio
Geological Society and a member of the Board of Directors of the Eastern Ohio
Oil and Gas Association. He is a member of the American Association of Petroleum
Geologists, the Society of Professional Well Log Analysts, the Ohio Geological
Society, and the Ohio Oil and Gas Association.
35
<PAGE>
Board of Directors
Number of Directors; Terms. In accordance with the Company's Third
Amended and Restated Charter and Third Amended and Restated Bylaws, there are
currently three members of the Board of Directors, each of whom serve annual
terms or until their successors are duly elected and qualified. Upon
consummation of this Offering, there will be five members of the Board of
Directors, at least two of whom must be outside Directors (i.e. they may not be
officers or employees the Company presently or in the preceding three years).
The initial two outside directors will be appointed by the three current
directors (Messrs. Torrey, Remine and Cooper). Commencing at the first annual
meeting of shareholders after consummation of this Offering, the Board of
Directors of the Company shall be divided into three classes, each class to
consist as nearly as possible of one-third of the Directors. The term of office
of one class of Directors shall expire each year with the initial term of office
of the Class I Directors expiring at the 1998 annual meeting of shareholders;
the initial term of office of the Class II Directors expiring at the 1999 annual
meeting of the shareholders; and the initial terms of office of the Class III
Directors expiring at the 2000 annual meeting of shareholders. Commencing with
the 1998 annual meeting of shareholders, the Directors of the class elected at
each annual meeting of shareholders shall hold office for a term of three years.
Director Compensation. As compensation to outside directors, the Company
plans to pay directors' fees not to exceed $2,500 per quarter, plus expenses.
While not presently finalized, the Company is considering a program wherein up
to one - half of directors' fees may, upon agreement between the Company and the
director, be payable in shares of the Company's Common Stock, based on the value
of the stock on the last day of each quarter. Inside directors will not receive
compensation, but may be reimbursed for expenses.
Executive Compensation
The following table sets forth the compensation paid or to be paid to
the Company's chief executive officer, president and any other executive
officers who received, or are anticipated to receive, annual compensation in
excess of $100,000 (the "Named Executives") for services rendered in all
capacities for the fiscal year ended December 31, 1995, as well as for services
rendered, or expected to be rendered, in all capacities for 1996 and 1997
pursuant existing employment contracts of such executive officers. The Company
has written employment contracts (containing, among other things,
confidentiality and noncompetition provisions) with each of the Named
Executives. Pursuant to the employment agreements with the Named Executives,
certain Named Executives will receive compensation in excess of $100,000 in the
event of the resignation, retirement or other termination of employment. See
"Management -- Employment Agreements."
Summary Compensation Table
Annual Compensation
Other
Name/Title Year Salary(1) Bonus(2) Compensation(3)
- ---------- ---- --------- -------- ---------------
Richard S. Cooper
President (4) 1997 $180,000(5) (2) $28,100
1996 $136,000(6) $66,000 $34,100
1995 $126,980 $0 $22,100
Charles P. Torrey, Jr.
CEO (7) 1997 $180,000(5) (2) $28,100
1996 $166,500(6)(9) $85,000 $34,100
1995 $169,956(9) $0 $22,100
Robert L. Remine
Secretary/Treasurer(8) 1997 $180,000(5) (2) $28,100
1996 $166,500(6)(9) $84,000 $34,100
1995 $146,101(9) $0 $22,100
- ------------------------------
(1) Represents annual salary paid or to be paid to the executive officer.
(2) Represents annual bonus compensation paid or to be paid to the executive
officer in the amount of 25% of base salary if gross working interest revenue of
the Company grows by 20% or more over prior year. See "Management -- Employment
Agreements."
(3) Represents an estimate of all other annual compensation paid or to be paid
to the executive officer, including automobile allowance, health, disability and
life insurance, contributions to retirement plans, and certain compensation
assigned to executive officers as a stated amount in lieu of their respective
interests in certain Affiliated Drilling Partnership net revenues previously
assigned to them by the Company.
36
<PAGE>
Messrs. Torrey, Remine and Cooper currently own warrants to purchase
619 shares of Common Stock, each exercisable at $10 per share. The current
inherent valuation of such Common Stock purchase warrants is unknown.
As an additional benefit each of Messrs. Torrey, Remine and Cooper are
entitled to participate in the drilling of Company wells as follows: The Company
has granted the option to purchase one percent working interest in any well
drilled by the Company to be owned by the Company (not for the benefit of an
existing or future Affiliated Drilling Program) for a price equal to the pro
rata one percent completion costs for such well; under this option, the employee
is carried through the drilling and casing point but is responsible for his pro
rata portion of actual third party completion costs.
(4) Richard S. Cooper has been President of the Company since 1991. He has
entered into an employment agreement with the Company providing for, among other
things, the level of his annual and other compensation effective January 1,
1997.
(5) Represents compensation payable as of January 1, 1997 as provided in the
employment agreement of the executive officer.
(6) Represents projected annual and other compensation for the 1996 fiscal year
(7) Charles P. Torrey, Jr. has been Chief Executive Officer of the Company since
its inception in 1990. He has entered into an employment agreement with the
Company providing for, among other things, the level of his annual and other
compensation effective January 1, 1997.
(8) Robert L. Remine has been Secretary/Treasurer of the Company since its
inception in 1990. He has entered into an employment agreement with the Company
providing for, among other things, the level of his annual and other
compensation effective January 1, 1997.
(9) In 1996 and 1995 compensation and benefits to Messrs. Torrey and Remine
was/is partially paid by Equity Financial Corporation ("EFC"), an affiliate of
the Company.
37
<PAGE>
Officer Year EFC Company Combined
------- ---- --- ------- --------
Charles P. Torrey, Jr. 1996 $166,500 $119,000 $285,500
1995 $169,956 $22,000 $191,956
Robert L. Remine 1996 $166,500 $118,000 $284,500
1995 $146,101 $22,000 $168,101
It is contemplated that Messrs. Torrey and Remine will be providing
services full-time to the Company in 1997 and forward. As a result, their
employment compensation will be paid by the Company according to their
Employment Agreement beginning January 1, 1997.
Employment Agreements
Charles P. Torrey, Jr., Richard S. Cooper and Robert L. Remine. The
Company has entered into employment agreements with each of Charles P. Torrey,
Jr., as Chief Executive Officer, with Richard S. Cooper, as President, and with
Robert L. Remine, as Secretary and Treasurer. Each of these employment
agreements are effective January 1, 1997, continue for an initial term of five
years and are subject to automatic annual renewal terms of one year each
thereafter. Base salary for each of the employment agreements is $180,000 per
year, subject to an annual increase of at least 6% per year plus any additional
amount the Board of Directors may award. In addition, in each year in which the
gross working interest revenue of the Company increases by at least 20% over its
level in the preceding year, each of the employment agreements provide for a
yearly performance bonus equal to 25% of the executive officer's base salary.
Under the employment agreements, Messrs. Torrey, Cooper and Remine are each
entitled to receive the following: a nonaccountable automobile allowance of
$1,000 per month and reimbursement of itemized fuel, cleaning and related
expenses; a life insurance policy in the face amount of $500,000 (with the
employee to name the beneficiary) provided the employee is insurable at standard
rates (and if extra premiums are incurred in order to insure the life of the
employee, the employee will be responsible for payment of such additional
premiums or may accept such reduced death benefit as may be purchased for the
cost of standard premiums); medical, health and hospitalization insurance as
provided to other executive officers; participation in any bonus or profit
sharing plan, profit-sharing plan, qualified salary deferral plan or pension
plan now or in the future adopted by the Company; three weeks paid vacation; and
participation with the Company in the drilling of Company oil and gas wells by
giving the employee the option to purchase 1% carried working interest in any
well drilled by the Company (other than in connection with syndicated existing
or future Affiliated Drilling Program) for a price equal to 1% of the completion
costs for the well (thereby being carried by the Company through the drilling
and casing point).
In the event of a termination of any of Messrs. Torrey, Cooper or
Remine by the Company with or without cause, the employee shall be entitled to
be paid a severance allowance equal to 24 months' salary (less amounts required
to be withheld and deducted) plus any performance bonus, ratably apportioned. In
the event any of Messrs. Torrey, Cooper or Remine are terminated without cause,
such termination shall be preceded by 120 days advance written notice. No
advance written notice is required to be given by the Company for a termination
with cause.
Messrs. Torrey, Remine and Cooper's employment agreements each contain
confidentiality provisions (generally requiring that that all the Company's
confidential and proprietary data be kept confidential) and noncompetition
provisions (generally providing that the employee will not directly or
indirectly compete with the Company during the term of employment or for 2 years
thereafter) for the benefit of the Company.
John M. Johnston. The Company has entered into an employment agreement
with John M. Johnston as Vice President of Exploration and Development. This
employment agreement is effective January 1, 1997, continues for an initial term
of one year and is subject to automatic annual renewal terms of one year each
thereafter. Base salary for the employment agreement is $72,000 per year. In
addition, in each year in which the gross working interest revenue of the
Company increases by at least 20% over its level in the preceding year, the
employment agreement provides for a yearly performance bonus equal to 25% of Mr.
Johnston's base salary. Under the employment agreement, Mr. Johnston will be
entitled to the following: a nonaccountable automobile allowance including use,
maintenance, repair and insurance of an automobile and reimbursement of itemized
fuel, cleaning and related expenses; a life insurance policy in the face amount
of $100,000 (with the employee to name the beneficiary) provided the employee is
insurable at standard rates (and if extra premiums are incurred in order to
insure the life of the employee, the employee will be responsible for payment of
such additional premiums or may accept such reduced death benefit as may be
purchased for the cost of standard premiums); medical, health and
hospitalization insurance as provided to other employees; participation in any
bonus or profit sharing plan, profit-sharing plan, qualified salary deferral
plan or pension plan now or in the future adopted by the Company; and two weeks
paid vacation.
38
<PAGE>
In the event of a termination of Mr. Johnston by the Company with or
without cause, he shall be entitled to be paid a severance allowance equal to
one year salary (less amounts required to be withheld and deducted) plus any
performance bonus, ratably apportioned. In the event Mr. Johnston is terminated
without cause, such termination shall be preceded by 120 days advance written
notice. No advance written notice is required to be given by the Company for a
termination with cause.
Mr. Johnston's employment agreement contains confidentiality provisions
(generally requiring that that all the Company's confidential and proprietary
data be kept confidential) and noncompetition provisions (generally providing
that the employee will not directly or indirectly compete with the Company
during the term of employment or for 1 year thereafter) for the benefit of the
Company.
Benefit Plans
1997 Stock Compensation Plan. The Company's 1997 Stock Compensation
Plan was approved by the Board of Directors and Stockholders of the Company on
September 18, 1996 to provide for the grant of incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended and
options which do not constitute incentive options to officers, Directors (other
than Outside Directors), employees and advisors of the Company or a subsidiary
of the Company. A total of 300,000 shares of Common Stock have been authorized
and reserved for issuance under the 1997 Stock Compensation Plan, subject to
adjustment to reflect changes in the Company's capitalization in the case of a
stock split, stock dividend or similar event. The 1997 Stock Compensation Plan
will be administered by the Compensation Committee, which consists of the
Company's three Outside Directors. The Compensation Committee will have the sole
authority to interpret the 1997 Stock Compensation Plan, to determine the
persons to whom options will be granted, to determine the basis upon which the
options will be granted, and to determine the exercise price, duration and other
terms of options to be granted under the 1997 Stock Compensation Plan; provided
that, (i) the exercise price of each option granted under the 1997 Stock
Compensation Plan may not be less than the fair market value of the Common Stock
on the day of the grant of the option, (ii) the exercise price must be paid in
cash upon exercise of the option, (iii) no option may be exercisable for more
than 10 years after the date of grant, and (iv) no option is transferable other
than by will or the laws of descent and distribution. No option is exercisable
after an optionee ceases to be employed by the Company or a subsidiary of the
Company, subject to the right of the Compensation Committee to extend the
exercise period for not more than 90 days following the date of termination of
an optionee's employment. An optionee who was a director or advisor may exercise
his option at any time within 90 days after such optionee's status as a director
or advisor terminates to the extent he was entitled to exercise such option at
the date of termination of his status. If an optionee's employment is terminated
by reason of disability, the Compensation Committee has the authority to extend
the exercise period for not more than one year following the date of termination
of the optionee's employment or service as an advisor or director. If an
optionee dies and holds options not fully exercised, such options may be
exercised in whole or in part within one year of the optionee's death by the
executors or administrators of the optionee's estate or by the optionee's heirs.
The vesting period, if any, specified for each option will be accelerated upon
the occurrence of a change of control or threatened change of control of the
Company.
Outside Directors Stock Option Plan. The Outside Directors Stock Option
Plan was approved by the Board of Directors and Stockholders of the Company on
September 18, 1996. A total of 50,000 shares of Common Stock have been
authorized and reserved for issuance under the Outside Directors Stock Option
Plan, subject to adjustment to reflect changes in the Company's capitalization
in the case of a stock split, stock dividend or similar event. The Outside
Directors Stock Option Plan will be administered by the Board of Directors of
the Company. The Board of Directors has authority to interpret the Outside
Directors Stock Option Plan, to determine the persons to whom options will be
granted, to determine the basis upon which the options will be granted, and to
determine the exercise price, duration and other terms of options to be granted
under the Outside Directors Stock Option Plan; provided that, (i) the exercise
price of each option granted under the Plan may not be less than the fair market
value of the Common Stock on the day of the grant of the option, (ii) the
exercise price must be paid in cash upon exercise of the option, (iii) no option
may be exercisable for more than 10 years after the date of grant, and (iv) no
option is transferable other than by will or the laws of descent and
distribution. If an optionee's status as an Outside Director is terminated for
any reason other than death, the optionee may exercise his option at any time
within 90 days after such termination to the extent it was then exercisable. If
an optionee dies while an Outside Director and shall not have fully exercised
options granted under the Outside Directors Stock Option Plan, such options may
be exercised in whole or in part within six months of the optionee's death by
the executors or administrators of the optionee's estate or by the optionee's
heirs. The vesting period, if any, specified for each option will be accelerated
upon the occurrence of a change of control or threatened change of control of
the Company.
Options under the Outside Directors Stock Option Plan will be granted
only to "Outside Directors" selected by the Board of Directors. Outside
Directors shall mean only those directors of the Company or a subsidiary of the
Company who are not regular salaried employees of either the Company or a
subsidiary as of the date the option is granted.
39
<PAGE>
Indemnification of Officers and Directors
According to the Third Amended and Restated Bylaws of the Company, any
Director or officer, or his executor or administrator, will be entitled to
indemnification from losses and advancement of expenses incurred personally as a
result of his status as a Director or an officer of the Company in accordance
with the Tennessee Business Corporation Act.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Company pursuant to the foregoing provisions, or otherwise, the Company has
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 Company of expenses incurred or
paid by a director, officer or controlling person of the Company on the
successful defense of any action, suit or proceeding) is asserted by such a
director, officer or controlling person in connection with the securities being
registered, the Company 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 the final adjudication of
such issue.
40
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding certain
principal stockholders' beneficial ownership of the Common Stock of the Company
as of the date of this Prospectus and as adjusted to reflect the sale of Units
offered hereby. The beneficial ownership of Common Stock of these principal
stockholders assumes that (a) all outstanding Preferred Stock has been converted
into Common Stock on a one share - to - one share basis, (b) any outstanding
Common Stock purchase warrants owned by them have been exercised, and (c) the
two - for - one stock split expected to occur immediately prior to completion of
this Offering has occurred. The principal stockholders included in the following
table are: (i) each person known by the Company to be the beneficial owner of
more than five percent of the total outstanding shares of Common Stock of the
Company, (ii) each Director or executive officer of the Company, (iii) all
Directors and executive officers of the Company as a group, (iv) all holders of
Preferred Stock. The following table does not assume that any Series A Warrants
or Underwriters' Warrants have been exercised. Except as otherwise indicated all
persons listed below have record and beneficial ownership and sole voting power
and investment power with respect to their shares of Common Stock (except to the
extent that authority is shared by spouses under applicable law).
<TABLE>
Name Amount Percent of Amount Percent of
Beneficially Class Prior to Beneficially Class After
Owned Prior to Offering Owned After Offering
Offering Offering
<S> <C> <C> <C> <C>
Charles P. Torrey, Jr.,
CEO and Director 311,238 (1) 15.40% 311,238 10.30%
Richard S. Cooper
President and Director 311,238 (1) 15.40% 311,238 10.30%
Robert L. Remine
Sec/Treas and Director 311,238 (1) 15.40% 311,238 10.30%
John M. Johnston
Vice President Expl. and Dev. 60,000 2.97% 60,000 1.99%
All Officers and Directors as a
group (four persons) 993,714 49.16% 993,714 32.89%
Preferred Stockholders as a
group, none of whom individually
will own more than 5% of the
Common Stock upon conversion (2)
900,000 44.53% 900,000 29.79%
</TABLE>
- ------------------------------
(1) Includes 3,714 post-stock split shares of Common Stock per person expected
to be acquired by the exercise of presently outstanding Common Stock purchase
warrants owned by Messrs. Torrey, Remine and Cooper.
(2) It is assumed that all 900,000 post-stock split shares of Preferred Stock
outstanding as of the date of this Prospectus will be converted into 900,000
shares of Common Stock of the Company. The holders of Preferred Stock have the
option to have their shares of Preferred Stock redeemed upon consummation of
this Offering at $10 per share (pre-stock split) or $5 per share (post-stock
split). Notice of the event triggering the Preferred Stockholders' option to
have their shares redeemed has been sent out by the Company contemporaneously
with the filing of the Registration Statement for this Offering and holders of
Preferred Stock shall have thirty days after the date of such notice (until
approximately November 1, 1996) to notify the Company of their intent to have
their shares of Preferred Stock redeemed. Any Preferred Stock not redeemed will
be automatically converted into shares of Common Stock on a one share-to-one
share basis contemporaneously with the two-for-one stock split planned to occur
immediately prior to completion of this Offering.,.
The address of the officers and Directors shown above is 280 Fort
Sanders West Boulevard, Suite 200, Knoxville, Tennessee, 37922.
41
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Equity Financial Corporation ("EFC") of Knoxville, Tennessee is a
Tennessee corporation and an NASD-member broker-dealer. EFC is owned and managed
by Messrs. Torrey and Remine, each of whom hold securities licenses as
registered principals. EFC acted as the placement agent for each Affiliated
Drilling Partnership and the Pipeline Income Partnership for which the Company
served as general partner and operator. Messrs. Torrey and Remine received sales
commissions in connection with the offerings of Affiliated Drilling Partnerships
and the Pipeline Income Partnership. It is anticipated that EFC will act as
placement agent for future Company-sponsored Affiliated Drilling Programs.
Messrs. Torrey and Remine will receive sales commissions for selling interests
in future Affiliated Drilling Programs on behalf of EFC.
EFC shares its offices and certain office equipment and facilities with
the Company. For this the Company pays EFC $1,000 per month.
The Company leases an airplane from Charles P. Torrey, Jr., its Chief
Executive Officer and a Director pursuant to an aircraft lease dated February 1,
1995. The term of the lease is month to month. The lease requires the Company to
make payments of base rent of $1,575 per month payable in advance. The base rent
covers the first 12 hours of usage by the Company. Any excess use is subject to
a charge of $100 per hour. Mr. Torrey, as lessor, is responsible for maintenance
of the aircraft.
The Company is the borrower under promissory notes payable to Charles
P. Torrey, Jr., in the principal amount of $65,000, to Richard S. Cooper, in the
principal amount of $65,000, and to Robert L. Remine, in the principal amount of
$120,000. All of the promissory notes are due on demand and bear interest at the
rate of 10% per annum. The Company plans to pay these notes with the proceeds of
this Offering.
The Company serves as managing general partner in twelve syndicated
Affiliated Drilling Partnerships, as well as the Pipeline Operating Partnership
and the Pipeline Income Partnership. In connection with each Affiliated Drilling
Partnership, the Company has entered into a JDOA which establishes the terms and
conditions of the Company's participation in the wells and its services as
driller-operator. For a discussion of the Company's relationship to each of
these partnerships see "Business and Properties -- Sponsorship of Affiliated
Drilling Partnerships; Pipeline Operating Partnership and Pipeline Income
Partnership."
42
<PAGE>
DESCRIPTION OF SECURITIES
Capital Stock of the Company
The authorized capital stock of the Company presently consists of
10,000,000 shares of Common Stock, no par value, 216,950 shares of Class A
Preferred Stock , no par value and 450,000 shares of Class B Preferred Stock, no
par value.
Preferred Stock
At the date of this Prospectus, there were 207,700 shares of Class A
Preferred Stock outstanding. Such shares were issued in exchange, on a dollar -
for - dollar basis at $10 per share, for outstanding principal owed on the
Company's Debentures. The Class A Preferred Stock bears a cumulative,
noncompounded dividend at a rate of 5% per annum payable upon the occurrence of
a surrender event, defined below ("Surrender Event").
At the date of this Prospectus, there were 242,300 shares of Class B
Preferred Stock outstanding. Such shares were issued for consideration equal to
$10 per shares in cash.
All shares of Class A Preferred Stock and shares of Class B Preferred
Stock (collectively, the "Preferred Stock") are redeemable by the Company, at
the option of the Preferred Stockholder, at $10 per share upon the occurrence of
a Surrender Event. Any shares of Preferred Stock which are not redeemed upon the
occurrence of a Surrender Event are automatically convertible, on a one
share-for-one share basis, into shares of Common Stock.
Prior to conversion into Common Stock, the Class A Preferred Stock is
entitled to receive a $10 per share, plus accrued and unpaid dividends,
liquidation preference over Class B Preferred Stock and Common Stock. Prior to
conversion into Common Stock, the Class B Preferred Stock is entitled to receive
a $10 per share liquidation preference over Common Stock. After conversion, any
liquidation preference formerly associated with Class A Preferred Stock or Class
B Preferred Stock shall lapse.
For purposes of the Preferred Stock, the term "Surrender Event" is
defined as: (a) the Company merging or consolidating with another company in a
transaction in which the Company is not the survivor; (b) the Company selling or
disposing of all, or substantially all, of its assets; or (c) management of the
Company undertakes a registration and initial public offering of any of its
Common Stock.
The Preferred Shares have no voting rights (other than those prescribed
by Tennessee law) unless and until they are converted into shares of Common
Stock. Tennessee law provides that a vote of the holders of a majority of the
outstanding shares of Preferred Stock is required to change the powers,
preferences, or special rights of the Preferred Stock in a manner adverse to
them. The rule applies to the Preferred Stock on a class-by-class basis.
The initial public offering of the Common Stock of the Company represented
by this Prospectus constitutes a Surrender Event for purposes of the Company's
Preferred Stock. As such, holders of Preferred Stock have the option to redeem
their shares of Preferred Stock at $10 per share or have their shares be
converted into shares of Common Stock on a one share - to - one share basis.
Contemporaneously with the filing of the Registration Statement for this
Offering, the Company has mailed to holders of Preferred Stock notice of this
Offering, which constitutes a Surrender Event for purposes of the Preferred
Stock. The holders of Preferred Stock will have thirty days after the date of
the notice (until approximately November 1, 1996) to provide the Company with
written notice of their intent to have their shares of Preferred Stock redeemed.
Any Preferred Stockholders who do not give the Company timely written notice of
intent to have their Preferred Stock redeemed will have such stock automatically
converted to Common Stock. Management of the Company believes that no Preferred
Stockholders will elect to have their shares of Preferred Stock redeemed.
Following redemption or conversion of the Class A Preferred Shares, the
Company will have no authority to issue further Class A Preferred Shares.
Following redemption or conversion of the Class B Preferred Shares, the Company
will still be authorized to issue up to 900,000 (post-stock split) shares of
Class B Preferred Stock, but presently has no intention of doing so in the
future.
43
<PAGE>
Units
Each Unit consists of one share of Common Stock and one Series A
Warrant. The shares of Common Stock and the Series A Warrants included in the
Units may not be separately traded until _______, 1997 [six months after the
date of this Prospectus] unless earlier separated upon three days prior written
notice from La Jolla Securities, Inc. (the "Representative") to the Company.
Common Stock
At the date of this Prospectus, there were 550,000 shares of Common
Stock outstanding. In addition, 10,645 shares of Common Stock were reserved for
issuance upon exercise of Common Stock purchase warrants granted under the
Company's existing Common Stock warrant plans, all of which must be exercised,
if at all, within 90 days after the successful completion of this Offering.
Immediately prior to completion of this Offering, the Company will undergo a
two-for-one stock split which will have the effect of doubling the number of
outstanding shares of Common Stock as well as the number of shares of Common
Stock that may be purchased pursuant to currently outstanding Common Stock
purchase warrants.
As of the date of this Prospectus, there were 450,000 shares of
Preferred Stock (including Class A and Class B shares) outstanding which will be
either redeemed at $10 per share or converted into Common Stock on a one share -
to - one share (pre-stock split) basis upon a successful closing of this
Offering.
The holders of outstanding shares of Common Stock, as well as the
shares of Common Stock to be received upon conversion of shares of Preferred
Stock or issued upon exercise of existing Common Stock warrants, are entitled to
share ratably in any dividends paid on the Common Stock when, as and if declared
by the Board of Directors out of funds legally available therefor. Each holder
of Common Stock is entitled to one vote for each share held of record. The
Common Stock is not entitled to cumulative voting or preemptive rights and is
not subject to redemption. Upon liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in the net
assets legally available for distribution. All outstanding shares of Common
Stock are fully paid and nonassessable.
Series A Warrants
The Company has authorized the issuance of Series A Warrants to
purchase 1,000,000 shares of Common Stock (not including 150,000 Series A
Warrants which may be issued pursuant to the Underwriters' Over-allotment
Option, and 100,000 Underwriters' Warrants) and has reserved an equivalent
number of shares of Common Stock for issuance upon exercise of such Series A
Warrants and Underwriters' Warrants. The following statements are brief
summaries of certain provisions of the Warrant Agreement (defined below). Copies
of the Warrant Agreement may be obtained from the Company or the Warrant Agent
(defined below) and have been filed with the Commission as an exhibit to the
Registration Statement of which this Prospectus is a part.
The Series A Warrants will be issued in registered form under, governed
by, and subject to the terms of a warrant agreement (the "Warrant Agreement")
between the Company and _______ Trust Company as warrant agent (the "Warrant
Agent"). Each Warrant entitles the holder thereof to purchase one share of
Common Stock at an exercise price of 120% of the offering price per Unit
exercisable at any time commencing on ________________________, 199_ [thirteen
months after the closing of this Offering], until ______________, 2001, unless
earlier redeemed. The Series A Warrants will not become separately traded until
________________________, 1997 [six months after the date of this Prospectus]
unless earlier separated upon three days prior written notice by the
Representative to the Company at the discretion of the Representative. The
Series A Warrants contain provisions that protect the Warrant holders against
dilution by adjustment of the exercise price in certain events, including, but
not limited to stock dividends, stock splits, reclassifications or mergers.
Holders of Series A Warrants may not exercise the Series A Warrants for
fractional shares. A Warrant holder will not possess any rights as a shareholder
of the Company. Shares of Common Stock, when issued upon the exercise of the
Series A Warrants in accordance with the terms thereof, will be fully paid and
non-assessable. No fractional shares will be issued upon the exercise of the
Series A Warrants. The Company will pay cash in lieu of fractional shares.
The Series A Warrants are subject to redemption by the Company at a
price of $0.05 per Series A Warrant at any time commencing eighteen months after
the date of this Prospectus, on thirty days prior written notice, provided that
the closing sale price per share for the Common Stock has equaled or exceeded
200% of the offering price per Unit for twenty consecutive trading day within
the thirty-day period immediately preceding such notice.
44
<PAGE>
At any time when the Series A Warrants are exercisable, the Company has
agreed to have a current registration statement on file with the Commission and
to effect appropriate qualifications under the laws and regulations of the
states in which the holders of the Series A Warrants reside in order to comply
with applicable laws in connection with the exercise of the Series A Warrants
and the resale of the Common Stock issued upon such exercise. So long as the
Series A Warrants are outstanding, the Company has agreed to file all
post-effective amendments to the Registration Statement required to be filed
under the Securities Act, and to take appropriate action under federal law and
the securities laws of those states where the Series A Warrants were initially
offered to permit the issuance and resale of the Common Stock issuable upon
exercise of the Series A Warrants. However, there can be no assurance that the
Company will be in a position to effect such action under the federal and
applicable state securities laws, and the failure of the Company to effect such
action may cause the exercise of the Series A Warrants and the resale or other
disposition of the Common Stock issued upon such exercise to become unlawful.
The Company may amend the terms of the Series A Warrants, but only by extending
the termination date or lowering the exercise price thereof. The Company has no
present intention of amending such terms.
Transfer Agent and Registrar; Warrant Agent
The Transfer Agent and Registrar for the Units, Common Stock and the
Warrant Agent for the Series A Warrants and the Underwriters' Warrants will be
________ Trust Company, _______.
Reports to Shareholders
The Company intends to furnish its shareholders with annual reports
containing audited financial statements and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
The Company has agreed, subject to the sale of the Units offered
hereby, that on the date of this Prospectus, it will register its Common Stock
and Series A Warrants under the provisions of Section 12(b) of the Exchange Act,
and that it will use its best efforts to continue to maintain such registration.
Such registration will require the Company to comply with periodic reporting,
proxy solicitation, and certain other requirements of the Exchange Act.
________ Stock Exchange and NASDAQ Small-Cap Market
The Company is seeking approval for listing of the Common Stock and the
Series A Warrants on the _____ Stock Exchange under the symbols __________ and
on the ________ Small-Cap Market under the symbols ________.
45
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, assuming 100% of outstanding
Preferred Shares convert to Common Stock and none elect to be redeemed, the
Company will have 3,000,000 shares of Common Stock outstanding. In addition,
there will be outstanding Common Stock purchase warrants to purchase 21,290
shares of Common Stock exercisable within 90 days after completion of this
Offering. Of the 3,000,000 Common shares to be outstanding, the 1,000,000 shares
to be sold in this Offering (1,150,000 if the Underwriters' Over-allotment
Option is exercised in full) will be tradable in the public market without
restriction under the Securities Act, except shares purchased by an "affiliate"
(as defined in the Securities Act -- in general, a person who is in a control
relationship with the Company) of the Company. All of the remaining 2,000,000
shares of Common Stock will be "Restricted Shares" within the meaning of the
Securities Act and may be publicly sold only if registered under the Securities
Act or sold in accordance with an exemption from registration, such as those
provided by Rules 144 and 701 promulgated under the Securities Act. In addition,
to the extent any of the previously outstanding warrants to purchase 21,290
shares of Common Stock are exercised, such shares will also be Restricted
Shares. The officers and Directors who, after completion of this Offering, will
be holders of 993,714 shares of Common Stock, assuming all outstanding Common
Stock purchase warrants held by all of them are exercised, and further assuming
the effect of the two - for - one stock split, of Restricted Stock of the
Company, have agreed that they will not, without the prior written consent of
the Representative, offer, sell or otherwise dispose of any shares of Common
Stock beneficially owned by them or acquired upon the exercise of stock options
for a period of two years after closing of this Offering.
In general, under Rule 144, as currently in effect, a person (or
persons whose shares are aggregated) is entitled to sell Restricted Shares if at
least two years have passed since the later of the date such shares were
acquired from the Company or any affiliate of the Company. Rule 144 provides
that within any three-month period such person may sell only up to the greater
of 1% of the then outstanding shares of the Company's Common Stock
(approximately 30,212 shares following completion of this Offering) or the
average weekly trading volume in the Company's Common Stock during the four
calendar weeks immediately preceding the date on which the notice of the sale is
filed with the Securities and Exchange Commission. Sales pursuant to Rule 144
are subject to certain other requirements relating to manner of sale, notice of
sale and availability of current public information. Any person who has not been
an affiliate of the Company for a period of three months preceding a sale of
Restricted Shares is entitled to sell such shares under Rule 144 without regard
to such limitations if at least three years have passed since the later of the
date such shares were acquired from the Company or any affiliate of the Company.
Shares held by persons who are deemed to be affiliates of the Company are
subject to such volume limitations regardless of how long they have been owned
or how they were acquired. The foregoing is a brief summary of certain
provisions of Rule 144 and is not intended to be a complete description thereof.
Without consideration of contractual restrictions described below, an
aggregate of 930,000 post-stock split shares of Common Stock, representing 31.0%
of the outstanding shares of the Commons Stock, (29.5% if the Underwriters'
Over-allotment Option is exercised in full) will be eligible for public sales
pursuant to Rule 144 after the completion of this Offering. In addition,
warrants to purchase an aggregate of 21,290 post-stock split shares of Common
Stock are presently outstanding and will be eligible for public sale pursuant to
Rule 144 after completion of this Offering. The Company cannot estimate the
number of shares that may be sold under Rule 144, as the number will depend upon
the market price, trading volume for the Common Stock, personal circumstances of
the sellers and other factors.
After this Offering, executive officers, Directors and senior management
will own 990,000 post-stock split shares of the Common Stock. In addition, these
individuals own warrants to purchase 3,714 post-stock split Shares of Common
Stock. The Company's largest three shareholders, Messrs. Torrey, Remine and
Cooper, have agreed with the Representative, subject to certain limited
exceptions, not to sell or otherwise dispose of any shares of Common Stock held
by him for a period of two years after the date of this Prospectus without the
prior written consent of the Underwriters. See "Underwriting".
Any employee, officer or director of the Company who purchases his or
her shares pursuant to a written compensatory plan or contract is entitled to
rely on the resale provision of Rule 701 under the Securities Act, which permits
non-affiliates to sell those shares without having to comply with the public
information, holding period, volume limitations or notice provisions of Rule 144
and permits affiliates to sell those shares without having to comply with the
holding period restrictions of Rule 144, in each case commencing 90 days from
the date of this Prospectus.
With respect to the Preferred Stock, the Company has agreed that, if it
undertakes to register any shares of Common Stock, it shall use its best efforts
to register all shares of Common Stock into which the Preferred Stock may be
convertible upon the occurrence of a Surrender Event. However, in the event that
the managing underwriter determines not to register the shares of Common Stock
underlying the Preferred Stock, the Company shall have no obligation to do so
and the holder of Preferred Stock is free to undertake the registration of his
or her own shares of underlying Common Stock at his or her own expense. The
Company has requested that the Representative include in this registration and
initial public offering the shares of Common Stock into which the shares of
outstanding Preferred Stock are convertible. The Representative has indicated to
the Company that it believes it is not in the best interest of the Company to
include such shares in this offering.
Prior to this Offering, there has been no public market for the Common
Stock, and no predictions can be made as to the effect, if any, that market
sales of shares or the availability of shares for sale will have on the market
price prevailing from time to time. The sale, or availability for sale, of
substantial amounts of the Common Stock in the public market could adversely
affect prevailing market prices.
46
<PAGE>
UNDERWRITING
Pursuant to the terms and subject to the conditions contained in the
Underwriting Agreement, the Company has agreed to sell on a firm commitment
basis to the Underwriters named below, and each of the Underwriters, for whom La
Jolla Securities Corporation (the "Representative") is acting as the
Representative, have severally agreed to purchase the number of Units set forth
opposite their names in the following table.
Underwriters Number of Units
La Jolla Securities Corporation
Total 1,000,000
The Representative has advised the Company that the Underwriters
propose to offer the Units to the public at the initial public offering price
per share set forth on the cover page of this Prospectus and to certain dealers
at such price less a concession of not more than $ per Unit, of which $ may be
reallowed to other dealers. After the Offering, the public offering price,
concession and reallowance to dealers may be reduced by the Representative. No
such reduction will change the amount of proceeds to be received by the Company
as set forth on the cover page of this Prospectus.
The Company has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this Prospectus, to purchase up to
150,000 additional Units to cover over-allotments, if any, at the offering price
to the public of the Units subject to this Prospectus less the Underwriting
Discount. To the extent that the Underwriters exercise such option, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional Units that the number of Units to be purchased by
it shown in the above table represents as a percentage of the 1,000,000 Units
offered hereby. If purchased, such additional Units will be sold by the
Underwriters on the same terms as those on which the 1,000,000 Units are being
sold.
Messrs. Torrey, Remine and Cooper have entered into "lock-up" agreements
with the Representative pursuant to which they have agreed that, for a period of
two years after the date of this prospectus, with certain limited exceptions,
they will not offer, sell, make any short sale of, loan, encumber, grant any
option for the purchase of, or otherwise dispose of any securities of the
Company now owned or hereafter acquired without the prior written consent of the
Representative. The Company has also agreed, for a period of two years after the
date of this prospectus, not to issue, sell, contract to sell, transfer, assign,
pledge, encumber, hypothecate, or grant any option to purchase any securities of
the Company other than upon the exercise of the Series A Warrants or outstanding
options described herein, without the prior written consent of the
Representative.
The Underwriters have the right to offer the Units offered hereby only
through licensed securities dealers in the United States who are members of the
National Association of Securities Dealers, Inc. (the "NASD") and may allow such
dealers such portion of its ten (10%) percent commission as each Underwriter may
determine.
The Underwriters will not confirm sales to any discretionary accounts.
The Company has agreed to pay the Representative a non-accountable
expense allowance of 3% of the gross amount of the Units sold ($_______ upon the
sale of the Units offered) at the closing of the Offering. The Underwriters'
expenses in excess thereof will be paid by the Representative. To the extent
that the expenses of the underwriting are less than that amount, such excess
will be deemed to be additional compensation to the Underwriters.
The Company has agreed to enter into a consulting agreement with the
Representative at a rate of $________ per month for a period of 24 months.
For a period of 24 months following the completion of this Offering,
the Company will allow an observer designated by the Representative and
acceptable to the Company to attend all meetings of the Board of Directors. Such
observer will have no voting rights, will be reimbursed for all out-of-pocket
expenses incurred in attending meetings, and will be indemnified by the Company
against all claims, liabilities, damages, costs and expenses arising out of his
or her participation at Board of Directors meetings.
The Underwriting Agreement provides for indemnification between the
Company and the Underwriters against certain civil liabilities, including
liabilities under the Securities Act. In addition, the Underwriters' Warrants
provide for indemnification among the Company and the holders of the
Underwriters' Warrants and underlying shares against certain civil liabilities,
including liabilities under the Securities Act and the Exchange Act.
47
<PAGE>
Underwriters' Warrants
Upon the closing of this Offering, the Company has agreed to sell to
the Underwriters, for nominal consideration, warrants to purchase 10% of the
number of Units offered hereunder (the "Underwriters' Warrants.") The
Underwriters' Warrants are exercisable at 120% of the public offering price Unit
for a four-year period commencing one year from the effective date of this
Offering. The Underwriters' Warrants may not be sold, transferred, assigned or
hypothecated for a period of two years from the date of this offering except to
the officers of the Underwriters, their successors and dealers participating in
the Offering and/or the partners or officers of such dealers. The Underwriters'
Warrants will contain anti-dilution provisions providing for appropriate
adjustment of the number of shares subject to the Underwriters' Warrants under
certain circumstances. The holders of the Underwriters' Warrants will have no
voting, dividend or other rights as shareholders of the Company with respect to
shares underlying the Underwriters' Warrants until the Underwriters' Warrants
have been exercised.
The Underwriters' Warrants and the securities issuable thereunder have been
registered under the Securities Act in connection with this Offering; however,
such securities may not be offered for sale except in compliance with the
applicable provisions of the Securities Act. The Company has agreed that, if, at
any time after the first anniversary of the date of this Prospectus but prior to
the fifth anniversary of the date of this Prospectus, it shall cause a
Post-Effective Amendment or a new Registration Statement to be filed with the
Securities and Exchange Commission, the Underwriters shall have the right to
include in such Post-Effective Amendment or new Registration Statement, the
Underwriters' Warrants and/or the securities issuable upon their exercise at no
expense to the Underwriters.
For the exercise period during which the Underwriters' Warrants are
exercisable, the holder or holders will have the opportunity to profit from a
rise in the market value of the Common Stock, with a resulting dilution in the
interest of the other stockholders of the Company. The holder or holders of the
Underwriters' Warrants can be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital from an
offering of its unissued Common Stock on terms more favorable to the Company
than those provided for in the Underwriters' Warrants. Such factors may
adversely affect the terms on which the Company can obtain additional financing.
To the extent that the Underwriters realize any gain from the resale of the
Underwriters' Warrants or the securities issuable thereunder, such gain may be
deemed additional underwriting compensation under the Securities Act.
Determination of Offering Price
Prior to this Offering, there has been no public market for the
securities offered and there can be no assurance that a regular trading market
will develop upon completion of the Offering. Consequently, purchasers of the
Units may not find a ready market for the sale of their securities. The initial
public offering price for the Units will be determined by negotiation between
the Company and the Underwriters. The factors to be considered in determining
the initial public offering price include the Company's revenue growth since its
organization, the industry in which it operates, the Company's business
potential and earnings prospects and the general condition of the securities
markets at the time of the Offering. The initial public offering price does not
necessarily bear any relationship to the Company's assets, book value, net worth
or other recognized objective value.
48
<PAGE>
LEGAL MATTERS
Certain matters with respect to the validity of the securities offered
hereby will be passed upon for the Company by Patrick R, Sughroue, P.C., 3777
Sparks Drive, S.E., Suite 130, Grand Rapids, Michigan, 49546. Certain legal
matters will be passed upon for the Underwriters by Winstead Sechrest & Minick
P.C., 5400 Renaissance Tower, 1201 Elm Street, Dallas, Texas 75270.
EXPERTS
The financial statements of the Company at December 31, 1995 and
December 31, 1994, and for the respective periods then ended, appearing in this
Prospectus, have been audited by Ronald D. Cameron, C.P.A., independent auditor,
as set forth in his report thereon appearing elsewhere herein, and are included
in reliance upon such report given on the authority of such person as an expert
in auditing and accounting.
The reserve report of Kim A. Walbe, certified geologist, of the proved
reserves and future net revenues attributable to the Company's properties has
been relied upon as a basis for information contained herein in reliance upon
the authority of such person as an expert in geology and oil and gas reservoirs.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement on Form SB-2 under the Securities Act
with respect to the Units. This Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits. For
further information with respect to the Company and the Units, reference is made
to the Registration Statement and the exhibits filed as a part thereof.
Statements made in this Prospectus as to the contents of any contract or any
other document referred to are not necessarily complete, and, in each instance,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference to such exhibit. The Registration Statement,
including exhibits thereto, may be inspected without charge at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, NW, Washington, DC 20549 and at the regional offices of the
Commission at 7 World Trade Center, 13th Floor, New York, New York 10048 and at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the
Registration Statement and the exhibits thereto may be obtained from the
Commission at such offices upon payment of prescribed rates.
The Company is not presently a reporting company. The Company intends
to register the securities offered hereby under the Securities Exchange Act of
1934, as amended, simultaneously with the effectiveness of the Registration
Statement of which this Prospectus is part. As a result, the Company will become
a reporting Company.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other periodic reports as the
Company may determine to be appropriate or as may be required by law.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING ACTIVITIES, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME.
49
<PAGE>
GLOSSARY
Affiliate. "Affiliate" shall mean with respect to another person, (i) any person
directly or indirectly owning, controlling or holding with power to vote 10% or
more of the outstanding voting securities of or equity interests in such other
person, (ii) any person 10% or more of whose outstanding voting securities or
equity interest are directly or indirectly controlling, controlled or held with
power to vote by such other person, (iii) any person directly or indirectly
controlling, controlled by or under common control with such other person, (iv)
any officer or director of such other person, and (v) any company for which any
such officer or director acts in any such capacity.
Affiliated Drilling Partnership(s). The limited partnership(s) formerly or in
the future sponsored by the Company or its affiliates and marketed by EFC for
the purpose of raising drilling capital for the Company.
Board of Directors. The board of directors of the Company.
Bbl. "Bbl" means barrel. "MBbl" means thousand barrels. "MMBbl" means million
barrels.
B/O. "B/O" means barrels of oil.
BOE. "BOE" means barrel of oil equivalent, which are determined using the ratio
of one barrel of crude oil, condensate or natural gas liquids to 6 Mcf of
natural gas so that 6 Mcf of natural gas is referred to as one barrel of oil
equivalent or "BOE". "MBOE" means thousands of barrels of oil equivalent.
"MMBOE" means millions of barrels of oil equivalent.
B/C. "B/C" means barrels of condensate.
BOPD. "BOPD" means barrels of oil per day.
Carried Interest. A fractional interest in an oil and gas lease or property, the
holder of which has no personal obligation for drilling costs, which are paid by
the owners of the remaining fraction, i.e. the working interest owners, who
reimburse themselves therefor out of production, if any.
Class A Preferred Stock. The convertible Class A Preferred Stock, no par value,
accruing a 5% per annum cumulative, noncompounded dividend, which shares are
redeemable or automatically convertible to Common Stock upon completion of this
Offering.
Class B Preferred Stock. The convertible Class B Preferred Stock, no par value,
which shares are redeemable or automatically convertible to Common Stock upon
completion of this Offering.
Commercial Well. A well that will make a profit over the cost of drilling,
completing and operating the well.
Common Share(s). The shares of common stock of the Company.
Completion. The installation of permanent equipment for the production of oil
and gas. Completion costs are the costs incurred for the equipment and labor
required therefor.
Developmental Well. "Developmental Well" shall mean a well drilled to a known
producing oil or natural gas horizon in a previously discovered field or in an
area where known producing horizons reasonably believed by the operator, based
on experience and known geological, production and other data, to be
geologically continuous.
50
<PAGE>
EFC. "EFC" shall mean Equity Financial Corporation of Knoxville, Tennessee.
Exploratory Well. A well drilled to find and produce oil or gas in an unproved
area, to find a new reservoir in a field previously found to be productive of
oil and gas in another reservoir, or to extend a known reservoir.
Gas Gathering System. The natural gas gathering and pipeline system owned by the
Pipeline Operating Partnership and managed by the Company servicing wells in the
principal area of the Company's operations in southeastern Ohio.
Gas Servicing Agreement. The agreement between the Pipeline Operating
Partnership and the Company, for its own account and on behalf of Affiliated
Drilling Partnerships, for the gathering, transportation and marketing of
natural gas through the Gas Gathering System.
Gas Well. A gas well is a well drilled for producing only gas as its primary
product and not producing oil or condensate .
Gross Acres. The total acres in which an entity has an interest, either directly
or through an affiliate.
JDOA. "JDOA" shall mean a Joint Drilling and Operating Agreement between the
Company and an Affiliated Drilling Partnership.
MCF and MCFPD. "MCF means one thousand cubic feet of gas, and "MCFPD" means one
thousand cubic feet of gas per day.
Net Acres. Calculated by multiplying the number of gross acres in which that
party has an interest by the fractional interest of the party in each such acre.
Net Revenue Interest. The share of revenues from oil and/or gas production net
of all other interest burdening the gross revenues such as landowner's royalty
and overriding royalties, etc.
Non-Economic Property. A well or lease that may or may not be producing. Such
production, if any, is not sufficient enough to exceed the operational costs of
such property, i.e., operating at a loss.
Pipeline Income Partnership. "Pipeline Operating Partnership" shall mean Energy
Search Natural Gas Pipeline Income, L.P., a Tennessee Limited Partnership, which
is the sole limited partner of the Pipeline Operating Partnership.
Pipeline Operating Partnership. "Pipeline Operating Partnership" shall mean ESI
Pipeline Operating, L.P., a Tennessee Limited Partnership, the limited partner
of the Pipeline Operating Partnership, of which the Company is the managing
general partner.
51
<PAGE>
Preferred Share(s). The Class A Preferred Shares and/or the Class B Preferred
Shares of the Company currently outstanding.
Plugging Liability. A liability or exposure to the costs and hazards of plugging
and abandoning oil/gas well.
Plugging of a Well. The sealing off of the fluids in the strata penetrated by a
well, so that the fluid from one stratum will not escape into another or to the
surface. This is usually accomplished by introducing cement and mud into the
hole. Regulations in many states require the plugging of abandoned wells.
Proved Reserves. Those quantities of crude oil, natural gas, and natural gas
liquids which, upon analysis of geologic and engineering data, appear with
reasonable certainty to be recoverable in the future from known oil and gas
reservoirs under existing economic and operating conditions. Proved reserves are
limited to those quantities of oil and gas which can be expected, with little
doubt, to be recoverable commercially at current prices and costs, under
existing regulatory practices and with existing conventional equipment and
operating methods. Depending upon their status of development, such Proved
Reserves shall be subdivided into the following classifications:
(a) Proved Developed Reserves. These are Proved reserves which can be
expected to be recovered through existing wells with existing equipment and
operating methods. This classification shall include:
(1) Proved Developed Producing Reserves. These are proved
developed reserves which are expected to be produced from
existing completion interval(s) now open for production in
existing wells; and
(2) Proved Developed Non-Producing Reserves. These are proved
developed reserves which exist behind the casing existing wells,
(but not below the depths of the present bottom of such wells)
which are expected to be produced through these wells in the
predictable future, where the cost of making such oil and gas
available for production should be relatively small compared to
the cost of a new well.
Additional oil and gas expected to be obtained through the application
of fluid injection or other improved recovery techniques of supplementing the
natural forces and mechanisms of primary recovery shall 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.
(b) Proved Undeveloped Reserves. These are Proved Reserves which are
expected to be recovered from new wells on undrilled acreage, or from
existing wells at depths below the present bottom of the wells.
52
<PAGE>
Reserves. Crude oil and natural gas, condensate and natural gas liquids, are net
of leasehold burdens, stated on a net revenue interest basis, and found to be
commercially recoverable.
Royalty Interest or Overriding Royalty Interest. An interest in an oil and gas
property entitling the owner to a share of oil and gas production (or the
proceeds of the sale thereof) free of the costs of production.
SEC Method. The SEC method is a method of determining the present value of
proved reserves. Under the SEC method, the future net revenues from proved
reserves are estimated assuming that oil and gas prices and production costs
remain constant. The resulting stream of revenues is then discounted at the rate
of 10% per year to obtain a present value.
Undeveloped Acreage. Is oil and gas acreage (including, in applicable instances,
rights in one or more horizons which may be penetrated by existing well bores
but which have not been tested) to which proved reserves have not been assigned
by independent petroleum engineers.
Working Interest. The operating interest under an oil and gas lease which gives
the owner the right to drill, produce and conduct operating activities on the
property and a share of production, subject to all royalties, overriding
royalties and other burdens and to all costs of exploration, development and
operations and all risks in connection therewith.
- --------
53
<PAGE>
ENERGY SEARCH, INCORPORATED
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
as of and for the periods ended
December 31, 1995 and 1994
Independent Auditor's Report ............................................. F-2
Balance Sheets ........................................................... F-3
Statements of Operations ................................................. F-5
Statements of Shareholders' Deficit ...................................... F-6
Statements of Cash Flows ................................................. F-7
Notes to Financial Statements ............................................ F-8
Supplementary Information (Unaudited)
as of December 31, 1995
Independent Auditor's Report on Supplementary Information ........... F-16
Costs Incurred in Oil and Gas Producing Activities .................. F-17
Estimates of Natural Gas and Oil Reserves ........................... F-17
FINANCIAL STATEMENTS (UNAUDITED)
as of and for the periods ended
June 30, 1996 and 1995
Balance Sheets (Unaudited) ...................................... F-20
Statements of Operations(Unaudited) ............................. F-22
Statements of Cash Flows (Unaudited) ............................ F-24
Notes to Unaudited Financial Statements ......................... F-26
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders of
Energy Search, Incorporated:
I have audited the accompanying balance sheets of Energy Search, Incorporated
(the Company) as of December 31, 1995 and 1994 and the related statements of
operations, shareholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. My responsibility is to express an opinion on these financial
statements based on my audits.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audits 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.
I believe that my audits provide a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Energy Search, Incorporated as of
December 31, 1995 and 1994 and the results of its operations and its cash flows
for the years then ended in conformity with generally accepted accounting
principles.
Ronald D. Cameron
Knoxville, Tennessee
January 30, 1996
F-2
<PAGE>
BALANCE SHEETS
ENERGY SEARCH, INCORPORATED
December 31
1995 1994
---- ----
ASSETS
CURRENT ASSETS
Cash ........................................... $ 105,978 $ 136,939
Accounts receivable ............................ 78,439 63,989
Due from related partnerships, net of $102,468
allowance for uncollectible accounts in 1995
and $60,178 in 1994 .......................... 1,114,828 863,930
Inventory ...................................... 62,165 37,989
----------- -----------
TOTAL CURRENT ASSETS ....................... 1,361,410 1,102,847
OIL AND GAS PROPERTIES, USING
SUCCESSFUL EFFORTS ACCOUNTING
Proved properties .............................. 487,313 292,195
Wells and related equipment .................... 4,920,839 4,383,546
Less accumulated depreciation, depletion and
amortization ................................. (2,447,439) (1,957,119)
----------- -----------
NET OIL AND GAS PROPERTIES ................... 2,960,713 2,718,622
OTHER ASSETS
Other property and equipment less accumulated
depreciation of $337,333 in 1995 and
$394,358 in 1994 ............................. 76,267 212,592
Investments in related partnerships ............ 1,223,928 993,758
Debenture issue costs, less accumulated
amortization of $15,078 in 1995 ................ 129,256 72,573
Other assets ................................... 60,232 81,645
----------- -----------
1,489,683 1,360,568
----------- -----------
$ 5,811,806 $ 5,182,037
=========== ===========
F-3
<PAGE>
December 31
1995 1994
---- ----
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Current portion of long-term debt ............... $ 783,254 $ 289,405
Accounts payable and accrued expenses ........... 692,803 594,170
Drilling advances ............................... 2,415,120 3,265,996
----------- -----------
TOTAL CURRENT LIABILITIES ..................... 3,891,177 4,149,571
LONG-TERM DEBT, LESS CURRENT PORTION .............. 2,285,592 1,665,771
COMMITMENTS AND CONTINGENCIES -- NOTE G
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, par value $1; 2,000 shares
authorized; 1,200 shares issued and outstanding 1,200 1,200
Retained earnings (deficit) ..................... (366,163) (634,505)
----------- -----------
(364,963) (633,305)
----------- -----------
$ 5,811,806 $ 5,182,037
=========== ===========
F-4
<PAGE>
STATEMENTS OF OPERATIONS
ENERGY SEARCH, INCORPORATED
December 31
1995 1994
---- ----
NET REVENUE
Turnkey revenue, net of drilling expenses $ 2,025,078 $ 807,405
Oil and gas sales ....................... 173,162 213,744
Management fees ......................... 175,350 203,290
Other revenue ........................... 118,473 233,725
----------- -----------
TOTAL NET REVENUE ................... 2,492,063 1,458,164
OPERATING EXPENSES
Production costs ........................ 432,714 702,254
Exploration costs ....................... 31,721 145,785
Depreciation, depletion and amortization 574,239 706,346
Interest ................................ 234,820 88,373
General and administrative .............. 934,988 975,040
----------- -----------
TOTAL OPERATING EXPENSES ............ 2,208,482 2,617,798
----------- -----------
NET INCOME (LOSS) FROM OPERATIONS ... 283,581 (1,159,634)
OTHER INCOME (EXPENSES)
Gain (loss) on the sale of assets ....... 73,540 (5,244)
Equity in losses of related partnerships (88,779) (37,692)
----------- -----------
(15,239) (42,936)
----------- -----------
NET INCOME (LOSS) ........ $ 268,342 $(1,202,570)
=========== ===========
EARNINGS (LOSS) PER SHARE $ 224 $ (1,002)
=========== ===========
F-5
<PAGE>
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
ENERGY SEARCH, INCORPORATED
Years Ended December 31, 1995 and 1994
Retained
Common Earnings
Stock (Deficit) Total
----- --------- -----
Balance at January 1, 1994 .... $ 1,200 $ 568,065 $ 569,265
Net loss for the year ended
December 31, 1994 .......... -0- (1,202,570) (1,202,570)
----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994 1,200 (634,505) (633,305)
Net income for the year ended
December 31, 1995 .......... -0- 268,342 268,342
----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995 $ 1,200 $ (366,163) $ (364,963)
=========== =========== ===========
F-6
<PAGE>
STATEMENTS OF CASH FLOWS
ENERGY SEARCH, INCORPORATED
<TABLE>
December 31
1995 1994
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 268,342 $(1,202,570)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation, depletion and amortization ......................... 574,239 706,346
(Gain) loss on sale of assets .................................... (73,540) 5,244
Equity in losses of related partnerships ......................... 88,779 37,692
Increase in accounts receivable and due from partnerships(265,348) (488,666)
(Increase) decrease in inventory ................................. (24,176) 7,650
Decrease in other assets ......................................... 21,413 27,712
Increase in accounts payable and accrued expenses ................ 98,633 71,779
Increase (decrease) in drilling advances ......................... (850,876) 24,499
----------- -----------
(430,876) 392,256
----------- -----------
NET CASH USED IN OPERATING
ACTIVITIES ......................................... (162,534) (810,314)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in proved properties .................................... (195,118) (124,768)
Proceeds from sale of other property and equipment ................. 152,000 -0-
Capital expenditures, net .......................................... (548,269) (656,549)
Distributions from related partnerships ............................ 71,077 137,132
Contributions to related partnerships .............................. (390,026) (358,908)
Payments received on notes receivable .............................. -0- 17,500
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ................................ (910,336) (985,593)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt ........................... 1,427,000 1,587,282
Payments on long-term debt ......................................... (313,330) (405,842)
Payments of debenture issue costs .................................. (71,761) (72,573)
----------- -----------
NET CASH PROVIDED BY FINANCING
ACTIVITIES .......................................... 1,041,909 1,108,867
----------- -----------
NET DECREASE IN CASH ....... (30,961) (687,040)
CASH AT BEGINNING OF YEAR ....... 136,939 823,979
----------- -----------
CASH AT END OF YEAR ....... $ 105,978 $ 136,939
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest during the year ............................. $ 229,264 $ 76,454
=========== ===========
</TABLE>
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
ENERGY SEARCH, INCORPORATED
December 31, 1995 and 1994
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Energy Search, Inc. (ESI) is engaged in the exploration,
development, production and marketing of oil and natural gas in the Appalachian
Basin area. ESI's revenue is primarily derived from the drilling of oil and gas
wells on a contract basis, the sale of natural gas and crude oil from wells in
which it has working interests, the transmission of natural gas through a
pipeline and gathering system owned by an affiliated partnership in which ESI
has an ownership interest, the management and operation of oil and gas wells,
and the formation and management of oil and gas partnerships. All ESI oil and
gas wells and the majority of its market for oil and gas produced are located
primarily in Washington County, Ohio, and the counties contiguous thereto.
Because of the nature of ESI's business, a significant number of transactions
are with related parties. For affiliated oil and gas partnerships in which ESI
has an interest, its proportionate share of revenue and expenses is recorded in
the income statement as oil and gas sales and lease operating expenses,
respectively.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Inventory: Materials and supplies inventory, consisting primarily of tubular
goods and field materials, is stated at the lower of average cost or market.
Oil and Gas Properties: ESI uses the successful efforts method of accounting for
oil and gas producing activities, as set forth in the Statement of Financial
Accounting Standards No. 19, as amended. ESI does not capitalize intangible
drilling costs since under the terms of the drilling contracts, these costs are
the responsibility of the contracting parties. ESI does capitalize all tangible
drilling costs when incurred, as they retain ownership of the well equipment
under the drilling contracts. ESI's policy is to expense the cost of any
non-salvageable tangible equipment on exploratory wells that do not result in
proven reserves. Oil and gas properties are periodically assessed for impairment
of value, and a loss is recognized at time of impairment.
Proved properties represent purchased working interests in producing oil and gas
wells, as well as oil and gas leases. Proved properties and wells and related
equipment are depreciated and depleted by the units-of-production method using
estimates of proven reserves. Because of inherent uncertainties in estimating
proven reserves, estimates of depletion and depreciation could change
significantly.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
ESI has acquired certain oil and gas leases providing rights for exploration,
development, extraction and sale of oil and gas from the land covered by such
leases. Upon contribution of the oil and gas lease to the partnership or upon
abandonment of lease, the cost of the lease is charged to expense.
Other Property and Equipment: Other property and equipment is recorded at cost.
Major additions and improvements are capitalized while repairs, replacements and
maintenance which do not improve or extend the life of the respective assets are
expensed. Depreciation is computed under the double-declining balance method
over the estimated useful lives.
Investments in Related Partnerships: Investments in related partnerships are
accounted for by the equity method. ESI, as the managing general partner of the
oil and gas partnerships, makes initial capital contributions to the
partnerships in accordance with provisions in the respective placement
memorandum governing the activities of the particular partnership. Income or
losses are allocated to the investments according to ESI's ownership interest in
the partnerships and distributions or withdrawals are deducted from the
investments.
Drilling Revenue: ESI enters into contracts with the affiliated oil and gas
partnerships to drill oil and gas wells under turnkey agreements. Under the
terms of the contracts, ESI provides all tangible well equipment and receives
working interests in the completed wells. The partnerships pay all intangible
drilling costs and receive working interests in the wells. The partnerships
advance funds to ESI in order to finance the drilling activity. ESI initially
defers the full amount of the drilling advances and recognizes drilling revenue
as the wells are completed. Drilling expenses are netted against turnkey
drilling revenue and include $1,675,499 and $1,950,446 in 1995 and 1994,
respectively.
Management Fees and Other Revenue: In connection with the sponsorship of natural
gas partnerships in 1995 and 1994, ESI received reimbursement for the
organization and offering expenses in an amount equal to 1% of the investors'
subscriptions. In its role as operator of the oil and gas wells owned by various
related partnerships, ESI charges a wellhead fee of between $100 and $200 per
month for each producing well. In its role as general partner of the partnership
which owns the gas pipeline and gathering system, ESI charges the partnership a
management fee of $5,000 per month.
Income Taxes: ESI is a subchapter S corporation by election under the provisions
of the Internal Revenue Code. As such, all income, losses and credits of ESI are
reported for inclusion in the individual Federal income tax returns of the
shareholders. As a result, there is no provision for federal income taxes in the
accompanying financial statements. ESI is subject to state franchise and excise
taxes.
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Reclassifications: Certain reclassifications have been made to 1994 amounts to
conform to 1995 presentation.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
ENERGY SEARCH, INCORPORATED
December 31, 1995 and 1994
NOTE B--AFFILIATED OIL AND GAS PARTNERSHIPS
Since 1989, ESI has sponsored the formation of partnerships for the purpose of
conducting oil and gas exploration, development, and production activities on
certain oil and gas properties. Such partnerships include the Natural Gas/Tax
Credit 1989 L.P., the Natural Gas/Tax Credit 1990 L.P., the Natural Gas/Tax
Credit 1991 L.P., the Natural Gas/Tax Credit 1992 L.P., the Natural Gas/Tax
Credit 1992A L.P., the Natural Gas 1993 L.P. and the Energy Search Natural Gas
1993-A L.P., the Energy Search Natural Gas 1994 L.P. and Energy Search Natural
Gas 1994-A L.P., and the Energy Search Natural Gas 1995 L.P. and Energy Search
Natural Gas 1995-A L.P. ESI serves as managing general partner of these
partnerships and, as such, has full and exclusive discretion in the management
and control of the partnerships. The turnkey drilling and operating agreements
that ESI enters into with the partnerships provide that the partnerships pay for
the intangible drilling costs of the wells at an agreed-upon price per well. ESI
provides all tangible equipment required in the drilling, equipping, completing
and operation of the properties. Revenues from the partnership oil and gas
properties are allocated based upon the working interest ownership percentage of
the properties. The partnerships' working interests in the properties range from
63% to 70% at both December 31, 1995 and 1994. ESI's working interests in the
properties range from 8% to 16% and 8% to 13% at December 31, 1995 and 1994,
respectively.
In 1993, ESI sponsored the formation of the ESI Pipeline Operating L.P. (the
Operating Partnership), which purchased a portion of ESI's gas pipeline and
gathering system. ESI contributed its remaining interest in the pipeline system
to the new partnership in exchange for an ownership interest in the Operating
Partnership.
Also, in 1993, ESI sponsored the formation of the ESI Natural Gas Pipeline
Income L.P. (the Pipeline Partnership). The Pipeline Partnership made a capital
contribution to the Operating Partnership to finance the initial purchase of
ESI's pipeline system. In turn, the Pipeline Partnership received an ownership
interest in the Operating Partnership. ESI serves as managing general partner
for both of these partnerships and, as such, has full and exclusive discretion
in the management of and control of the partnerships. The Operating Partnership
earns revenues by charging gas wells a transportation fee based upon the volume
of gas moved through the pipeline system. Substantially all these gas wells are
operated by ESI. The Operating Partnership nets these transportation revenues
against the pipeline system operating expenses and remits net transportation
revenues to the partners based upon their respective ownership percentage. As of
December 31, 1995 and 1994, the Pipeline Partnership owned approximately 62% and
64% of the Operating Partnership with ESI owning the remaining 38% and 36%
respectively.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
ENERGY SEARCH, INCORPORATED
December 31, 1995 and 1994
NOTE B--AFFILIATED OIL AND GAS PARTNERSHIPS - Continued
In 1993, a partnership comprised of the shareholders of ESI entered into a
turnkey drilling agreement with ESI that called for ESI to drill wells at a
contract price of ESI's cost plus ten percent. ESI received drilling advances of
$180,000 from the partnership. In 1995 and 1994, ESI recognized drilling
revenues of $11,505 and $79,323, respectively, under this contract. Unearned
drilling revenue at December 31, 1995 and 1994 includes $27,145 and $38,650
which will be recognized as revenue as drilling costs are incurred and the wells
are completed in subsequent years.
Total assets and equity of the related partnerships in the aggregate were
approximately $4,430,000 and $4,412,000, respectively, at December 31, 1995 and
$4,689,000 and $4,675,000, respectively, at December 31, 1994.
NOTE C--REIMBURSEMENT OF PARTNERSHIP EXPENSES
During 1995 and 1994, ESI reimbursed the various partnerships or paid on their
behalf $188,072 and $418,671, respectively, which represents a portion of the
lease operating expenses allocated to the partnerships and is included in
production costs in the accompanying statements of operations. ESI is under no
legal or contractual obligation to reimburse partnership lease operating
expenses, and there is no expectation that this reimbursement will continue in
future years.
NOTE D--LONG-TERM DEBT
Long-term debt consisted of the following at December 31:
<TABLE>
1995 1994
---- ----
<S> <C> <C>
Variable Rate Subordinated Debentures; unsecured ............................... $2,169,500 $1,282,500
Note payable to bank, secured by equipment and guaranties of shareholders,
payable in monthly installments of $842 plus interest at prime plus
1.22% which was 9.72% at December 31, 1994 ................................... -0- 131,159
Note payable to bank, secured by vehicles and guaranties of shareholders,
payable in monthly installments of $5,250, including interest at prime plus
0.50% which was 9% at December
31, 1995 and 1994 through May 10, 1998 ....................................... 137,296 184,847
</TABLE>
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
ENERGY SEARCH, INCORPORATED
December 31, 1995 and 1994
NOTE D--LONG-TERM DEBT - Continued
<TABLE>
1995 1994
---- ----
<S> <C> <C>
Line of credit at bank, secured by lien on oil and
gas property, with interest at prime plus 2.0%,
which was 10.5% at December 31, 1995 ........... 400,000 -0-
Note payable to related entity, unsecured, payable
in monthly installments of $5,005, including
interest at 12%, through October 1, 1996 ....... 42,873 94,379
Note payable to related entity, unsecured, payable
in monthly installments of $3,612, including
interest at 10%, through October 1, 1997 ....... 69,321 103,835
Note payable to related entity, unsecured, payable
in monthly installments of $4,449, including
interest at 12%, through April 1, 1996 ......... 13,083 61,683
Notes payable to shareholders, due on demand ..... 236,773 96,773
---------- ----------
3,068,846 1,955,176
Less current portion ............................. 783,254 289,405
---------- ----------
$2,285,592 $1,665,771
========== ==========
</TABLE>
During 1994, ESI issued $1,282,500 in variable rate subordinated debentures
under terms of a $2,000,000 private placement memorandum. In 1995, a supplement
was made to the private placement memorandum to increase the maximum amount of
debentures to $2,500,000 and an additional $887,000 in debentures were issued.
All the debentures bear interest at a stated interest rate of 9% per annum
through December 31, 1997 and 10% per annum from January 1, 1998 through
maturity. The debentures also provide for the payment of additional interest at
maturity as described in the private placement memorandum. The debentures shall
mature at the earlier of December 31, 2001, upon sale or disposition of all or
substantially all qualifying oil and gas assets, or upon merger or combination
of ESI with another entity such that ESI is not the surviving entity.
F-11
<PAGE>
NOTE D--LONG-TERM DEBT - Continued
The three notes payable to related entities represent promissory notes payable
to affiliated partnerships. The shareholders of ESI serve as the general
partners of these partnerships and have full and exclusive discretion in the
management and control of the partnerships. The sole and limited purpose of the
affiliated partnerships is the provision of loans to ESI.
Principal maturities of long-term debt at December 31, 1995 are as follows:
Year Ending December 31,
1996 $ 783,254
1997 88,505
1998 27,587
1999 -0-
2000 -0-
Thereafter 2,169,500
---------
$3,068,846
The estimate of the fair value of the long-term debt at December 31, 1995 is
$3,267,125 based on the current rates available to ESI for debt of the same
remaining maturities and risk. This estimate does not give effect to any
additional interest related to the variable rate subordinated debentures.
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
ENERGY SEARCH, INCORPORATED
December 31, 1995 and 1994
NOTE E--DRILLING ADVANCES
During 1995 and 1994, ESI received drilling advances from two affiliated oil and
gas partnerships in the amount of $2,935,000 and $2,915,400, respectively.
Drilling advances from affiliated oil and gas partnerships of $2,387,975 and
$3,227,346 as of December 31, 1995 and 1994, respectively, relate to advances in
1995 and 1994 and preceding years and will be earned as drilling costs are
incurred and the wells are completed in subsequent years.
NOTE F--PENSION PLAN
ESI sponsors a Simplified Employee Pension Plan (SEP) for qualifying employees.
Employee contributions to individual retirement plans may not exceed the greater
of 15% of employee earnings or $22,500 per year per employee. ESI contributed
$12,235 and $10,195 to the SEP during 1995 and 1994, respectively.
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
ENERGY SEARCH, INCORPORATED
December 31, 1995 and 1994
NOTE G--COMMITMENTS AND CONTINGENCIES
The nature of the independent oil and gas industry involves a dependence on
drilling capital from outside investors and involves a concentration of oil and
gas sales to a few customers.
As general partner in various affiliated oil and gas partnerships, ESI is
subject to contingencies that may arise in the normal course of business of
these partnerships. Management is of the opinion that liabilities, if any,
related to such contingencies that may arise would not be material to the
financial statements.
ESI entered into exploration, drilling and development agreements with an oil
and gas company in Ohio. Under the agreement, ESI is obligated to pay its
proportionate shares of any charges for seismic lines run on the lease acreage.
If ESI elects to participate in the drilling of wells, ESI is obligated to pay a
percentage of total costs to the casing point and a percentage of all costs
relative to the completion of the wells, if so elected, in accordance with ESI's
working interest. As of December 31, 1995, ESI's share of the estimated costs to
the casing point for the exploratory well is approximately $24,000.
ESI is contingently liable with respect to a $50,000 letter of credit issued as
a performance bonding commitment related to well activities and operations.
Subsequent to yearend, ESI began the process of issuing preferred stock to
selected investors through private placement. Proceeds of the sale of the
preferred stock is to be used for retirement of the variable rate subordinated
debentures and any remaining proceeds will be used for operational and
administrative working capital needs of the Company. The terms of the offering
have not been finalized.
NOTE H--OTHER RELATED PARTY TRANSACTIONS
As the managing general partner of the Energy Search Natural Gas 1995 and 1995-A
L.P.'s, ESI paid $250,800 in 1995 to the placement agent, Equity Financial
Corporation (EFC), a related party owned by two shareholders, as management fees
and sales commission for managing the offering of the programs to investors.
Similarly, ESI paid $229,500 in 1994 to EFC related to the Energy Search Natural
Gas 1994 and 1994-A L.P.'s. In addition, four percent of the proceeds from
issuance of the variable rate subordinated debentures were paid to EFC as sales
commissions which totaled approximately $41,000 and $57,000 in 1995 and 1994,
respectively.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS - Continued
ENERGY SEARCH, INCORPORATED
December 31, 1995 and 1994
NOTE H--OTHER RELATED PARTY TRANSACTIONS - Continued
ESI also paid $36,000 and $57,000 in rent and management fees during 1995 and
1994, respectively, to EFC under a monthly shared service arrangement.
As of December 31, 1995, amounts due from EFC for prepaid commissions related to
sales of the Energy Search Natural Gas 1995 L.P. and 1995-A L.P. totaled
$27,200.
NOTE I--CASH CONCENTRATIONS
Financial instruments that potentially subject ESI to concentrations of credit
risk consist principally of cash. ESI has cash deposits with a financial
institution. The balances are insured by the Federal Deposit Insurance
Corporation up to $100,000. At December 31, 1995, ESI's uninsured cash balances
as reflected by the financial institution were $144,444.
F-15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
ON SUPPLEMENTARY INFORMATION
To the Shareholders of
Energy Search, Incorporated:
The Costs incurred in Oil and Gas Producing Activities and Estimates of Natural
Gas and Oil Reserves on pages 16-18 is not a required part of the basic
financial statements of Energy Search, Incorporated, but is supplementary
information required by the Financial Accounting Standards Board. I have applied
certain limited procedures, which consisted principally of inquiries of
management regarding the methods of measurement and presentation of the
supplementary information. However, I did not audit the information and express
no opinion on it.
Ronald D. Cameron
Knoxville, Tennessee
January 30, 1996
F-16
<PAGE>
SUPPLEMENTARY INFORMATION (UNAUDITED)
ENERGY SEARCH, INCORPORATED
December 31, 1995
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
Year Ended December 31
1995 1994
---- ----
Property acquisition costs - proved $195,118 $124,768
Exploration costs ................. 31,721 145,785
Development costs ................. 695,758 885,711
ESTIMATES OF NATURAL GAS AND OIL RESERVES
The following estimates of proved developed natural gas and oil reserve
quantities and related standardized measure of discounted net cash flow are
estimates prepared by ESI's engineer as of December 31, 1995 and 1994. They do
not purport to reflect realizable values or fair market values of ESI's
reserves. ESI emphasizes that reserve estimates are inherently imprecise and
that estimates of new discoveries are more imprecise than those of producing oil
and gas properties. Accordingly, these estimates are expected to change as
future information becomes available. All of ESI's reserves are located in
southeastern Ohio.
Proved reserves are estimated reserves of crude oil (including condensate and
natural gas liquids) and natural gas that geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions. Proved
developed reserves are those expected to be recovered through existing wells,
equipment and operating methods.
The standardized measure of discounted future net cash flows is computed by
applying year-end prices of oil and gas to the estimated future production of
proved oil and gas reserves, less estimated future expenditures (based on
year-end costs) to be incurred in developing and producing the proved reserves,
less estimated future severance tax expenses and assuming continuation of
existing economic conditions. The estimated future net cash flows are then
discounted using a rate of ten percent a year to reflect the estimated timing of
the future cash flows.
F-17
<PAGE>
SUPPLEMENTARY INFORMATION (UNAUDITED)
ENERGY SEARCH, INCORPORATED
December 31, 1995
ESTIMATES OF NATURAL GAS AND OIL RESERVES - Continued
Oil Gas
(Bbl) (Mcf)
----- -----
Proved developed and undeveloped reserves
January 1, 1994 4,678 786,227
Revisions and other changes 542 (236,867)
Extensions and discoveries 17,994 298,220
Purchases of reserves -0- -0-
Production (1,292) (99,587)
----------- -----------
December 31, 1994 21,922 747,993
Revisions and other changes (15,302) (153,948)
Extensions and discoveries 16,886 2,594,786
Purchases of reserves -0- 466,815
Production (1,166) (91,119)
------------ -----------
December 31, 1995 22,340 3,564,527
============ ==========
Proved developed reserves
December 31, 1994 21,922 747,993
December 31, 1995 11,723 1,259,454
Equity interest in proved reserves
December 31, 1994 162 84,559
December 31, 1995 2,392 169,023
F-18
<PAGE>
SUPPLEMENTARY INFORMATION (UNAUDITED)
ENERGY SEARCH, INCORPORATED
December 31, 1995
ESTIMATES OF NATURAL GAS AND OIL RESERVES - Continued
December 31
1995 1994
---- ----
Standardized measure of discounted
future net cash flows
Future cash inflows $10,097,118 $1,884,133
Future production costs (2,385,183) (538,048)
Future development costs (2,454,290) -0-
------------- ---------------
Future net cash flows 5,257,645 1,346,085
10% annual discount for estimated
timing of cash flows (2,536,994) (513,161)
------------ -----------
Standardized measure of discounted
future net cash flows relating to
proved oil and gas reserves $ 2,720,651 $ 832,924
=========== ===========
ESI's share of equity method investors'
standardized measure of discounted
future cash flows $ 26,387 $ 9,841
============= ============
The following reconciles the change in the standardized measure of discounted
future net cash flow for the year ended December 31,
1995 1994
---- ----
Beginning of year ............................. $ 832,924 $ 1,115,912
Sales of oil and gas produced, net of
production costs ............................ (219,464) (281,518)
Extensions, discoveries, and improved recovery,
less related costs .......................... 1,603,198 635,486
Revisions of previous quantity estimates ...... (253,575) (476,905)
Net change from purchases and sales of
minerals in place ........................... 535,514 -0-
Other ......................................... 222,054 (160,051)
----------- -----------
End of year ................................... $ 2,720,651 $ 832,924
=========== ===========
F-19
<PAGE>
BALANCE SHEETS (UNAUDITED)
ENERGY SEARCH, INCORPORATED
June 30
1996 1995
---- ----
ASSETS
CURRENT ASSETS
Cash ........................................ $ 285,561 $ 157,542
Accounts receivable ......................... 77,655 20,585
Due from related partnerships, net .......... 155,566 189,378
Inventory ................................... 75,432 54,574
----------- -----------
TOTAL CURRENT ASSETS .................... 594,214 422,079
OIL AND GAS PROPERTIES, USING SUCCESSFUL
EFFORTS ACCOUNTING
Proved properties ........................... 519,265 334,465
Wells and related equipment ................. 5,240,130 4,644,960
Less accumulated depreciation, depletion and
amortization ............................ (2,728,083) (2,237,763)
----------- -----------
NET OIL AND GAS PROPERTIES ............. 3,031,312 2,741,662
OTHER ASSETS
Other property and equipment less accumulated
depreciation of $219,199 and $316,002,
respectively ............................ 48,373 95,117
Investments in affiliated partnerships ...... 1,499,139 1,131,943
Deferred state income tax asset ............. 33,586 -0-
Deferred federal income tax asset ........... 132,531 -0-
Loan issue costs, net ....................... 3,500 173,717
Other assets ................................ 54,540 70,801
----------- -----------
1,771,669 1,471,578
----------- -----------
$ 5,397,195 $ 4,635,319
=========== ===========
F-20
<PAGE>
<TABLE>
June 30
1996 1995
---- ----
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Line of credit ...................................... $ 400,000 $ 400,000
Current portion of long-term debt ................... 252,635 263,640
Accounts payable and accrued expenses ............... 719,026 337,896
Drilling advances ................................... 1,038,920 2,388,149
----------- -----------
TOTAL CURRENT LIABILITIES ........................ 2,410,581 3,389,685
LONG-TERM DEBT, less current portion ..................... 75,404 1,765,802
REDEEMABLE PREFERRED STOCK
Class A Convertible Preferred Stock (no par value;
5% cumulative; .................................. 216,945
shares authorized, 205,200
shares issued and outstanding at $10 per share) . 2,052,000 -0-
Class B Convertible Preferred Stock (no par value;
no dividend preference, 244,800 shares authorized
152,100 shares issued and outstanding at $10
per share) ...................................... 1,521,000 -0-
3,573,000 -0-
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock (no stated value; 2,000 shares
authorized, 1,200 shares issued and outstanding) 1,200 1,200
Retained earnings (deficit) ......................... (638,990) (521,368)
Distribution to shareholders ........................ (24,000) -0-
----------- -----------
(661,790) (520,168)
----------- -----------
$ 5,397,195 $ 4,635,319
=========== ===========
</TABLE>
F-21
<PAGE>
STATEMENTS OF OPERATIONS (UNAUDITED)
ENERGY SEARCH, INCORPORATED
Six Months Ended June 30
1996 1995
---- ----
NET REVENUE
Turnkey revenue ................................. $ 839,224 $ 758,653
Oil & gas sales ................................. 104,449 104,932
Management fees ................................. 98,200 80,000
Other revenue ................................... 38,130 90,052
----------- -----------
TOTAL NET REVENUE ........................... 1,080,003 1,033,637
OPERATING EXPENSES
Lease operating ................................. 126,806 100,607
Field management ................................ 144,371 129,916
Depreciation, depletion & amortization .......... 307,386 308,538
Interest ........................................ 151,555 36,191
General and administrative ...................... 498,791 432,067
----------- -----------
TOTAL OPERATING EXPENSES .................... 1,228,909 1,007,319
TOTAL INCOME (LOSS) FROM OPERATIONS ...... (148,906) 26,318
OTHER INCOME (EXPENSE)
Stock issuance expense .......................... (82,080) -0-
Gain on sale of assets .......................... 54,348 53,924
Equity in income of related partnerships ........ 2,269 34,622
----------- -----------
(25,463) 88,546
NET INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM .................. (174,369) 114,864
Income tax benefit (expense) ...................... 108,873 (1,726)
----------- -----------
NET INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM ....................... (65,496) 113,138
Extraordinary item - loss on early extinguishment
of debt (net of income tax benefit of $50,669) (79,251) -0-
----------- -----------
NET INCOME (LOSS) .......................... $ (144,747) $ 113,138
=========== ===========
F-22
<PAGE>
STATEMENTS OF OPERATIONS (UNAUDITED) - Continued
ENERGY SEARCH, INCORPORATED
Six Months Ended June 30
1996 1995
---- ----
Earnings (loss) per common share:
Net income (loss) before extraordinary item $ (54.58) $ 94.28
Extraordinary item (66.04) -0-
----------- ------------
Net income (loss) $ (120.62) $ 94.28
========== ==========
F-23
<PAGE>
STATEMENTS OF CASH FLOWS (UNAUDITED)
ENERGY SEARCH, INCORPORATED
<TABLE>
Six Months Ended June 30
1996 1995
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ (144,747) $ 113,138
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation, depletion and amortization .......... 307,386 308,538
Loss on early extinguishment of debt .............. 129,920 -0-
Gain on sale of assets ............................ (54,348) (53,924)
Equity in income of related partnerships .......... (2,269) (34,622)
Decrease in accounts receivable and due
from partnerships .............................. 960,046 717,956
Increase in inventory ............................. (13,267) (16,585)
Decrease in other assets .......................... 5,692 10,844
Increase in deferred income taxes ................. (166,117) -0-
Increase (decrease) in accounts payable and
accrued expenses ............................. 26,223 (256,274)
Decrease in drilling advances ..................... (1,376,200) (877,847)
----------- -----------
Total adjustments ............................ (182,934) (201,914)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES ............ (327,681) (88,776)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in proved properties ..................... (31,952) (42,270)
Proceeds from sale of other property and equipment .. 31,500 152,000
Capital expenditures ................................ (319,291) (269,910)
Contributions to related partnerships, net .......... (272,942) (103,563)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES ............ (592,685) (263,743)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of Class B preferred stock 1,392,920 -0-
Proceeds from issuance of debt ...................... -0- 694,000
Payments on long-term debt .......................... (288,807) (219,734)
Payments of loan issue costs ........................ (4,164) (101,144)
NET CASH PROVIDED
BY FINANCING ACTIVITIES ........................ $ 1,099,949 $ 373,122
----------- -----------
</TABLE>
F-24
<PAGE>
STATEMENTS OF CASH FLOWS (UNAUDITED) - Continued
ENERGY SEARCH, INCORPORATED
<TABLE>
Six Months Ended June 30
1996 1995
---- ----
<S> <C> <C>
NET INCREASE IN CASH $ 179,583 $ 20,603
CASH AT BEGINNING OF PERIOD 105,978 136,939
----------- ------------
CASH AT END OF PERIOD $ 285,561 $ 157,542
=========== ===========
SUPPLEMENTAL DISCLOSURE:
Cash paid for interest during the period $ 169,030 $ 48,110
=========== ===========
</TABLE>
F-25
<PAGE>
SELECTED INFORMATION (UNAUDITED) -- Substantially All Disclosures Required By
Generally Accepted Accounting Principles Are Not Included
ENERGY SEARCH, INCORPORATED
June 30, 1996 and 1995
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations: Energy Search, Inc. (ESI) is engaged in the exploration,
development, production and marketing of oil and natural gas in the Appalachian
Basin area. ESI's revenue is primarily derived from the drilling of oil and gas
wells on a contract basis, the sale of natural gas and crude oil from wells in
which it has working interests, the transmission of natural gas through a
pipeline and gathering system owned by an affiliated partnership in which ESI
has an ownership interest, the management and operation of oil and gas wells,
and the formation and management of oil and gas partnerships. All ESI oil and
gas wells and the majority of its market for oil and gas produced are located
primarily in Washington County, Ohio, and the counties contiguous thereto.
Because of the nature of ESI's business, a significant number of transactions
are with related parties. For affiliated oil and gas partnerships in which ESI
has an interest, its proportionate share of revenue and expenses is recorded in
the income statement as oil and gas sales and lease operating expenses,
respectively.
Estimates: The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Inventory: Materials and supplies inventory, consisting primarily of tubular
goods and field materials, is stated at the lower of average cost or market.
Oil and Gas Properties: ESI uses the successful efforts method of accounting for
oil and gas producing activities, as set forth in the Statement of Financial
Accounting Standards No. 19, as amended. ESI does not capitalize intangible
drilling costs since under the terms of the drilling contracts, these costs are
the responsibility of the contracting parties. ESI does capitalize all tangible
drilling costs when incurred, as they retain ownership of the well equipment
under the drilling contracts. ESI's policy is to expense the cost of any
non-salvageable tangible equipment on exploratory wells that do not result in
proven reserves. Oil and gas properties are periodically assessed for impairment
of value, and a loss is recognized at time of impairment.
Proved properties represent purchased working interests in producing oil and gas
wells, as well as oil and gas leases. Proved properties and wells and related
equipment are depreciated and depleted by the units-of-production method using
estimates of proven reserves. Because of inherent uncertainties in estimating
proven reserves, estimates of depletion and depreciation could change
significantly.
F-26
<PAGE>
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
ESI has acquired certain oil and gas leases providing rights for exploration,
development, extraction and sale of oil and gas from the land covered by such
leases. Upon contribution of the oil and gas lease to the partnership or upon
abandonment of lease, the cost of the lease is charged to expense.
Other Property and Equipment: Other property and equipment is recorded at cost.
Major additions and improvements are capitalized while repairs, replacements and
maintenance which do not improve or extend the life of the respective assets are
expensed. Depreciation is computed under the double-declining balance method
over the estimated useful lives.
Investments in Related Partnerships: Investments in related partnerships are
accounted for by the equity method. ESI, as the managing general partner of the
oil and gas partnerships, makes initial capital contributions to the
partnerships in accordance with provisions in the respective placement
memorandum governing the activities of the particular partnership. Income or
losses are allocated to the investments according to ESI's ownership interest in
the partnerships and distributions or withdrawals are deducted from the
investments.
Turnkey Drilling Revenue: ESI enters into contracts with the affiliated oil and
gas partnerships to drill oil and gas wells under turnkey agreements. Under the
terms of the contracts, ESI provides all tangible well equipment and receives
working interests in the completed wells. The partnerships pay all intangible
drilling costs and receive working interests in the wells. The partnerships
advance funds to ESI in order to finance the drilling activity. ESI initially
defers the full amount of the drilling advances and recognizes drilling revenue
as the wells are completed. Drilling expenses of $878,976 and $774,693 are
netted against turnkey drilling revenue in 1996 and 1995, respectively.
Management Fees and Other Revenue: In connection with the sponsorship of natural
gas partnerships in 1996 and 1995, ESI received reimbursement for the
organization and offering expenses in an amount equal to 1% of the investors'
subscriptions. In its role as operator of the oil and gas wells owned by various
related partnerships, ESI charges a wellhead fee of between $100 and $200 per
month for each producing well. In its role as general partner of the partnership
which owns the gas pipeline and gathering system, ESI charges the partnership a
management fee of $5,000 per month.
Income Taxes: ESI accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes".
These provisions were not applicable to the financial statements at June 30,
1995 due to ESI's tax status as a Subchapter "S" corporation under provisions of
the Internal Revenue Code. See Note D for further discussion.
F-27
<PAGE>
SELECTED INFORMATION (UNAUDITED) -- Substantially All Disclosures Required By
Generally Accepted Accounting Principles Are Not Included
ENERGY SEARCH, INCORPORATED
June 30,1996 and 1995
NOTE A-- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
Earnings Per Share: Earnings (loss) per share of common and common equivalent
stock is based on the weighted average common shares outstanding. The
convertible preferred stock is considered to be the equivalent of common stock
from the time of its issuance in 1996; however, conversion has not been assumed
due to the net loss for 1996.
NOTE B--UNAUDITED FINANCIAL STATEMENTS
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of management, are necessary to present fairly
the financial position of ESI at June 30, 1996 and 1995 and its results of
operations and its cash flows for the periods presented. All such adjustments
are of a normal recurring nature.
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and Item 310 of Regulation S-B. Accordingly, footnote disclosure, which would
substantially duplicate the disclosure contained in the most recent audited
financial statements, has been substantially omitted. The accompanying unaudited
financial statements should be read in conjunction with the notes to financial
statements contained in the December 31, 1995 financial statements.
NOTE C--PREFERRED STOCK ISSUANCE
During the six months ended June 30, 1996, ESI issued 205,200 shares of Class A
convertible preferred stock with a $10 stated value in exchange for and to
retire the outstanding principle on its variable rate subordinated debentures.
Of the $2,169,500 debentures payable outstanding at December 31, 1995, a total
of $2,052,000 was converted to Class A convertible preferred stock with the
remaining $117,500 in debentures being paid from cash. The write-off of the
deferred loan costs related to the debentures has been reflected as a loss on
early extinguishment of the debt. In addition, ESI issued 152,100 shares of
Class B convertible preferred stock with a $10 stated value during this period.
Issue costs of $128,080 related to the Class B preferred stock were charged
directly to retained earnings (deficit).
Both the Class A and the Class B preferred stock is redeemable by the Company,
at the option of the holder, at $10 per share or, if not redeemed, is
automatically convertible on a share-by-share basis into common stock upon the
occurrence of a certain event. Such event includes merger or consolidation with
another company in which ESI is not the survivor; sale or disposition of all, or
substantially all, assets; or the undertaking of a registration and initial
public offering of any of ESI's common stock.
F-28
<PAGE>
SELECTED INFORMATION (UNAUDITED) -- Substantially All Disclosures Required By
Generally Accepted Accounting Principles Are Not Included
ENERGY SEARCH, INCORPORATED
June 30, 1996 and 1995
NOTE D--CHANGE IN TAX STATUS
Effective January 1, 1996, ESI filed an election with the Internal Revenue
Service to change its tax status from a Subchapter S corporation to a C
corporation under the provisions of the Internal Revenue Code. As a Subchapter S
corporation, earnings and losses are allocated to stockholders and, accordingly,
the financial statements for 1995 do not reflect a provision for federal income
taxes. Under the provisions of SFAS No. 109, "Accounting for Income Taxes",
deferred income taxes are recognized for the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The effect of
the election for the change in tax status and the resulting recognition of the
deferred tax assets and tax benefits is included in the accompanying statement
of operations for the six months ended June 30, 1996.
NOTE E--OTHER CHANGES TO SHAREHOLDERS' EQUITY
In addition to the net loss and net income for the six months ended June 30,
1996 and 1995, respectively, and to the charge for stock issuance costs in 1996
as discussed in Note C, ESI declared and distributed a property dividend of
$24,000 during the six months ended June 30, 1996.
NOTE F--ACCOUNTING STANDARDS IMPLEMENTED IN 1996
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of". SFAS No. 121 establishes accounting standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used, and for long-lived assets and
certain identifiable intangibles held for disposal. The Statement requires the
long-lived assets to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Measurement of an impairment loss for
long-lived assets and identifiable intangibles that an entity expects to hold
and use should be based on the fair value of the asset. The Statement is
effective for fiscal years beginning after December 15, 1995. ESI has adopted
the Statement effective January 1, 1996; however, the adoption had no material
effect on ESI's financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". The Statement establishes a fair value based method of accounting
for stock-based compensation plans. It encourages entities to adopt that method
for all arrangements under which employees receive shares of stock or other
equity instruments of the employer or the employer incurs
F-29
<PAGE>
SELECTED INFORMATION (UNAUDITED) -- Substantially All Disclosures Required By
Generally Accepted Accounting Principles Are Not Included
ENERGY SEARCH, INCORPORATED
June 30, 1996 and 1995
NOTE F-- ACCOUNTING STANDARDS IMPLEMENTED IN 1996 - Continued
liabilities to employees in amounts based on the price of its stocks. As ESI
does not have any stock-based compensation arrangements with employees or
others, implementation of the Statement had no effect on the financial
statements.
NOTE G--COMMITMENTS AND CONTINGENCIES
ESI is contingently liable to two of the company's officers for $4,000 of
compensation per month during the six-month period ended June 30, 1996. The
payment is contingent upon the approval of the Board of Directors. As of June
30, 1996, the Board of Directors has not authorized such payment.
F-30
<PAGE>
No person has been authorized to give any information or to make any
representation in connection with this offering other than those contained in
this Prospectus and, if given or made, such information or representation must
not be relied upon as having been authorized by the Company or any Underwriter.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the securities to which it relates or an
offer to sell or the solicitation of an offer to buy such securities in any
circumstances in which such offer or solicitation is unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstance, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information herein is
correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
PAGE
Prospectus Summary........................ 2
Risk Factors.............................. 6
Use of Proceeds........................... 13
Dividend Policy........................... 14
Dilution.................................. 15
Capitalization............................ 16
Management's Discussion and
Analysis of Financial Condition
and Results of Operation................. 17
Business and Properties................... 20
Management................................ 35
Principal Stockholders.................... 41
Certain Relationships
and Related Transactions............... 42
Description of Securities................. 43
Shares Eligible For Future Sale........... 46
Underwriting.............................. 47
Legal Matters............................. 49
Experts................................... 49
Additional Information.................... 49
Glossary.................................. 50
Index to Financial Statements............. F-1
1,000,000 Units
Each Unit Consisting of
One Share of Common Stock
and
One Redeemable Series A
Common Stock Purchase Warrant
Offering Price
$
Per Unit
Energy
Search,
Incorporated
Prospectus
La Jolla Securities
Corporation
.........Until _________ , 199_ (25 days from the date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligations of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
According to the Third Amended and Restated Bylaws of the Company, any
Director or officer, or his executor or administrator, will be entitled to
indemnification from losses and advancement of expenses incurred personally as a
result of his status as a Director or an officer of the Company in accordance
with Section 48-18-501 et. seq. of the Tennessee Business Corporation Act (the
"Tennessee Act"). According to the Tennessee Act, the Company may indemnify a
Director or officer made a party to a proceeding if the Director or officer
conducted himself or herself in good faith and in a manner he or she reasonably
believed to be, in case of conduct in the Director or officer's official
capacity with the Company, in the best interest of, or, in all other cases, not
opposed to, the best interests of the Company. In the case of a criminal
proceeding, the Company may indemnify the Director or officer if the Director or
officer had no reason to believe his or her conduct was unlawful.
Indemnification by the Company is mandatory if the Director or officer is wholly
successful on the merits or otherwise in defending a claim. Indemnification is
prohibited if the Director or officer of the Company is adjudged liable in a
proceeding charging improper benefit to him or her.
Item 25. Other Expenses of Issuance and Distribution
Estimated expenses in connection with the public offering by the
Company of the securities offered hereunder are as follows:
Securities and Exchange Commission Filing Fee $9,551.76
NASD Filing Fee 3,270.01
American Stock Exchange Application and Listing Fee 25,000.00
Accounting Fees and Expenses* 50,000.00
Legal Fees and Expenses* 45,000.00
Printing* 35,000.00
Fees of Transfer Agents and Registrar* 2,000.00
Underwriter's Non-Accountable Expense Allowance 300,000.00
Miscellaneous* 15,178.23
------------------
Total* $485,000.00
* Modifications of these estimates may be supplied by amendment.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
Set forth below is certain information regarding securities that the
Company has sold in the past three years.
In March through September 1996, the Company sold 207,700 shares of
Class A Preferred Stock (at $10.00 per share) and 2,423,000 shares of Class B
Preferred Stock (at $10.00 per share) to 78 accredited investors and 33
non-accredited investors for total consideration of $4,500,000. The Class A
Preferred Stock was offered and issued exclusively to the holders of the
Company's variable rate subordinated debentures (the "Debentures") in
consideration for dollar-for-dollar elimination of principal outstanding on such
Debentures. The Class B Preferred Stock was offered and issued for cash. The
Company paid 4% commissions for Class A Preferred Stock to Equity Financial
Corporation ("EFC"), an NASD member, totaling $41,540. The Company paid 8%
commissions for Class B Preferred Stock to EFC, totaling $193,840. EFC was
permitted to reallow all or part of such compensation to other participating
NASD-member broker dealers.
In September 1994 through November 1995, the Company sold 43.4 Units
($30,000 each) of Debentures to 33 accredited investors and 13 non-accredited
investors for total consideration of $2,169,350. The Company paid 4% commissions
to EFC, totaling $86,774. EFC was permitted to reallow all or part of such
compensation to other participating NASD-member broker dealers.
All securities described above were sold in reliance on the exemption
under 4(2) of the Securities Act of 1933 and Regulation D, Rule 506 promulgated
thereunder. No advertising or general solicitation of offerees was employed.
Confidential Private Placement Memoranda were delivered to each purchaser prior
to investing. No more than 35 nonaccredited investors purchased securities in
any offering. All nonaccredited investors were reasonably believed by the
Company to be sophisticated and capable of evaluating risks and merits of the
relevant investment. A Form D was timely filed with the Securities and Exchange
Commission for each offering.
II-2
<PAGE>
Item 27. Exhibits
<TABLE>
Exhibit No. Descriptions
- ----------- ------------
<S> <C>
Exhibit 1.1 Form of Underwriting Agreement, Agreement Among Underwriters, Selected Dealer Agreement
Exhibit 1.2 Form of Financial Consulting Agreement
Exhibit 1.3 Form of Underwriters' Warrant Agreement
Exhibit 3.1 Third Amended and Restated Charter of the Registrant
Exhibit 3.2 Third Amended and Restated Bylaws of the Registrant
Exhibit 4.1 Specimen of Common Stock Certificate*
Exhibit 4.2 Specimen of Redeemable Series A Common Stock Purchase Warrant Certificate*
Exhibit 4.3 Specimen of Underwriters' Warrant Certificate*
Exhibit 5.1 Opinion of Patrick R. Sughroue, P.C.*
Exhibit 9.1 Shareholder Voting Agreement and Irrevocable Proxy
Exhibit 10.1 Energy Search Natural Gas 1995-A L.P. - Limited Partnership Agreement, Dated: December 31, 1995
Exhibit 10.2 Energy Search Natural Gas 1995-A L.P. - Joint Drilling and Operating Agreement, Dated: December
31, 1995
Exhibit 10.3 Energy Search Natural Gas 1996 L.P. - Limited Partnership Agreement, Dated June 10, 1996
Exhibit 10.4 Energy Search Natural Gas 1996 L.P. - Joint Drilling and Operating Agreement, Dated: June 10,
1996
Exhibit 10.5 ESI Pipeline Operating Partnership - Limited Partnership Agreement, Dated: January 7, 1993
Exhibit 10.6 Energy Search Natural Gas Pipeline Income Partnership - Limited Partnership Agreement, Dated:
January 7, 1993
Exhibit 10.7 Gas Servicing Agreement between the Registrant and ESI Pipeline Operating L.P., Dated: January
5, 1993
Exhibit 10.8 Selling Agreement - Class B Convertible Preferred Shares between the Registrant and Equity
Financial Corporation, Dated: March 4, 1996
Exhibit 10.9 Selling Agreement -- Class A and Class B Preferred Shares between Registrant and Equity
Financial Corporation, Dated: March 4, 1996
Exhibit 10.10 Selling Agreement -- Variable Rate Subordinated Debentures between Registrant and Equity
Financial Corporation, Dated: September 19, 1994
Exhibit 10.11 Aircraft Lease between Charles P. Torrey, Jr. and the Registrant, Dated February 1, 1995
Exhibit 10.12 Beaver Coal Company Lease between Beaver Coal Company Limited and the Registrant, Dated
September 15, 1996
Exhibit 10.13 Employment Agreements with officers and key employees of the Registrant
(a) John M. Johnston
(b) Robert L. Remine
(c) Charles P. Torrey, Jr.
(d) Richard S. Cooper
Exhibit 10.14 Promissory Notes of Executive Officers in Favor of Registrant
(a) Charles P. Torrey, Jr.
(b) Robert L. Remine
(c) Richard S. Cooper
Exhibit 10.15 1997 Stock Compensation Plan*
Exhibit 10.16 Outside Directors Stock Option Plan *
Exhibit 10.17 Form of Lock-up Agreement
Exhibit 23.1 Consent of Patrick R. Sughroue, P.C. (included in opinion filed as Exhibit 5.1)*
Exhibit 23.2 Consent of Ronald D. Cameron CPA
Exhibit 23.3 Consent of Kim A. Walbe
Exhibit 27.1 Financial Data Schedule
</TABLE>
* To be provided by amendment
II-3
<PAGE>
Item 28. Undertakings
The undersigned registrant hereby undertakes as follows:
(1) To provide to the Underwriters at the closing specified in the Underwriting
Agreement certificates in such denominations and registered in such names
as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) To file, during any period in which it offers or sells securities, a
post-effective amendment to this Registration Statement to:
(a) Include any Prospectus required by Section 10(a)(3) of the
Securities Act;
(b) Reflect in the Prospectus any facts or events which, individually
or together, represent a fundamental change in the Registration
Statement, and notwithstanding the forgoing, any increase or
decrease in volume of securities offered (if the total dollar
value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in the volume and price represent
no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statment; and (c) Include any additional
or changed material information on the plan of distribution.
(3) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus 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.
(4) To file a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(5) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has 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 a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
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 the final
adjudication of such issue.
II-4
<PAGE>
(6) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act as be part of this Registration Statement
as of the time the Commission declared it effective.
(7) For determining any liability under the Securities Act, to treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the Registration
Statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
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 authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Knoxville, State of Tennessee on September 26, 1996.
ENERGY SEARCH, INCORPORATED
By:___________/s/__________
Richard S. Cooper
President and Director
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Richard S. Cooper his true and lawful
attorney-in-fact and agent, with full power of substitution, and resubstitution,
for him in his name, place and stead, in any and all capacities, to sign,
execute and file any and all documents relating to this Registration Statement,
including any and all amendments, post-effective amendments, abbreviated
registration statements pursuant to Rule 462 under the Securities Act of 1933,
and any and all exhibits and supplements thereto, and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person thereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to 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 Date
--------- ----- ----
______/s/__________ Chief Executive Officer; Director September 26, 1996
Charles P. Torrey, Jr.
______/s/__________ Treasurer, Secretary; Director; September 26, 1996
Robert L. Remine (Principal Financial and Accounting
Officer)
______/s/__________ President; Director September 26, 1996
Richard S. Cooper (Principal Executive Officer)
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
Exhibit No. Descriptions
- ----------- ------------
<S> <C>
Exhibit 1.1 Form of Underwriting Agreement, Agreement Among Underwriters, Selected Dealer Agreement
Exhibit 1.2 Form of Financial Consulting Agreement
Exhibit 1.3 Form of Underwriters' Warrant Agreement
Exhibit 3.1 Third Amended and Restated Charter of the Registrant
Exhibit 3.2 Third Amended and Restated Bylaws of the Registrant
Exhibit 4.1 Specimen of Common Stock Certificate*
Exhibit 4.2 Specimen of Redeemable Series A Common Stock Purchase Warrant Certificate*
Exhibit 4.3 Specimen of Underwriters' Warrant Certificate*
Exhibit 5.1 Opinion of Patrick R. Sughroue, P.C.*
Exhibit 9.1 Shareholder Voting Agreement and Irrevocable Proxy
Exhibit 10.1 (a) Energy Search Natural Gas 1995-A L.P. - Limited Partnership Agreement, Dated: December 31,
1995
Exhibit 10.2 (b) Energy Search Natural Gas 1995-A L.P. - Joint Drilling and Operating Agreement, Dated:
December 31, 1995
Exhibit 10.3 (a) Energy Search Natural Gas 1996 L.P. - Limited Partnership Agreement, Dated June 10, 1996
Exhibit 10.4 (b) Energy Search Natural Gas 1996 L.P. - Joint Drilling and Operating Agreement, Dated: June
10, 1996
Exhibit 10.5 ESI Pipeline Operating Partnership - Limited Partnership Agreement, Dated: January 7, 1993
Exhibit 10.6 Energy Search Natural Gas Pipeline Income Partnership - Limited Partnership Agreement, Dated:
January 7, 1993
Exhibit 10.7 Gas Servicing Agreement between the Registrant and ESI Pipeline Operating L.P., Dated: January
5, 1993
Exhibit 10.8 Selling Agreement - Class B Convertible Preferred Shares between the Registrant and Equity
Financial Corporation, Dated: March 4, 1996
Exhibit 10.9 Selling Agreement -- Class A and Class B Preferred Shares between Registrant and Equity
Financial Corporation, Dated: March 4, 1996
Exhibit 10.10 Selling Agreement -- Variable Rate Subordinated Debentures between Registrant and Equity
Financial Corporation, Dated: September 19, 1994
Exhibit 10.11 Aircraft Lease between Charles P. Torrey, Jr. and the Registrant, Dated February 1, 1995
Exhibit 10.12 Beaver Coal Company Lease between Beaver Coal Company Limited and the Registrant, Dated
September 15, 1996
Exhibit 10.13 Employment Agreements with officers and key employees of the Registrant
(a) John M. Johnston
(b) Robert L. Remine
(c) Charles P. Torrey, Jr.
(d) Richard S. Cooper
Exhibit 10.14 Promissory Notes of Executive Officers in Favor of Registrant
(a) Charles P. Torrey, Jr.
(b) Robert L. Remine
(c) Richard S. Cooper
Exhibit 10.15 1997 Stock Compensation Plan*
Exhibit 10.16 Outside Directors Stock Option Plan *
Exhibit 10.17 Form of Lock-up Agreement
Exhibit 23.1 Consent of Patrick R. Sughroue, P.C. (included in opinion filed as Exhibit 5.1)*
Exhibit 23.2 Consent of Ronald D. Cameron CPA
Exhibit 23.3 Consent of Kim A. Walbe
Exhibit 27.1 Financial Data Schedule
</TABLE>
* To be provided by amendment
1,000,000 Units
ENERGY SEARCH, INC.
Each Unit Consisting of
One Share of Common Stock and
One Redeemable Series A Common Stock Purchase Warrant
, 1996
UNDERWRITING AGREEMENT
LA JOLLA SECURITIES CORPORATION
As Representative of the Several Underwriters
c/o La Jolla Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
Dear Sirs:
Energy Search, Inc., a Tennessee corporation (the "Company"), proposes
to issue and sell to you and the other underwriters named in Schedule I hereto
(collectively, the "Underwriters"), for whom La Jolla Securities Corporation is
acting as the managing underwriter and Representative (the "Representative"), in
the respective amount set forth opposite the Underwriter's name in Schedule I
hereto an aggregate of 1,000,000 Units (individually a "Unit" and collectively
the "Units"), each Unit consisting of one share of Common Stock, no par value
per share, of the Company (the " Common Stock") and one Redeemable Series A
Common Stock Purchase Warrant (individually, a "Series A Warrant"), which
entitles the holder thereof to purchase one share of Common Stock at a price of
$____ per share, subject to certain conditions. Such Units, together with (a)
the shares of Common Stock and the Series A Warrant comprising such Units and
(b) the shares of Common Stock issuable upon exercise of such Series A Warrants,
are collectively referred to herein as the "Underwritten Securities." In
addition, (i) the Company proposes to grant to the Underwriters an option (the
"Underwriters' Option") to purchase up to an aggregate of 150,000 additional
Units solely to cover over-allotments in the sale of the Underwritten Securities
(such additional Units, together with (a) the shares of Common Stock and Series
A Warrants comprising such additional Units and (b) the shares of Common Stock
issuable upon exercise of such Series A Warrants, are collectively referred to
herein as the "Option Securities") and (ii) the Company proposes to sell to the
Underwriters the Underwriters' Warrants (described in Section 7 hereof) to
purchase ______ additional Units, which additional Units are identical to the
Units described above (such Underwriters' Warrants and additional Units,
together with (a) the shares of Common Stock and Series A Warrants comprising
such additional Units and (b) the shares of Common Stock issuable upon exercise
of such Series A Warrants, are collectively referred to herein as the
"Underwriters' Securities"). The Underwritten Securities, the Option Securities
and the Underwriters' Securities are collectively referred to herein as the
"Securities."
The terms which follow, when used in this Agreement, shall have the
meanings indicated. "Effective Date" shall mean each date that the Registration
Statement (as defined below) and any post-effective amendment or amendments
thereto became or become effective. "Execution Time" shall mean the date and
time that this Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus referred to in
Section 1(a) below with respect to the offering of the Securities, and any
preliminary prospectus included in the Registration Statement at the Effective
Date that omits Rule 430A Information (as defined below). Capitalized terms not
otherwise defined herein shall have the meanings ascribed to them in the most
recent Preliminary Prospectus which predates or coincides with the Execution
Time. "Prospectus" shall mean the final prospectus with respect to the offering
of the Securities that contains the Rule 430A Information (as defined below).
"Registration Statement" shall mean the registration statement referred to in
Section 1(a) below, including exhibits and financial statements, in the form in
which it has or shall become effective and, in the event any post-effective
amendment thereto becomes effective prior to the Closing Date (as hereinafter
defined) or any settlement date pursuant to Section 3(b) hereof, shall also mean
such registration statement as so amended on such date. Such term shall include
Rule 430A Information (as defined below) deemed to be included therein at the
Effective Date as provided by Rule 430A. "Rule 424"and "Rule 430A" refer to such
rules under the Securities Act of 1933, as amended (the "Act"). "Rule 430A
Information" means information with respect to the Securities and the offering
thereof permitted to be omitted from the Registration Statement when it becomes
effective pursuant to Rule 430A.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, each Underwriter that:
(a) The Company meets the requirements for the use of
Form SB-2 under the Act and has filed with the ______ Office of the
Securities and Exchange Commission (the "Commission") a registration
statement, including a related preliminary prospectus ("Preliminary
Prospectus"), on Form SB-2 (Commission File No. ______) (the
"Registration Statement") for the registration under the Act of the
Securities. The Company may have filed one or more amendments thereto,
including related Preliminary Prospectuses, each of which has
previously been furnished to you. The Company will next file with the
Commission either, prior to effectiveness of such Registration
Statement, a further amendment thereto (including the form of
Prospectus) or, after effectiveness of such Registration Statement, a
Prospectus in accordance with Rules 430A and 424(b)(1) or (4). As
filed, such amendment and form of Prospectus, or such Prospectus, shall
include all Rule 430A Information and, except to the extent the
Representative shall agree in writing to a modification, shall be in
all substantive respects in the form furnished to you prior to the
Execution Time or, to the extent not completed at the Execution Time,
shall contain only such specific additional information and other
changes (beyond that contained in the latest Preliminary Prospectus) as
the Company has advised you in writing, prior to the Execution Time,
will be included or made therein.
(b) Each Preliminary Prospectus, at the time of
filing thereof, conformed in all material respects with the applicable
requirements of the Act and the rules and regulations thereunder and
did not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading. If the Effective
Date is prior to or simultaneous with the Execution Time, (i) on the
Effective Date, the Registration Statement conformed in all material
respects to the requirements of the Act and the rules and regulations
thereunder and did not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading and
(ii) at the Execution Time, the Registration Statement conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b), the
Registration Statement and the Prospectus will conform, in all material
respects to the requirements of the Act and the rules and regulations
thereunder, and neither of such documents includes, or will include,
any untrue statement of a material fact or omits, or will omit, to
state a material fact required to be stated therein or necessary in
order to make the statements therein (and, in the case of the
Prospectus, in the light of the circumstances under which they were
made) not misleading. If the Effective Date is subsequent to the
Execution Time, on the Effective Date, the Registration Statement and
the Prospectus will conform in all material respects to the
requirements of the Act and the rules and regulations thereunder, and
neither of such documents will contain any untrue statement of any
material fact or will omit to state any material fact required to be
stated therein or necessary to make the statements therein (and, in the
case of the Prospectus, in the light of the circumstances under which
they were made) not misleading. The two preceding sentences do not
apply to statements in or omissions from the Registration Statement or
the Prospectus (or any supplements thereto) based upon and in
conformity with information furnished in writing to the Company by or
on behalf of any Underwriter through the Representative specifically
for use in connection with the preparation of the Registration
Statement or the Prospectus (or any supplements thereto).
(c) Except as set forth in the Prospectus, the Company has no
subsidiaries, and as of the Effective Date, will have no subsidiaries.
(d) The Company has been duly organized and is validly existing
as a corporation in good standing under the laws of the State of
Tennessee with full corporate power and corporate authority to own its
properties and conduct its business as described in the Prospectus,
and is duly qualified to do business as a foreign corporation and is
in good standing under the laws of each jurisdiction in which it
conducts its business or owns property and in which the failure,
individually or in the aggregate, to be so qualified would have a
material adverse effect on the properties, assets, operations,
business or condition (financial or otherwise) of the Company
("Material Adverse Effect").
(e) The Company does not own any shares of capital stock or any
other securities of any corporation or any equity interest in any
firm, partnership, association or other entity other than as described
in the Registration Statement.
(f) The Company's pro forma authorized and outstanding capital
stock and short-term and long-term indebtedness is as set forth in the
Prospectus under the caption "Capitalization" as of the dates therein
indicated and giving effect to the statements and assumptions therein
stated. The Company's equity capitalization is as set forth in the
Prospectus; the capital stock of the Company conforms in all material
respects to the description thereof contained in the Prospectus; all
outstanding shares of Common Stock have been duly and validly
authorized and issued and are fully paid and nonassessable, and the
certificates therefor are in valid and sufficient form in accordance
with the laws of the State of Tennessee and the Company's Bylaws; and,
on the Closing Date (as defined in Section 3(a) hereof) and any
settlement date pursuant to Section 3(b) hereof, there will be, no
other classes of stock outstanding except Common Stock; all
outstanding options to purchase shares of Common Stock have been duly
and validly authorized and issued; except as described in the
Prospectus, there are, and, on the Closing Date and any settlement
date pursuant to Section 3(b) hereof, there will be, no options,
warrants or rights to acquire, or debt instruments convertible into or
exchangeable for, or other agreements or understandings to which the
Company is a party, outstanding or in existence, entitling any person
to purchase or otherwise acquire shares of capital stock of the
Company; the issuance and sale of the Securities have been duly and
validly authorized and, when issued, delivered and paid for in
accordance with the terms hereof, the Securities will be fully paid
and nonassessable and free from preemptive rights, and will conform in
all respects to the description thereof contained in the Prospectus;
the Series A Warrants and Underwriters' Warrants will, when issued,
constitute valid and binding obligations of the Company enforceable in
accordance with their terms and the Company has reserved a sufficient
number of shares of Common Stock for issuance upon exercise thereof
(including the Series A Warrants included in the Underwriters'
Warrants); the Series A Warrants and Underwriters' Warrants will, when
issued, possess the rights, privileges and characteristics as
represented in the exhibits to the Registration Statement and as
described in the Prospectus; and the Securities (other than the
Underwriters' Warrants) have been approved for listing on the ________
Stock Exchange upon notice of issuance thereof. Each offer and sale of
securities of the Company referred to in Item 26 of Part II of the
Registration Statement was effected in compliance with the Act and the
rules and regulations thereunder, and with all applicable state
securities and blue sky ("Blue Sky") laws.
(g) Other than as described in the Prospectus, there
is no pending or, to the best knowledge of the Company, threatened
action, suit or proceeding before any court or governmental agency,
authority or body, domestic or foreign, or any arbitrator involving the
Company of a character required to be disclosed in the Registration
Statement or the Prospectus. There is no contract or other document of
a character required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit that is not described or filed
as required.
(h) This Agreement has been duly authorized, executed
and delivered by the Company and constitutes the legal, valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as rights of indemnity and
contribution hereunder may be limited by public policy and except as
the enforceability hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors' rights
generally and general principles of equity.
(i) The Company has full corporate power and
authority to enter into and perform its obligations under this
Agreement and to issue, sell and deliver the Securities in the manner
provided in this Agreement. The Company has taken all necessary
corporate action to authorize the execution and delivery of, and the
performance of its obligations under, this Agreement.
(j) Neither the execution, delivery and performance
of this Agreement by the Company, the offering, issue and sale of the
Securities, nor the consummation of any other of the transactions
contemplated herein, nor the fulfillment of the terms hereof, will
conflict with or result in a breach or violation of, or constitute a
default (or an event that with notice or lapse of time, or both, would
constitute a default) under, or result in the imposition of a lien on
any properties of the Company or an acceleration of indebtedness
pursuant to, the Articles of Incorporation or bylaws of the Company, or
any of the terms of any indenture or other agreement or instrument to
which the Company is a party or by which the Company or any of its
properties are bound, or any federal, state or local law, rule,
regulation of any court, governmental or regulatory body, stock
exchange or arbitrator having jurisdiction over the Company or any of
its assets. The Company is not (A) in violation of its Articles of
Incorporation or bylaws or (B) in breach of or default under any of the
terms of any indenture or other agreement or instrument to which it is
a party or by which it or its properties are bound, which breach or
default described in this clause (B) would, individually or in the
aggregate, have a Material Adverse Effect.
(k) Except as disclosed in the Prospectus, no person
has the right, contractual or otherwise, to cause the Company to issue
to it any shares of capital stock in consequence of the issue and sale
of the Securities, nor does any person have preemptive rights, or
rights of first refusal or other rights to purchase any of the
Securities. Except as referred to in the Prospectus, no person holds a
right to require or participate in a registration under the Act of
Common Stock or any other equity securities of the Company.
(l) The Company has not (i) taken and will not take,
directly or indirectly, any action designed to cause or result in, or
which has constituted or which might reasonably be expected to cause or
result in, under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), or otherwise, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale
or the Securities or (ii) effected any sales of shares or securities
that are required to be disclosed in response to Item 26 of Part II of
the Registration Statement (other than transactions disclosed in
response to Item 26 of Part II of the Registration Statement or the
Prospectus).
(m) No consent, approval, authorization or order of,
or declaration or filing with, any court or governmental agency or body
is required to be obtained or filed by or on behalf of the Company in
connection with the transactions contemplated herein, except such as
may have been obtained or made and registration of the Securities under
the Act, and such as may be required under the Blue Sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters.
(n) The accountants who have certified the financial
statements filed or to be filed with the Commission as part of the
Registration Statement are independent accountants as required by the
Act.
(o) No stop order preventing or suspending the use of
any Preliminary Prospectus has been issued, and no proceedings for that
purpose are pending or, to the best knowledge of the Company,
threatened or contemplated by the Commission; no stop order suspending
the sale of the Securities in any jurisdiction has been issued and no
proceedings for that purpose have been instituted or, to the best
knowledge of the Company, threatened or are contemplated; and any
request of the Commission for additional information (to be included in
the Registration Statement or the Prospectus or otherwise) has been
complied with.
(p) The Company has not sustained since December 31,
___, any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, and, since the respective dates as of which
information is given in the Registration Statement and the Prospectus,
there have not been any material changes in the capital stock or short-
or long-term debt of the Company, or any material adverse change, or a
development known to the Company that could reasonably be expected to
cause or result in a material adverse change, in the general affairs,
management, financial position, stockholders' equity, results of
operations or prospects of the Company, other than as set forth in the
Prospectus. Except as set forth in the Prospectus, there exists no
present condition or state of facts or circumstances known to the
Company (A) affecting its reserves or (B) involving its customers which
the Company can now reasonably foresee would have a Material Adverse
Effect or which would result in a termination or cancellation of any
agreement with any customer for whom the Company provides construction
services, individually or in the aggregate, are material to the
business of the Company, or which would result in any material decrease
in sales to any such customer, or which would prevent the Company from
conducting its business as described in the Prospectus in essentially
the same manner in which it has heretofore been conducted.
(q) The financial statements and the related notes of
the Company included in the Registration Statement and the Prospectus
present fairly the financial position, results of operations, cash flow
and changes in stockholders' equity of the Company at the dates and for
the periods indicated, subject in the case of the financial statements
for interim periods, to normal and recurring year-end adjustments. The
financial statement schedules included in the Registration Statement
present fairly the information required to be stated therein. Such
financial statements and schedules were prepared in conformity with the
Commission's rules and regulations and in accordance with generally
accepted accounting principles applied on a consistent basis throughout
the periods involved, except as stated therein. The financial
information of the Company set forth in the Prospectus under the
captions "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" fairly present, on the
basis stated in the Prospectus, the information included therein. The
inventories reflected on the financial statements, and thereafter
acquired by the Company through the date hereof, taken as a whole, are
in all material respects of a quality and quantity usable or salable in
the normal course of the business of the Company at values (taken as a
whole) at least equal to the values at which such items are carried on
the financial statements. The values at which such inventories are
carried on the financial statements reflect the normal inventory
valuation policy of the Company (including the writing down of the
value of any slow moving or obsolete inventory) of stating inventories
at the lower of cost or market on a weighted average,
first-in/first-out basis.
(r) The Company owns or possesses, or has the right
to use pursuant to licenses, sublicenses, agreements, permissions or
otherwise, adequate patents, copyrights, trade names, trademarks,
service marks, licenses and other intellectual property rights
necessary to carry on its business as described in the Prospectus, and,
except as set forth in the Prospectus, the Company has not received any
notice of either (i) default under any of the foregoing or (ii)
infringement of or conflict with asserted rights of others with respect
to, or challenge to the validity of, any of the foregoing which, in the
aggregate, if the subject of an unfavorable decision, ruling or
finding, could have a Material Adverse Effect, and the Company knows of
no fact or existing circumstance which could reasonably be anticipated
to serve as the basis for any such notice or any such default,
infringement or conflict.
(s) The Company has filed all applications and has
obtained all permits, approvals, licenses, franchises, certificates and
authorizations of all Federal, state, local or foreign governmental
authorities ("Permits") as are necessary to own its respective property
and to conduct its business in the manner now being conducted and as
described in the Prospectus, subject to such qualifications as may be
set forth in the Prospectus, except where the lack of ownership or
possession of such Permits would not, individually or in the aggregate,
have a Material Adverse Effect on the Company; the Company has
fulfilled and performed all of its material obligations with respect to
such Permits and no event has occurred which allows, or after notice or
lapse of time would allow, revocation or termination thereof or would
result in any other material impairment of the rights of the holder of
any such Permit, subject in each case to such qualification as may be
set forth in the Prospectus, except where such revocations,
terminations or other impairments thereof would not, individually or in
the aggregate, have a Material Adverse Effect on the Company; and,
except as described in the Prospectus, none of such Permits contains
any restriction that is materially burdensome to the Company.
(t) Subject to such exceptions as are not material (A) the
Company owns all properties and assets described in the Registration
Statement and the Prospectus as being owned by it and (B) the Company
has good title to all properties and assets owned by it, free and clear
of all liens, charges, encumbrances and restrictions, except as
otherwise disclosed in the Prospectus, and except for (i) liens for
taxes not yet due, (ii) mortgages and liens securing debt reflected on
the financial statements included in the Prospectus, (iii)
materialmen's, workmen's, vendor's and other similar liens incurred in
the ordinary course of business that are not delinquent and,
individually or in the aggregate, do not have a material adverse effect
on the value of such properties or assets to the Company, or on the use
of such properties or assets by the Company, in its respective
businesses, and (iv) any other liens that, individually or in the
aggregate, are not likely to result in a Material Adverse Effect. All
leases to which the Company is a party and which are material to the
conduct of the business of the Company are valid and binding and no
material default by the Company has occurred and is continuing
thereunder; and the Company enjoys peaceful and undisturbed possession
under all such material leases to which it is a party as lessee.
(u) The books, records and accounts of the Company
accurately and fairly reflect, in reasonable detail, the transactions
in and dispositions of the assets of the Company. The system of
internal accounting controls maintained by the Company is sufficient to
provide reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(v) Except as set forth in the Prospectus, subsequent
to the respective dates as of which information is given in the
Registration Statement and the Prospectus, the Company has not incurred
any liabilities or obligations, direct or contingent, or entered into
any transactions, in each case, which are likely to result in a
Material Adverse Effect, and there has not been any payment of or
declaration to pay any dividends or any other distribution with respect
to the shares of the capital stock of the Company.
(w) The Company has obtained and delivered to the
Representative the written agreements, in substantially the form of
Exhibit A attached hereto, of each of the persons listed in Schedule
III attached hereto, restricting dispositions of shares of capital
stock of the Company in accordance with the provisions of Section 6
hereof and the terms contained in the Exhibit A form applicable
thereto.
(x) The Company is in compliance in all material
respects with all applicable laws, rules and regulations, including,
without limitation, employment and employment practices, immigration,
terms and conditions of employment, health and safety of workers,
customs and wages and hours, and is not engaged in any unfair labor
practice. No property of the Company has been seized by any
governmental agency or authority as a result of any violation by the
Company or any independent contractor of the Company of any provision
of law. There is no pending unfair labor practice complaint or charge
filed with any governmental agency against the Company. There is no
labor strike, material dispute, slow down or work stoppage actually
pending or, to the best knowledge of the Company, threatened against or
affecting the Company; no grievance or arbitration arising out of or
under any collective bargaining agreement is pending against the
Company; no collective bargaining agreement which is binding on the
Company restricts the Company from relocating or closing any of its
operations; and the Company has not experienced any work stoppage or
other labor dispute at any time.
(y) The Company has accurately, properly and timely
(giving effect to any valid extensions of time) filed all federal,
state, local and foreign tax returns (including all schedules thereto)
that are required to be filed, and has paid all taxes and assessments
shown thereon. All tax deficiencies asserted or assessed against the
Company by the Internal Revenue Service ("IRS") or any other foreign or
domestic taxing authority have been paid or finally settled with no
remaining amounts owed. Neither the IRS nor any other foreign or
domestic taxing authority has examined any tax returns of the Company.
The charges, accruals and reserves shown in the financial statements
included in the Prospectus in respect of taxes for all fiscal periods
to date are adequate, and nothing has occurred subsequent to the date
of such financial statements that makes such charges, accruals or
reserves inadequate. The Company is not aware of any proposal (whether
oral or written) by any taxing authority to adjust any tax return filed
by the Company.
(z) Except as set forth in the Prospectus, there are
no outstanding loans, advances or guaranties of indebtedness by the
Company to or for the benefit of its affiliates, or any of its officers
or directors, or any of the members of the families of any of them,
which are required to be disclosed in the Registration Statement or the
Prospectus.
(aa) The Company is not an investment company subject
to registration under the Investment Company Act of 1940, as amended.
(bb) Except as set forth in the Prospectus, the
Company has insurance of the types and in the amounts that it
reasonably believes is adequate for its business, including, but not
limited to, casualty and general liability insurance covering all real
and personal property owned or leased by the Company, as applicable,
against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against.
(cc) The Company has not at any time (i) made any
contributions to any candidate for political office, or failed to
disclose fully any such contribution, in violation of law; (ii) made
any payment to any state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public
duties, other than payments required or allowed by all applicable laws;
or (iii) violated, nor is it in violation of, any provision of the
Foreign Corrupt Practices Act of 1977.
(dd) The preparation and the filing of the
Registration Statement with the Commission have been duly authorized by
and on behalf of the Company, and the Registration Statement has been
duly executed pursuant to such authorization by and on behalf of the
Company.
(ee) All documents delivered or to be delivered by
the Company or any of its directors or officers to the Underwriters,
the Commission or any state securities law administrator in connection
with the issuance and sale of the Securities were, on the dates on
which they were delivered, and will be, on the dates on which they are
to be delivered, true, complete and correct in all material respects.
(ff) With such exceptions as are not likely to result
in a Material Adverse Effect, the Company is in compliance with all
Federal, state, foreign and local laws and regulations relating to
pollution or protection of human health or the environment
("Environmental Laws"), and the Company has not received any notice or
other communication alleging a currently pending violation of any
Environmental Laws. With such exceptions as are not likely to result in
a Material Adverse Effect, other than as set forth in the Prospectus,
to the Company's best knowledge, there are no past or present actions,
activities, circumstances, conditions, events or incidents, including,
without limitation, the release, emission, discharge or disposal of any
chemicals, pollutants, contaminants, wastes, toxic substances,
petroleum and petroleum products, that may result in the imposition of
liability on the Company or any claim against the Company or, to the
Company's best knowledge, against any person or entity whose liability
for any claim the Company has or may have assumed either contractually
or by operation of law, and the Company has not received any notice or
other communication concerning any such claim against the Company or
such person or entity.
(gg) Except as described in the Prospectus, the
Company does not maintain, nor does any other person maintain on behalf
of the Company, any retirement, pension (whether deferred or
non-deferred, defined contribution or defined benefit) or money
purchase plan or trust. There are no unfunded liabilities of the
Company with respect to any such plans or trusts that are not accrued
or otherwise reserved for on the Company's financial statements
included in the Registration Statement and the Prospectus.
(hh) Any certificates signed by an officer of the
Company and delivered to the Representative or the Underwriters shall
also be deemed a representation and warranty of the Company to the
Underwriters as to the matters covered thereby.
(ii) The Company is not in violation of or default under any
judgment, ruling, decree or order or any statute, rule or regulation
of any court or other United States governmental agency or body,
including any applicable laws respecting employment, immigration and
wages and hours, in each case, where such violation or default could
have a Material Adverse Effect.
2. Purchase and Sale.
(a) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company agrees
to issue and sell to the Underwriters an aggregate of 1,000,000 Units,
with each Unit consisting of one share of Common Stock and one
Redeemable Series A Warrant. Each of the Underwriters agrees, severally
and not jointly, to purchase from the Company the number of Units set
forth opposite its name in Schedule I hereto. The purchase price per
Unit to be paid by the several Underwriters to the Company shall be
$____ per Unit. No value shall be attributable to the Series A Warrants
which comprise a part of each Unit.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Company hereby
grants an option (the "Underwriters' Option") to the several
Underwriters to purchase, severally and not jointly, up to an aggregate
of 150,000 Units at the purchase price of $____ per Unit for use solely
in covering any over-allotments made by the Representative for the
account of the Underwriters in the sale and distribution of the
Underwritten Securities. The Underwriters' Option may be exercised in
whole or in part at any time on or before the 45th day after the
Effective Date upon written or telegraphic notice by the Representative
to the Company setting forth the number of Units which the several
Underwriters are electing to purchase pursuant to the Underwriters'
Option and the settlement date and instructions as to the names and
denominations in which the Securities to be issued pursuant to the
Underwriters' Option are to be registered. Delivery of certificates for
such Units by the Company, and payment therefor to the Company, shall
be made as provided in Section 3 hereof. The number of Units to be so
purchased by each Underwriter pursuant to the Underwriters' Option
shall be determined by multiplying the number of Units to be sold by
the Company pursuant to the Underwriters' Option, as exercised, by a
fraction, the numerator of which is the number of Units to be purchased
by such Underwriter as set forth opposite its name in Schedule I and
the denominator of which is the total number of Units to be purchased
by all of the Underwriters as set forth on Schedule I (subject to such
adjustments to eliminate any fractional Unit purchases as the
Representative in their discretion may make).
3. Delivery and Payment.
(a) Delivery of the certificates for the Units described in
Sections 2(a) and, if the Underwriters' Option described in Section
2(b) hereof is exercised on or before the third business day prior to
the Closing Date (as defined below), 2(b) hereof shall be made by the
Company through the facilities of the Depository Trust Company
("DTC"), and payment therefor, shall be made at the office of the
Company at 11:00 a.m. Dallas, Texas time, on such date, not earlier
than the fourth full business day following the Effective Date of the
Registration Statement, but not later than twelve business days after
such Effective Date, as you shall designate by at least 48 hours'
prior notice to the Company (such date, time of delivery and payment
for such Securities being herein called the "Closing Date"). Delivery
of the certificates for such Securities to be purchased on the Closing
Date shall be made as provided in the preceding sentence for the
respective accounts of the several Underwriters against payment by the
several Underwriters through the Representative of the aggregate
purchase price of such Securities being sold by the Company, to or
upon the order of the Company, by certified or official bank check or
checks drawn on or by a New York Clearing House bank and payable in
next day funds. Certificates for such Securities shall be registered
in such names and in such denominations as the Representative may
request not less than three full business days in advance of the
Closing Date. The Company agrees to have the certificates for the
Securities to be purchased on the Closing Date available at the office
of the DTC, not later than 9:00 a.m. Dallas, Texas time at least one
business day prior to the Closing Date.
(b) If the Underwriters' Option is exercised after the third
business day prior to the Closing Date, the Company will deliver (at
the expense of the Company) on the date specified by the Representative
(which shall not be less than three business days after exercise of the
Underwriters' Option), certificates for the Securities described in
Section 2(b) hereof in such names and denominations as the
Representative shall have requested against payment at the office of
the Company of the purchase price therefor, by certified or official
bank check or checks drawn on or by a New York Clearing House bank and
payable in next day funds. If settlement for such Securities occurs
after the Closing Date, the Company will deliver to the Representative
on the settlement date for such Securities, and the obligation of the
Underwriters to purchase such Securities shall be conditioned upon
receipt of, supplemental opinions, certificates and letters confirming
as of such date the opinions, certificates and letters delivered on the
Closing Date pursuant to Section 6 hereof. The Company agrees to have
the certificates for the Securities to be purchased after the Closing
Date available at the office of the DTC, not later than 9:00 a.m.
Dallas, Texas time at least one business day prior to the settlement
date.
4. Offering by Underwriters. It is understood that the several Underwriters
propose to offer the Securities for sale to the public as set forth in the
Prospectus.
5. Agreements of the Company. The Company agrees with the several Underwriters
that:
(a) The Company will use its best efforts to cause the
Registration Statement, and any amendment thereof, if not effective at
the Execution Time, to become effective as promptly as possible. If the
Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Prospectus is otherwise required under Rule
424(b), the Company will file the Prospectus, properly completed,
pursuant to Rule 424(b) within the time period prescribed and will
provide evidence satisfactory to the Representative of such timely
filing. The Company will promptly advise the Representative (i) when
the Registration Statement shall have become effective, (ii) when any
post-effective amendment thereto shall have become effective, (iii) of
any request by the Commission for any amendment or supplement of the
Registration Statement or the Prospectus or for any additional
information with respect thereto, (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or of the receipt by the Company of any
notification with respect to the institution or threatening of any
proceeding for that purpose, and (v) of the receipt by the Company of
any notification with respect to the suspension of the qualification of
the Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose. The Company will use
its best efforts to prevent the issuance of any such stop order or
suspension and, if issued, to obtain as soon as possible the withdrawal
thereof. The Company will not file any amendment to the Registration
Statement or supplement to the Prospectus without the prior consent of
the Representative. The Company will prepare and file with the
Commission, promptly upon your request, any amendment to the
Registration Statement or supplement to the Prospectus that you
reasonably determine to be necessary or advisable in connection with
the distribution of the Securities by you, and will use its best
efforts to cause the same to become effective as promptly as possible.
The Company, at the Company's expense, shall keep the Registration
Statement effective and the information contained therein (including
information contained in the Prospectus) current during the term of the
Series A Warrants in accordance with the Act and the rules and
regulations thereunder. Without limiting the effect of the preceding
sentence, in the event any Underwriter is required to deliver a
Prospectus in connection with sales of any of the Securities at any
time nine months or more after the Effective Date, upon the written
request of the Representative and at the expense of the Company, the
Company will prepare, file with the Commission and deliver to such
Underwriter as many copies as the Representative may request of an
amended or supplemented Prospectus complying with Section 10(a)(3) of
the Act.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it
otherwise shall be necessary to supplement the Prospectus to comply
with the Act or the rules or regulations thereunder, the Company will
promptly notify the Representative and prepare and file with the
Commission, subject to Section 5(a) hereof, a supplement that will
correct such statement or omission or a supplement that will effect
such compliance.
(c) As soon as practicable (but not later than _____1996), the
Company will make generally available to its security holders and to
the Representative an earnings statement or statements (which need not
be audited) of the Company covering a period of at least twelve months
after the Effective Date (but in no event commencing later than 90 days
after such date), which will satisfy the provisions of Section 11(a) of
the Act and Rule 158 promulgated thereunder.
(d) The Company will furnish to each of you and counsel for
the Underwriters, without charge, three signed copies of the
Registration Statement and any amendments thereto (including exhibits
thereto) and to each other Underwriter a conformed copy of the
Registration Statement and any amendments thereto (without exhibits
thereto) and, so long as delivery of a prospectus by an Underwriter or
dealer may be required by the Act, as many copies of the Prospectus and
each Preliminary Prospectus and any supplements thereto as the
Representative may reasonably request. The Company will furnish or
cause to be furnished to the Representative copies of all reports on
Form SR required by Rule 463 under the Act.
(e) The Company will take all actions necessary for the
registration or qualification of the Securities for sale under the laws
of such jurisdictions within the United States and its territories as
the Representative may designate, will maintain such qualifications in
effect so long as required for the distribution of the Securities and
will pay the fee of the National Association of Securities Dealers,
Inc. (the "NASD") in connection with its review of the offering,
provided that the Company shall not be required to qualify as a foreign
corporation or to consent to service of process under the laws of any
such jurisdiction (except service of process with respect to the
offering and sale of the Securities).
(f) The Company will apply the net proceeds from the offering
received by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(g) The Company will (i) cause the Securities (other than the
Underwriters' Warrants) to be listed on the ________ Stock Exchange,
(ii) comply with all registration, filing and reporting requirements of
the Exchange Act and the ________ Stock Exchange which may from time to
time be applicable to the Company, and (iii) file a report of sales and
use of proceeds on Form SR as required to be filed pursuant to Rule 463
under the Act from time to time.
(h) The Company will file promptly all documents required to
be filed with the Commission pursuant to Sections 13, 14 or 15(d) of
the Exchange Act subsequent to the Effective Date and during any period
in which the Prospectus is required to be delivered.
(i) During the five year period commencing on the date hereof,
the Company will furnish to its stockholders, as soon as practicable
after the end of each respective period, annual reports (including
financial statements audited by independent certified public
accountants) and unaudited quarterly reports of earnings and will
furnish to you and, upon request, to the other Underwriters hereunder
(i) concurrent with furnishing such annual and quarterly reports to its
stockholders, copies of such reports; (ii) as soon as they are
available, copies of all reports and financial statements furnished to
or filed with the Commission, the NASD, the ________ Stock Exchange, or
any other securities exchange; (iii) every press release and every
material news item or article in respect of the Company or its affairs
which was released or prepared by the Company; and (iv) any additional
information of a public nature concerning the Company or its business
that you may reasonably request. During such five year period, if the
Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the
accounts of the Company and its subsidiaries are consolidated, and
shall be accompanied by similar financial statements for any
significant subsidiary that is not so consolidated.
(j) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a
registrar (which may be the same entity as the transfer agent) for the
Securities.
(k) The Company will not, for a period of one year following
the Effective Date, without the prior written consent of the
Representative, issue, sell, contract to sell (including, without
limitation, any short sale), transfer, assign, pledge, encumber,
hypothecate or grant any option to purchase or otherwise dispose of,
any capital stock, or any options, rights or warrants to purchase any
capital stock of the Company, or any securities or indebtedness
convertible into or exchangeable for shares of capital stock of the
Company, except for (i) sales of the Securities as contemplated by this
Agreement, and (ii) sales of Common Stock upon the exercise of Series A
Warrants or outstanding options described in the Prospectus.
(l) The Company has reserved and shall continue to reserve a
sufficient number of shares of Common Stock for issuance upon exercise
of the Underwriters' Warrants and Series A Warrants (including the
Series A Warrants included in the Underwriters' Warrants).
(m) The Company will not take, directly or indirectly, any
action designed to or that might reasonably be expected to cause or
result in stabilization or manipulation of the price of the Units,
Common Stock or Series A Warrants to facilitate the sale or resale of
such Securities or that otherwise might reasonably be expected to
violate the provisions of Rule 10b-6, Rule 10b-7 or Rule 10b-18 under
the Exchange Act.
6. Conditions to the Obligations of the Underwriters. The obligations of the
Underwriters to purchase the Units described in Sections 2(a) and 2(b)
hereof shall be subject to (i) the accuracy in all material respects of the
representations and warranties on the part of the Company contained herein
as of the Execution Time, the Closing Date (except that each of the
representations and warranties of the Company, the breach or violation of
which is qualified as to materiality, shall be true in all respects) and
(in the case of any Units delivered after the Closing Date) any settlement
date pursuant to Section 3(b) hereof, (ii) the accuracy of the statements
of the Company made in any certificates delivered pursuant to the
provisions hereof, (iii) the performance in all material respects by the
Company of their respective obligations hereunder (except that each of the
obligations of the Company, the violation of which is qualified as to
materiality, shall be performed in all respects), and (iv) the following
additional conditions:
(a) The Registration Statement shall have become effective
(or, if a post-effective amendment is required to be filed pursuant to
Rule 430A under the Act, such post-effective amendment shall become
effective) not later than 5:00 p.m. ______ time, on the execution date
hereof or at such later date and time as you may approve in writing
and, at the Closing Date (and any settlement date pursuant to Section
3(b) hereof), no stop order suspending the effectiveness of the
Registration Statement or any qualification in any jurisdiction shall
have been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or any Underwriter,
threatened by the Commission, and any request of the Commission for
additional information (to be included in the Registration Statement or
Prospectus or otherwise) shall have been complied with to the
Representative's reasonable satisfaction.
(b) The Company shall have furnished to the Representative the
opinion of Patrick R. Sughroue, P.C., counsel for the Company, or other
counsel acceptable to the Underwriters addressed to the Underwriters
and dated the Closing Date (and any settlement date pursuant to Section
3(b) hereof), to the effect that:
(i) The Registration Statement has become effective
under the Act; any required filing of the Prospectus or any
supplements thereto pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b);
to the best knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement or
any qualification in any jurisdiction has been issued and no
proceedings for that purpose have been instituted or
threatened; the Registration Statement and the Prospectus (and
any amendments or supplements thereto) comply as to form in
all material respects with the applicable requirements of the
Act and the rules and regulations thereunder (other than the
financial statements and related schedules, as to which such
counsel need make no statement).
(ii) Except as set for in the Prospectus, the
Company has no subsidiaries.
(iii) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the State of Tennessee, with requisite corporate power
and authority to own its properties and conduct its business
as described in the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing
under the laws of each jurisdiction in which it conducts its
business or owns property and in which the failure,
individually or in the aggregate, to be so qualified would
have a Material Adverse Effect. The Company has all necessary
and material authorizations, approvals, orders, licenses,
certificates and permits of and from all government regulatory
officials and bodies, to own its properties and conduct its
business as described in the Prospectus, except where failure
to obtain such authorizations, approvals, orders, licenses,
certificates or permits would not have a Material Adverse
Effect.
(iv) The Company does not own any shares of capital
stock or any other equity securities of any corporation or any
equity interest in any firm, partnership, association or other
entity, other than as described in the Prospectus.
(v) The Company has authorized and outstanding share
capitalization as set forth in the Prospectus; the capital
stock of the Company conforms in all material respects to the
description thereof contained in the Prospectus; all
outstanding shares of Common Stock have been duly and validly
authorized and issued and are fully paid and nonassessable and
the certificates therefor are in valid and sufficient form in
accordance with the laws of the State of Tennessee and the
Company's Bylaws; there are no other classes of stock
outstanding except Common Stock as described in the
Prospectus; all outstanding options to purchase shares of
Common Stock have been duly and validly authorized and issued;
except as described in the Prospectus, there are no options,
warrants or rights to acquire, or debt instruments convertible
into or exchangeable for, or other agreements or
understandings to which the Company is a party, outstanding or
in existence, entitling any person to purchase or otherwise
acquire any shares of capital stock of the Company; the
issuance and sale of the Securities have been duly and validly
authorized and, when issued and delivered and paid for in
accordance with the terms of this Agreement, the Securities
will be fully paid and nonassessable and free from preemptive
rights, and will conform in all respects to the description
thereof contained in the Prospectus; the Series A Warrants and
Underwriters' Warrants constitute valid and binding
obligations of the Company enforceable in accordance with
their terms (subject to customary bankruptcy and equitable
remedy exceptions) and the Company has reserved a sufficient
number of shares of Common Stock for issuance upon exercise
thereof (including the Series A Warrants included in the
Underwriters' Warrants); the Series A Warrants and
Underwriters' Warrants possess the rights, privileges and
characteristics as represented in the forms filed as exhibits
to the Registration Statement and as described in the
Prospectus; and the Securities (other than the Underwriters'
Warrants) have been approved for listing on the ________ Stock
Exchange upon notice of issuance thereof. Each offer and sale
of securities of the Company referred to in Item 26 of Part II
of the Registration Statement was effected in compliance with
the Act and the rules and regulations thereunder, and with all
applicable state securities and blue sky ("Blue Sky") laws.
(vi) Other than as described in the Prospectus, there
is no pending or, to the best knowledge of such counsel,
threatened action, suit or proceeding before any court or
governmental agency, authority or body, domestic or foreign,
or any arbitrator involving the Company of a character
required to be disclosed in the Registration Statement or the
Prospectus that is not adequately disclosed in the Prospectus,
and, to the best knowledge of such counsel, there is no
contract or other document of a character required to be
described in the Registration Statement or the Prospectus, or
to be filed as an exhibit, which is not described or filed as
required.
(vii) This Agreement has been duly authorized,
executed and delivered by the Company and constitutes the
legal, valid and binding agreement and obligation of the
Company enforceable against it in accordance with its terms
(subject to customary bankruptcy and equitable remedy
exceptions, and limitations under the Act as to the
enforceability of indemnification provisions).
(viii) The Company has requisite corporate power and
authority to enter into and perform its obligations under this
Agreement and to issue, sell and deliver the Securities to be
sold by it in the manner provided in this Agreement. The
Company has taken all necessary corporate action to authorize
the execution and delivery of, and the performance of its
obligations under, this Agreement.
(ix) Neither the execution, delivery and
performance of this Agreement by the Company, the offering,
issue and sale of the Securities, nor the consummation of any
other of the transactions contemplated herein, nor the
fulfillment of the terms hereof, will conflict with or result
in a breach or violation of, or constitute a default (or an
event that with notice or lapse of time, or both, would
constitute a default) under, or result in the imposition of a
lien on any properties of the Company or an acceleration of
indebtedness pursuant to, the Articles of Incorporation or
bylaws of the Company, or any of the terms of any indenture or
other agreement or instrument to which the Company is a party
or by which the Company or any of its properties are bound, or
any federal, state or local law, rule, regulation of any
court, governmental or regulatory body, stock exchange or
arbitrator having jurisdiction over the Company or any of its
assets. The Company is not (A) in violation of its Articles of
Incorporation or bylaws or (B) in breach of or default under
any of the terms of any indenture or other agreement or
instrument to which it is a party or by which it or its
properties are bound, which breach or default described in
this clause (B) would, individually or in the aggregate, have
a Material Adverse Effect. Neither the offering, issue and
sale of the Securities nor the consummation of any other of
the transactions contemplated herein, nor the fulfillment of
the terms hereof, will conflict with or result in a breach or
violation of, or constitute a default (or an event that with
notice or lapse of time, or both, would constitute a default)
under, or result in the imposition of a lien on any properties
of the Company, or an acceleration of indebtedness pursuant
to, the Articles of Incorporation or bylaws of the Company, or
any of the terms of any indenture or other agreement or
instrument to which the Company is a party or by which any of
their respective properties are bound, or any law, rule,
regulation, court decree, judgment or other order of any
court, governmental or regulatory body, stock exchange or
arbitrator having jurisdiction over the Company or any of its
assets. The Company is not (A) in violation of its Articles of
Incorporation or bylaws or (B) in breach of or default under
any of the terms of any indenture or other agreement or
instrument to which it is a party or by which it or its
properties are bound, which breach or default described in
this clause (B) would, individually or in the aggregate, have
a Material Adverse Effect.
(x) Except as disclosed in the Prospectus, no person
has the right, contractual or otherwise, to cause the Company
to issue to it any shares of capital stock in consequence of
the issue and sale of the Securities to be sold by the Company
hereunder nor does any person have preemptive rights, or
rights of first refusal or other rights to purchase any of the
Securities. Except as referred to in the Prospectus, no person
holds a right to require or participate in a registration
under the Act of Common Stock or any other equity securities
of the Company.
(xi) No consent, approval, authorization or order of,
or declaration or filing with, any court or governmental
agency or body is required to be obtained or filed by or on
behalf of the Company in connection with the transactions
contemplated herein, except such as may have been obtained or
made and registration of the Securities under the Act, and
such as may be required under the Blue Sky laws of any
jurisdiction.
(xii) The Company is not in violation of or default
under any judgment, ruling, decree or order or any statute,
rule or regulation of any court or other United States
governmental agency or body, including any applicable laws
respecting employment, immigration and wages and hours, in
each case, where such violation or default could have a
Material Adverse Effect. The Company is not involved in any
labor dispute nor, to the best knowledge of such counsel, is
any labor dispute threatened.
(xiii) The Company is not an investment company
subject to registration under the Investment Company Act of
1940, as amended.
(xiv) The preparation and the filing of the
Registration Statement with the Commission have been duly
authorized by and on behalf of the Company and the
Registration Statement has been duly executed pursuant to such
authorization by and on behalf of the Company.
(xv) The Company owns or possesses, or has the right
to use pursuant to licenses, sublicenses, agreements,
permissions or otherwise, adequate patents, copyrights, trade
names, trademarks, service marks, licenses and other
intellectual property rights necessary to carry on its
business as described in the Prospectus, and, except as set
forth in the Prospectus, the Company has not received any
notice of either (i) default under any of the foregoing, or
(ii) infringement of or conflict with asserted rights of
others with respect to, or challenge to the validity of, any
of the foregoing which, in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could have a Material
Adverse Effect.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of
the Company, representatives of the independent public accountants of
the Company and representatives of the Underwriters at which the
contents of the Registration Statement and Prospectus were discussed
and, although such counsel is not passing upon and does not assume
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or Prospectus
(except as and to the extent stated in the first three clauses of
subparagraph (v) above), on the basis of the foregoing and on such
counsel's participation in the preparation of the Registration
Statement and the Prospectus, nothing has come to the attention of such
counsel that causes such counsel to believe that the Registration
Statement, at the Effective Date and at the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), contained or contains
any untrue statement of a material fact or omitted or omits to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, or that the Prospectus, at the date of such
Prospectus or at the Closing Date (or any settlement date pursuant to
Section 3(b) hereof), or any amendment or supplement to the Prospectus,
as of its respective date or as of the Closing Date (or any settlement
date pursuant to Section 3(b) hereof) contained or contains any untrue
statement of a material fact or omitted or omits to state a material
fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no
comment with respect to the financial statements and schedules and
other financial or statistical data included in the Registration
Statement or Prospectus).
References to the Prospectus in this Section 7(b) shall
include any amendments or supplements thereto.
(c) The Representative shall have received from Winstead
Sechrest & Minick P.C. counsel for the Underwriters, an opinion dated
the Closing Date (and any settlement date pursuant to Section 3(b)
hereof), with respect to the issuance and sale of the Securities, and
with respect to the Registration Statement, the Prospectus and other
related matters as the Representative may reasonably require, and the
Company shall have furnished to such counsel such documents as they may
reasonably request for the purpose of enabling them to pass upon such
matters.
(d) The Company shall have furnished to the Representative a
certificate of the Company, signed by its President and Chief Executive
Officer, dated the Closing Date (and any settlement date pursuant to
Section 3(b) hereof), to the effect that each has carefully examined
the Registration Statement, the Prospectus (and any supplements
thereto) and this Agreement, and, after due inquiry, that:
(i) As of the Closing Date (and any settlement date
pursuant to Section 3(b) hereof), the statements made in the
Registration Statement and the Prospectus are true and correct
and the Registration Statement and the Prospectus do not
contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or
necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(ii) No order suspending the effectiveness of the
Registration Statement or the qualification or registration of
the Securities under the securities or Blue Sky laws of any
jurisdiction is in effect and no proceeding for such purpose
is pending before or, to the knowledge of such officers,
threatened or contemplated by the Commission or the
authorities of any such jurisdiction; and any request for
additional information with respect to the Registration
Statement or the Prospectus on the part of the staff of the
Commission or any such authorities brought to the attention of
such officers has been complied with to the satisfaction of
the staff of the Commission or such authorities.
(iii) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, (x) there has not been any change in the capital
stock or short- or long-term debt of the Company, except as
set forth in or contemplated by the Registration Statement and
the Prospectus, (y) there has not been any material adverse
change in the business, prospects, properties, management,
results of operations or condition (financial or otherwise) of
the Company, whether or not arising from transactions in the
ordinary course of business, in each case, other than as set
forth in or contemplated by the Registration Statement and the
Prospectus, and (z) the Company has not sustained any material
interference with its business or properties from fire,
explosion, flood or other casualty, whether or not covered by
insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree,
which is not set forth in the Registration Statement and the
Prospectus.
(iv) Since the respective dates as of which
information is given in the Registration Statement and the
Prospectus, there has been no litigation instituted against
the Company or any of its respective officers or directors,
and since such dates there has been no proceeding instituted
or, to the best knowledge of such officers, threatened against
the Company or any of its officers or directors before any
federal, state or county court, commission, regulatory body,
administrative agency or other governmental body, domestic or
foreign, in which litigation or proceeding an unfavorable
ruling, decision or finding could have a Material Adverse
Effect.
(v) Each of the representations and warranties of the
Company in this Agreement is true and correct in all material
respects on and as of the Execution Time and the Closing Date
(and any settlement date pursuant to Section 3(b) hereof) with
the same effect as if made on and as of the Closing Date (and
any settlement date pursuant to Section 3(b) hereof).
(vi) Each of the covenants required in this Agreement
to be performed by the Company on or prior to the Closing Date
(and any settlement date pursuant to Section 3(b) hereof) has
been duly, timely and fully performed in all material
respects, and each condition required herein to be complied
with by the Company on or prior to the Closing Date (and any
settlement date pursuant to Section 3(b) hereof) has been
duly, timely and fully complied with in all material respects.
(e) At the Execution Time and on the Closing Date (and any
settlement date pursuant to Section 3(b) hereof), Ronald D. Cameron,
C.P.A., shall have furnished to the Representative letters, dated as of
such dates, in form and substance satisfactory to the Representative,
confirming that they are independent accountants within the meaning of
the Act and the applicable rules and regulations thereunder and stating
in effect that:
(i) In their opinion, the audited financial statements
of the Company for the fiscal year ended December 31, 1995,
and the interim periods compiled by Pershing Yoakley &
Associates, P.C., and delivered to the Representatives the
notes to the financial statements and financial statement
schedules for those periods included in the Registration
Statement and the Prospectus, comply in form in all material
respects with the applicable accounting requirements of the
Act and the applicable rules and regulations thereunder.
(ii) On the basis of a reading of the latest
unaudited financial statements made available by the Company,
carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing
standards), a reading of the minutes of the meetings of the
stockholders, directors and committees of the Company, and
inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the
Company, nothing came to their attention that caused them to
believe that with respect to the period subsequent to December
31, 1995, at a specified date not more than five business days
prior to the date of the letter, (y) there were any changes in
the short- or long-term debt or capital stock of the Company,
or decreases in net current assets, net assets or
stockholders' equity of the Company as compared with the
amounts shown on the December 31, 1995 balance sheet included
in the Registration Statement and the Prospectus, or (z) there
were any decreases in reserves, sales, net income or income
from operations, of the Company, as compared with the
corresponding period in the preceding year, except for changes
or decreases which the Registration Statement discloses have
occurred or may occur and except for changes or decreases, set
forth in such letter, in which case (A) the letter shall be
accompanied by an explanation by the Company as to the
significance thereof unless said explanation is not deemed
necessary by the Representative and (B) such changes or
decreases and the explanation thereof shall be acceptable to
the Representative, in its sole discretion.
(iii) They have performed certain other specified
procedures as a result of which they determined that all
information of an accounting, financial or statistical nature
(which is limited to accounting, financial or statistical
information derived from the general accounting records of the
Company ) set forth in the Registration Statement and the
Prospectus and specified by you prior to the Execution Time,
agrees with the accounting records of the Company.
(iv) On the basis of a reading of the unaudited
balance sheet as of _________, 1996 and the related unaudited
statements of operations for the ______months ended
__________, 1996, and the procedures specified by you prior to
the Execution Time, nothing came to their attention that
caused them to believe that the above described balance sheet
and statements of operations had not been properly compiled on
the bases described in the notes thereto.
References to the Prospectus in this Section 6(e)
shall include any amendments or supplements thereto.
The Representative shall have also received from Ronald D.
Cameron, C.P.A. a letter to the Company stating that the Company's
system of internal accounting controls taken as a whole are sufficient
to meet the broad objectives of internal accounting control insofar as
those objectives pertain to the prevention or detection of errors or
irregularities in amounts that would be material to the financial
statements of the Company.
(f) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, there shall
not have been (i) any changes or decreases from those specified in the
letters referred to in Section 6(e) hereof which have been accepted by
the Representative pursuant thereto or (ii) any change in the
properties, assets, results of operations, business, capitalization,
net worth, prospects, general affairs or condition (financial or
otherwise) of the Company the effect of which is, in the sole judgment
of the Representative, so material and adverse as to make it
impractical or inadvisable to proceed with the public offering or
delivery of the Securities as contemplated by the Registration
Statement and the Prospectus.
(g) On or prior to the Effective Date, the Securities shall
have been approved for listing on the ________ Stock Exchange.
(h) The Company shall not have sustained any uninsured
substantial loss as a result of fire, flood, accident or other
calamity.
(i) The Company shall have furnished to the Representative a
certificate of the Secretary of the Company certifying as to certain
information and other matters as the Representative may reasonably
request.
(j) The Company shall have furnished to the Representative
such further information, certificates and documents as the
Representative may reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in any respect when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above
or elsewhere in this Agreement shall not be in all respects reasonably
satisfactory in form and substance to the Representative and its
counsel, this Agreement and all obligations of the Underwriters
hereunder may be canceled at, or at any time prior to, the Closing Date
(or any settlement date, pursuant to Section 3(b) hereof), by the
Representative. Notice of such cancellation shall be given to the
Company in writing or by telephone, facsimile or telegraph confirmed in
writing.
7. Fees and Expenses and Underwriters' Warrants. The Company agrees to pay or
cause to be paid the following:
(a) The fees, disbursements and expenses of its own counsel and
accountants in connection with the registration of the Securities
under the Act and all other expenses in connection with the
preparation, printing and filing of the Registration Statement, any
Preliminary Prospectus, any Prospectus, and any drafts thereof, and
amendments and supplements thereto, and the mailing and delivery of
copies thereof to the Underwriters and dealers;
(b) All expenses in connection with the qualification of the
Securities for offering under state securities laws, including the
fees and disbursements of counsel for the Underwriters in connection
with such qualification and in connection with the Blue Sky
Memorandum;
(c) All filing and other fees in connection with filing with the
NASD, and complying with applicable review requirements thereof;
(d) The cost of preparing and printing certificates for the
Securities;
(e) All expenses, taxes, fees and commissions, including, without
limitation, any and all fixed transfer duties, sellers' and buyers'
stamp taxes or duties on the purchase and sale of the Securities and
stock exchange brokerage and transaction levies with respect to the
purchase and, if applicable, the sale of the Securities (the latter to
the extent paid and not reimbursed) (i) incident to the sale and
delivery by the Company of the Securities to the Underwriters, and
(ii) incident to the sale and delivery of the Securities by the
Underwriters to the initial purchasers thereof;
(f) The costs and charges of any transfer agent and registrar;
(g) The fees and expenses in connection with the registration of
the Securities under the Exchange Act and the qualification of the
Securities for listing on the ________ Stock Exchange;
(h) The cost of printing, producing and distributing this
Agreement, the Agreement among Underwriters, the Selected Dealers
Agreement, the related syndication materials and the Preliminary and
Final Blue Sky Memoranda;
(i) All travel expenses (including without limitation airfare and
hotel) of the Company's officers, directors and other representatives
in connection with the road show;
(j) A nonaccountable expense allowance of 3.0% of the gross
proceeds from the offering (including the Units described in Section
2(b) hereof) payable to the Representative; and
(k) All other costs and expenses incident to the performance of
the Company's obligations hereunder.
In addition to the sums payable to the Representative as
provided elsewhere herein and in addition to the Underwriters' Option,
the Underwriters shall be entitled to receive, as partial compensation
for their services, unit purchase warrants for the purchase of up to an
additional 100,000 Units (the "Underwriters' Warrants"). The
Underwriters' Warrants shall be issued pursuant to the Warrant and
Registration Rights Agreement (the "Underwriters' Warrant Agreement")
in the form of Exhibit B attached hereto and shall be exercisable, in
whole or in part, for a period of four years commencing one year from
the date of the Prospectus, at 120% of the public offering price of the
Units set forth on the cover page of the Prospectus. The Underwriters'
Warrants, including the Series A Warrants issuable upon exercise
thereof, shall be non-transferable for one year from the date of
issuance of the Underwriters' Warrants, except as provided in the
Underwriters' Warrant Agreement. The terms of the Units subject to the
Underwriters' Warrants shall be the same as the Units sold to the
public.
Without limiting in any respect the foregoing obligations of
the Company, which obligations shall survive any termination of this
Agreement, if the sale of the Securities provided for herein is not
consummated because any condition to the obligations of the
Underwriters set forth in Section 6 hereof is not satisfied, because of
any termination pursuant to Section 10 hereof, or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or comply in all material respects with any provision
hereof other than by reason of a default by any of the Underwriters,
the Company agrees to reimburse the Underwriters, upon demand, for all
out-of-pocket expenses (including reasonable fees and disbursements of
counsel) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities to the extent the amounts
paid pursuant to Section 7(j) hereof are insufficient therefor.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person who controls any Underwriter within the meaning of the
Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other federal or state
statutory law or regulation, at common law or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in (i) Section 1 of this
Agreement, the Registration Statement, any Preliminary Prospectus or
the Prospectus, or in any amendment thereof or supplement thereto, or
(ii) any application or other document, or any amendment or supplement
thereto, executed by the Company or based upon written information
furnished by or on behalf of the Company filed in any jurisdiction in
order to qualify the Securities under the securities or Blue Sky laws
thereof or filed with the Commission or any securities association or
securities exchange, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, and
agrees to reimburse each such indemnified party, as incurred, for any
legal or other expenses reasonably incurred by it in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter through the
Representative specifically for use in the Registration Statement or
Prospectus; provided further, that with respect to any untrue statement
or omission, or any alleged untrue statement or omission, made in any
Preliminary Prospectus, the indemnity agreement contained in this
Section 8 shall not inure to the benefit of any Underwriter (or to the
benefit of any person controlling any such Underwriter) from whom the
person asserting any such losses, claims, damages, liabilities or
expenses purchased the Securities concerned to the extent that such
untrue statement or omission, or alleged untrue statement or omission,
has been corrected in the Prospectus and the failure to deliver the
Prospectus was not a result of the Company's failure to comply with its
obligations under Sections 5(b) and 5(d) hereof. The indemnity
agreement contained in this section 8 will be in addition to any
liability which the Company may otherwise have. The Company will not,
without the prior written consent of each Underwriter, settle or
compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act is a
party to such claim, action, suit or proceeding), unless the settlement
or compromise or consent includes an unconditional release of such
Underwriter and each such controlling person from all liability arising
out of such claim, action, suit or proceeding, satisfactory in form and
substance to the Representative.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within
the meaning of the Act or the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Underwriter, but only with
reference to written information relating to such Underwriter furnished
to the Company by or on behalf of such Underwriter through the
Representative specifically for use in the Registration Statement or
Prospectus. The Company acknowledges that the corporate names of the
Underwriters and the information under the heading "Underwriting" in
the Prospectus and in any Preliminary Prospectus constitute the only
information furnished in writing by or on behalf of the several
Underwriters. The obligations of each Underwriter under this subsection
(b) shall be in addition to any liability which the Underwriters may
otherwise have.
(c) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, suit or proceeding, such
indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 8, notify the
indemnifying party in writing of the commencement thereof and the
indemnifying party shall assume the defense thereof, including the
employment of counsel reasonably satisfactory to the indemnified party
and the payment of all expenses; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may
have to any indemnified party, unless such omission results in the
forfeiture of substantive rights or defenses by the indemnifying party.
All such expenses shall be paid by the indemnifying party as incurred
by an indemnified party. Any such indemnified party shall have the
right to employ separate counsel in any such action and to participate
in the defense thereof, but the fees and expenses of such counsel shall
be at the expense of such indemnified party unless (i) the indemnifying
party has agreed to pay such fees and expenses or (ii) the indemnifying
party shall have failed promptly after notice by such indemnified party
to assume the defense of such action or proceeding and employ counsel
reasonably satisfactory to the indemnified party in any such action,
suit or proceeding or (iii) the named parties in any such action or
proceeding (including any impleaded parties) include both such
indemnified party and the indemnifying party, and such indemnified
party shall have been advised by counsel that there is a conflict of
interest on the part of counsel employed by the indemnifying party to
represent such indemnified party or there may be one or more legal
defenses available to such indemnified party which are different from
or additional to those available to the indemnifying party (in which
case, if such indemnified party notifies the indemnifying party in
writing that it elects to employ separate counsel at the expense of the
indemnifying party, the indemnifying party shall not have the right to
assume the defense of such action or proceeding on behalf of the
indemnified party or parties, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or
proceeding or separate but substantially similar or related actions or
proceedings in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (together with
appropriate local counsel) at any time for all such indemnified
parties, which firm shall be designated in writing to the indemnifying
party). Any such fees and expenses payable by the indemnifying party
shall be paid to or on behalf of the indemnified party entitled thereto
as incurred. An indemnifying party shall not be liable for any
settlement of any action or claim effected without its consent, which
shall not be unreasonably withheld.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in Section 8(a)
or 8(b) is applicable in accordance with its terms but is for any
reason held by a court to be unavailable from the indemnifying party on
grounds of policy or otherwise, the Company and the Underwriters shall
contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection
with investigating or defending same) to which the Company and one or
more of the Underwriters may be subject (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company on
the one hand and the Underwriters on the other hand from the offering
of the Units or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i)
above, but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or
omissions that resulted in such losses, claims, damages and
liabilities, as well as any other relevant equitable considerations;
provided, however, that (x) in no case shall any Underwriter (except as
may be provided in the Agreement Among Underwriters relating to the
offering of the Securities) be responsible for any amount in excess of
the underwriting discount applicable to the Units to be purchased by
such Underwriter hereunder pursuant to this Section 8 and (y) no person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. The relative
benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total
net proceeds from the offering of the Units (before deducting expenses)
received by the Company bear to the total underwriting discounts and
commission received by the Underwriters by reason of the sale of Units
by the Company, in each case as set forth in the table on the cover
page of the Prospectus. The relative fault of the Company on the one
hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the
one hand or by the Underwriters on the other hand and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. For purposes of this
Section 8, each person who controls an Underwriter within the meaning
of the Act shall have the same rights to contribution as such
Underwriter, and each person who controls the Company within the
meaning of the Act, each officer of the Company who shall have signed
the Registration Statement and each director of the Company shall have
the same rights to contribution as the Company, subject in each case to
clause (y) of this Section 8(d). Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action,
suit or proceeding against such party in respect of which a claim for
contribution may be made against another party or parties under this
Section 8, notify such party or parties from whom contribution may be
sought, but the omission so to notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from
any other obligation it or they may have hereunder or otherwise.
9. Default by an Underwriter. If any one or more Underwriters shall fail to
purchase and pay for any of the Units agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under
this Agreement, the remaining Underwriters shall be obligated severally to
take up and pay for (in the respective proportions which the number of
Units set forth opposite their names in Schedule I hereto bears to the
aggregate number of Units set forth opposite the names of all the remaining
Underwriters) the Units which the defaulting Underwriter or Underwriters
agreed but failed to purchase; provided, however, that if the aggregate
number of Units which the defaulting Underwriter or Underwriters agreed but
failed to purchase shall exceed 10% of the aggregate number of Units set
forth in Schedule I hereto, the remaining Underwriters shall have the right
to purchase all, but shall not be under any obligation to purchase any, of
such Units, and if such nondefaulting Underwriters do not purchase all of
such Units, this Agreement will terminate without liability to any
non-defaulting Underwriter or the Company except as otherwise provided in
Section 7. In the event of a default by any Underwriter as set forth in
this Section 9, the Closing Date shall be postponed for such period, not
exceeding seven days, as the Representative shall determine in order that
the required changes in the Registration Statement and the Prospectus or in
any other documents or arrangements may be effected. Nothing contained in
this Agreement shall relieve any defaulting Underwriter of its liability,
if any, to the Company or any nondefaulting Underwriter for damages
occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in the absolute
discretion of the Representative, by notice given to the Company prior to
delivery of and payment for the Securities, if prior to such time (a) a
suspension or material limitation in trading in securities generally on the
New York or Chicago Stock Exchange, the Nasdaq National Market, or a fall
in the Dow Jones Industrial Average of either ten percent (10%) or more,
(b) a banking moratorium shall have been declared by federal, New York or
Texas state authorities, or (c) the United States shall have engaged in
hostilities which shall have resulted in the declaration, on or after the
date hereof, of a national emergency or war, or (d) a change in national or
international political, financial or economic conditions or national or
international equity markets shall have occurred, and with respect to
events specified in clause (c) or (d) hereof, if the effect of any such
event is, in the reasonable judgment of the Representative, so material and
adverse to the issuer as to make it impractical or inadvisable to proceed
with the public offering or delivery of the Securities due to the
materially impaired investment quality of the Securities as contemplated by
the Registration Statement and the Prospectus.
11. Representations and Indemnities to Survive. The respective agreements,
representations, warranties, indemnities and other statements of the
Company, its officers, and the Underwriters set forth in, referred to in,
or made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter,
the Company, or any of the officers, directors or controlling persons
referred to in Section 8 hereof, and will survive delivery of and payment
for the Securities. The provisions of Sections 7 and 8 hereof shall survive
the termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and effective only
on receipt, and will be mailed, delivered, telegraphed or sent by facsimile
transmission and confirmed:
to the Representative at:
La Jolla Securities Inc.
8214 Westchester
Suite 500
Dallas, Texas 75225
Attention: Robert A. Shuey, III
Facsimile No. (214) 987-2091
to the Company at:
Energy Search, Incorporated
280 Fort Sanders West Blvd.
Suite 200
Knoxville, TN 37922
Facsimile No. (423)531-1435
13. Successors. This Agreement will inure to the benefit of and be binding upon
the parties hereto and their respective successors and the officers,
directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14. Counterparts. This Agreement may be signed in ___ or more counterparts,
each of which shall be an original, with the same effect as if the
signatures thereon and hereon were on the same instrument.
15. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of Texas, without reference to
conflict of laws or principles thereunder. All disputes relating to this
Underwriting Agreement shall be tried before a court of Texas located in
Dallas County, Texas to the exclusion of all other courts that might have
jurisdiction.
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the Company
and the several Underwriters.
Very truly yours,
Energy Search, Incorporated
By:
Richard S. Cooper, President
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
By:
Name:________________________________
Title:_________________________________
La Jolla Securities Corporation
By:
Name:________________________________
Title:_________________________________
For themselves and the other several Underwriters in Schedule I to the foregoing
Agreement.
<PAGE>
SCHEDULE I
Underwriters
La Jolla Securities Corporation
<PAGE>
SCHEDULE III
<PAGE>
EXHIBIT A
Form of Lock-Up Agreement
, 1996
LA JOLLA SECURITIES CORPORATION
8214 Westchester, Suite 500
Dallas, Texas 75225
Re: Agreement Not to Sell
Gentlemen:
Reference is made to the proposed public offering of 100,000 Units by
Energy Search, Inc. (the "Company"), to be made pursuant to a Registration
Statement (the "Registration Statement") filed with the Securities and Exchange
Commission and to be underwritten by La Jolla Securities Corporation, Inc. ("La
Jolla") as representative (the "Representative") of the several underwriters
(the "Underwriters") to be named in an underwriting agreement.
In consideration of the offer and sale of such Units by the Company and
the Underwriters and of other good and valuable consideration the receipt of
which is hereby acknowledged, the undersigned agrees that, without the express
prior written consent of La Jolla acting alone, he will not offer, sell, make
any short sale of, loan, encumber, grant any option for the purchase of, or
otherwise dispose of (the "Resale Restrictions"), any securities of the Company
beneficially owned or otherwise held by the undersigned as of the date of this
letter or hereafter acquired by the undersigned (other than those securities
included in the registration, if any) (collectively, the "Shares") until
__________ (the "Lock-up Period"). The foregoing Resale Restrictions are
expressly agreed to preclude the holder of the Shares from engaging in any
hedging or other transaction which may lead to or result in a sale of Shares
during the Lock-up Period even if such Shares would be sold by someone other
than the undersigned. Such prohibited hedging or other transactions would
include without limitation any short sale (whether or not against the box), any
pledge or any purchase, sale or grant of any right (including without limitation
any put or call option) with respect to any of the Shares.
The undersigned agrees and consents to the entry of stop transfer
instructions with the transfer agent for the Company's Common Stock against any
transfer of shares of Common Stock by the undersigned in contravention of the
Resale Restrictions. In addition, the undersigned agrees to be bound by the
Resale Restrictions whether or not the undersigned participates in the public
offering. The undersigned understands that the Underwriters and the Company will
rely upon the representations set forth in this letter in proceeding with the
public offering. The undersigned understands that the agreements of the
undersigned are irrevocable and shall be binding upon the undersigned's heirs,
legal representatives, successors and assigns.
<PAGE>
Notwithstanding the foregoing, the undersigned may transfer any or all
of the Shares either during his lifetime or on death by will or intestacy to his
immediate family or to a trust the beneficiaries of which are exclusively the
undersigned and/or a member or members of his immediate family; provided,
however, that in any such case it shall be a condition to the transfer that the
transferee execute an agreement stating that the transferee is receiving and
holding the Shares except in accordance with this Lock-up Agreement. For
purposes of this paragraph, "immediate family" shall mean spouse, lineal
descendant, father, mother, brother or sister of the transferor.
Very truly yours,
By:
Signature
Richard S. Cooper
Accepted and Agreed to:
LA JOLLA SECURITIES CORPORATION
As Representative of the
Several Underwriters
By:____________________________
Title___________________________
PLEASE COMPLETE AND RETURN TO:
La Jolla Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
<PAGE>
1,000,000 Units
ENERGY SEARCH, INCORPORATED
Each Unit Consisting of
One Share of Common Stock and
One Redeemable Series A Warrant
________, 1996
AGREEMENT AMONG UNDERWRITERS
La Jolla Securities Corporation
as Representative of the Underwriters
c/o La Jolla Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
Dear Sirs:
1. Underwriting Agreement. We understand that ENERGY SEARCH, INCORPORATED,
a Tennessee Corporation (the "Company"), proposes to enter into an underwriting
agreement (the "Underwriting Agreement"), with you as managing underwriters
("Managing Underwriters") and other prospective underwriters, including
ourselves, acting severally and not jointly, providing for (a) the purchase by
the Underwriters (as defined in Section ___ hereof) of 1,000,000 Units, each
Unit consisting of one share of Common Stock, no par value, of the Company
("Common Stock"), and one redeemable Series A common stock purchase warrant
(individually, a "Series A Warrant"), each of which entitles the holder thereof
to purchase one share of Common Stock at a price of $___ (such Units, together
with (A) the shares of Common Stock and Series A Warrants comprising such Units
and (B) the shares of Common Stock issuable upon exercise of such Series A
Warrants, are collectively referred to herein as the "Underwritten Securities")
and (b) the grant by the Company to the Underwriters, as provided in Section
2(b) of the Underwriting Agreement, of an option to purchase from the Company up
to an aggregate of 150,000 additional Units (such additional Units, together
with (A) the shares of Common Stock and Series A Warrants comprising such
additional Units and (B) the shares of Common Stock issuable upon exercise of
such Series A Warrants, are collectively referred to herein as the "Option
Securities") solely for the purpose of covering over-allotments in the sale of
the Underwritten Securities; in each case, upon the conditions stated in the
Underwriting Agreement, in which we agree, in accordance with the terms thereof
and subject to adjustment pursuant to Section 9 thereof, to purchase the number
of Units included within the Underwritten Securities set forth opposite our
names in Schedule I thereof and our pro rata portion of the number of Units
included within the Option Securities, determined in accordance with Section
2(b) of the Underwriting Agreement, with respect to which the over-allotment
option is exercised. The Underwritten Securities and the Option Securities are
hereinafter referred to as the "Securities" and the Units included therein are
hereinafter referred to as the "Registered Unit".
2. Registration Statement and Prospectus. The Securities are more
particularly described in the registration statement relating thereto filed with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended (the "Act"). Amendments to such registration statement have been or may
be filed, in which, with our consent hereby confirmed, we have been or will be
named as one of the Underwriters of the Securities. Copies of the registration
statement and the related preliminary prospectus have heretofore been delivered
to us, and we confirm that they are correct insofar as they relate to us. You
are authorized to approve on our behalf any amendments or any supplements to the
registration statement, any preliminary prospectus and the prospectus which you
consider necessary or appropriate. The registration statement and related
prospectus, as amended and supplemented from time to time, are hereinafter
respectively referred to as the "Registration Statement" and "Prospectus". We
agree, if you so request, to furnish a copy of any revised preliminary
prospectus to each person to whom we have delivered a copy of any previous
preliminary prospectus. We further represent that we have delivered all
preliminary prospectuses and agree that we will deliver all final prospectuses
required for compliance with the provisions of Rule l5c2-8 of the General Rules
and Regulations under the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
3. Authority of Managing Underwriters. We authorize you, as Managing
Underwriters, (a) to execute and deliver on our behalf the Underwriting
Agreement in the form annexed hereto as Exhibit A, with such changes therein as
in your discretion may be necessary or advisable, including changes in those who
are to be Underwriters and in the respective number of Registered Units to be
purchased by them (but not any change in the number of Registered Units to be
purchased by us except with our consent or as provided in the Underwriting
Agreement), (b) to take such action as in your discretion may be necessary or
advisable to carry out the Underwriting Agreement, this Agreement and the
transactions for the accounts of the several Underwriters contemplated thereby
and hereby, including, in your discretion, whether to purchase any or all of the
Registered Units included within the Option Securities for the accounts of the
several Underwriters, and (c) to take such action as in your discretion may be
necessary or advisable to carry out the purchase, carrying, sale and
distribution of the Registered Units. The parties on whose behalf you execute
the Underwriting Agreement, including yourself as Managing Underwriters, are
herein called the "Underwriters."
4. Public Offering. We authorize you to supply the Company with the
information to be included in the Registration Statement and Prospectus with
respect to the terms of the offering, to determine the time of the initial
public offering after the Registration Statement becomes effective, to vary the
public offering price of the Registered Units and the concessions and discounts
to dealers after the initial public offering, and to determine all matters
relating to the advertisement of the Securities and communication with dealers
or others.
We authorize you, with respect to any Registered Units which we so agree
to purchase, to reserve for sale and to sell for our account such number of our
Registered Units as you shall determine, to securities dealers ("Dealers"),
including any of the Underwriters. We authorize you to determine the form and
manner of any communications or agreements with Dealers. If there shall be any
such agreements with Dealers, you are authorized to act as managers thereunder,
and we agree, in such event, to be governed by the terms and conditions of such
agreements to the extent we act as a Dealer. The form of Selected Dealer
Agreement attached hereto as Exhibit B is satisfactory to us. If there shall not
be any written agreements with Dealers, we agree to be governed by the terms and
conditions of such Selected Dealer Agreement to the extent we act as a Dealer.
After the Registration Statement becomes effective, you will advise us
of the number of our Registered Units not so reserved but retained by us for
direct sale. Any of our Registered Units reserved but not sold may, from time to
time, on our request and in your discretion, be released to us, and Registered
Units so released will not thereafter be deemed to be reserved, except that any
time prior to termination of the provisions of the last paragraph of this
Section 4, we will on request advise you of the number of our retained unsold
Registered Units and you may in your discretion add all or any number of such
retained unsold Registered Units to those reserved by you for sale. Sales of
reserved Registered Units to Dealers will be made at $_______ per Unit for the
accounts of the several Underwriters as nearly as practicable in proportion to
their respective underwriting obligations.
You may in your discretion sell to another Underwriter any of the
Registered Units so reserved for our account if you determine that such sales
are advisable for Blue Sky purposes. The transfer tax on any such sales shall be
charged to the accounts of the several Underwriters in proportion to their
respective underwriting obligations.
You, and any of the Underwriters with your consent, may make purchases
and sales of Registered Units from or to any other Underwriter at the public
offering price less a concession equivalent to all or any part of the gross
underwriting spread. You are authorized to purchase Registered Units for our
account from Dealers at the public offering price less a concession not
exceeding the concession to Dealers. We will offer to the public, in conformity
with the terms of the offering set forth in the Prospectus, our Registered Units
not reserved by you.
5. Payment and Delivery. Payment for Registered Units retained by us for
direct sale shall be made by us through the Depository Trust Company ("DTC"),
payable in same-day funds to the order of LA JOLLA SECURITES CORPORATION, at
such time or times as you may designate, against delivery of such Registered
Units to us through the facilities of the DTC. The above payment will be made by
us at $______ per Unit; however you will promptly reimburse us the amount of
$_____ per Unit.
If our funds are not received by you when required, you are authorized,
in your individual capacities or as Managing Underwriters, but shall not be
obligated, to make payment pursuant to the Underwriting Agreement for our
account in accordance with the provisions of Section 6 hereof. Any such payment
by you shall not relieve us from any of our obligations hereunder or under the
Underwriting Agreement.
We authorize you to hold and deliver to Dealers, against payment, our
Registered Units reserved by you for offering to them. Upon receiving payment
for Registered Units so sold for our account, you will remit to us as promptly
as practicable the amount of $_______ per Unit.
As soon as practicable after termination of the provisions referred to
in the first paragraph of Section 10 hereof, you shall deliver to us, against
payment therefor unless such payment has already been made, any of our
Registered Units reserved by you for sale but not sold, except that if the
aggregate of all such reserved and unsold Registered Units of all Underwriters
does not exceed 10% of the total number of Registered Units, you are authorized
in your discretion to sell such Registered Units for the accounts of the several
Underwriters at such price or prices as you may determine.
6. Authority to Borrow. In connection with the purchase or carrying for
our account of any Registered Units purchased for our account under this
Agreement or the Underwriting Agreement, we authorize you, in your discretion
and individual capacity, to advance your own funds for our account, charging
current interest rates as Managing Underwriters to arrange and make loans on our
behalf and for our account, and to execute and deliver any notes or security as
may be necessary or advisable in your discretion. Any lending bank is hereby
authorized to rely upon your instructions in all matters relating to any such
loan. We shall be paid or credited with the proceeds of any such advance or loan
made for our account and shall be debited with any repayment.
You may deliver to us from time to time, for carrying purposes only, any
of our reserved Registered Units held by you for our account which have not been
sold. We will redeliver to you on demand any Registered Units so delivered to us
for carrying purposes.
7. Stabilization. We ratify and confirm your stabilization transactions,
if any, for the accounts of the several Underwriters prior to the date hereof,
and we authorize you, in your discretion, to buy and sell Registered Units in
the open market or otherwise, on a when-issued basis or otherwise, for either
long or short account, at such prices and on such terms as you may determine,
and to over-allot in arranging for sales. We authorize you in your discretion to
cover any short position incurred for the accounts of the several Underwriters
pursuant to this Section 7 by exercising the over-allotment option referred to
in Section 2(b) of the Underwriting Agreement and by buying Registered Units,
and, in lieu of delivering to the several Underwriters any of the Registered
Units held for their respective accounts pursuant to Section 4 hereof, to sell
such Registered Units for the accounts of each of the Underwriters, in each case
at such prices and on such terms as you may determine. All such purchases, sales
and over-allotments will be for the accounts of the several Underwriters as
nearly as practicable in proportion to their respective underwriting
obligations, and at no time will our net commitment under the foregoing
provisions of this paragraph, either for long or short account, exceed 15 % of
our original underwriting obligations. We will take up at cost on demand any of
the Registered Units so purchased for our account and deliver on demand any of
the Registered Units sold or over-allotted for our account. In the event of
default by one or more Underwriters with respect to their obligations under this
paragraph, each nondefaulting Underwriter shall assume its proportionate share
of the obligations of such defaulting Underwriter without relieving such
defaulting Underwriter of its liability hereunder. The existence of this
provision is no assurance that the price of any of the aforesaid Registered
Units will be stabilized or that stabilizing, if commenced, will not be
discontinued at any time.
We authorize you on our behalf to maintain the records required by Rule
17a-2 of the General Rules and Regulations under the Exchange Act and to file
any reports required in connection with any transaction made by you pursuant to
this Section 7, and we agree to furnish you with any information needed for such
reports. You agree that if stabilization is undertaken you will notify the
several Underwriters promptly upon the initiation and termination of such
stabilization. We agree, if stabilization is undertaken, promptly, and in any
event, within ___ business days following such stabilization, to transmit to
you, the price, date and time at which such stabilizing purchase was effected.
In addition, we agree to promptly notify you of the date and time when
stabilizing was terminated.
We agree to advise you, from time to time upon your request, of the
number of Registered Units retained by or released to us and remaining unsold,
and will, upon your request, release to you for the accounts of one or more of
the several Underwriters such number of Registered Units as you may designate at
such price, not less than the net price to Dealers nor more than the public
offering price, as you may determine.
If, pursuant to the provisions of this Section 7, you purchase or
contract to purchase any Registered Units that were retained by or released to
us for direct sale, we authorize you in your discretion either to require us to
repurchase such Registered Units at a price equal to the total cost of such
purchase, including commissions and transfer tax on redelivery, to sell for our
account such Registered Units and debit or credit our account for the profit or
loss resulting from such sale, or to charge our account with an amount equal to
the concession to Dealers with respect thereto.
Upon the termination of this Agreement, you are authorized in your
discretion, in lieu of delivering to the several Underwriters any Registered
Units then held for their respective accounts pursuant to this Section 7, to
sell such Registered Units for the accounts of each of the Underwriters at such
price or prices as you may determine.
8. Open Market Transactions. We and you agree not to bid for, purchase,
attempt to induce others to purchase, or sell, directly or indirectly, any of
the Securities, including the Registered Units, for our own account or for the
accounts of customers except as brokers pursuant to unsolicited orders and as
otherwise provided in this Agreement or the Underwriting Agreement.
9. Allocation of Expenses. We authorize you to charge our account with
all transfer taxes on sales made by you for our account (except as otherwise
provided herein) and our proportionate share (based upon our underwriting
obligation) of all other expenses incurred by you in finding and developing this
public offering, and arising under the terms of this Agreement or the
Underwriting Agreement, or in connection with the purchase, carrying, sale or
distribution of the Registered Units. Your determination of the amount and
allocation of such expenses shall be final and conclusive. In the event of the
default of any Underwriter in carrying out its obligations hereunder, the
expenses arising from such default may be proportionately charged by you against
the other Underwriters not so defaulting without, however, relieving such
defaulting Underwriter from its liability therefor.
10. Termination and Settlement. The provisions of the last paragraph of
Section 4 hereof, the first sentence and fourth paragraph of Section 7 hereof,
and Section 8 hereof will terminate at the close of business 45 days after the
date of the initial public offering unless extended by you by notice to us for a
further period not exceeding an additional 45 days. Such provisions may be
terminated at such earlier time as you determine in your discretion, by notice
to us stating that such provisions are terminated.
As promptly as practicable after termination of the provisions referred
to in the first paragraph of this Section 10, our account will be settled and
paid, provided that you reserve from distribution to the several Underwriters
such amounts as you may deem advisable to cover possible additional expenses.
You may at any time make partial distribution of credit balances or call on the
several Underwriters to pay their respective debit balances. Any of our funds in
your hands may be held with your general funds without accountability for
interest and may be commingled with your general funds. Notwithstanding
termination of this Agreement or any settlement, we agree to pay (a) our
proportionate share (based on our underwriting obligation) of all expenses and
liabilities which may be incurred by or for the account of the Underwriters and
(b) any transfer taxes paid after such settlement on account of any sale or
transfer for our account.
If the Underwriting Agreement shall be terminated or canceled, or if it
shall be executed but shall not become effective, our obligations hereunder
shall immediately cease and terminate except for the obligation to pay our
proportionate share of all expenses and except for obligations, if any, incurred
for our account under Section 7 hereof and our obligations under the second
paragraph of this Section 10 and under Section 14 hereof.
11. Default by Underwriters. Default by one or more Underwriters in
respect of their obligations under the Underwriting Agreement will not release
us from any of our obligations or in any way affect the liability of any
defaulting Underwriter to the other Underwriters for damages resulting from such
default. In case of such default with respect to the purchase of 10 % or less of
the Registered Units included within the Underwritten Securities, we will
purchase additional Registered Units as set forth in Section 9 of the
Underwriting Agreement. If such default exceeds 10% of the Registered Units
included within the Underwritten Securities, you are authorized, but shall not
be obligated, to arrange for the purchase by other persons, who may include
yourself or any nondefaulting Underwriter, of that defaulted portion in excess
of 10%. If such arrangements are made, we will purchase Registered Units not
exceeding our original commitments under Section 9 of the Underwriting
Agreement, and the additional number of Registered Units to be purchased by the
nondefaulting Underwriters and by such other persons, if any, shall be added to
our original commitments and shall together be taken as the basis for
determining the proportionate several obligations and benefits hereunder and
under the Underwriting Agreement, but this shall in no way affect the liability
of any defaulting Underwriter for damages resulting from such default. If there
is any default as to the purchase of any portion of the Registered Units, you
are authorized, but shall not be obligated, to purchase or to arrange for the
purchase by the nondefaulting Underwriters of the defaulted portion.
12. Position of the Managing Underwriters. Except as in this Agreement
otherwise specifically provided, you shall have full authority to take such
action as you deem necessary or advisable in respect of all matters pertaining
to the Underwriting Agreement and this Agreement in connection with the
purchase, carrying, sale and distribution of the Registered Units, but you shall
be under no liability to us, except for your own lack of good faith, for
obligations expressly assumed by you in this Agreement and for any liabilities
imposed upon you by the Act. No obligations on your part shall be implied or
inferred herefrom. Authority with respect to matters to be determined by you, or
by you and the Company pursuant to the Underwriting Agreement, shall survive the
termination of this Agreement.
Nothing herein contained shall be construed as making us partners with
you or with other Underwriters or shall be construed as making the several
Underwriters an association or other separate entity, and the rights and
liabilities of ourselves and each of the other Underwriters (including you) are
several and not joint.
13. Underwriters' Warrants. We agree that the Underwriters' Warrants (as
defined in the Underwriting Agreement) shall be allocated as follows: (i) 50% to
you as Managing Underwriters and (ii) 50% to us in the ratio that the number of
Registered Units purchased by each of us bears to the number of Registered Units
purchased by all of us.
14. Indemnification.
(a) Each Underwriter agrees to indemnify and hold harmless each other
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act to the extent
and under the terms set forth in the Underwriting Agreement upon which each
Underwriter agrees to indemnify the Company, and the Company's respective
directors, officers and controlling persons. Such indemnity shall survive the
termination of this Agreement and any investigation made by or on behalf of any
Underwriter or any person so controlling an Underwriter.
(b) We agree that you shall be under no liability in respect of any
matters connected herewith or actions taken by you pursuant to this Agreement,
except for obligations expressly assumed by you in this Agreement. If at any
time any claim or claims shall be asserted against you, as Managing
Underwriters, or otherwise involving the Underwriters generally, relating to any
preliminary prospectus, the Prospectus, the Registration Statement, the public
offering of the Securities, any state or other securities or Blue Sky law
qualification matters, or any of the transactions contemplated by this
Agreement, we authorize you to make such investigation, to retain such counsel
and to take such other actions as you may deem necessary or desirable under the
circumstances, including settlement of any such claim or claims if such course
of action shall be recommended by counsel retained by you. We agree to pay you,
upon request, our proportionate share (based on our underwriting obligation) of
all expenses incurred by you (including, but not limited to, the disbursements
and fees of counsel retained by you) in investigating and defending against such
claim or claims, and our proportionate share (based on our underwriting
obligation) of any liability incurred by you in respect of such claim or claims,
whether such liability shall be the result of a judgment against you or the
result of any such settlement. In determining amounts payable pursuant to this
Section 14(b), any loss, claim, damage, liability or expense (i) incurred by any
person controlling any Underwriter within the meaning of Section 15 of the Act
or Section 20 of the Exchange Act, and (ii) for which such Underwriter actually
receives indemnification pursuant to Section 14(a) above or contribution or
indemnification pursuant to the Underwriting Agreement, shall reduce the amount
payable pursuant to this Section 14(b) by the amount so incurred and received.
If any Underwriter or Underwriters default in their obligations to make any
payments under this Section 14(b), then, without relieving such defaulting
Underwriter of its liability hereunder, each nondefaulting Underwriter shall be
obligated to pay its proportionate share of all defaulted payments.
15. Blue Sky Matters. You will not have any responsibility with respect
to the right of any Underwriter or other person to sell any of the Registered
Units in any jurisdiction, notwithstanding any information that we may furnish
in that connection. We understand that you will file a New York Further State
Notice, if required, and we authorize you to take such other action as may be
necessary or advisable to qualify the Securities for offering and sale in any
jurisdiction.
16. Notices. Any notice from you to us will be deemed to have been duly
given if mailed or sent by facsimile transmission to us at our address and
facsimile number set forth below. Any notice to you shall be deemed to have been
given if mailed or sent by facsimile transmission to LA JOLLA SECURITIES
CORPORATION, 8214 Westchester, Suite 500, Dallas, Texas, 75225, attention:
Robert A. Shuey, III, facsimile number (214)987-2091. Mailed notices shall be
sent by registered mail, return receipt requested. Notices shall be effective
upon receipt.
17. Miscellaneous.
(a) We authorize you to file with any governmental agency any
reports required to be filed by you in connection with the transactions
contemplated by this Agreement or the Underwriting Agreement, and we will
furnish any information in our possession needed for such reports.
(b) In connection with the transactions contemplated by this
Agreement or the Underwriting Agreement, we will not advertise over our name
until after the first public advertisement made by you and then only at our own
expense and risk. We authorize you to exercise complete discretion with regard
to the first public advertisement.
(c) We hereby confirm (i) that we have examined the
Registration Statement and the Prospectus and are familiar with the proposed
further amendment thereto or final Prospectus, (ii) that the information therein
is correct and is not misleading insofar as it relates to us and (iii) that we
are willing to accept the responsibilities under the Act of an Underwriter named
in such Registration Statement. You are authorized, in your discretion, on our
behalf, to approve of or to object to any further amendments or supplements to
the Registration Statement or the Prospectus.
(d) We confirm that we are actually engaged in the investment
banking or securities business and are either (i) a member in good standing of
the National Association of Securities Dealers, Inc. (the "NASD") and our
commitment to purchase Registered Units pursuant to the Underwriting Agreement
will not result in a violation of the financial responsibility requirements of
Rule l5c3-1 under the Exchange Act, or of any similar provisions of any
applicable rules of any securities exchange to which we are subject or of any
restriction imposed upon us by any such exchange or any governmental authority
or (ii) a foreign dealer not eligible for membership in the NASD who hereby
agrees to make no sales within the United States, its territories or its
possessions (except that we may participate in sales to Dealers and others under
Section 4 hereof) or to persons who are citizens thereof or residents therein.
In making sales of Registered Units, if we are such a member, we agree to comply
with all applicable rules of the NASD, including, without limitation, the
Interpretation of the Board of Governors of the NASD with Respect to Free-Riding
and Withholding and Sections 8, 24 and 36 of Article III of the NASD's Rules of
Fair Practice, or, if we are such a foreign dealer, we agree to comply with such
Interpretation and Sections 8, 24 and 36 of such Article as though we were such
a member and Section 25 of such Article as that Section applies to a non-member
foreign dealer.
(e) We confirm that the ratio of our aggregate indebtedness to
our net capital is such that we may, in accordance with and pursuant to Rule
l5c3-1 under the Exchange Act, obligate ourselves to purchase, and purchase, the
number of Registered Units that we agree to purchase under the Underwriting
Agreement.
(f) This Agreement will be governed by, and construed in
accordance with, the laws of the State of Texas without reference to
California's conflict of laws rules.
(g) This Agreement may be signed in any number of counterparts
which taken together shall constitute one and the same instrument.
Very truly yours,
NAME:
By:
Address:
Facsimile.:
NAME:
By:
Address:
Facsimile No.:
NAME:
By:
Address:
Facsimile No.:
NAME:
By:
Address:
Facsimile No.:
Confirmed as of the date first written:
LA JOLLA SECURITIES CORPORATION
By: By:
, President ____________,President
<PAGE>
1,000,000 Units
ENERGY SEARCH, INC.
Each Unit Consisting of
One Share of Common Stock and
One Redeemable Series A Warrant
________,1996
SELECTED DEALER AGREEMENT
Dear Sirs:
LA JOLLA SECURITIES CORPORATION ("La Jolla") and the several
underwriters (collectively, the "Underwriters"), on whose behalf La Jolla is
acting as managing underwriters and Representative (the "Representative"), have
severally agreed to purchase from ENERGY SEARCH, INC., a Tennessee Corporation
(the "Company"), (a) an aggregate of 1,000,000 Units, each Unit consisting of
one shares of Common Stock, no par value, of the Company ("Common Stock"), and
one redeemable Series A common stock purchase warrant (individually, a "Series A
Warrant"), each of which entitles the holder thereof to purchase one share of
Common Stock at a price of $___ (such Units, together with (A) the shares of
Common Stock and Series A Warrants comprising the Units and (B) the shares of
Common Stock issuable upon exercise of such Series A Warrants, are collectively
referred to herein as the "Underwritten Securities"), plus (b) up to 150,000
additional Units pursuant to an option for the purpose of covering
over-allotments (such additional Units, together with (A) the shares of Common
Stock and Series A Warrants comprising such additional Units and (B) the shares
of Common Stock issuable upon exercise of such Series A Warrants, are
collectively referred to herein as the "Option Securities"; the Underwritten
Securities and the Option Securities are collectively referred to herein as the
"Securities"; and the Units included in the Securities are collectively referred
to herein as the "Registered Units"), all as set forth in the Preliminary
Prospectus dated ______, 1996, as amended and supplemented from time to time,
and subject to the terms of the Underwriting Agreement referred to therein. The
Registered Units and the terms upon which they are to be offered for sale by the
several Underwriters are more particularly described in the Preliminary
Prospectus, additional copies of which will be supplied in reasonable quantities
upon request to the Underwriters.
1. Offering to Dealers. The Registered Units are to be offered to the
public by the Underwriters at the price per share set forth on the cover page of
the Preliminary Prospectus (the "Public Offering Price"). The several
Underwriters, acting through the Representative, and subject to the terms and
conditions hereof, are severally offering a portion of the Registered Units to
certain dealers (the "Dealers") as principals, at the Public Offering Price of
$_____ per Unit, less a selling concession of $____ per Unit (the "Selling
Concession"). Dealers must be actually engaged in the investment banking or
securities business and be either (i) a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD") who agrees that in making
sales of the Registered Units it will comply with the Rules of Fair Practice,
including Sections 8, 24 and 36 of Article m, and the Interpretation of the
Board of Governors of the NASD with respect to Free-Riding and Withholding, or
(ii) dealers with their principal place of business located outside the United
States, its territories and possessions and not registered as brokers or dealers
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), who
have agreed not to make any sales within the United States, its territories or
its possessions or to persons who are nationals thereof or residents therein,
and who agree that in making sales of the Registered Units outside the United
States, they will comply with the requirements of the Rules of Fair Practice of
the NASD, including Sections 8, 24 and 36 of Article m of such Rules, and
Section 25 of such Article as that Section applies to non-member foreign
dealers, and the Interpretation of the Board of Governors of the NASD with
respect to Free-Riding and Withholding.
Under this Agreements the Representative shall have full authority to
take such action as they may deem advisable in respect to all matters pertaining
to the public offering of the Registered Units.
If you desire to purchase any of the Registered Units, your
confirmation should reach the Representative promptly by mail or facsimile
transmission at the office of the Representative, LA JOLLA SECURITIES
CORPORATON, 8214 Westchester, Suite 500, Dallas, TX, 75225, attention: Robert A.
Shuey, facsimile number (214)987-2091. The Representative reserve the right to
reject subscriptions in whole or in part, to make allotments and to close the
subscription books at any time without notice. The Registered Units allotted to
you and the method and terms of the offering of the Registered Units will be
confirmed to you.
2. Offering by Dealers. Any Registered Units purchased by you under the
terms of this Agreement may be immediately offered to the public in conformity
with the terms of the offering set forth herein and in the Preliminary
Prospectus, subject to the securities or blue sky laws of the various states or
other jurisdictions.
Neither you nor any other person is, or has been, authorized by the
Company or the Representative to give any information or make any representation
in connection with the sale of the Registered Units other than those contained
in the Preliminary Prospectus.
It is assumed that the Registered Units will be effectively placed for
investment. If during the term of this Agreement, the Representative shall
purchase or contract to purchase any Registered Units purchased by you
hereunder, the Representative may, at their election, either (a) require you to
repurchase such Registered Units at a price equal to the total costs of such
purchase by the Representative, including brokerage commissions, if any, and
transfer taxes on the redelivery, or (b) charge you with and collect from you an
amount equal to the Selling Concession originally allowed you with respect to
the Registered Units so purchased by you.
3. Payment and Delivery. Payment for the Registered Units that you have
agreed to purchase hereunder shall be made by you through the Depository Trust
Company ("DTC"), payable in same-day funds to the order of ________, at such
time and on such date as _______ may designate, against delivery of such
Registered Units to you through the facilities of the DTC. The above payment
shall be made by you at $___ per Unit.
4. Blue Sky Matters. Upon request, you will be informed as to the
states and other jurisdictions in which the Underwriters have been advised that
the Registered Units are qualified for sale under the respective securities or
blue sky laws of such states or jurisdictions. However, neither the
Representative nor any of the other Underwriters shall have any obligation or
responsibility with respect to the right of any Dealer to sell the Registered
Units in any jurisdiction and you shall indemnify and hold harmless the
Representative and the other Underwriters and any person controlling the
Representative and the other Underwriters from and against any and all losses,
claims, damages, expenses or liabilities to which any of them may become subject
as a result of your failure to comply with the laws of any jurisdiction in
connection with the offer and the sale of Registered Units. In compliance with
the General Business law of the State of New York, it may be necessary for you
to file a Further State Notice respecting the Registered Units, in the form
required by said Law, prior to offering any of the Registered Units in such
state.
5. Termination. This Agreement shall terminate when the Representative
shall have determined that the public offering of the Registered Units has been
completed and upon facsimile notice to you of such termination, or, if not
theretofore terminated, it shall terminate 45 days after the initial public
offering of the Registered Units; provided, however, that the Representative
shall have the right to extend this Agreement for a period or periods not to
exceed an additional 45 days in the aggregate upon facsimile notice to you. The
Representative may terminate this Agreement at any time without prior notice to
you. Notwithstanding termination of this Agreement, you shall remain liable for
your portion of any transfer tax or other liability that may be asserted or
assessed against the Representative, any of the other Underwriters or any of the
Dealers based upon the claim that the Dealers or any of them constitute a
partnership, an association, an unincorporated business or other separate
entity.
6. Obligations and Positions of Dealers. Notwithstanding any provision
herein, your confirmation hereof will constitute a binding obligation on your
part to purchase, upon the terms and conditions hereof, the aggregate amount of
the Registered Units reserved for you and accepted by you and to perform and
observe all the terms and conditions hereof. You are not authorized to act as
agent of the Representative or the other Underwriters in offering the Registered
Units to the public or otherwise. Nothing contained herein shall constitute the
Dealers an association or other separate entity, or partners with the
Representative or the other Underwriters, but you will be responsible for your
share of any liability or expense based on any claim to the contrary. Neither
the Representative nor the other Underwriters shall be under any liability to
you for or in respect of the value, validity or form of the Registered Units, or
the delivery of the Registered Units, or the performance by anyone of any
agreement on its part, or the qualification of the Registered Units for sale
under the laws of any jurisdiction, or for or in respect of any other matter
relating to this Agreement, except for lack of good faith and matters expressly
assumed by the Representative and the other Underwriters in this Agreement, and
no obligation on the part of the Representative or the other Underwriters shall
be implied therefrom. The foregoing provisions shall not be deemed a waiver of
any liability imposed under the Securities Act of 1933, as amended (the "Act"),
or the Exchange Act.
You agree that at any time or times prior to the termination of the
Agreement you will, upon the request of the Representative, report to the
Representative the number of Registered Units purchased by you under this
Agreement that then remain unsold by you and will, upon the request of the
Representative at such time or times, sell to the Underwriters for their
account, such number of unsold Registered Units as the Representative may
designate, at the Public Offering Price, less the Selling Concession or such
part thereof as the Representative may determine.
The Representative shall have full authority to take such actions as
they may deem advisable in respect of all matters pertaining to the offering of
the Registered Units or arising hereunder. No obligation not expressly assumed
by the Representative in this Agreement shall be implied hereby or inferred
herefrom.
7. Compliance with Securities Laws. On becoming a Dealer, and in
offering and selling the Registered Units, you agree to comply with all of the
applicable requirements of the Act and the Exchange Act. You confirm that you
are familiar with Rule 15c2-8 under the Exchange Act relating to the
distribution of preliminary and final prospectuses for securities of an issuer
and confirm that you have complied and will comply therewith with respect to the
offering of the Registered Units.
8. Stabilization and Over-Allotment. Each Underwriter has authorized
the Representative, in the discretion of the Representative, to make purchases
and sales of Registered Units, for long or short account, on such terms and at
such prices as the Representative deem advisable, to cover any short position so
incurred and to over-allot in arranging sales.
Each Underwriter has agreed that, during the term of the Agreement
Among Underwriters, or such shorter period as the Representative may determine,
it will not buy or sell any Securities of the Company except as a broker
pursuant to unsolicited orders and as otherwise provided in said Agreement.
Your attention is directed to Rule 10b-6 of the General Rules and
Regulations under the 1934 Act, which contains certain prohibitions against
trading by a person interested in a distribution until such person has completed
its participation in such distribution.
9. Notices. Any notice from you to the Representative should be mailed
or sent by facsimile transmission to the Representative at the addresses and
facsimile numbers set forth in Section 1 hereof. Any notice from the
Representative to you shall be mailed or sent by facsimile transmission to you
at the address and facsimile number set forth on the confirmation executed by
you in the form attached hereto as Exhibit A. Mailed notices shall be sent by
registered mail, return receipt requested. Notices shall be effective upon
receipt.
<PAGE>
10. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Texas without giving effect to the
choice of law or conflicts of law or principles thereof.
If you desire to purchase any Registered Units, please confirm your
agreement by signing and returning to the Representative by mail or facsimile
transmission your confirmation in the form attached hereto as Exhibit A even
though you may have previously advised the Representative thereof.
Very truly yours,
LA JOLLA SECURITIES CORPORATION
By:
Robert A. Shuey, III
For itself and the other several Underwriters
in Schedule I to the Underwriting Agreement
<PAGE>
EXHIBIT A
Confirmation
c/o LA JOLLA SECURITIES CORPORATION
8214 Westchester, Suite 500
Dallas, Texas 75225
Facsimile Number (214) 987-2091
Dear Sirs:
The undersigned hereby confirms its agreement to purchase Units of
ENERGY SEARCH, INC., a Tennessee Corporation (the "Registered Units"), each
Registered Unit consisting of one share of Common Stock, no par value, and one
Redeemable Series A Common Stock Purchase Warrant, each of which entitles the
holder thereof to purchase one share of Common Stock at a price of $___. The
purchase price shall be $____per Registered Unit, less a selling concession of
$___ per Registered Unit, subject to the terms and conditions of the foregoing
Selected Dealer Agreement, and the undersigned agrees to take up and pay for
such Registered Units on the terms and conditions set forth in such Agreement.
The undersigned hereby acknowledges receipt of the Preliminary Prospectus
relating to the Securities (as defined in the Selected Dealer Agreement) and
confirms that in agreeing to purchase the Registered Units it has relied on said
Preliminary Prospectus and on no other statement whatsoever, written or oral.
The undersigned represents that it has complied and will comply with the
requirements of Rule 15c2-8 under the Securities Exchange Act of 1934, as
amended, with respect to the offering of the Registered Units.
The undersigned confirms that it is a member in good standing of the
National Association of Securities Dealers, Inc. (the "NASD") and represents
that in making sales of the Registered Units it will comply with the Rules of
Fair Practice (including Sections 8, 24 and 36 of Article m) and the
Interpretation of the Board of Governors of the NASD with respect to Free-Riding
and Withholding; alternatively, the undersigned represents that it is a foreign
dealer that is not eligible for membership in the NASD and agrees not to offer
or sell the Registered Units in the United States, its territories or its
possessions or to persons it has reason to believe are nationals thereof or
residents therein, and further agrees that in making sales of the Registered
Units outside the United States, it will comply with the requirements of the
Rules of Fair Practice (including Sections 8, 24 and 36 of Article m, and
Section 25 of such Article as that Section applies to non-member foreign
dealers) and the Interpretation of the Board of Governors of the NASD with
respect to Free-Riding and Withholding.
By:
Name:
Title:
Address:
Facsimile
Number:
Dated , 1996
FINANCIAL CONSULTING AGREEMENT
AGREEMENT made as of this ___ day of , 1996, by and between Energy
Search, Inc., a Tennessee corporation (the "Company"), and La Jolla Securities
Corporation, a California corporation ("La Jolla").
W I T N E S S E T H:
WHEREAS, the Company has filed a Registration Statement on Form SB-2,
File No. ______ with the Securities and Exchange Commission ("SEC") in
connection with a proposed public offering of 1,000,000 Units, each Unit
consisting of one share of Common Stock and one Redeemable Series A Common Stock
Purchase Warrant to purchase one share of Common Stock (the "Public Offering")
to be underwritten by La Jolla; and
WHEREAS, as part of the underwriting agreement, the Company has agreed
to retain La Jolla as a financial consultant.
NOW THEREFORE, in consideration of the promises and mutual covenants
herein set forth it is agreed as follows:
A. The Company hereby retains La Jolla as a financial consultant and La
Jolla shall provide to the Company, when requested by the Company from time to
time during normal business hours, consultation concerning, but not limited to,
shareholder relations, including preparation of the Company's annual report to
shareholders and other releases, assisting in long-term financial planning,
corporate reorganization and expansion, possible acquisition opportunities,
capital structure, borrowings and other financial assistance. Notwithstanding
the foregoing, La Jolla shall be under no obligation to devote a specific amount
of time to the performance of its duties hereunder.
B. This agreement shall become effective on the date hereof and shall
continue for a period of ___ (2) years thereafter.
C. As compensation for its services, the Company shall pay to La Jolla a
monthly fee of $_____, payable in _____ equal monthly installments (total
$________) in advance, beginning on the first day of the next month from the
closing date of the Public Offering. In addition, La Jolla shall be reimbursed
by the Company for all reasonable and necessary out-of-pocket expenses incurred
by it in connection with the performance of its obligations hereunder, which are
approved by the Company in advance.
D. La Jolla covenants that all information concerning the Company,
including proprietary information, of which it obtains knowledge as a result of
the services rendered pursuant to this Agreement shall be kept confidential and
shall not be used by La Jolla except for the direct benefit of the Company or
disclosed by La Jolla to any third party without the prior written approval of
the Company.
E. In the event that La Jolla, during the term hereof, originates a
financing or a merger, acquisition, joint venture or other transaction to which
the Company is a party, the Company agrees to pay La Jolla a finder's fee in
consideration for originating such transaction. The amount and terms and
conditions of such fee shall be mutually agreed to by La Jolla and the Company
in advance of the origination of each transactions.
F. La Jolla and the Company hereby acknowledge that La Jolla is an
independent contractor. La Jolla shall not hold itself out as, nor shall it take
any action from which others might infer that it is a partner of, agent of, or a
joint venturer of the Company. In addition, La Jolla shall take no action which
binds, or purports to bind, the Company.
G. This Agreement contains the entire agreement between the parties. It may
not be changed except by agreement in writing signed by the party against whom
enforcement of any waiver, change, discharge, or modification is sought. Waiver
of or failure to exercise any rights provided by this Agreement in any respect
shall not be deemed a waiver of any further or future rights.
H. This Agreement shall be construed according to the laws of the State of
Texas and subject to the jurisdiction of the courts of said state.
I. This Agreement shall be binding upon the parties, their successors and
assigns.
IN WITNESS WHEREOF, the parties hereto have executed or caused these
present to be executed as of the day and year first above written.
ENERGY SEARCH, INC.
By:
Richard S. Cooper
President
LA JOLLA SECURITIES CORPORATION
By:
Warrant and Registration Rights Agreement
___________, 1996
LA JOLLA SECURITIES CORPORATION
As Representative of the Several Underwriters
8214 Westchester
Suite 500
Dallas, Texas 75225
Gentlemen:
Energy Search, Incorporated, a Tenessee corporation (the "Company"), hereby
agrees to sell to the several underwriters (the "Underwriters") named in
Schedule I to that certain Underwriting Agreement (herein so called) of even
date herewith by and among you and the Company, and you hereby agree, as
representative of the Underwriters, that the Underwriters will purchase from the
Company at an aggregate purchase price of $100, warrants (the "Underwriter
Warrants") to purchase ______ of the Company's units (the "Units"), each Unit
consisting of one share of the Company's Common Stock and one Redeemable Series
A Common Stock Purchase Warrant (the "Warrant") issued in accordance with the
terms of a warrant agreement dated as of _______, 1996 between the Company and
_____________, as warrant agent. The Underwriter Warrants will be exercisable by
the holders thereof as to all or any lesser number of Units covered thereby, at
the Purchase Price per Unit (as defined below) at any time and from time to time
on and after the first anniversary of the date hereof and ending at 5:00 p.m. on
the fifth anniversary of the date hereof.
1. Definitions.
As used herein the following terms, unless the context otherwise
requires, shall have for all purposes hereof the following meanings:
(a) The term " Common Stock" refers to the common stock of the
Company pursuant to the Articles of Incorporation of the Company,
as amended.
(b) The term "Other Securities" refers to any stock (other than
Units) and other securities of the Company or any other person
(corporate or otherwise) which the holders of the Underwriter
Warrants at any time shall be entitled to receive, or shall have
received, upon the exercise of the Underwriter Warrants, in lieu
of or in addition to Common Stock and Warrants, or which at any
time shall be issuable or shall have been issued in exchange for
or in replacement of Units or Other Securities pursuant to
Section 6 below or otherwise.
(c) The term "Purchase Price" refers to the purchase price of the
Underlying Units subject to this Agreement. The Purchase Price
shall equal 120% of the offering price per Unit as set forth in
the Registration Statement. The Purchase Price is subject to
adjustment as provided in Section 6 below.
(d) The term "Registration Statement" refers to the Registration
Statement on Form SB-2 (File No. 333-_______ filed by the Company
with the Securities and Exchange Commission (the "Commission")
pursuant to the Securities Act of 1933, as amended (the "Act").
(e) The term "Underlying Common Stock" refers to the shares of Common
Stock (or Other Securities) which are part of the Underlying
Units and are issuable upon the exercise, in whole or in part, of
the Underwriter Warrants.
(f) The term "Underlying Securities" refers to the Underlying Units,
the Underlying Common Stock and the Underlying Warrants.
(g) The term "Underlying Units" refers to the Units issued or
issuable upon the exercise, in whole or in part, of the
Underwriter Warrants.
(h) The term "Underlying Warrants" refers to the Warrants which are
part of the Underlying Units and are issued or issuable upon the
exercise of the Underwriter Warrants.
(i) The term "Warrant Stock" refers to shares of Common Stock issued
or issuable upon the exercise of the Underlying Warrants.
The purchase and sale of the Underwriter Warrants shall take place, and the
purchase price therefore shall be paid by delivery of your check payable to the
Company on the Closing Date (as defined in the Underwriting Agreement).
2. Representations and Warranties.
The Company represents and warrants to you as follows:
(a) Corporate Action. The Company has all requisite corporate power
and authority, and has taken all necessary corporate action, to
execute and deliver this Agreement, to issue and deliver the
Underwriter Warrants and certificates evidencing same, and to
authorize and reserve for issuance, and upon payment from time to
time of the Purchase Price to issue and deliver, the Underlying
Units, including the Underlying Common Stock, the Underlying
Warrants and the Warrant Stock.
(b) No Violation. Neither the execution nor delivery of this
Agreement, the consummation of the actions herein contemplated
nor compliance with the terms and provisions hereof will conflict
with, or result in a breach of, or constitute a default or an
event permitting acceleration under, any of the terms, provisions
or conditions of the Articles of Incorporation or Bylaws of the
Company or any indenture, mortgage, deed of trust, note, bank
loan, credit agreement, franchise, license, lease, permit,
judgment, decree, order, statute, rule or regulation or any other
agreement, understanding or instrument to which the Company is a
party or by which it is bound.
3. Compliance with the Act.
(a) Transferability of Underwriter Warrants. You agree that for a
period of two years from the date hereof the Underwriter Warrants
may not be transferred, sold, assigned or hypothecated, except to
(i) persons who are officers of you or any successor of you; (ii)
a successor to you in a merger or consolidation; (iii) a
purchaser of all or substantially all of your assets; (iv) your
shareholders in the event you are liquidated or dissolved; (v)
broker-dealers participating in the Company's initial public
offering, and (viii) persons who are officers or partners of such
participating broker-dealers.
(b) Registration of Underlying Common Stock. The Underlying Common
Stock issuable upon the exercise of the Underwriter Warrants has
been registered under the Act. However, you agree not to make any
sale or other disposition of the Underlying Common Stock except
pursuant to a new registration statement which has become
effective under the Act, setting forth the terms of such
offering, the underwriting discount and the commissions and any
other pertinent data with respect thereto, unless you have
provided the Company with an opinion of recognized counsel
reasonably acceptable to the Company that such registration is
not required under the Act and applicable state securities laws.
(c) Inclusion in Registration of Other Securities. If at any time
after the first anniversary of the effective date hereof but
prior to the fifth anniversary of the effective date hereof, the
Company shall propose the registration on an appropriate form
under the Act of any shares of Common Stock or Other Securities
(other than in connection with a merger or acquisition or an
employee benefit plan), the Company shall at least 30 days prior
to the filing of such registration statement give you written
notice of such proposed registration and, upon written notice
given to the Company within 10 business days after your receipt
of such notice from the Company, shall include or cause to be
included in any such registration statement all or such portion
of the Underwriter Warrants, the Underlying Securities and the
Warrant Stock as you may request, provided, however, that the
Company may at any time withdraw or cease proceeding with any
such registration if it shall at the same time withdraw or cease
proceeding with the registration of such Common Stock or such
Other Securities originally proposed to be registered.
Notwithstanding any provision of this Agreement to the
contrary, if any holder of any of the Underwriter Warrants
exercises his Underwriter Warrants but shall not have included
all the Underlying Securities or Warrant Stock in a
registration statement which complies with Section 10(a)(3) of
the Act, which has been effective for at least 30 calendar
days following the exercise of the Underwriter Warrants, the
registration rights set forth in this Subsection 3(c) shall be
extended until such time as (i) the registration statement has
been effective for at least 30 calendar days, or (ii) in the
opinion of counsel satisfactory to you and the Company,
registration is not required under the Act or under applicable
state laws for resale of the Underlying Securities or Warrant
Stock in the manner proposed.
(d) Company's Obligations in Registration. In the event you timely
elect to participate in an offering by including your Underwriter
Warrants, the Underlying Securities or the Warrant Stock in a
registration statement pursuant to Subsection 3(c) above, the
Company shall:
(i) Notify you as to the filing thereof and of all amendments or
supplements thereto filed prior to the effective date
thereof;
(ii) Comply with all applicable rules and regulations of the
Commission;
(iii)Notify you immediately, and confirm the notice in writing,
(1) when the registration statement becomes effective, (2)
of the issuance by the Commission of any stop order or of
the initiation, or the threatening, of any proceedings for
that purpose, (3) of the receipt by the Company of any
notification with respect to the suspension of qualification
of the Common Stock, the Warrants or the Units for sale in
any jurisdiction or of the initiation, or the threatening,
of any proceedings for that purpose and (4) of the receipt
of any comments, or requests for additional information,
from the Commission or any state regulatory authority. If
the Commission or any state regulatory authority shall enter
such a stop order or order suspending qualification at any
time, the Company will make every reasonable effort to
obtain the lifting of such order as promptly as practicable.
(iv) During the time when a registration statement is required to
be delivered under the Act during the period required for
the distribution of the Underlying Securities or the Warrant
Stock, comply so far as it is able with all requirements
imposed upon it by the Act, as hereafter amended, and by the
rules and regulations promulgated thereunder, as from time
to time in force, so far as necessary to permit the
continuance of sales of the Underlying Securities and the
Warrant Stock, as applicable. If at any time when a
registration statement relating to the Underlying Securities
or the Warrant Stock is required to be delivered under the
Act any event shall have occurred as a result of which, in
the opinion of counsel for the Company or your counsel, the
registration statement relating to the Underlying Securities
or the Warrant Stock as then amended or supplemented
includes an untrue statement of a material fact or omits to
state any material fact required to be stated therein or
necessary to make the statements therein, in the light of
the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend such
registration statement to comply with the Act, the Company
will promptly prepare and file with the Commission an
appropriate amendment or supplement (in form satisfactory to
you).
(v) Endeavor in good faith, in cooperation with you, at or prior
to the time the registration statement becomes effective, to
qualify the Underlying Securities and/or the Warrant Stock,
as applicable for offering and sale under the securities
laws relating to the offering or sale of the Underlying
Securities and/or the Warrant Stock, as applicable in such
jurisdictions as you may reasonably designate and to
continue the qualifications in effect so long as required
for purposes of the sale of the Underlying Securities and/or
the Warrant Stock, as applicable; provided that no such
qualification shall be required in any jurisdiction where,
as a result thereof, the Company would be subject to service
of general process, or to taxation as a foreign corporation
doing business in such jurisdiction. In each jurisdiction
where such qualification shall be effected, the Company
will, unless you agree that such action is not at the time
necessary or advisable, file and make such statements or
reports at such times as are or may reasonably be required
by the laws of such jurisdiction. For the purposes of this
paragraph, "good faith" is defined as the same standard of
care and degree of effort as the Company will use to qualify
its securities other than the Underlying Securities and the
Warrant Stock.
(vi) Make generally available to its security holders as soon as
practicable, but not later than the first day of the
eighteenth full calendar month following the effective date
of the registration statement, an earnings statement (which
need not be certified by independent public or independent
certified public accountants unless required by the Act or
the rules and regulations promulgated thereunder, but which
shall satisfy the provisions of Section 11(a) of the Act)
covering a period of at least twelve months beginning after
the effective date of the registration statement.
(vii)After the effective date of such registration statement,
prepare, and promptly notify you of the proposed filing of,
and promptly file with the Commission, each and every
amendment or supplement thereto or to any registration
statement forming a part thereof as may be necessary to make
any statements therein not misleading in any material
respect; provided that no such amendment or supplement shall
be filed if you shall object thereto in writing promptly
after being furnished a copy thereof.
(viii) Furnish to you, as soon as available, copies of any such
registration statement, including all preliminary or final
registration statements, or supplement or amendment prepared
pursuant thereto, all in such quantities as you may from
time to time reasonably request;
(ix) Make such representations and warranties to any underwriter
of the Underlying Securities or the Warrant Stock, as
applicable, and use your best efforts to cause Company
counsel to render such usual and customary opinions to such
underwriter, as such underwriter may reasonably request; and
(x) Pay all costs and expenses incident to the performance of
the Company's obligations under Subsection 3(c) above and
under Subsection 3(d), including without limitation the fees
and disbursements of Company auditors and legal counsel, of
legal counsel for you and of legal counsel responsible for
qualifying the Underlying Securities and/or the Warrant
Stock under blue sky laws, all filing fees and printing
expenses, all expenses in connection with the transfer and
delivery of the Underlying Securities and/or Warrant Stock,
and all expenses in connection with the qualification of the
Underlying Securities and/or the Warrant Stock under blue
sky laws provided, however, that the Company shall not be
responsible for indemnity discounts and commissions.
(e) Agreements by Warrant Holder. In connection with the filing of a
registration statement pursuant to Subsection 3(c) above, if you
participate in the offering of the Underlying Securities and/or
Warrant Stock by including securities owned by you, you agree:
(i) To furnish the Company all material information requested by
the Company concerning yourself and your holdings of
securities of the Company and the proposed method of sale or
other disposition of the Underlying Securities and/or
Warrant Stock and such other information and undertakings as
shall be reasonably required in connection with the
preparation and filing of any such registration statement
covering all or a part of the Underlying Securities and/or
Warrant Stock and in order to ensure full compliance with
the Act; and
(ii) To cooperate in good faith with the Company and its
underwriters, if any, in connection with such registration,
including placing the shares of Underlying Securities and/or
Warrant Stock to be included in such registration statement
in escrow or custody to facilitate the sale and distribution
thereof.
(f) Indemnification. The Company shall indemnify and hold harmless
you and each of the other Underwriters, each of your and their
officers and directors, and each person, if any, who respectively
controls you or any such Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), against any loss,
liability, claim, damage and expense whatsoever (including but
not limited to any and all expense whatsoever reasonably incurred
in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever), joint or
several, to which any of you or any such Underwriter or such
controlling person becomes subject, under the Act or otherwise,
insofar as such loss, liability, claim, damage and expense (or
actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact
contained in (i) a registration statement covering any Underlying
Security or Warrant Stock, in the prospectus contained therein,
or in an amendment or supplement thereto or (ii) in any
application or other document or communication (in this
Subsection collectively called "application") executed by or on
behalf of the Company or based upon written information furnished
by or on behalf of the Company filed in any jurisdiction in order
to qualify the Underlying Securities and/or Warrant Stock under
the securities laws thereof or filed with the Commission, or
arise out of or based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading provided,
however, that the Company shall not be obligated to indemnify in
any such case to the extent that any such loss, claim, damage,
expense or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged
omission made in reliance upon, and in conformity with, written
information respectively furnished by you or any such Underwriter
or such controlling person for use in the registration statement,
or any amendment or supplement thereto, or any application, as
the case may be.
If any action is brought against a person in respect of which
indemnity may be sought against the Company pursuant to the
foregoing paragraph, such person shall promptly notify the
Company in writing of the institution of such action and the
Company shall assume the defense of the action, including the
employment of counsel (satisfactory to the indemnified person
in its reasonable judgment) and payment of expenses. The
indemnified person shall have the right to employ its or their
own counsel in any such case, but the fees and expenses of
such counsel shall be at the expense of such indemnified
person unless the employment of such counsel shall have been
authorized in writing by the Company in connection with the
defense of the action or the Company shall not have employed
counsel to have charge of the defense of the action or the
indemnified person shall have reasonably concluded that there
may be defenses available to it or them which are different
from or additional to those available to the Company (in which
case the Company shall not have the right to direct the
defense of the action on behalf of the indemnified person), in
any of which events these fees and expenses shall be borne by
the Company. Anything in this paragraph to the contrary
notwithstanding, the Company shall not be liable for any
settlement of any claim or action effected without its
consent. The Company's indemnity agreements contained in this
Subsection shall remain in full force and effect regardless of
any investigation made by or on behalf of any indemnified
person, and shall survive any termination of this Agreement.
The Company agrees promptly to notify you of the commencement
of any litigation or proceedings against the Company or any of
its officers or directors in connection with the registration
statement pursuant to Subsection 3(c) above.
If you choose to include all or a part of the Underlying
Securities or Warrant Stock in a public offering pursuant to
Subsection 3(c), then you agree to indemnify and hold harmless
the Company and each of its directors and officers who have
signed any such registration statement, and any underwriter
for the Company (as defined in the Act), and each person, if
any, who controls the Company or such underwriter within the
meaning of the Act, to the same extent as the indemnity by the
Company in this Subsection 3(f) but only with respect to
statements or omissions, if any, made in such registration
statement, or any amendment or supplement thereto, or in any
application in reliance upon, and in conformity with, written
information furnished by you to the Company for use in the
registration statement, or any amendment or supplement
thereto, or any application, as the case may be. In case any
action shall be brought in respect of which indemnity may be
sought against you, you shall have the rights and duties given
to the Company, and the persons so indemnified shall have the
rights and duties given to you by the provisions of the first
paragraph of this Subsection.
The Company further agrees that, if the indemnity provisions
of the foregoing paragraphs are held to be unenforceable, any
holder of an Underwriter Warrant or controlling person of such
a holder may recover contribution from the Company in an
amount which, when added to contributions such holder or
controlling person has theretofore received or concurrently
receives from officers and directors of the Company or
controlling persons of the Company, will reimburse such holder
or controlling person for all losses, claims, damages or
liabilities and legal or other expenses; provided, however,
that if the full amount of the contribution specified in this
Subsection 3(f) is not permitted by law, then such holder or
controlling person shall be entitled to contribution from the
Company and its officers, directors and controlling persons to
the full extent permitted by law.
4. Exercise of Underwriter Warrants; Partial Exercise.
(a) Exercise in Full. Each Underwriter Warrant may be exercised in
full, for a period of four years commencing one year from the
date hereof, by the holder thereof by surrender of the related
Warrant Certificate, with the form of subscription at the end
thereof duly executed by such holder, to the Company at its
principal office, accompanied by payment, in cash or by certified
or bank cashiers check payable to the order of the Company, in
the respective amount obtained by multiplying the number of
Underlying Units represented by the Warrant Certificate (after
giving effect to any adjustment therein as provided in Section 6
below) by the Purchase Price per Unit.
(b) Partial Exercise. Each Underwriter Warrant may be exercised in
part, for a period of four years commencing one year from the
date hereof, by surrender of the related Warrant Certificate in
the manner and at the place provided in Subsection 4(a) above,
accompanied by payment, in cash or by certified or bank cashiers
check payable to the order of the Company, in the respective
amount obtained by multiplying the number of Underlying Units
designated by the holder in the form of subscription attached to
the Warrant Certificate by the Purchase Price per Unit (after
giving effect to any adjustment therein as provided in Section 6
below). Upon any such partial exercise, the Company at its
expense will forthwith issue and deliver to or upon the order of
the purchasing holder, a new Warrant Certificate or Certificates
of like tenor, in the name of the holder thereof or as such
holder (upon payment by such holder of any applicable transfer
taxes) may request calling in the aggregate for the purchase of
the number of Units equal to the number of such Units called for
on the face of the original Warrant Certificate (after giving
effect to any adjustment therein as provided in Section 6 below)
minus the number of such Units (after giving effect to such
adjustment) designated by the holder in the aforementioned form
of subscription.
(c) Company to Reaffirm Obligations. The Company will, at the time of
any exercise of any Underwriter Warrant, upon the request of the
holder thereof, acknowledge in writing its continuing obligation
to afford to such holder any rights (including without limitation
any right to registration of the Underlying Securities and
Warrant Stock) to which such holder shall continue to be entitled
after such exercise in accordance with the provisions of this
Agreement; provided, however, that if the holder of an
Underwriter Warrant shall fail to make any such request, such
failure shall not affect the continuing obligation of the Company
to afford to such holder any such rights.
5. Delivery of Certificates, etc, on Exercise.
As soon as practicable after the exercise of any Underwriter Warrant in
full or in part, and in any event within twenty days thereafter, the Company at
its expense (including the payment by it of any applicable issue taxes) will
cause to be issued in the name of and delivered to the purchasing holder
thereof, a certificate or certificates for the number of Units, Underlying
Warrants and fully paid and nonassessable shares of Underlying Common Stock to
which such holder shall be entitled upon such exercise, plus in lieu of any
fractional share to which such holder would otherwise be entitled, cash in an
amount determined pursuant to Section 7(g), together with any other stock or
other securities and property (including cash, where applicable) to which such
holder is entitled upon such exercise pursuant to Section 6 below or otherwise.
6. Anti-dilution Provisions.
The Underwriter Warrants are subject to the following terms and
conditions during the term thereof:
(a) Stock Distributions and Splits. In case (i) the outstanding
shares of Common Stock (or Other Securities) shall be subdivided
into a greater number of shares, or (ii) a dividend in Common
Stock (or Other Securities) shall be paid in respect of Common
Stock (or Other Securities), the Purchase Price per Unit in
effect immediately prior to such subdivision or at the record
date of such dividend or distribution shall simultaneously with
the effectiveness of such subdivision or immediately after the
record date of such dividend or distribution be proportionately
reduced; and if outstanding shares of Common Stock (or Other
Securities) shall be combined into a smaller number of shares
thereof, the Purchase Price per Unit in effect immediately prior
to such combination shall simultaneously with the effectiveness
of such combination be proportionately increased. Any dividend
paid or distributed on the Common Stock (or Other Securities) in
stock or any other securities convertible into shares of Common
Stock (or Other Securities) shall be treated as a dividend paid
in Common Stock (or Other Securities) to the extent that shares
of Common Stock (or Other Securities) are issuable upon the
conversion thereof.
(b) Adjustments. Whenever the Purchase Price per Unit is adjusted as
provided in Subsection 6(a) above, the number of Underlying Units
purchasable upon exercise of the Underwriter Warrants immediately
prior to such Purchase Price adjustment shall be adjusted,
effective simultaneously with such Purchase Price adjustment, to
equal the product obtained (calculated to the nearest full share)
by multiplying such number of Underlying Units by a fraction, the
numerator of which is the Purchase Price per Unit in effect
immediately prior to such Purchase Price adjustment and the
denominator of which is the Purchase Price per Unit in effect
upon such Purchase Price adjustment, which adjusted number of
Underlying Units shall thereupon be the number of Underlying
Units purchasable upon exercise of the Underwriter Warrants until
further adjusted as provided herein.
(c) Reorganizations. If any consolidation or merger of the Company
with another corporation, or the sale of all or substantially all
of its assets to another corporation, shall be effected in such a
way that holders of Common Stock shall be entitled to receive
stock, securities or assets with respect to or in exchange for
Common Stock, then, as a condition of such consolidation, merger
or sale, lawful and adequate provisions shall be made whereby the
holders of Underwriter Warrants shall thereafter have the right
to purchase and receive upon the basis and upon the terms and
conditions specified in this Agreement and in lieu of the shares
of Common Stock of the Company immediately theretofore
purchasable and receivable upon the exercise of the Underwriter
Warrants, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number of
outstanding shares of Common Stock equal to the number of shares
of such stock immediately theretofore purchasable and receivable
upon the exercise of the rights represented by the Underwriter
Warrants had such consolidation, merger or sale not taken place,
and in any such case, appropriate provision shall be made with
respect to the rights and interests of the holders of Underwriter
Warrants to the end that the provisions hereof (including without
limitation provisions for adjustments of the Purchase Price and
of the number of Units purchasable and receivable upon the
exercise of the Underwriter Warrants) shall thereafter be
applicable, as nearly as may be, in relation to any shares of
stock, securities or assets thereafter deliverable upon the
exercise thereof (including an immediate adjustment, by reason of
such consolidation or merger, of the Purchase Price to the value
for the Common Stock reflected by the terms of such consolidation
or merger if the value so reflected is less than the Purchase
Price in effect immediately prior to such consolidation or
merger). In the event of a merger or consolidation of the Company
with or into another corporation as a result of which a number of
shares of common stock of the surviving corporation greater or
lesser than the number of shares of Common Stock of the Company
outstanding immediately prior to such merger or consolidation are
issuable to holders of Common Stock of the Company, then the
Purchase Price in effect immediately prior to such merger or
consolidation shall be adjusted in the same manner as though
there were a subdivision or combination of the outstanding shares
of Common Stock of the Company. The Company will not effect any
such consolidation, merger or sale, unless prior to the
consummation thereof the successor corporation (if other than the
Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written
instrument executed and mailed or delivered to the registered
holder hereof at the last address of such holder appearing on the
books of the Company, the obligation to deliver to such holder
such shares of stock, securities or assets as, in accordance with
the foregoing provisions, such holder may be entitled to
purchase. If a purchase, tender or exchange offer is made to and
accepted by the holders of more than 50% of the outstanding
shares of Common Stock of the Company, the Company shall not
effect any consolidation, merger or sale with the Person having
made such offer or with any Affiliate of such Person, unless
prior to the consummation of such consolidation, merger or sale
the holders of Underwriter Warrants shall have been given a
reasonable opportunity to then elect to receive upon the exercise
of Underwriter Warrants either the stock, securities or assets
then issuable with respect to the Common Stock of the Company or
the stock, securities or assets, or the equivalent issued to
previous holders of Common Stock in accordance with such offer.
The term "Person" as used in this subparagraph shall mean and
include an individual, a partnership, a corporation, a trust, a
joint venture, an unincorporated organization and a government or
any department or agency thereof. For the purposes of this
subparagraph, an "Affiliate" of any Person shall mean any Person
directly or indirectly controlling, controlled by or under direct
or indirect common control with, such other Person. A Person
shall be deemed to control a corporation if such Person
possesses, directly or indirectly, the power to direct or cause
the direction of the management and policies of such corporation,
whether through the ownership of voting securities, by contract
or otherwise.
(d) Effect of Dissolution or Liquidation. In case the Company shall
dissolve or liquidate all or substantially all of its assets, all
rights under this Agreement shall terminate as of the date upon
which a certificate of dissolution or liquidation shall be filed
with the Secretary of the State of Colorado (or, if the Company
theretofore shall have been merged or consolidated with a
corporation incorporated under the laws of another state, the
date. upon which action of equivalent effect shall have been
taken); provided, however, that (i) no dissolution or liquidation
shall affect the rights under Subsection 6(c) of any holder of an
Underwriter Warrant, and (ii) if the Company's Board of Directors
shall propose to dissolve or liquidate the Company, each holder
of an Underwriter Warrant shall be given written notice of such
proposal at the earlier of (i) the time when the Company's
shareholders are first given notice of the proposal, or (ii) the
time when notice to the Company's shareholders is first required.
(e) Notice of Change of Purchase Price. Whenever the Purchase Price
per Unit or the kind or amount of securities purchasable under
the Underwriter Warrants shall be adjusted pursuant to any of the
provisions of this Agreement, the Company shall forthwith
thereafter cause to be sent to each holder of an Underwriter
Warrant, a certificate setting forth the adjustments in the
Purchase Price per Unit and/or in such number of Units, and also
setting forth in detail the facts requiring such adjustments,
including without limitation a statement of the consideration
received or deemed to have been received by the Company for any
additional securities issued by it requiring such adjustment. In
addition, the Company at its expense shall within 90 days
following the end of each of its fiscal years during the term of
this Agreement, and promptly upon the reasonable request of any
holder of an Underwriter Warrant in connection with the exercise
from time to time of all or any portion of any Underwriter
Warrant, cause independent certified public accountants of
recognized standing selected by the Company to compute any such
adjustment in accordance with the terms of the Underwriter
Warrants and prepare a certificate setting forth such adjustment
and showing in detail the facts upon which such adjustment is
based.
(f) Notice of a Record Date. In the event of (i) any taking by the
Company of a record of the holders of any class of securities for
the purpose of determining the holders thereof who are entitled
to receive any dividend (other than a cash dividend payable out
of earned surplus of the Company) or other distribution, or any
right to subscribe for, purchase or otherwise acquire any shares
of stock of any class or any other securities or property, or to
receive any other right, (ii) any transfer of all or
substantially all of the assets of the Company to, or
consolidation or merger of the Company with or into, any other
person or (iii) any voluntary or involuntary dissolution or
liquidation of the Company, then and in each such event the
Company will mail or cause to be mailed to each holder of an
Underwriter Warrant a notice specifying not only the date on
which any such record is to be taken for the purpose of such
dividend, distribution or right and stating the amount and
character of such dividend, distribution or right, but also the
date on which any such transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place, and the
time, if any, as of which the holders of record of Common Stock
(or Other Securities) shall be entitled to exchange their shares
of Common Stock (or other Securities) for securities or other
property deliverable upon such transfer, consolidation, merger,
dissolution, liquidation or winding-up. Such notice shall be
mailed at least 20 days prior to the proposed record date therein
specified.
7. Further Covenants of the Company.
(a) Reservation of Stock. The Company shall at all times reserve and
keep available, solely for issuance and delivery upon the
exercise of the Underwriter Warrants, all shares of the
Underlying Common Stock and Warrant Stock from time to time
issuable upon the exercise of the Underlying Warrants and the
Underwriter Warrants and shall take all necessary actions to
ensure that the par value per share, if any, of the Underlying
Common Stock, and Warrant Stock is, at all times equal to or less
than the then effective Purchase Price per Unit attributable to
each share of Common Stock.
(b) Title to Units. All Units, all Underlying Warrants, all
Underlying Common Stock and all Warrant Stock delivered upon the
exercise of the Underwriter Warrants and the Underlying Warrants
shall be validly issued, fully paid and nonassessable; each
holder of an Underwriter Warrant shall receive good and
marketable title to the Units, the Underlying Common Stock, the
Underlying Warrants and the Warrant Stock free and clear of all
voting and other trust arrangements, liens, encumbrances,
equities and claims whatsoever; and the Company shall have paid
all taxes, if any, in respect of the issuance thereof.
(c) Listing on Securities Exchanges; Registration. If the Company at
any time shall list any Units, Common Stock, or Warrants on any
national securities exchange, the Company will, at its expense,
simultaneously list on such exchange, upon official notice of
issuance upon the exercise of the Underwriter Warrants, and
maintain such listing of, all Units, all Underlying Securities
and all Warrant Stock from time to time issuable upon the
exercise of the Underwriter Warrants; and the Company will so
list on any national securities exchange, will so register and
will maintain such listing of, any Other Securities if and at the
time that any securities of like class or similar type shall be
listed on such national securities exchange by the Company.
(d) Exchange of Underwriter Warrants. Subject to Subsection 3(a)
hereof, upon surrender for exchange of any Warrant Certificate to
the Company, the Company at its expense will promptly issue and
deliver to or upon the order of the holder thereof a new Warrant
Certificate or certificates of like tenor, in the name of such
holder or as such holder (upon payment by such holder of any
applicable transfer taxes) may direct, calling in the aggregate
for the purchase of the number of Units called for on the face or
faces of the Warrant Certificate or Certificates so surrendered.
(e) Replacement of Underwriter Warrants. Upon receipt of evidence
reasonably satisfactory to the Company of the loss, theft,
destruction or mutilation of any Warrant Certificate and, in the
case of any such loss, theft or destruction, upon delivery of an
indemnity agreement reasonably satisfactory in form and amount to
the Company or, in the case of any such mutilation, upon
surrender and cancellation of such Warrant Certificate, the
Company, at the expense of the holder of such Underwriter Warrant
will execute and deliver, in lieu thereof, a new Warrant
Certificate of like tenor.
(f) Reporting by the Company. The Company agrees that, if it files a
Registration Statement during the term of the Underwriter
Warrants, it will use its best efforts to keep current in the
filing of all forms and other materials which it may be required
to file with the appropriate regulatory authority pursuant to the
Exchange Act, and all other forms and reports required to be
filed with any regulatory authority having jurisdiction over the
Company.
(g) Fractional Shares. No fractional shares of Underlying Common
Stock, or Warrant Stock are to be issued upon the exercise of any
Underwriter Warrant or Warrant, but the Company shall pay a cash
adjustment in respect of any fraction of a share which would
otherwise be issuable in an amount equal to the same fraction of
the highest market price per share of Underlying Common Stock or
Warrant Stock on the day of exercise, as determined by the
Company.
(h) Reorganizations and Reclassifications. While any Underwriter
Warrant remains outstanding, the Company shall not effect any
capital reorganization of the Company, or any reclassification or
recapitalization of the capital stock of the Company; provided,
however, that the Company may reincorporate in another state if
such reincorporation does not involve a change in the capital
structure of the Company, and the Company may change the par
value of the Common Stock, subject to the antidilution provisions
hereof.
8. Other Holders.
The Underwriter Warrants are issued upon the following terms, to all of
which each holder or owner thereof by the taking thereof consents and agrees as
follows: (a) any person who shall become a transferee, within the limitations on
transfer imposed by Subsection 3(a) hereof, of an Underwriter Warrant properly
endorsed shall take such Underwriter Warrant subject to the provisions of
Subsection 3(a) hereof and thereupon shall be authorized to represent himself as
absolute owner thereof and, subject to the restrictions contained in this
Agreement, shall be empowered to transfer absolute title by endorsement and
delivery thereof to a permitted bona fide purchaser for value; (b) each prior
taker or owner waives and renounces all of his equities or rights in such
Underwriter Warrant in favor of each such permitted bona fide purchaser, and
each such permitted bona fide purchaser shall acquire absolute title thereto and
to all rights presented thereby; (c) until such time as the respective
Underwriter Warrant is transferred on the books of the Company, the Company may
treat the registered holder thereof as the absolute owner thereof for all
purposes, notwithstanding any notice to the contrary and (d) all references to
the word "you" in this Agreement shall be deemed to apply with equal effect to
any person to whom a Warrant Certificate or Certificates have been transferred
in accordance with the terms hereof, and where appropriate, to any person
holding Units, Underlying Securities or Warrant Stock.
9. Miscellaneous.
All notices, certificates and other communications from or at the
request of the Company to the holder of any Underwriter Warrant shall be mailed
by first class, registered or certified mail, postage prepaid, to such address
as may have been furnished to the Company in writing by such holder, or, until
an address is so furnished, to the address of the last holder of such
Underwriter Warrant who has so furnished an address to the Company, except as
otherwise provided herein. This Agreement and any of the terms hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of such change, waiver, discharge
or termination is sought. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of Texas. The headings in
this Agreement are for reference only and shall not limit or otherwise affect
any of the terms hereof. This Agreement, together with the forms of instruments
annexed hereto as Schedule I, constitutes the full and complete agreement of the
parties hereto with respect to the subject matter hereof.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed on this _____ day of ______________, 1996, in city of ________, State
of Tennessee by its proper corporate officers thereunto duly authorized.
Energy Search, Incorporated
By:
Richard S. Cooper, President
The above Warrant and Registration Rights Agreement is confirmed this _____ day
of __________, 1996.
La Jolla Securities Corporation
By:
Robert A. Shuey III
<PAGE>
Exhibit A
ENERGY SEARCH INCORPORATED
Unit Purchase Warrant
Certificate Evidencing Right to Purchase
______ Units
This is to certify that La Jolla Securities is entitled to purchase at any time
or from time to time after 9:00 a.m., Dallas, Texas time, on ________ and until
9:00 a.m., Dallas, Texas time, on __________ up to the above referenced number
of Units consisting of one share of the Company's Common Stock (the "Shares")
and one Redeemable Series A Warrant (the "Warrants"), of Energy Search,
Incorporated, a Tennessee corporation (the "Company"), for the consideration
specified in Subsection 1(c) of the Warrant and Registration Rights Agreement
dated August 14, 1996 between the Company and La Jolla Securities Corporation,
as representative of the several Underwriters (as defined therein) (the "Warrant
Agreement"), pursuant to which this Warrant is issued. All rights of the holder
of this Warrant are subject to the terms and provisions of the Warrant
Agreement, copies of which are available for inspection at the office of the
Company.
The Units issuable upon the exercise of this Warrant have been
registered under the Securities Act of 1933, as amended (the "Act"); however, no
distribution of the Units, Shares or Warrants issuable upon exercise of this
Warrant may be made except in compliance with the applicable provisions of the
Act. Transfer of this Warrant Certificate is restricted as provided in
Subsection 3(a) of the Warrant Agreement.
This Warrant has been issued to the registered owner in reliance upon
written representations necessary to ensure that this Warrant was issued in
accordance with an appropriate exemption from registration under any applicable
state and federal securities laws, rules and regulations. This Warrant may not
be sold, transferred, or assigned unless, in the opinion of the Company and its
legal counsel, such sale, transfer or assignment will not be in violation of the
Act, applicable rules and regulations of the Securities and Exchange Commission,
and any applicable state securities laws.
Subject to the provisions of the Act and of the Warrant Agreement, this
Warrant and all rights hereunder are transferable, in whole or in part, at the
offices of the Company, by the holder hereof in person or by duly authorized
attorney, upon surrender of this Warrant, together with the Assignment hereof
duly endorsed. Until transfer of this Warrant is on the books of the Company,
the Company may treat the registered holder hereof as the owner hereof for all
purposes.
Any Units, Warrants or Common Stock which are acquired pursuant to the
exercise of this Warrant shall be acquired in accordance with the Warrant
Agreement and certificates representing all securities so acquired shall bear a
restrictive legend reading substantially as follows:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR
UNDER ANY APPLICABLE STATE LAW. THEY MAY NOT BE OFFERED FOR SALE, SOLD,
TRANSFERRED OR PLEDGED WITHOUT (1) REGISTRATION UNDER THE SECURITIES ACT OF 1933
AND ANY APPLICABLE STATE LAW, OR (2) AN OPINION OF COUNSEL (SATISFACTORY TO THE
CORPORATION) THAT SUCH REGISTRATION IS NOT REQUIRED.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed on this
____th day of ______, 199__, in Dallas, Texas, by its proper corporate officer's
thereunto duly authorized.
Energy Search, Incorporated
By: Attest:______________________________
Richard S. Cooper, President __________, Secretary
<PAGE>
Exhibit B
SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: Energy Search, Incorporated
The undersigned, the holder of the enclosed Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, _________________ Units (as defined in the Warrant and
Registration Rights Agreement to which the form of this Subscription was
attached) and herewith makes payment of $______________ therefor, and requests
that the certificate or certificates for such Units be issued in the name of and
delivered to the undersigned.
Date:
(Signature must conform
in all respects to name
of holder as specified on
the face of the Warrant)
(Address)
Insert the number of Units called for on the face of the Warrant (or,
in the case of a partial exercise, the portion thereof as to which the Warrant
is being exercised), in either case without making any adjustment for additional
Units or other securities or property or cash which, pursuant to the adjustment
provisions of the Warrant, may be deliverable upon exercise.
<PAGE>
Exhibit C
ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto
_______________________________ the right represented by the enclosed Warrant to
purchase ________ Units with full power of substitution in the premises.
The undersigned represents and warrants that the transfer, in whole in
or in part, of such right to purchase represented by the enclosed Warrant is
permitted by the terms of the Warrant and Registration Rights Agreement pursuant
to which the enclosed Warrant has been issued, and the transferee hereof, by his
acceptance of this Assignment, represents and warrants that he is familiar with
the terms of such Warrant and Registration Rights Agreement and agrees to be
bound by the terms thereof with the same force and effect as if a signatory
thereto, including without limitation to Section 3 thereof.
Date:
(Signature must conform
in all respects to name of
holder as specified on
the face of the Warrant)
(Address)
Signed in the presence of:
THIRD AMENDED AND RESTATED CHARTER
OF
ENERGY SEARCH, INCORPORATED
Pursuant to the provisions of Section 48-20-107 of the Tennessee
Business Corporation Act, the undersigned Corporation hereby submits this Third
Amended and Restated Charter and states as follows:
1. The name of the Corporation is Energy Search, Incorporated.
2. The complete address of the principal office of the Corporation is: 280
Ft. Sanders West Boulevard, Suite 200, Knoxville, Knox County, Tennessee 37922.
3. The complete name and address of the registered agent of the Corporation
is: Robert L. Remine, 280 Ft. Sanders West Boulevard, Suite 200, Knoxville, Knox
County, Tennessee 37922.
4. This Third Amended and Restated Charter contains an amendment to the
original Charter, as amended, increasing the number of common shares the
Corporation is authorized to issue under paragraph 5 below and providing for
staggered terms for members of the board of directors of the Corporation. The
amendment regarding increasing authorized common stock and providing for
staggered terms of directors required Shareholder approval and was duly adopted
by the Shareholders of the Corporation on September 23, 1996.
5. Following is the description of the authorized capital stock of the
Corporation:
Common Stock
General. The Corporation shall be authorized to issue 10,000,000 Common
Shares. The Common Shares will have no par value. The Common Shares will be
equal in all respects. There will be no preemptive rights, conversion rights,
redemption privileges or sinking funds with respect to the Common Shares.
Dividends on Common Shares may be paid if, as and when declared by the Board of
Directors out of funds legally available for distributions and subject to the
prior rights of holders of the Class A Preferred Shares, if any.
Holders of Common Shares will be entitled to one vote for each issued and
outstanding share held of record at each meeting of Common Shareholders. There
will be no cumulative voting for the election of Directors.
In any liquidation or distribution of assets of the Corporation, whether
voluntary or involuntary, holders of the Common Shares will be entitled to
receive pro rata the assets remaining after creditors have been paid in full and
holders of the Corporation s Preferred Shares, if any, have received their full
liquidation preferences.
Preferred Stock; Class A Preferred Shares and Class B Preferred Shares
General. The Corporation shall be authorized to issue two (2) classes of
Preferred Stock; Class A Preferred Shares and Class B Preferred Shares, which
shall be equal in all respects, except as provided below. The Class A Preferred
Shares will be authorized as a class of 216,945 shares having no par value, a 5%
per annum cumulative dividend preference, and a $10.00 per share liquidation
preference over Class B Preferred Shares and Common Shares. The Class B
Preferred Shares will be authorized as a class of 450,000 shares having no par
value, no dividend preference, and a $10.00 per share liquidation preference
over Common Shares. The Preferred Shares will have no preemptive rights or
sinking funds.
Terms of the Preferred Shares
Dividends. The Class A Preferred Shares will accrue a 5% per annum
cumulative, noncompounded dividend payable upon a Surrender Event (defined
below) or earlier if declared by the Board of Directors. Class B Preferred
Shares will accrue no dividends and be entitled to no dividend preference over
Class A Preferred Shares or Common Shares. In the event any dividends were
declared by the Board of Directors on either Class A Preferred Shares or Class B
Preferred Shares, other than the 5% cumulative, noncompounded dividend to Class
A Preferred Shares, such dividends would not be entitled to any preference over
dividends with respect to the other class of Preferred Shares or Common Shares.
The 5% cumulative, noncompounded dividend to Class A Preferred Shares accrues
from the date of issuance of any such Class A Preferred Shares. Unpaid accrued
dividends on the Class A Preferred Shares cumulate and must be paid or set aside
for payment before any distribution, in cash, stock or other property (other
than in Common Shares), is made to holders of Class B Preferred Shares or Common
Shares.
Liquidation Preference. In the event of the voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the holders of Class
A Preferred Shares shall receive $10.00 per share plus their accrued and unpaid
5% per annum cumulative, noncompounded, dividend prior to any distribution to
the holders of Class B Preferred Shares or to the holders of Common Shares. In
any such event of dissolution, the holders of Class B Preferred Shares will
receive $10.00 per share prior to any distribution to the holders of Common
Shares. If, upon any liquidation, dissolution or winding up of the Corporation,
the amounts payable with respect to either Class A or Class B Preferred Shares
cannot be paid in full, the holders of class of Preferred Shares will share
ratably in any such distribution of assets in proportion to the respective full
preferential amounts to which they would otherwise be entitled. After payment of
the full preferential amounts to which the holders of Preferred Shares are
entitled upon any liquidation, dissolution or winding up, they will have no
right or claim to any of the remaining assets of the Corporation. The merger or
consolidation of the Corporation into or with any other corporation or the
merger of any other corporation into it, or the sale, lease or other disposition
of all or substantially all of the assets or business of the Corporation will
not be deemed to be a dissolution, liquidation or winding up of the Corporation.
Voting Rights. The Preferred Shares shall have no voting rights (other
than those which may be prescribed by Tennessee law in connection with
extraordinary events or transactions) unless and until they are converted into
Common Shares pursuant to the conversion feature of the Preferred Shares
discussed below, at which time they shall enjoy the same voting rights as all
other Common Shares.
Surrender Rights of Preferred Shares
Redemption. Class A Preferred Shares and Class B Preferred Shares shall be
redeemable by the Corporation, at the option of the holder, at $10.00 per share
(plus, in the case of Class A Preferred Shares, accrued and unpaid 5% per annum
cumulative, noncompounded dividends) upon the first occurrence of a Surrender
Event. Notice of redemption will be sent to each holder of the Preferred Shares
to be redeemed at the address shown on the share transfer records of the
Corporation not less than 30 nor more than 60 days prior to the redemption date,
which shall be specified therein.
Conversion. All Preferred Shares which are not redeemed upon the first
occurrence of a Surrender Event shall be automatically convertible into Common
Shares (the Underlying Common Shares). The conversion ratio will be one Common
Share for each Preferred Share converted. This one Preferred Share to one Common
Share conversion ratio will be subject to adjustment upon any stock dividend on
the Common Shares, any stock split, stock combination, or reclassification of
the Common Shares or any merger, consolidation or combination of the Corporation
with any other corporation or corporations (which occurrence would constitute a
Surrender Event.) In the event of any of the foregoing, the conversion ratio
will be proportionately adjusted in relation to the adjustment to Common Shares.
For example, if the Common Shares of the Corporation undergo a two-to-one stock
split prior to a Surrender Event, then the conversion ratio for the Preferred
Shares will be adjusted to two Common Shares for each Preferred Share.
The conversion of the Preferred Shares not redeemed shall occur
automatically upon expiration of the time period for redemption of Preferred
Shares. The Corporation will send notice of the automatic conversion and
promptly issue new Common Share certificates to the holders of Preferred Shares.
Upon automatic conversion, the Corporation shall declare and pay any cumulated
unpaid dividends on the Class A Preferred Shares that have accrued through the
effective date of the conversion as soon as practicable after such effective
date.
The Corporation shall keep available, out of its authorized but unissued
Common Shares, a sufficient number of Common Shares to effect the conversion of
all outstanding Preferred Shares. Any converted Preferred Shares will be
canceled by the Corporation's Board of Directors.
Surrender Events. For purposes of redemption and conversion of all
Preferred Shares and the payment of accrued dividends in the case of Class A
Preferred Shares, the following shall constitute Surrender Events: (a) the
Corporation merges or consolidates with another Corporation in a transaction in
which the Corporation is not the survivor; (b) the Corporation sells or disposes
of all, or substantially all, of its assets; (c) management of the Corporation
undertakes a registration and initial public offering of any of its Common
Shares.
6. The Corporation is for profit.
7. The purpose of the Corporation is to explore, prospect, drill for,
produce, market, sell, and deal in and with petroleum, mineral animal,
vegetable, and other oils, asphaltum, natural gas, gasoline, naphthalene,
hydrocarbons, oil shales, sulfur, salt, clay, coal, minerals, mineral
substances, metals, ores of every kind or other mineral or non-mineral, liquid,
solid, or volatile substances and products, by-products, combinations and
derivatives thereof, and to buy, lease, hire, contract for, invest in, and
otherwise acquire, and to own, hold, maintain, equip, operate, manage, mortgage,
create security interests in, deal in and with, and to sell, lease, exchange,
and otherwise dispose of oil gas, mineral, and mining lands, wells, mines,
quarries, rights, royalties, overriding royalties, oil payments, and other oil,
gas, and mineral interests, claims, locations, patents, concessions, easements,
rights-of-way, franchises, real and personal property, and all interests
therein, tanks, reservoirs warehouses storage facilities, elevators, terminals,
markets, docks, piers, wharves, dry-docks, bulkheads, pipelines pumping
stations, tank cars, trains, automobiles, trucks, cars tankers, ships, tugs,
barges, boats, vessels, aircraft, and other vehicles, crafts, or machinery for
use on land, water, or air, for prospecting, exploring, and drilling for,
producing, gathering, manufacturing, refining, purchasing, leasing, exchanging,
or otherwise acquiring, selling, exchanging, trading for, or otherwise disposing
of such mineral and non-mineral substances; and to do engineering and
contracting and to design, construct, drill, bore, sink, develop, improve,
extend, maintain, operate, and repair wells, mines, plants, works, machinery,
appliances, rigging, casing, tools, storage, and transportation lines and
systems for this Corporation and other persons, associations, or corporations.
To establish and maintain a drilling business with authority to own and operate
drilling rigs, machinery, tools, or apparatus necessary in the boring or
otherwise sinking of wells for the production of oil, gas, or water; to
construct or acquire by lease or otherwise and to maintain and operate pipelines
for the conveyance of oil and natural gas, oil storage tanks and reservoirs, and
tank cars of all kinds tank steamers, and other vessels, wharves, docks,
warehouses, storage houses, loading racks, and all other convenient
instrumentalities for the shipping and transportation of crude or refined
petroleum or natural gas and all other volatile, solid, or liquid mineral
substances in any and all forms; to manufacture, buy, sell, lease, let, and hire
machines and machinery, equipment tools, implements, and appliances, and all
other property, real and personal, useful or available in prospecting for an in
producing, transporting, storing, refining, or preparing for market, petroleum
and natural gas and all other volatile and mineral substances and their products
and by-products and of all articles and materials in any way resulting from or
connected therewith; to purchase, lease construct, or otherwise acquire,
exchange, sell, let, or otherwise dispose of, own, maintain, develop, and
improve any and property, real or personal, plants, refineries, factories,
warehouses, stores, and buildings of all kinds useful in connection with the
business of the Corporation including the drilling for oil and gas wells or
mining in any manner or by any method permitted by law on such real property;
and to conduct any other business enterprises not contrary to the laws of the
state of Tennessee.
8. Upon successful completion of an initial public offering of the
Corporation's, Common Stock the directors of the Corporation shall have
staggered terms in accordance with Section 48-18-106 of the Tennessee Business
Corporation Act. Commencing at the first annual meeting of Shareholders after
consummation of the initial public offering of the Corporation's common stock,
the Board of Directors of the Company shall be divided into three classes, each
class to consist as nearly as possible of one-third of the Directors. The term
of office of one class of Directors shall expire each year with the initial term
of office of the Class I Directors expiring at the 1998 annual meeting of
Shareholders; the initial term of office of the Class II Directors expiring at
the 1999 annual meeting of the Shareholders; and the initial terms of office of
the Class III Directors expiring at the 2000 annual meeting of shareholders.
Commencing with the 1998 annual meeting of Shareholders, the Directors of the
class elected at each annual meeting of Shareholders shall hold office for a
term of three years.
9. Nothing in this Charter shall be deemed to limit the authority of the
Corporation to indemnify or advance expenses to officers or directors (and their
estates, heirs and personal representatives) to the fullest extent required or
addressed under the laws of the state of Tennessee, both now in effect and as
hereafter adopted or amended.
10. This Third Amended and Restated Charter supersedes the original
Charter of the Corporation and all prior amendments and restatements thereto.
DATED this 23rd day of September, 1996.
ENERGY SEARCH, INCORPORATED
By: ____________________________________
Name: Richard S. Cooper
Title: President and Original Incorporator
280 Ft. Sanders West Boulevard
Suite 200
Knoxville, TN 37922
THIRD AMENDED AND RESTATED BYLAWS
OF
ENERGY SEARCH, INCORPORATED
Adopted as of September 23, 1996
These Third Amended and Restated Bylaws ("Bylaws") shall supersede all
prior Bylaws, amendments and restatements thereof, and shall regulate the
business and affairs of the Corporation, subject to the provisions of the
Corporation's Charter, as amended and restated, and any applicable provisions of
the Tennessee Business Corporation Act, Section 48-11-101 et seq., Tennessee
Code Annotated, as amended, (the "Tennessee Act").
SECTION 1
OFFICES AND REGISTERED AGENT
Section 1.01. Registered Office. The Corporation shall designate and
continuously maintain a registered office in the State of Tennessee.
Section 1.02. Principal Office. The principal office of the Corporation
shall be that which is designated as such in its Charter.
Section 1.03. Other Offices. The Corporation may also have other offices
within and without the State of Tennessee at such places as the Board of
Directors may from time to time determine.
Section 1.04. Registered Agent. The Corporation shall designate and
continuously maintain a registered agent in the State of Tennessee at its
registered office.
SECTION 2
SHAREHOLDERS
Section 2.01. Place. All meetings of the shareholders of the Corporation
shall be held at the principal office of the Corporation, or at such other place
as may be fixed by resolution of the Board of Directors.
Section 2.02. Annual Meeting. The annual meeting of the shareholders of the
Corporation shall be held at 10:00 a.m. E.S.T. on the third Wednesday in May of
each and every year, if not a legal holiday, and if a legal holiday, then on the
next succeeding business day, not a legal holiday. The Board of Directors may,
however, by resolution, fix the date of the annual meeting on any day within the
period of sixty (60) days next succeeding the foregoing date. At the annual
meeting, the shareholders shall elect Directors, receive reports on the
activities and financial condition of the Corporation, and transact such other
business as may properly come before the meeting.
Section 2.03. Special Meetings. The Corporation shall hold a special
meeting of its shareholders upon the call of the Board of Directors or the
President, or upon the written demand(s) to the Secretary by shareholders
holding at least ten (10%) percent of all votes entitled to be cast on any issue
to be considered at the proposed special meeting. Any call or demand for a
special meeting shall describe the purpose(s) for which the special meeting is
to be held. Only business within the purpose(s) described in the meeting notice
for the special meeting may be conducted at such meeting.
Section 2.04. Notice of Meetings. The Corporation shall notify its
shareholders of the date, time and place of each annual and special meeting of
shareholders no fewer than ten (10) days, nor more than two (2) months before
the meeting date. If a meeting is adjourned to a different date, time and/or
place, notice of the new date, time and/or place need not be given if they are
announced at the meeting before adjournment, unless a new record date is or must
be fixed.
Section 2.05. Waiver of Notice. A shareholder's attendance at a meeting:
(a) Waives objection to lack of notice or defective notice of
the meeting unless the shareholder at the beginning of the meeting (or
promptly upon arrival) objects to holding the meeting or transacting
business at the meeting; and
(b) Waives objection to consideration of a particular matter
at the meeting that is not within the purpose(s) described in the
meeting notice, unless the shareholder objects to considering the
matter when it is presented.
Section 2.06. Quorum. Unless otherwise required by law, a majority of
the votes entitled to be cast on a matter must be represented at any meeting of
the shareholders to constitute a quorum on that matter. If, however, such
majority is not represented at a meeting, the chairman of the meeting or the
holders of a majority of the votes in fact represented at the meeting (whether
in person or by proxy) shall have the power to adjourn the meeting to another
date, time and/or place without notice other than announcement at the meeting,
unless a new record date is or must be fixed, until the requisite quorum is
present or represented, when any business may be transacted which might have
been transacted at the meeting as it was originally scheduled before
adjournment.
Section 2.07. Voting Requirements. Except as otherwise provided in
these Bylaws, action on any matter voted upon at a meeting of the shareholders
is approved if a quorum exists and if the votes cast in favor of the action
exceed the votes cast against the action. However, Directors shall be elected by
a plurality of the votes cast by the shares entitled to vote in the election at
a meeting of the shareholders at which a quorum is present.
Section 2.08. Action without Meeting. Action that is required or
permitted to be taken at a meeting of the shareholders may be taken without such
a meeting if all shareholders entitled to vote on the action consent to taking
such action without a meeting. If all of such shareholders so consent, the
affirmative vote of the number of shares that would be necessary to authorize or
take such action at a meeting shall be the act of the shareholders, except as
otherwise provided in these Bylaws. Such consent (or counterpart(s) thereof)
shall describe the action taken, be in writing, be signed by each shareholder
entitled to vote on the action, indicate each signing shareholder's vote or
abstention on the action, and be delivered to the Secretary of the Corporation
and included in the minutes or corporate records.
SECTION 3
BOARD OF DIRECTORS
Section 3.01. General Powers and Qualifications. All corporate powers
of the Corporation shall be exercised by and under the authority of, and the
business and affairs of the Corporation shall be managed under the direction of,
the Board of Directors. All Directors must be natural persons and shall be at
least eighteen (18) years of age. Upon successful completion of the initial
public offering of common stock of the Corporation anticipated to take place in
the latter part of 1996 (the "IPO"), at least two (2) members of the Board of
Directors shall be outside Directors; that is, they may not presently, or within
the preceding three (3) years, be, or have been, officers, Directors or
employees of the Corporation. Such Directors shall be referred to as "Outside
Directors."
Section 3.02. Number of Directors. Until successful completion of the
IPO, the Board of Directors shall be comprised of three (3) Director(s). Upon
successful completion of the IPO, the Board of Directors shall be comprised of
five (5) Directors, at least two (2) of which shall be Outside Directors. These
Bylaws may be amended from time to time by the shareholders or by the Board of
Directors to increase or decrease the number of Directors within the limits
provided by law.
Section 3.03. Election and Tenure. Directors shall be elected by the
shareholders at each annual meeting of the shareholders for those Director terms
then expired. The Directors of the Corporation shall have staggered terms in
accordance with Section 48-18-106 of the Tennessee Act Upon successful
completion of the IPO, the Board of Directors then in office shall appoint two
(2) Outside Directorsh who shall serve until his or her successors is duly
elected and qualified. in the election of first group Directors at the first
annual meeting of Shareholders after successful completion of the IPO.
Commencing at the first annual meeting of Shareholders after consummation of the
IPO, the Board of Directors of the Company shall be divided into three classes,
each class to consist as nearly as possible of one-third of the Directors. The
term of office of one class of Directors shall expire each year with the initial
term of office of the Class I Directors expiring at the 1998 annual meeting of
Shareholders; the initial term of office of the Class II Directors expiring at
the 1999 annual meeting of the Shareholders; and the initial terms of office of
the Class III Directors expiring at the 2000 annual meeting of Shareholders.
Commencing with the 1998 annual meeting of Shareholders, the Directors of the
class elected at each annual meeting of Shareholders shall hold office for a
term of three years.
Section 3.04. Regular Meetings. Regular meetings of the Board of
Directors may be held without notice at such time and place as the Board of
Directors shall determine from time to time, but no less frequently than once a
year.
Section 3.05. Special Meetings. Special meetings of the Board of
Directors may be called by the President or by any two (2) Directors. If,
however, the Board of Directors is comprised of only one (1) Director, then
special meetings may be called by that single Director.
Section 3.06. Notice of Meetings. Regular meetings of the Board of
Directors may be held without notice of the date, time, place, or purpose of the
meeting. Special meetings of the Board of Directors must be preceded by at least
two (2) days' notice to each Director of the date, time and place, but not the
purpose, of such special meeting. Notice of any adjourned meeting need not be
given if the time and place to which the meeting is adjourned are fixed at the
meeting at which the adjournment is taken, and if the period of adjournment does
not exceed one (1) month in any one (1) adjournment.
Section 3.07. Waiver of Notice. If a Director attends or participates
in a meeting, he or she waives any required notice to him or her of the meeting
unless the Director at the beginning of the meeting (or promptly upon arrival)
objects to holding the meeting or transacting business at the meeting and does
not thereafter vote for or assent to action taken at the meeting.
Section 3.08. Quorum and Voting. A quorum of the Board of Directors
consists of a majority of the number of Directors which comprise the Board, as
fixed by these Bylaws. If a quorum is present when a vote is taken, the
affirmative vote of a majority of the Directors present is the act of the Board
of Directors, except as otherwise provided in these Bylaws.
Section 3.09. Vacancy. If a vacancy occurs on the Board of Directors,
including a vacancy resulting from an increase in the number of Directors or a
vacancy resulting from a removal of a Director with or without cause:
(a) The shareholders may fill the vacancy;
(b) The Board of Directors may fill the vacancy; or
(c) If the Directors remaining in office constitute fewer than
a quorum of the Board, they may fill the vacancy by the affirmative
vote of a majority of all Directors remaining in office.
Section 3.10. Removal of Directors. The shareholders may remove any one
(1) or more Directors, with or without cause, at any special meeting which is
specifically called for that purpose.
Section 3.11. Action without Meeting. Action which is required or
permitted to be taken at a meeting of the Board of Directors may be taken
without such a meeting if all Directors consent to taking such action without a
meeting. If all Directors so consent, the affirmative vote of the number of
Directors that would be necessary to authorize or take such action at a meeting
shall be the act of the Board, except as otherwise provided in these Bylaws.
Such consent (or counterpart(s) thereof) shall describe the action taken, be in
writing, be signed by each Director entitled to vote, indicate each signing
Director's vote or abstention on the action, and be delivered to the Secretary
of the Corporation and included in the minutes or corporate records.
Section 3.12. Indemnification. With respect to claims or liabilities
arising out of service as a Director of the Corporation, the Corporation shall
indemnify and advance expenses to each present and future Director (and his or
her estate, heirs, and personal representatives) to the fullest extent required
or allowed by the laws of the State of Tennessee, both as now in effect and as
hereafter adopted or amended.
SECTION 4
OFFICERS
Section 4.01. Required Officers. The officers of the Corporation shall
be a Chief Executive Officer, a President, a Vice President, a Secretary, a
Treasurer and such other officers as may from time to time be elected or
appointed by the Board of Directors. Except for the offices of President and
Secretary, the same individual may simultaneously hold more than one (1) office
in the Corporation. All officers must be natural persons and shall be at least
eighteen (18) years of age.
Section 4.02. Election. At the first meeting of the Board of Directors
after each annual meeting of the shareholders, the Board shall elect the
officers of the Corporation by a majority vote of those Directors present,
provided a quorum exists.
Section 4.03. Term of Office. The officers of the Corporation shall
hold office for one (1) year or until their successors are chosen and qualify in
their stead, subject, however, to the right and authority of the Board of
Directors to remove any officer at any time with or without cause.
Section 4.04. Powers and Duties of Officers. The powers and duties of the
officers of the Corporation shall be as follows:
(a) Chief Executive Officer. The Chief Executive Officer shall
serve as the Chairman of the Board of the Corporation, shall consult
with and advise the President and other officers as necessary or
appropriate in carrying out their duties, and shall have such powers
and perform such duties as may be assigned to him or her by the Board
of Directors.
(b) President. The President shall be the primary Officer of
the Corporation, shall have general and active management of the
Corporation, shall consult with the Chief Executive Officer as may be
necessary or appropriate and shall see that all orders and resolutions
of the Board of Directors are carried into effect, subject, however, to
the right of the Board of Directors to delegate any specific powers,
unless exclusively conferred upon the President by law, to any other
officer(s) of the Corporation.
(c) Vice President. The Vice President shall have such powers
and perform such duties as may be assigned to him or her by the Board
of Directors or the President, and shall consult with the Chief
Executive Officer as may be necessary or appropriate to carry out his
or her duties. In the absence or disability of the President, the Vice
President shall perform the duties and exercise the powers of the
President. The Vice President may sign and execute contracts and other
obligations pertaining to the regular course of his or her duties.
(d) Secretary. The Secretary shall attend all meetings of the
Board of Directors and of the shareholders of the Corporation and shall
be responsible for preparing the minutes of such meetings. The
Secretary shall be responsible for the care and custody of the minute
book of the Corporation and for authenticating records of the
Corporation. It shall be his or her duty to give or cause to be given
notice of all meetings of the shareholders and of the Board of
Directors. The Secretary shall also perform such other duties as may be
assigned to him or her by the Board of Directors or by the President,
under whose supervision he or she shall act, and shall consult with the
Chief Executive Officer as may be necessary or appropriate to carry out
his or her duties. In the event the Secretary is absent for some reason
from any meeting where minutes are to be prepared or is otherwise
unable to take such minutes, the presiding officer of such meeting
shall appoint another person, subject to the approval of those present
and entitled to vote at such meeting, to take the minutes thereof.
(e) Treasurer. The Treasurer shall have custody of the
Corporation funds, securities and shall keep full and accurate account
of receipts and disbursements in the appropriate Corporation books, and
shall require the deposit of all monies and other valuable assets in
the name of and to the credit of the Corporation in such financial
institutions as may be designated by the Board of Directors. The
Treasurer shall require disbursement of the funds of the Corporation as
may be ordered by the Board of Directors, and shall render to the
President and the Board of Directors, at any time they may require, an
account of his or her transactions as Treasurer and of the financial
condition of the Corporation. The Treasurer shall also report on the
financial condition of the Corporation at all annual meetings of the
shareholders. The Treasurer shall also perform such other duties as may
be assigned to him or her by the Board of Directors or by the
President, under whose supervision he or she will act, and shall
consult with the Chief Executive Officer as may be necessary or
appropriate to carry out his or her duties.
Section 4.05. Removal. The Board of Directors may remove any officer at any
time with or without cause.
Section 4.06. Vacancies. Any vacancies occurring in the offices of the
President, Vice President, Secretary or Treasurer shall be filled by the Board
of Directors as soon as practicable. Vacancies in other offices may be filled at
the discretion of the Board of Directors.
Section 4.07. Delegation of Powers and Duties. In case of the absence of
any officer of the Corporation, or for any reason that the Board of Directors
may deem sufficient, the Board of Directors may delegate the powers of such
officer to any other officer or to any Director for the time being.
Section 4.08. Indemnification. With respect to claims or liabilities
arising out of service as an officer of the Corporation, the Corporation shall
indemnify and advance expenses to each present and future officer (and his or
her estate, heirs and personal representatives) to the fullest extent required
or allowed by the laws of the State of Tennessee, both as now in effect and as
hereafter adopted or amended.
SECTION 5
RECORDS AND REPORTS
Section 5.01. Corporate Records. The Corporation shall keep as permanent
records minutes of all meetings of its shareholders and Board of Directors, a
record of all actions taken by the shareholders or Board of Directors without a
meeting, appropriate accounting records, and a list of its shareholders in
alphabetical order by class and series showing their respective addresses and
the number of shares each shareholder holds.
Section 5.02. Records at Principal Office. The Corporation shall keep at
all times a copy of the following records at its principal office:
(a) Its Charter or Restated Charter and all amendments thereto;
(b) These Bylaws and all amendments thereto;
(c) Resolutions adopted by the Board of Directors creating one
(1) or more classes or series of shares of stock, and fixing their
relative rights, preferences, and limitations, if shares issued
pursuant to those resolutions are outstanding;
(d) The minutes of all meetings of shareholders and the
records of all actions taken by shareholders without a meeting for the
past three (3) years;
(e) All written communications to shareholders generally
within the past three (3) years, including the past three (3) years'
annual financial statements;
(f) A list of the names and business addresses of its current
Directors and officers; and (g) The most recent annual report
delivered to the Tennessee Secretary of State.
Section 5.03. Annual Financial Statements. The Corporation shall
prepare annual financial statements that include a balance sheet as of the end
of the fiscal year, an income statement for that year, a statement of changes in
shareholders' equity for the year unless that information appears elsewhere in
the financial statements, and such other information necessary to comply with
the requirements of the applicable provisions of the Tennessee Act or any other
federal, state or local law to which the Corporation shall be subject.
SECTION 6
ISSUANCE AND TRANSFER OF SHARES
Section 6.01. Certificates of Stock. All shares of issued and
outstanding stock of the Corporation shall be evidenced by stock certificates
that shall be numbered and shall be entered on the books of the Corporation as
they are issued. The certificates shall show the class of stock, the holder's
name, the number of shares and the date issued. They shall be signed by the
President and the Secretary.
Section 6.02. Lost Certificates. In case of loss or destruction of a
certificate of stock, no new certificate shall be issued in lieu thereof except
upon satisfactory proof of the loss to the Board of Directors. Upon issuing a
duplicate certificate in lieu of a lost or destroyed certificate, the Board may
require the giving of such security as it may deem expedient against loss to the
Corporation. Any such new certificate shall have "duplicate" marked on its face.
Section 6.03. Restrictions and Limitations. The certificates of stock
may be restricted or limited as to transferability or otherwise by the Charter,
these Bylaws, an agreement among shareholders or any two (2) or more of them, or
an agreement between shareholders and the Corporation. Each certificate which is
so restricted or limited shall have conspicuously noted thereon a statement as
to the existence of such restriction or limitation. In addition to such
restrictions or limitations, if any, the following legend, if applicable, shall
appear upon each certificate of stock, and such stock shall be subject to the
following restrictions:
Transfer of the shares represented by this Certificate is
restricted and may not occur absent appropriate registration under
federal and applicable state securities laws or qualifications for
exemption from registration.
Section 6.04. Transfer of Shares. The rights against the Corporation
inherent in the shares represented by a certificate of stock in the Corporation
are transferable only by registration of such shares in the name of the
transferee or assignee as the registered holder on the books of the Corporation.
In all cases of transfer, the former certificate shall be surrendered and
canceled before a new certificate is issued. Shares of stock may be transferred
on the books of the Corporation only by:
(a) Delivery of the certificate properly endorsed by the holder
of record; or
(b) Delivery of the certificate and a separate document
containing a written assignment of the certificate by the holder of
record or a proper written power of attorney to sell, assign or
transfer the same or the shares represented thereby.
SECTION 7
MISCELLANEOUS PROVISIONS
Section 7.01. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
Section 7.02. No Seal. The Corporation shall have no seal, unless otherwise
determined by the Board of Directors.
Section 7.03. Notices. Whenever notice is required to be given to
shareholders, Directors or officers, unless otherwise provided by law, the
Charter or these Bylaws, such notice may be given in person, or by telephone,
telegraph, teletype, facsimile transmission or other form of wire or wireless
communication, or by mail or other private carrier. If such notice is given by
mail, it shall be sent postage prepaid by first class United States mail or by
registered or certified United States mail, return receipt requested, and
addressed to the respective address which appears for each such person on the
books of the Corporation. Written notice sent by mail to shareholders shall be
deemed to have been given when it is mailed. Any other written notice shall be
deemed to have been given at the earliest of the following:
(a) When received;
(b) Five (5) days after its deposit in the United States
mail if sent first class, postage prepaid; or
(c) On the date on the return receipt, if sent by registered
or certified United States mail, return receipt requested,
postage prepaid, and the receipt is signed by or on behalf of the
addressee.
Section 7.04. Waiver of Notice. Whenever any notice is required to be
given under the provisions of any statute, or of the Charter or these Bylaws, a
waiver thereof in writing signed by the person entitled to such notice, whether
before or after the date stated thereon, and delivered to the Secretary of the
Corporation and included in the minutes or corporate records, shall be deemed
equivalent thereto.
Section 7.05. Negotiable Instruments. All checks, drafts, notes or
other obligations of the Corporation shall be signed by such of the officers of
the Corporation, or by such other person(s), as may be authorized by the Board
of Directors.
Section 7.06. Deposits. The monies of the Corporation may be deposited
in the name of the Corporation in such bank(s) or financial institution(s) as
the Board of Directors shall designate from time to time and shall be drawn out
by check signed by the officer(s) or person(s) designated by resolution adopted
by the Board of Directors.
SECTION 8
AMENDMENT OF BYLAWS
Section 8.01. By Shareholders. These Bylaws may be amended by a
majority vote of all shares issued and outstanding and entitled to vote at any
annual or special meeting of the shareholders where a quorum is present,
provided notice of intention to amend shall have been contained in the notice of
any special meeting for that purpose. These Bylaws may also be amended by the
shareholders without a meeting in the same manner as provided therefor herein,
except that such action to amend must be by a majority vote of all shares issued
and outstanding and entitled to vote if such a meeting were to take place.
Section 8.02. By Board of Directors. By a majority vote of the
Directors then in office, the Board of Directors may amend these Bylaws,
including bylaws adopted by the shareholders, at any regular or special meeting
of the Board of Directors where a quorum is present, provided that the
shareholders may from time to time specify particular provisions of these Bylaws
that may not be amended by the Board of Directors. The Board of Directors may
also amend these Bylaws without a meeting in the same manner as provided
therefor herein, except that such action to amend must be by a majority vote of
the Directors then in office.
CERTIFICATION
By my signature below I certify that I am the Secretary of the
Corporation and that the foregoing document represents the Third Amended and
Restated Bylaws of the Corporation duly adopted by the Board of Directors of the
Corporation. These Third Amended and Restated Bylaws shall supersede and amend
any and all prior Bylaws of the Corporation, or any amendments or restatements
thereof. Dated: September 23, 1996
------------------------------------
Secretary of Energy Search, Incorporated
ENERGY SEARCH, INCORPORATED
SHAREHOLDER VOTING AGREEMENT
and
IRREVOCABLE PROXY
1. The undersigned shareholders ("Shareholders"), holders of the number of
shares of common stock of Energy Search, Incorporated a Tennessee corporation
(the "Company") indicated opposite their signatures (the "Subject Shares"), have
received such Subject Shares from Charles P. Torrey, Jr., Robert L. Remine and
Richard S. Cooper (the "Original Shareholders') under the condition that the
Board of Directors of the Company be granted the right to vote such Subject
Shares for all purposes until the occurrence of a "Surrender Event" with respect
to the Company's Class A and Class B Preferred Stock, defined as set forth in
paragraph 6 below. The parties hereby agree that the Subject Shares be voted
according to the terms of this Shareholder Voting Agreement and Irrevocable
Proxy.
2. The Shareholders hereby irrevocably appoint and constitute the Board of
Directors of the Company ("Proxy Holder") as their attorney and proxy to attend
meetings, vote, give consents, and in all other ways to act in their place and
stead as to all Subject Shares as long as this Irrevocable Proxy is in effect.
Death or incapacity of the Shareholders, or any of them, shall not cause a
revocation of this Irrevocable Proxy. Proxy Holders shall have full power of
substitution and revocation and any proxies heretofore given are hereby revoked.
3. In compliance with Sections 48-17-203 and 48-17-302 of the Tennessee Business
Corporation Act, as amended or any successor provisions thereto this Irrevocable
Proxy is made irrevocable and executed in consideration of the shareholder
voting agreement represented hereby for a term commencing as of the date hereof
and continuing until the occurrence of a "Surrender Event" of the Company's
Class A and Class B Preferred Stock set forth in paragraph 6 below.
4. Proxy Holder shall have complete discretion to vote the Subject Shares under
this Irrevocable Proxy as to any matter requiring a vote of shareholders.
5. Any additional shares issued to the Shareholders shall be subject to this
Irrevocable Proxy. Certificates representing the shares indicated below and any
additional shares issued to the Shareholders shall be affixed with a legend
indicating that the shares are subject to this Irrevocable Proxy as follows:
"The voting power of the shares represented by this Certificate have
been previously granted to the Board of Directors of the Company
pursuant to a written shareholder voting agreement and irrevocable
proxy effective _______, 19____.
6. This Proxy shall terminate upon the occurrence of a "Surrender Event" defined
as follows:
(a) the Company merges or consolidates with another company in a
transaction in which the Company is not the survivor;
(b) the Company sells or disposes of all, or substantially all, of its
assets; or
(c) management of the Company undertakes a registration and initial
public offering of any of its Common Shares.
7. In the event of a dispute or controversy arising out of or relating to this
Irrevocable Proxy, or performance hereof, Proxy Holder shall be entitled to vote
the Subject Shares pursuant to this Irrevocable Proxy during the pendency of
such dispute. Shareholders acknowledge that the only basis to contest in any way
this Irrevocable Proxy, or the voting of shares hereunder, is for gross abuse by
Proxy Holder of the voting rights herein transferred. The prevailing party in
any litigation or proceeding pertaining to this Irrevocable Proxy shall be
entitled to reasonable attorney's fees actually incurred, together with costs of
the litigation including expert witness fees, if any.
This Irrevocable Proxy may be executed in one or more counterparts,
each of which shall constitute an original document, but all of which together
shall be one and the same Irrevocable Proxy.
Dated: July 1, 1996
ORIGINAL SHAREHOLDERS:
________/s/_________ Dated: July 1, 1996
Charles P. Torrey, Jr.
_________/s/_________ Dated: July 1, 1996
Robert L. Remine
_________/s/_________ Dated: July 1, 1996
Richard S. Cooper
<PAGE>
ACCEPTANCE OF PROXY BY PROXY HOLDER
The undersigned constitute all members of the Board of Directors of the
Company as of the effective date of this Shareholder Voting Agreement and
Irrevocable Proxy.
___________/s/____________ Dated: July 1, 1996
Charles P. Torrey, Jr., Director
___________/s/___________ Dated: July 1, 1996
Robert L. Remine, Director
___________/s/___________ Dated: July 1, 1996
Richard S. Cooper, Director
[Signatures of Shareholders are set forth on separate Signature Pages hereto]
<PAGE>
Signature Page to
ENERGY SEARCH, INCORPORATED
SHAREHOLDER VOTING AGREEMENT
and
IRREVOCABLE PROXY
Effective Date: July 1, 1996
The undersigned shareholder agrees to all terms of the above
Shareholder Voting Agreement and grants to the Board of Directors of the Company
the Irrevocable Party referenced therein.
__________/s/________ Dated: July 1, 1996
Signature
John M. Johnston No. of Shares: 30,000
Print Name
<PAGE>
Signature Page to
ENERGY SEARCH, INCORPORATED
SHAREHOLDER VOTING AGREEMENT
and
IRREVOCABLE PROXY
Effective Date: July 1, 1996
The undersigned shareholder agrees to all terms of the above
Shareholder Voting Agreement and grants to the Board of Directors of the Company
the Irrevocable Party referenced therein.
__________/s/________ Dated: July 1, 1996
Signature
Patrick R. Sughroue No. of Shares: 5,000
Print Name
<PAGE>
Signature Page to
ENERGY SEARCH, INCORPORATED
SHAREHOLDER VOTING AGREEMENT
and
IRREVOCABLE PROXY
Effective Date: July 1, 1996
The undersigned shareholder agrees to all terms of the above
Shareholder Voting Agreement and grants to the Board of Directors of the Company
the Irrevocable Party referenced therein.
__________/s/________ Dated: July 1, 1996
Signature
Laverne H. Giger No. of Shares: 5,000
Print Name
<PAGE>
Signature Page to
ENERGY SEARCH, INCORPORATED
SHAREHOLDER VOTING AGREEMENT
and
IRREVOCABLE PROXY
Effective Date: July 1, 1996
The undersigned shareholder agrees to all terms of the above
Shareholder Voting Agreement and grants to the Board of Directors of the Company
the Irrevocable Party referenced therein.
__________/s/________ Dated: July 1, 1996
Signature
Derry M. Thompson No. of Shares: 30,000
Print Name
<PAGE>
Signature Page to
ENERGY SEARCH, INCORPORATED
SHAREHOLDER VOTING AGREEMENT
and
IRREVOCABLE PROXY
Effective Date: July 1, 1996
The undersigned shareholder agrees to all terms of the above
Shareholder Voting Agreement and grants to the Board of Directors of the Company
the Irrevocable Party referenced therein.
__________/s/________ Dated: July 1, 1996
Signature
James T. McKay No. of Shares: 15,000
Print Name
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY APPLICABLE STATE SECURITIES ACTS. THESE SECURITIES MUST BE
ACQUIRED FOR INVESTMENT, ARE RESTRICTED AS TO TRANSFERABILITY, AND MAY NOT BE
TRANSFERRED OR SOLD EXCEPT IN CONFORMANCE WITH THE RESTRICTIONS CONTAINED IN
THIS AGREEMENT.
LIMITED PARTNERSHIP AGREEMENT
ENERGY SEARCH NATURAL GAS 1995-A L.P.
THIS LIMITED PARTNERSHIP AGREEMENT (the "Agreement") dated as of
December 31, 1995, by and between ENERGY SEARCH, INCORPORATED, of Suite 200, 280
Fort Sanders West Boulevard, Knoxville, Tennessee 37922, referred to as the
"Managing General Partner," and the persons who sign separate signature pages
hereto, and are listed, from time to time on Schedule A hereto, as Initial
Co-General Partners or Initial Limited Partners.
WITNESSETH:
The parties desire to form a limited partnership pursuant to the
Tennessee Revised Uniform Limited Partnership Act, as amended.
NOW, THEREFORE, in consideration of the mutual promises of the parties
hereto and for other good and valuable consideration, the receipt and adequacy
of which is hereby acknowledged, it is agreed as follows:
ARTICLE I
DEFINITIONS OF KEY TERMS
As used in this Agreement, the following terms shall have the meanings
set forth in this Article I as follows:
"Activation" shall mean the date, as designated by the Managing General
Partner, in its sole discretion, after the Minimum Investor Subscriptions have
been sold that the Partnership shall be deemed formed and its business
activities shall commence. Immediately upon Activation, the Managing General
Partner shall undertake to file a Certificate of Limited Partnership for the
Partnership with the office of the Tennessee Secretary of State.
"Affiliate" shall mean with respect to another person, (i) any person
directly or indirectly owning, controlling or holding with power to vote 10.0%
or more of the outstanding voting securities of or equity interests in such
other person, (ii) any person 10.0% or more of whose outstanding voting
securities or equity interests are directly or indirectly controlling,
controlled or held with power to vote by such other person, (iii) any person
directly or indirectly controlling, controlled by or under common control with
such other person, (iv) any officer or director of such other person, and (v)
any company for which any such officer or director acts in any such capacity.
"Bankrupt" or "Bankruptcy" with respect to a person shall mean that the
person has:
(a) Made an assignment for the benefit of creditors;
(b) Filed a voluntary petition in bankruptcy;
(c) Been adjudicated as bankrupt or insolvent;
(d) Filed a petition or answer seeking for himself any
reorganization, arrangement, composition, readjustment,
liquidation, dissolution or similar relief under any
statute, law or regulation;
(e) Filed an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against
him in any proceeding of this nature;
(f) Sought, consented to or acquiesced in the appointment of a
trustee, receiver or liquidator for himself or of all or any
substantial part of his properties;
(g) If, within 120 days after the commencement of any proceeding
against him seeking reorganization, arrangement,
composition, adjustment, liquidation, dissolution or similar
relief under any statute, law or regulation, the proceeding
has not been dismissed; or
(h) If, within 90 days after the appointment without his consent
or acquiescence of a trustee, receiver or liquidator for
himself or of all or any substantial part of his properties,
the appointment is not vacated or stayed, or if, within 90
days after the expiration of any such stay, the appointment
is not vacated.
"Capital Account" shall mean, with respect to any Partner or Unit
Holder, the Capital Account established and maintained for such Person in
accordance with Subchapter K of the Code and Treasury Regulations promulgated
thereunder.
"Capital Contribution" shall mean, with respect to any Partner, the
amount of money and the fair market value of any property (other than money)
contributed to the Partnership.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Conversion" shall mean the event of conversion of Initial Co-General
Partners to the status of Limited Partners pursuant to Article XIII of this
Agreement.
"Cost" shall mean the following: (i) when used with respect to the
purchase of Leases, it shall mean the Lease Acquisition Costs; (ii) when used
with respect to services provided, it shall mean the price charged by an
unrelated third party providing such services in the normal course of business;
(iii) when used with respect to materials, it shall mean the price charged by an
unrelated third party providing such materials in the normal course of business;
and (iv) when used with respect to labor, materials or equipment furnished by
ESI as Operator or Manager, it shall mean the cost of such labor, materials or
equipment at the usual hourly or daily rate in accordance with the schedule of
rates maintained from time to time by ESI.
"Developmental Well" shall mean a Well drilled to a known producing oil
or gas Horizon in a previously discovered field or in an area where the known
producing Horizon is reasonably believed by ESI, based on experience and known
geological production and other data, to be geologically continuous.
"Direct Costs" shall mean all actual and necessary costs directly
incurred for the benefit of the Partnership attributable to the goods and
services (such as accounting fees, legal fees or consulting engineer or
geologist fees) provided to the Partnership by parties other than the Managing
General Partner or an Affiliate thereof. Direct Costs shall not include any cost
otherwise classified as Sales Commissions, Management Fees, Due Diligence Fees,
Organization and Offering Expenses, the Partnership Administrative Fee,
Operating Costs, Lease Acquisition Costs, Tangible Costs, Intangible Development
Costs or Subsequent Development Costs. Direct Costs may include the cost of
services provided by the Managing General Partner or its Affiliates if such
services are provided at Cost, as defined herein, and in compliance with this
Agreement.
"Distributable Cash" shall mean, with respect to any fiscal period of
the Partnership, the Net Partnership Cash for such period, less any amount used
in such period by the Managing General Partner in that fiscal period to
establish Working Capital Reserves.
"Drillsite" shall mean the tract of a Lease upon which a single Well
may be drilled according to applicable spacing law or regulations.
"Due Diligence Fees" shall mean an amount not to exceed 1.0% of
Investor Subscriptions payable by the Partnership to the Placement Agent or
Participating Selling Agents to defray a portion of their due diligence expenses
in preparing to participate in the Offering.
"ESI" shall mean Energy Search, Incorporated.
"Excess IDC" shall mean any Intangible Development Costs incurred in
the Initial Development Operations of any Well in excess of the Turnkey Price
for such Well established pursuant to the JDOA.
"Extended Maximum Subscriptions" shall mean $4,800,000 (80 Units) to
which the Offering may be increased in the sole discretion of the Managing
General Partner.
"Farmout" shall mean an agreement by which the owner of a Lease (the
"farmor") agrees to assign all or part of its interest in specific acreage to
another party (the "farmee") retaining some interest (such as an overriding
royalty interest, an oil and gas payment, a Working Interest after payout, or
other type of interest), subject to a requirement that the farmee drill one or
more specific wells or perform other acts as a condition of the assignment.
"General Allocations" shall mean the allocation among Partners for
Federal income tax purposes of items of revenue, cost, income, gain, loss,
deduction and credit as follows: 94.0% for the Investor Partners and 6.0% for
the Managing General Partner.
"General Sharing Ratios" shall mean the sharing arrangement among
Investor Partners and the Managing General Partner in the Partnership consistent
with the General Allocations.
"Horizon" shall mean a zone of a particular formation of sufficient
porosity and permeability to form a petroleum reservoir.
"IDC Prepaid Amount" shall mean the amount of funds to be prepaid by
the Partnership to ESI as Operator or Manager pursuant to the JDOA to be
utilized to pay Intangible Development Costs incurred in Initial Development
Operations of the Wells.
"Incapacity" or "Incompetency" shall, with respect to a Person, mean
that there has been an order entered by a court or agency of competent
jurisdiction adjudicating such person to be legally incapacitated or unable or
incompetent to manage his person or estate.
"Inflation Adjustment Factor" shall mean the inflation adjustment to be
made annually as of the first day of January (the "Adjustment Date") each year
beginning January 1, 1997, by the percentage increase (if any) in the "Weighted
Average Gas Price" in the calendar quarter preceding the Adjustment Date over
the Weighted Average Gas Price in the first calendar quarter in the preceding
year. The "Weighted Average Gas Price" shall mean the weighted average price
(net of all transportation, servicing and severance fees and taxes) received by
ESI from the sale of all natural gas sold from wells it operates in southeastern
Ohio.
"Initial Capital Contribution" shall mean for any Partner the total
dollar amount of a cash contribution or fair market value of a property
contribution to the capital of the Partnership made by such Partner in
consideration for a Partnership Interest.
"Initial Co-General Partner" shall mean each person, other than the
Managing General Partner, who subscribes for the purchase of Units and is
admitted to the Partnership as a general partner.
"Initial Development Operations" shall mean all activity in connection
with initially preparing a Drillsite for drilling, conduct of drilling, plugging
and abandoning the Well if no completion attempt is made or, if the Well
warrants completion, completing the Well in one or more Horizons.
"Initial Limited Partner" shall mean an Investor who elects to invest
in the Partnership as a Limited Partner.
"Intangible Development Costs ("IDC's")" shall mean all expenditures
made for wages, fuel, repairs, hauling and supplies, or any of them, incident to
and necessary for the drilling of any Well and the preparation of such Well for
the production of oil or gas, as the case may be, therefrom, which are
chargeable to capital or expense, at the option of the Partnership on behalf of
Investors, pursuant to Section 263(c) of the Code and Treasury Regulations
Section 1.612-4, or any successor provision thereto, which are generally termed
"intangible drilling and development costs." Examples of such costs include
amounts paid for wages, fuel, repairs, hauling, supplies and similar items, or
any of them, which are used (i) in the drilling, shooting and clearing of any
Well, (ii) in such clearing of ground, draining, road making, surveying and
geological works as are necessary in preparation for the drilling of any Well
and the preparation of such Well for the production of oil or gas and (iii) the
expense of plugging and abandoning the Well prior to a completion attempt. These
expenditures in general shall include only those drilling and development items
which in themselves do not have a salvage value. For these purposes, labor,
fuel, repairs, hauling, supplies and similar items are not considered as having
a salvage value, even though used in connection with the installation of
physical property which has a salvage value.
"Interest" or "Partnership Interest" shall mean the Partnership
interest of each Partner in the Partnership relative to the other Partners as
set forth in this Partnership Agreement.
"Investor Partner" or "Investor" shall mean a person who shall make an
Initial Capital Contribution to the Partnership ($60,000 per Unit) and become a
Partner therein, together with any assignee thereof who agrees to become an
Investor Partner and whose substitution as an Investor Partner is agreed to by
the Managing General Partner pursuant to relevant provisions of this Agreement.
"Investor Subscription(s)" shall mean the Initial Capital Contribution
to the Partnership made by each Investor Partner by way of purchase of Units.
"IRS" shall mean the Internal Revenue Service.
"JDOA" shall mean the Joint Drilling and Operating Agreement to be
entered into among ESI, as Operator and Manager, and the Partnership for the
joint development and operation of the Wells.
"Lease" shall mean a Working Interest, mineral interest, Royalty, or
other interest in and to oil, gas, and related hydrocarbons (or a contractual
right to acquire such an interest) or an undivided interest therein or portion
thereof (including those covering only certain Horizons or depths), together
with all easements, permits, licenses, servitudes, and rights-of-way situated
upon or used or held for future use in connection with the exploration,
development, or operation of such interest.
"Lease Acquisition Costs" shall mean the sum of the amounts paid by a
party for Leases acquired from third parties, plus all expenses relating to the
acquisition of Leases. The expenses relating to the acquisition of a Lease shall
include, but not be limited to: (i) title insurance and title examination costs,
brokers' commissions, finders' fees, escrow fees, filing fees, recording costs,
and transfer taxes, if any; (ii) taxes paid in connection with acquisition of
the Lease, including, but not limited to, ad valorem, real estate, personal
property and excise taxes paid; (iii) geological, geophysical, seismic, land,
engineering, drafting, accounting, auditing, legal and other costs incurred in
connection with the Lease acquisition transaction; and (iv) such portion of the
reasonable, necessary and actual expenses incurred by the party not more than 36
months prior to the property transaction for geological, geophysical, seismic,
land, engineering, drafting, accounting, auditing, legal or like services
obtained or provided by the party which are allocated to the Lease in accordance
with accepted industry practice, including the costs of funds used for any of
these purposes such as interest, loan commitment fees, points and other
financing fees and charges for such funds.
"Limited Partner" shall mean any Initial Limited Partner and any
Initial Co-General Partner who becomes a Limited Partner after Conversion.
"Limited Right of Presentment" shall mean the right of Investor
Partners to present their Units to the Managing General Partner for repurchase
during the Presentment Term in accordance with Section 9.08 of this Agreement.
"Majority In Interest" shall mean, with respect to any vote or written
consent of Investor Partners, those Investor Partners whose combined Units, at
the time of determination thereof, exceed 50.0% of the total Units held by
Investor Partners who are eligible to participate in such vote or written
consent; provided, however, Units held by the Managing General Partner and any
of its Affiliates shall not be counted.
"Management Fees" shall mean the fee in the amount of 4.0% of Investor
Subscriptions payable to the Placement Agent for its services in managing the
offering of Units. The Placement Agent may re-allow all or a portion or the
entire Management Fee to Participating Selling Agents who participate in
managing the Offering. The Managing General Partner shall make a Capital
Contribution to the Partnership in an amount sufficient to pay all Management
Fees.
"Managing General Partner" shall mean Energy Search, Incorporated of
Knoxville, Tennessee, or any substitute or additional Managing General Partner
designated pursuant to this Agreement.
"Maximum Subscriptions" shall mean $2,400,000 (40 Units) of Investor
Subscriptions.
"Memorandum" shall mean the Confidential Private Placement Memorandum
dated October 9, 1995, covering the Offering of Units, as such may be
supplemented or amended.
"Minimum Subscription" shall mean the sale of and acceptance by the
Managing General Partner of 4 Units ($240,000) in the Partnership.
"Net Cash From Operations" shall mean, with respect to any fiscal
period of the Partnership, Net Operating Revenue less any amounts used in that
period to reduce principal on Partnership debt.
"Net Operating Revenue" shall mean, with respect to any fiscal period
of the Partnership, gross revenue from all operations and activities of the
Partnership (including, without limitation, Production Operations) less all
costs and expenses of operating the Partnership during such fiscal period
(including, without limitation, Production Costs, Subsequent Development Costs,
the Partnership Administrative Fee, Direct Costs and interest expense).
"Net Partnership Cash" shall mean, with respect to any fiscal period of
the Partnership, Net Cash From Operations, plus net cash available from other
sources including, without limitation, Capital Contributions and Partnership
borrowing.
"Net Proceeds Available" shall mean total Initial Capital Contributions
less Due Diligence Fees and Organization and Offering Expenses. Net Proceeds
Available will be used to pay the IDC Prepaid Amount pursuant to the JDOA and,
perhaps to a limited extent, to acquire Producing Properties.
"Nonconventional Fuel Source (NFS) Tax Credit" shall mean the tax
credit available under Code Section 29 as a result of the production of oil or
natural gas from certain qualifying formations, including Tight Sands
Formations.
"Nonrecourse Deductions" shall have the meaning set forth in Section
5.06(k) of this Agreement.
"Offering" shall mean the offering of Units in the Partnership.
"Offering Period" shall mean the period commencing on the effective
date of the Memorandum and ending not later than the Termination Date during
which time Units of the Partnership shall be offered.
"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 Production Operations. Operating Costs shall include the
Production Administration Fee payable to the Operator pursuant to the JDOA.
"Operator" shall mean the party charged with the duty to operate the
Wells pursuant to the operating agreement governing the Wells. With respect to
Wells to be drilled pursuant to the JDOA and, perhaps, certain Producing
Properties to be acquired by the Partnership, the Operator will be Energy
Search, Incorporated of Knoxville, Tennessee.
"Organization and Offering Expenses" shall mean expenses (exclusive of
Sales Commissions, Management Fees and Due Diligence Fees) incurred in
connection with the organization of the Partnership and the sale of Units in the
Partnership, including, but not limited to, fees and expenses of accountants,
legal counsel and Tax Counsel, marketing consultants and other experts; printing
and distribution costs; filing costs; travel expenses incident to organizing and
conducting the Offering; and other costs and expenses incurred in the
organization of the Partnership and in the offering or sale of the Units.
Organization and Offering Expenses will be reimbursed to the Managing General
Partner by the Partnership in an amount not to exceed 1.0% of total Investor
Subscriptions.
"Participating Selling Agent(s)" shall mean licensed and registered
securities broker-dealers, and their registered representatives, which are
members of the NASD, have signed a selling agreement with the Placement Agent
and are participating in this Offering by offering and selling Units.
"Partner" shall mean, individually and collectively, the Managing
General Partner, the Initial Co-General Partner and/or each Limited Partner.
"Partner Loan Nonrecourse Deductions" shall have the meaning set forth
in Section 5.06(l) of this Agreement.
"Partnership" shall mean the limited partnership formed under the
Tennessee Act pursuant to this Agreement.
"Partnership Administrative Fee" shall mean the monthly fee equal to
$100 per gross Well payable by the Partnership to the Managing General Partner
for its services in routine and general management and administration of the
Partnership. The Partnership Administrative Fee shall be adjusted annually for
inflation pursuant to the Inflation Adjustment Factor.
"Partnership Minimum Gain" has the meaning set forth in Section 5.06(i)
of this Agreement.
"Person" shall mean any individual, corporation, partnership,
association, joint stock company, joint venture, trust, estate, or any other
entity or organization.
"Placement Agent" shall mean Equity Financial Corporation, an
NASD-member broker-dealer of Knoxville, Tennessee.
"Plugging Costs" shall mean all costs and expenses associated with
cementing and plugging a Well in preparation for abandonment.
"Preferred Payment" shall mean the resulting deficiency amount in the
event the amount of Net Cash From Operations distributed to Investor Partners as
Distributable Cash is insufficient to maintain the Preferred Return. The
Preferred Payment, if any, shall accumulate and be paid from Net Cash From
Operations if and when available. For example, if Distributable Cash paid to
Investor Partners resulted in a 9.0% return in year 1, a 12.0% return in year 2,
and an 10.0% return in year 3 (i.e. return measured with respect to Initial
Capital Contributions), then the Preferred Payment payable in year 4 upon the
availability sufficient of Net Cash From Operations would be 8.0% of Initial
Capital Contributions, subject to further averaging for subsequent payments of
Distributable Cash.
"Preferred Return" shall mean the timing preference in favor of
Investor Partners with respect to Distributable Cash commencing as of the date
of the first regular distribution of oil and gas production revenues and
continuing for 36 months thereafter. Pursuant to this feature, the Managing
General Partner's General Sharing Ratio of Partnership revenues (i.e. 6.0%) will
be subordinated to a cumulative cash distribution preference in favor of
Investor Partners in the amount of 10.0% per annum, noncompounded on the Initial
Capital Contributions of Investor Partners. Any Preferred Return not paid in
whole or in part in any distribution period shall accumulate to subsequent
distribution periods.
"Presentment Term" shall mean, for purposes of the Limited Right of
Presentment, the term commencing as of the 48th month following the first
regular distribution of oil and gas operating revenues of the Partnership and
continuing for 3 years thereafter.
"Producing Properties" shall mean interests in oil and gas properties
or assets which produce, or are expected to produce, current income. Producing
Properties shall include, without limitation: (i) oil and natural gas wells
producing oil or natural gas in commercial quantities; (ii) shut-in wells
capable, with minimal rework, of production in commercial quantities; (iii)
properties acquired as an incidental part of the acquisition of producing or
shut-in wells capable of production; and (iv) well machinery, equipment,
gathering systems, pipelines, storage facilities, processing installations or
other equipment and property associated with the production and field processing
of oil or natural gas. Producing Properties may include interests in Working
Interests, Landowner Royalty Interests, Overriding Royalty Interests, net
profits interests, and nonoperating interests. Producing Properties may be
invested in and held directly or indirectly through ownership of general or
limited partnership interests, beneficial interests, interests in trusts, common
or preferred stock, or other interests in entities, provided the Managing
General Partner determines that such means of ownership would not cause the
Partnership to be subject to the provisions of the Investment Company Act of
1940.
"Production Administration Fee" shall mean the monthly charge in the
amount of $250 (subject to increase for inflation pursuant to the Inflation
Adjustment Factor) per gross Well to be paid (under the JDOA and any operating
agreement governing Wells which are Producing Properties operated by ESI) by the
Working Interest owners of the Wells to the Operator for routine and incidental
maintenance, inspection, adjustments, administration and operating with respect
to the Wells.
"Production Operations" shall mean all activities relating to operating
and maintaining producing Wells, including contracting, preserving and marketing
oil, natural gas and other hydrocarbons, as well as service, repair and
maintenance of the Wells.
"Profits" and "Losses" means, for each fiscal year or other period, an
amount equal to the Partnership's taxable income or loss for such year or
period.
"Prospect" shall mean an area covering lands which are believed to
contain subsurface structural or stratigraphic conditions making it susceptible
to the accumulations of hydrocarbons in commercially productive quantities at
one or more Horizons. A Prospect may be limited to the minimum area permitted by
state or local practice, whichever is applicable, to protect against drainage
from adjacent wells.
"Regulatory Allocation(s)" shall have the meaning set forth in Section
5.06(m) of this Agreement.
"Royalty Interest" shall mean a Landowner Royalty Interest and/or Over
riding Royalty Interest.
"Sales Commissions" shall mean the amount not to exceed 4.0% of
Investor Subscriptions payable to the Placement Agent as commissions for selling
Units. All or part of the Sales Commissions may be re-allowed in whole or in
part by the Placement Agent to Selling Agents who participate in selling Units.
The Managing General Partner shall make a Capital Contribution to the
Partnership in an amount sufficient to pay all Sales Commissions.
"Site Reclamation Costs" shall mean all costs and expenses (excluding
Tangible Reclamation Costs) associated with reclamation of a Well site in
preparation for abandonment of a Well.
"Subscription Agreement" shall mean, with respect to an Investor
Partner, the subscription agreement executed and delivered by that Investor
Partner in connection with his subscription to purchase Units and containing
certain representations, warranties, covenants, and agreements of that Investor
Partner.
"Subsequent Development Operations" shall mean any development
activities conducted with respect to a Well which are not Initial Development
Operations, including substantial rework activities, additional completions,
re-completions, deepening or side-tracking, with respect to a Well conducted
after the Well has either (i) produced in commercial quantities or (ii) been
plugged and abandoned.
"Tangible Costs" shall mean all costs incurred in drilling, completing,
repairing or enhancing a Well relating to equipment, parts, items of hardware
and those tangible items necessary to deliver acceptable oil and gas production
to purchasers to the extent installed downstream from the wellhead of the Well
and which costs are required to be capitalized pursuant to applicable provisions
of the Code and Treasury Regulations thereunder.
"Tangible Reclamation Costs" shall mean all costs and expenses
associated with salvaging tubing and tangible equipment from a Well in
connection with plugging and abandonment thereof.
"Tennessee Act" shall mean the Tennessee Revised Uniform Limited
Partnership Act.
"Termination Date" shall be December 31, 1995, or such earlier date as
the Managing General Partner shall, in its sole and absolute discretion,
terminate the Offering.
"Tight Sands Formation" shall mean a geological formation, the
production of gas from which may qualify for NFS Tax Credits pursuant to Section
29 of the Code.
"Treasury Regulation(s)" shall mean the rules and regulations which
have been promulgated by the United States Department of Treasury under and with
respect to the Code and which are applied by the IRS.
"Turnkey Price" shall mean the fixed price to be charged by ESI, as
Operator or Manager, to the Participants pursuant to the JDOA for drilling,
completing (if warranted) or plugging and abandoning a Well in connection with
Initial Development Operations.
"Unit" shall mean an investment unit in the Partnership offered for
$60,000.
"Unit Holder" shall mean all Persons who hold Units regardless of
whether they are Partners.
"Well" shall mean any oil or natural gas Well in which the Partnership
owns a Working Interest.
"Working Capital Reserve" shall mean any Net Partnership Cash set aside
by the Managing General Partner, not exceeding 3.0% of Investors' Subscriptions
in the first calendar year of the Partnership nor 10.0% of Investors'
Subscriptions in years thereafter, to meet reasonably anticipated liabilities,
obligations, costs or expenses of the Partnership during the following 12
months. The Managing General Partner may, in its discretion, from time to time,
distribute to Partners amounts held in Working Capital Reserve.
"Working Interest" shall mean an operating interest in a Lease
providing the owner thereof the right to explore for and extract therefrom oil,
natural and other hydrocarbons from beneath the surface (according to the terms
of the Lease) and which is subject to some portion of the expense of
development, operation or maintenance.
"Year Interval" shall mean each 12-month period during the Presentment
Term.
ARTICLE II
FORMATION
2.01 Formation. The parties hereby create a limited partnership under
and pursuant to the Act. The Managing General Partner shall cause a certificate
of limited partnership and any other documents or instruments to be completed,
signed by the Managing General Partner (for itself and as attorney in fact for
Investor Partners), and filed in the appropriate offices of the State of
Tennessee as shall be necessary or appropriate to form and continue the
existence and operation of the Partnership.
2.02 Name. The name of the Partnership is ENERGY SEARCH NATURAL GAS
1995-A L.P. The business of the Partnership may be conducted under any name or
names chosen by the Managing General Partner, which may, in its sole discretion
and from time to time, change the name of the Partnership.
2.03 Principal Place of Business. The principal place of business of
the Partnership shall be 280 Fort Sanders West Boulevard, Suite 200, Knoxville,
Tennessee 37922, or at such other location as may hereafter be determined by the
Managing General Partner. The Managing General Partner shall promptly notify all
Partners of any change in the principal place of business. The Partnership shall
maintain such other offices at any other place or places as the Managing General
Partner may from time to time deem advisable. Richard S. Cooper shall be the
agent of the Partnership for purposes of service of process. Mr. Cooper's
address for service of process shall be the same as indicated above as the
principal place of business of the Partnership.
2.04 Term. The term of the Partnership shall commence on the date
hereof and shall terminate at such time as terminated in accordance with this
Agreement, but not later than 60 years from the date hereof.
ARTICLE III
PURPOSES; AUTHORITY; PARTNERS
3.01 Purpose. The purpose and character of the business of the
Partnership is to acquire or invest in producing and nonproducing oil and gas
Leases and other related oil and gas properties or activities, by purchase or
otherwise, and to drill for or participate directly or indirectly in the
drilling for oil and natural gas located in, on or under such Leases and to
invest and engage in any and all phases of the oil and gas business. Such
business purposes shall include, without limitation, the purchase, sale,
acquisition, disposition, development, operation and production of, and
exploration for, oil and gas, and the doing of any and all things incident
thereto or connected therewith. The Partnership shall conduct its business in a
manner substantially consistent with the description of its activities contained
in the Memorandum and shall be authorized to do all things allowed by law to
accomplish the same. As described in the Memorandum, the Partnership shall
allocate no more than 15.0% of Net Proceeds Available to the acquisition of
Producing Properties; no more than 15.0% of Net Proceeds Available to the
drilling of Exploratory Wells, and at least 70.0% of Net Proceeds Available to
the drilling of Developmental Wells. All drilling shall be conducted pursuant to
the JDOA in the form set forth as an exhibit to the Memorandum.
<PAGE>
3.02 Partners. The Partners in the Partnership shall be as follows:
(a) Managing General Partner. The Managing General Partner
shall be ENERGY SEARCH, INCORPORATED of Suite 200, 280 Fort Sanders
West Boulevard, Knoxville, Tennessee 37922, together with any person
admitted as a substitute Managing General Partner or additional
Managing General Partner pursuant to Article X of this Agreement.
(b) Investor Partners. The Investor Partners shall be the
persons who purchase Units in the Partnership and who sign separate
signature pages for their Agreement, together with any persons admitted
as substitute Investor Partners pursuant to Article IX of this
Agreement. Investor Partners shall elect, upon their subscription for
Units, to be either Initial Limited Partners or Initial Co-General
Partners. Initial Co-General Partners may Convert their status in the
Partnership to that of Limited Partners pursuant to Article XIII of
this Agreement.
ARTICLE IV
CAPITAL CONTRIBUTIONS
AND LIABILITY OF PARTNERS
4.01 Initial Capital Contributions.
(a) Upon Activation, the Managing General Partner shall make
an Initial Capital Contribution to the Partnership in cash in an amount
equal to the sum of (1) any Management Fees to be paid by the
Partnership to the Placement Agent, (2) any Sales Commissions to be
paid by the Partnership to the Placement Agent, (3) any Due Diligence
Fees or other amounts refunded to Investor Partners who qualify for the
Early Subscription Incentive, and (4) any Organization and Offering
Expenses incurred by the Partnership in excess of 1.0% of Investor
Subscriptions.
(b) Each of the Investor Partners shall make an Initial
Capital Contribution equal to the product of $60,000 times the number
of Units acquired by such Investor Partner payable in cash upon
Subscription for Units.
(c) Notwithstanding Subsection 4.0(b), those Investor Partners
who participate in and qualify for the Early Subscription Incentive
shall receive a refund on their Initial Capital Contribution in the
amount of 5.0% of their Investor Subscriptions. Any return of Initial
Capital Contribution of an Investor Partner as a result of the Early
Subscription Incentive shall be payable within 90 days from the date
such Investor Partner's subscription proceeds are contributed to the
Partnership as an Initial Capital Contribution.
(d) No Partner shall be entitled to be paid any interest on his
Capital Contribution or his Capital Account.
(e) Except as otherwise specifically provided in this
Agreement, there shall be no voluntary or mandatory assessments or
capital calls to which the Partners shall be subject.
4.02 Liability of Partners.
(a) Initial Limited Partners.
(1) The liability of an Initial Limited Partner to
the Partnership or to others with respect to the business
activities or liabilities of the Partnership shall be limited
to the Capital Contribution which he is obligated to make as
specified in Section 4.01, his share of any net profits which
have not been distributed by the Partnership and any amounts
distributed to the Initial Limited Partner which he is
required, pursuant to the Tennessee Act, to return to the
Partnership for the benefit of Partnership creditors. The
Partnership Interest of an Initial Limited Partner shall not
be assessable, such Initial Limited Partner shall not have any
further liability to contribute money or property to the
Partnership, or to repay the Partnership, any Partner or any
creditor of the Partnership, and such Initial Limited Partner
shall not be personally liable for the liabilities of the
Partnership, except as is provided under the Tennessee Act.
(2) Even though an Initial Limited Partner may, under
certain circumstances, as provided by the Tennessee Act or
common law thereunder, be obligated to return to the
Partnership, for the benefit of Partnership creditors,
distributions previously made to him as a return of capital,
it is the intention of the Partners that no distribution to
any Initial Limited Partner shall be deemed to be a return of
capital for purposes of this Agreement, even if such
distribution represents, for Federal income tax purposes or
otherwise, in whole or in part, a return of capital, and that
an Initial Limited Partner shall not be obligated to pay any
such amount to or for the account of the Partnership or to any
creditor of the Partnership. However, if any court of
competent jurisdiction holds that, notwithstanding the
provisions of this Agreement, an Initial Limited Partner is
obligated by the laws of the State of Tennessee under the
circumstances to make such payment, then such obligation shall
be the obligation of such Initial Limited Partner and not the
Managing General Partner.
(b) Initial Co-General Partners.
(1) Prior to Conversion, Initial Co-General Partners
shall not be considered Limited Partners in the Partnership
and therefore, under the Tennessee Act and other applicable
law, will not receive the benefit of limited liability
available to Initial Limited Partners as described in
subsection 4.02(a) above. As to Partnership creditors, and
subject to the indemnification provided in subsection
4.02(b)(3) below, Initial Co-General Partners shall be
considered general partners in the Partnership.
Notwithstanding the foregoing, (i) no Initial Co-General
Partner shall be obligated to make any Capital Contribution to
the Partnership other than as set forth in subsection 4.01,
(ii) the Partnership Interest of each Initial Co-General
Partner shall not be assessable and (iii) such Initial
Co-General Partner shall not have any further liability to
contribute money or property to the Partnership, to repay the
Partnership, any Partner or any creditor of the Partnership,
except as may be required under the Tennessee Act. Any sum
paid by an Initial Co-General Partner to or on behalf of the
Partnership, to the extent he is required to do so pursuant to
the Tennessee Act or otherwise, shall be treated as an
additional Capital Contribution to the Partnership by such
Initial Co-General Partner.
(2) In the event of Conversion, an Initial Co-General
Partner shall have its Partnership Interest converted to that
of a Limited Partner pursuant to Article XIII. After
Conversion, former Initial Co-General Partners shall bear
liability only to the extent of Limited Partners as described
in subsection 4.02(a) above. Conversion shall not, however,
affect the liability of Initial Co-General Partners for
Partnership obligations or activities occurring prior to
Conversion.
(3) The Managing General Partner shall indemnify and
hold harmless each Initial Co-General Partner from and against
any liability sustained or incurred to any third party, as a
result of his status as a general partner in the Partnership
to the extent such liability exceeds the Initial Co-General
Partner's Capital Contribution, interest in undistributed
revenues and interest in insurance proceeds available to
satisfy such liability.
(c) The Managing General Partner. Except as otherwise provided
in this Agreement, the Managing General Partner shall not be personally
liable to any Investor Partner or to the Partnership for the repayment
of the Capital Contribution of any Investor Partner or of any negative
amount in the Capital Account of any Investor Partner. The Managing
General Partner shall not be obligated by this Agreement to make any
Capital Contribution to the Partnership other than as specifically
provided in this Agreement or as may be required pursuant to the
Tennessee Act. Any sum paid by the Managing General Partner to or on
behalf of the Partnership to the extent that it is required to do so by
any Partnership creditor under this Agreement, the Tennessee Act or
otherwise shall be deemed and treated as an additional Capital
Contribution to the Partnership by the Managing General Partner.
4.03 Partnership Advances. The Managing General Partner or its
Affiliates may loan or advance funds to the Partnership to be used for
Partnership operations provided that such advances shall be upon terms generally
no less favorable than would be available on similar loans from commercial
banks. Neither the Managing General Partner nor any of its Affiliates shall
advance money to the Partnership where the interest to be charged would
significantly exceed that which would be charged the Partnership (without
reference to the Managing General Partner's financial abilities or guarantees)
by unrelated commercial lenders, or receive interest in excess of its interest
costs, and the Managing General Partner or its Affiliates shall not receive any
other compensation in connection with such loans or advances, such as points or
other financing charges or fees. Interest with respect to such advances may not
exceed legal limits under applicable state usury laws. Payment of interest and
repayment of principal on such advances shall be solely the obligation of the
Partnership.
ARTICLE V
PARTNERSHIP INTERESTS;
CAPITAL ACCOUNTS; ALLOCATION OF
PROFITS AND LOSSES; DISTRIBUTIONS; TAX ELECTIONS
5.01 Interests of the Partners Generally. The Interests of the Partners
in the Partnership for all purposes of this Agreement, except as otherwise
specified in this Article V, shall be equal to the percentages determined in
accordance with this Section 5.01.
(a) The Interests of the Partnership Classes. The aggregate
Partnership Interest of all the Investor Partners as a class shall be
94.0%. The Interest of the Managing General Partner shall be 6.0%. The
Partnership Interest of the Managing General Partner shall be subject
to allocations described in Sections 5.02(h) and 5.03(g) in connection
with the Preferred Return in favor of Investor Partners.
(b) The Interest of Each Investor Partner in Relation to the
Class. Except as otherwise provided in this Article V, the Partnership
Interest of any Investor Partner shall be equal to a percentage which
shall be determined by dividing (1) the amount of the Initial Capital
Contribution of such Investor Partner; by (2) the total amount of
Initial Capital Contributions of all Investor Partners.
(c) The Interest of the Managing General Partner. The Partnership
Interest of the Managing General Partner shall be 100% owned by ESI
5.02 Allocation of Costs and Expenses. All costs and expenses of
the Partnership shall be allocated and charged to the Partners, as follows:
(a) Sales Commissions relating to Units subscribed shall be
allocated 100% to the Managing General Partner.
(b) Management Fees with respect to Units subscribed shall be
allocated 100% to the Managing General Partner.
(c) Organization and Offering Expenses shall be allocated
entirely to Investor Partners to the extent of 1.0% of the Investors'
Subscriptions. Any Organization and Offering Expenses in excess of
1.0% of Investors' Subscriptions will be allocated and charged to the
Managing General Partner. For Investor Partners who qualify for the
Early Subscription Incentive, Organization and Offering Expenses
relating to the Units subscribed shall be allocated to the Managing
General Partner.
(d) Due Diligence Fees with respect to the Units subscribed shall
be allocated 100% to Investor Partners. For Investor Partners who
qualify for the Early Subscription Incentive, Due Diligence Fees
relating to the Units subscribed shall be allocated to the Managing
General Partner.
(e) Any costs paid by the Partnership with the IDC Prepaid Amount
(including Intangible Development Costs of Initial Development
Operations of Wells drilled pursuant to the JDOA) shall be allocated
100% to the Investor Partners as a class, and within such class, in
accordance with Section 5.01(b); provided, however, that to the extent
the Managing General Partner makes a Capital Contribution to the
Partnership as a result of any Early Subscription Incentive awarded to
Investor Partners, and such Capital Contribution is used by the
Partnership to fund the IDC Prepaid Amount, costs paid with such funds
(including Intangible Development Costs) shall be allocated to the
Managing General Partner.
(f) Lease Acquisition Costs, Intangible Development Costs and/or
Tangible Costs in connection with Producing Properties incurred by the
Partnership with Initial Capital Contributions of the Partners shall
be allocated 99.0% to Investor Partners as a class, and within such
class, in accordance with Section 5.01(b), and 1.0% to the Managing
General Partner; provided, however, that to the extent any such costs
are paid with the proceeds of Capital Contibutions of the Managing
General Partner resulting from any Early Subscription Incentive
awarded to Investor Partners, such costs shall be allocated to the
Managing General Partner.
(g) Operating Costs (including the Production Administration Fee
in connection with Wells operated by ESI), costs of Subsequent
Development Operations, Plugging Costs, Site Reclamation Costs,
Tangible Reclamation Costs, the Partnership Administrative Fee, Direct
Costs and any other costs or expenses of the Partnership not
specifically allocated above, or otherwise allocated in connection
with the Preferred Return, will be allocated 94.0% to Investor
Partners as a class, and within such class, in accordance with Section
5.01(b); and 6.0% to the Managing General Partner.
(h) In any period in which payments of Distributable Cash are
made pursuant to the Preferred Return, costs incorporated into the Net
Cash From Operations utilized to make such payments of Distributable
Cash not otherwise specifically allocated above shall be allocated to
those Partners receiving Distributable Cash pursuant to the Preferred
Return.
5.03 Allocation of Revenues. All revenues of the Partnership
shall be allocated and credited to the Partners as follows:
(a) Revenues from the temporary investment of Investors'
Subscription proceeds prior to Activation of the Partnership shall be
allocated 100% to the Investor Partners as a class, and among Investor
Partners in accordance with Section 5.01(b).
(b) Subject to allocations in connection with the Preferred
Return, revenues from the sale of oil and natural gas in connection
with Production Operations shall be allocated to the Partners in
accordance with their respective Partnership Interests under Section
5.01.
(c) Revenues resulting form the sale or other taxable
disposition of an oil and gas property (as such term is defined in
Section 614 of the Code) shall be allocated: (1) to the extent such
revenues constitute a recovery of the Partnership's Simulated Basis (as
defined in Section 5.05(c)) in such property, to the Partners in the
same percentages as the adjusted basis of the property sold was
allocated up to an amount equal to the Partnership's Simulated Basis in
such property at time of such sale; (2) in the case of property
contributed to the Partnership, to the Partner or Partners who
contributed such property in an amount equal to the difference between
the fair market value of such property at the time of the contribution
and its Simulated Basis at such time; (3) to the Partners in the manner
provided pursuant to the Preferred Return; and (4) thereafter to the
Partners in a manner which will cause the aggregate of all revenues
allocated to the Partners from such sale or disposition (to the extent
possible) to equal the amounts which would have been allocated to the
Partners if all such revenues had been allocated among the Partners
according to their respective Interests in the Partnership pursuant to
Section 5.01.
(d) Subject to allocations in connection with the Preferred
Return, revenues resulting from the rental, sale or other disposition
of any item of depreciable property shall be allocated to the Partners
in the same proportions as the costs of such property were allocated to
the Partners, except for revenues resulting from the disposition of
depreciable property contributed to the Partnership, which shall first
be allocated to the Partner or Partners who contributed such property
in an amount equal to the difference between the fair market value of
such property at the time of the contribution and its adjusted tax
basis at such time.
(e) Revenues used to repay any principal, interest or other
amounts owing with respect to any Partnership borrowings shall be
allocated to the Partners in the same proportions as the costs paid
with such borrowings or indebtedness were allocated to the Partners
(and, with respect to any indebtedness to which any property was
acquired by the Partnership was subject at the time of its acquisition,
in the same proportions as the costs of acquisition of such property
were allocated at the time such property was acquired by the
Partnership).
(f) In any period in which Distributable Cash is distributed
pursuant to the Preferred Return, revenues which generated the Net Cash
From Operations resulting in such Distributable Cash shall be allocated
to the Partners pursuant to the Preferred Return.
(g) Revenues not specifically allocated above shall be
allocated to the Partners in accordance with their respective Interests
under the provisions of Section 5.01.
5.04 Allocation of Nonconventional Fuel Source Tax Credits. Nonconventional
Fuel Source Tax Credits, if any, shall be allocated in the same manner as the
revenue from the sale of the oil or natural gas, the production of which
generated such tax credits.
5.05 Capital Accounts. A separate Capital Account shall be established and
maintained by the Partnership for each Partner throughout the term of the
Partnership as provided below:
(a) The Capital Account of each Partner shall, except as
otherwise provided herein, be (1) credited by such Partner's Capital
Contributions to the Partnership, (2) credited by the fair market value
of any other assets contributed by such Partner to the Partnership (net
of liabilities secured by such contributed assets that the Partnership
is considered to assume, or take subject to, pursuant to Section 752 of
the Code), (3) credited with the amount of any item of taxable income
or gain and the amount of any item of income or gain exempt from tax
allocated to such Partner, (4) debited by the amount of any item of tax
deduction or loss allocated to such Partner, (5) debited by such
Partner's allocable share of expenditures of the Partnership not
deductible in computing the Partnership's taxable income and not
properly chargeable as capital expenditures and (6) debited by the
amount of cash or the fair market value of any assets distributed to
such Partner (net of liabilities secured by such distributed assets
that such Partner is considered to assume, or take subject to, pursuant
to Section 752 of the Code).
(b) Immediately prior to any distribution of assets by the
Partnership that is not pursuant to a liquidation of the Partnership,
the Partners' Capital Accounts shall be adjusted by (1) assuming that
the distributed assets were sold by the Partnership for cash at their
respective fair market values as of the date of distribution by the
Partnership and (2) crediting or debiting each Partner's Capital
Account with such Partner's respective share of the hypothetical gains
or losses resulting from such assumed sales in the same manner as gains
or losses on actual sales of such assets would be allocated under
Subsection 5.06(d).
(c) The allocation of basis prescribed by Section
613A(c)(7)(D) of the Code and provided for in Subsection 5.06(b) of
this Article V and each Partner's separately computed depletion
deductions shall not reduce such Partner's Capital Account, but such
Partner's Capital Account shall be decreased by an amount equal to the
product of the depletion deductions that would otherwise be allocable
to the Partnership in the absence of Section 613A(c)(7)(D) of the Code
(computed without regard to any limitations which theoretically could
apply to any Partner) times such Partner's percentage share of the
adjusted basis of the property with respect to which such depletion is
claimed (herein called "Simulated Depletion"). The Partnership's basis
in any oil and gas property as adjusted form time to time for the
Simulated Depletion allocable to all Partners (and where the context
requires, each Partner's allocable share thereof) is herein called
"Simulated Basis." No Partner's Capital Account shall be decreased,
however, by Simulated Depletion deductions attributable to any
depletable property to the extent such deductions exceed such Partner's
remaining Simulated Basis in such property. Debits and credits to a
Partner's Capital Account from the disposition of depletable property
shall be computed by taking into account the Partnership's Simulated
Basis in such property after adjusting such basis for Simulated
Depletion.
(d) Adjustments of the basis of Partnership assets provided
for pursuant to Sections 734 and 743 of the Code (resulting from an
election under Section 754 of the Code) and elections by individual
Partners under Section 59(e)(4) of the Code to amortize such Partner's
share of Intangible Development Cost shall not affect the Capital
Accounts of the Partners, except to the extent required by Treasury
Regulation Section 1.704-1(b)(2)(iv)(m), or any successor thereto.
(e) Capital Accounts shall be adjusted, in a manner consistent
with this Section 5.05, to reflect any adjustments in items of
Partnership income, gain, loss or deduction that result from amended
returns filed by the Partnership or pursuant to an agreement by the
Partnership with the IRS or a final court decision.
(f) In the case of property contributed to the Partnership by
a Partner, the Partner's Capital Accounts may be debited or credited
for items of depreciation, cost recovery, Simulated Depletion,
amortization and gain or loss with respect to such property computed in
the same manner as such items would be computed if the adjusted tax
basis of such property were equal to its fair market value on the date
of its contribution to the Partnership, in lieu of the Capital Account
adjustments provided above for such items, all in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv)(g), or any successor
thereto.
(g) It is the intention of the Partners that the Capital
Account of each Partner shall be maintained in the manner required
under Treasury Regulation Section 1.704-1(b)(2)(iv) or any successor
Treasury Regulation. To the extent that any additional adjustment to
the Capital Accounts is required by such Treasury Regulation, the Tax
Matters Partner, as defined in Section 5.11, shall be authorized to
make such adjustment provided that such adjustment is not likely to
materially affect the distributions to the Partners under Section 5.07.
(h) Except as otherwise provided in this Agreement, no
Investor Partner shall be obligated to the Partnership or any other
Partner to restore any negative balance in such Investor Partner's
Capital Account. However, by the end of the taxable year in which the
Managing General Partner's Partnership Interest is liquidated, or
within 90 days after the date the Partnership is liquidated in
accordance with Article XI, the Managing General Partner shall
contribute capital to the Partnership sufficient to restore any deficit
in its Capital Account.
5.06 Allocation of Taxable Income and Tax Loss. All items of income,
gain, amount realized, loss, deduction, recapture and credit of the Partnership
for purposes of any applicable Federal, state or local income tax law, rule or
regulation shall be allocated to the Partners as follows:
(a) Income from the sale of oil or gas in connection with
Production Operations shall be allocated in the same manner as revenue
from such operation and sale of production is allocated and credited
pursuant to Section 5.03(b).
(b) Cost and percentage depletion deductions and the gain or
loss on the sale or other disposition of property the production from
which is subject to depletion (herein referred to as "depletable
property") shall be computed separately by the Partners rather than by
the Partnership. For purposes of making such computations, the
Partnership's adjusted basis in each depletable property shall be
allocated under Section 613A(c)(7)(D) of the Code in proportion to each
Partner's respective share of the costs and expenses which entered into
the Partnership's adjusted basis for each depletable property. After
the initial allocation of basis of each depletable property, the
Partnership shall make a new allocation of the basis of its depletable
properties in accordance with Proposed Treasury Regulation Section
1.613A(e) (and any successor provision) upon (i) a contribution of
additional money, other property or services to the Partnership by a
Partner; (ii) the making of additional capital expenditures with
respect to a property; or (iii) a partial or complete withdrawal of a
Partner from the Partnership. Each Partner agrees to cooperate with the
Managing General Partner and to provide the Managing General Partner
with any information requested by the Managing General Partner and
which is necessary or helpful to the Managing General Partner in making
these calculations and allocations. The amount realized on the sale or
other disposition of each such property shall be allocated to the
Partners in proportion to each Partner's respective share of the
revenues from the sale or other disposition of such property provided
for in subsection 5.03(c).
(c) Deductions, losses and credits not specifically provided
for above (other than loss from the sale or other disposition of
Partnership property), including deductions for Intangible Development
Costs, Operating Costs, depreciation, cost recovery and amortization
deductions and those relating to the Preferred Return, shall be
allocated to the Partners in the same manner that the costs and
expenses of the Partnership that gave rise to such items of deduction,
loss and credit were allocated and charged pursuant to Section 5.02.
(d) Gain from the sale or other disposition of Partnership
property that is not specifically provided for above shall be allocated
to the Partners in a manner which reflects each Partner's allocable
share of the revenue form the sale of the Partnership property provided
for in Section 5.03, and loss from the sale or other disposition of
Partnership property that is not specifically provided for above shall
be allocated to the Partners in a manner which reflects each Partner's
allocable share of the costs and expenses of the Partnership property
provided for in Section 5.02.
(e) Any other items of Partnership income or gain not
specifically provided for above, including those with respect to the
Preferred Return, shall be allocated in the same manner as relating
revenue is allocated and credited pursuant to Section 5.03.
(f) Notwithstanding anything to the contrary in this Section
5.06, any recapture income treated as an increase in tax, decrease in
credits or an increase in ordinary income shall be allocated, to the
maximum extent possible, to the Partners in the same manner as the
deductions and credits which gave rise to such recapture income were
allocated.
(g) Notwithstanding anything to the contrary in this Section
5.06, if any Investor Partner's Capital Account has a deficit balance
because the Investor Partner unexpectedly received any adjustments,
allocations, or distributions described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6), or any successor provisions
thereto, items of Partnership income and gain (including items of gross
income) shall be specially allocated to such Investor Partner in an
amount and manner sufficient to eliminate, to the extent required by
the Treasury Regulations, such excess deficit Capital Account balance
as quickly as possible.
(h) Notwithstanding anything to the contrary in this Section
5.06, if the allocation of any loss or deduction to an Investor Partner
would cause the balance of such Investor Partner's Capital Account to
be less than zero, only the amount that reduces the balance in such
Investor Partner's Capital Account to zero shall be allocated to such
Investor Partners with positive Capital Account balances in proportion
to their respective positive Capital Account balances; and if no
Investor Partner has a positive Capital Account, the remainder shall be
allocated to the Managing General Partner.
(i) Notwithstanding any other provision of this Article III,
if there is a net decrease in Partnership Minimum Gain (as defined in
Treasury Regulation Section 1.704-2(b)(2) or any successor Treasury
Regulation thereto) during any Partnership fiscal year, and if any
Investor Partner would otherwise have a Capital Account deficit at the
end of such year, each such Investor Partner shall be specially
allocated items of Partnership income and gain for such year (and, if
necessary, subsequent years) in an amount and manner sufficient to
eliminate such Capital Account deficit as quickly as possible. The
items to be so allocated shall be determined in accordance with
Treasury Regulation Section 1.704-2(b)(2). This subsection 5.06(i) is
intended to comply with the "minimum gain chargeback" requirement in
such section of the Treasury Regulations and shall be interpreted
consistently therewith.
(j) In the event any Investor Partner has a deficit Capital
Account at the end of any Partnership fiscal year that is in excess of
(1) the amount the Partner is obligated to restore pursuant to any
provision of this Agreement, and (2) the amount the Investor Partner is
deemed to be obligated to restore pursuant to the penultimate sentence
of Treasury Regulation Sections 1.704-1(b)(2)(ii)(b) and
1.704-1(b)(2)(ii)(d) and (3) the amount the Investor Partner would be
deemed obligated to restore if Partner Loan Nonrecourse Deductions were
treated as Nonrecourse Deductions, the Investor Partner shall be
specially allocated items of Partnership income and gain in the amount
of such excess as quickly as possible, provided that an allocation
pursuant to this subsection 5.06(j) shall be made only if and to the
extent that such Investor Partner would have a deficit Capital Account
in excess of such sum after all other allocations provided for in this
Section 5.06 have been tentatively made as if subsection 5.06(g) hereof
and this subsection 5.06(j) were not in the Agreement.
(k) Nonrecourse Deductions for any fiscal year or other period
shall be specially allocated 1.0% to the Managing General Partner and
99.0% to the Investor Partners. For purposes of this Agreement, the
term "Nonrecourse Deductions" shall have the meaning set forth in
Treasury Regulation Section 1.704-2(c), or any successor Treasury
Regulation thereto. The amount of Nonrecourse Deduction for a
Partnership fiscal year shall equal the net increase, if any, in the
amount of Partnership Minimum Gain during that fiscal year, determined
according to the provisions of Treasury Regulation Section 1.704-2(c).
(l) Any Partner Loan Nonrecourse Deductions for any fiscal
year or other period shall be allocated to the Partner who bears the
risk of loss with respect to the loan to which such Partner Loan
Nonrecourse Deductions are attributable in accordance with Treasury
Regulation Section 1.704-2(i). For purposes of this Agreement, the term
"Partner Loan Nonrecourse Deductions" shall mean Partnership deductions
that would be Nonrecourse Deductions if they were not attributable to a
loan made or guaranteed by a Partner or within the meaning of Treasury
Regulation Section 1.704-2(i).
(m) The allocations set forth in subsections 5.06(g), (h),
(i), (j), (k) and (l) (hereinafter "Regulatory Allocations") are
intended to comply with certain requirements of Treasury Regulations
Sections 1.704-1 and 1.704-2. Notwithstanding anything to the contrary
in this Agreement (other than the Regulatory Allocations), the
Regulatory Allocations shall be taken into account in allocating other
taxable income and tax losses and items of income, gain, loss and
deduction among the Partners so that, to the extent possible and
consistent with Treasury Regulation Sections 1.704-1 and 1.704-2, the
net amount of such allocations of other taxable income and tax losses
and other items and the Regulatory Allocations to each Partner shall be
equal to the net amount that would have been allocated to each such
Partner if the Regulatory Allocations had not occurred. Notwithstanding
the preceding sentence, Regulatory Allocations relating to (1)
Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a reduction in Partnership Minimum Gain and
(2) Partner Loan Nonrecourse Deductions shall not be taken into account
except to the extent that there would have been a reduction in
Partnership Minimum Gain if the loan to which such deductions are
attributable were not made or guaranteed by a Partner within the
meaning of Treasury Regulation Section 1.704-2(i).
(n) Notwithstanding anything to the contrary in this Section
5.06, all deductions allocable under Section 83(h) of the Code shall be
allocated to the Partner who is allocated the income which gives rise
to the to the deduction under Section 83(h) of the Code.
(o) In accordance with Section 704(c) of the Code and the
Treasury Regulations thereunder, income, gain, loss and deduction with
respect to any property contributed to the Partnership shall, solely
for tax purposes, be allocated among the Partners so as to take account
of any variation between the fair market value of such property and its
adjusted basis in the hands of the Partnership on the contribution
date. This Section 5.06 shall not affect, or in any way be taken into
account in computing any Partner's Capital Account or distributions
pursuant to any provision of this Agreement.
5.07 Distributions. At least quarterly (within 30 days after the close
of each calendar quarter), all Distributable Cash of the Partnership which the
Managing General Partner determines is not needed to pay existing or anticipated
Partnership expenses or to fund Working Capital Reserves, shall be distributed
to the Partners. Distributable Cash of the Partnership shall be allocated first,
to the Investor Partners in an amount sufficient to maintain the Preferred
Return (on a current basis); second, to the Managing General Partner to the
extent necessary to bring the Managing General Partner's aggregate cash
distributions to the level of its General Sharing Ratio; and third, to the
Partners in accordance with their respective Partnership Interests as set forth
in Section 5.01. The Partnership shall not require that Investor Partners
reinvest their share of cash available for distribution in the Partnership. Cash
distributions from the Partnership to the Managing General Partner shall only be
made in conjunction with distributions to Investor Partners and only out of
funds properly allocated to the Managing General Partner's account. No
distribution shall be made to any Investor Partner to the extent the same would
create or increase a deficit in such Partner's Capital Account. Any such
prohibited distribution shall be reallocated to those Partners not having a
deficit in their Capital Accounts in the proportion that the positive balance of
each such Partner's adjusted Capital Account bears to the aggregate balance of
all such Partners' adjusted Capital Accounts. Notwithstanding the foregoing, any
distributions to be made in connection with, in contemplation of, or as a part
of the liquidation of the Partnership as provided in Article XI of this
Agreement, shall be made first to the Investor Partners in an amount equal to
the Preferred Payment, if any, and then to the Partners in proportion to their
respective positive Capital Account balances until their Capital Accounts have
been reduced to zero and thereafter in proportion to their respective
Partnership Interests as set forth in Section 5.01.
5.08 Effects of Admissions, Transfers and Withdrawals on Allocations
and Distributions. If at any time during a fiscal year of the Partnership, a new
Partner is admitted to the Partnership, an existing Partner withdraws from the
Partnership, or any Partner transfers all or any portion of such Partner's
Interest in the Partnership, allocations of items of taxable income and of
taxable loss shall be allocated between the transferor and the transferee, in
the complete and sole discretion of the Tax Matters Partner, as defined in
Section 5.10, based on either: (1) the interim closing of the books method; or
(2) the daily basis allocation method; and distributions shall be made to the
person who is the holder of record of the Interest on the Partnership's books at
the time of the distribution.
5.09 Authority of Tax Matters Partner to Vary Allocations to Preserve and
Protect the Intention of the Partners.
(a) It is the intention of the Partners that each Partner's
distributive share of income, gain, loss, deduction or credit (or any
item thereof) shall be determined and allocated in accordance with this
Article V to the fullest extent permitted by Section 704(b) of the
Code, or any successor thereto. In order to preserve and protect the
allocations provided for in this Article V, the Tax Matters Partner, as
defined in Section 5.11, shall have the authority to allocate income,
gain, loss, deduction or credit (or any item thereof) arising in any
year or maintain Capital Accounts differently than that expressly
provided for in this Article V, if and to the extent that determining
and allocating income, gain, loss, deduction or credit (or any item
thereof) in the manner expressly provided for in this Article V, would
cause the allocations of each Partner's distributive share of income,
gain, loss, deduction or credit (or any item thereof) not to be
permitted by Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder. Any allocation made pursuant to this Section
5.09 shall be deemed to be in place of an allocation otherwise
expressly provided for in this Article V, and no amendment of this
Agreement or further consent of any Partner shall be required therefor.
(b) In making any such discretionary allocation under this
Section 5.09, the Tax Matters Partner shall be authorized to act only
after having been advised by the Partnership's tax accountant or legal
counsel that, under Section 704(b) of the Code and the Treasury
Regulations thereunder that such discretionary allocation or
modification in the manner of maintaining Capital Accounts is: (1)
necessary, and (2) the minimum modification of the provisions otherwise
expressly provided for in this Article V which is necessary in order to
assure that, either in the then-current fiscal year or in any preceding
fiscal year, each Partner's distributive share of income, gain, loss,
deduction or credit (or any item thereof) is determined and allocated
in accordance with this Article V to the fullest extent permitted by
Section 704(b) of the Code and the Treasury Regulations thereunder.
(c) If the Tax Matters Partner is required by this Section
5.09 to make any discretionary allocation or change in method of
Capital Account maintenance in a manner less favorable to the Investor
Partners than is otherwise expressly provided for in this Article V,
then the Tax Matters Partner shall have the authority, only after
having been advised by the Partnership's tax accountant or legal
counsel that it is permitted by Section 704(b) of the Code, to allocate
income, gain, loss, deduction or credit (or any item thereof) to the
Partners as comparable as possible to the allocations otherwise
expressly provided for or contemplated by this Article V.
(d) Any new allocation made by the Tax Matters Partner under
this Section 5.09 in reliance upon the advice of the Partnership's tax
accountant or legal counsel shall be deemed to be made pursuant to the
fiduciary obligation of the Tax Matters Partner to the Partnership and
to the Partners, and no such new allocation shall give rise to any
claim or cause of action by any Partner.
5.10 Tax Matters Partner. Energy Search, Incorporated ("ESI") is hereby
designated and authorized to act as the "Tax Matters Partner" of the
Partnership, as that term is described and used in the Treasury Regulations
promulgated under Section 6231 of the Code. Each Partner consents to such
designation of ESI as the Tax Matters Partner and agrees to execute, certify,
acknowledge, deliver, swear to, file and record with the IRS or other
appropriate governmental authorities such documents as may be necessary or
appropriate to evidence such consent. ESI shall have the rights, power and
authority which are granted to a "Tax Matters Partner" under such provisions of
the Code and Treasury Regulations and shall be authorized, but not obligated, to
do any act specified therein. Any cost or expense incurred by the Tax Matters
Partner in connection with any of the foregoing matters shall be payable by the
Partnership as a Direct Cost, and the Partnership shall indemnify and reimburse
the Tax Matters Partner for all costs and expenses, including legal and
accounting fees, claims, liabilities, losses and damages incurred in connection
with any tax audit or judicial review with respect to the tax liability of the
Partners.
5.11 Tax Elections.
(a) No election shall be made by the Partnership or any
Partner, pursuant to Section 761 of the Code, to have the Partnership
excluded from the application of the provisions of Subchapter K of
Chapter 1 of Subtitle A of the Code, or to be excluded from any similar
provisions of state tax laws.
(b) In the event of the transfer of a Partnership Interest or
in the event of the distribution of Partnership property to any
Partner, the Partnership may elect in accordance with Section 754 of
the Code, in the absolute discretion of the Tax Matters Partner, to
cause the basis of the Partnership property to be adjusted for Federal
income tax purposes as provided for by Sections 734 and 743 of the
Code.
(c) The Partnership shall elect, in accordance with Section
263(c) of the Code and applicable Treasury Regulations and comparable
provisions of state law, to expense all Intangible Development Costs.
(d) The Tax Matters Partner shall have the authority on behalf
of the Partnership, to make or refrain from making any other tax
election provided in the Code, or in Treasury Regulations or in any
other applicable Federal or state tax law as deemed appropriate by the
Tax Matters Partner.
(e) Each Partner hereby represents, warrants and agrees as
follows:
(1) He will not file the statement described in
Section 6224(c)(3)(B) of the Code prohibiting 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(s)(3) of the Code) of the
Partnership;
(2) He will not form or become and exercise any
rights as a member of a group of Partners having a 5.0% or
greater interest in the profits of the Partnership under Code
Section 6223(b)(2) of the Code; and
(3) ESI is authorized to file a copy of this
Agreement (or pertinent portions hereof) with the IRS pursuant
to Section 6224(b) of the Code if necessary to perfect the
waiver of rights under this Subsection 5.11.
ARTICLE VI
PAYMENT OF PARTNERSHIP COSTS AND EXPENSES
6.01 Costs and Expenses Paid From Initial Capital Contributions. The
Partnership shall pay Sales Commissions, Management Fees, Due Diligence Fees,
Organization and Offering Expenses, Intangible Development Costs paid from the
IDC Prepaid Amount, and Lease Acquisition Costs and other costs associated with
investment in Producing Properties in appropriate proportionate amounts pursuant
to the "Estimated Sources of Funds and Uses of Proceeds" section of the
Memorandum upon and after Activation of the Partnership as funds are released
from the Escrow Account to the Partnership.
6.02 Partnership Operations. The Partnership shall pay Operating Costs
(including the Production Administration Fee payable in connection with Wells
operated by ESI) and any other costs or expenses incurred in its Production
Operations.
6.03 Partnership Administration. The Partnership shall pay the
Partnership Administration Fee and all Direct Costs incurred in managing
and administration of the Partnership.
ARTICLE VII
MANAGEMENT OF THE PARTNERSHIP
7.01 Power and Authority of Managing General Partner. Subject
specifically to the other provisions of this Article VII, and except as provided
elsewhere in this Agreement or by applicable law, the Partners hereby delegate
and grant to the Managing General Partner, and each of them, full and exclusive
power and authority on behalf of the Partnership to manage, control, administer,
and operate the properties, assets, funds, business, and affairs of the
Partnership and to do or cause to be done any and all acts deemed by the
Managing General Partner to be necessary or appropriate thereto. The scope of
such power and authority shall encompass all matters in any way connected with
such business or incident thereto, including without limitation the power and
authority:
(a) To purchase or otherwise invest in Leases and other real
or personal property of every nature considered necessary or
appropriate to carry on and conduct the business of the Partnership.
(b) To borrow monies for the business of the Partnership and
to engage in any other means of financing customary in the oil
and gas industry.
(c) To enter into any agreement for sharing of profits, joint
venture, or partnership with any person, firm, corporation, government,
or agency thereof engaged in any business or transaction in which the
Partnership is authorized to engage, or any business or transaction
capable of being conducted, so as to directly or indirectly benefit the
Partnership, and to cause the purposes of the Partnership thereunder to
be carried out.
(d) To explore and prospect by geological, geophysical, or
other methods for the location of anomalies or other indications
favorable to the accumulation of oil and gas, including specifically
the power to contract with third parties for such purposes.
(e) To maintain, explore, develop, operate, manage, and defend
Partnership property and to drill, test, plug and abandon or complete,
and equip, rework, and recomplete Wells on any Lease owned by the
Partnership for the production of oil and gas located thereunder, and
to contract with third parties for such purposes, to carry out a
program of enhanced recovery on Partnership property and to do any and
all other things necessary or appropriate to carry out the terms and
provisions of this Agreement that would or might be done in the
exploration, development, operation, and management of its own
property.
(f) To enter into and execute Leases, drilling contracts,
Farmout agreements, Farmin contracts, dry and bottom hole and acreage
contribution letters, participation agreements, and any other
agreements customarily employed in the oil and gas industry in
connection with the acquisition, sale, exploration, development, or
operation of oil and gas properties including, without limitation, the
JDOA.
(g) To sell the production accruing to Leases acquired by the
Partnership and to execute gas sales contracts, casinghead gas
contracts, transfer orders, division orders, or any other instruments
in connection with the sale of production from the Partnership's
interest in any property.
(h) To Farmout, sell, assign, convey, or otherwise dispose of,
for such consideration and upon such terms and conditions as the
Managing General Partner may determine, all or any part of the
Partnership property, any interest therein, or any interest payable
therefrom.
(i) To employ on behalf of the Partnership agents, employees,
managers, consultants, accountants, lawyers, geologists, geophysicists,
landmen, clerical help, and such other assistance and services as the
Managing General Partner may deem proper and to pay therefor such
remuneration and compensation as the Managing General Partner may deem
reasonable and appropriate.
(j) To purchase, lease, rent or otherwise acquire or obtain
the use of machinery, equipment, tools, materials, and all other kinds
and types of real or personal property that may in any way be deemed
necessary or advisable in connection with carrying on the business of
the Partnership, and to incur expenses for travel, telephone,
telegraph, insurance, and for such other things, whether similar or
dissimilar, as may be deemed necessary or appropriate for carrying on
and performing the business of the Partnership.
(k) To pay delay rentals, shut-in gas Royalty payments,
property taxes, and any other amounts necessary or appropriate to the
maintenance or operation of any Partnership property.
(l) To make and enter into such agreements and contracts with
such parties and to give such receipts, releases, and discharges with
respect to any and all of the foregoing and any matters incident
thereto as the Managing General Partner may deem advisable or
appropriate.
(m) To procure and maintain in force such insurance as the
Managing General Partner shall deem prudent to serve as protection
against liability for loss and damage that may be occasioned by the
activities to be engaged in by the Partnership and the Managing General
Partner on behalf of the Partnership.
(n) To pay, extend, renew, modify, adjust, submit to
arbitration, prosecute, defend or compromise on behalf of the
Partnership, upon such terms as the Managing General Partner may
determine and upon such evidence as they may deem sufficient, any
obligation, suit, liability, cause of action, or claim, including a
suit or claim for taxes, in favor of or against the Partnership.
(o) To quitclaim, surrender, release, or abandon any
Partnership property with or without consideration therefor.
(p) To make such classifications, determination, and
allocations as the Managing General Partner may deem advisable, having
due regard for any relevant generally accepted auditing standards.
(q) To enter into an agreement with the Placement Agent and to
perform all of the Partnership's obligations thereunder, to issue and
sell Units to Initial Co-General Partners and Limited Partners pursuant
to the terms and conditions of this Agreement and the Memorandum, to
accept and execute on behalf of the Partnership Subscription Agreements
with Investor Partners, and to admit original and substituted Investor
Partners to the Partnership.
(r) To take such other actions, to execute and deliver such
documents, contracts, instruments or agreements and to perform such
other acts as may be deemed by the Managing General Partner to be
appropriate to carry out the business and affairs of the Partnership.
(s) To establish a Working Capital Reserve not to exceed 3.0%
of Investors' Subscriptions upon Activation and not to exceed 10.0% of
Investors' Subscriptions at any time one year after Activation for the
purpose of meeting anticipated Partnership obligations, liabilities and
expenses within the following 12 months. In the discretion of the
Managing General Partner, funds in the Working Capital Reserve which
are no longer needed to be retained may be distributed from time to
time to Partners.
In accomplishing all of the foregoing and except as otherwise provided
in this Agreement, the Managing General Partner may, in its sole discretion,
use, employ or contract its own personnel, properties, or equipment or those of
any Affiliate thereof (subject to the provisions of Section 7.04) or the
Managing General Partner may hire or rent those of third parties and may employ
on a temporary or continuing basis outside accountants, attorneys, consultants,
and others on such terms as the Managing General Partner deems advisable. No
person, firm, or corporation dealing with the Partnership shall be required to
inquire into the authority of the Managing General Partner to take any action or
make any decision.
7.02 Certain Restrictions Concerning the Managing General Partner's
Power and Authority. Notwithstanding any other provisions of this Agreement to
the contrary, no Managing General Partner shall have the power or authority to,
and shall not, directly or indirectly, do, perform, or authorize any of the
following:
(a) Borrow any money in the name or on behalf of the
Partnership unless (1) the total amount of the borrowings or financings
outstanding (excluding trade credit incurred in the normal course of
business) do not exceed 25.0% of Investor Subscriptions, (2) the terms
of any such financing or the effect of applicable law provide that the
lender has recourse only against Partnership assets or the Managing
General Partner and not against any Investor Partner individually, and
(3) the Managing General Partner determines in good faith that such
borrowing is consistent with the business purposes of the Partnership
and in the best interest of Investor Partners.
(b) Without having first received the prior consent of a
Majority In Interest of the Investor Partners, sell all or
substantially all of the oil and gas properties of the Partnership
other than in the ordinary course of business (except upon liquidation
of the Partnership pursuant to Article X), unless cash funds of the
Partnership are insufficient to pay the obligations and other
liabilities of the Partnership.
(c) Guarantee in the name or on behalf of the Partnership the
payment of money or the performance of any contract or other
obligation of any person.
(d) Use, or permit any other person to use, the Partnership's
name, funds, credit, or property for purposes other than legitimate
Partnership purposes;
(e) Take any action, or permit any other person to take any
action, with respect to the assets or property of the Partnership that
does not primarily benefit the Partnership, and is not substantially
consistent with the stated purposes of the Partnership as described in
Section 3.01, including, without limitation, utilization of funds of
the Partnership as compensating balances for its own benefit.
(f) Benefit from any arrangement for the marketing of oil and
gas production or other relationships affecting the property of the
Partnership, unless such benefits are no greater than those which could
be realized by third parties dealing at arms-length with the
Partnership and are fairly and equitably apportioned among the parties
involved.
(g) On any loans or advances made available to the Partnership
by the Managing General Partner or any Affiliate, receive interest in
excess of any of the following: (1) the maximum rate permitted by
applicable law, (2) the effective interest rate than being paid by the
Managing General Partner or Affiliate for its funds, or (3) the rate
that would be charged the Partnership (without regard to the Managing
General Partner's or Affiliate's financial ability or guaranties) by
unrelated banks on comparable loans for the same purpose; and the
Managing General Partner and its Affiliate shall not receive points or
other finance charges or fees, regardless of amount.
(h) Receive, or permit an Affiliate to receive, rebates or
give-ups, or participate, or permit an Affiliate to participate in any
reciprocal business arrangement which would circumvent the restrictions
and prohibitions on the Managing General Partner and its Affiliates
imposed by this Article.
(i) Cause or permit to make loans or advances of credit to the
Managing General Partner or its Affiliates, including any other
partnerships managed by the Managing General Partner or its Affiliates.
(j) Profit for itself or any Affiliate by drilling or
operating Wells in contravention of its fiduciary obligations.
(k) Reinvest current revenues of the Partnership for any
purpose other than conduct of Production Operations or Subsequent
Development Operations determined by the Managing General Partner to be
consistent with the business purpose of the Partnership and in the best
interest of Investor Partners.
7.03 Commitment of Managing General Partner. During the existence of
the Partnership, the Managing General Partner shall devote such time and effort
to the Partnership business as may be necessary to promote adequately the
interests of the Partnership and the mutual interests of the Partners; however,
it is specifically understood and agreed that the Managing General Partner shall
not be required to devote full time to Partnership business, and the Managing
General Partner and its Affiliates thereof may at any time and from time to time
engage in and possess interests in other business ventures of any and every type
and description, independently or with others, including without limitation the
acquisition, ownership, exploration, development, operation, and management of
oil and gas properties for themselves and other persons and the organization and
management of other partnerships and joint ventures similar to the Partnership
provided, at all times, the Managing General Partner acts consistent with its
fiduciary duty to the Partnership.
7.04 Contracts with Managing General Partner or Affiliates. The
Partnership may enter into contracts and agreements with the Managing General
Partner, or any Affiliate of the Managing General Partner, for any legitimate
purpose consistent with the business purposes and restrictions of the
Partnership including, without limitation, the rendering of services or the sale
or lease of materials, equipment or supplies; provided which the Managing
General Partner determines in good faith that the terms, conditions, prices and
compensation under such contracts or agreements are fair and reasonable to the
Partnership and generally no less favorable than terms which the Managing
General Partner or Affiliate offer, or would offer, to unrelated third parties
in the same geographical area. Specifically the Managing General Partner, on
behalf of the Partnership, is authorized to enter into and perform the JDOA, Gas
Servicing Agreement and any ancillary contracts or agreements contemplated
thereby. In no case shall the fact that the other party to a contract or
agreement with the Partnership is a Partner (including the Managing General
Partner) or an Affiliate of a Partner prohibit or prevent the Partnership from
entering into or performing such contract or agreement provided the Managing
General Partner determines that the terms thereof are fair and reasonable to the
Partnership and commensurate with terms that could be negotiated at arms-length
with independent third parties in the same geographic area.
7.05 Sales of Lease Interests to Partnership. Neither the Managing
General Partner nor any Affiliate (including any partnership managed by the
Managing General Partner or an Affiliate) shall sell, transfer or convey any
interest in a Producing Property or Lease to the Partnership except pursuant to
a price and under terms and conditions that are fair and reasonable to the
Partnership as determined in good faith by the Managing General Partner.
7.06 Purchases of Properties From the Partnership. Neither the Managing
General Partner nor any Affiliate (including any partnership managed by the
Managing General Partner or an Affiliate) may purchase or acquire any interest
in a Producing Property or Lease from the Partnership, directly or indirectly,
except pursuant to a price equal to fair market value (determined in good faith
by the Managing General Partner) and such other terms and conditions that are
fair and reasonable to the Partnership.
7.07 Custody of Partnership Funds and Properties. The Managing General
Partner and its Affiliates shall observe the following requirements in dealing
with Partnership funds and other properties:
(a) The Managing General Partner will 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.
(b) Funds of the Partnership shall not be commingled with
funds of any other entity. The Managing General Partner may, however,
establish a master fiduciary account pursuant to which separate
subtrust accounts are maintained for the benefit of the Partnership and
other partnerships managed by the Managing General Partner or its
Affiliates; provided that the Partnership's funds are afforded maximum
protection from the claims of other partnerships and their creditors.
The prohibition of this subsection (b) shall not apply to the payment
of the IDC Prepaid Amount to the Operator pursuant to the JDOA or to
investments meeting the requirements of subsection (d) below.
(c) Leases may be held in the names of nominees temporarily to
facilitate their acquisition and for similar valid purposes. On a
permanent basis, Producing Properties may be held in the name of a
special nominee entity organized by the Managing General Partner for
the sole purpose of holding record title for oil and gas properties;
provided, however, that the nominee entity shall engage in no other
business and incur no other liabilities and the Leases are held in the
name of a special nominee, either a ruling from the IRS or an opinion
of qualified tax counsel shall be obtained to the effect that such
arrangement shall not change the ownership status of the properties for
Federal income tax purposes.
(d) Partnership funds may not be invested in the securities of
another partnership, corporation, trust or other legal entity except in
the following instances:
(1) investments in Producing Properties or undivided
interests in Leases made in the ordinary course of the
Partnership's business;
(2) temporary investments of Partnership funds in
income producing short-term, highly liquid investments, where
there is safety of principal substantially the same as U.S.
Treasury Bills, bank certificates of deposit or bank money
market accounts.
(3) investments in entities established solely to
limit the Partnership's liabilities associated with the
ownership or operation of property or equipment, provided that
in such instances duplicative fees and expenses shall be
prohibited; and
(4) temporary investments in other partnerships,
joint ventures or corporations owning interests in oil and gas
properties, for the purpose of liquidating the same into the
Partnership; provided, however, that the terms of any such
arrangements are consistent with the purposes stated in
Section 3.01 and do not directly or indirectly circumvent or
violate the restrictions or requirements imposed upon the
Managing General Partner, or the rights of Investor Partners,
pursuant to this Agreement.
7.08 Insurance. With respect to Wells to be drilled pursuant to the
JDOA or Producing Properties to be operated by ESI, to the extent available upon
terms and for prices deemed commercially practicable and reasonable in the sole
discretion of the Managing General Partner, the Managing General Partner shall
cause the Partnership to be listed as an additional insured on the Operator's
general liability, well control, blowout and/or environmental contamination
insurance with primary, excess or umbrella coverage limits, per occurrence or in
the aggregate of at least $10,000,000. The Managing General Partner shall notify
Investor Partners at least 30 days prior to the effective date of any adverse
material change or cancellation in such insurance coverage. With respect to
Non-Operated Properties, if any, the Managing General Partner shall cause the
operator of such properties to maintain such liability, well control, blowout
and/or other insurance as is customary to be carried in the industry. In
addition, the Managing General Partner shall require that any operators and
contractors furnishing goods and services to the Wells and Leases carry
reasonable and customary automobile liability insurance and workers compensation
insurance required by law.
7.09 Liability of Managing General Partner and Affiliates. No Managing
General Partner nor any Affiliate thereof shall have any liability to the
Partnership or to any Partner for any loss suffered by the Partnership that
arises out of any action or inaction performed or omitted by the Managing
General Partner or any Affiliate thereof, if the Managing General Partner or
such Affiliate in good faith determined that such course of conduct was in the
best interest of the Partnership and provided that such course of conduct did
not constitute gross negligence or willful misconduct on the part of the
Managing General Partner or such Affiliate; provided further that nothing in
this Agreement shall authorize the Managing General Partner or any Affiliate
thereof to breach its fiduciary duty to either the Partnership or the Partners.
7.10 Indemnification of Managing General Partner and Affiliates.
(a) The Partnership shall indemnify the Managing General
Partner and/or its Affiliates against any losses, judgments,
liabilities, expenses, and amounts paid in settlement of any claims
sustained by the Managing General Partner or its Affiliates in
connection with any matter associated with the Partnership; provided
that (1) the Managing General Partner, or the indemnified Affiliate,
has determined in good faith that the course of conduct that caused the
loss or liability was in the best interest of the Partnership and (2)
the conduct of the Managing General Partner, or the indemnified
Affiliate, did not constitute gross negligence or willful misconduct.
(b) Notwithstanding Section 7.10(a), neither a Managing
General Partner nor any Affiliate thereof, nor the Placement Agent, nor
any Participating Selling Agent shall be indemnified by the Partnership
or any Investor Partner for any losses, liabilities, or expenses
arising from or out of an alleged violation of Federal or state
securities laws unless (1) there has been a successful adjudication on
the merits of each count involving alleged securities laws violations
as to the particular indemnitee and the court approves indemnification
of the litigation costs, (2) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to the
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 securities commissioners of any
state in which interests were offered or sold as to indemnification for
violations of securities law.
(c) The Partnership may purchase and maintain insurance on
behalf of the Managing General Partner and its Affiliates thereof
against any liabilities asserted against or expenses incurred by the
Managing General Partner and Affiliate there in connection with
Partnership activities, provided that the Partnership shall not incur
the cost of that portion of any insurance that insures the Managing
General Partner or any Affiliate thereof against any liability with
respect to which the Managing General Partner and any Affiliates
thereof are denied indemnification under the provisions of this
Agreement; provided, however, that nothing contained herein shall
preclude the Partnership from purchasing and paying for such types of
insurance including without limitation extended coverage liability and
casualty and workers compensation, as would be customary for any person
owning comparable assets and engaged in a similar business, or from
naming the Managing General Partner and Affiliates thereof as
additional insured parties thereunder, provided, that such addition
does not increase the premiums payable by the Partnership.
(d) Legal expenses and other costs incurred as a result of a
claim described in this Section 7.10 shall be paid by the Partnership
from time to time in advance of the final disposition of such claim if
the following three (3) conditions are satisfied: (1) the claim relates
to the performance of duties or services by the Managing General
Partner or any Affiliates thereof on behalf of the Partnership; (2) the
claim is initiated by a third party who is not an Investor Partner or
the claim is initiated by an Investor Partner and a court of competent
jurisdiction specifically approves such advancement; and (3) the
Managing General Partner or its Affiliate undertakes to repay the
advanced funds to the Partnership, together with the applicable legal
rate of interest thereon, in the event it is later determined that such
Managing General Partner or its Affiliate is not entitled to
indemnification under the provisions of this Section 7.10.
(e) The indemnification provided by this Section 7.10 shall
continue as to the Managing General Partner and its Affiliates in the
event it ceases to be the Managing General Partner of the Partnership
with respect to claims relating to the period in which the Managing
General Partner was the Managing General Partner of the Partnership and
shall inure to the benefit of the successors and assigns of the
Managing General Partner and Affiliates thereof.
(f) The indemnification provided by this Section 7.10 shall be
made, and shall be recoverable by the Managing General Partner or any
Affiliate thereof, only out of the assets of the Partnership and not
from the Investor Partners.
(g) For purposes of Section 7.09 and this Section 7.10, the
term "Affiliate" shall mean any person performing services or
participating in management decisions on behalf of the Managing General
Partner and acting within the scope of the Managing General Partner's
authority who (1) directly or indirectly controls, is controlled by or
is under common control with the Managing General Partner, (2) owns or
controls 10.0% or more of the outstanding voting securities of the
Managing General Partner, (3) is an officer, director, agent, employee,
partner or trustee of the Managing General Partner, or (4) is an
officer, director, agent, employee, partner, or trustee of any company
for which the Managing General Partner acts in any such capacity.
ARTICLE VIII
RIGHTS OF INVESTOR PARTNERS; POWER OF ATTORNEY
8.01 Limitations on Investor Partners. Except as otherwise set forth in
Section 8.02, no Investor Partner, including any Initial Co-General Partner,
shall: (a) be permitted to take part in the management or control of the
business or affairs of the Partnership; (b) have any voice in the management or
operation of any Partnership assets; or (c) have the authority or power in his
capacity as an Investor Partner to act as agent for or on behalf of the
Partnership or any other Partner, to do any act which would be binding on the
Partnership or any other Partner, or to incur any expenditures on behalf of or
with respect to the Partnership. Any Investor Partner who violates this Section
8.01 shall be liable to the remaining Investor Partners, the Managing General
Partner and the Partnership for any damages, costs or expenses any of them may
incur as a result of such violation. The Investor Partners hereby grant to the
Managing General Partner or its successors or assigns the exclusive authority to
manage and control the Partnership business in its sole discretion and to
thereby bind the Partnership and all Partners in its conduct of the Partnership
business. Investor Partners shall have the right to vote only as set forth in
Section 8.02.
8.02 Rights of Investor Partners.
(a) The Investor Partners shall have the rights enumerated in
this Section 8.02 unless and until (1) either (A) a court of competent
jurisdiction shall have determined, in an action for declaratory
judgment or similar relief brought on behalf of the Limited Partners,
that the grant or the exercise of the power described in this Section
8.02 will result in the loss of any Limited Partner's limited
liability, or (B) counsel for the Partnership shall have delivered to
the Partnership an opinion to the same effect; or (2) either (A) a
ruling shall have been received by the Partnership from the IRS to the
effect that the grant or the exercise of the powers described in this
Section 8.02 will adversely affect the tax status of the Partnership,
or the Partners, or the continuing applicability of any ruling issued
to the Partnership by the IRS or (B) counsel for the Partnership shall
have delivered to the Partnership an opinion to the same effect.
Opinion of counsel referred to in this Section 8.02 may be obtained at
any time by the Managing General Partner and the cost of the same shall
be paid by the Partnership as a Direct Cost.
(b) Subject to the provisions set forth above and the further
requirements of this Article VIII, the Investor Partners shall have the
right to: (1) approve an amendment to this Partnership Agreement
pursuant to Section 14.01; (2) vote to dissolve, wind up and terminate
the Partnership pursuant to Article XI; (3) vote to remove a Managing
General Partner pursuant to Section 10.05; (4) approve additional
Managing General Partners pursuant to Section 10.02; (5) approve the
withdrawal of a Managing General Partner pursuant to Section 10.01; (6)
elect to continue the Partnership subject to termination pursuant to
Section 11.02; (7) approve a sale, transfer, lease or disposition of
substantially all of the oil and gas properties of the Partnership
outside the ordinary course of business pursuant to Section 7.02(b);
and (8) by affirmative vote of at least 25% in interest of the Investor
Partners, commission an audit of the Partnership's financial statements
in accordance with Section 12.04.
8.03 Exercise of Rights of Investor Partners.
(a) Whenever the Managing General Partner determines that the
exercise of the Investor Partners' rights granted in Section 8.02
hereof should be considered by the Investor Partners, the Managing
General Partner shall send written notice to each Investor Partner,
which notice shall set forth the nature of such rights then
exercisable, the facts and circumstances relevant to a determination as
to whether such rights should or should not be exercised and a
statement that the exercise or non-exercise of such rights will be
determined by the affirmative vote of the Investor Partners owning the
requisite percentage in interest of the then outstanding Units. Such
notice shall also state that each Investor Partner may vote by sending
to the Managing General Partner at the address of the Partnership
written notice of his vote which clearly indicates whether he votes in
favor or against exercise of such rights described in the notice from
the Managing General Partner to the Investor Partners.
(b) The exercise or non-exercise of such rights pursuant to
this Section 8.02 shall be determined by the affirmative vote of the
Investor Partners owning the requisite percentage in interest of the
Units outstanding at the time the vote is taken. Each Unit shall have
one (1) vote. Fractional Units shall have fractional votes. For
purposes of any vote by Investor Partners under this Agreement, any
Units owned by any Managing General Partner, or its Affiliates, shall
be excluded in determining the existence of a quorum or the requisite
percentage in interest of the Units necessary to carry the vote of
Investor Partners. After every vote of Investor Partners pursuant to
this Section 8.03, the Managing General Partner shall tally the vote
and send written notice to the Investor Partners of the results of the
voting. The Managing General Partner shall keep complete and accurate
records of all votes of the Investor Partners.
(c) The rights described in this Section 8.03 may be exercised
by each Investor Partner by written authorization to another person to
act for him by proxy; provided a true copy of the proxy is on file at
the office of the Managing General Partner prior to the time any vote
is taken. No such proxy shall be voted for more than one year from its
date. Each proxy shall be revocable unless it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power.
(d) Any action required by this Agreement to be taken by vote
of the Investor Partners of the Partnership may be taken without a
meeting of Investors and without a vote if prior notice is given to the
Investor Partners by the Managing General Partner and if a consent in
writing, setting forth the action so taken, shall be signed by the
requisite number of Investor Partners holding not less than the minimum
number of Units that would be necessary to authorize or take such
action at a meeting at which all Investor Partners were present and
voted.
(e) A meeting of the Investor Partners may be called at any
time by Investor Partners owning more than 10.0% in interest of the
then outstanding Units for purposes of considering the exercise of
Investor Partners rights or any other matters on which the Investor
Partners may vote as provided in this Agreement. A request for a
meeting of the Investor Partners shall be deemed to have been made upon
receipt by the Managing General Partner of a written request for such
meeting from Investor Partners owning not less than 10.0% in interest
of the then outstanding Units. Such request shall state the purpose of
the meeting requested. Upon receipt of such written request, the
Managing General Partner shall, within 15 days thereafter, send written
notice to all Investor Partners of the meeting and the purpose of the
meeting, the date of which shall be not less than 30 days nor more than
60 days after the date of such notice to the Investor Partners. All
such meetings shall be held at a reasonable time and place.
(f) Unless otherwise expressly stated elsewhere in this
Agreement with respect to any matter, the rights of Investor Partners
pursuant to this Agreement shall be exercised by affirmative vote of
the owners of a Majority In Interest of the outstanding Units,
excluding Units owned by the Managing General Partner or Affiliates
thereof.
8.04 Books and Information. In addition to any other rights
specifically set forth herein, all Investor Partners shall have the right to
have (a) the Partnership books kept at the principal place of business of the
Partnership and for any proper purpose, upon adequate written notice at
reasonable times, to inspect and, at such Investor Partner's expense, to copy
any of them personally or through a properly authorized representative, and (b)
on demand and for any proper purpose, true and full information of all things
affecting the Partnership relevant to the Investor Partner, and a formal account
of Partnership affairs, whenever permitted by law.
8.05 Access of Investor Partners to Geophysical Data. During the term
of the Partnership, the Partnership may acquire or have access to geophysical,
geological, and other similar data and information. Each Investor Partner shall,
during the term of the Partnership, have the right for a proper purpose during
normal business hours at the offices of the Partnership to inspect and review
all such data and information and studies, maps, evaluations, or reports derived
therefrom and material related thereto; provided, however, that the Managing
General Partner may refuse for a reasonable period of time to grant an Investor
Partner access to such data and information and studies, maps, evaluations, and
reports that the Managing General Partner (a) has agreed to keep confidential,
or (b) determines in good faith should be kept confidential considering the best
interests of the Partnership and each of the Partners in the aggregate.
8.06 Restrictions on Ownership of Managing General Partner. Each
Investor Partner who is not a Managing General Partner hereby agrees that he
will not, at any time, either directly or indirectly, own any stock or other
interest in any entity which is a Managing General Partner of the Partnership
if, in the opinion of the Partnership's counsel, such ownership may cause the
Partnership to be taxed pursuant to Federal income tax law as an association
taxable as a corporation and not as a partnership.
8.07 Power of Attorney.
(a) Each Investor Partner makes, constitutes and appoints the
Managing General Partner and its authorized agents and successors, with
full power of substitution, the agent and attorney in fact for such
Investor Partner for all purposes relating to the Partnership and
hereby grants to said agents and attorneys-in-fact full right, power
and authority, in such Investor Partner's name, place and stead, to
make, execute, sign, certify, acknowledge, verify, deliver, file and
record from time to time any writing, document, agreement, instrument
or certificate necessary or
(1) To legally and validly establish or continue the Partnership as a limited
partnership under the laws (2) To authorize the Partnership to transact business
in the State of Tennessee and the State of Ohio, (4) To efTo authorize or
effectuate the exercise of powers granted to the Managing General Partner under
(5) To effectuate the admission to the Partnership of a substitute Managing
General Partner or a substituted (6) To effectuate a Conversion of Partnership
Interests of Initial Co-General Partners to Limited Partners (7) To effectuate
the dissolution, liquidation and termination of the Partnership pursuant to the
terms of
this Agreement;
(b) Notwithstanding the foregoing, the power of attorney so
granted shall not constitute a waiver of, or be used to avoid, the
rights of an Investor Partner under this Agreement or be used in any
manner inconsistent with the status of the Partnership or a limited
partnership or the limited liability of any Limited Partner.
(c) Each Investor Partner authorizes such attorney-in-fact to
take any further action which such attorney-in-fact shall consider
necessary or advisable to be done in and about the foregoing, including
the power to consent to items (1) through (7) of Subsection 8.07(a)
above, as fully as such Investor Partner might or could do if
personally present and hereby ratifies and confirms all that such
attorney-in-fact shall lawfully do or cause to be done by virtue
hereof.
(d) The foregoing power of attorney is a durable and special
power of attorney coupled with an interest, is irrevocable and shall
survive the delivery of an assignment by an Investor Partner of the
whole or a portion of his interest in the Partnership, until the
assignee thereof becomes a substituted Investor Partner, and shall
survive the incompetency or incapacity of any Investor Partner.
ARTICLE IX
TRANSFERS OF PARTNERSHIP INTERESTS;
SUBSTITUTE INVESTOR PARTNERS
9.01 Assignments and Transfers of Interests by Investor Partners.
Subject to the provisions of Sections 9.03 and 9.04, except as provided below,
no Partnership Interest of an Investor Partner shall be assignable, in whole or
in part, without the express written consent of the Managing General Partner
which may be withheld for any reason or no reason. If the Managing General
Partner shall consent to such assignment, the assignee shall not become a
substituted Investor Partner, except as provided in Section 9.02. An assignee
who does not become a substituted Investor Partner shall have no rights
hereunder except to receive any allocations or distributions which (but for the
assignment) would have been made to the assignor. Notwithstanding the foregoing,
the Managing General Partner will not be obligated to recognize any assignment
sooner than the first day of the month after the month in which the Managing
General Partner approves in writing the assignment. A mortgagee or secured
party, the personal representative, guardian or other successor in interest of a
deceased, legally incompetent or (in the case of an Investor Partner which is a
corporation, partnership or joint venture) dissolved Investor Partner, or any
successor, personal representative, heir or devisee thereof, shall, upon written
notice to the Managing General Partner signed by assignor and assignee,
automatically be considered an approved assignee (but not a substituted Investor
Partner) and be entitled to receive the share of revenues, distributions, income
or gain and, upon dissolution of the Partnership, the share of the assets of the
Partnership to which such deceased, legally incompetent or dissolved Investor
Partner would have been entitled under the terms of this Agreement. No
assignment of a Partnership Interest of an Investor Partner shall be effective
until a copy of the instrument of assignment, properly executed and in form and
content acceptable to the Managing General Partner shall have been received and
approved by the Managing General Partner.
9.02 Substituted Investor Partners. The assignee of a Partnership
Interest of an Investor Partner may become a substituted Investor Partner only
if (a) the assignor and the Managing General Partner shall have specifically
consented thereto in writing (which consent, may be withheld for any reason or
no reason in the sole discretion of the Managing General Partner), (b) the
assignee shall have agreed in writing to be bound as an Investor Partner to the
terms of this Agreement, as amended, (c) the assignee shall have executed and
delivered to the Managing General Partner such documents, certificates,
instruments or legal opinions as are required by law or requested by the
Managing General Partner (in its sole discretion), (d) the assignor and/or the
assignee shall have paid or obligated himself to pay all reasonable costs and
expenses (including legal fees) incurred in connection with such admission or
substitution. Any substituted Investor Partner will be deemed to be the same
status of Partner (i.e., Initial Co-General Partner or Initial Limited Partner)
as was his assignor.
9.03 Restrictions on Transfer Which May Result in Termination for Tax
Purposes. No Partnership Interest, or any part thereof or interest therein,
shall not be sold, assigned or otherwise transferred at any time, if and to the
extent that any such sale, assignment or other transfer would, in the opinion of
legal counsel to the Partnership, result in the termination of the Partnership
for Federal income tax purposes.
9.04 Restrictions on Transfer Imposed by Securities Laws. The
Partnership Interests have not been registered under the Securities Act of 1933,
as amended (the "1933 Act"), or under the securities laws of any state or other
jurisdiction but have been offered and sold pursuant to and in reliance upon
exemptions from registration thereunder. As a consequence of the restrictions on
subsequent transfer imposed by these exemptions, the Partnership Interests shall
not subsequently be sold, assigned, conveyed, pledged, hypothecated or otherwise
transferred by a holder thereof except, pursuant to an effective registration
statement registering the Partnership Interests under the 1933 Act and/or
applicable state securities laws, or pursuant to an opinion of counsel, which
has been obtained by such holder and which is in all respects satisfactory to
the Managing General Partner, that such registration under the 1933 Act and/or
applicable state securities laws is not required for such holder to lawfully
affect such subsequent sale, assignment, conveyance, pledge, hypothecation or
other transfer.
9.05 Notification of Transfer Required by the Code. Any Partner who
proposes to transfer a Partnership Interest, or part thereof or interest
therein, shall, within 30 days of the proposed effective date of the proposed
transfer, whichever is earlier, provide the Managing General Partner with the
information required under Code Sections 6050K and 6112 of the Code and the
Treasury Regulations promulgated thereunder.
9.06 Reservation of Right to Refuse to Register Transfer. The
Partnership and the Managing General Partner reserve and shall have the right to
refuse to accept or reject the assignment or other transfer of any Partnership
Interest, or any part thereof or any interest therein, unless and until the
conditions specified in this Article IX have been satisfied.
9.07 Effect on an Invalid Transfer. Any attempted or purported sale,
assignment, conveyance, pledge, hypothecation or other transfer which is in
contravention of the restrictions on transfer specified in this Article IX shall
be invalid, ineffective and a fraud against the Partnership and the other
Partners. The purported assignor and assignee, by their respective purported
transfer or purported acceptance thereof, severally agree to indemnify and hold
harmless the Partnership and the other Partners for any claim, loss or damage
which may accrue by reason of such purported transfer. If such claim, loss or
damage accruing by reason of the purported transfer is incapable of being
ascertained accurately, then any consideration paid in connection with such
purported transfer shall be transferred and paid over to the Partnership as its
liquidated damages.
9.08 Limited Right of Presentment.
(a) Notice and Presentment. Commencing in the 48th month after
the first regular distribution of operating revenues of the Partnership
and continuing for 3 successive years ("Year Interval(s)") thereafter
(the "Presentment Term") any Investor Partner may provide by certified
mail, return receipt requested, written notice of intent to present
such Investor Partner's Units for purchase by the Managing General
Partner. Any Investor Partner electing to present Units for purchase
pursuant to this Section 9.08 must present all Units held.
(b) Obligation to Purchase. Subject to the conditions of
subsection 9.08(c), the Managing General Partner shall purchase in each
year ("Year Interval") during the Presentment Term no less than 3 Units
presented for purchase pursuant to subsection 9.08(a). To the extent
that more than 3 Units are properly presented for purchase, the
Managing General Partner shall purchase the Units presented on a first
come, first served basis, determined by when the notice of presentment
was received. In its sole discretion, the Managing General Partner may
purchase more than 3 Units presented for purchase.
(c) Conditions to Purchase. The Managing General Partner's
obligation or right to purchase any Units presented shall be subject
to: (1) the ability of the Managing General Partner to obtain financing
for the purchase of such Units upon terms reasonably acceptable to the
Managing General Partner; and (2) the Managing General Partner
receiving an opinion of tax counsel that the purchase of Units will not
result in a termination of the Partnership under Code Section 708, or
cause the Partnership to be classified as a "publicly traded
partnership" for purposes of Code Sections 469 and 7704. Any purchase
of Units pursuant to this Section 9.08 by the Managing General Partner
shall be for investment purposes and not with a view of resale or
distribution.
(d) Unit Repurchase Price. The purchase price for purposes of
the Limited Right of Presentment shall be 30 times the monthly average
of the previous 6 months' cash distributions received with respect to
the Unit(s) purchased. All purchases by the Managing General Partner
shall be for cash and shall be closed no later than the last day of the
12th month of the applicable Year Interval of the Presentment Term.
(e) Liquidation. The obligation of the Managing General
Partner to purchase any Units pursuant to this Limited Right of
Presentment in any calendar year shall be cancelled in the event the
Partnership dissolves or is liquidated in such calendar year.
(f) Assignment. The Managing General Partner shall have the
right to assign to its Affiliate, including an Affiliated partnership,
its right (but not its obligation) to purchase Units pursuant to the
Limited Right of Presentment set forth in this Section 9.08.
ARTICLE X
WITHDRAWAL OR REMOVAL OF MANAGING GENERAL
PARTNER; ELECTION OF NEW MANAGING GENERAL PARTNER
10.01 Withdrawal of Managing General Partner. The Managing General Partner
may not withdraw from the Partnership except in accordance with the provisions
of this Section 10.01.
(a) In the event there is more than one Managing General
Partner, a Managing General Partner may withdraw from the Partnership
upon the consent of all other Managing General Partner(s) and a
Majority In Interest of Investor Partners, provided such withdrawing
Managing General Partner transfers his entire Partnership Interest to
another Managing General Partner(s) or the Partnership upon mutually
agreeable terms.
(b) A corporate Managing General Partner may withdraw from the
Partnership in the event it transfers its entire Partnership Interest
to a corporation or other entity into which it has been merged,
consolidated or which has acquired substantially all of its assets,
provided the other entity expressly assumes all obligations of the
Managing General Partner hereunder.
(c) Upon withdrawal from the Partnership, a withdrawing
Managing General Partner shall be discharged from any further liability
or obligation under this Agreement.
10.02 Additional Managing General Partners. Unless a sole Managing
General Partner has dissolved, become Incompetent or Incapacitated, any Managing
General Partner, or any successors thereto, may, with the consent of Investor
Partners owning a Majority In Interest of the then outstanding Units, at any
time designate one or more additional person(s) or entities to be Managing
General Partners, whose interests in the Partnership shall be such as shall be
agreed upon by the Managing General Partner and such additional Managing General
Partners; provided that the interests of the Investor Partners shall not be
affected thereby and the additional Managing General Partners qualify as set
forth in Section 10.04.
10.03 Interests of Bankrupt, Dissolved, Disabled or Deceased Managing
General Partner. Upon the Bankruptcy, dissolution, death, Incapacity or
adjudication of Incompetence of a Managing General Partner, his or its
Partnership Interest shall be converted to that of an Investor Partner and such
Managing General Partner shall not thereafter participate in the management of
the Partnership, but for all other purposes of this Agreement, including the
right to receive allocations and distributions, such interest shall remain
unaffected. None of the foregoing shall have any effect on any Partnership
Interest which is acquired by a Managing General Partner as a result of the
purchase of Units.
10.04 Substitute or Additional Managing General Partner. For purposes
of Section 10.01 and 10.02, a person or entity may be admitted as a substitute
or additional Managing General Partner only if the following terms and
conditions are satisfied:
(a) The successor person or entity shall have accepted and
assumed all the terms and provisions of this Agreement, as amended;
(b) If the substitute or additional Managing General Partner
is a corporation, it shall have provided legal counsel for the
Partnership with a certified copy of a resolution of its board of
directors authorizing it to become a Managing General Partner under the
terms and conditions of this Agreement;
(c) The substitute or additional Managing General Partner
shall have executed this Agreement and such other documents or
instruments as may be required or appropriate in order to effect the
admission of such person or entity as a Managing General Partner; and
(d) The substitute or additional Managing General Partner
shall deliver to the Partnership an opinion from competent tax counsel
to the effect that the substitution or addition of the Managing General
Partner as proposed will have no material adverse tax consequences on
the Partnership or any Investor Partners.
10.05 Removal of a Managing General Partner. A Managing General Partner
may be removed for any reason upon the written consent or affirmative vote of
Investor Partners owning greater than 80.0% in interest of the then outstanding
Units. In the event of death, Bankruptcy, Incapacity or adjudication of
Incompetence, a Managing General Partner shall be deemed to be removed for
purposes of this Section 10.05. In the event of removal of a sole Managing
General Partner, any Partner may nominate a successor Managing General Partner,
who, with the affirmative vote of Investor Partners owning a Majority In
Interest of the then outstanding Units, may be admitted as a substitute Managing
General Partner pursuant to the provisions of Section 10.04. Upon the removal of
any Managing General Partner for any reason, his Managing General Partner
Interest shall thereupon terminate and a valuation of the Partnership Interest
of the removed Managing General Partner shall be made by an independent
appraiser selected by any remaining Managing General Partner or by a Majority In
Interest of Investor Partners. In making such appraisal, the appraiser shall not
consider any restrictions on the transferability of the interest of the removed
Managing General Partner. Upon completion of the required appraisal, the
Partnership shall purchase the removed Managing General Partner's Partnership
Interest for the appraised value payable 25.0% down in cash and the balance to
be paid in equal annual installments over 3 years with interest accruing on any
unpaid balance at 10.0% per annum.
10.06 Managing General Partner's Assignment of Partnership Interest. A
Managing General Partner may assign, transfer, pledge, hypothecate, grant a
security interest in or otherwise transfer its right to receive allocations and
distributions hereunder (without withdrawing as Managing General Partner)
without consent of any Partner hereunder provided (a) such assignment, transfer
or pledge is consistent with Federal or state securities laws, and (b) such
assignment, transfer or pledge does not result in adverse tax consequences to
the Partnership or Investor Partners. Such assignee, transferee or secured party
shall not become a substitute Managing General Partner and shall have no rights
under this Agreement other than to receive allocations and distributions arising
by virtue of Articles IV and V for cash on the basis of the said valuation.
ARTICLE XI
DISSOLUTION AND LIQUIDATION
11.01 Dissolution of the Partnership. The Partnership shall be
dissolved upon the happening of any of the following events, subject to the
provisions of Section 11.02:
(a) Upon the withdrawal, legally adjudicated Incapacity or
Incompetency, death, Bankruptcy, dissolution or removal pursuant to
Section 10.05, of all or a sole Managing General Partner(s);
(b) Sale or other disposition of all or substantially all of the
oil and gas properties of the Partnership;
(c) Upon the election in writing by the Investor Partners owning
a Majority In Interest of the then outstanding Units of the
Partnership to dissolve the Partnership;
(d) The occurrence of any event causing dissolution under the
Tennessee Act; or
(e) Upon expiration of the time period set forth in Section 2.04.
11.02 Election to Continue. In the event of a dissolution caused by an
occurrence specified in Section 11.01(a), the Investor Partners owning a
Majority In Interest of the then outstanding Units may elect, within 120 days of
an event of dissolution, to continue the Partnership and, if necessary, elect a
new Managing General Partner for the express purpose of continuing the
Partnership. During such 120-day period, Mr. Doug Yoakley, or his designee, of
the accounting firm Pershing & Yoakley of Knoxville, Tennessee shall
automatically be appointed interim Managing General Partner. The interim
Managing General Partner shall operate and manage the Partnership in the best
interest of Investor Partners and with a view of effecting the election of a new
Managing General Partner. The interim Managing General Partner shall be entitled
to indemnification pursuant to Section 7.10. If no election is made to continue
the Partnership during such 120-day period, the Partnership shall dissolve and
the affairs of the Partnership will be wound up in accord with Section 11.03.
11.03 Winding Up.
(a) Upon the dissolution of the Partnership pursuant to
Section 11.01, and if there is no election to continue the Partnership
pursuant to Section 11.02, the winding up of the Partnership and the
distribution of Partnership property and assets shall be carried out
with due diligence and in a timely manner and consistent with the
provisions of this Section 11.03 and applicable requirements of law.
(b) The Managing General Partner or interim Managing General
Partner will be responsible for taking all actions relating to the
winding up and distribution of assets of the Partnership. The Managing
General Partner, interim Managing General Partner or such responsible
person or party as may be appointed by the Managing General Partner,
interim Managing General Partner, or in the event there is no Managing
General Partner or interim Managing General Partner, by a Majority In
Interest of Investor Partners, shall function as and be referred to
hereinafter in this Section 11.03 as the "Liquidator." Upon the
complete termination and distribution of the Partnership property and
assets, the Investor Partners shall cease to be Partners in the
Partnership.
(c) The Liquidator shall proceed without any unnecessary delay
to sell and otherwise liquidate the Partnership property; provided,
however, that if the Liquidator shall determine that an immediate sale
of part or all of the Partnership property would cause undue loss to
the Partners, the Liquidator may, in order to avoid such loss, defer
the liquidation of part or all of the Partnership property for a
reasonable time, except for such liquidations as may be necessary to
satisfy debts and liabilities to persons and parties other than the
Partners. The proceeds from the sale and liquidation shall be
distributed as provided in Section 11.04.
(d) Upon the dissolution of the Partnership pursuant to
Section 11.01, and if there is no election to continue the Partnership
pursuant to Section 11.02, the Managing General Partner or interim
Managing General Partner shall cause a certified public accountant to
prepare, within 60 days of such termination, and the Liquidator shall
immediately furnish to each Partner, a statement setting forth the
assets and liabilities of the Partnership as of the date of its
termination. Promptly following the complete liquidation and
distribution of the Partnership property and assets, the accountant
shall prepare, and the Liquidator shall furnish to each Partner, a
statement showing the manner in which the property and assets were
liquidated and distributed.
11.04 Distribution of Proceeds from Liquidation. The net proceeds resulting
from the liquidation of the property and assets of the Partnership pursuant to
this Article XI shall be distributed and applied in the following order of
priority;
(a) To the payment of debts and liabilities of the Partnership,
other than loans, debts or liabilities due to the then present or
former Partners;
(b) To the payment of any unpaid loans, debts or liabilities to
any then present or former Partners;
(c) To the establishment of any reserves which the Liquidator
deems reasonably necessary for contingent or unforeseen liabilities or
obligations;
(d) To the Investor Partners in the amount of any accrued and
unpaid Preferred Payment;
(e) To the Partners, in proportion to their positive Capital
Account balances as of the date of such distribution, after giving
effect to all Capital Contributions, distributions and allocations for
all periods, until the Capital Accounts of all Partners are reduced to
zero; and
(f) To the Partners, in accordance with their Partnership
Interests as set forth in Section 5.01.
11.05 In Kind Liquidating Distributions. In the event the Liquidator
determines to distribute assets of the Partnership in kind pursuant to
liquidation of the Partnership, such distribution shall be made to a liquidating
trust or similar entity for the benefit of Investor Partners, unless at the time
of the distribution (a) the Managing General Partner shall offer the individual
Investor Partners the election of receiving in kind property distribution, and
the Investor Partners accept such offer after being advised of the risks
associated with such direct ownership; or (b) there are alternative arrangements
in place which assure the Investor Partners that they will not, at any time, be
responsible for the operation or disposition of Partnership properties.
11.06 Compliance with Law. The Liquidator shall comply with any
requirements of the Tennessee Act and all other applicable laws pertaining to
the winding up of the affairs of the Partnership and the final distribution of
its assets. The distribution of cash or property to the Partners in accordance
with the provisions of this Section 11.06 shall constitute a complete return to
the Partners of their Capital Contributions and a complete distribution to the
Partners of their Interests in the Partnership and all Partnership property, and
no Investor Partner shall have any recourse against the Managing General Partner
or any other Investor Partner if the cash so distributed shall be insufficient
to return in full his Capital Contributions.
11.07 Cancellation of Certificate. Upon the completion of the
distribution of Partnership assets as provided herein, the Partnership shall be
terminated, and the person acting as Liquidator (or the Partners if necessary)
shall cause the cancellation of the Certificate of Limited Partnership and shall
take such other actions as may be necessary to terminate the Partnership.
ARTICLE XII
BOOKS AND RECORDS
12.01 Books and Records.
(a) The Managing General Partner shall maintain at the
principal office and place of business of the Partnership: (1) complete
and accurate books of account with respect to the Partnership; (2) a
current list of the full name and last known address of each Partner;
(3) a copy of this Agreement, the certificate of limited partnership
for the Partnership and all amendments thereto, together with executed
copies of any powers of attorney pursuant to which any certificate has
been executed; (4) copies of any Federal, state and local income tax
returns and reports of the Partnership for the three (3) most recent
years; (5) all financial statements of the Partnership for the three
(3) most recent years; and (6) copies of all insurance policies
relating to Partnership activities. Each Partner and his duly
authorized representatives shall at all reasonable times during
ordinary business hours and on reasonable notice have access upon
request to such books and records.
(b) The Managing General Partner shall maintain a list of the
names and addresses of all Investor Partners at the principal office of
the Partnership. Such list shall be made available for the review of
any Investor Partner or his representative at reasonable times.
(c) Each Partner shall have the right to obtain from the
Managing General Partner from time to time upon reasonable demand true
and full information regarding the state of the business and financial
condition of the Partnership, a copy of the Partnership's Federal,
state and local income tax returns for each year promptly after they
become available and such other information regarding the affairs of
the Partnership as is just and reasonable.
12.02 Accounting Basis and Fiscal Year. The books of the Partnership
shall be kept on the accrual method of accounting or on such other method of
accounting, as then permitted by the Code, as the Managing General Partner may
determine, in its complete and absolute discretion, to be in the best interests
of the Partnership, and such books shall be closed and balanced at the end of
each Partnership fiscal year. The fiscal year of the Partnership shall be the
calendar year.
12.03 Reports to Partners. In addition to any reports required elsewhere in
this Agreement:
(a) The Managing General Partner shall, for each fiscal year,
cause to be prepared and filed on behalf of the Partnership a Federal
income tax partnership return within the time prescribed by law
(including extensions) for such filing. The Managing General Partner
shall also file on behalf of the Partnership such state and/or city
income tax returns as may be required by law;
(b) The Managing General Partner shall provide to each
Investor Partner an annual report within 120 days after the close of
each Partnership fiscal year, containing, except as otherwise
indicated, at least the following information:
(1) Financial statements, including a balance sheet
and income statement prepared in accordance with generally
accepted accounting principles.
(2) Such other information as the Managing General
Partner deems appropriate.
All reports and other information required by this Article XII and all
other reports which the Managing General Partner deems necessary or desirable to
transmit to the Partners shall be prepared and transmitted at the expense of the
Partnership. The Managing General Partner is hereby authorized to employ other
persons or entities to assist him in the preparation of such reports, all at the
expense of the Partnership.
12.04 Partnership Audit. Upon the affirmative vote of at least 25% in
interest of the Investor Partners, the Managing General Partner shall have the
Partnership financial statements audited by an independent certified public
accounting firm to be selected by the Managing General Partner. The cost of such
audit shall be assessed and charged to the Investor Partners who affirmatively
voted to commission the audit. Upon completion, the audit report, audited
financial statements and footnotes thereof shall be mailed to the Managing
General Partner and each Investor Partner at the expense of the Partnership.
ARTICLE XIII
CONVERSION
13.01 General. Commencing in 1997, Initial Co-General Partners on a
case-by-case basis shall, subject to the provisions of this Article XIII, have
the opportunity to Convert their status to that of Limited Partners.
Notwithstanding this election, the Managing General Partner, in its sole
discretion, may elect to Convert all Initial Co-General Partners to Limited
Partners if it determines, in its sole discretion upon consultation with Tax
Counsel, that such Conversion will not materially, adversely affect the Partners
or the Partnership. Limited Partners may not Convert their Interests to Initial
Co-General Partner Interests.
13.02 Procedure and Conditions of Conversion. Commencing in 1997, any
Initial Co-General Partner may elect by written notice to the Managing General
Partner to Convert his Interest to that of a Limited Partner. Notice of such
election must be in form acceptable to the Managing General Partner and be
received by the Managing General Partner on or before December 1 of any year and
shall be effective commencing in the following year. Upon receipt of such
notice, the Managing General Partner shall secure a legal opinion from counsel
acceptable to it concerning the Federal income tax consequences of Conversion on
the Partnership and Partners, the cost of which shall be charged to any Initial
Co-General Partners seeking to Convert for such year, whether such opinion is
favorable or unfavorable covering such tax consequences. The Managing General
Partner may refuse to allow a Conversion if counsel opines that the same is
likely to have material adverse tax consequences on the Partnership or Partners.
13.03 Entire Interest. Any election by an Initial Co-General partner to
Convert to a Limited Partner must be as to the entire Interest of the Initial
Co-General Partner.
13.04 Administrative Costs. The Managing General Partner may require
Initial Co-General Partners electing to Convert to reimburse it for
administrative costs (including legal fees and filing fees) incurred in
evaluating or effecting the Conversion.
13.05 Amendment to Certificate of Limited Partnership. The Managing General
Partner shall prepare and file an amendment to the certificate of limited
partnership for the Partnership to reflect any Conversion of Interests allowable
hereunder. The effective date of Conversion with respect to any Initial
Co-General Partner shall be the date of filing of an amended certificate of
limited partnership reflecting such Partner as a Limited Partner.
ARTICLE XIV
AMENDMENTS
14.01 Amendments.
(a) Unless otherwise specifically herein provided, this
Agreement shall not be amended without the consent of the Investor
Partners owning a Majority in Interest of the then outstanding Units
entitled to vote (except that Amendments relating to provisions
involving super-majority vote of Investor Partners require consent of
Investor Partners having that amount in interest of the then
outstanding Units).
(b) The Managing General Partner may, without notice to or
consent of any Investor Partner, amend any provisions of this
Agreement, or consent to and execute any amendment to this Agreement,
to reflect:
(1) A change in the name or location of the principal
place of business of the Partnership;
(2) The admission of substituted or additional Investor
Partners in accordance with this Agreement;
(3) A reduction in, return of, or withdrawal of all or
a portion of any Investor Partner's Capital Contribution;
(4) A correction of any typographical error or
omission;
(5) A change which is necessary in order to qualify the
Partnership as a limited partnership under the laws of any
other state or which is necessary or advisable, in the
opinion of the Managing General Partner, to ensure that the
Partnership will be treated as a partnership and not as an
association taxable as a corporation for Federal income tax
purposes;
(6) A change in the allocation provisions, in
accordance with the provisions of Section 5.09 herein, in a
manner that, in the sole opinion of the Managing General
Partner (which opinion shall be determinative), would result
in the most favorable aggregate consequences to the Investor
Partners as nearly as possible consistent with the
allocations contained herein, for such allocations to be
recognized for Federal income tax purposes due to
developments in the Federal income tax laws or otherwise; or
(7) Any other amendment similar to the foregoing.
ARTICLE XV
GENERAL PROVISIONS
15.01 Notices. Except as otherwise provided herein, any notice which
shall be given in connection with the Partnership shall be deemed given if
reduced to writing and delivered personally to the person to whom it is
authorized to be given, or if sent by mail or telegraph, to the last address
furnished by him for such purpose. Notice shall be deemed served upon delivery,
if personally delivered, or upon mailing, as determined by postmark, if mailed.
15.02 Applicable Law. All questions with respect to the validity,
construction or enforceability of this Agreement shall be governed exclusively
by its terms and by the laws of the State of Tennessee.
15.03 Binding Agreement. This Agreement shall be binding upon the
parties hereto, their successors, assigns, heirs, devisees, legal
representatives, executors and administrators.
15.04 Article Headings. All article and section headings in this
Agreement are for convenience of reference only and are not intended to qualify
the meaning of any article or section.
15.05 Counterparts. This Agreement may be executed in several
counterparts, and all so executed shall constitute one Agreement, binding on all
of the parties hereto, notwithstanding that all of the parties are not signatory
to the original or the same counterpart.
15.06 Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal, invalid or in conflict
with any existing or future law or the purposes of this Agreement, for any
reason whatsoever, such term or provision shall be ineffectual and void, and the
validity of the remainder of this Agreement shall not be affected thereby.
15.07 Return of Certificate of Limited Partnership. The Partners, by
execution hereof, hereby waive their right to have a copy of any certificate of
limited partnership, certificate of amendment thereto, restatement thereof, or
certificate of cancellation thereof returned to them after filing or recording.
15.08 Litigation. The Managing General Partner shall prosecute and
defend such actions at law or in equity as may be necessary to enforce or
protect the interests of the Partnership. The Partnership and the Managing
General Partner shall respond to any final decree, judgment or decision in any
court or board of authority having jurisdiction in the matter. The Managing
General Partner shall satisfy any such judgment, decree or decision first out of
any insurance proceeds available therefor, next out of the assets of the
Partnership, and finally out of the assets of any Partner who is liable for
debts of the Partnership.
15.09 Right to Rely Upon the Authority of the Managing General Partner.
No person dealing with any Managing General Partner shall be required to
determine its authority to make any commitment or undertaking on behalf of the
Partnership, nor to determine any fact or circumstance bearing upon the
existence of its authority.
15.10 Right to Rely Upon Authority of Person Signing Agreement. In the
event that a Partner is a trust (with or without disclosed beneficiaries),
partnership, joint venture, corporation, or any other entity other than a
natural person, the Managing General Partner shall:
(a) Not be required to determine the authority of the person
signing this Agreement or any amendment hereof to make any commitment
or undertaking on behalf of such entity, nor to determine any fact or
circumstance bearing upon the existence of his authority;
(b) Not be required to see to the application or distribution of
revenues, proceeds or credit on behalf of such entity;
(c) Be entitled to rely on the authority of the person signing
this Agreement or any amendment hereto with respect to the voting of
the interest of such entity and with respect to the giving of consent
on behalf of such entity in connection with any matter for which
consent is permissible or required hereunder; and
(d) Be entitled to rely upon the authority of any general
partner, joint venturer, co- or successor trustee, or president or
vice president (as the case may be), of any such entity, the same as
though such person were the person originally signing this Agreement
or any amendment hereto on behalf of such entity.
15.11 Integrated Agreement. This Agreement constitutes the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof, and there are no agreements, understandings, restrictions,
representations or warranties among the parties other than those set forth
herein or herein provided for. This Agreement shall control over the Memorandum
or any subscription agreement in connection therewith.
15.12 Number and Gender. Whenever the singular number is used in this
Agreement, and when required by the context, the same shall include the plural,
and the masculine gender shall include the feminine and neuter genders, and the
word "person" shall include corporation, firm, partnership or other form of
association.
15.13 Consent to Allocations and Distributions. The methods herein set
forth by which allocations and distributions are made and apportioned are hereby
expressly consented to by each Partner as an express condition to becoming a
Partner.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Partnership
Agreement as of the date first above written.
MANAGING GENERAL PARTNER:
ENERGY SEARCH, INCORPORATED,
a Tennessee Corporation
By
/s/
Richard S. Cooper
Its President
THE SIGNATURES OF THE INVESTOR PARTNERS ARE SET FORTH ON SEPARATE
SIGNATURE PAGES WHICH ARE MAINTAINED IN THE PRINCIPAL OFFICE OF THE
MANAGING GENERAL PARTNER. IT IS EXPRESSLY AGREED THAT, BY EXECUTING A
SIGNATURE PAGE HERETO, AN INVESTOR PARTNER HAS AGREED TO BE BOUND BY
ALL TERMS AND
PROVISIONS HEREOF.
<PAGE>
EXHIBIT A
INVESTOR PARTNERS
This Exhibit A shall be attached to and become a part of the ENERGY SEARCH
NATURAL GAS 1995-A L.P. Limited Partnership Agreement dated as of the day of ,
1995.
Name/Type of Investment Date
Unit Held* Address SSN Amount Admitted
*Insert either the abbreviation for Initial Limited Partner ("ILP") or Initial
Co-General Partner ("IGP").
JOINT DRILLING AND OPERATING AGREEMENT
THIS AGREEMENT, dated as of the 31st day of December, 1995, by and
between ENERGY SEARCH, INCORPORATED, a Tennessee corporation ("ESI"), and ENERGY
SEARCH NATURAL GAS 1995-A L.P. (the "Partnership"), each party above with the
address of Suite 200, 280 Fort Sanders West Boulevard, Knoxville, Tennessee
37922.
RECITALS
A. ESI and its Affiliates have significant knowledge and experience in
evaluating, developing, acquiring and operating oil and gas drilling Prospects
in the oil and gas exploration and development region of the United States known
as the Appalachian Basin. One or more of these parties, as "Leasehold
Participant(s)", own, have access to, or have contributed to the development of,
interests in oil and natural gas leases (the "Leases") in and around the
Appalachian Basin providing rights for the exploration, development, extraction
and sale of oil and natural gas from beneath the surface of the land covered by
such Leases.
C. The Leasehold Participants have agreed to propose and contribute for
joint development hereunder various Lease interests in drillsites suitable for
drilling oil and gas wells (the "Wells") on the Leases.
D. The Partnership, as the "IDC Participant," has agreed to pay to ESI,
either as "Operator," in the case of Wells operated by ESI, or as "Manager" in
the case of Wells not operated by ESI, the IDC Prepaid Amount to be used
exclusively to pay Intangible Development Costs of Initial Development
Operations of the Wells.
E. ESI or its Affiliates, as the "Tangible Participant(s)," have agreed to
provide Tangible Costs and related services of Initial Development Operations of
the Wells.
F. ESI, either as Operator or Manager, has agreed to provide for services
necessary for evaluation, acquisition, drilling, completion (if warranted),
plugging and abandonment (when appropriate), and operation of the Wells for and
on behalf of the Participants, pursuant to the terms set forth below.
IT IS AGREED AS FOLLOWS:
1. DEFINITIONS. The following definitions shall apply for purposes of
this Agreement:
"AFE" shall mean the Authority For Expenditure with respect to the
Wells. For Wells to be drilled by ESI, as Operator to the Clinton Horizon in
Washington, Athens or Meigs Counties, Ohio, the AFE shall be in the form of
Annex B attached hereto.
"Affiliate" shall mean with respect to another person, (i) any person
directly or indirectly owning, controlling or holding with power to vote 10% or
more of the outstanding voting securities of or equity interests in such other
person, (ii) any person 10% or more of whose outstanding voting securities or
equity interests are directly or indirectly controlling, controlled or held with
power to vote by such other person, (iii) any person directly or indirectly
controlling, controlled by or under common control with such other person, (iv)
any officer or director of such other person, and (v) any company for which any
such officer or director acts in any such capacity.
"Capital Account" shall mean, with respect to any Participant, the
Capital Account maintained for such person in accordance with Subchapter K of
the Code and Treasury Regulations promulgated thereunder.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Cost" shall mean the following: (i) when used with respect to the
purchase of Leases, it shall mean the Lease Acquisition Costs; (ii) when used
with respect to services provided, it shall mean the price charged by an
unrelated third party providing such services in the normal course of business;
(iii) when used with respect to materials, it shall mean the price charged by an
unrelated third party providing such materials in the normal course of business;
and (iv) when used with respect to labor, materials or equipment furnished by
ESI, as Operator or Manager, it shall mean the cost of such labor, materials or
equipment at the usual hourly or daily rate in accordance with the schedule of
rates maintained, from time to time, by ESI.
"Depth Adjustment Rate" shall mean the amount per foot that the Turnkey
Price for Intangible Development Costs of Initial Development Operations will be
adjusted to pursuant to paragraph 9(b) of this JDOA.
"Developmental Well" shall mean a Well drilled to a known producing oil
or gas Horizon in a previously discovered field or in an area where the known
producing Horizon is believed by ESI, based on experience and known geological,
production and other data, to be geologically continuous.
"Drillsite" shall mean the tract of a Lease upon which a single Well
may be drilled according to applicable spacing law or regulations.
"ESI" shall mean Energy Search, Incorporated of Knoxville, Tennessee.
"Excess IDC" shall mean any Intangible Development Costs incurred in
the Initial Development Operations of any Well in excess of the Turnkey Price
for Intangible Development Costs of Initial Development Operations for such
Wells established pursuant to this JDOA.
" Exploratory" when used with respect to a Prospect, Well or drilling
activity, shall refer to exploration or drilling to find commercially productive
hydrocarbons in an unproven Horizon believed, based on data known to ESI, to be
productive of hydrocarbons.
"Farmout" shall mean an agreement by which the owner of a Lease agrees
to assign all or part of its interest in specific acreage to another party (the
"Farmee"), retaining some interest (such as an overriding royalty interest, an
oil and gas payment, a Working Interest after payout, or other type of
interest), subject to a requirement that the farmee drill one or more specific
wells or perform other acts as a condition of the assignment.
"Gas Servicing Agreement" shall mean the agreement between ESI, as
Operator, and ESI Pipeline Operating L.P., an Affiliate of ESI, pursuant to
which ESI Pipeline Operating L.P. agrees to gather, transport, purchase and
resell natural gas produced from the Wells. A form of the Gas Servicing
Agreement is set forth on Annex C to this JDOA.
"Horizon" shall mean a zone of a particular formation of sufficient
porosity and permeability to form a petroleum reservoir.
"IDC Participant(s)" shall mean the Participant(s), identified as IDC
Participant(s) on the Signature Page to this JDOA, which has (have) agreed to
prepay to ESI, as Operator or Manager, certain Intangible Development Costs in
connection with Initial Development Operations of the Wells, as provided in this
Agreement.
"IDC Prepaid Amount" shall mean the amount of funds to be prepaid by
the IDC Participant(s), to ESI, as Operator or Manager, pursuant to this
Agreement to be utilized to pay Intangible Development Costs incurred in
connection with Initial Development Operations of the Wells pursuant to this
Agreement.
"Inflation Adjustment Factor" shall mean the inflation adjustment to be
made annually as of the first day of January (the "Adjustment Date") each year
beginning January 1, 1997, by the percentage increase (if any) in the "Weighted
Average Gas Price" in the calendar quarter preceding the Adjustment Date over
the Weighted Average Gas Price in the first calendar quarter in the preceding
year. The "Weighted Average Gas Price" shall mean the weighted average price
(net of all transportation, servicing and severance fees and taxes) received by
ESI from the sale of all natural gas sold from wells it operates in southeastern
Ohio.
"Initial Development Operations" shall mean all activity in connection
with acquiring a Drillsite, preparing the Drillsite for drilling, drilling a
Well thereon, plugging and abandoning the Well if no completion attempt is made
and/or completing the Well, if the Well warrants completion, in one or more
Horizons.
"Intangible Development Costs ("IDC's")" shall mean expenditures made
for wages, fuel, repairs, hauling and supplies, or any of them, incident to and
necessary for the drilling of any Well and the preparation of such Well for the
production of oil or gas, as the case may be, therefrom, which are chargeable to
capital or expense, at the option of the IDC Participant(s), pursuant to Section
263(c) of the Code and Treasury Regulation Section 1.612-4(a), or any successor
provision thereto, which are generally termed "intangible drilling and
development costs." Examples of such costs include amounts paid for wages, fuel,
repairs, hauling, supplies and similar items, or any of them, which are used (i)
in the drilling, shooting and clearing of any Well, (ii) in such clearing of
ground, draining, road making, surveying and geological works as are necessary
in preparation for the drilling of any Well and the preparation of such Well for
the production of oil or gas and (iii) the expense of plugging and abandoning
the Well prior to a completion attempt. These expenditures in general shall
include only those drilling and development items which in themselves do not
have a salvage value. For these purposes, labor, fuel, repairs, hauling,
supplies and similar items are not considered as having a salvage value, even
though used in connection with the installation of physical property which has a
salvage value.
"IRS" shall mean the Internal Revenue Service.
"JDOA" or "Agreement" shall mean this Joint Drilling and Operating
Agreement.
"Landowner Royalty" shall mean the share of production revenues from
oil and gas produced from the Wells payable to landowners upon whose land the
Wells are located pursuant to their Landowner Royalty Interests.
"Landowner Royalty Interest" shall mean the interest of a landowner in
the oil and gas produced by a Well located on such landowner's property, or in
the proceeds from the sale therefrom, to be received free and clear of all costs
of development, operation or maintenance of such Well.
"Lease" shall mean a Working Interest, mineral interest, Royalty, or
other interest in and to oil, gas, and related hydrocarbons (or a contractual
right to acquire such an interest) or an undivided interest therein or portion
thereof (including those covering only certain Horizons or depths), together
with all easements, permits, licenses, servitude's, and rights-of-way situated
upon or used or held for future use in connection with the exploration,
development, or operation of such interest.
"Lease Acquisition Costs" shall mean the sum of the amounts paid by a
party for Leases acquired from third parties, plus all expenses relating to the
acquisition of Leases. The expenses relating to the acquisition of a Lease shall
include, but not be limited to: (i) title insurance and title examination costs,
brokers' commissions, finders' fees, escrow fees, filing fees, recording costs,
and transfer taxes, if any; (ii) taxes paid in connection with acquisition of
the Lease, including, but not limited to, ad valorem, real estate, personal
property and excise taxes paid; (iii) geological, geophysical, seismic, land,
engineering, drafting, accounting, auditing, legal and other costs incurred in
connection with the Lease acquisition transaction; and (iv) such portion of the
reasonable, necessary and actual expenses incurred by the party not more than
thirty-six (36) months prior to the property transaction for geological,
geophysical, seismic, land, engineering, drafting, accounting, auditing, legal
or like services obtained or provided by the party which are allocated to the
Lease in accordance with accepted industry practice, including the costs of
funds used for any of these purposes such as interest, loan commitment fees,
points and other financing fees and charges for such funds.
"Leasehold Participant(s)" shall mean the Participant(s), identified as
Leasehold Participant(s) on the Signature Page to this JDOA, which own or have
access to Leases from which it will propose and assign Drillsites to the
Participants for joint development under this Agreement.
"Manager" shall mean ESI acting in its capacity as supervisor-manager
of joint development activities pursuant to this JDOA on behalf of the
Participants concerning Wells which are not operated by ESI.
"Nonconventional Fuel Source (NFS) Tax Credit" shall mean the tax
credit available under Code Section 29 as a result of the production of oil or
natural gas from certain qualifying formations, including Tight Sands
Formations.
"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 Production Operations. Operating Costs include the
Production Administration Fee payable to ESI, as Operator of Wells subject to
this Agreement.
"Operator" shall mean Energy Search, Incorporated of Knoxville,
Tennessee, or such other person or entity authorized and designated as operator
of a Well.
"Overriding Royalty" shall mean the carved-out share of production
revenues from oil and gas produced from the Wells payable to unrelated third
parties such as owners, other than landowners, of an operating interest in the
Leases, landmen, oil companies or drilling contractors.
"Overriding Royalty Interest" shall mean an interest in the oil and gas
produced from a Well, to be received by unrelated third parties such as oil
companies, landmen and drilling contractors, free and clear of all costs of
development, operation or maintenance.
"Participant(s)" shall mean, individually and collectively, all parties
who own a Working Interest in the Wells and participate in the joint drilling
and operation of the Wells pursuant to this JDOA.
"Partnership" shall mean the limited partnership formed under the
Tennessee Revised Uniform Limited Partnership Act which will participate in the
drilling of Wells pursuant to this JDOA.
"Person" shall mean any individual, corporation, partnership,
association, joint stock company, joint venture, trust, estate, or any other
entity or organization.
"Pipeline Partnership" shall mean ESI Pipeline Operating L.P., an
Affiliate of ESI.
"Plugging Costs" shall mean all costs and expenses associated with
cementing and plugging a Well in preparation for abandonment.
"Production Administration Fee" shall mean, with respect to Wells
operated by ESI, the monthly charge for each Well to be paid by the Participants
to ESI, as Operator, proportionately based on Working Interest ownership for
routine maintenance, inspection, adjustments, administration and operation with
respect to the Wells.
"Production Operations" shall mean all activities relating to operating
and maintaining producing Wells, including contracting, preserving and marketing
oil, natural gas and other hydrocarbons, as well as service, repair and
maintenance of the Wells.
"Prospect" shall mean an area covering lands which are believed to
contain subsurface structural or stratigraphic conditions making it susceptible
to the accumulations of hydrocarbons in commercially productive quantities at
one or more Horizons. A Prospect may be limited to the minimum area permitted by
state or local practice, whichever is applicable, to protect against drainage
from adjacent wells.
"Prospect Area" shall mean the geographic area in which the Leases,
Drillsites and Wells will be located for joint development pursuant to this
Agreement.
"Royalty Interest" shall mean a Landowner Royalty Interest or
Overriding Royalty Interest.
"Signature Page" shall mean the signature page to this Agreement signed
by a Participant.
"Site Reclamation Costs" shall mean all costs and expenses (excluding
Tangible Reclamation Costs) associated with reclamation of a Well site in
preparation for abandonment of a Well.
"Subsequent Development Operations" shall mean any development
activities which are not Initial Development Operations, including substantial
rework activities, additional completions, re-completions, deepening or
side-tracking, with respect to a Well conducted after the Well has either (i)
produced in commercial quantities or (ii) been plugged and abandoned.
"Tangible Costs" shall mean all costs incurred in Initial Development
Operations or Subsequent Development Operations relating to 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 costs are
required to be capitalized pursuant to applicable provisions of the Code and
Treasury Regulations thereunder.
"Tangible Participant(s)" shall mean the Participant(s), identified as
Tangible Participant(s) on the Signature Page to this JDOA, who will pay all
Tangible Costs of Initial Development Operations of the Wells.
"Tangible Reclamation Costs" shall mean all costs and expenses
associated with salvaging tubing and other tangible equipment from a Well in
connection with plugging and abandonment thereof.
"Tax Partnership" shall mean the partnership formed among the
Participants for purposes of subchapter K of Chapter 1 of Subtitle A of the Code
pursuant to this Agreement.
"Tight Sands Formation" shall mean a geological formation, the
production of gas from which may qualify for NFS Tax Credits pursuant to Section
29 of the Code.
"Treasury Regulation(s)" shall mean the rule(s) and regulation(s) which
have been promulgated by the United States Department of Treasury under and with
respect to the Code and which are applied by the IRS.
"Turnkey Price" shall mean the fixed price to be charged by ESI, as
Operator or Manager, to Participants pursuant to this JDOA for their
participation in drilling, completing (if warranted) or plugging and abandoning
a Well in connection with Initial Development Operations.
"Working Interest" shall mean an operating interest in a Lease
providing the owner thereof the right to explore for and extract therefrom oil,
natural gas and other hydrocarbons from beneath the surface (according to the
terms of the Lease) and which is subject to some portion of the expense of
development, operation or maintenance.
2. PROSPECT AREA. The Prospect Area in which the Leases will be located
and from which the Drillsites will be selected and assigned to the Participants
pursuant to this Agreement will be located in the oil and gas exploration and
development region of the United States known as the Appalachian Basin. It is
anticipated that Wells to be operated by ESI may be primarily be located in
Washington, Athens and Meigs Counties and contiguous counties thereto in the
states of Ohio, West Virginia and Kentucky. Wells in which the Participants will
participate pursuant to the terms of this Agreement, but which ESI may not
operate, may be primarily be located in Medina and Wayne Counties, Ohio. Other
Wells in which the Participants may participate may be located in West Virginia,
Tennessee or Kentucky. These Wells may, or may not, be operated by ESI. The
Prospect Area may be enlarged or reduced, from time to time, by agreement of all
Participants. ESI will propose, from time to time, Drillsites on the Leases for
joint development pursuant to this Agreement. All Drillsites proposed for joint
development hereunder will be subject to the approval of all Participants
pursuant to Section 3.
3. SELECTION OF DRILLSITES; TITLE. Any Drillsite proposed for joint
development hereunder must be acceptable to all Participants. Any Drillsite
proposed will be deemed accepted by Participants unless ESI, as Operator or
Manager, receives written notice of objection to the proposed Drillsite within
the time period established for objecting to title defects as described below.
Prior to drilling a Well on a Drillsite, ESI, as Operator or Manager, shall
cause a title opinion to be issued by an attorney in good standing and licensed
to practice law in the state in which the Drillsite is located. The title
opinion, to the extent practicable, shall be dated as of no more than 60 days
prior to the spud date of the Well and shall describe in detail the status of
title to the Drillsite and the nature of any encumbrances thereon. Upon written
request, any Participant shall have the right to receive a copy of the title
opinion and shall have 10 days after receipt thereof to object to ESI to the
status of title. If no objection is made within such time period or if no title
opinion is requested, a Participant shall be presumed to have agreed to the
status of title as reflected in such opinion. In the event a Participant objects
to the status of title, ESI may, at its option, elect to cure any title defects,
obtain title insurance covering such title defects, or abandon the proposed
Drillsite from consideration for joint development hereunder. After title for
any Drillsite has been accepted by the Participants, 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
Participants, unless such loss, expense, cost or liability was caused by the
breach of any of the warranties and representations made in Section 4 hereof by
the Leasehold Participant(s) who contributed the Drillsite. To the extent
practicable upon advance written request to ESI, the examining attorney's title
opinion shall be issued in the name of a Participant.
4. LEASE REPRESENTATIONS. With respect to any Lease upon which a
Drillsite has been contributed for joint development pursuant to the Agreement,
the Leasehold Participant(s) contributing such Drillsite hereby represents and
warrants to the Participants as follows: (a) true and correct copies of the
Lease, including any assignments, amendments, subleases, modifications or
supplements related thereto, have been delivered to the Participants; (b) to the
best knowledge of the Leasehold Participant(s), no condition exists and no event
has occurred which constitutes a default under the Lease or related assignments,
amendments, subleases, modifications or supplements; (c) to the best knowledge
of the Leasehold Participant(s), the Lease (and related assignments, amendments,
subleases, modifications and supplements) has been duly executed and delivered
by the lessor(s) therein, has been duly recorded, and is presently in full force
and effect and enforceable in accordance with its terms; (d) to the best
knowledge of the Leasehold Participant(s), all required consents or approvals
of, or notices to, the lessor(s) under the Lease (and related assignments,
amendments, subleases, modifications and supplements), any governmental body or
other third parties, with respect to the assignment of any Drillsite on the
Lease to the Participants in the manner contemplated by this Agreement, have
been obtained or given; (e) each assignment of a Drillsite on the Lease will
effectively assign and transfer to the Participants such right, title and
interest of the Leasehold Participant(s) in and to the Drillsite which such
assignment purports to assign; and (f) the Leasehold Participant(s) have not
done, committed, executed, permitted or suffered any act whereby its title to or
interest in the Lease or any Drillsite thereon has become encumbered in any
manner or subject to an adverse interest. The representations and warranties
contained in (b), (c), (d), (e) and (f) above shall also be deemed made by the
Leasehold Participant(s) at the time of each recorded assignment of the acreage
included in each Drillsite on the Lease, 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 Annex A. IT IS
UNDERSTOOD AND AGREED THAT, EXCEPT AS SPECIFICALLY SET FORTH ABOVE, NO LEASEHOLD
PARTICIPANT MAKES ANY 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 THE LEASE.
<PAGE>
5. ASSIGNMENT AND NUMBER OF DRILLSITES.
(a) A Drillsite selected for joint development hereunder may
be temporarily assigned to (or retained by) ESI, as nominee for the
Participants, in order to facilitate joint operations. After the Well
has been drilled on the Drillsite and a decision has been made to
attempt a completion of the Well, ESI shall execute and deliver an
assignment of undivided percentages of Working Interest in the
Drillsite pursuant to an assignment document substantially in the form
of Annex A hereto. The aggregate undivided percentages of Working
Interest to be assigned hereunder to the Participants shall be shared
80% by the IDC Participant(s) and 20% by the Leasehold Participant(s)
and the Tangible Participant(s), collectively. Such assignment shall be
limited to a depth from the surface to 100 feet below the base of the
deepest Horizon penetrated by the bore hole of the Well drilled on the
Drillsite. The minimum amount of acreage included in each Drillsite
assignment shall be not less than that established by applicable local
law.
(b) The Leasehold Participant(s) agree(s) to contribute, or
arrange for contribution, to the Participants for joint development
hereunder as many Drillsites as are necessary in order to fully
utilize, pursuant to this Agreement, the entire IDC Prepaid Amount paid
by the IDC Participant(s) to ESI pursuant to subsection 9(b). The
Tangible Participant(s) agree(s) it (they) will pay or arrange for
payment of Tangible Costs of any Well drilled and developed, in whole
or in part, with the IDC Prepaid Amount pursuant to this Agreement.
6. OPERATOR - RESPONSIBILITIES IN GENERAL; TERM.
(a) ESI shall be designated as Operator, in the case of Wells
it operates, or Manager, in the case of Wells it does not operate, of
all Wells, Drillsites and Leases subject to this Agreement. The status
of ESI as Operator or Manager shall be as the Participants' independent
contractor, and in such capacity ESI shall, in addition to its other
obligations hereunder, directly or indirectly, (1) make the necessary
arrangements for the drilling and completion of Wells, including the
installation of the necessary gas gathering line systems and connection
facilities; (2) make the technical decisions required in drilling,
testing, completing and operating such Wells; (3) manage, supervise and
conduct all field operations in connection with the drilling, testing,
completing, equipping, operating and producing of the Wells; (4)
maintain all Wells, equipment, gathering lines and facilities in good
working order during the useful life thereof; and (5) perform the
necessary administrative and accounting functions. In the performance
of work contemplated by this Agreement, ESI is an independent
contractor with authority to control and direct the performance of the
details of the work.
(b) ESI covenants and agrees that (1) it shall perform and
carry on (or cause to be performed and carried on) its duties and
obligations hereunder in a good and workmanlike manner using
technically sound, acceptable oil and gas field practices then
prevailing in the geographical area of the Drillsites; (2) all drilling
and other operations conducted by, for and under the control of ESI
hereunder shall substantially conform in all material respects to
Federal, state and local laws, statutes, ordinances, regulations, and
requirements; (3) unless otherwise agreed in writing by the
Participants, any work performed hereunder pursuant to a written
estimate shall substantially 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 (but serviceable) and of good quality; (4) in the course
of conducting operations hereunder, it shall substantially 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; (5) it shall keep the
Drillsites 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; (6) 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 (7) it will provide competent
and experienced personnel (including contracted consultants) 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) ESI shall serve as Operator or Manager hereunder until the
earliest of (1) the termination of this Agreement pursuant to Section
20 hereof, (2) the termination of ESI as Operator or Manager by the
Participants which may be effected by agreement of all Participants of
the Wells, with or without cause, upon at least 60 days advance written
notice to ESI; or (3) the resignation of ESI as Operator or Manager
hereunder which may occur upon at least 90 days' written notice to the
Participants at any time after five (5) years from the date hereof, it
being expressly understood and agreed that ESI shall have no right to
resign as Operator or Manager hereunder prior to the expiration of the
aforesaid five (5) year period absent written consent of all
Participants. Any successor Operator or Manager hereunder shall be
selected by affirmative majority interest vote (based on ownership of
Working Interest) of the Participants. Nothing contained in this
subsection 6(c) shall relieve or release ESI from any liability or
obligation hereunder which accrued or occurred prior to ESI's removal
or resignation as Operator or Manager hereunder. Upon any change in the
Operator or Manager pursuant to this provision, the then outgoing
Operator or Manager shall deliver to the successor Operator or Manager
possession of all records, equipment, materials and appurtenances used
or obtained for use in connection with operations hereunder and owned
by the Participants.
7. DRILLING STRATEGY. ESI shall use its best efforts to cause the
commencement of drilling of all Wells to be drilled hereunder on or before March
31, 1996. Once drilling has commenced, ESI will use its best efforts to
diligently proceed to drill each Well to test stratigraphic Horizons from the
top of the surface to an identified target depth of the Well. The target depth
for any Well shall be proposed by ESI and established by mutual agreement of the
Participants prior to commencement of drilling. It is anticipated that Wells to
be operated by ESI will target the Clinton Sandstone (approximately 5,600 feet
in Washington, Athens and Meigs Counties, Ohio); the Medina Sandstone
(approximately 5,100 feet in Washington, Athens and Meigs Counties, Ohio); or
the Oriskany Sandstone (approximately 4,250 feet in Washington, Athens and Meigs
Counties, Ohio). ESI may also propose Wells located generally in contiguous
counties in Ohio, West Virginia and Kentucky. It is anticipated that Wells which
may not be operated by ESI may target the Clinton Sandstone (approximately 3,500
feet in Ashtabula County, Ohio) and the Trempeleau B and Rose Run Horizons
(approximately 5,000 feet in Meridian and Wayne Counties, Ohio.) The Wells
developed pursuant to this JDOA are anticipated to be primarily Developmental
Wells. Some of the Wells may, however, be Exploratory Wells. The actual depth of
any Well will ultimately depend upon the determination by ESI, in its sole
discretion, of the depth at which it will be most advantageous to attempt a
completion of the Well pursuant to Section 8 of this Agreement. For each Well,
ESI's discretion regarding drilling strategy and total Well depth shall be
exercised in good faith, in a manner consistent with reasonable oil and gas
field practice, and in a manner consistent with the best interests of the
Participants. With respect to Wells not operated by ESI, the decision regarding
actual depth and completion of a Well may be delegated to the actual Operator.
8. OPERATOR'S COMPLETION DETERMINATION.
(a) With respect to any Well drilled hereunder, ESI shall in
good faith determine, on behalf of all Participants, based on
reasonable oil and gas field practices and techniques, whether or not
to run production casing for an attempted completion (or attempted
multiple completions if warranted) or to plug and abandon the Well. Any
completion attempt in a Horizon shall be made only if ESI has in good
faith determined that there is a reasonable possibility of obtaining
commercial quantities of oil or gas from such Horizon. A completion
attempt will generally involve either stimulation of the target Horizon
by hydraulic fracturing or, in the discretion of ESI, utilization of
low radius horizontal drilling and completion techniques.
(b) If ESI, in good faith, determines at any time during the
drilling or attempted completion of any Well hereunder, in accordance
with reasonable oil and gas field practices and techniques, that such
Well should not be completed or a completion attempt previously
undertaken should be aborted, ESI shall promptly (1) plug and abandon
the Well if no further drilling or completion attempt is warranted, (2)
abort the attempted completion and resume drilling to deepen the Well,
or (3) abort further drilling or the attempted completion, plug back
the Well and, pursuant to subsection 8(a) above, attempt a completion
in a shallower Horizon.
(c) With respect to Wells not operated by ESI, the decision
regarding completion of a Well or plugging of a Well may be delegated
by ESI to the actual Operator of the Well.
9. CHARGES FOR DRILLING AND COMPLETION OF WELLS.
(a) All oil and gas wells to be drilled hereunder shall be
drilled and completed in the course of Initial Development Operations
on a turnkey basis for the total price set forth in subsection 9(b)
below (the "Turnkey Price"). The Turnkey Price for each Well shall
cover all Intangible Development Costs and Tangible Costs of Initial
Development Operations including, without limitation, site preparation,
Drillsite geology and engineering, permits and bonds, roadways, surface
damages, power at the site, water, ESI's reasonable overhead and risk
allowance, rights-of-way, drilling rigs, equipment and materials, costs
of Drillsite title examination, logging, cementing, fracturing, casing,
meters (other than utility purchase meters), connection facilities,
salt water collection tanks, separators, siphon string, rabbit, tubing,
and a gathering line of approximately 1,500 feet per Well. However, the
Turnkey Price for any Well shall not include the cost of (1) completing
more than one (1) Horizon (unless otherwise proposed by Operator), (2)
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 Turnkey Price), (3) natural gas compression
equipment, and (4) pumping equipment or equipment or materials
necessary or appropriate to lift oil (except that the cost of tank
batteries shall be included in the Turnkey Price). Any such extra costs
shall be billed to the Participants in proportion to the share of the
Working Interest at Cost plus 15% to cover supervisory services and
overhead.
(b) Except as provided below, the Turnkey Price for Initial
Development Operations of any Well drilled hereunder operated by ESI
and located in Washington, Athens or Meigs Counties, Ohio which has as
its target depth the Clinton Horizon shall be $265,000, of which $215
,000 shall be the Turnkey Price for Intangible Development Costs of
Initial Development Operations, and $50,000 shall be the Turnkey Price
for Tangible Costs of Initial Development Operations of the Well.
Attached as Annex B is an Authority Fee Expenditures (the "AFE") for
such a Clinton Well. In the event any Well is drilled hereunder
targeting a Horizon other than the Clinton Horizon, or ESI exercising
its discretion pursuant to Section 7 above, determines to drill a Well
initially targeted for the Clinton Horizon to a Horizon either
shallower or deeper than the Clinton Horizon, the Turnkey Price for
Intangible Development Costs of Initial Development Operations shall be
adjusted by a factor (the " Depth Adjustment Rate") equal to the
product of (1) the Depth Adjustment Rate times (2) the difference
between 5,600 feet and the actual depth drilled. For this purpose, the
Depth Adjustment Rate will equal $25 per foot for Wells deeper than
2,500 feet and $20 per foot for Wells shallower than 2,500 feet. In the
case of a Well drilled to a Horizon shallower than the Clinton, the
Turnkey Price for Tangible Costs shall be reduced by any actual savings
on production casing, tubing and other tangibles. Furthermore, in the
event that ESI determines during the course of Initial Development
Operations to stimulate by fracturing more than one (1) Horizon in any
Well, the Turnkey Price shall be increased by $25,000 for each
additional fracture treatment. Notwithstanding the foregoing, in the
event any Well drilled is plugged and abandoned as a dry hole prior to
an attempted completion, the Turnkey Price for Intangible Development
Costs of Initial Development Operations shall be reduced by one-half
(1/2). To the extent that ESI determines to complete a Well utilizing
low radius horizontal techniques, the Turnkey Price will be (i) reduced
by those costs set forth in the AFE associated with fracturing and (ii)
increased by costs associated with the low radius drilling and
completion activity billed to the Intangible Participants at Cost plus
15%. The amount saved by such reduction shall be promptly allocated by
ESI to Intangible Development Costs of another Well proposed by ESI to
be drilled pursuant to the Agreement. In no event shall reduced
Intangible Development Costs as a result of a dry hole result in any
refund to any IDC Participant.
(c) Except as provided below, with respect to non-operated
Clinton Wells located in locations other than Washington, Athens or
Meigs Counties, Ohio, the Participants shall participate in such Wells
on generally an equivalent economic basis as is applicable to Clinton
Wells operated by ESI and located in Washington, Athens or Meigs
Counties. Thus, the IDC Participant(s) will pay a fixed Turnkey Price,
all of which shall be allocated to the extent possible to Intangible
Development Costs of Initial Development Operations, equal to $2,500
per 1% Working Interest. The Tangible Participant(s) shall pay, or
cause to be paid, all Tangible Costs associated with its Working
Interest in the Well. The Tangible Participant(s) or the Leasehold
Participant(s) shall also pay any Excess IDC associated with the IDC
Participant's Working Interest in the Well. In the case of a Trempeleau
B or Rose Run Well not operated by ESI and located in Meridian or Wayne
Counties, the same basic arrangement as described above for
non-operated Clinton Wells shall apply except the fixed Turnkey Price
to IDC Participant(s) shall be $3,500 per 1% Working Interest, all of
which shall be allocated, to the extent possible, to Intangible
Development Costs of Initial Development Operations of the Wells.
(d) In order to provide working capital to enable ESI as
Operator or Manager to commence site preparation, obtain suitable
subcontractors at favorable rates and ensure the availability of
equipment and materials, the IDC Participant(s), shall prepay to ESI,
as Operator or Manager, upon demand from time to time, an amount up to
$4,704,000 (the "IDC Prepaid Amount"). Such funds shall be utilized by
ESI exclusively to pay Intangible Drilling Costs of Initial Development
Operations of Wells drilled pursuant to this Agreement. ESI will use
its best efforts to cause the spudding of all Wells by March 31, 1996,
and drilling will be diligently pursued to target Horizons after
spudding. Payment of the IDC Prepaid Amount shall represent final
payment by the IDC Participant to ESI for Intangible Development Costs
of Initial Development Operations hereunder and shall be nonrefundable.
(e) Any Intangible Development Costs incurred in Initial
Development Operations of a Well in excess of the Turnkey Price for
such Intangible Development Costs as described in subsection 9(c)
(referred to as "Excess IDC") shall be borne and paid by the Leasehold
Participant(s) or the Tangible Participant(s).
(f) The Tangible Participant(s) shall pay to ESI, within ten
(10) business days of its receipt of ESI invoice therefor, the entire
Turnkey Price allocable to the Tangible Costs incurred in Initial
Development Operations of any Well being drilled hereunder. At its
option, with approval of ESI, the Tangible Participant(s) may, in lieu
of paying its share of the Turnkey Price, contribute in-kind some or
all equipment or materials necessary to furnish all Tangible Costs of
the Well; provided, however, that any such equipment or materials
contributed in-kind shall be new or used (but serviceable) equipment of
good quality.
10. PRODUCTION OPERATIONS. In the case of Wells drilled and operated
hereunder which are not operated by ESI, ESI shall manage and supervise all
activities of the Participants pursuant to this JDOA. In such cases, ESI shall
monitor all activities of the actual Operator concerning Production Operations
of the Wells. In the case of Wells drilled hereunder which are operated by ESI,
the following shall apply:
(a) Commencing with the month in which a Well drilled
hereunder begins to produce, the Operator shall be entitled to receive,
and the Participants shall pay in proportion to their ownership share
of Working Interest in the Wells, on a Well-by-Well basis, a Production
Administration Fee equal to $250 computed on a per-Well, per-month
basis for each Well being operated under this Agreement. The Production
Administration Fee shall be proportionately reduced, however, for any
Well to the extent the Participants collectively own less than 100% of
the Working Interest in the Well. The Production Administration Fee
shall be charged in lieu of any direct charges by the Operator for its
services or the provision by the Operator of its equipment for normal
and incidental superintendence and maintenance of the Wells and related
gathering system and facilities. The Production Administration Fee
shall cover all normal, incidental, regularly recurring operating
expenses for the production, delivery and sale of natural gas,
including without limitation well tending, routine and incidental
maintenance and adjustment, reading meters, recording production,
pumping, maintaining appropriate books and records, preparing reports
to the Participants and government agencies, and collecting and
disbursing revenues. The Production Administration Fee shall be subject
to adjustment annually as of January 1, of each year (the "Adjustment
Date") beginning January 1, 1997, pursuant to the Inflation Adjustment
Factor. With respect to the Production Administration Fee, the
following shall apply:
(1) An active Well either produced or injected into
for any portion of the month shall be considered as a one-Well
charge for the entire month.
(2) An inactive gas Well shut in because of
over-production or failure of purchase to take production
shall be considered as a one-Well charge providing the base
Well is directly connected to a permanent sales outlet.
(3) A one-Well charge may be made for the month in
which plugging and abandonment operations are completed on
any Well.
(4) All other inactive Wells (including, but not
limited to, inactive Wells covered by unit allowable, lease
allowable, transferred allowable, etc.) shall not qualify for
a per-Well Production Administration Fee.
(5) Each active completion in a multi-completed Well
in which production is not commingled downhole, shall be
considered as a one-Well charge providing each completion is
considered a separate Well by the governing regulatory
authority, or production from each completion qualifies for a
different price pursuant to the Natural Gas Policy Act of 1978
or by regulations issued by the Federal Energy Regulatory
Commission or by the appropriate State Regulatory Authorities.
Notwithstanding the foregoing, the Production Administration
Fee shall not cover costs and expenses related to the (i) costs of
services, materials or equipment utilized in Production Operations
charged and billed as direct charges by Operator (such charges may
include, without limitation, treating Wells with emulsion breakers,
paraffin solvents, corrosion inhibitors, or other chemicals as
requested; lease, operation or use of service rig equipment or pressure
trucks; non-incidental repair or replacement of machinery or equipment;
direct costs of labor, material or equipment incurred in reworking or
cleaning the Wells; properly gathering, containing and disposing of all
waste, including saltwater brine, oil, water, sand and mud, that may
result from operation of the Wells), (ii) collection and disposal of
saltwater or other liquids produced by the Wells, (iii) rebuilding of
access roads, and (iv) purchase of equipment or costs of Subsequent
Development Operations. All of the above-described costs and expenses
shall be billed and charged by Operator to the Participants at Cost
plus 15% in proportion to their ownership share of the Working
Interest.
(b) Operator shall not undertake any single project involving
Subsequent Development Operations or incur any extraordinary cost with
respect to any Well being operated hereunder reasonably estimated to
result in an expenditure of more than $5,000, unless (1) Operator
receives prior written consent of all Participants after furnishing a
written estimate of costs, or (2) such project or extraordinary cost is
deemed by Operator as necessary to safeguard persons or property or to
protect the Well or related facilities in the event of an emergency. In
no event, however, shall the Participants be required to pay for any
project or extraordinary cost arising from the gross negligence or
intentional misconduct of Operator, its agents, servants, employees,
contractors, licensees or invitees. All extraordinary costs and
Subsequent Development Costs incurred and the cost of projects
undertaken with respect to a Well being operated hereunder shall be
charged and billed by Operator to the Participants in proportion to
their ownership share of the Working Interest of the Well (except that
Tangible Costs shall be billed to and paid solely by the Tangible
Participant(s)) at Cost plus 15%. Operator shall have the right to
require the Participants to pay in advance of undertaking any such
project all or a portion of the estimated amounts. Operator shall have
the right to exercise its lien, granted pursuant to Section 15, on the
Working Interest of any Participant who fails or refuses to pay its
share of extraordinary costs on Subsequent Development Operations
approved by a majority in interest of Working Interest owners.
(c) Notwithstanding anything herein to the contrary, the
Participants shall have full responsibility for and bear all costs in
proportion to their share of the Working Interest with respect to
obtaining price determinations under and otherwise complying with the
Natural Gas Policy Act of 1978 (the "NGPA") 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 the NGPA and the implementing state
regulations. Operator agrees to furnish such information and render
such assistance as the Participants may reasonably request in order to
comply with the NGPA and the implementing state regulations without
charge for services performed by its employees.
(d) Operator shall promptly and timely pay and discharge on
behalf of the Participants, in proportion to their ownership share of
the Working Interest, all severance taxes, Royalties, Overriding
Royalties, Operating Costs (including the Production Administration
Fee), pipeline gathering charges (including transportation and
compression charges) and other expenses and liabilities payable and
incurred by reason of its operation of the Wells in accordance with
this Agreement and shall pay, in proportion to the share of the Working
Interest owned by the Participants in the Wells, on or before the due
date any third party invoices rendered to Operator with respect to such
costs and expenses; provided, however, that Operator shall not be
required to pay and discharge any such costs and expenses which are
being contested in good faith by Operator.
Operator shall deduct the foregoing costs and expenses from
each Participant's share of the proceeds of the oil and/or gas sold
from the Wells operated hereunder and shall keep an accurate record of
each Participant's account hereunder, showing expenses incurred and
charges and credits made and received with respect to each Well. In the
event that such proceeds or revenues are insufficient to pay said
Royalties, costs and expenses, Operator may, at its option, pay and
discharge the same and immediately thereupon prepare and submit an
invoice to the Participants in proportion to their ownership share of
Working Interest each month for any excess costs and expenses.
Alternatively, Operator may not pay such amounts and immediately
invoice the Participants for their share of such costs or expenses. Any
such invoice shall be paid by the Participants within 10 business days
of its receipt.
THE PARTICIPANTS ACKNOWLEDGE THAT NATURAL GAS PRODUCED FROM
THE WELLS WILL BE GATHERED, PURCHASED AND RESOLD BY THE PIPELINE
PARTNERSHIP, AN AFFILIATE OF ESI, PURSUANT TO THE GAS SERVICING
AGREEMENT IN THE FORM OF ANNEX C ATTACHED. THE PIPELINE PARTNERSHIP
WILL RECEIVE COMPENSATION FOR ITS SERVICES PURSUANT TO THE GAS
SERVICING AGREEMENT.
(e) Operator shall disburse to the Participants, on at least a
quarterly basis, the Participants' share of the proceeds of the sale of
oil and/or gas sold from the Wells operated hereunder. Each such
disbursement made and/or invoice submitted pursuant to subsection 10(a)
above shall be accompanied by a statement reasonably itemizing with
respect to each Well (1) 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 Participants' share thereof, (2) the total
proceeds received from any sale thereof, and the Participants' share
thereof, (3) the costs and expenses deducted from said proceeds and/or
being billed to the Participants pursuant to subsection 10(d) above,
and (4) such other information as the Participants may reasonably
request. 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, which account shall be used
solely for the purpose of collecting and disbursing funds constituting
proceeds from the sale of oil and gas production.
(f) In addition to any other statements required hereunder,
Operator, within 75 days after the completion of each Well drilled
hereunder, shall furnish the Participants with a statement itemizing
total costs and charges with respect to such Well and the Participants'
share thereof, and such other information as is necessary to enable the
Participants to allocate costs incurred with respect to such Well
between Lease Acquisition Costs, Tangible Costs and Intangible
Development Costs.
(g) Upon request, Operator shall promptly furnish a
Participant 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 Participants and their authorized employees, agents
and consultants, including independent accountants, shall, at
Participants' sole cost and expense, (i) upon at least 10 days' written
notice have access during normal business hours to Operator's records
pertaining to operations hereunder, including without limitation, have
the right to audit the books of account of Operator relating to all
receipts, costs, charges and expenses under this Agreement, and (ii)
have access, at their sole risk, to any Wells drilled by Operator
hereunder at all times to inspect and observe any machinery, equipment
and operations. Notwithstanding the foregoing, Operator shall not be
required to furnish to any Participant information of a confidential or
proprietary nature unless the requesting Participant agrees in writing
to reasonable confidentiality provisions acceptable to Operator.
(h) In the event Operator shall use any of its own employees
or equipment to perform any work hereunder, Operator shall be entitled
to charge Participants the Cost of such services at such employee's or
equipment's usual hourly or daily rate in accordance with its schedule
of such rates maintained from time to time by Operator.
11. ABANDONMENT OF WELLS THAT HAVE PRODUCED. With respect to all Wells
hereunder, ESI in its sole discretion (subject to any applicable operating
agreement in the case of a Non-Operated Well), may determine to plug and abandon
any Well drilled hereunder which has produced oil or natural gas without consent
of all Participants. In the event ESI elects to plug and abandon any Well, such
work shall be carried out by ESI in accordance with reasonable oil and gas field
standards and in compliance with applicable laws and regulations. Plugging Costs
and Site Reclamation Costs shall be charged and billed to the Participants at
Cost in proportion to their ownership share of Working Interest. Tangible
Reclamation Costs shall be charged and billed entirely to the Tangible
Participant(s) at Cost. The IDC Participant(s) shall quitclaim and assign to the
Tangible Participant(s), without warranty of any kind, all such IDC
Participant(s)' interest, if any, in the Well abandoned and related equipment.
If all of the Participants are unable to reach agreement as to the abandonment
of a Well, then the Participant(s) wishing to continue to operate the Well shall
pay to the Participant(s) wishing to plug and abandon a sum equivalent to said
Participant(s)' pro rata share of the net salvage value of the material and
equipment of the Well (after deduction of the cost to plug and abandon such
Well), multiplied by the percentage of Working Interest of each of the Working
Interest owners wishing to plug and abandon at the time of the proposed
abandonment. The assignment of the Working Interest will be made to the Working
Interest owner continuing the operation. After the assignment, the assignor
shall have no further responsibility, liability or interest in the operation of
or production from the Well.
12. PARTICIPANTS' RIGHT TO PRODUCTION.
(a) The Participants shall share oil, natural gas and other
hydrocarbon production from the Wells in proportion to their ownership
share of Working Interest.
(b) Subject to the provisions of Section 15 hereof, each
Participant shall have the exclusive right to sell or dispose 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; and Operator shall not have any right to sell or
otherwise dispose of such oil and gas. Each Participant shall have the
exclusive right to execute all production sales contracts hereunder.
Each Participant agrees to designate ESI, or ESI's designated bank
agent, as the Participant's collection agent in any such contract. Upon
request, ESI shall render assistance in information which comes to
ESI's attention regarding opportunities for sale of production. In the
event a Participant 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, ESI shall have the right, subject to
the revocation upon notice and at will by the Participant, 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 Participant at
prevailing prices obtainable in the area for such production. Any such
purchase or sale by ESI shall be subject always to the right of the
Participant 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. Nothing in this subsection 12(b) or other
provision of this Agreement shall prevent or affect the rights of any
Participant to enter into a separate agreement or contract with any
third party, or ESI, with respect to the sale or marketing of its share
of production.
13. NO JOINT LIABILITY. The liability of the Participants hereunder
shall be several, not joint or collective. Each Participant shall be responsible
only for its obligations as set forth herein. It is not the intention of the
Participants to create, nor shall this Agreement be construed as creating a
partnership(other than for Federal or state income tax purposes), a mining
partnership or association to render the parties liable as partners.
14. INSURANCE. During drilling, completion and operation of the Wells,
ESI shall maintain, or cause to be maintained, the following insurance, and
name, if possible, each Participant, or their designees, as an additional
insured(s), in coverage amounts of not less than the following: (1)
comprehensive general liability insurance with bodily injury limits of not less
than $1,000,000 per occurrence and $1,000,000 per accident, and property damage
with coverage limits of not less than $1,000,000 per accident; (2) comprehensive
automobile liability insurance with bodily injury limits of not less than
$500,000 per person and $500,000 per accident, and property damage coverage with
limits of not less than $500,000 per accident; (3) primary, umbrella or excess
liability insurance with coverage limits of at least $10,000,000 per occurrence
and in the aggregate; and (4) workers' compensation insurance as required under
the laws of the state in which the Wells are located. The Participants agree
that ESI shall be entitled to reimbursement for a proportionate share of its
cost of comprehensive general liability and umbrella liability insurance
procured by ESI benefiting the Participants. For Wells operated by ESI, such
cost shall be considered an Operating Cost of the Wells. ESI shall require all
subcontractors engaged in work relating to the Wells to comply with workers'
compensation insurance requirements of the laws of the state in which the Wells
are located. Upon request, ESI shall furnish to each Participant, or their
designees, evidence of the foregoing insurance. ESI shall provide for at least
45 days' prior notice to each Participant, in the event of material reduction or
cancellation of insurance coverage.
15. OPERATOR'S LIEN. With respect to Wells operated by ESI, the following
shall apply:
(a) The Participants hereby grant Operator a first and
preferred lien on and security interest in any interest of the
Participants covered by this Agreement, and in the Participants'
interest in oil and gas produced and the proceeds thereof, and upon the
Participants' interest in materials and equipment, to secure the
payment of all sums due from Participants to Operator under the
provisions of this Agreement.
(b) In the event that the Participants fail to pay any amount
owing hereunder by it to 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
Participants' share thereof until the amount owed by the Participants,
plus 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.
16. SUCCESSORS AND ASSIGNS: TRANSFERS; APPOINTMENT OF AGENT. With respect
to Wells operated by ESI, the following shall apply:
(a) This Agreement shall be binding upon and shall inure to
the benefit of the undersigned parties hereto and their respective
heirs, devisees, legal representatives, successors and assigns, and the
terms hereof shall be deemed to run with the Leases and Working
Interests subject to this Agreement.
(b) 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 all Participants, except that such consent
shall not be required in connection with (1) 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, or (2) any lien,
security interest, pledge or mortgage arising under or pursuant to
Operator's present or future financing arrangements, or (3) the
liquidation, merger, consolidation or sale of substantially all of the
assets of Operator or other corporate reorganization, provided the
successor or survivor entity assumes Operator's obligations hereunder.
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 Participants
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 Participants in all Wells' production, equipment and
leasehold interests subject hereto or an equal undivided interest in
all such Wells, production, equipment, and leasehold interests.
(c) Subject to the provisions of subsection 16(a) above, any
sale, encumbrance, transfer or other disposition made by any
Participant of its interest in the Wells, production, equipment, and/or
leasehold interests covered hereby shall be made (i) expressly subject
to this Agreement and only as provided in this Agreement, (ii) without
prejudice to the rights of the other party, and (iii) in accordance
with and subject to the provisions of the applicable Lease.
(d) Notwithstanding any other provision of this Section 16, no
Participant may assign, transfer, sell, hypothecate or otherwise
dispose of its interest in any Well except in accordance with
subsection 18(i).
(e) If at any time the interest of a Participant 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 apply 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.
17. ESI'S LIABILITY AND INDEMNIFICATION. With respect to Wells operated
or managed by ESI, ESI's liability to the Participants as Operator or Manager
hereunder shall be limited to, ESI shall indemnify the Participants and hold
them harmless from, claims, penalties, liabilities, obligations, charges,
losses, costs, damages or expenses (including but not limited to attorneys'
fees) relating to, caused by or arising out of (i) the material noncompliance
with or violation by ESI, its employees, agents, or subcontractors of any local,
state or Federal law, statute, regulation, or ordinance; (ii) the gross
negligence or intentional misconduct of ESI, its employees, agents or
subcontractors; or (iii) the material breach of or failure to comply with this
Agreement.
18. PARTNERSHIP TAX ELECTION.
(a) It is the intention of the Participants to jointly form a
tax partnership (the "Tax Partnership") pursuant to the provisions of
Subchapter K of Chapter 1 of Subtitle A of the Code.
(b) Notwithstanding anything to the contrary in this
Agreement, the Participants agree with respect to all operations and
activities conducted under this Agreement that so long as the
provisions of this Section 18 remain in effect that (1) the
Participants shall file returns as a tax partnership for Federal, state
and local income tax purposes (2) the Tax Partnership (and/or each
Participant) will not elect for the Tax Partnership to be excluded from
the application of the provisions of Subchapter K of Chapter 1 of
Subtitle A (the partnership provisions) of the Code or any provisions
of applicable state laws comparable to Subchapter K of Chapter 1 of
Subtitle A of the Code, and (3) the Tax Partnership (and/or each
Participant) will join in the execution of such additional documents
and elections as may be required in order to effectuate the foregoing.
(c) The provisions of this Section 18 shall continue in full
force and effect from and after the effective date of this Agreement
until the earlier of (1) the termination of this Agreement pursuant to
its terms, (2) the mutual agreement of all the Participants or (3) upon
the occurrence of an event described in Section 708(b) of the Code.
(d) The term "Capital Accounts" for purposes of this Section
18 shall mean the Capital Account of each Participant as determined
from the inception of the Tax Partnership and as maintained in
accordance with the allocations specified in Section 18(h), and with
Treasury Regulation Section 1.704-1(b)(2)(iv) or any successor
provisions. Solely for the purpose of maintaining the Capital Accounts,
the Participants shall elect, at the time each Well is placed into
production whether to use actual or simulated depletion for such Well
in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(k),
which election shall be for the life of such Well.
(e) ESI shall prepare and file the necessary Federal, state
and local partnership income tax returns for the Tax Partnership and
each Participant agrees to furnish to ESI all pertinent information
relating to the operations and activities (pursuant to this Agreement
which is necessary for ESI to prepare and file such returns. The cost
incurred by ESI to prepare and file such necessary Federal, state and
local partnership income tax returns shall be considered an Operating
Cost to be charged and billed at Cost by ESI to the Participants in
proportion to their ownership share of Working Interest.
(f) The Participants hereby authorize and direct ESI to make
the following Federal income tax elections on the appropriate returns
prepared and filed hereunder:
(1) To elect to adopt the accrual method of accounting,
and such accounting shall be maintained on a calendar year
basis;
(2) To elect, in accordance with Section 263(c) of
the Code and applicable Treasury Regulations and comparable
provisions of state law, to expense all Intangible Development
Costs; and
(3) To make or refrain from making any other tax
election provided in the Code, the Treasury Regulations or in
any other applicable Federal or state tax law as deemed
appropriate by ESI.
(g) ESI is directed and authorized to act as the "Tax Matters
Partner," as that term is described and used in the Treasury
Regulations promulgated under Section 6231 of the Code, of the Tax
Partnership. Each Participant consents to such designation of ESI, as
the Tax Matters Partner and agrees to execute, certify, acknowledge,
deliver, swear to, file and record with the IRS or other appropriate
governmental authorities such documents as may be necessary or
appropriate to evidence such consent. Any cost or expense incurred by
the Tax Matters Partner shall be deemed to be an Operating Cost to be
charged and billed at Cost to the Participants in proportion to their
share of Working Interest, and the Participants shall indemnify and
reimburse the Tax Matters Partner for all costs and expenses, including
legal and accounting fees, claims, liabilities, losses and damages
incurred in connection with any tax audit or judicial review with
respect to the tax liability of the Participants.
(h) Except as otherwise specified herein, all items of
revenue, cost, income, gain, loss, deduction or credit with respect to
any Well shall be allocated for Federal income tax purposes among the
Participants in proportion to their respective shares of Working
Interest (hereinafter referred to as the "General Allocations").
Notwithstanding the foregoing, items of revenue, cost, income, gain,
loss, deduction or credit with respect to the following items for any
Well shall be allocated for Federal income tax purposes as follows
(hereinafter referred to as the "Special Allocations"):
(1) Lease Acquisition Costs of any Drillsite shall be
allocated to the Leasehold Participant who contributed the
Drillsite;
(2) Intangible Development Costs shall be allocated to
the IDC Participant(s) who are charged and pay such costs
pursuant to this Agreement;
(3) Tangible Costs shall be allocated to the Tangible
Participant(s) who are charged and pay such costs pursuant
to this Agreement;
(4) Tangible Reclamation Costs in connection with
plugging and abandoning a Well after it has produced in
commercial quantities shall be allocated to the Tangible
Participant(s);
(5) Revenues, income or gain resulting from the rental,
sale or other disposition of any item of depreciable
property shall be allocated to the Participants in the same
proportions as the costs of such property were allocated to
the Participants, except for revenues resulting from the
disposition of depreciable property contributed to the Tax
Partnership, which shall first be allocated to the
Participant who contributed such property in an amount equal
to the difference between the fair market value of such
property at the time of the contribution and its adjusted
tax basis at such time;
(6) Loss from the sale or other disposition of Tax
Partnership property shall be allocated to the Participants
in the same proportion in which they were charged costs with
respect to such property;
(7) Any recapture treated as an increase in tax,
decrease in credits, or an increase in ordinary income shall
be allocated to the Participants in the same manner as the
deductions and credits which gave rise to such recapture
were allocated to them;
(8) Cost and percentage depletion deductions and the
gain or loss on the sale or other disposition of property
the production from which is subject to depletion (herein
sometimes called "depletable property") shall be computed
separately by the Participants rather than by the Tax
Partnership. For purposes of making such computations, the
Tax Partnership's adjusted basis in each depletable property
shall be allocated under Section 613A-3(c)(7)(D) of the Code
and Treasury Regulations promulgated thereunder in
proportion to each Participant's respective share of the
costs and expenses which entered into the Tax Partnership's
adjusted basis for each depletable property. After the
initial allocation of basis of each depletable property, the
Tax Partnership shall make a new allocation of the basis of
its depletable properties in accordance with Regulation
Section 1.613A(e) (or any successor provision) upon (i) a
contribution of additional money, other property or services
to the Tax Partnership by a Participant; (ii) the making of
additional capital expenditures made with respect to a Well;
or (iii) a partial or complete withdrawal of a Participant
from the Tax Partnership. Each Participant agrees to
cooperate with ESI and to provide ESI with any information
requested by ESI and which is necessary or helpful to ESI in
making these calculations and allocations. The amount
realized on the sale or other disposition of each such
property shall be allocated to (A) the extent the same
constitutes a recovery of the Tax Partnership's simulated
basis in the property, to the Participants in the same
percentages as the adjusted basis of the property sold or
disposed of was allocated to them up to an amount equal to
the Tax Partnership's simulated basis in such property at
the time of such sale or disposition; (B) in the case of
property contributed to the Tax Partnership, to the
Participant who contributed such property in an amount equal
to the difference between the fair market value of the
property at the time of the contribution and its simulated
basis at such time; and (C) thereafter, the Participants in
proportion to their share of the Working Interest in the
property sold or transferred;
(9) Notwithstanding anything to the contrary in this
Section 18, if any Participant's Capital Account has a deficit
balance because the Participant unexpectedly received any
adjustments, allocations, or distributions described in
Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or
(6), items of Tax Partnership income and gain (including items
of gross income) shall be specially allocated to such
Participant in an amount and manner sufficient to eliminate,
to the extent required by the Treasury Regulations, such
excess deficit Capital Account balance as quickly as possible;
(10) Notwithstanding anything to the contrary in this
Section 18, if the allocation of any loss or deduction to a
Participant would cause the balance of such Participant's
Capital Account to be less than zero, only the amount that
reduces the balance in such Participant's Capital Account to
zero shall be allocated to such Participant and the remainder
shall be allocated to the Participants with positive Capital
Account balances in proportion to their positive Capital
Account balances;
(11) The allocations set forth in subsections
18(h)(ix) and (x) (the "Regulatory Allocations") are intended
to comply with certain requirements of Treasury Regulations
Sections 1.704-1 and 1.704-2. Notwithstanding anything to the
contrary in this Agreement (other than the Regulatory
Allocations), the Regulatory Allocations shall be taken into
account in allocating other taxable income and tax losses and
items of income, gain, loss and deduction among the
Participants so that, to the extent possible and consistent
with Treasury Regulation Sections 1.704-1 and 1.704-2, the net
amount of such allocations of other taxable income and tax
losses and other items and the Regulatory Allocations to each
Participant shall be equal to the net amount that would have
been allocated to each such Participant if the Regulatory
Allocations had not occurred.
(12) Notwithstanding anything to the contrary in this
Subsection 18(k), all deductions allowable under Section 83(h)
of the Code shall be allocated to the Participant who is
allocated the income which gives rise to the deduction under
Section 83(h).
(13) In accordance with Section 704(c) of the Code
and the Treasury Regulations thereunder, income, gain, loss
and deduction with respect to any property contributed to the
Tax Partnership shall, solely for tax purposes, be allocated
among the Participants so as to take account of any variation
between the fair market value of such property and its
adjusted basis in the hands of the Partnership on the
contribution date. This subsection 18(h)(xiii) shall not
affect, or in any way be taken into account in computing, any
Participant's Capital Account or distributions pursuant to any
provision of this Agreement.
(i) No Participant may assign or transfer its interest in the
Tax Partnership without the prior approval of ESI; provided, however,
that ESI may only withhold its approval if it believes that such
assignment or transfer would result in the termination of this Tax
Partnership for Federal income tax purposes. In accordance with
Treasury Regulations under Section 6050K of the Code, any Participant
who sells or exchanges its interest in the Tax Partnership must notify
ESI within 30 days (or, if earlier, by January 15, of the calendar year
following the calendar year in which the exchange occurred) of such
transaction. Such notification must include the names, addresses and
taxpayer identification numbers (if known) of the transferor and
transferee and the date of the exchange. Thereafter, the Tax
Partnership shall notify the IRS of such sale or exchange of Working
Interest, along with the names and addresses of the transferor and
transferee and all other required information.
(j) Any distribution in termination of any Participant's
interest in the Tax Partnership other than pursuant to subsection 18(k)
below, shall be in an amount of cash or fair market value of property
equal to the Capital Account balance of such Participant at the time
such interest is terminated, after such Capital Account balance has
been adjusted in accordance with subsection 18(k)(4) below, and the
applicable Treasury Regulations under Section 704(b) of the Code, and
shall be made by the later of (1) the end of the Tax Partnership
taxable year in which such termination occurs or (2) within 90 days
after the date of such termination; provided, however, that if such
Capital Account balance is less than zero after taking into account
such adjustments and the distribution provided for in this subsection
18(j), such Participant shall contribute an amount of cash to the Tax
Partnership sufficient to cause his or its Capital Account to have a
zero balance by the later of (i) the end of the Tax Partnership taxable
year in which such termination occurs or (ii) within 90 days after the
date of such termination.
(k) Upon termination of the provisions of this Section 18, the
activities of the Participants under this Section 18 shall be concluded
and the property subject to this Section 18 and the other provisions of
this Agreement shall be distributed to the Participants in the manner
and in the order set forth below:
(1) Debts of the Participants owed to persons other
than the Participants and created pursuant to operations and
activities under this Agreement shall be paid.
(2) Debts owed among the Participants and created
pursuant to operations and activities under this Agreement
shall be paid.
(3) All cash on hand representing unexpended
contributions by any Participant shall be returned to the
contributor.
(4) The Participants' respective Capital Accounts shall
be adjusted by (1) assuming the sale of all remaining
properties subject to this Agreement for cash at their
respective fair market values as of the date of termination
of this Agreement and (2) debiting or crediting each
Participant's respective Capital Account with such
Participant's respective share of the hypothetical gains or
losses resulting from such assumed sales in the same manner
as such Participant's Capital Account would be debited or
credited under this subsection 18(k) for gains or losses on
actual sales of such properties.
(5) Thereafter, all remaining properties shall be
distributed to the Participants in accordance with their
respective positive Capital Account balances as so adjusted
by the later of (i) the end of the Tax Partnership taxable
year in which the termination occurs or (ii) within 90 days
after the date of such termination; provided, however, that
if such Capital Account balance is less than zero after
taking into account such adjustments and the distribution
provided for in this sub-paragraph, such Participant shall
contribute an amount of cash to the Tax Partnership
sufficient to cause his or its Capital Account to have a
zero balance by the later of (A) the end of the Tax
Partnership taxable year in which such termination occurs or
(B) within 90 days after the date of such termination. If
property subject to this Agreement is distributed pursuant
to this subsection 18(k), the amount of the distribution
shall be equal to the fair market value of the distributed
property.
(l) It is understood and agreed that it shall be the
obligation of each Participant to make such assignments as are required
upon termination of the provisions of this Section 18. Such assignments
shall be made subject to the liability of each assignee for costs,
expenses and liabilities therefore incurred or for which commitment had
been made by ESI prior to the date of termination and such costs,
expenses and liabilities shall be allocated to such assignee pursuant
to this Section 18.
19. FORCE MAJEURE.
(a) If ESI is rendered unable, wholly or in part, by force
majeure (as hereinafter defined) to carry out is obligations under this
Agreement, ESI shall give to the Participants prompt written notice of
the force majeure with reasonably full particulars concerning it;
thereupon, the obligations of ESI, so far as it is affected by the
force majeure, shall be suspended during but no longer than, the
continuance of the force majeure. ESI 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, change of law, 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 ESI's performance hereunder and is not
reasonably within the control of ESI.
(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 ESI, contrary to
its wishes; the method of handling all such difficulties shall be
entirely within the discretion of ESI.
20. TERM. This Agreement shall become effective when executed by ESI and
all Participants and, except as provided in subsection 6(c), shall continue and
remain in full force and effect for the productive lives of the Wells being
operated hereunder.
21. INVALIDITY. 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.
22. 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.
23. 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.
24. 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 prepared, to the following addresses until changed by certified or
registered letter so addressed to the other party:
Initial Address for ESI and All Participants:
280 Fort Sanders West Boulevard, Suite 200
Knoxville, Tennessee 37922
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.
IN WITNESS WHEREOF, the parties have executed this Agreement
the day and year first written above.
LEASEHOLD PARTICIPANT(S): OPERATOR AND MANAGER:
ENERGY SEARCH, INCORPORATED ENERGY SEARCH, INCORPORATED
a Tennessee Corporation a Tennessee Corporation
By: By:
Richard S. Cooper,
President Richard S. Cooper, President
IDC PARTICIPANT(S):
ENERGY SEARCH NATURAL GAS 1995-A L.P.,
a Tennessee Limited Partnership
ENERGY SEARCH, INCORPORATED
Its Managing General Partner
By:
TANGIBLE PARTICIPANT(S): Richard S. Cooper, President
ENERGY SEARCH, INCORPORATED
a Tennessee Corporation
By:
Richard S. Cooper, President
<PAGE>
ANNEX A
TO JOINT DRILLING AND OPERATING AGREEMENT
PARTIAL ASSIGNMENT
OF
OIL AND GAS LEASE
THIS ASSIGNMENT made this ______ day of ________________, 1995, from ENERGY
SEARCH, INCORPORATED, a Tennessee corporation, with offices at 280 Fort Sanders
West Boulevard, Suite 200, Knoxville, Tennessee 37922 (the "Assignor") to ENERGY
SEARCH NATURAL GAS 1995-A L.P., a Tennessee limited partnership, with offices at
280 Fort Sanders West Boulevard, Suite 200, Knoxville, Tennessee 37922 (the
"Assignee").
WITNESS THAT:
WHEREAS, Assignor is the present Lessee under that certain Oil and Gas Lease
(the "Lease") from ______________________, dated _______ _______________, and
recorded in Deed Book Volume _______________, Page _______, in the Recorder's
Office of _______________________ County, _________________, covering
approximately ________________ acres in ________________ Township,
________________ County, ___________;
WHEREAS, Assignor desires to assign a certain undivided percentage of its
interest to a depth of _____ feet in a portion of the oil and gas Lease estate
covered by the above-described Lease to each Assignee on the terms and
conditions herein set forth;
NOW THEREFORE, in consideration of One Dollar ($1.00) and other good and
valuable consideration, receipt of which is hereby acknowledged, Assignor does
hereby sell, assign, quitclaim, set over and transfer to Assignee, its
respective successors and assigns forever, an undivided ____ percent (___%) of
Working Interest in, to and under the above-described Lease with respect to that
portion of the oil and gas leasehold estate shown on the map attached hereto as
Exhibit A (the "Drillsite") and subject to the terms and conditions of the
aforesaid Lease only to a depth from the surface to one hundred (100) feet below
the base of the deepest stratigraphic Horizon encountered by a well drilled on
the Drillsite (the "Assigned Depth").
TOGETHER with all rights, titles and interest appurtenant hereto, as set forth
in said Lease, including such surface rights, easements (other than pipeline
easements) and other rights and privileges as are necessary or convenient for
access to or otherwise for the drilling and proper operation and maintenance of
oil and/or gas wells on the portion of the oil and gas leasehold estate covered
by this Assignment, and for the transportation, removal and sale of the oil and
gas produced therefrom.
Assignor hereby expressly excepts, reserves, and retains unto itself, its
successors and assigns, all of Assignor's right, title, interest and position as
the lessee in, to and under the above-described Lease with respect to the
remaining undivided percentage of Working Interest, if any, all oil and gas
rights below the Assigned Depth, and to the portion of the oil and gas leasehold
estate shown as being retained by Assignor on the map attached hereto as Exhibit
A, together with all rights, titles and interests appurtenant thereto, as set
forth in said Lease including, without limitation, all surface and sub-surface
rights, easements and other rights and privileges necessary or convenient to the
enjoyment of Assignor's retained estate.
Assignor represents and warrants to Assignee and its successors and assigns
that: (i) Assignor has delivered to Assignee true, correct and complete copies
of the Lease, the Assignment and any amendments, modifications or supplements
thereto; (ii) to the best knowledge of Assignor, no condition exists and no
event has occurred which constitutes a default under said Lease or related
Assignment, amendments, modifications or supplements; (iii) to the best
knowledge of Assignor, said Lease and related Assignment, amendments,
modifications or supplements have been duly executed and delivered by the
lessor(s) therein and/or the assignor(s) thereof, have been duly recorded, and
presently are in full force and effect and enforceable in accordance with their
respective terms; (iv) to the best knowledge of Assignor, all required consents
or approvals of, or notices to, the lessor(s) under said Lease (and related
Assignments, amendments, modifications and supplements), any governmental body
or other third parties, with respect to this Assignment, have been obtained or
given; (v) this Assignment effectively assigns and transfers to Assignee all of
the Assignor's right, title and interest in, to, and under said Lease and
related Assignment, amendments, modifications or supplements to the portion of
the leasehold estate covered hereby; and (vi) Assignor has not done, committed,
executed, permitted or suffered any act whereby its title to or interest in said
Lease has become encumbered in any manner or subject to an adverse interest. IT
IS EXPRESSLY UNDERSTOOD AND AGREED THAT, EXCEPT AS SET FORTH ABOVE, ASSIGNOR
MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO ITS TITLE OR THE
TITLE OF THE LESSOR(S) IN AND TO THE LANDS OR OIL AND GAS INTERESTS COVERED BY
SAID LEASE OR THIS ASSIGNMENT.
This Assignment shall be binding upon and shall inure to the benefit of Assignor
and Assignee and their respective successors and assigns.
IN WITNESS WHEREOF, Assignor has caused this Agreement to be duly executed on
the day and year first above written.
Witnesses: ASSIGNOR:
ENERGY SEARCH, INCORPORATED
_______/s/________________________ a Tennessee Corporation
______/s/_________________________ By
/s/
Richard S. Cooper, President
STATE OF TENNESSEE )
)SS:
COUNTY OF KNOX )
On this _9__ day of __January____, 1996, before me, a Notary Public,
personally appeared Richard S. Cooper, who acknowledged himself to be the
President of Energy Search, Incorporated, a Tennessee corporation, and that as
President being duly authorized to do so he executed the foregoing instrument
for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/
Notary Public
My Commission Expires:
5/31/99
[Notary Seal]
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES ACTS. THESE SECURITIES MUST
BE ACQUIRED FOR INVESTMENT, ARE RESTRICTED AS TO TRANSFERABILITY, AND MAY NOT BE
TRANSFERRED OR SOLD EXCEPT IN CONFORMANCE WITH THE RESTRICTIONS CONTAINED IN
THIS AGREEMENT.
LIMITED PARTNERSHIP AGREEMENT
ENERGY SEARCH NATURAL GAS 1996 L.P.
THIS LIMITED PARTNERSHIP AGREEMENT (the "Agreement") dated as of
________ __, 1996, by and between ENERGY SEARCH, INCORPORATED, of Suite 200, 280
Fort Sanders West Boulevard, Knoxville, Tennessee 37922, referred to as the
"Managing General Partner," and the persons who sign separate signature pages
hereto, and are listed, from time to time on Schedule A hereto, as Initial
Co-General Partners or Initial Limited Partners.
WITNESSETH:
The parties desire to form a limited partnership pursuant to the
Tennessee Revised Uniform Limited Partnership Act, as amended.
NOW, THEREFORE, in consideration of the mutual promises of the parties
hereto and for other good and valuable consideration, the receipt and adequacy
of which is hereby acknowledged, it is agreed as follows:
ARTICLE I
DEFINITIONS OF KEY TERMS
As used in this Agreement, the following terms shall have the meanings
set forth in this Article I as follows:
"Activation" shall mean the date, as designated by the Managing General
Partner, in its sole discretion, after the Minimum Investor Subscriptions have
been sold that the Partnership shall be deemed formed and its business
activities shall commence. Immediately upon Activation, the Managing General
Partner shall undertake to file a Certificate of Limited Partnership for the
Partnership with the office of the Tennessee Secretary of State.
"Affiliate" shall mean with respect to another person, (i) any person
directly or indirectly owning, controlling or holding with power to vote 10.0%
or more of the outstanding voting securities of or equity interests in such
other person, (ii) any person 10.0% or more of whose outstanding voting
securities or equity interests are directly or indirectly controlling,
controlled or held with power to vote by such other person, (iii) any person
directly or indirectly controlling, controlled by or under common control with
such other person, (iv) any officer or director of such other person, and (v)
any company for which any such officer or director acts in any such capacity.
"Bankrupt" or "Bankruptcy" with respect to a person shall mean that the
person has:
(a) Made an assignment for the benefit of creditors;
(b) Filed a voluntary petition in bankruptcy;
(c) Been adjudicated as bankrupt or insolvent;
(d) Filed a petition or answer seeking for himself any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation;
(e) Filed an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against him in
any proceeding of this nature;
(f) Sought, consented to or acquiesced in the appointment of a
trustee, receiver or liquidator for himself or of all or any
substantial part of his properties;
(g) If, within 120 days after the commencement of any proceeding
against him seeking reorganization, arrangement, composition,
adjustment, liquidation, dissolution or similar relief under any
statute, law or regulation, the proceeding has not been dismissed; or
(h) If, within 90 days after the appointment without his consent
or acquiescence of a trustee, receiver or liquidator for himself or of
all or any substantial part of his properties, the appointment is not
vacated or stayed, or if, within 90 days after the expiration of any
such stay, the appointment is not vacated.
"Capital Account" shall mean, with respect to any Partner or Unit
Holder, the Capital Account established and maintained for such Person in
accordance with Subchapter K of the Code and Treasury Regulations promulgated
thereunder.
"Capital Contribution" shall mean, with respect to any Partner, the
amount of money and the fair market value of any property (other than money)
contributed to the Partnership.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Conversion" shall mean the event of conversion of Initial Co-General
Partners to the status of Limited Partners pursuant to Article XIII of this
Agreement.
"Cost" shall mean the following: (i) when used with respect to the
purchase of Leases, it shall mean the Lease Acquisition Costs; (ii) when used
with respect to services provided, it shall mean the price charged by an
unrelated third party providing such services in the normal course of business;
(iii) when used with respect to materials, it shall mean the price charged by an
unrelated third party providing such materials in the normal course of business;
and (iv) when used with respect to labor, materials or equipment furnished by
ESI as Operator or Manager, it shall mean the cost of such labor, materials or
equipment at the usual hourly or daily rate in accordance with the schedule of
rates maintained from time to time by ESI.
"Developmental Well" shall mean a Well drilled to a known producing oil
or gas Horizon in a previously discovered field or in an area where the known
producing Horizon is reasonably believed by ESI, based on experience and known
geological production and other data, to be geologically continuous.
"Direct Costs" shall mean all actual and necessary costs directly
incurred for the benefit of the Partnership attributable to the goods and
services (such as accounting fees, legal fees or consulting engineer or
geologist fees) provided to the Partnership by parties other than the Managing
General Partner or an Affiliate thereof. Direct Costs shall not include any cost
otherwise classified as Sales Commissions, Management Fees, Due Diligence Fees,
Organization and Offering Expenses, the Partnership Administrative Fee,
Operating Costs, Lease Acquisition Costs, Tangible Costs, Intangible Development
Costs or Subsequent Development Costs. Direct Costs may include the cost of
services provided by the Managing General Partner or its Affiliates if such
services are provided at Cost, as defined herein, and in compliance with this
Agreement.
"Distributable Cash" shall mean, with respect to any fiscal period of
the Partnership, the Net Partnership Cash for such period, less any amount used
in such period by the Managing General Partner in that fiscal period to
establish Working Capital Reserves.
"Drillsite" shall mean the tract of a Lease upon which a single Well
may be drilled according to applicable spacing law or regulations.
"Due Diligence Fees" shall mean an amount not to exceed 1.0% of
Investor Subscriptions payable by the Partnership to the Placement Agent or
Participating Selling Agents to defray a portion of their due diligence expenses
in preparing to participate in the Offering.
"Early Subscription Incentive" shall mean the return of capital
available to the purchasers of up to the first 15 Units (unless expanded in the
sole discretion of the Managing General Partner to no more than 40 Units) who
subscribe for Units by June 30, 1996 in the amount of 5.0% of their investment
in Units. Investors will be eligible for the Early Subscription Incentive only
if their subscription is accepted by the Managing General Partner and their
subscription check or money order clears collection through normal banking
channels.
"ESI" shall mean Energy Search, Incorporated.
"Excess IDC" shall mean any Intangible Development Costs incurred in
the Initial Development Operations of any Well in excess of the Turnkey Price
for such Well established pursuant to the JDOA.
"Extended Maximum Subscriptions" shall mean $4,800,000 (80 Units) to
which the Offering may be increased in the sole discretion of the Managing
General Partner.
"Farmout" shall mean an agreement by which the owner of a Lease (the
"farmor") agrees to assign all or part of its interest in specific acreage to
another party (the "farmee") retaining some interest (such as an overriding
royalty interest, an oil and gas payment, a Working Interest after payout, or
other type of interest), subject to a requirement that the farmee drill one or
more specific wells or perform other acts as a condition of the assignment.
"General Allocations" shall mean the allocation among Partners for
Federal income tax purposes of items of revenue, cost, income, gain, loss,
deduction and credit as follows: 99.0% for the Investor Partners and 1.0% for
the Managing General Partner.
"General Sharing Ratios" shall mean the sharing arrangement among
Investor Partners and the Managing General Partner in the Partnership consistent
with the General Allocations.
"Horizon" shall mean a zone of a particular formation of sufficient
porosity and permeability to form a petroleum reservoir.
"IDC Prepaid Amount" shall mean the amount of funds to be prepaid by
the Partnership to ESI as Operator or Manager pursuant to the JDOA to be
utilized to pay Intangible Development Costs incurred in Initial Development
Operations of the Wells.
"Incapacity" or "Incompetency" shall, with respect to a Person, mean
that there has been an order entered by a court or agency of competent
jurisdiction adjudicating such person to be legally incapacitated or unable or
incompetent to manage his person or estate.
"Inflation Adjustment Factor" shall mean the inflation adjustment to be
made annually as of the first day of January (the "Adjustment Date") each year
beginning January 1, 1998, by the percentage increase (if any) in the "Weighted
Average Gas Price" in the calendar quarter preceding the Adjustment Date over
the Weighted Average Gas Price in the first calendar quarter in the preceding
year. The "Weighted Average Gas Price" shall mean the weighted average price
(net of all transportation, servicing and severance fees and taxes) received by
ESI from the sale of all natural gas sold from wells it operates in southeastern
Ohio.
"Initial Capital Contribution" shall mean for any Partner the total
dollar amount of a cash contribution or fair market value of a property
contribution to the capital of the Partnership made by such Partner in
consideration for a Partnership Interest.
"Initial Co-General Partner" shall mean each person, other than the
Managing General Partner, who subscribes for the purchase of Units and is
admitted to the Partnership as a general partner.
"Initial Development Operations" shall mean all activity in connection
with initially preparing a Drillsite for drilling, conduct of drilling, plugging
and abandoning the Well if no completion attempt is made or, if the Well
warrants completion, completing the Well in one or more Horizons.
"Initial Limited Partner" shall mean an Investor who elects to invest
in the Partnership as a Limited Partner.
"Intangible Development Costs ("IDC's")" shall mean all expenditures
made for wages, fuel, repairs, hauling and supplies, or any of them, incident to
and necessary for the drilling of any Well and the preparation of such Well for
the production of oil or gas, as the case may be, therefrom, which are
chargeable to capital or expense, at the option of the Partnership on behalf of
Investors, pursuant to Section 263(c) of the Code and Treasury Regulations
Section 1.612-4, or any successor provision thereto, which are generally termed
"intangible drilling and development costs." Examples of such costs include
amounts paid for wages, fuel, repairs, hauling, supplies and similar items, or
any of them, which are used (i) in the drilling, shooting and clearing of any
Well, (ii) in such clearing of ground, draining, road making, surveying and
geological works as are necessary in preparation for the drilling of any Well
and the preparation of such Well for the production of oil or gas and (iii) the
expense of plugging and abandoning the Well prior to a completion attempt. These
expenditures in general shall include only those drilling and development items
which in themselves do not have a salvage value. For these purposes, labor,
fuel, repairs, hauling, supplies and similar items are not considered as having
a salvage value, even though used in connection with the installation of
physical property which has a salvage value.
"Interest" or "Partnership Interest" shall mean the Partnership
interest of each Partner in the Partnership relative to the other Partners as
set forth in this Partnership Agreement.
"Investor Partner" or "Investor" shall mean a person who shall make an
Initial Capital Contribution to the Partnership ($60,000 per Unit) and become a
Partner therein, together with any assignee thereof who agrees to become an
Investor Partner and whose substitution as an Investor Partner is agreed to by
the Managing General Partner pursuant to relevant provisions of this Agreement.
"Investor Subscription(s)" shall mean the Initial Capital Contribution
to the Partnership made by each Investor Partner by way of purchase of Units.
"IRS" shall mean the Internal Revenue Service.
"JDOA" shall mean the Joint Drilling and Operating Agreement to be
entered into among ESI, as Operator and Manager, and the Partnership for the
joint development and operation of the Wells.
"Lease" shall mean a Working Interest, mineral interest, Royalty, or
other interest in and to oil, gas, and related hydrocarbons (or a contractual
right to acquire such an interest) or an undivided interest therein or portion
thereof (including those covering only certain Horizons or depths), together
with all easements, permits, licenses, servitudes, and rights-of-way situated
upon or used or held for future use in connection with the exploration,
development, or operation of such interest.
"Lease Acquisition Costs" shall mean the sum of the amounts paid by a
party for Leases acquired from third parties, plus all expenses relating to the
acquisition of Leases. The expenses relating to the acquisition of a Lease shall
include, but not be limited to: (i) title insurance and title examination costs,
brokers' commissions, finders' fees, escrow fees, filing fees, recording costs,
and transfer taxes, if any; (ii) taxes paid in connection with acquisition of
the Lease, including, but not limited to, ad valorem, real estate, personal
property and excise taxes paid; (iii) geological, geophysical, seismic, land,
engineering, drafting, accounting, auditing, legal and other costs incurred in
connection with the Lease acquisition transaction; and (iv) such portion of the
reasonable, necessary and actual expenses incurred by the party not more than 36
months prior to the property transaction for geological, geophysical, seismic,
land, engineering, drafting, accounting, auditing, legal or like services
obtained or provided by the party which are allocated to the Lease in accordance
with accepted industry practice, including the costs of funds used for any of
these purposes such as interest, loan commitment fees, points and other
financing fees and charges for such funds.
"Limited Partner" shall mean any Initial Limited Partner and any Initial
Co-General Partner who becomes a Limited Partner after Conversion.
"Limited Right of Presentment" shall mean the right of Investor
Partners to present their Units to the Managing General Partner for repurchase
during the Presentment Term in accordance with Section 9.08 of this Agreement.
"Majority In Interest" shall mean, with respect to any vote or written
consent of Investor Partners, those Investor Partners whose combined Units, at
the time of determination thereof, exceed 50.0% of the total Units held by
Investor Partners who are eligible to participate in such vote or written
consent; provided, however, Units held by the Managing General Partner and any
of its Affiliates shall not be counted.
"Management Fees" shall mean the fee in the amount of 4.0% of Investor
Subscriptions payable to the Placement Agent for its services in managing the
offering of Units. The Placement Agent may re-allow all or a portion or the
entire amount of Management Fees to Participating Selling Agents who participate
in managing the Offering. The Managing General Partner shall make a Capital
Contribution to the Partnership in an amount sufficient to pay all Management
Fees.
"Managing General Partner" shall mean Energy Search, Incorporated of
Knoxville, Tennessee, or any substitute or additional Managing General Partner
designated pursuant to this Agreement.
"Maximum Subscriptions" shall mean $2,400,000 (40 Units) of Investor
Subscriptions.
"Memorandum" shall mean the Confidential Private Placement Memorandum
dated April 19, 1996, covering the Offering of Units, as such may be
supplemented or amended.
"Minimum Subscription" shall mean the sale of and acceptance by the
Managing General Partner of 4 Units ($240,000) in the Partnership.
"Net Cash From Operations" shall mean, with respect to any fiscal
period of the Partnership, Net Operating Revenue less any amounts used in that
period to reduce principal on Partnership debt.
"Net Operating Revenue" shall mean, with respect to any fiscal period
of the Partnership, gross revenue from all operations and activities of the
Partnership (including, without limitation, Production Operations) less all
costs and expenses of operating the Partnership during such fiscal period
(including, without limitation, Production Costs, Subsequent Development Costs,
the Partnership Administrative Fee, Direct Costs and interest expense).
"Net Partnership Cash" shall mean, with respect to any fiscal period of
the Partnership, Net Cash From Operations, plus net cash available from other
sources including, without limitation, Capital Contributions and Partnership
borrowing.
"Net Proceeds Available" shall mean total Initial Capital Contributions
less Due Diligence Fees and Organization and Offering Expenses. Net Proceeds
Available will be used to pay the IDC Prepaid Amount pursuant to the JDOA and,
perhaps to a limited extent, to acquire Producing Properties.
"Nonconventional Fuel Source (NFS) Tax Credit" shall mean the tax
credit available under Code Section 29 as a result of the production of oil or
natural gas from certain qualifying formations, including Tight Sands
Formations.
"Nonrecourse Deductions" shall have the meaning set forth in Section
5.06(k) of this Agreement.
"Offering" shall mean the offering of Units in the Partnership.
"Offering Period" shall mean the period commencing on the effective
date of the Memorandum and ending not later than the Termination Date during
which time Units of the Partnership shall be offered.
"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 Production Operations. Operating Costs shall include the
Production Administration Fee payable to the Operator pursuant to the JDOA.
"Operator" shall mean the party charged with the duty to operate the
Wells pursuant to the operating agreement governing the Wells. With respect to
Wells to be drilled pursuant to the JDOA and, perhaps, certain Producing
Properties to be acquired by the Partnership, the Operator will be Energy
Search, Incorporated of Knoxville, Tennessee.
"Organization and Offering Expenses" shall mean expenses (exclusive of
Sales Commissions, Management Fees and Due Diligence Fees) incurred in
connection with the organization of the Partnership and the sale of Units in the
Partnership, including, but not limited to, fees and expenses of accountants,
legal counsel and Tax Counsel, marketing consultants and other experts; printing
and distribution costs; filing costs; travel expenses incident to organizing and
conducting the Offering; and other costs and expenses incurred in the
organization of the Partnership and in the offering or sale of the Units.
Organization and Offering Expenses will be reimbursed to the Managing General
Partner by the Partnership in an amount not to exceed 1.0% of total Investor
Subscriptions.
"Participating Selling Agent(s)" shall mean licensed and registered
securities broker-dealers, and their registered representatives, which are
members of the NASD, have signed a selling agreement with the Placement Agent
and are participating in this Offering by offering and selling Units.
"Partner" shall mean, individually and collectively, the Managing
General Partner, the Initial Co-General Partner and/or each Limited Partner.
"Partner Loan Nonrecourse Deductions" shall have the meaning set forth
in Section 5.06(l) of this Agreement.
"Partnership" shall mean the limited partnership formed under the
Tennessee Act pursuant to this Agreement.
"Partnership Administrative Fee" shall mean the monthly fee equal to
$100 per gross Well payable by the Partnership to the Managing General Partner
for its services in routine and general management and administration of the
Partnership. The Partnership Administrative Fee shall be adjusted annually for
inflation pursuant to the Inflation Adjustment Factor.
"Partnership Minimum Gain" has the meaning set forth in Section 5.06(i) of
this Agreement.
"Person" shall mean any individual, corporation, partnership,
association, joint stock company, joint venture, trust, estate, or any other
entity or organization.
"Placement Agent" shall mean Equity Financial Corporation, an NASD-member
broker-dealer of Knoxville, Tennessee.
"Plugging Costs" shall mean all costs and expenses associated with
cementing and plugging a Well in preparation for abandonment.
"Preferred Return" shall mean the timing preference in favor of
Investor Partners with respect to Distributable Cash commencing as of the date
of the first regular distribution of oil and gas production revenues and
continuing for thirty-six (36) months thereafter. Pursuant to this feature, the
Managing General Partner's General Sharing Ratio of Partnership revenues (i.e.,
1.0%) and one-half of ESI's net revenues from its 20% working interest share in
the Wells pursuant to the JDOA, will be subordinated to a cumulative cash
distribution preference in favor of Investor Partners in the amount of 10.0% per
annum, noncompounded and noncumulative, on the Initial Capital Contributions of
Investor Partners. Any Preferred Return not paid in whole or in part in any
distribution period will not accumulate to subsequent distribution periods.
"Presentment Term" shall mean, for purposes of the Limited Right of
Presentment, the term commencing as of the 48th month following the first
regular distribution of oil and gas operating revenues of the Partnership and
continuing for 3 years thereafter.
"Producing Properties" shall mean interests in oil and gas properties
or assets which produce, or are expected to produce, current income. Producing
Properties shall include, without limitation: (i) oil and natural gas wells
producing oil or natural gas in commercial quantities; (ii) shut-in wells
capable, with minimal rework, of production in commercial quantities; (iii)
properties acquired as an incidental part of the acquisition of producing or
shut-in wells capable of production; and (iv) well machinery, equipment,
gathering systems, pipelines, storage facilities, processing installations or
other equipment and property associated with the production and field processing
of oil or natural gas. Producing Properties may include interests in Working
Interests, Landowner Royalty Interests, Overriding Royalty Interests, net
profits interests, and nonoperating interests. Producing Properties may be
invested in and held directly or indirectly through ownership of general or
limited partnership interests, beneficial interests, interests in trusts, common
or preferred stock, or other interests in entities, provided the Managing
General Partner determines that such means of ownership would not cause the
Partnership to be subject to the provisions of the Investment Company Act of
1940.
"Production Administration Fee" shall mean the monthly charge in the
amount of $250 (subject to increase for inflation pursuant to the Inflation
Adjustment Factor) per gross Well to be paid (under the JDOA and any operating
agreement governing Wells which are Producing Properties operated by ESI) by the
Working Interest owners of the Wells to the Operator for routine and incidental
maintenance, inspection, adjustments, administration and operating with respect
to the Wells.
"Production Operations" shall mean all activities relating to operating
and maintaining producing Wells, including contracting, preserving and marketing
oil, natural gas and other hydrocarbons, as well as service, repair and
maintenance of the Wells.
"Profits" and "Losses" means, for each fiscal year or other period, an
amount equal to the Partnership's taxable income or loss for such year or
period.
"Prospect" shall mean an area covering lands which are believed to
contain subsurface structural or stratigraphic conditions making it susceptible
to the accumulations of hydrocarbons in commercially productive quantities at
one or more Horizons. A Prospect may be limited to the minimum area permitted by
state or local practice, whichever is applicable, to protect against drainage
from adjacent wells.
"Regulatory Allocation(s)" shall have the meaning set forth in Section
5.06(m) of this Agreement.
"Royalty Interest" shall mean a Landowner Royalty Interest and/or
Overriding Royalty Interest.
"Sales Commissions" shall mean the amount not to exceed 4.0% of
Investor Subscriptions payable to the Placement Agent as commissions for selling
Units. All or part of the Sales Commissions may be re-allowed in whole or in
part by the Placement Agent to Selling Agents who participate in selling Units.
The Managing General Partner shall make a Capital Contribution to the
Partnership in an amount sufficient to pay all Sales Commissions.
"Site Reclamation Costs" shall mean all costs and expenses (excluding
Tangible Reclamation Costs) associated with reclamation of a Well site in
preparation for abandonment of a Well.
"Subscription Agreement and Investor Questionnaire" shall mean, with
respect to an Investor Partner, the subscription agreement and Investor
questionnaire executed and delivered by that Investor Partner in connection with
his subscription to purchase Units and containing certain representations,
warranties, covenants, and agreements of that Investor Partner.
"Subsequent Development Operations" shall mean any development
activities conducted with respect to a Well which are not Initial Development
Operations, including substantial rework activities, additional completions,
re-completions, deepening or side-tracking, with respect to a Well conducted
after the Well has either (i) produced in commercial quantities or (ii) been
plugged and abandoned.
"Tangible Costs" shall mean all costs incurred in drilling, completing,
repairing or enhancing a Well relating to equipment, parts, items of hardware
and those tangible items necessary to deliver acceptable oil and gas production
to purchasers to the extent installed downstream from the wellhead of the Well
and which costs are required to be capitalized pursuant to applicable provisions
of the Code and Treasury Regulations thereunder.
"Tangible Reclamation Costs" shall mean all costs and expenses
associated with salvaging tubing and tangible equipment from a Well in
connection with plugging and abandonment thereof.
"Tennessee Act" shall mean the Tennessee Revised Uniform Limited
Partnership Act.
"Termination Date" shall be September 30, 1996, or such earlier date as
the Managing General Partner shall, in its sole and absolute discretion,
terminate the Offering.
"Tight Sands Formation" shall mean a geological formation, the
production of gas from which may qualify for NFS Tax Credits pursuant to Section
29 of the Code.
"Treasury Regulation(s)" shall mean the rules and regulations which
have been promulgated by the United States Department of Treasury under and with
respect to the Code and which are applied by the IRS.
"Turnkey Price" shall mean the fixed price to be charged by ESI, as
Operator or Manager, to the Participants pursuant to the JDOA for drilling,
completing (if warranted) or plugging and abandoning a Well in connection with
Initial Development Operations.
"Unit" shall mean an investment unit in the Partnership offered for
$60,000.
"Unit Holder" shall mean all Persons who hold Units regardless of
whether they are Partners.
"Volume Subscription Incentive" shall mean the return of capital
available to Investors subscribing for at least Units ($360,000) by June 30,
1996 who shall receive a return of 3.0% of their Investors' Subscription amount.
The Volume Subscription Incentive will be payable within 90 days of termination
of the Offering. Investors will be eligible for the Volume Subscription
Incentive only if their subscription is accepted by the Managing General Partner
and their subscription check or money order clears collection through normal
banking channels. The Volume Subscription Incentive may be extended beyond June
30, 1996 in the discretion of the Managing General Partner.
"Well" shall mean any oil or natural gas Well in which the Partnership
owns a Working Interest.
"Working Capital Reserve" shall mean any Net Partnership Cash set aside
by the Managing General Partner, not exceeding 3.0% of Investors' Subscriptions
in the first calendar year of the Partnership nor 10.0% of Investors'
Subscriptions in years thereafter, to meet reasonably anticipated liabilities,
obligations, costs or expenses of the Partnership during the following 12
months. The Managing General Partner may, in its discretion, from time to time,
distribute to Partners amounts held in Working Capital Reserve.
"Working Interest" shall mean an operating interest in a Lease
providing the owner thereof the right to explore for and extract therefrom oil,
natural and other hydrocarbons from beneath the surface (according to the terms
of the Lease) and which is subject to some portion of the expense of
development, operation or maintenance.
"Year Interval" shall mean each 12-month period during the Presentment
Term.
ARTICLE II
FORMATION
2.01 Formation. The parties hereby create a limited partnership under
and pursuant to the Act. The Managing General Partner shall cause a certificate
of limited partnership and any other documents or instruments to be completed,
signed by the Managing General Partner (for itself and as attorney in fact for
Investor Partners), and filed in the appropriate offices of the State of
Tennessee as shall be necessary or appropriate to form and continue the
existence and operation of the Partnership.
2.02 Name. The name of the Partnership is ENERGY SEARCH NATURAL GAS
1996 L.P. The business of the Partnership may be conducted under any name or
names chosen by the Managing General Partner, which may, in its sole discretion
and from time to time, change the name of the Partnership.
2.03 Principal Place of Business. The principal place of business of
the Partnership shall be 280 Fort Sanders West Boulevard, Suite 200, Knoxville,
Tennessee 37922, or at such other location as may hereafter be determined by the
Managing General Partner. The Managing General Partner shall promptly notify all
Partners of any change in the principal place of business. The Partnership shall
maintain such other offices at any other place or places as the Managing General
Partner may from time to time deem advisable. Richard S. Cooper shall be the
agent of the Partnership for purposes of service of process. Mr. Cooper's
address for service of process shall be the same as indicated above as the
principal place of business of the Partnership.
2.04 Term. The term of the Partnership shall commence on the date
hereof and shall terminate at such time as terminated in accordance with this
Agreement, but not later than 60 years from the date hereof.
ARTICLE III
PURPOSES; AUTHORITY; PARTNERS
3.01 Purpose. The purpose and character of the business of the
Partnership is to acquire or invest in producing and nonproducing oil and gas
Leases and other related oil and gas properties or activities, by purchase or
otherwise, and to drill for or participate directly or indirectly in the
drilling for oil and natural gas located in, on or under such Leases and to
invest and engage in any and all phases of the oil and gas business. Such
business purposes shall include, without limitation, the purchase, sale,
acquisition, disposition, development, operation and production of, and
exploration for, oil and gas, and the doing of any and all things incident
thereto or connected therewith. The Partnership shall conduct its business in a
manner substantially consistent with the description of its activities contained
in the Memorandum and shall be authorized to do all things allowed by law to
accomplish the same. As described in the Memorandum, the Partnership shall
allocate no more than 15.0% of Net Proceeds Available to the acquisition of
Producing Properties; no more than 15% of Net Proceeds Available to the drilling
of Non-Operated Wells; no more than 15.0% of Net Proceeds Available to the
drilling of Exploratory Wells, and at least 70.0% of Net Proceeds Available to
the drilling of Developmental Wells. All drilling shall be conducted pursuant to
the JDOA in the form set forth as an exhibit to the Memorandum.
3.02 Partners. The Partners in the Partnership shall be as follows:
(a) Managing General Partner. The Managing General Partner
shall be ENERGY SEARCH, INCORPORATED of Suite 200, 280 Fort Sanders
West Boulevard, Knoxville, Tennessee 37922, together with any person
admitted as a substitute Managing General Partner or additional
Managing General Partner pursuant to Article X of this Agreement.
(b) Investor Partners. The Investor Partners shall be the
persons who purchase Units in the Partnership and who sign separate
signature pages for their Agreement, together with any persons admitted
as substitute Investor Partners pursuant to Article IX of this
Agreement. Investor Partners shall elect, upon their subscription for
Units, to be either Initial Limited Partners or Initial Co-General
Partners. Initial Co-General Partners may Convert their status in the
Partnership to that of Limited Partners pursuant to Article XIII of
this Agreement.
ARTICLE IV
CAPITAL CONTRIBUTIONS
AND LIABILITY OF PARTNERS
4.01 Initial Capital Contributions.
(a) Upon Activation, the Managing General Partner shall make
an Initial Capital Contribution to the Partnership in cash in an amount
equal to the sum of (1) any Management Fees to be paid by the
Partnership to the Placement Agent, (2) any Sales Commissions to be
paid by the Partnership to the Placement Agent, (3) any Due Diligence
Fees or other amounts refunded to Investor Partners who qualify for the
Early Subscription Incentive or the Volume Subscription Incentive, and
(4) any Organization and Offering Expenses incurred by the Partnership
in excess of 1.0% of Investor Subscriptions.
(b) Each of the Investor Partners shall make an Initial
Capital Contribution equal to the product of $60,000 times the number
of Units acquired by such Investor Partner payable in cash upon
Subscription for Units.
(c) Notwithstanding Subsection 4.0(b), those Investor Partners
who participate in and qualify for the Early Subscription Incentive
shall receive a refund on their Initial Capital Contribution in the
amount of 5.0% of their Investor Subscriptions. Any return of Initial
Capital Contribution of an Investor Partner as a result of the Early
Subscription Incentive shall be payable within ninety (90) days from
the termination of the Offering.
(d) Investors subscribing for at least 6 Units ($360,000) by
June 30, 1996 shall qualify for the "Volume Subscription Incentive" and
will thereby receive a return of 3.0% of their Investors' Subscription
amount. The Volume Subscription Incentive will be payable within 90
days of termination of the Offering. Investors will be eligible for the
Volume Subscription Incentive only if their subscription is accepted by
the Managing General Partner and their subscription check or money
order clears collection through normal banking channels. The Volume
Subscription Incentive may be extended beyond June 30, 1996 in the
discretion of the Managing General Partner. The Volume Subscription
Incentive will be funded by ESI in the following manner: (i) ESI will
forego its entitlement to be reimbursed for the Due Diligence Fee in
the amount of 1.0% of Investors' Subscriptions and Organization and
Offering Expenses in the amount of 1.0% of Investors' Subscriptions,
and (ii) ESI, in its capacity as Operator pursuant to JDOA, will
provide the Partnership with a discount on the Turnkey Price for total
work to be done during Initial Development Operations in an amount
equal to the total Volume Subscription Incentive awarded to Investors
less the amount of Due Diligence Fee and Organization and Offering
Expenses foregone by ESI. The JDOA will provide for this discount on
the Turnkey Price.
(e) No Partner shall be entitled to be paid any interest on his
Capital Contribution or his Capital Account.
(f) Except as otherwise specifically provided in this Agreement,
there shall be no voluntary or mandatory assessments or capital calls
to which the Partners shall be subject.
4.02 Liability of Partners.
(a) Initial Limited Partners.
(1) The liability of an Initial Limited Partner to
the Partnership or to others with respect to the business
activities or liabilities of the Partnership shall be limited
to the Capital Contribution which he is obligated to make as
specified in Section 4.01, his share of any net profits which
have not been distributed by the Partnership and any amounts
distributed to the Initial Limited Partner which he is
required, pursuant to the Tennessee Act, to return to the
Partnership for the benefit of Partnership creditors. The
Partnership Interest of an Initial Limited Partner shall not
be assessable, such Initial Limited Partner shall not have any
further liability to contribute money or property to the
Partnership, or to repay the Partnership, any Partner or any
creditor of the Partnership, and such Initial Limited Partner
shall not be personally liable for the liabilities of the
Partnership, except as is provided under the Tennessee Act.
(2) Even though an Initial Limited Partner may, under
certain circumstances, as provided by the Tennessee Act or
common law thereunder, be obligated to return to the
Partnership, for the benefit of Partnership creditors,
distributions previously made to him as a return of capital,
it is the intention of the Partners that no distribution to
any Initial Limited Partner shall be deemed to be a return of
capital for purposes of this Agreement, even if such
distribution represents, for Federal income tax purposes or
otherwise, in whole or in part, a return of capital, and that
an Initial Limited Partner shall not be obligated to pay any
such amount to or for the account of the Partnership or to any
creditor of the Partnership. However, if any court of
competent jurisdiction holds that, notwithstanding the
provisions of this Agreement, an Initial Limited Partner is
obligated by the laws of the State of Tennessee under the
circumstances to make such payment, then such obligation shall
be the obligation of such Initial Limited Partner and not the
Managing General Partner.
(b) Initial Co-General Partners.
(1) Prior to Conversion, Initial Co-General Partners
shall not be considered Limited Partners in the Partnership
and therefore, under the Tennessee Act and other applicable
law, will not receive the benefit of limited liability
available to Initial Limited Partners as described in
subsection 4.02(a) above. As to Partnership creditors, and
subject to the indemnification provided in subsection
4.02(b)(3) below, Initial Co-General Partners shall be
considered general partners in the Partnership.
Notwithstanding the foregoing, (i) no Initial Co-General
Partner shall be obligated to make any Capital Contribution to
the Partnership other than as set forth in subsection 4.01,
(ii) the Partnership Interest of each Initial Co-General
Partner shall not be assessable and (iii) such Initial
Co-General Partner shall not have any further liability to
contribute money or property to the Partnership, to repay the
Partnership, any Partner or any creditor of the Partnership,
except as may be required under the Tennessee Act. Any sum
paid by an Initial Co-General Partner to or on behalf of the
Partnership, to the extent he is required to do so pursuant to
the Tennessee Act or otherwise, shall be treated as an
additional Capital Contribution to the Partnership by such
Initial Co-General Partner.
(2) In the event of Conversion, an Initial Co-General
Partner shall have its Partnership Interest converted to that
of a Limited Partner pursuant to Article XIII. After
Conversion, former Initial Co-General Partners shall bear
liability only to the extent of Limited Partners as described
in subsection 4.02(a) above. Conversion shall not, however,
affect the liability of Initial Co-General Partners for
Partnership obligations or activities occurring prior to
Conversion.
(3) The Managing General Partner shall indemnify and
hold harmless each Initial Co-General Partner from and against
any liability sustained or incurred to any third party, as a
result of his status as a general partner in the Partnership
to the extent such liability exceeds the Initial Co-General
Partner's Capital Contribution, interest in undistributed
revenues and interest in insurance proceeds available to
satisfy such liability.
(c) The Managing General Partner. Except as otherwise provided
in this Agreement, the Managing General Partner shall not be personally
liable to any Investor Partner or to the Partnership for the repayment
of the Capital Contribution of any Investor Partner or of any negative
amount in the Capital Account of any Investor Partner. The Managing
General Partner shall not be obligated by this Agreement to make any
Capital Contribution to the Partnership other than as specifically
provided in this Agreement or as may be required pursuant to the
Tennessee Act. Any sum paid by the Managing General Partner to or on
behalf of the Partnership to the extent that it is required to do so by
any Partnership creditor under this Agreement, the Tennessee Act or
otherwise shall be deemed and treated as an additional Capital
Contribution to the Partnership by the Managing General Partner.
4.03 Partnership Advances. The Managing General Partner or its
Affiliates may loan or advance funds to the Partnership to be used for
Partnership operations provided that such advances shall be upon terms generally
no less favorable than would be available on similar loans from commercial
banks. Neither the Managing General Partner nor any of its Affiliates shall
advance money to the Partnership where the interest to be charged would
significantly exceed that which would be charged the Partnership (without
reference to the Managing General Partner's financial abilities or guarantees)
by unrelated commercial lenders, or receive interest in excess of its interest
costs, and the Managing General Partner or its Affiliates shall not receive any
other compensation in connection with such loans or advances, such as points or
other financing charges or fees. Interest with respect to such advances may not
exceed legal limits under applicable state usury laws. Payment of interest and
repayment of principal on such advances shall be solely the obligation of the
Partnership.
ARTICLE V
PARTNERSHIP INTERESTS;
CAPITAL ACCOUNTS; ALLOCATION OF
PROFITS AND LOSSES; DISTRIBUTIONS; TAX ELECTIONS
5.01 Interests of the Partners Generally. The Interests of the Partners
in the Partnership for all purposes of this Agreement, except as otherwise
specified in this Article V, shall be equal to the percentages determined in
accordance with this Section 5.01.
(a) The Interests of the Partnership Classes. The aggregate
Partnership Interest of all the Investor Partners as a class shall be
99.0%. The Interest of the Managing General Partner shall be 1.0%. The
Partnership Interest of the Managing General Partner shall be subject
to allocations described in Sections 5.02(h) and 5.03(g) in connection
with the Preferred Return in favor of Investor Partners.
(b) The Interest of Each Investor Partner in Relation to the
Class. Except as otherwise provided in this Article V, the Partnership
Interest of any Investor Partner shall be equal to a percentage which
shall be determined by dividing (1) the amount of the Initial Capital
Contribution of such Investor Partner; by (2) the total amount of
Initial Capital Contributions of all Investor Partners.
(c) The Interest of the Managing General Partner. The Partnership
Interest of the Managing General Partner shall be 100% owned by ESI.
5.02 Allocation of Costs and Expenses. All costs and expenses of the
Partnership shall be allocated and charged to the Partners, as follows:
(a) Sales Commissions relating to Units subscribed shall be
allocated 100% to the Managing General Partner.
(b) Management Fees with respect to Units subscribed shall be
allocated 100% to the Managing General Partner.
(c) Organization and Offering Expenses shall be allocated
entirely to Investor Partners to the extent of 1.0% of the Investors'
Subscriptions. Any Organization and Offering Expenses in excess of
1.0% of Investors' Subscriptions will be allocated and charged to the
Managing General Partner. For Investor Partners who qualify for the
Early Subscription Incentive or the Volume Subscription Incentive,
Organization and Offering Expenses relating to the Units subscribed
shall be allocated to the Managing General Partner.
(d) Due Diligence Fees with respect to the Units subscribed shall
be allocated 100% to Investor Partners. For Investor Partners who
qualify for the Early Subscription Incentive or the Volume
Subscription Incentive, Due Diligence Fees relating to the Units
subscribed shall be allocated to the Managing General Partner.
(e) Any costs paid by the Partnership with the IDC Prepaid Amount
(including Intangible Development Costs of Initial Development
Operations of Wells drilled pursuant to the JDOA) shall be allocated
100% to the Investor Partners as a class, and within such class, in
accordance with Section 5.01(b); provided, however, that to the extent
the Managing General Partner makes a Capital Contribution to the
Partnership as a result of any Early Subscription Incentive awarded to
Investor Partners, and such Capital Contribution is used by the
Partnership to fund the IDC Prepaid Amount, costs paid with such funds
(including Intangible Development Costs) shall be allocated to the
Managing General Partner.
(f) Lease Acquisition Costs, Intangible Development Costs and/or
Tangible Costs in connection with Producing Properties incurred by the
Partnership with Initial Capital Contributions of the Partners shall
be allocated 99.0% to Investor Partners as a class, and within such
class, in accordance with Section 5.01(b), and 1.0% to the Managing
General Partner; provided, however, that to the extent any such costs
are paid with the proceeds of Capital Contributions of the Managing
General Partner resulting from any Early Subscription Incentive or
Volume Subscription Incentive awarded to Investor Partners, such costs
shall be allocated to the Managing General Partner.
(g) Operating Costs (including the Production Administration Fee
in connection with Wells operated by ESI), costs of Subsequent
Development Operations, Plugging Costs, Site Reclamation Costs,
Tangible Reclamation Costs, the Partnership Administrative Fee, Direct
Costs and any other costs or expenses of the Partnership not
specifically allocated above, or otherwise allocated in connection
with the Preferred Return, will be allocated 99.0% to Investor
Partners as a class, and within such class, in accordance with Section
5.01(b); and 1.0% to the Managing General Partner.
(h) In any period in which payments of Distributable Cash are
made pursuant to the Preferred Return, costs incorporated into the Net
Cash From Operations utilized to make such payments of Distributable
Cash not otherwise specifically allocated above shall be allocated to
those Partners receiving Distributable Cash pursuant to the Preferred
Return.
5.03 Allocation of Revenues. All revenues of the Partnership shall be
allocated and credited to the Partners as follows:
(a) Revenues from the temporary investment of Investors'
Subscription proceeds prior to Activation of the Partnership shall be
allocated 100% to the Investor Partners as a class, and among Investor
Partners in accordance with Section 5.01(b).
(b) Subject to allocations in connection with the Preferred
Return, revenues from the sale of oil and natural gas in connection
with Production Operations shall be allocated to the Partners in
accordance with their respective Partnership Interests under Section
5.01.
(c) Revenues resulting form the sale or other taxable
disposition of an oil and gas property (as such term is defined in
Section 614 of the Code) shall be allocated: (1) to the extent such
revenues constitute a recovery of the Partnership's Simulated Basis (as
defined in Section 5.05(c)) in such property, to the Partners in the
same percentages as the adjusted basis of the property sold was
allocated up to an amount equal to the Partnership's Simulated Basis in
such property at time of such sale; (2) in the case of property
contributed to the Partnership, to the Partner or Partners who
contributed such property in an amount equal to the difference between
the fair market value of such property at the time of the contribution
and its Simulated Basis at such time; (3) to the Partners in the manner
provided pursuant to the Preferred Return; and (4) thereafter to the
Partners in a manner which will cause the aggregate of all revenues
allocated to the Partners from such sale or disposition (to the extent
possible) to equal the amounts which would have been allocated to the
Partners if all such revenues had been allocated among the Partners
according to their respective Interests in the Partnership pursuant to
Section 5.01.
(d) Subject to allocations in connection with the Preferred
Return, revenues resulting from the rental, sale or other disposition
of any item of depreciable property shall be allocated to the Partners
in the same proportions as the costs of such property were allocated to
the Partners, except for revenues resulting from the disposition of
depreciable property contributed to the Partnership, which shall first
be allocated to the Partner or Partners who contributed such property
in an amount equal to the difference between the fair market value of
such property at the time of the contribution and its adjusted tax
basis at such time.
(e) Revenues used to repay any principal, interest or other
amounts owing with respect to any Partnership borrowings shall be
allocated to the Partners in the same proportions as the costs paid
with such borrowings or indebtedness were allocated to the Partners
(and, with respect to any indebtedness to which any property was
acquired by the Partnership was subject at the time of its acquisition,
in the same proportions as the costs of acquisition of such property
were allocated at the time such property was acquired by the
Partnership).
(f) In any period in which Distributable Cash is distributed
pursuant to the Preferred Return, revenues which generated the Net Cash
From Operations resulting in such Distributable Cash shall be allocated
to the Partners pursuant to the Preferred Return.
(g) Revenues not specifically allocated above shall be
allocated to the Partners in accordance with their respective Interests
under the provisions of Section 5.01.
5.04 Allocation of Nonconventional Fuel Source Tax Credits. Nonconventional
Fuel Source Tax Credits, if any, shall be allocated in the same manner as the
revenue from the sale of the oil or natural gas, the production of which
generated such tax credits.
5.05 Capital Accounts. A separate Capital Account shall be established and
maintained by the Partnership for each Partner throughout the term of the
Partnership as provided below:
(a) The Capital Account of each Partner shall, except as
otherwise provided herein, be (1) credited by such Partner's Capital
Contributions to the Partnership, (2) credited by the fair market value
of any other assets contributed by such Partner to the Partnership (net
of liabilities secured by such contributed assets that the Partnership
is considered to assume, or take subject to, pursuant to Section 752 of
the Code), (3) credited with the amount of any item of taxable income
or gain and the amount of any item of income or gain exempt from tax
allocated to such Partner, (4) debited by the amount of any item of tax
deduction or loss allocated to such Partner, (5) debited by such
Partner's allocable share of expenditures of the Partnership not
deductible in computing the Partnership's taxable income and not
properly chargeable as capital expenditures and (6) debited by the
amount of cash or the fair market value of any assets distributed to
such Partner (net of liabilities secured by such distributed assets
that such Partner is considered to assume, or take subject to, pursuant
to Section 752 of the Code).
(b) Immediately prior to any distribution of assets by the
Partnership that is not pursuant to a liquidation of the Partnership,
the Partners' Capital Accounts shall be adjusted by (1) assuming that
the distributed assets were sold by the Partnership for cash at their
respective fair market values as of the date of distribution by the
Partnership and (2) crediting or debiting each Partner's Capital
Account with such Partner's respective share of the hypothetical gains
or losses resulting from such assumed sales in the same manner as gains
or losses on actual sales of such assets would be allocated under
Subsection 5.06(d).
(c) The allocation of basis prescribed by Section
613A(c)(7)(D) of the Code and provided for in Subsection 5.06(b) of
this Article V and each Partner's separately computed depletion
deductions shall not reduce such Partner's Capital Account, but such
Partner's Capital Account shall be decreased by an amount equal to the
product of the depletion deductions that would otherwise be allocable
to the Partnership in the absence of Section 613A(c)(7)(D) of the Code
(computed without regard to any limitations which theoretically could
apply to any Partner) times such Partner's percentage share of the
adjusted basis of the property with respect to which such depletion is
claimed (herein called "Simulated Depletion"). The Partnership's basis
in any oil and gas property as adjusted form time to time for the
Simulated Depletion allocable to all Partners (and where the context
requires, each Partner's allocable share thereof) is herein called
"Simulated Basis." No Partner's Capital Account shall be decreased,
however, by Simulated Depletion deductions attributable to any
depletable property to the extent such deductions exceed such Partner's
remaining Simulated Basis in such property. Debits and credits to a
Partner's Capital Account from the disposition of depletable property
shall be computed by taking into account the Partnership's Simulated
Basis in such property after adjusting such basis for Simulated
Depletion.
(d) Adjustments of the basis of Partnership assets provided
for pursuant to Sections 734 and 743 of the Code (resulting from an
election under Section 754 of the Code) and elections by individual
Partners under Section 59(e)(4) of the Code to amortize such Partner's
share of Intangible Development Cost shall not affect the Capital
Accounts of the Partners, except to the extent required by Treasury
Regulation Section 1.704-1(b)(2)(iv)(m), or any successor thereto.
(e) Capital Accounts shall be adjusted, in a manner consistent
with this Section 5.05, to reflect any adjustments in items of
Partnership income, gain, loss or deduction that result from amended
returns filed by the Partnership or pursuant to an agreement by the
Partnership with the IRS or a final court decision.
(f) In the case of property contributed to the Partnership by
a Partner, the Partner's Capital Accounts may be debited or credited
for items of depreciation, cost recovery, Simulated Depletion,
amortization and gain or loss with respect to such property computed in
the same manner as such items would be computed if the adjusted tax
basis of such property were equal to its fair market value on the date
of its contribution to the Partnership, in lieu of the Capital Account
adjustments provided above for such items, all in accordance with
Treasury Regulation Section 1.704-1(b)(2)(iv)(g), or any successor
thereto.
(g) It is the intention of the Partners that the Capital
Account of each Partner shall be maintained in the manner required
under Treasury Regulation Section 1.704-1(b)(2)(iv) or any successor
Treasury Regulation. To the extent that any additional adjustment to
the Capital Accounts is required by such Treasury Regulation, the Tax
Matters Partner, as defined in Section 5.11, shall be authorized to
make such adjustment provided that such adjustment is not likely to
materially affect the distributions to the Partners under Section 5.07.
(h) Except as otherwise provided in this Agreement, no
Investor Partner shall be obligated to the Partnership or any other
Partner to restore any negative balance in such Investor Partner's
Capital Account. However, by the end of the taxable year in which the
Managing General Partner's Partnership Interest is liquidated, or
within 90 days after the date the Partnership is liquidated in
accordance with Article XI, the Managing General Partner shall
contribute capital to the Partnership sufficient to restore any deficit
in its Capital Account.
5.06 Allocation of Taxable Income and Tax Loss. All items of income,
gain, amount realized, loss, deduction, recapture and credit of the Partnership
for purposes of any applicable Federal, state or local income tax law, rule or
regulation shall be allocated to the Partners as follows:
(a) Income from the sale of oil or gas in connection with
Production Operations shall be allocated in the same manner as revenue
from such operation and sale of production is allocated and credited
pursuant to Section 5.03(b).
(b) Cost and percentage depletion deductions and the gain or
loss on the sale or other disposition of property the production from
which is subject to depletion (herein referred to as "depletable
property") shall be computed separately by the Partners rather than by
the Partnership. For purposes of making such computations, the
Partnership's adjusted basis in each depletable property shall be
allocated under Section 613A(c)(7)(D) of the Code in proportion to each
Partner's respective share of the costs and expenses which entered into
the Partnership's adjusted basis for each depletable property. After
the initial allocation of basis of each depletable property, the
Partnership shall make a new allocation of the basis of its depletable
properties in accordance with Proposed Treasury Regulation Section
1.613A(e) (and any successor provision) upon (i) a contribution of
additional money, other property or services to the Partnership by a
Partner; (ii) the making of additional capital expenditures with
respect to a property; or (iii) a partial or complete withdrawal of a
Partner from the Partnership. Each Partner agrees to cooperate with the
Managing General Partner and to provide the Managing General Partner
with any information requested by the Managing General Partner and
which is necessary or helpful to the Managing General Partner in making
these calculations and allocations. The amount realized on the sale or
other disposition of each such property shall be allocated to the
Partners in proportion to each Partner's respective share of the
revenues from the sale or other disposition of such property provided
for in subsection 5.03(c).
(c) Deductions, losses and credits not specifically provided
for above (other than loss from the sale or other disposition of
Partnership property), including deductions for Intangible Development
Costs, Operating Costs, depreciation, cost recovery and amortization
deductions and those relating to the Preferred Return, shall be
allocated to the Partners in the same manner that the costs and
expenses of the Partnership that gave rise to such items of deduction,
loss and credit were allocated and charged pursuant to Section 5.02.
(d) Gain from the sale or other disposition of Partnership
property that is not specifically provided for above shall be allocated
to the Partners in a manner which reflects each Partner's allocable
share of the revenue form the sale of the Partnership property provided
for in Section 5.03, and loss from the sale or other disposition of
Partnership property that is not specifically provided for above shall
be allocated to the Partners in a manner which reflects each Partner's
allocable share of the costs and expenses of the Partnership property
provided for in Section 5.02.
(e) Any other items of Partnership income or gain not
specifically provided for above, including those with respect to the
Preferred Return, shall be allocated in the same manner as relating
revenue is allocated and credited pursuant to Section 5.03.
(f) Notwithstanding anything to the contrary in this Section
5.06, any recapture income treated as an increase in tax, decrease in
credits or an increase in ordinary income shall be allocated, to the
maximum extent possible, to the Partners in the same manner as the
deductions and credits which gave rise to such recapture income were
allocated.
(g) Notwithstanding anything to the contrary in this Section
5.06, if any Investor Partner's Capital Account has a deficit balance
because the Investor Partner unexpectedly received any adjustments,
allocations, or distributions described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6), or any successor provisions
thereto, items of Partnership income and gain (including items of gross
income) shall be specially allocated to such Investor Partner in an
amount and manner sufficient to eliminate, to the extent required by
the Treasury Regulations, such excess deficit Capital Account balance
as quickly as possible.
(h) Notwithstanding anything to the contrary in this Section
5.06, if the allocation of any loss or deduction to an Investor Partner
would cause the balance of such Investor Partner's Capital Account to
be less than zero, only the amount that reduces the balance in such
Investor Partner's Capital Account to zero shall be allocated to such
Investor Partners with positive Capital Account balances in proportion
to their respective positive Capital Account balances; and if no
Investor Partner has a positive Capital Account, the remainder shall be
allocated to the Managing General Partner.
(i) Notwithstanding any other provision of this Article III,
if there is a net decrease in Partnership Minimum Gain (as defined in
Treasury Regulation Section 1.704-2(b)(2) or any successor Treasury
Regulation thereto) during any Partnership fiscal year, and if any
Investor Partner would otherwise have a Capital Account deficit at the
end of such year, each such Investor Partner shall be specially
allocated items of Partnership income and gain for such year (and, if
necessary, subsequent years) in an amount and manner sufficient to
eliminate such Capital Account deficit as quickly as possible. The
items to be so allocated shall be determined in accordance with
Treasury Regulation Section 1.704-2(b)(2). This subsection 5.06(i) is
intended to comply with the "minimum gain chargeback" requirement in
such section of the Treasury Regulations and shall be interpreted
consistently therewith.
(j) In the event any Investor Partner has a deficit Capital
Account at the end of any Partnership fiscal year that is in excess of
(1) the amount the Partner is obligated to restore pursuant to any
provision of this Agreement, and (2) the amount the Investor Partner is
deemed to be obligated to restore pursuant to the penultimate sentence
of Treasury Regulation Sections 1.704-1(b)(2)(ii)(b) and
1.704-1(b)(2)(ii)(d) and (3) the amount the Investor Partner would be
deemed obligated to restore if Partner Loan Nonrecourse Deductions were
treated as Nonrecourse Deductions, the Investor Partner shall be
specially allocated items of Partnership income and gain in the amount
of such excess as quickly as possible, provided that an allocation
pursuant to this subsection 5.06(j) shall be made only if and to the
extent that such Investor Partner would have a deficit Capital Account
in excess of such sum after all other allocations provided for in this
Section 5.06 have been tentatively made as if subsection 5.06(g) hereof
and this subsection 5.06(j) were not in the Agreement.
(k) Nonrecourse Deductions for any fiscal year or other period
shall be specially allocated 1.0% to the Managing General Partner and
99.0% to the Investor Partners. For purposes of this Agreement, the
term "Nonrecourse Deductions" shall have the meaning set forth in
Treasury Regulation Section 1.704-2(c), or any successor Treasury
Regulation thereto. The amount of Nonrecourse Deduction for a
Partnership fiscal year shall equal the net increase, if any, in the
amount of Partnership Minimum Gain during that fiscal year, determined
according to the provisions of Treasury Regulation Section 1.704-2(c).
(l) Any Partner Loan Nonrecourse Deductions for any fiscal
year or other period shall be allocated to the Partner who bears the
risk of loss with respect to the loan to which such Partner Loan
Nonrecourse Deductions are attributable in accordance with Treasury
Regulation Section 1.704-2(i). For purposes of this Agreement, the term
"Partner Loan Nonrecourse Deductions" shall mean Partnership deductions
that would be Nonrecourse Deductions if they were not attributable to a
loan made or guaranteed by a Partner or within the meaning of Treasury
Regulation Section 1.704-2(i).
(m) The allocations set forth in subsections 5.06(g), (h),
(i), (j), (k) and (l) (hereinafter "Regulatory Allocations") are
intended to comply with certain requirements of Treasury Regulations
Sections 1.704-1 and 1.704-2. Notwithstanding anything to the contrary
in this Agreement (other than the Regulatory Allocations), the
Regulatory Allocations shall be taken into account in allocating other
taxable income and tax losses and items of income, gain, loss and
deduction among the Partners so that, to the extent possible and
consistent with Treasury Regulation Sections 1.704-1 and 1.704-2, the
net amount of such allocations of other taxable income and tax losses
and other items and the Regulatory Allocations to each Partner shall be
equal to the net amount that would have been allocated to each such
Partner if the Regulatory Allocations had not occurred. Notwithstanding
the preceding sentence, Regulatory Allocations relating to (1)
Nonrecourse Deductions shall not be taken into account except to the
extent that there has been a reduction in Partnership Minimum Gain and
(2) Partner Loan Nonrecourse Deductions shall not be taken into account
except to the extent that there would have been a reduction in
Partnership Minimum Gain if the loan to which such deductions are
attributable were not made or guaranteed by a Partner within the
meaning of Treasury Regulation Section 1.704-2(i).
(n) Notwithstanding anything to the contrary in this Section
5.06, all deductions allocable under Section 83(h) of the Code shall be
allocated to the Partner who is allocated the income which gives rise
to the to the deduction under Section 83(h) of the Code.
(o) In accordance with Section 704(c) of the Code and the
Treasury Regulations thereunder, income, gain, loss and deduction with
respect to any property contributed to the Partnership shall, solely
for tax purposes, be allocated among the Partners so as to take account
of any variation between the fair market value of such property and its
adjusted basis in the hands of the Partnership on the contribution
date. This Section 5.06 shall not affect, or in any way be taken into
account in computing any Partner's Capital Account or distributions
pursuant to any provision of this Agreement.
5.07 Distributions. At least quarterly (within 30 days after the close
of each calendar quarter), all Distributable Cash of the Partnership which the
Managing General Partner determines is not needed to pay existing or anticipated
Partnership expenses or to fund Working Capital Reserves, shall be distributed
to the Partners. Distributable Cash of the Partnership shall be allocated first,
to the Investor Partners in an amount sufficient to maintain the Preferred
Return (on a current basis); second, to the Managing General Partner to the
extent necessary to bring the Managing General Partner's aggregate cash
distributions to the level of its General Sharing Ratio; and third, to the
Partners in accordance with their respective Partnership Interests as set forth
in Section 5.01. The Partnership shall not require that Investor Partners
reinvest their share of cash available for distribution in the Partnership. Cash
distributions from the Partnership to the Managing General Partner shall only be
made in conjunction with distributions to Investor Partners and only out of
funds properly allocated to the Managing General Partner's account. No
distribution shall be made to any Investor Partner to the extent the same would
create or increase a deficit in such Partner's Capital Account. Any such
prohibited distribution shall be reallocated to those Partners not having a
deficit in their Capital Accounts in the proportion that the positive balance of
each such Partner's adjusted Capital Account bears to the aggregate balance of
all such Partners' adjusted Capital Accounts. Notwithstanding the foregoing, any
distributions to be made in connection with, in contemplation of, or as a part
of the liquidation of the Partnership as provided in Article XI of this
Agreement, shall be made first to the Investor Partners in an amount equal to
the Preferred Return, if any, and then to the Partners in proportion to their
respective positive Capital Account balances until their Capital Accounts have
been reduced to zero and thereafter in proportion to their respective
Partnership Interests as set forth in Section 5.01.
5.08 Effects of Admissions, Transfers and Withdrawals on Allocations and
Distributions. If at any time during a fiscal year of the Partnership, a new
Partner is admitted to the Partnership, an existing Partner withdraws from the
Partnership, or any Partner transfers all or any portion of such Partner's
Interest in the Partnership, allocations of items of taxable income and of
taxable loss shall be allocated between the transferor and the transferee, in
the complete and sole discretion of the Tax Matters Partner, as defined in
Section 5.10, based on either: (1) the interim closing of the books method; or
(2) the daily basis allocation method; and distributions shall be made to the
person who is the holder of record of the Interest on the Partnership's books at
the time of the distribution.
5.09 Authority of Tax Matters Partner to Vary Allocations to Preserve and
Protect the Intention of the Partners.
(a) It is the intention of the Partners that each Partner's
distributive share of income, gain, loss, deduction or credit (or any
item thereof) shall be determined and allocated in accordance with this
Article V to the fullest extent permitted by Section 704(b) of the
Code, or any successor thereto. In order to preserve and protect the
allocations provided for in this Article V, the Tax Matters Partner, as
defined in Section 5.11, shall have the authority to allocate income,
gain, loss, deduction or credit (or any item thereof) arising in any
year or maintain Capital Accounts differently than that expressly
provided for in this Article V, if and to the extent that determining
and allocating income, gain, loss, deduction or credit (or any item
thereof) in the manner expressly provided for in this Article V, would
cause the allocations of each Partner's distributive share of income,
gain, loss, deduction or credit (or any item thereof) not to be
permitted by Section 704(b) of the Code and the Treasury Regulations
promulgated thereunder. Any allocation made pursuant to this Section
5.09 shall be deemed to be in place of an allocation otherwise
expressly provided for in this Article V, and no amendment of this
Agreement or further consent of any Partner shall be required therefor.
(b) In making any such discretionary allocation under this
Section 5.09, the Tax Matters Partner shall be authorized to act only
after having been advised by the Partnership's tax accountant or legal
counsel that, under Section 704(b) of the Code and the Treasury
Regulations thereunder that such discretionary allocation or
modification in the manner of maintaining Capital Accounts is: (1)
necessary, and (2) the minimum modification of the provisions otherwise
expressly provided for in this Article V which is necessary in order to
assure that, either in the then-current fiscal year or in any preceding
fiscal year, each Partner's distributive share of income, gain, loss,
deduction or credit (or any item thereof) is determined and allocated
in accordance with this Article V to the fullest extent permitted by
Section 704(b) of the Code and the Treasury Regulations thereunder.
(c) If the Tax Matters Partner is required by this Section
5.09 to make any discretionary allocation or change in method of
Capital Account maintenance in a manner less favorable to the Investor
Partners than is otherwise expressly provided for in this Article V,
then the Tax Matters Partner shall have the authority, only after
having been advised by the Partnership's tax accountant or legal
counsel that it is permitted by Section 704(b) of the Code, to allocate
income, gain, loss, deduction or credit (or any item thereof) to the
Partners as comparable as possible to the allocations otherwise
expressly provided for or contemplated by this Article V.
(d) Any new allocation made by the Tax Matters Partner under
this Section 5.09 in reliance upon the advice of the Partnership's tax
accountant or legal counsel shall be deemed to be made pursuant to the
fiduciary obligation of the Tax Matters Partner to the Partnership and
to the Partners, and no such new allocation shall give rise to any
claim or cause of action by any Partner.
5.10 Tax Matters Partner. Energy Search, Incorporated ("ESI") is hereby
designated and authorized to act as the "Tax Matters Partner" of the
Partnership, as that term is described and used in the Treasury Regulations
promulgated under Section 6231 of the Code. Each Partner consents to such
designation of ESI as the Tax Matters Partner and agrees to execute, certify,
acknowledge, deliver, swear to, file and record with the IRS or other
appropriate governmental authorities such documents as may be necessary or
appropriate to evidence such consent. ESI shall have the rights, power and
authority which are granted to a "Tax Matters Partner" under such provisions of
the Code and Treasury Regulations and shall be authorized, but not obligated, to
do any act specified therein. Any cost or expense incurred by the Tax Matters
Partner in connection with any of the foregoing matters shall be payable by the
Partnership as a Direct Cost, and the Partnership shall indemnify and reimburse
the Tax Matters Partner for all costs and expenses, including legal and
accounting fees, claims, liabilities, losses and damages incurred in connection
with any tax audit or judicial review with respect to the tax liability of the
Partners.
5.11 Tax Elections.
(a) No election shall be made by the Partnership or any Partner,
pursuant to Section 761 of the Code, to have the Partnership excluded
from the application of the provisions of Subchapter K of Chapter 1 of
Subtitle A of the Code, or to be excluded from any similar provisions
of state tax laws.
(b) In the event of the transfer of a Partnership Interest or in
the event of the distribution of Partnership property to any Partner,
the Partnership may elect in accordance with Section 754 of the Code,
in the absolute discretion of the Tax Matters Partner, to cause the
basis of the Partnership property to be adjusted for Federal income
tax purposes as provided for by Sections 734 and 743 of the Code.
(c) The Partnership shall elect, in accordance with Section
263(c) of the Code and applicable Treasury Regulations and comparable
provisions of state law, to expense all Intangible Development Costs.
(d) The Tax Matters Partner shall have the authority on behalf of
the Partnership, to make or refrain from making any other tax election
provided in the Code, or in Treasury Regulations or in any other
applicable Federal or state tax law as deemed appropriate by the Tax
Matters Partner.
(e) Each Partner hereby represents, warrants and agrees as
follows:
(1) He will not file the statement described in
Section 6224(c)(3)(B) of the Code prohibiting 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(s)(3) of the Code) of the
Partnership;
(2) He will not form or become and exercise any
rights as a member of a group of Partners having a 5.0% or
greater interest in the profits of the Partnership under Code
Section 6223(b)(2) of the Code; and
(3) ESI is authorized to file a copy of this
Agreement (or pertinent portions hereof) with the IRS pursuant
to Section 6224(b) of the Code if necessary to perfect the
waiver of rights under this Subsection 5.11.
ARTICLE VI
PAYMENT OF PARTNERSHIP COSTS AND EXPENSES
6.01 Costs and Expenses Paid From Initial Capital Contributions. The
Partnership shall pay Sales Commissions, Management Fees, Due Diligence Fees,
Organization and Offering Expenses, Intangible Development Costs paid from the
IDC Prepaid Amount, and Lease Acquisition Costs and other costs associated with
investment in Producing Properties in appropriate proportionate amounts pursuant
to the "Estimated Sources of Funds and Uses of Proceeds" section of the
Memorandum upon and after Activation of the Partnership as funds are released
from the Escrow Account to the Partnership.
6.02 Partnership Operations. The Partnership shall pay Operating Costs
(including the Production Administration Fee payable in connection with Wells
operated by ESI) and any other costs or expenses incurred in its Production
Operations.
6.03 Partnership Administration. The Partnership shall pay the Partnership
Administration Fee and all Direct Costs incurred in managing and administration
of the Partnership.
ARTICLE VII
MANAGEMENT OF THE PARTNERSHIP
7.01 Power and Authority of Managing General Partner. Subject
specifically to the other provisions of this Article VII, and except as provided
elsewhere in this Agreement or by applicable law, the Partners hereby delegate
and grant to the Managing General Partner, and each of them, full and exclusive
power and authority on behalf of the Partnership to manage, control, administer,
and operate the properties, assets, funds, business, and affairs of the
Partnership and to do or cause to be done any and all acts deemed by the
Managing General Partner to be necessary or appropriate thereto. The scope of
such power and authority shall encompass all matters in any way connected with
such business or incident thereto, including without limitation the power and
authority:
(a) To purchase or otherwise invest in Leases and other real or
personal property of every nature considered necessary or appropriate
to carry on and conduct the business of the Partnership.
(b) To borrow monies for the business of the Partnership and to
engage in any other means of financing customary in the oil and gas
industry.
(c) To enter into any agreement for sharing of profits, joint
venture, or partnership with any person, firm, corporation,
government, or agency thereof engaged in any business or transaction
in which the Partnership is authorized to engage, or any business or
transaction capable of being conducted, so as to directly or
indirectly benefit the Partnership, and to cause the purposes of the
Partnership thereunder to be carried out.
(d) To explore and prospect by geological, geophysical, or other
methods for the location of anomalies or other indications favorable
to the accumulation of oil and gas, including specifically the power
to contract with third parties for such purposes.
(e) To maintain, explore, develop, operate, manage, and defend
Partnership property and to drill, test, plug and abandon or complete,
and equip, rework, and recomplete Wells on any Lease owned by the
Partnership for the production of oil and gas located thereunder, and
to contract with third parties for such purposes, to carry out a
program of enhanced recovery on Partnership property and to do any and
all other things necessary or appropriate to carry out the terms and
provisions of this Agreement that would or might be done in the
exploration, development, operation, and management of its own
property.
(f) To enter into and execute Leases, drilling contracts, Farmout
agreements, Farmin contracts, dry and bottom hole and acreage
contribution letters, participation agreements, and any other
agreements customarily employed in the oil and gas industry in
connection with the acquisition, sale, exploration, development, or
operation of oil and gas properties including, without limitation, the
JDOA.
(g) To sell the production accruing to Leases acquired by the
Partnership and to execute gas sales contracts, casinghead gas
contracts, transfer orders, division orders, or any other instruments
in connection with the sale of production from the Partnership's
interest in any property.
(h) To Farmout, sell, assign, convey, or otherwise dispose of,
for such consideration and upon such terms and conditions as the
Managing General Partner may determine, all or any part of the
Partnership property, any interest therein, or any interest payable
therefrom.
(i) To employ on behalf of the Partnership agents, employees,
managers, consultants, accountants, lawyers, geologists,
geophysicists, landmen, clerical help, and such other assistance and
services as the Managing General Partner may deem proper and to pay
therefor such remuneration and compensation as the Managing General
Partner may deem reasonable and appropriate.
(j) To purchase, lease, rent or otherwise acquire or obtain the
use of machinery, equipment, tools, materials, and all other kinds and
types of real or personal property that may in any way be deemed
necessary or advisable in connection with carrying on the business of
the Partnership, and to incur expenses for travel, telephone,
telegraph, insurance, and for such other things, whether similar or
dissimilar, as may be deemed necessary or appropriate for carrying on
and performing the business of the Partnership.
(k) To pay delay rentals, shut-in gas Royalty payments, property
taxes, and any other amounts necessary or appropriate to the
maintenance or operation of any Partnership property.
(l) To make and enter into such agreements and contracts with
such parties and to give such receipts, releases, and discharges with
respect to any and all of the foregoing and any matters incident
thereto as the Managing General Partner may deem advisable or
appropriate.
(m) To procure and maintain in force such insurance as the
Managing General Partner shall deem prudent to serve as protection
against liability for loss and damage that may be occasioned by the
activities to be engaged in by the Partnership and the Managing
General Partner on behalf of the Partnership.
(n) To pay, extend, renew, modify, adjust, submit to arbitration,
prosecute, defend or compromise on behalf of the Partnership, upon
such terms as the Managing General Partner may determine and upon such
evidence as they may deem sufficient, any obligation, suit, liability,
cause of action, or claim, including a suit or claim for taxes, in
favor of or against the Partnership.
(o) To quitclaim, surrender, release, or abandon any Partnership
property with or without consideration therefor.
(p) To make such classifications, determination, and allocations
as the Managing General Partner may deem advisable, having due regard
for any relevant generally accepted auditing standards.
(q) To enter into an agreement with the Placement Agent and to
perform all of the Partnership's obligations thereunder, to issue and
sell Units to Initial Co-General Partners and Limited Partners
pursuant to the terms and conditions of this Agreement and the
Memorandum, to accept and execute on behalf of the Partnership
Subscription Agreements with Investor Partners, and to admit original
and substituted Investor Partners to the Partnership.
(r) To take such other actions, to execute and deliver such
documents, contracts, instruments or agreements and to perform such
other acts as may be deemed by the Managing General Partner to be
appropriate to carry out the business and affairs of the Partnership.
(s) To establish a Working Capital Reserve not to exceed 3.0% of
Investors' Subscriptions upon Activation and not to exceed 10.0% of
Investors' Subscriptions at any time one year after Activation for the
purpose of meeting anticipated Partnership obligations, liabilities
and expenses within the following 12 months. In the discretion of the
Managing General Partner, funds in the Working Capital Reserve which
are no longer needed to be retained may be distributed from time to
time to Partners.
In accomplishing all of the foregoing and except as otherwise provided
in this Agreement, the Managing General Partner may, in its sole discretion,
use, employ or contract its own personnel, properties, or equipment or those of
any Affiliate thereof (subject to the provisions of Section 7.04) or the
Managing General Partner may hire or rent those of third parties and may employ
on a temporary or continuing basis outside accountants, attorneys, consultants,
and others on such terms as the Managing General Partner deems advisable. No
person, firm, or corporation dealing with the Partnership shall be required to
inquire into the authority of the Managing General Partner to take any action or
make any decision.
7.02 Certain Restrictions Concerning the Managing General Partner's
Power and Authority. Notwithstanding any other provisions of this Agreement to
the contrary, no Managing General Partner shall have the power or authority to,
and shall not, directly or indirectly, do, perform, or authorize any of the
following:
(a) Borrow any money in the name or on behalf of the Partnership
unless (1) the total amount of the borrowings or financings
outstanding (excluding trade credit incurred in the normal course of
business) do not exceed 25.0% of Investor Subscriptions, (2) the terms
of any such financing or the effect of applicable law provide that the
lender has recourse only against Partnership assets or the Managing
General Partner and not against any Investor Partner individually, and
(3) the Managing General Partner determines in good faith that such
borrowing is consistent with the business purposes of the Partnership
and in the best interest of Investor Partners.
(b) Without having first received the prior consent of a Majority
In Interest of the Investor Partners, sell all or substantially all of
the oil and gas properties of the Partnership other than in the
ordinary course of business (except upon liquidation of the
Partnership pursuant to Article X), unless cash funds of the
Partnership are insufficient to pay the obligations and other
liabilities of the Partnership.
(c) Guarantee in the name or on behalf of the Partnership the
payment of money or the performance of any contract or other
obligation of any person.
(d) Use, or permit any other person to use, the Partnership's
name, funds, credit, or property for purposes other than legitimate
Partnership purposes;
(e) Take any action, or permit any other person to take any
action, with respect to the assets or property of the Partnership that
does not primarily benefit the Partnership, and is not substantially
consistent with the stated purposes of the Partnership as described in
Section 3.01, including, without limitation, utilization of funds of
the Partnership as compensating balances for its own benefit.
(f) Benefit from any arrangement for the marketing of oil and gas
production or other relationships affecting the property of the
Partnership, unless such benefits are no greater than those which
could be realized by third parties dealing at arms-length with the
Partnership and are fairly and equitably apportioned among the parties
involved.
(g) On any loans or advances made available to the Partnership by
the Managing General Partner or any Affiliate, receive interest in
excess of any of the following: (1) the maximum rate permitted by
applicable law, (2) the effective interest rate than being paid by the
Managing General Partner or Affiliate for its funds, or (3) the rate
that would be charged the Partnership (without regard to the Managing
General Partner's or Affiliate's financial ability or guaranties) by
unrelated banks on comparable loans for the same purpose; and the
Managing General Partner and its Affiliate shall not receive points or
other finance charges or fees, regardless of amount.
(h) Receive, or permit an Affiliate to receive, rebates or
give-ups, or participate, or permit an Affiliate to participate in any
reciprocal business arrangement which would circumvent the
restrictions and prohibitions on the Managing General Partner and its
Affiliates imposed by this Article.
(i) Cause or permit to make loans or advances of credit to the
Managing General Partner or its Affiliates, including any other
partnerships managed by the Managing General Partner or its
Affiliates.
(j) Profit for itself or any Affiliate by drilling or operating
Wells in contravention of its fiduciary obligations.
(k) Reinvest current revenues of the Partnership for any purpose
other than conduct of Production Operations or Subsequent Development
Operations determined by the Managing General Partner to be consistent
with the business purpose of the Partnership and in the best interest
of Investor Partners.
7.03 Commitment of Managing General Partner. During the existence of
the Partnership, the Managing General Partner shall devote such time and effort
to the Partnership business as may be necessary to promote adequately the
interests of the Partnership and the mutual interests of the Partners; however,
it is specifically understood and agreed that the Managing General Partner shall
not be required to devote full time to Partnership business, and the Managing
General Partner and its Affiliates thereof may at any time and from time to time
engage in and possess interests in other business ventures of any and every type
and description, independently or with others, including without limitation the
acquisition, ownership, exploration, development, operation, and management of
oil and gas properties for themselves and other persons and the organization and
management of other partnerships and joint ventures similar to the Partnership
provided, at all times, the Managing General Partner acts consistent with its
fiduciary duty to the Partnership.
7.04 Contracts with Managing General Partner or Affiliates. The
Partnership may enter into contracts and agreements with the Managing General
Partner, or any Affiliate of the Managing General Partner, for any legitimate
purpose consistent with the business purposes and restrictions of the
Partnership including, without limitation, the rendering of services or the sale
or lease of materials, equipment or supplies; provided which the Managing
General Partner determines in good faith that the terms, conditions, prices and
compensation under such contracts or agreements are fair and reasonable to the
Partnership and generally no less favorable than terms which the Managing
General Partner or Affiliate offer, or would offer, to unrelated third parties
in the same geographical area. Specifically the Managing General Partner, on
behalf of the Partnership, is authorized to enter into and perform the JDOA, Gas
Servicing Agreement and any ancillary contracts or agreements contemplated
thereby. In no case shall the fact that the other party to a contract or
agreement with the Partnership is a Partner (including the Managing General
Partner) or an Affiliate of a Partner prohibit or prevent the Partnership from
entering into or performing such contract or agreement provided the Managing
General Partner determines that the terms thereof are fair and reasonable to the
Partnership and commensurate with terms that could be negotiated at arms-length
with independent third parties in the same geographic area.
7.05 Sales of Lease Interests to Partnership. Neither the Managing General
Partner nor any Affiliate (including any partnership managed by the Managing
General Partner or an Affiliate) shall sell, transfer or convey any interest in
a Producing Property or Lease to the Partnership except pursuant to a price and
under terms and conditions that are fair and reasonable to the Partnership as
determined in good faith by the Managing General Partner.
7.06 Purchases of Properties From the Partnership. Neither the Managing
General Partner nor any Affiliate (including any partnership managed by the
Managing General Partner or an Affiliate) may purchase or acquire any interest
in a Producing Property or Lease from the Partnership, directly or indirectly,
except pursuant to a price equal to fair market value (determined in good faith
by the Managing General Partner) and such other terms and conditions that are
fair and reasonable to the Partnership.
7.07 Custody of Partnership Funds and Properties. The Managing General
Partner and its Affiliates shall observe the following requirements in dealing
with Partnership funds and other properties:
(a) The Managing General Partner will 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.
(b) Funds of the Partnership shall not be commingled with
funds of any other entity. The Managing General Partner may, however,
establish a master fiduciary account pursuant to which separate
subtrust accounts are maintained for the benefit of the Partnership and
other partnerships managed by the Managing General Partner or its
Affiliates; provided that the Partnership's funds are afforded maximum
protection from the claims of other partnerships and their creditors.
The prohibition of this subsection (b) shall not apply to the payment
of the IDC Prepaid Amount to the Operator pursuant to the JDOA or to
investments meeting the requirements of subsection (d) below.
(c) Leases may be held in the names of nominees temporarily to
facilitate their acquisition and for similar valid purposes. On a
permanent basis, Producing Properties may be held in the name of a
special nominee entity organized by the Managing General Partner for
the sole purpose of holding record title for oil and gas properties;
provided, however, that the nominee entity shall engage in no other
business and incur no other liabilities and the Leases are held in the
name of a special nominee, either a ruling from the IRS or an opinion
of qualified tax counsel shall be obtained to the effect that such
arrangement shall not change the ownership status of the properties for
Federal income tax purposes.
(d) Partnership funds may not be invested in the securities of
another partnership, corporation, trust or other legal entity except in
the following instances:
(1) investments in Producing Properties or undivided
interests in Leases made in the ordinary course of the
Partnership's business;
(2) temporary investments of Partnership funds in
income producing short-term, highly liquid investments,
where there is safety of principal substantially the same as
U.S. Treasury Bills, bank certificates of deposit or bank
money market accounts.
(3) investments in entities established solely to limit
the Partnership's liabilities associated with the ownership
or operation of property or equipment, provided that in such
instances duplicative fees and expenses shall be prohibited;
and
(4) temporary investments in other partnerships, joint
ventures or corporations owning interests in oil and gas
properties, for the purpose of liquidating the same into the
Partnership; provided, however, that the terms of any such
arrangements are consistent with the purposes stated in
Section 3.01 and do not directly or indirectly circumvent or
violate the restrictions or requirements imposed upon the
Managing General Partner, or the rights of Investor
Partners, pursuant to this Agreement.
7.08 Insurance. With respect to Wells to be drilled pursuant to the
JDOA or Producing Properties to be operated by ESI, to the extent available upon
terms and for prices deemed commercially practicable and reasonable in the sole
discretion of the Managing General Partner, the Managing General Partner shall
cause the Partnership to be listed as an additional insured on the Operator's
general liability, well control, blowout and/or environmental contamination
insurance with primary, excess or umbrella coverage limits, per occurrence or in
the aggregate of at least $10,000,000. The Managing General Partner shall notify
Investor Partners at least 30 days prior to the effective date of any adverse
material change or cancellation in such insurance coverage. With respect to
Non-Operated Properties, if any, the Managing General Partner shall cause the
operator of such properties to maintain such liability, well control, blowout
and/or other insurance as is customary to be carried in the industry. In
addition, the Managing General Partner shall require that any operators and
contractors furnishing goods and services to the Wells and Leases carry
reasonable and customary automobile liability insurance and workers compensation
insurance required by law.
7.09 Liability of Managing General Partner and Affiliates. No Managing
General Partner nor any Affiliate thereof shall have any liability to the
Partnership or to any Partner for any loss suffered by the Partnership that
arises out of any action or inaction performed or omitted by the Managing
General Partner or any Affiliate thereof, if the Managing General Partner or
such Affiliate in good faith determined that such course of conduct was in the
best interest of the Partnership and provided that such course of conduct did
not constitute gross negligence or willful misconduct on the part of the
Managing General Partner or such Affiliate; provided further that nothing in
this Agreement shall authorize the Managing General Partner or any Affiliate
thereof to breach its fiduciary duty to either the Partnership or the Partners.
7.10 Indemnification of Managing General Partner and Affiliates.
(a) The Partnership shall indemnify the Managing General
Partner and/or its Affiliates against any losses, judgments,
liabilities, expenses, and amounts paid in settlement of any claims
sustained by the Managing General Partner or its Affiliates in
connection with any matter associated with the Partnership; provided
that (1) the Managing General Partner, or the indemnified Affiliate,
has determined in good faith that the course of conduct that caused the
loss or liability was in the best interest of the Partnership and (2)
the conduct of the Managing General Partner, or the indemnified
Affiliate, did not constitute gross negligence or willful misconduct.
(b) Notwithstanding Section 7.10(a), neither a Managing
General Partner nor any Affiliate thereof, nor the Placement Agent, nor
any Participating Selling Agent shall be indemnified by the Partnership
or any Investor Partner for any losses, liabilities, or expenses
arising from or out of an alleged violation of Federal or state
securities laws unless (1) there has been a successful adjudication on
the merits of each count involving alleged securities laws violations
as to the particular indemnitee and the court approves indemnification
of the litigation costs, (2) such claims have been dismissed with
prejudice on the merits by a court of competent jurisdiction as to the
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 securities commissioners of any
state in which interests were offered or sold as to indemnification for
violations of securities law.
(c) The Partnership may purchase and maintain insurance on
behalf of the Managing General Partner and its Affiliates thereof
against any liabilities asserted against or expenses incurred by the
Managing General Partner and Affiliate there in connection with
Partnership activities, provided that the Partnership shall not incur
the cost of that portion of any insurance that insures the Managing
General Partner or any Affiliate thereof against any liability with
respect to which the Managing General Partner and any Affiliates
thereof are denied indemnification under the provisions of this
Agreement; provided, however, that nothing contained herein shall
preclude the Partnership from purchasing and paying for such types of
insurance including without limitation extended coverage liability and
casualty and workers compensation, as would be customary for any person
owning comparable assets and engaged in a similar business, or from
naming the Managing General Partner and Affiliates thereof as
additional insured parties thereunder, provided, that such addition
does not increase the premiums payable by the Partnership.
(d) Legal expenses and other costs incurred as a result of a
claim described in this Section 7.10 shall be paid by the Partnership
from time to time in advance of the final disposition of such claim if
the following three (3) conditions are satisfied: (1) the claim relates
to the performance of duties or services by the Managing General
Partner or any Affiliates thereof on behalf of the Partnership; (2) the
claim is initiated by a third party who is not an Investor Partner or
the claim is initiated by an Investor Partner and a court of competent
jurisdiction specifically approves such advancement; and (3) the
Managing General Partner or its Affiliate undertakes to repay the
advanced funds to the Partnership, together with the applicable legal
rate of interest thereon, in the event it is later determined that such
Managing General Partner or its Affiliate is not entitled to
indemnification under the provisions of this Section 7.10.
(e) The indemnification provided by this Section 7.10 shall
continue as to the Managing General Partner and its Affiliates in the
event it ceases to be the Managing General Partner of the Partnership
with respect to claims relating to the period in which the Managing
General Partner was the Managing General Partner of the Partnership and
shall inure to the benefit of the successors and assigns of the
Managing General Partner and Affiliates thereof.
(f) The indemnification provided by this Section 7.10 shall be
made, and shall be recoverable by the Managing General Partner or any
Affiliate thereof, only out of the assets of the Partnership and not
from the Investor Partners.
(g) For purposes of Section 7.09 and this Section 7.10, the
term "Affiliate" shall mean any person performing services or
participating in management decisions on behalf of the Managing General
Partner and acting within the scope of the Managing General Partner's
authority who (1) directly or indirectly controls, is controlled by or
is under common control with the Managing General Partner, (2) owns or
controls 10.0% or more of the outstanding voting securities of the
Managing General Partner, (3) is an officer, director, agent, employee,
partner or trustee of the Managing General Partner, or (4) is an
officer, director, agent, employee, partner, or trustee of any company
for which the Managing General Partner acts in any such capacity.
ARTICLE VIII
RIGHTS OF INVESTOR PARTNERS; POWER OF ATTORNEY
8.01 Limitations on Investor Partners. Except as otherwise set forth in
Section 8.02, no Investor Partner, including any Initial Co-General Partner,
shall: (a) be permitted to take part in the management or control of the
business or affairs of the Partnership; (b) have any voice in the management or
operation of any Partnership assets; or (c) have the authority or power in his
capacity as an Investor Partner to act as agent for or on behalf of the
Partnership or any other Partner, to do any act which would be binding on the
Partnership or any other Partner, or to incur any expenditures on behalf of or
with respect to the Partnership. Any Investor Partner who violates this Section
8.01 shall be liable to the remaining Investor Partners, the Managing General
Partner and the Partnership for any damages, costs or expenses any of them may
incur as a result of such violation. The Investor Partners hereby grant to the
Managing General Partner or its successors or assigns the exclusive authority to
manage and control the Partnership business in its sole discretion and to
thereby bind the Partnership and all Partners in its conduct of the Partnership
business. Investor Partners shall have the right to vote only as set forth in
Section 8.02.
8.02 Rights of Investor Partners.
(a) The Investor Partners shall have the rights enumerated in
this Section 8.02 unless and until (1) either (A) a court of competent
jurisdiction shall have determined, in an action for declaratory
judgment or similar relief brought on behalf of the Limited Partners,
that the grant or the exercise of the power described in this Section
8.02 will result in the loss of any Limited Partner's limited
liability, or (B) counsel for the Partnership shall have delivered to
the Partnership an opinion to the same effect; or (2) either (A) a
ruling shall have been received by the Partnership from the IRS to the
effect that the grant or the exercise of the powers described in this
Section 8.02 will adversely affect the tax status of the Partnership,
or the Partners, or the continuing applicability of any ruling issued
to the Partnership by the IRS or (B) counsel for the Partnership shall
have delivered to the Partnership an opinion to the same effect.
Opinion of counsel referred to in this Section 8.02 may be obtained at
any time by the Managing General Partner and the cost of the same shall
be paid by the Partnership as a Direct Cost.
(b) Subject to the provisions set forth above and the further
requirements of this Article VIII, the Investor Partners shall have the
right to: (1) approve an amendment to this Partnership Agreement
pursuant to Section 14.01; (2) vote to dissolve, wind up and terminate
the Partnership pursuant to Article XI; (3) vote to remove a Managing
General Partner pursuant to Section 10.05; (4) approve additional
Managing General Partners pursuant to Section 10.02; (5) approve the
withdrawal of a Managing General Partner pursuant to Section 10.01; (6)
elect to continue the Partnership subject to termination pursuant to
Section 11.02; (7) approve a sale, transfer, lease or disposition of
substantially all of the oil and gas properties of the Partnership
outside the ordinary course of business pursuant to Section 7.02(b);
and (8) by affirmative vote of at least 25% in interest of the Investor
Partners, commission an audit of the Partnership's financial statements
in accordance with Section 12.04.
8.03 Exercise of Rights of Investor Partners.
(a) Whenever the Managing General Partner determines that the
exercise of the Investor Partners' rights granted in Section 8.02
hereof should be considered by the Investor Partners, the Managing
General Partner shall send written notice to each Investor Partner,
which notice shall set forth the nature of such rights then
exercisable, the facts and circumstances relevant to a determination as
to whether such rights should or should not be exercised and a
statement that the exercise or non-exercise of such rights will be
determined by the affirmative vote of the Investor Partners owning the
requisite percentage in interest of the then outstanding Units. Such
notice shall also state that each Investor Partner may vote by sending
to the Managing General Partner at the address of the Partnership
written notice of his vote which clearly indicates whether he votes in
favor or against exercise of such rights described in the notice from
the Managing General Partner to the Investor Partners.
(b) The exercise or non-exercise of such rights pursuant to
this Section 8.02 shall be determined by the affirmative vote of the
Investor Partners owning the requisite percentage in interest of the
Units outstanding at the time the vote is taken. Each Unit shall have
one (1) vote. Fractional Units shall have fractional votes. For
purposes of any vote by Investor Partners under this Agreement, any
Units owned by any Managing General Partner, or its Affiliates, shall
be excluded in determining the existence of a quorum or the requisite
percentage in interest of the Units necessary to carry the vote of
Investor Partners. After every vote of Investor Partners pursuant to
this Section 8.03, the Managing General Partner shall tally the vote
and send written notice to the Investor Partners of the results of the
voting. The Managing General Partner shall keep complete and accurate
records of all votes of the Investor Partners.
(c) The rights described in this Section 8.03 may be exercised
by each Investor Partner by written authorization to another person to
act for him by proxy; provided a true copy of the proxy is on file at
the office of the Managing General Partner prior to the time any vote
is taken. No such proxy shall be voted for more than one year from its
date. Each proxy shall be revocable unless it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power.
(d) Any action required by this Agreement to be taken by vote
of the Investor Partners of the Partnership may be taken without a
meeting of Investors and without a vote if prior notice is given to the
Investor Partners by the Managing General Partner and if a consent in
writing, setting forth the action so taken, shall be signed by the
requisite number of Investor Partners holding not less than the minimum
number of Units that would be necessary to authorize or take such
action at a meeting at which all Investor Partners were present and
voted.
(e) A meeting of the Investor Partners may be called at any
time by Investor Partners owning more than 10.0% in interest of the
then outstanding Units for purposes of considering the exercise of
Investor Partners rights or any other matters on which the Investor
Partners may vote as provided in this Agreement. A request for a
meeting of the Investor Partners shall be deemed to have been made upon
receipt by the Managing General Partner of a written request for such
meeting from Investor Partners owning not less than 10.0% in interest
of the then outstanding Units. Such request shall state the purpose of
the meeting requested. Upon receipt of such written request, the
Managing General Partner shall, within 15 days thereafter, send written
notice to all Investor Partners of the meeting and the purpose of the
meeting, the date of which shall be not less than 30 days nor more than
60 days after the date of such notice to the Investor Partners. All
such meetings shall be held at a reasonable time and place.
(f) Unless otherwise expressly stated elsewhere in this
Agreement with respect to any matter, the rights of Investor Partners
pursuant to this Agreement shall be exercised by affirmative vote of
the owners of a Majority In Interest of the outstanding Units,
excluding Units owned by the Managing General Partner or Affiliates
thereof.
8.04 Books and Information. In addition to any other rights
specifically set forth herein, all Investor Partners shall have the right to
have (a) the Partnership books kept at the principal place of business of the
Partnership and for any proper purpose, upon adequate written notice at
reasonable times, to inspect and, at such Investor Partner's expense, to copy
any of them personally or through a properly authorized representative, and (b)
on demand and for any proper purpose, true and full information of all things
affecting the Partnership relevant to the Investor Partner, and a formal account
of Partnership affairs, whenever permitted by law.
8.05 Access of Investor Partners to Geophysical Data. During the term
of the Partnership, the Partnership may acquire or have access to geophysical,
geological, and other similar data and information. Each Investor Partner shall,
during the term of the Partnership, have the right for a proper purpose during
normal business hours at the offices of the Partnership to inspect and review
all such data and information and studies, maps, evaluations, or reports derived
therefrom and material related thereto; provided, however, that the Managing
General Partner may refuse for a reasonable period of time to grant an Investor
Partner access to such data and information and studies, maps, evaluations, and
reports that the Managing General Partner (a) has agreed to keep confidential,
or (b) determines in good faith should be kept confidential considering the best
interests of the Partnership and each of the Partners in the aggregate.
8.06 Restrictions on Ownership of Managing General Partner. Each
Investor Partner who is not a Managing General Partner hereby agrees that he
will not, at any time, either directly or indirectly, own any stock or other
interest in any entity which is a Managing General Partner of the Partnership
if, in the opinion of the Partnership's counsel, such ownership may cause the
Partnership to be taxed pursuant to Federal income tax law as an association
taxable as a corporation and not as a partnership.
8.07 Power of Attorney.
(a) Each Investor Partner makes, constitutes and appoints the
Managing General Partner and its authorized agents and successors, with
full power of substitution, the agent and attorney in fact for such
Investor Partner for all purposes relating to the Partnership and
hereby grants to said agents and attorneys-in-fact full right, power
and authority, in such Investor Partner's name, place and stead, to
make, execute, sign, certify, acknowledge, verify, deliver, file and
record from time to time any writing, document, agreement, instrument
or certificate necessary or appropriate:
(1) To legally and validly establish or continue the
Partnership as a limited partnership under the laws of the
State of Tennessee;
(2) To authorize the Partnership to transact business
in the State of Tennessee and the State of Ohio, or any
other jurisdiction;
(3) To effectuate the provisions of this Agreement and
to carry on the business of the Partnership;
(4) To authorize or effectuate the exercise of powers
granted to the Managing General Partner under this
Agreement;
(5) To effectuate the admission to the Partnership of a
substitute Managing General Partner or a substituted
Investor Partner;
(6) To effectuate a Conversion of Partnership Interests
of Initial Co-General Partners to Limited Partners pursuant
to Article XIII; and
(7) To effectuate the dissolution, liquidation and
termination of the Partnership pursuant to the terms of this
Agreement;
(b) Notwithstanding the foregoing, the power of attorney so
granted shall not constitute a waiver of, or be used to avoid, the
rights of an Investor Partner under this Agreement or be used in any
manner inconsistent with the status of the Partnership or a limited
partnership or the limited liability of any Limited Partner.
(c) Each Investor Partner authorizes such attorney-in-fact to
take any further action which such attorney-in-fact shall consider
necessary or advisable to be done in and about the foregoing, including
the power to consent to items (1) through (7) of subsection 8.07(a)
above, as fully as such Investor Partner might or could do if
personally present and hereby ratifies and confirms all that such
attorney-in-fact shall lawfully do or cause to be done by virtue
hereof.
(d) The foregoing power of attorney is a durable and special
power of attorney coupled with an interest, is irrevocable and shall
survive the delivery of an assignment by an Investor Partner of the
whole or a portion of his interest in the Partnership, until the
assignee thereof becomes a substituted Investor Partner, and shall
survive the incompetency or incapacity of any Investor Partner.
ARTICLE IX
TRANSFERS OF PARTNERSHIP INTERESTS;
SUBSTITUTE INVESTOR PARTNERS
9.01 Assignments and Transfers of Interests by Investor Partners.
Subject to the provisions of Sections 9.03 and 9.04, except as provided below,
no Partnership Interest of an Investor Partner shall be assignable, in whole or
in part, without the express written consent of the Managing General Partner
which may be withheld for any reason or no reason. If the Managing General
Partner shall consent to such assignment, the assignee shall not become a
substituted Investor Partner, except as provided in Section 9.02. An assignee
who does not become a substituted Investor Partner shall have no rights
hereunder except to receive any allocations or distributions which (but for the
assignment) would have been made to the assignor. Notwithstanding the foregoing,
the Managing General Partner will not be obligated to recognize any assignment
sooner than the first day of the month after the month in which the Managing
General Partner approves in writing the assignment. A mortgagee or secured
party, the personal representative, guardian or other successor in interest of a
deceased, legally incompetent or (in the case of an Investor Partner which is a
corporation, partnership or joint venture) dissolved Investor Partner, or any
successor, personal representative, heir or devisee thereof, shall, upon written
notice to the Managing General Partner signed by assignor and assignee,
automatically be considered an approved assignee (but not a substituted Investor
Partner) and be entitled to receive the share of revenues, distributions, income
or gain and, upon dissolution of the Partnership, the share of the assets of the
Partnership to which such deceased, legally incompetent or dissolved Investor
Partner would have been entitled under the terms of this Agreement. No
assignment of a Partnership Interest of an Investor Partner shall be effective
until a copy of the instrument of assignment, properly executed and in form and
content acceptable to the Managing General Partner shall have been received and
approved by the Managing General Partner.
9.02 Substituted Investor Partners. The assignee of a Partnership
Interest of an Investor Partner may become a substituted Investor Partner only
if (a) the assignor and the Managing General Partner shall have specifically
consented thereto in writing (which consent, may be withheld for any reason or
no reason in the sole discretion of the Managing General Partner), (b) the
assignee shall have agreed in writing to be bound as an Investor Partner to the
terms of this Agreement, as amended, (c) the assignee shall have executed and
delivered to the Managing General Partner such documents, certificates,
instruments or legal opinions as are required by law or requested by the
Managing General Partner (in its sole discretion), (d) the assignor and/or the
assignee shall have paid or obligated himself to pay all reasonable costs and
expenses (including legal fees) incurred in connection with such admission or
substitution. Any substituted Investor Partner will be deemed to be the same
status of Partner (i.e., Initial Co-General Partner or Initial Limited Partner)
as was his assignor.
9.03 Restrictions on Transfer Which May Result in Termination for Tax
Purposes. No Partnership Interest, or any part thereof or interest therein,
shall not be sold, assigned or otherwise transferred at any time, if and to the
extent that any such sale, assignment or other transfer would, in the opinion of
legal counsel to the Partnership, result in the termination of the Partnership
for Federal income tax purposes.
9.04 Restrictions on Transfer Imposed by Securities Laws. The
Partnership Interests have not been registered under the Securities Act of 1933,
as amended (the "1933 Act"), or under the securities laws of any state or other
jurisdiction but have been offered and sold pursuant to and in reliance upon
exemptions from registration thereunder. As a consequence of the restrictions on
subsequent transfer imposed by these exemptions, the Partnership Interests shall
not subsequently be sold, assigned, conveyed, pledged, hypothecated or otherwise
transferred by a holder thereof except, pursuant to an effective registration
statement registering the Partnership Interests under the 1933 Act and/or
applicable state securities laws, or pursuant to an opinion of counsel, which
has been obtained by such holder and which is in all respects satisfactory to
the Managing General Partner, that such registration under the 1933 Act and/or
applicable state securities laws is not required for such holder to lawfully
affect such subsequent sale, assignment, conveyance, pledge, hypothecation or
other transfer.
9.05 Notification of Transfer Required by the Code. Any Partner who
proposes to transfer a Partnership Interest, or part thereof or interest
therein, shall, within 30 days of the proposed effective date of the proposed
transfer, whichever is earlier, provide the Managing General Partner with the
information required under Code Sections 6050K and 6112 of the Code and the
Treasury Regulations promulgated thereunder.
9.06 Reservation of Right to Refuse to Register Transfer. The
Partnership and the Managing General Partner reserve and shall have the right to
refuse to accept or reject the assignment or other transfer of any Partnership
Interest, or any part thereof or any interest therein, unless and until the
conditions specified in this Article IX have been satisfied.
9.07 Effect on an Invalid Transfer. Any attempted or purported sale,
assignment, conveyance, pledge, hypothecation or other transfer which is in
contravention of the restrictions on transfer specified in this Article IX shall
be invalid, ineffective and a fraud against the Partnership and the other
Partners. The purported assignor and assignee, by their respective purported
transfer or purported acceptance thereof, severally agree to indemnify and hold
harmless the Partnership and the other Partners for any claim, loss or damage
which may accrue by reason of such purported transfer. If such claim, loss or
damage accruing by reason of the purported transfer is incapable of being
ascertained accurately, then any consideration paid in connection with such
purported transfer shall be transferred and paid over to the Partnership as its
liquidated damages.
9.08 Limited Right of Presentment.
(a) Notice and Presentment. Commencing in the 48th month after
the first regular distribution of operating revenues of the Partnership
and continuing for 3 successive years ("Year Interval(s)") thereafter
(the "Presentment Term") any Investor Partner may provide by certified
mail, return receipt requested, written notice of intent to present
such Investor Partner's Units for purchase by the Managing General
Partner. Any Investor Partner electing to present Units for purchase
pursuant to this Section 9.08 must present all Units held.
(b) Obligation to Purchase. Subject to the conditions of
subsection 9.08(c), the Managing General Partner shall purchase in each
year ("Year Interval") during the Presentment Term no less than 3 Units
presented for purchase pursuant to subsection 9.08(a). To the extent
that more than 3 Units are properly presented for purchase, the
Managing General Partner shall purchase the Units presented on a first
come, first served basis, determined by when the notice of presentment
was received. In its sole discretion, the Managing General Partner may
purchase more than 3 Units presented for purchase.
(c) Conditions to Purchase. The Managing General Partner's
obligation or right to purchase any Units presented shall be subject
to: (1) the ability of the Managing General Partner to obtain financing
for the purchase of such Units upon terms reasonably acceptable to the
Managing General Partner; and (2) the Managing General Partner
receiving an opinion of tax counsel that the purchase of Units will not
result in a termination of the Partnership under Code ss.708, or cause
the Partnership to be classified as a "publicly traded partnership" for
purposes of Code ss.ss.469 and 7704. Any purchase of Units pursuant to
this Section 9.08 by the Managing General Partner shall be for
investment purposes and not with a view of resale or distribution.
(d) Unit Repurchase Price. The purchase price for purposes of
the Limited Right of Presentment shall be 30 times the monthly average
of the previous 12 months' cash distributions received with respect to
the Unit(s) purchased. All purchases by the Managing General Partner
shall be for cash and shall be closed no later than the last day of the
12th month of the applicable Year Interval of the Presentment Term.
(e) Liquidation. The obligation of the Managing General
Partner to purchase any Units pursuant to this Limited Right of
Presentment in any calendar year shall be canceled in the event the
Partnership dissolves or is liquidated in such calendar year.
(f) Assignment. The Managing General Partner shall have the
right to assign to its Affiliate, including an Affiliated partnership,
its right (but not its obligation) to purchase Units pursuant to the
Limited Right of Presentment set forth in this section 9.08.
ARTICLE X
WITHDRAWAL OR REMOVAL OF MANAGING GENERAL
PARTNER; ELECTION OF NEW MANAGING GENERAL PARTNER
10.01 Withdrawal of Managing General Partner. The Managing General Partner
may not withdraw from the Partnership except in accordance with the provisions
of this Section 10.01.
(a) In the event there is more than one Managing General
Partner, a Managing General Partner may withdraw from the Partnership
upon the consent of all other Managing General Partner(s) and a
Majority In Interest of Investor Partners, provided such withdrawing
Managing General Partner transfers his entire Partnership Interest to
another Managing General Partner(s) or the Partnership upon mutually
agreeable terms.
(b) A corporate Managing General Partner may withdraw from the
Partnership in the event it transfers its entire Partnership Interest
to a corporation or other entity into which it has been merged,
consolidated or which has acquired substantially all of its assets,
provided the other entity expressly assumes all obligations of the
Managing General Partner hereunder.
(c) Upon withdrawal from the Partnership, a withdrawing
Managing General Partner shall be discharged from any further liability
or obligation under this Agreement.
10.02 Additional Managing General Partners. Unless a sole Managing
General Partner has dissolved, become Incompetent or Incapacitated, any Managing
General Partner, or any successors thereto, may, with the consent of Investor
Partners owning a Majority In Interest of the then outstanding Units, at any
time designate one or more additional person(s) or entities to be Managing
General Partners, whose interests in the Partnership shall be such as shall be
agreed upon by the Managing General Partner and such additional Managing General
Partners; provided that the interests of the Investor Partners shall not be
affected thereby and the additional Managing General Partners qualify as set
forth in Section 10.04.
10.03 Interests of Bankrupt, Dissolved, Disabled or Deceased Managing
General Partner. Upon the Bankruptcy, dissolution, death, Incapacity or
adjudication of Incompetence of a Managing General Partner, his or its
Partnership Interest shall be converted to that of an Investor Partner and such
Managing General Partner shall not thereafter participate in the management of
the Partnership, but for all other purposes of this Agreement, including the
right to receive allocations and distributions, such interest shall remain
unaffected. None of the foregoing shall have any effect on any Partnership
Interest which is acquired by a Managing General Partner as a result of the
purchase of Units.
10.04 Substitute or Additional Managing General Partner. For purposes
of Section 10.01 and 10.02, a person or entity may be admitted as a substitute
or additional Managing General Partner only if the following terms and
conditions are satisfied:
(a) The successor person or entity shall have accepted and
assumed all the terms and provisions of this Agreement, as amended;
(b) If the substitute or additional Managing General Partner is a
corporation, it shall have provided legal counsel for the Partnership
with a certified copy of a resolution of its board of directors
authorizing it to become a Managing General Partner under the terms
and conditions of this Agreement;
(c) The substitute or additional Managing General Partner shall
have executed this Agreement and such other documents or instruments
as may be required or appropriate in order to effect the admission of
such person or entity as a Managing General Partner; and
(d) The substitute or additional Managing General Partner shall
deliver to the Partnership an opinion from competent tax counsel to
the effect that the substitution or addition of the Managing General
Partner as proposed will have no material adverse tax consequences on
the Partnership or any Investor Partners.
10.05 Removal of a Managing General Partner. A Managing General Partner
may be removed for any reason upon the written consent or affirmative vote of
Investor Partners owning greater than 80.0% in interest of the then outstanding
Units. In the event of death, Bankruptcy, Incapacity or adjudication of
Incompetence, a Managing General Partner shall be deemed to be removed for
purposes of this Section 10.05. In the event of removal of a sole Managing
General Partner, any Partner may nominate a successor Managing General Partner,
who, with the affirmative vote of Investor Partners owning a Majority In
Interest of the then outstanding Units, may be admitted as a substitute Managing
General Partner pursuant to the provisions of Section 10.04. Upon the removal of
any Managing General Partner for any reason, his Managing General Partner
Interest shall thereupon terminate and a valuation of the Partnership Interest
of the removed Managing General Partner shall be made by an independent
appraiser selected by any remaining Managing General Partner or by a Majority In
Interest of Investor Partners. In making such appraisal, the appraiser shall not
consider any restrictions on the transferability of the interest of the removed
Managing General Partner. Upon completion of the required appraisal, the
Partnership shall purchase the removed Managing General Partner's Partnership
Interest for the appraised value payable 25.0% down in cash and the balance to
be paid in equal annual installments over 3 years with interest accruing on any
unpaid balance at 10.0% per annum.
10.06 Managing General Partner's Assignment of Partnership Interest. A
Managing General Partner may assign, transfer, pledge, hypothecate, grant a
security interest in or otherwise transfer its right to receive allocations and
distributions hereunder (without withdrawing as Managing General Partner)
without consent of any Partner hereunder provided (a) such assignment, transfer
or pledge is consistent with Federal or state securities laws, and (b) such
assignment, transfer or pledge does not result in adverse tax consequences to
the Partnership or Investor Partners. Such assignee, transferee or secured party
shall not become a substitute Managing General Partner and shall have no rights
under this Agreement other than to receive allocations and distributions arising
by virtue of Articles IV and V for cash on the basis of the said valuation.
ARTICLE XI
DISSOLUTION AND LIQUIDATION
11.01 Dissolution of the Partnership. The Partnership shall be
dissolved upon the happening of any of the following events, subject to the
provisions of Section 11.02:
(a) Upon the withdrawal, legally adjudicated Incapacity or
Incompetency, death, Bankruptcy, dissolution or removal pursuant to
Section 10.05, of all or a sole Managing General Partner(s);
(b) Sale or other disposition of all or substantially all of the
oil and gas properties of the Partnership;
(c) Upon the election in writing by the Investor Partners owning
a Majority In Interest of the then outstanding Units of the
Partnership to dissolve the Partnership;
(d) The occurrence of any event causing dissolution under the
Tennessee Act; or
(e) Upon expiration of the time period set forth in Section 2.04.
11.02 Election to Continue. In the event of a dissolution caused by an
occurrence specified in Section 11.01(a), the Investor Partners owning a
Majority In Interest of the then outstanding Units may elect, within 120 days of
an event of dissolution, to continue the Partnership and, if necessary, elect a
new Managing General Partner for the express purpose of continuing the
Partnership. During such 120-day period, Mr. Doug Yoakley, or his designee, of
the accounting firm Pershing & Yoakley of Knoxville, Tennessee shall
automatically be appointed interim Managing General Partner. The interim
Managing General Partner shall operate and manage the Partnership in the best
interest of Investor Partners and with a view of effecting the election of a new
Managing General Partner. The interim Managing General Partner shall be entitled
to indemnification pursuant to Section 7.10. If no election is made to continue
the Partnership during such 120-day period, the Partnership shall dissolve and
the affairs of the Partnership will be wound up in accord with Section 11.03.
11.03 Winding Up.
(a) Upon the dissolution of the Partnership pursuant to
Section 11.01, and if there is no election to continue the Partnership
pursuant to Section 11.02, the winding up of the Partnership and the
distribution of Partnership property and assets shall be carried out
with due diligence and in a timely manner and consistent with the
provisions of this Section 11.03 and applicable requirements of law.
(b) The Managing General Partner or interim Managing General
Partner will be responsible for taking all actions relating to the
winding up and distribution of assets of the Partnership. The Managing
General Partner, interim Managing General Partner or such responsible
person or party as may be appointed by the Managing General Partner,
interim Managing General Partner, or in the event there is no Managing
General Partner or interim Managing General Partner, by a Majority In
Interest of Investor Partners, shall function as and be referred to
hereinafter in this Section 11.03 as the "Liquidator." Upon the
complete termination and distribution of the Partnership property and
assets, the Investor Partners shall cease to be Partners in the
Partnership.
(c) The Liquidator shall proceed without any unnecessary delay
to sell and otherwise liquidate the Partnership property; provided,
however, that if the Liquidator shall determine that an immediate sale
of part or all of the Partnership property would cause undue loss to
the Partners, the Liquidator may, in order to avoid such loss, defer
the liquidation of part or all of the Partnership property for a
reasonable time, except for such liquidations as may be necessary to
satisfy debts and liabilities to persons and parties other than the
Partners. The proceeds from the sale and liquidation shall be
distributed as provided in Section 11.04.
(d) Upon the dissolution of the Partnership pursuant to
Section 11.01, and if there is no election to continue the Partnership
pursuant to Section 11.02, the Managing General Partner or interim
Managing General Partner shall cause a certified public accountant to
prepare, within 60 days of such termination, and the Liquidator shall
immediately furnish to each Partner, a statement setting forth the
assets and liabilities of the Partnership as of the date of its
termination. Promptly following the complete liquidation and
distribution of the Partnership property and assets, the accountant
shall prepare, and the Liquidator shall furnish to each Partner, a
statement showing the manner in which the property and assets were
liquidated and distributed.
11.04 Distribution of Proceeds from Liquidation. The net proceeds resulting
from the liquidation of the property and assets of the Partnership pursuant to
this Article XI shall be distributed and applied in the following order of
priority;
(a) To the payment of debts and liabilities of the
Partnership, other than loans, debts or liabilities due to the
then present or former Partners;
(b) To the payment of any unpaid loans, debts or liabilities
to any then present or former Partners;
(c) To the establishment of any reserves which the
Liquidator deems reasonably necessary for contingent or
unforeseen liabilities or obligations;
(d) To the Investor Partners in the amount of any accrued
and unpaid Preferred Return;
(e) To the Partners, in proportion to their positive Capital
Account balances as of the date of such distribution, after
giving effect to all Capital Contributions, distributions and
allocations for all periods, until the Capital Accounts of all
Partners are reduced to zero; and
(f) To the Partners, in accordance with their Partnership
Interests as set forth in Section 5.01.
11.05 In Kind Liquidating Distributions. In the event the Liquidator
determines to distribute assets of the Partnership in kind pursuant to
liquidation of the Partnership, such distribution shall be made to a liquidating
trust or similar entity for the benefit of Investor Partners, unless at the time
of the distribution (a) the Managing General Partner shall offer the individual
Investor Partners the election of receiving in kind property distribution, and
the Investor Partners accept such offer after being advised of the risks
associated with such direct ownership; or (b) there are alternative arrangements
in place which assure the Investor Partners that they will not, at any time, be
responsible for the operation or disposition of Partnership properties.
11.06 Compliance with Law. The Liquidator shall comply with any
requirements of the Tennessee Act and all other applicable laws pertaining to
the winding up of the affairs of the Partnership and the final distribution of
its assets. The distribution of cash or property to the Partners in accordance
with the provisions of this Section 11.06 shall constitute a complete return to
the Partners of their Capital Contributions and a complete distribution to the
Partners of their Interests in the Partnership and all Partnership property, and
no Investor Partner shall have any recourse against the Managing General Partner
or any other Investor Partner if the cash so distributed shall be insufficient
to return in full his Capital Contributions.
11.07 Cancellation of Certificate. Upon the completion of the
distribution of Partnership assets as provided herein, the Partnership shall be
terminated, and the person acting as Liquidator (or the Partners if necessary)
shall cause the cancellation of the Certificate of Limited Partnership and shall
take such other actions as may be necessary to terminate the Partnership.
ARTICLE XII
BOOKS AND RECORDS
12.01 Books and Records.
(a) The Managing General Partner shall maintain at the
principal office and place of business of the Partnership: (1) complete
and accurate books of account with respect to the Partnership; (2) a
current list of the full name and last known address of each Partner;
(3) a copy of this Agreement, the certificate of limited partnership
for the Partnership and all amendments thereto, together with executed
copies of any powers of attorney pursuant to which any certificate has
been executed; (4) copies of any Federal, state and local income tax
returns and reports of the Partnership for the three (3) most recent
years; (5) all financial statements of the Partnership for the three
(3) most recent years; and (6) copies of all insurance policies
relating to Partnership activities. Each Partner and his duly
authorized representatives shall at all reasonable times during
ordinary business hours and on reasonable notice have access upon
request to such books and records.
(b) The Managing General Partner shall maintain a list of the
names and addresses of all Investor Partners at the principal office of
the Partnership. Such list shall be made available for the review of
any Investor Partner or his representative at reasonable times.
(c) Each Partner shall have the right to obtain from the
Managing General Partner from time to time upon reasonable demand true
and full information regarding the state of the business and financial
condition of the Partnership, a copy of the Partnership's Federal,
state and local income tax returns for each year promptly after they
become available and such other information regarding the affairs of
the Partnership as is just and reasonable.
12.02 Accounting Basis and Fiscal Year. The books of the Partnership
shall be kept on the accrual method of accounting or on such other method of
accounting, as then permitted by the Code, as the Managing General Partner may
determine, in its complete and absolute discretion, to be in the best interests
of the Partnership, and such books shall be closed and balanced at the end of
each Partnership fiscal year. The fiscal year of the Partnership shall be the
calendar year.
<PAGE>
12.03 Reports to Partners. In addition to any reports required elsewhere in
this Agreement:
(a) The Managing General Partner shall, for each fiscal year,
cause to be prepared and filed on behalf of the Partnership a Federal
income tax partnership return within the time prescribed by law
(including extensions) for such filing. The Managing General Partner
shall also file on behalf of the Partnership such state and/or city
income tax returns as may be required by law;
(b) The Managing General Partner shall provide to each
Investor Partner an annual report within 120 days after the close of
each Partnership fiscal year, containing, except as otherwise
indicated, at least the following information:
(1) Financial statements, including a balance sheet and
income statement prepared in accordance with generally
accepted accounting principles.
(2) Such other information as the Managing General
Partner deems appropriate.
All reports and other information required by this Article XII and all
other reports which the Managing General Partner deems necessary or desirable to
transmit to the Partners shall be prepared and transmitted at the expense of the
Partnership. The Managing General Partner is hereby authorized to employ other
persons or entities to assist him in the preparation of such reports, all at the
expense of the Partnership.
12.04 Partnership Audit. Upon the affirmative vote of at least 25% in
interest of the Investor Partners, the Managing General Partner shall have the
Partnership financial statements audited by an independent certified public
accounting firm to be selected by the Managing General Partner. The cost of such
audit shall be assessed and charged to the Investor Partners who affirmatively
voted to commission the audit. Upon completion, the audit report, audited
financial statements and footnotes thereof shall be mailed to the Managing
General Partner and each Investor Partner at the expense of the Partnership.
ARTICLE XIII
CONVERSION
13.01 General. Commencing in 1998, Initial Co-General Partners on a
case-by-case basis shall, subject to the provisions of this Article XIII, have
the opportunity to Convert their status to that of Limited Partners.
Notwithstanding this election, the Managing General Partner, in its sole
discretion, may elect to Convert all Initial Co-General Partners to Limited
Partners if it determines, in its sole discretion upon consultation with Tax
Counsel, that such Conversion will not materially, adversely affect the Partners
or the Partnership. Limited Partners may not Convert their Interests to Initial
Co-General Partner Interests.
13.02 Procedure and Conditions of Conversion. Commencing in 1998, any
Initial Co-General Partner may elect by written notice to the Managing General
Partner to Convert his Interest to that of a Limited Partner. Notice of such
election must be in form acceptable to the Managing General Partner and be
received by the Managing General Partner on or before December 1 of any year and
shall be effective commencing in the following year. Upon receipt of such
notice, the Managing General Partner shall secure a legal opinion from counsel
acceptable to it concerning the Federal income tax consequences of Conversion on
the Partnership and Partners, the cost of which shall be charged to any Initial
Co-General Partners seeking to Convert for such year, whether such opinion is
favorable or unfavorable covering such tax consequences. The Managing General
Partner may refuse to allow a Conversion if counsel opines that the same is
likely to have material adverse tax consequences on the Partnership or Partners.
At its sole discretion, the Managing General Partner send notice no later than
November 1 of any year to Initial Co-General Partners that the Interests of all
Initial Co-General Partners will automatically Convert to Limited Partner status
unless the Managing General Partner receives notice on or before December 1 of
that year, of an Initial Co-General Partner's desire not to Convert. The
automatic Conversion shall be effective as of January 1 of the following year as
to all Initial Co-General Partners who have not timely sent notice of desire not
to Convert.
13.03 Entire Interest. Any election by an Initial Co-General partner to
Convert to a Limited Partner must be as to the entire Interest of the Initial
Co-General Partner.
13.04 Administrative Costs. The Managing General Partner may require
Initial Co-General Partners electing to Convert to reimburse it for
administrative costs (including legal fees and filing fees) incurred in
evaluating or effecting the Conversion.
13.05 Amendment to Certificate of Limited Partnership. The Managing General
Partner shall prepare and file an amendment to the certificate of limited
partnership for the Partnership to reflect any Conversion of Interests allowable
hereunder. The effective date of Conversion with respect to any Initial
Co-General Partner shall be the date of filing of an amended certificate of
limited partnership reflecting such Partner as a Limited Partner.
ARTICLE XIV
AMENDMENTS
14.01 Amendments.
(a) Unless otherwise specifically herein provided, this
Agreement shall not be amended without the consent of the Investor
Partners owning a Majority in Interest of the then outstanding Units
entitled to vote (except that Amendments relating to provisions
involving super-majority vote of Investor Partners require consent of
Investor Partners having that amount in interest of the then
outstanding Units).
(b) The Managing General Partner may, without notice to or
consent of any Investor Partner, amend any provisions of this
Agreement, or consent to and execute any amendment to this Agreement,
to reflect:
(1) A change in the name or location of the principal
place of business of the Partnership;
(2) The admission of substituted or additional Investor
Partners in accordance with this Agreement;
(3) A reduction in, return of, or withdrawal of all or
a portion of any Investor Partner's Capital Contribution;
(4) A correction of any typographical error or
omission;
(5) A change which is necessary in order to qualify the
Partnership as a limited partnership under the laws of any
other state or which is necessary or advisable, in the
opinion of the Managing General Partner, to ensure that the
Partnership will be treated as a partnership and not as an
association taxable as a corporation for Federal income tax
purposes;
(6) A change in the allocation provisions, in
accordance with the provisions of Section 5.09 herein, in a
manner that, in the sole opinion of the Managing General
Partner (which opinion shall be determinative), would result
in the most favorable aggregate consequences to the Investor
Partners as nearly as possible consistent with the
allocations contained herein, for such allocations to be
recognized for Federal income tax purposes due to
developments in the Federal income tax laws or otherwise; or
(7) Any other amendment similar to the foregoing.
ARTICLE XV
GENERAL PROVISIONS
15.01 Notices. Except as otherwise provided herein, any notice which
shall be given in connection with the Partnership shall be deemed given if
reduced to writing and delivered personally to the person to whom it is
authorized to be given, or if sent by mail or telegraph, to the last address
furnished by him for such purpose. Notice shall be deemed served upon delivery,
if personally delivered, or upon mailing, as determined by postmark, if mailed.
15.02 Applicable Law. All questions with respect to the validity,
construction or enforceability of this Agreement shall be governed exclusively
by its terms and by the laws of the State of Tennessee.
15.03 Binding Agreement. This Agreement shall be binding upon the
parties hereto, their successors, assigns, heirs, devisees, legal
representatives, executors and administrators.
15.04 Article Headings. All article and section headings in this
Agreement are for convenience of reference only and are not intended to qualify
the meaning of any article or section.
15.05 Counterparts. This Agreement may be executed in several
counterparts, and all so executed shall constitute one Agreement, binding on all
of the parties hereto, notwithstanding that all of the parties are not signatory
to the original or the same counterpart.
15.06 Severability. Every provision of this Agreement is intended to be
severable. If any term or provision hereof is illegal, invalid or in conflict
with any existing or future law or the purposes of this Agreement, for any
reason whatsoever, such term or provision shall be ineffectual and void, and the
validity of the remainder of this Agreement shall not be affected thereby.
15.07 Return of Certificate of Limited Partnership. The Partners, by
execution hereof, hereby waive their right to have a copy of any certificate of
limited partnership, certificate of amendment thereto, restatement thereof, or
certificate of cancellation thereof returned to them after filing or recording.
15.08 Litigation. The Managing General Partner shall prosecute and
defend such actions at law or in equity as may be necessary to enforce or
protect the interests of the Partnership. The Partnership and the Managing
General Partner shall respond to any final decree, judgment or decision in any
court or board of authority having jurisdiction in the matter. The Managing
General Partner shall satisfy any such judgment, decree or decision first out of
any insurance proceeds available therefor, next out of the assets of the
Partnership, and finally out of the assets of any Partner who is liable for
debts of the Partnership.
15.09 Right to Rely Upon the Authority of the Managing General Partner.
No person dealing with any Managing General Partner shall be required to
determine its authority to make any commitment or undertaking on behalf of the
Partnership, nor to determine any fact or circumstance bearing upon the
existence of its authority.
15.10 Right to Rely Upon Authority of Person Signing Agreement. In the
event that a Partner is a trust (with or without disclosed beneficiaries),
partnership, joint venture, corporation, or any other entity other than a
natural person, the Managing General Partner shall:
(a) Not be required to determine the authority of the person
signing this Agreement or any amendment hereof to make any commitment
or undertaking on behalf of such entity, nor to determine any fact or
circumstance bearing upon the existence of his authority;
(b) Not be required to see to the application or distribution of
revenues, proceeds or credit on behalf of such entity;
(c) Be entitled to rely on the authority of the person signing
this Agreement or any amendment hereto with respect to the voting of
the interest of such entity and with respect to the giving of consent
on behalf of such entity in connection with any matter for which
consent is permissible or required hereunder; and
(d) Be entitled to rely upon the authority of any general
partner, joint venture, co- or successor trustee, or president or vice
president (as the case may be), of any such entity, the same as though
such person were the person originally signing this Agreement or any
amendment hereto on behalf of such entity.
15.11 Integrated Agreement. This Agreement constitutes the entire
understanding and agreement among the parties hereto with respect to the subject
matter hereof, and there are no agreements, understandings, restrictions,
representations or warranties among the parties other than those set forth
herein or herein provided for. This Agreement shall control over the Memorandum
or any subscription agreement in connection therewith.
15.12 Number and Gender. Whenever the singular number is used in this
Agreement, and when required by the context, the same shall include the plural,
and the masculine gender shall include the feminine and neuter genders, and the
word "person" shall include corporation, firm, partnership or other form of
association.
15.13 Consent to Allocations and Distributions. The methods herein set
forth by which allocations and distributions are made and apportioned are hereby
expressly consented to by each Partner as an express condition to becoming a
Partner.
IN WITNESS WHEREOF, the undersigned have executed this Partnership
Agreement as of the date first above written.
MANAGING GENERAL PARTNER:
ENERGY SEARCH, INCORPORATED
a Tennessee Corporation
By
Richard S. Cooper
Its President
THE SIGNATURES OF THE INVESTOR PARTNERS ARE SET FORTH ON SEPARATE SIGNATURE
PAGES WHICH ARE MAINTAINED IN THE PRINCIPAL OFFICE OF THE MANAGING GENERAL
PARTNER. IT IS EXPRESSLY AGREED THAT, BY EXECUTING A SIGNATURE PAGE HERETO, AN
INVESTOR PARTNER HAS AGREED TO BE BOUND BY ALL TERMS AND PROVISIONS HEREOF.
<PAGE>
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EXHIBIT A
INVESTOR PARTNERS
This Exhibit A shall be attached to and become a part of the ENERGY
SEARCH NATURAL GAS 1996 L.P. Limited Partnership Agreement dated as of the day
of , 1996.
Name/Type of Investment Date
Unit Held* Address SSN Amount Admitted
*Insert either the abbreviation for Initial Limited Partner ("ILP") or Initial
Co-General Partner ("IGP").
JOINT DRILLING AND OPERATING AGREEMENT
THIS AGREEMENT, dated as of the ____ day of _________, 1996, by and
between ENERGY SEARCH, INCORPORATED, a Tennessee corporation ("ESI"), and ENERGY
SEARCH NATURAL GAS 1996 L.P. (the "Partnership"), each party above with the
address of Suite 200, 280 Fort Sanders West Boulevard, Knoxville, Tennessee
37922.
RECITALS
A. ESI and its Affiliates have significant knowledge and experience in
evaluating, developing, acquiring and operating oil and gas drilling Prospects
in the oil and gas exploration and development region of the United States known
as the Appalachian Basin. One or more of these parties, as "Leasehold
Participant(s)", own, have access to, or have contributed to the development of,
interests in oil and natural gas leases (the "Leases") in and around the
Appalachian Basin providing rights for the exploration, development, extraction
and sale of oil and natural gas from beneath the surface of the land covered by
such Leases.
C. The Leasehold Participants have agreed to propose and contribute for
joint development hereunder various Lease interests in drillsites suitable for
drilling oil and gas wells (the "Wells") on the Leases.
D. The Partnership, as the "IDC Participant," has agreed to pay to ESI,
either as "Operator," in the case of Wells operated by ESI, or as "Manager" in
the case of Wells not operated by ESI, the IDC Prepaid Amount to be used
exclusively to pay Intangible Development Costs of Initial Development
Operations of the Wells.
E. ESI or its Affiliates, as the "Tangible Participant(s)," have agreed to
provide Tangible Costs and related services of Initial Development Operations of
the Wells.
F. ESI, either as Operator or Manager, has agreed to provide for services
necessary for evaluation, acquisition, drilling, completion (if warranted),
plugging and abandonment (when appropriate), and operation of the Wells for and
on behalf of the Participants, pursuant to the terms set forth below.
IT IS AGREED AS FOLLOWS:
1. DEFINITIONS. The following definitions shall apply for
purposes of this Agreement:
"AFE" shall mean the Authority For Expenditure with respect to the
Wells. For Wells to be drilled by ESI, as Operator to the Clinton Horizon in
Washington, Athens or Meigs Counties, Ohio, the AFE shall be in the form of
Annex B attached hereto.
"Affiliate" shall mean with respect to another person, (i) any person
directly or indirectly owning, controlling or holding with power to vote 10% or
more of the outstanding voting securities of or equity interests in such other
person, (ii) any person 10% or more of whose outstanding voting securities or
equity interests are directly or indirectly controlling, controlled or held with
power to vote by such other person, (iii) any person directly or indirectly
controlling, controlled by or under common control with such other person, (iv)
any officer or director of such other person, and (v) any company for which any
such officer or director acts in any such capacity.
"Capital Account" shall mean, with respect to any Participant, the
Capital Account maintained for such person in accordance with Subchapter K of
the Code and Treasury Regulations promulgated thereunder.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Cost" shall mean the following: (i) when used with respect to the
purchase of Leases, it shall mean the Lease Acquisition Costs; (ii) when used
with respect to services provided, it shall mean the price charged by an
unrelated third party providing such services in the normal course of business;
(iii) when used with respect to materials, it shall mean the price charged by an
unrelated third party providing such materials in the normal course of business;
and (iv) when used with respect to labor, materials or equipment furnished by
ESI, as Operator or Manager, it shall mean the cost of such labor, materials or
equipment at the usual hourly or daily rate in accordance with the schedule of
rates maintained, from time to time, by ESI.
"Depth Adjustment Rate" shall mean the amount per foot that the Turnkey
Price for Intangible Development Costs of Initial Development Operations will be
adjusted to pursuant to paragraph 9(b) of this JDOA.
"Developmental Well" shall mean a Well drilled to a known producing oil
or gas Horizon in a previously discovered field or in an area where the known
producing Horizon is believed by ESI, based on experience and known geological,
production and other data, to be geologically continuous.
"Drillsite" shall mean the tract of a Lease upon which a single Well
may be drilled according to applicable spacing law or regulations.
"ESI" shall mean Energy Search, Incorporated of Knoxville, Tennessee.
"Excess IDC" shall mean any Intangible Development Costs incurred in
the Initial Development Operations of any Well in excess of the Turnkey Price
for Intangible Development Costs of Initial Development Operations for such
Wells established pursuant to this JDOA.
" Exploratory" when used with respect to a Prospect, Well or drilling
activity, shall refer to exploration or drilling to find commercially productive
hydrocarbons in an unproven Horizon believed, based on data known to ESI, to be
productive of hydrocarbons.
"Farmout" shall mean an agreement by which the owner of a Lease agrees
to assign all or part of its interest in specific acreage to another party (the
"Farmee"), retaining some interest (such as an overriding royalty interest, an
oil and gas payment, a Working Interest after payout, or other type of
interest), subject to a requirement that the farmee drill one or more specific
wells or perform other acts as a condition of the assignment.
"Gas Servicing Agreement" shall mean the agreement between ESI, as
Operator, and ESI Pipeline Operating L.P., an Affiliate of ESI, pursuant to
which ESI Pipeline Operating L.P. agrees to gather, transport, purchase and
resell natural gas produced from the Wells. A form of the Gas Servicing
Agreement is set forth on Annex C to this JDOA.
"Horizon" shall mean a zone of a particular formation of sufficient
porosity and permeability to form a petroleum reservoir.
"IDC Participant(s)" shall mean the Participant(s), identified as IDC
Participant(s) on the Signature Page to this JDOA, which has (have) agreed to
prepay to ESI, as Operator or Manager, certain Intangible Development Costs in
connection with Initial Development Operations of the Wells, as provided in this
Agreement.
"IDC Prepaid Amount" shall mean the amount of funds to be prepaid by
the IDC Participant(s), to ESI, as Operator or Manager, pursuant to this
Agreement to be utilized to pay Intangible Development Costs incurred in
connection with Initial Development Operations of the Wells pursuant to this
Agreement.
"Inflation Adjustment Factor" shall mean the inflation adjustment to be
made annually as of the first day of January (the "Adjustment Date") each year
beginning January 1, 1998, by the percentage increase (if any) in the "Weighted
Average Gas Price" in the calendar quarter preceding the Adjustment Date over
the Weighted Average Gas Price in the first calendar quarter in the preceding
year. The "Weighted Average Gas Price" shall mean the weighted average price
(net of all transportation, servicing and severance fees and taxes) received by
ESI from the sale of all natural gas sold from wells it operates in southeastern
Ohio.
"Initial Development Operations" shall mean all activity in connection
with acquiring a Drillsite, preparing the Drillsite for drilling, drilling a
Well thereon, plugging and abandoning the Well if no completion attempt is made
and/or completing the Well, if the Well warrants completion, in one or more
Horizons.
"Intangible Development Costs ("IDC's")" shall mean expenditures made
for wages, fuel, repairs, hauling and supplies, or any of them, incident to and
necessary for the drilling of any Well and the preparation of such Well for the
production of oil or gas, as the case may be, therefrom, which are chargeable to
capital or expense, at the option of the IDC Participant(s), pursuant to Section
263(c) of the Code and Treasury Regulation Section 1.612-4(a), or any successor
provision thereto, which are generally termed "intangible drilling and
development costs." Examples of such costs include amounts paid for wages, fuel,
repairs, hauling, supplies and similar items, or any of them, which are used (i)
in the drilling, shooting and clearing of any Well, (ii) in such clearing of
ground, draining, road making, surveying and geological works as are necessary
in preparation for the drilling of any Well and the preparation of such Well for
the production of oil or gas and (iii) the expense of plugging and abandoning
the Well prior to a completion attempt. These expenditures in general shall
include only those drilling and development items which in themselves do not
have a salvage value. For these purposes, labor, fuel, repairs, hauling,
supplies and similar items are not considered as having a salvage value, even
though used in connection with the installation of physical property which has a
salvage value.
"IRS" shall mean the Internal Revenue Service.
"JDOA" or "Agreement" shall mean this Joint Drilling and Operating
Agreement.
"Landowner Royalty" shall mean the share of production revenues from
oil and gas produced from the Wells payable to landowners upon whose land the
Wells are located pursuant to their Landowner Royalty Interests.
"Landowner Royalty Interest" shall mean the interest of a landowner in
the oil and gas produced by a Well located on such landowner's property, or in
the proceeds from the sale therefrom, to be received free and clear of all costs
of development, operation or maintenance of such Well.
"Lease" shall mean a Working Interest, mineral interest, Royalty, or
other interest in and to oil, gas, and related hydrocarbons (or a contractual
right to acquire such an interest) or an undivided interest therein or portion
thereof (including those covering only certain Horizons or depths), together
with all easements, permits, licenses, servitude's, and rights-of-way situated
upon or used or held for future use in connection with the exploration,
development, or operation of such interest.
"Lease Acquisition Costs" shall mean the sum of the amounts paid by a
party for Leases acquired from third parties, plus all expenses relating to the
acquisition of Leases. The expenses relating to the acquisition of a Lease shall
include, but not be limited to: (i) title insurance and title examination costs,
brokers' commissions, finders' fees, escrow fees, filing fees, recording costs,
and transfer taxes, if any; (ii) taxes paid in connection with acquisition of
the Lease, including, but not limited to, ad valorem, real estate, personal
property and excise taxes paid; (iii) geological, geophysical, seismic, land,
engineering, drafting, accounting, auditing, legal and other costs incurred in
connection with the Lease acquisition transaction; and (iv) such portion of the
reasonable, necessary and actual expenses incurred by the party not more than
thirty-six (36) months prior to the property transaction for geological,
geophysical, seismic, land, engineering, drafting, accounting, auditing, legal
or like services obtained or provided by the party which are allocated to the
Lease in accordance with accepted industry practice, including the costs of
funds used for any of these purposes such as interest, loan commitment fees,
points and other financing fees and charges for such funds.
"Leasehold Participant(s)" shall mean the Participant(s), identified as
Leasehold Participant(s) on the Signature Page to this JDOA, which own or have
access to Leases from which it will propose and assign Drillsites to the
Participants for joint development under this Agreement.
"Manager" shall mean ESI acting in its capacity as supervisor-manager
of joint development activities pursuant to this JDOA on behalf of the
Participants concerning Wells which are not operated by ESI.
"Nonconventional Fuel Source (NFS) Tax Credit" shall mean the tax
credit available under Code Section 29 as a result of the production of oil or
natural gas from certain qualifying formations, including Tight Sands
Formations.
"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 Production Operations. Operating Costs include the
Production Administration Fee payable to ESI, as Operator of Wells subject to
this Agreement.
"Operator" shall mean Energy Search, Incorporated of Knoxville,
Tennessee, or such other person or entity authorized and designated as operator
of a Well.
"Overriding Royalty" shall mean the carved-out share of production
revenues from oil and gas produced from the Wells payable to unrelated third
parties such as owners, other than landowners, of an operating interest in the
Leases, landmen, oil companies or drilling contractors.
"Overriding Royalty Interest" shall mean an interest in the oil and gas
produced from a Well, to be received by unrelated third parties such as oil
companies, landmen and drilling contractors, free and clear of all costs of
development, operation or maintenance.
"Participant(s)" shall mean, individually and collectively, all parties
who own a Working Interest in the Wells and participate in the joint drilling
and operation of the Wells pursuant to this JDOA.
"Partnership" shall mean the limited partnership formed under the
Tennessee Revised Uniform Limited Partnership Act which will participate in the
drilling of Wells pursuant to this JDOA.
"Partnership Agreement" shall mean the Limited Partnership Agreement,
as amended, for the Partnership.
"Person" shall mean any individual, corporation, partnership,
association, joint stock company, joint venture, trust, estate, or any other
entity or organization.
"Pipeline Partnership" shall mean ESI Pipeline Operating L.P., an
Affiliate of ESI.
"Plugging Costs" shall mean all costs and expenses associated with
cementing and plugging a Well in preparation for abandonment.
"Preferred Return" shall mean the timing preference in favor of
Investor Partners with respect to distributable cash of the Partnership
commencing as of the date of the first regular distribution of oil and gas
production revenues and continuing for thirty-six (36) months thereafter.
Pursuant to this feature, ESI's general sharing ratio of Partnership revenues
(i.e., 1.0%) and one-half of ESI's net revenues from its 20% working interest in
the Wells pursuant to this JDOA, will be subordinated to a cumulative cash
distribution preference in favor of Investor Partners in the amount of 10.0% per
annum, noncompounded and noncumulative, on the Initial Capital Contributions of
Investor Partners to the Partnership.
"Production Administration Fee" shall mean, with respect to Wells
operated by ESI, the monthly charge for each Well to be paid by the Participants
to ESI, as Operator, proportionately based on Working Interest ownership for
routine maintenance, inspection, adjustments, administration and operation with
respect to the Wells.
"Production Operations" shall mean all activities relating to operating
and maintaining producing Wells, including contracting, preserving and marketing
oil, natural gas and other hydrocarbons, as well as service, repair and
maintenance of the Wells.
"Prospect" shall mean an area covering lands which are believed to
contain subsurface structural or stratigraphic conditions making it susceptible
to the accumulations of hydrocarbons in commercially productive quantities at
one or more Horizons. A Prospect may be limited to the minimum area permitted by
state or local practice, whichever is applicable, to protect against drainage
from adjacent wells.
"Prospect Area" shall mean the geographic area in which the Leases,
Drillsites and Wells will be located for joint development pursuant to this
Agreement.
"Royalty Interest" shall mean a Landowner Royalty Interest or
Overriding Royalty Interest.
"Signature Page" shall mean the signature page to this Agreement signed
by a Participant.
"Site Reclamation Costs" shall mean all costs and expenses (excluding
Tangible Reclamation Costs) associated with reclamation of a Well site in
preparation for abandonment of a Well.
"Subsequent Development Operations" shall mean any development
activities which are not Initial Development Operations, including substantial
rework activities, additional completions, re-completions, deepening or
side-tracking, with respect to a Well conducted after the Well has either (i)
produced in commercial quantities or (ii) been plugged and abandoned.
"Tangible Costs" shall mean all costs incurred in Initial Development
Operations or Subsequent Development Operations relating to 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 costs are
required to be capitalized pursuant to applicable provisions of the Code and
Treasury Regulations thereunder.
"Tangible Participant(s)" shall mean the Participant(s), identified as
Tangible Participant(s) on the Signature Page to this JDOA, who will pay all
Tangible Costs of Initial Development Operations of the Wells.
"Tangible Reclamation Costs" shall mean all costs and expenses
associated with salvaging tubing and other tangible equipment from a Well in
connection with plugging and abandonment thereof.
"Tax Partnership" shall mean the partnership formed among the
Participants for purposes of subchapter K of Chapter 1 of Subtitle A of the Code
pursuant to this Agreement.
"Tight Sands Formation" shall mean a geological formation, the
production of gas from which may qualify for NFS Tax Credits pursuant to Section
29 of the Code.
"Treasury Regulation(s)" shall mean the rule(s) and regulation(s) which
have been promulgated by the United States Department of Treasury under and with
respect to the Code and which are applied by the IRS.
"Turnkey Price" shall mean the fixed price to be charged by ESI, as
Operator or Manager, to Participants pursuant to this JDOA for their
participation in drilling, completing (if warranted) or plugging and abandoning
a Well in connection with Initial Development Operations.
"Working Interest" shall mean an operating interest in a Lease
providing the owner thereof the right to explore for and extract therefrom oil,
natural gas and other hydrocarbons from beneath the surface (according to the
terms of the Lease) and which is subject to some portion of the expense of
development, operation or maintenance.
2. PROSPECT AREA. The Prospect Area in which the Leases will be located
and from which the Drillsites will be selected and assigned to the Participants
pursuant to this Agreement will be located in the oil and gas exploration and
development regions of the United States known as the Appalachian Basin and the
Mid-Continent. It is anticipated that Wells to be operated by ESI may be
primarily be located in Washington and Athens Counties and contiguous counties
thereto in the state of Ohio. Wells in which the Participants will participate
pursuant to the terms of this Agreement, but which ESI may not operate, may be
primarily be located in Medina and Wayne Counties, Ohio. Other Wells in which
the Participants may participate may be located in West Virginia, Tennessee or
Kentucky. These Wells may, or may not, be operated by ESI. The Prospect Area may
be enlarged or reduced, from time to time, by agreement of all Participants. ESI
will propose, from time to time, Drillsites on the Leases for joint development
pursuant to this Agreement. All Drillsites proposed for joint development
hereunder will be subject to the approval of all Participants pursuant to
Section 3.
3. SELECTION OF DRILLSITES; TITLE. Any Drillsite proposed for joint
development hereunder must be acceptable to all Participants. Any Drillsite
proposed will be deemed accepted by Participants unless ESI, as Operator or
Manager, receives written notice of objection to the proposed Drillsite within
the time period established for objecting to title defects as described below.
Prior to drilling a Well on a Drillsite, ESI, as Operator or Manager, shall
cause a title opinion to be issued by an attorney in good standing and licensed
to practice law in the state in which the Drillsite is located. The title
opinion, to the extent practicable, shall be dated as of no more than 60 days
prior to the spud date of the Well and shall describe in detail the status of
title to the Drillsite and the nature of any encumbrances thereon. Upon written
request, any Participant shall have the right to receive a copy of the title
opinion and shall have 10 days after receipt thereof to object to ESI to the
status of title. If no objection is made within such time period or if no title
opinion is requested, a Participant shall be presumed to have agreed to the
status of title as reflected in such opinion. In the event a Participant objects
to the status of title, ESI may, at its option, elect to cure any title defects,
obtain title insurance covering such title defects, or abandon the proposed
Drillsite from consideration for joint development hereunder. After title for
any Drillsite has been accepted by the Participants, 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
Participants, unless such loss, expense, cost or liability was caused by the
breach of any of the warranties and representations made in Section 4 hereof by
the Leasehold Participant(s) who contributed the Drillsite. To the extent
practicable upon advance written request to ESI, the examining attorney's title
opinion shall be issued in the name of a Participant.
4. LEASE REPRESENTATIONS. With respect to any Lease upon which a
Drillsite has been contributed for joint development pursuant to the Agreement,
the Leasehold Participant(s) contributing such Drillsite hereby represents and
warrants to the Participants as follows: (a) true and correct copies of the
Lease, including any assignments, amendments, subleases, modifications or
supplements related thereto, have been delivered to the Participants; (b) to the
best knowledge of the Leasehold Participant(s), no condition exists and no event
has occurred which constitutes a default under the Lease or related assignments,
amendments, subleases, modifications or supplements; (c) to the best knowledge
of the Leasehold Participant(s), the Lease (and related assignments, amendments,
subleases, modifications and supplements) has been duly executed and delivered
by the lessor(s) therein, has been duly recorded, and is presently in full force
and effect and enforceable in accordance with its terms; (d) to the best
knowledge of the Leasehold Participant(s), all required consents or approvals
of, or notices to, the lessor(s) under the Lease (and related assignments,
amendments, subleases, modifications and supplements), any governmental body or
other third parties, with respect to the assignment of any Drillsite on the
Lease to the Participants in the manner contemplated by this Agreement, have
been obtained or given; (e) each assignment of a Drillsite on the Lease will
effectively assign and transfer to the Participants such right, title and
interest of the Leasehold Participant(s) in and to the Drillsite which such
assignment purports to assign; and (f) the Leasehold Participant(s) have not
done, committed, executed, permitted or suffered any act whereby its title to or
interest in the Lease or any Drillsite thereon has become encumbered in any
manner or subject to an adverse interest. The representations and warranties
contained in (b), (c), (d), (e) and (f) above shall also be deemed made by the
Leasehold Participant(s) at the time of each recorded assignment of the acreage
included in each Drillsite on the Lease, 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 Annex A. IT IS
UNDERSTOOD AND AGREED THAT, EXCEPT AS SPECIFICALLY SET FORTH ABOVE, NO LEASEHOLD
PARTICIPANT MAKES ANY 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 THE LEASE.
5. ASSIGNMENT AND NUMBER OF DRILLSITES.
(a) A Drillsite selected for joint development hereunder may
be temporarily assigned to (or retained by) ESI, as nominee for the
Participants, in order to facilitate joint operations. After the Well
has been drilled on the Drillsite and a decision has been made to
attempt a completion of the Well, ESI shall execute and deliver an
assignment of undivided percentages of Working Interest in the
Drillsite pursuant to an assignment document substantially in the form
of Annex A hereto. The aggregate undivided percentages of Working
Interest to be assigned hereunder to the Participants shall be shared
80.0% by the IDC Participant(s) and 20.0% by the Leasehold
Participant(s) and the Tangible Participant(s), collectively. Such
assignment shall be limited to a depth from the surface to 100 feet
below the base of the deepest Horizon penetrated by the bore hole of
the Well drilled on the Drillsite. The minimum amount of acreage
included in each Drillsite assignment shall be not less than that
established by applicable local law.
(b) The Leasehold Participant(s) agree(s) to contribute, or
arrange for contribution, to the Participants for joint development
hereunder as many Drillsites as are necessary in order to fully
utilize, pursuant to this Agreement, the entire IDC Prepaid Amount paid
by the IDC Participant(s) to ESI pursuant to subsection 9(b). The
Tangible Participant(s) agree(s) it (they) will pay or arrange for
payment of Tangible Costs of any Well drilled and developed, in whole
or in part, with the IDC Prepaid Amount pursuant to this Agreement.
6. OPERATOR - RESPONSIBILITIES IN GENERAL; TERM.
(a) ESI shall be designated as Operator, in the case of Wells
it operates, or Manager, in the case of Wells it does not operate, of
all Wells, Drillsites and Leases subject to this Agreement. The status
of ESI as Operator or Manager shall be as the Participants' independent
contractor, and in such capacity ESI shall, in addition to its other
obligations hereunder, directly or indirectly, (1) make the necessary
arrangements for the drilling and completion of Wells, including the
installation of the necessary gas gathering line systems and connection
facilities; (2) make the technical decisions required in drilling,
testing, completing and operating such Wells; (3) manage, supervise and
conduct all field operations in connection with the drilling, testing,
completing, equipping, operating and producing of the Wells; (4)
maintain all Wells, equipment, gathering lines and facilities in good
working order during the useful life thereof; and (5) perform the
necessary administrative and accounting functions. In the performance
of work contemplated by this Agreement, ESI is an independent
contractor with authority to control and direct the performance of the
details of the work.
(b) ESI covenants and agrees that (1) it shall perform and
carry on (or cause to be performed and carried on) its duties and
obligations hereunder in a good and workmanlike manner using
technically sound, acceptable oil and gas field practices then
prevailing in the geographical area of the Drillsites; (2) all drilling
and other operations conducted by, for and under the control of ESI
hereunder shall substantially conform in all material respects to
Federal, state and local laws, statutes, ordinances, regulations, and
requirements; (3) unless otherwise agreed in writing by the
Participants, any work performed hereunder pursuant to a written
estimate shall substantially 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 (but serviceable) and of good quality; (4) in the course
of conducting operations hereunder, it shall substantially 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; (5) it shall keep the
Drillsites 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; (6) 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 (7) it will provide competent
and experienced personnel (including contracted consultants) 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) ESI shall serve as Operator or Manager hereunder until the
earliest of (1) the termination of this Agreement pursuant to Section
20 hereof, (2) the termination of ESI as Operator or Manager by the
Participants which may be effected by agreement of all Participants of
the Wells, with or without cause, upon at least 60 days advance written
notice to ESI; or (3) the resignation of ESI as Operator or Manager
hereunder which may occur upon at least 90 days' written notice to the
Participants at any time after five (5) years from the date hereof, it
being expressly understood and agreed that ESI shall have no right to
resign as Operator or Manager hereunder prior to the expiration of the
aforesaid five (5) year period absent written consent of all
Participants. Any successor Operator or Manager hereunder shall be
selected by affirmative majority interest vote (based on ownership of
Working Interest) of the Participants. Nothing contained in this
subsection 6(c) shall relieve or release ESI from any liability or
obligation hereunder which accrued or occurred prior to ESI's removal
or resignation as Operator or Manager hereunder. Upon any change in the
Operator or Manager pursuant to this provision, the then outgoing
Operator or Manager shall deliver to the successor Operator or Manager
possession of all records, equipment, materials and appurtenances used
or obtained for use in connection with operations hereunder and owned
by the Participants.
7. DRILLING STRATEGY. ESI shall use its best efforts to cause the
commencement of drilling of all Wells to be drilled hereunder on or before March
31, 1997. Once drilling has commenced, ESI will use its best efforts to
diligently proceed to drill each Well to test stratigraphic Horizons from the
top of the surface to an identified target depth of the Well. The target depth
for any Well shall be proposed by ESI and established by mutual agreement of the
Participants prior to commencement of drilling. It is anticipated that Wells to
be operated by ESI will target the Clinton Sandstone (approximately 5,600 feet
in Washington County, Ohio); the Medina Sandstone (approximately 5,100 feet in
Washington County, Ohio); or the Oriskany Sandstone (approximately 4,250 feet in
Washington County, Ohio). The Wells developed pursuant to this JDOA are
anticipated to be primarily Developmental Wells. Some of the Wells may, however,
be Exploratory Wells. The actual depth of any Well will ultimately depend upon
the determination by ESI, in its sole discretion, of the depth at which it will
be most advantageous to attempt a completion of the Well pursuant to Section 8
of this Agreement. For each Well, ESI's discretion regarding drilling strategy
and total Well depth shall be exercised in good faith, in a manner consistent
with reasonable oil and gas field practice, and in a manner consistent with the
best interests of the Participants. With respect to Wells not operated by ESI,
the decision regarding actual depth and completion of a Well may be delegated to
the actual Operator of the Well.
8. OPERATOR'S COMPLETION DETERMINATION.
(a) With respect to any Well drilled hereunder, ESI shall in
good faith determine, on behalf of all Participants, based on
reasonable oil and gas field practices and techniques, whether or not
to run production casing for an attempted completion (or attempted
multiple completions if warranted) or to plug and abandon the Well. Any
completion attempt in a Horizon shall be made only if ESI has in good
faith determined that there is a reasonable possibility of obtaining
commercial quantities of oil or gas from such Horizon.
(b) If ESI, in good faith, determines at any time during the
drilling or attempted completion of any Well hereunder, in accordance
with reasonable oil and gas field practices and techniques, that such
Well should not be completed or a completion attempt previously
undertaken should be aborted, ESI shall promptly (1) plug and abandon
the Well if no further drilling or completion attempt is warranted, (2)
abort the attempted completion and resume drilling to deepen the Well,
or (3) abort further drilling or the attempted completion, plug back
the Well and, pursuant to subsection 8(a) above, attempt a completion
in a shallower Horizon.
(c) With respect to Wells not operated by ESI, the decision
regarding completion of a Well or plugging of a Well may be delegated
by ESI to the actual Operator of the Well.
9. CHARGES FOR DRILLING AND COMPLETION OF WELLS.
(a) All oil and gas wells to be drilled hereunder shall be
drilled and completed in the course of Initial Development Operations
on a turnkey basis for the total price set forth in subsection 9(b)
below (the "Turnkey Price"). The Turnkey Price for each Well shall
cover all Intangible Development Costs and Tangible Costs of Initial
Development Operations including, without limitation, site preparation,
Drillsite geology and engineering, permits and bonds, roadways, surface
damages, power at the site, water, ESI's reasonable overhead and risk
allowance, rights-of-way, drilling rigs, equipment and materials, costs
of Drillsite title examination, logging, cementing, fracturing, casing,
meters (other than utility purchase meters), connection facilities,
salt water collection tanks, separators, siphon string, rabbit, tubing,
and a gathering line of approximately 1,500 feet per Well. However, the
Turnkey Price for any Well shall not include the cost of (1) completing
more than one (1) Horizon (unless otherwise proposed by Operator), (2)
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 Turnkey Price), (3) natural gas compression
equipment, and (4) pumping equipment or equipment or materials
necessary or appropriate to lift oil (except that the cost of tank
batteries shall be included in the Turnkey Price). Any such extra costs
shall be billed to the Participants in proportion to the share of the
Working Interest at Cost plus 15% to cover supervisory services and
overhead.
(b) Except as provided below, the Turnkey Price for Initial
Development Operations of any Well drilled hereunder operated by ESI
and located in Washington or Athens Counties, Ohio which has as its
target depth the Clinton Horizon shall be $265,000, of which $215,000
shall be the Turnkey Price for Intangible Development Costs of Initial
Development Operations, and $50,000 shall be the Turnkey Price for
Tangible Costs of Initial Development Operations of the Well. Attached
as Annex B is an Authority Fee Expenditures (the "AFE") for such a
Clinton Well. In the event any Well is drilled hereunder targeting a
Horizon other than the Clinton Horizon, or ESI exercising its
discretion pursuant to Section 7 above, determines to drill a Well
initially targeted for the Clinton Horizon to a Horizon either
shallower or deeper than the Clinton Horizon, the Turnkey Price for
Intangible Development Costs of Initial Development Operations shall be
adjusted by a factor (the " Depth Adjustment Rate") equal to the
product of (1) the Depth Adjustment Rate times (2) the difference
between 5,600 feet and the actual depth drilled. For this purpose, the
Depth Adjustment Rate will equal $25 per foot for Wells deeper than
2,500 feet and $20 per foot for Wells shallower than 2,500 feet. In the
case of a Well drilled to a Horizon shallower than the Clinton, the
Turnkey Price for Tangible Costs shall be reduced by any actual savings
on production casing, tubing and other tangibles. Furthermore, in the
event that ESI determines during the course of Initial Development
Operations to stimulate by fracturing more than one (1) Horizon in any
Well, the Turnkey Price shall be increased by $25,000 for each
additional fracture treatment. Notwithstanding the foregoing, in the
event any Well drilled is plugged and abandoned as a dry hole prior to
an attempted completion, the Turnkey Price for Intangible Development
Costs of Initial Development Operations shall be reduced by one-half
(1/2). The amount saved by such reduction shall be promptly allocated
by ESI to Intangible Development Costs of another Well proposed by ESI
to be drilled pursuant to the Agreement. In no event shall reduced
Intangible Development Costs as a result of a dry hole result in any
refund to any IDC Participant.
(c) Except as provided below, with respect to non-operated
Wells, the Participants shall participate in such Wells on the same
terms as are available to ESI. To the extent possible, ESI shall
arrange that the IDC Participant(s) will pay a fixed Turnkey Price, all
of which shall be allocated to the extent possible to Intangible
Development Costs of Initial Development Operations of the Well, and
the Tangible Participant(s) shall, to the extent possible, pay, or
cause to be paid, all Tangible Costs associated with its Working
Interest in the Well. To the extent possible, the Tangible
Participant(s) or the Leasehold Participant(s) shall also pay any
Excess IDC associated with the IDC Participant's Working Interest in
the Well. No more than 15% of the IDC Prepaid Amount shall be allocated
to drilling of Wells not operated by ESI.
(d) In order to provide working capital to enable ESI as
Operator or Manager to commence site preparation, obtain suitable
subcontractors at favorable rates and ensure the availability of
equipment and materials, the IDC Participant(s), shall prepay to ESI,
as Operator or Manager, upon demand from time to time, an amount up to
$4,704,000 (the "IDC Prepaid Amount"). Such funds shall be utilized by
ESI exclusively to pay Intangible Drilling Costs of Initial Development
Operations of Wells drilled pursuant to this Agreement. ESI will use
its best efforts to cause the spudding of all Wells by March 31, 1997,
and drilling will be diligently pursued to target Horizons after
spudding. Payment of the IDC Prepaid Amount shall represent final
payment by the IDC Participant to ESI for Intangible Development Costs
of Initial Development Operations hereunder and shall be nonrefundable.
(e) Any Intangible Development Costs incurred in Initial
Development Operations of a Well in excess of the Turnkey Price for
such Intangible Development Costs as described in subsection 9(c)
(referred to as "Excess IDC") shall be borne and paid by the Leasehold
Participant(s) or the Tangible Participant(s).
(f) The Tangible Participant(s) shall pay to ESI, within ten
(10) business days of its receipt of ESI invoice therefor, the entire
Turnkey Price allocable to the Tangible Costs incurred in Initial
Development Operations of any Well being drilled hereunder. At its
option, with approval of ESI, the Tangible Participant(s) may, in lieu
of paying its share of the Turnkey Price, contribute in-kind some or
all equipment or materials necessary to furnish all Tangible Costs of
the Well; provided, however, that any such equipment or materials
contributed in-kind shall be new or used (but serviceable) equipment of
good quality.
(g) The Volume Subscription Incentive will be funded by ESI in
the following manner: (a) ESI will forego its entitlement to be
reimbursed for the Due Diligence Fees, as defined in the Limited
Partnership Agreement for the Partnership, in the amount of 1.0% of
Investors' Subscriptions and Organization and Offering Expenses, as
defined in the Limited Partnership Agreement for the Partnership, in
the amount of 1.0% of Investors' Subscriptions, and (b) ESI, in its
capacity as Operator pursuant to the JDOA, will provide the Partnership
with a discount on the Turnkey Price for total work to be done during
Initial Development Operations in an amount equal to the total Volume
Subscription Incentive awarded to Investors less the amount of Due
Diligence Fee and Organization and Offering Expenses foregone by ESI.
10. PRODUCTION OPERATIONS. In the case of Wells drilled and operated
hereunder which are not operated by ESI, ESI shall manage and supervise all
activities of the Participants pursuant to this JDOA. In such cases, ESI shall
monitor all activities of the actual Operator concerning Production Operations
of the Wells. In the case of Wells drilled hereunder which are operated by ESI,
the following shall apply:
(a) Commencing with the month in which a Well drilled
hereunder begins to produce, the Operator shall be entitled to receive,
and the Participants shall pay in proportion to their ownership share
of Working Interest in the Wells, on a Well-by-Well basis, a Production
Administration Fee equal to $250 computed on a per-Well, per-month
basis for each Well being operated under this Agreement. The Production
Administration Fee shall be proportionately reduced, however, for any
Well to the extent the Participants collectively own less than 100% of
the Working Interest in the Well. The Production Administration Fee
shall be charged in lieu of any direct charges by the Operator for its
services or the provision by the Operator of its equipment for normal
and incidental superintendence and maintenance of the Wells and related
gathering system and facilities. The Production Administration Fee
shall cover all normal, incidental, regularly recurring operating
expenses for the production, delivery and sale of natural gas,
including without limitation well tending, routine and incidental
maintenance and adjustment, reading meters, recording production,
pumping, maintaining appropriate books and records, preparing reports
to the Participants and government agencies, and collecting and
disbursing revenues. The Production Administration Fee shall be subject
to adjustment annually as of January 1, of each year (the "Adjustment
Date") beginning January 1, 1998, pursuant to the Inflation Adjustment
Factor. With respect to the Production Administration Fee, the
following shall apply:
(1) An active Well either produced or injected into for any
portion of the month shall be considered as a one-Well charge for
the entire month.
(2) An inactive gas Well shut in because of over-production
or failure of purchase to take production shall be considered as
a one-Well charge providing the base Well is directly connected
to a permanent sales outlet.
(3) A one-Well charge may be made for the month in which
plugging and abandonment operations are completed on any Well.
(4) All other inactive Wells (including, but not limited to,
inactive Wells covered by unit allowable, lease allowable,
transferred allowable, etc.) shall not qualify for a per-Well
Production Administration Fee.
(5) Each active completion in a multi-completed Well in
which production is not commingled downhole, shall be considered
as a one-Well charge providing each completion is considered a
separate Well by the governing regulatory authority, or
production from each completion qualifies for a different price
pursuant to the Natural Gas Policy Act of 1978 or by regulations
issued by the Federal Energy Regulatory Commission or by the
appropriate State Regulatory Authorities.
Notwithstanding the foregoing, the Production Administration
Fee shall not cover costs and expenses related to the (i) costs of
services, materials or equipment utilized in Production Operations
charged and billed as direct charges by Operator (such charges may
include, without limitation, treating Wells with emulsion breakers,
paraffin solvents, corrosion inhibitors, or other chemicals as
requested; lease, operation or use of service rig equipment or pressure
trucks; non-incidental repair or replacement of machinery or equipment;
direct costs of labor, material or equipment incurred in reworking or
cleaning the Wells; properly gathering, containing and disposing of all
waste, including saltwater brine, oil, water, sand and mud, that may
result from operation of the Wells), (ii) collection and disposal of
saltwater or other liquids produced by the Wells, (iii) rebuilding of
access roads, and (iv) purchase of equipment or costs of Subsequent
Development Operations. All of the above-described costs and expenses
shall be billed and charged by Operator to the Participants at Cost
plus 15% in proportion to their ownership share of the Working
Interest.
(b) Operator shall not undertake any single project involving
Subsequent Development Operations or incur any extraordinary cost with
respect to any Well being operated hereunder reasonably estimated to
result in an expenditure of more than $5,000, unless (1) Operator
receives prior written consent of all Participants after furnishing a
written estimate of costs, or (2) such project or extraordinary cost is
deemed by Operator as necessary to safeguard persons or property or to
protect the Well or related facilities in the event of an emergency. In
no event, however, shall the Participants be required to pay for any
project or extraordinary cost arising from the gross negligence or
intentional misconduct of Operator, its agents, servants, employees,
contractors, licensees or invitees. All extraordinary costs and
Subsequent Development Costs incurred and the cost of projects
undertaken with respect to a Well being operated hereunder shall be
charged and billed by Operator to the Participants in proportion to
their ownership share of the Working Interest of the Well (except that
Tangible Costs shall be billed to and paid solely by the Tangible
Participant(s)) at Cost plus 15%. Operator shall have the right to
require the Participants to pay in advance of undertaking any such
project all or a portion of the estimated amounts. Operator shall have
the right to exercise its lien, granted pursuant to Section 15, on the
Working Interest of any Participant who fails or refuses to pay its
share of extraordinary costs on Subsequent Development Operations
approved by a majority in interest of Working Interest owners.
(c) Notwithstanding anything herein to the contrary, the
Participants shall have full responsibility for and bear all costs in
proportion to their share of the Working Interest with respect to
obtaining price determinations under and otherwise complying with the
Natural Gas Policy Act of 1978 (the "NGPA") 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 the NGPA and the implementing state
regulations. Operator agrees to furnish such information and render
such assistance as the Participants may reasonably request in order to
comply with the NGPA and the implementing state regulations without
charge for services performed by its employees.
(d) Operator shall promptly and timely pay and discharge on
behalf of the Participants, in proportion to their ownership share of
the Working Interest, all severance taxes, Royalties, Overriding
Royalties, Operating Costs (including the Production Administration
Fee), pipeline gathering charges (including transportation and
compression charges) and other expenses and liabilities payable and
incurred by reason of its operation of the Wells in accordance with
this Agreement and shall pay, in proportion to the share of the Working
Interest owned by the Participants in the Wells, on or before the due
date any third party invoices rendered to Operator with respect to such
costs and expenses; provided, however, that Operator shall not be
required to pay and discharge any such costs and expenses which are
being contested in good faith by Operator.
Operator shall deduct the foregoing costs and expenses from
each Participant's share of the proceeds of the oil and/or gas sold
from the Wells operated hereunder and shall keep an accurate record of
each Participant's account hereunder, showing expenses incurred and
charges and credits made and received with respect to each Well. In the
event that such proceeds or revenues are insufficient to pay said
Royalties, costs and expenses, Operator may, at its option, pay and
discharge the same and immediately thereupon prepare and submit an
invoice to the Participants in proportion to their ownership share of
Working Interest each month for any excess costs and expenses.
Alternatively, Operator may not pay such amounts and immediately
invoice the Participants for their share of such costs or expenses. Any
such invoice shall be paid by the Participants within ten (10) business
days of its receipt.
THE PARTICIPANTS ACKNOWLEDGE THAT NATURAL GAS PRODUCED FROM
THE WELLS WILL BE GATHERED, PURCHASED AND RESOLD BY THE PIPELINE
PARTNERSHIP, AN AFFILIATE OF ESI, PURSUANT TO THE GAS SERVICING
AGREEMENT IN THE FORM OF ANNEX C ATTACHED. THE PIPELINE PARTNERSHIP
WILL RECEIVE COMPENSATION FOR ITS SERVICES PURSUANT TO THE GAS
SERVICING AGREEMENT.
(e) Operator shall disburse to the Participants, on a monthly
basis, the Participants' share of the proceeds of the sale of oil
and/or gas sold from the Wells operated hereunder. Each such
disbursement made and/or invoice submitted pursuant to subsection 10(a)
above shall be accompanied by a statement reasonably itemizing with
respect to each Well (1) 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 Participants' share thereof, (2) the total
proceeds received from any sale thereof, and the Participants' share
thereof, (3) the costs and expenses deducted from said proceeds and/or
being billed to the Participants pursuant to subsection 10(d) above,
and (4) such other information as the Participants may reasonably
request. 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, which account shall be used
solely for the purpose of collecting and disbursing funds constituting
proceeds from the sale of oil and gas production.
(f) In addition to any other statements required hereunder,
Operator, within 75 days after the completion of each Well drilled
hereunder, shall furnish the Participants with a statement itemizing
total costs and charges with respect to such Well and the Participants'
share thereof, and such other information as is necessary to enable the
Participants to allocate costs incurred with respect to such Well
between Lease Acquisition Costs, Tangible Costs and Intangible
Development Costs.
(g) Upon request, Operator shall promptly furnish a
Participant 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 Participants and their authorized employees, agents
and consultants, including independent accountants, shall, at
Participants' sole cost and expense, (i) upon at least ten (10) days'
written notice have access during normal business hours to Operator's
records pertaining to operations hereunder, including without
limitation, have the right to audit the books of account of Operator
relating to all receipts, costs, charges and expenses under this
Agreement, and (ii) have access, at their sole risk, to any Wells
drilled by Operator hereunder at all times to inspect and observe any
machinery, equipment and operations. Notwithstanding the foregoing,
Operator shall not be required to furnish to any Participant
information of a confidential or proprietary nature unless the
requesting Participant agrees in writing to reasonable confidentiality
provisions acceptable to Operator.
(h) In the event Operator shall use any of its own employees
or equipment to perform any work hereunder, Operator shall be entitled
to charge Participants the Cost of such services at such employee's or
equipment's usual hourly or daily rate in accordance with its schedule
of such rates maintained from time to time by Operator.
11. ABANDONMENT OF WELLS THAT HAVE PRODUCED. With respect to all Wells
hereunder, ESI in its sole discretion (subject to any applicable operating
agreement in the case of a Non-Operated Well), may determine to plug and abandon
any Well drilled hereunder which has produced oil or natural gas without consent
of all Participants. In the event ESI elects to plug and abandon any Well, such
work shall be carried out by ESI in accordance with reasonable oil and gas field
standards and in compliance with applicable laws and regulations. Plugging Costs
and Site Reclamation Costs shall be charged and billed to the Participants at
Cost in proportion to their ownership share of Working Interest. Tangible
Reclamation Costs shall be charged and billed entirely to the Tangible
Participant(s) at Cost. The IDC Participant(s) shall quitclaim and assign to the
Tangible Participant(s), without warranty of any kind, all such IDC
Participant(s)' interest, if any, in the Well abandoned and related equipment.
If all of the Participants are unable to reach agreement as to the abandonment
of a Well, then the Participant(s) wishing to continue to operate the Well shall
pay to the Participant(s) wishing to plug and abandon a sum equivalent to said
Participant(s)' pro rata share of the net salvage value of the material and
equipment of the Well (after deduction of the cost to plug and abandon such
Well), multiplied by the percentage of Working Interest of each of the Working
Interest owners wishing to plug and abandon at the time of the proposed
abandonment. The assignment of the Working Interest will be made to the Working
Interest owner continuing the operation. After the assignment, the assignor
shall have no further responsibility, liability or interest in the operation of
or production from the Well.
12. PARTICIPANTS' RIGHT TO PRODUCTION.
(a) The Participants shall share oil, natural gas and other
hydrocarbon production from the Wells in proportion to their ownership
share of Working Interest.
(b) Subject to the provisions of Section 15 hereof, each
Participant shall have the exclusive right to sell or dispose 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; and Operator shall not have any right to sell or
otherwise dispose of such oil and gas. Each Participant shall have the
exclusive right to execute all production sales contracts hereunder.
Each Participant agrees to designate ESI, or ESI's designated bank
agent, as the Participant's collection agent in any such contract. Upon
request, ESI shall render assistance in information which comes to
ESI's attention regarding opportunities for sale of production. In the
event a Participant 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, ESI shall have the right, subject to
the revocation upon notice and at will by the Participant, 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 Participant at
prevailing prices obtainable in the area for such production. Any such
purchase or sale by ESI shall be subject always to the right of the
Participant 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. Nothing in this subsection 12(b) or other
provision of this Agreement shall prevent or affect the rights of any
Participant to enter into a separate agreement or contract with any
third party, or ESI, with respect to the sale or marketing of its share
of production.
(c) Commencing as of the first regular distribution of oil and
gas production revenues and continuing for all cash distributions for
thirty-six (36) months thereafter, ESI's 1% interest as Managing
General Partner in Partnership revenues, as well as half of ESI's 20%
Working Interest share in Well net revenues (as well as related
expenses) pursuant to the JDOA, will be subordinated to a cumulative,
preferred return (the "Preferred Return") in favor of Investor Partners
in the amount of 10% per annum, noncompounded and noncummulative on
Investor Partners' Initial Capital Contributions to the Partnership. At
any time that Investor Partners have received cash distributions
sufficient to maintain their Preferred Return, all Cash Available for
Distribution will be allocated to ESI, pursuant to the JDOA, and to
ESI, as Managing General Partner pursuant to the Partnership Agreement,
in order to bring its total cash distributions in line with what they
would have been according to the ESI's general sharing ratio (i.e., 20%
pursuant to the JDOA and 1% pursuant to the Partnership Agreement) had
their been no Preferred Return in favor of Investor Partners.
13. NO JOINT LIABILITY. The liability of the Participants hereunder
shall be several, not joint or collective. Each Participant shall be responsible
only for its obligations as set forth herein. It is not the intention of the
Participants to create, nor shall this Agreement be construed as creating a
partnership(other than for Federal or state income tax purposes), a mining
partnership or association to render the parties liable as partners.
14. INSURANCE. During drilling, completion and operation of the Wells,
ESI shall maintain, or cause to be maintained, the following insurance, and
name, if possible, each Participant, or their designees, as an additional
insured(s), in coverage amounts of not less than the following: (1)
comprehensive general liability insurance with bodily injury limits of not less
than $1,000,000 per occurrence and $1,000,000 per accident, and property damage
with coverage limits of not less than $1,000,000 per accident; (2) comprehensive
automobile liability insurance with bodily injury limits of not less than
$500,000 per person and $500,000 per accident, and property damage coverage with
limits of not less than $500,000 per accident; (3) primary, umbrella or excess
liability insurance with coverage limits of at least $10,000,000 per occurrence
and in the aggregate; and (4) workers' compensation insurance as required under
the laws of the state in which the Wells are located. The Participants agree
that ESI shall be entitled to reimbursement for a proportionate share of its
cost of comprehensive general liability and umbrella liability insurance
procured by ESI benefiting the Participants. For Wells operated by ESI, such
cost shall be considered an Operating Cost of the Wells. ESI shall require all
subcontractors engaged in work relating to the Wells to comply with workers'
compensation insurance requirements of the laws of the state in which the Wells
are located. Upon request, ESI shall furnish to each Participant, or their
designees, evidence of the foregoing insurance. ESI shall provide for at least
45 days' prior notice to each Participant, in the event of material reduction or
cancellation of insurance coverage.
15. OPERATOR'S LIEN. With respect to Wells operated by ESI, the
following shall apply:
(a) The Participants hereby grant Operator a first and
preferred lien on and security interest in any interest of the
Participants covered by this Agreement, and in the Participants'
interest in oil and gas produced and the proceeds thereof, and upon the
Participants' interest in materials and equipment, to secure the
payment of all sums due from Participants to Operator under the
provisions of this Agreement.
(b) In the event that the Participants fail to pay any amount
owing hereunder by it to 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
Participants' share thereof until the amount owed by the Participants,
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.
16. SUCCESSORS AND ASSIGNS: TRANSFERS; APPOINTMENT OF AGENT. With
respect to Wells operated by ESI, the following shall apply:
(a) This Agreement shall be binding upon and shall inure to
the benefit of the undersigned parties hereto and their respective
heirs, devisees, legal representatives, successors and assigns, and the
terms hereof shall be deemed to run with the Leases and Working
Interests subject to this Agreement.
(b) 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 all Participants, except that such consent
shall not be required in connection with (1) 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, or (2) any lien,
security interest, pledge or mortgage arising under or pursuant to
Operator's present or future financing arrangements, or (3) the
liquidation, merger, consolidation or sale of substantially all of the
assets of Operator or other corporate reorganization, provided the
successor or survivor entity assumes Operator's obligations hereunder.
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 Participants
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 Participants in all Wells' production, equipment and
leasehold interests subject hereto or an equal undivided interest in
all such Wells, production, equipment, and leasehold interests.
(c) Subject to the provisions of subsection 16(a) above, any
sale, encumbrance, transfer or other disposition made by any
Participant of its interest in the Wells, production, equipment, and/or
leasehold interests covered hereby shall be made (i) expressly subject
to this Agreement and only as provided in this Agreement, (ii) without
prejudice to the rights of the other party, and (iii) in accordance
with and subject to the provisions of the applicable Lease.
(d) Notwithstanding any other provision of this Section 16, no
Participant may assign, transfer, sell, hypothecate or otherwise
dispose of its interest in any Well except in accordance with
subsection 18(i).
(e) If at any time the interest of a Participant 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 apply 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.
17. ESI'S LIABILITY AND INDEMNIFICATION. With respect to Wells operated
or managed by ESI, ESI's liability to the Participants as Operator or Manager
hereunder shall be limited to, ESI shall indemnify the Participants and hold
them harmless from, claims, penalties, liabilities, obligations, charges,
losses, costs, damages or expenses (including but not limited to attorneys'
fees) relating to, caused by or arising out of (i) the material noncompliance
with or violation by ESI, its employees, agents, or subcontractors of any local,
state or Federal law, statute, regulation, or ordinance; (ii) the gross
negligence or intentional misconduct of ESI, its employees, agents or
subcontractors; or (iii) the material breach of or failure to comply with this
Agreement.
18. PARTNERSHIP TAX ELECTION.
(a) It is the intention of the Participants to jointly form a
tax partnership (the "Tax Partnership") pursuant to the provisions of
Subchapter K of Chapter 1 of Subtitle A of the Code.
(b) Notwithstanding anything to the contrary in this
Agreement, the Participants agree with respect to all operations and
activities conducted under this Agreement that so long as the
provisions of this Section 18 remain in effect that (1) the
Participants shall file returns as a tax partnership for Federal, state
and local income tax purposes (2) the Tax Partnership (and/or each
Participant) will not elect for the Tax Partnership to be excluded from
the application of the provisions of Subchapter K of Chapter 1 of
Subtitle A (the partnership provisions) of the Code or any provisions
of applicable state laws comparable to Subchapter K of Chapter 1 of
Subtitle A of the Code, and (3) the Tax Partnership (and/or each
Participant) will join in the execution of such additional documents
and elections as may be required in order to effectuate the foregoing.
(c) The provisions of this Section 18 shall continue in full
force and effect from and after the effective date of this Agreement
until the earlier of (1) the termination of this Agreement pursuant to
its terms, (2) the mutual agreement of all the Participants or (3) upon
the occurrence of an event described in Section 708(b) of the Code.
(d) The term "Capital Accounts" for purposes of this Section
18 shall mean the Capital Account of each Participant as determined
from the inception of the Tax Partnership and as maintained in
accordance with the allocations specified in Section 18(h), and with
Treasury Regulation Section 1.704-1(b)(2)(iv) or any successor
provisions. Solely for the purpose of maintaining the Capital Accounts,
the Participants shall elect, at the time each Well is placed into
production whether to use actual or simulated depletion for such Well
in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(k),
which election shall be for the life of such Well.
(e) ESI shall prepare and file the necessary Federal, state
and local partnership income tax returns for the Tax Partnership and
each Participant agrees to furnish to ESI all pertinent information
relating to the operations and activities (pursuant to this Agreement
which is necessary for ESI to prepare and file such returns. The cost
incurred by ESI to prepare and file such necessary Federal, state and
local partnership income tax returns shall be considered an Operating
Cost to be charged and billed at Cost by ESI to the Participants in
proportion to their ownership share of Working Interest.
(f) The Participants hereby authorize and direct ESI to make
the following Federal income tax elections on the appropriate returns
prepared and filed hereunder:
(1) To elect to adopt the accrual method of accounting,
and such accounting shall be maintained on a calendar year
basis;
(2) To elect, in accordance with Section 263(c) of the
Code and applicable Treasury Regulations and comparable
provisions of state law, to expense all Intangible
Development Costs; and
(3) To make or refrain from making any other tax
election provided in the Code, the Treasury Regulations or
in any other applicable Federal or state tax law as deemed
appropriate by ESI.
(g) ESI is directed and authorized to act as the "Tax Matters
Partner," as that term is described and used in the Treasury
Regulations promulgated under Section 6231 of the Code, of the Tax
Partnership. Each Participant consents to such designation of ESI, as
the Tax Matters Partner and agrees to execute, certify, acknowledge,
deliver, swear to, file and record with the IRS or other appropriate
governmental authorities such documents as may be necessary or
appropriate to evidence such consent. Any cost or expense incurred by
the Tax Matters Partner shall be deemed to be an Operating Cost to be
charged and billed at Cost to the Participants in proportion to their
share of Working Interest, and the Participants shall indemnify and
reimburse the Tax Matters Partner for all costs and expenses, including
legal and accounting fees, claims, liabilities, losses and damages
incurred in connection with any tax audit or judicial review with
respect to the tax liability of the Participants.
(h) Except as otherwise specified herein, all items of
revenue, cost, income, gain, loss, deduction or credit with respect to
any Well shall be allocated for Federal income tax purposes among the
Participants in proportion to their respective shares of Working
Interest (hereinafter referred to as the "General Allocations").
Notwithstanding the foregoing, items of revenue, cost, income, gain,
loss, deduction or credit with respect to the following items for any
Well shall be allocated for Federal income tax purposes as follows
(hereinafter referred to as the "Special Allocations"):
(1) Lease Acquisition Costs of any Drillsite shall be
allocated to the Leasehold Participant who contributed the
Drillsite;
(2) Intangible Development Costs shall be allocated to
the IDC Participant(s) who are charged and pay such costs
pursuant to this Agreement;
(3) Tangible Costs shall be allocated to the Tangible
Participant(s) who are charged and pay such costs pursuant
to this Agreement;
(4) Tangible Reclamation Costs in connection with
plugging and abandoning a Well after it has produced in
commercial quantities shall be allocated to the Tangible
Participant(s);
(5) Revenues, income or gain resulting from the rental,
sale or other disposition of any item of depreciable
property shall be allocated to the Participants in the same
proportions as the costs of such property were allocated to
the Participants, except for revenues resulting from the
disposition of depreciable property contributed to the Tax
Partnership, which shall first be allocated to the
Participant who contributed such property in an amount equal
to the difference between the fair market value of such
property at the time of the contribution and its adjusted
tax basis at such time;
(6) In any period in which net revenues of the Tax
Partnership are allocated to the pursuant to the Preferred
Return, items of revenue, cost, income, gain, loss,
deduction or credit relating to such net revenues shall be
allocated to the Partnership.
(7) Loss from the sale or other disposition of Tax
Partnership property shall be allocated to the Participants
in the same proportion in which they were charged costs with
respect to such property;
(8) Any recapture treated as an increase in tax,
decrease in credits, or an increase in ordinary income shall
be allocated to the Participants in the same manner as the
deductions and credits which gave rise to such recapture
were allocated to them;
(9) Cost and percentage depletion deductions and the
gain or loss on the sale or other disposition of property
the production from which is subject to depletion (herein
sometimes called "depletable property") shall be computed
separately by the Participants rather than by the Tax
Partnership. For purposes of making such computations, the
Tax Partnership's adjusted basis in each depletable property
shall be allocated under Section 613A-3(c)(7)(D) of the Code
and Treasury Regulations promulgated thereunder in
proportion to each Participant's respective share of the
costs and expenses which entered into the Tax Partnership's
adjusted basis for each depletable property. After the
initial allocation of basis of each depletable property, the
Tax Partnership shall make a new allocation of the basis of
its depletable properties in accordance with Regulation
Section 1.613A(e) (or any successor provision) upon (i) a
contribution of additional money, other property or services
to the Tax Partnership by a Participant; (ii) the making of
additional capital expenditures made with respect to a Well;
or (iii) a partial or complete withdrawal of a Participant
from the Tax Partnership. Each Participant agrees to
cooperate with ESI and to provide ESI with any information
requested by ESI and which is necessary or helpful to ESI in
making these calculations and allocations. The amount
realized on the sale or other disposition of each such
property shall be allocated to (A) the extent the same
constitutes a recovery of the Tax Partnership's simulated
basis in the property, to the Participants in the same
percentages as the adjusted basis of the property sold or
disposed of was allocated to them up to an amount equal to
the Tax Partnership's simulated basis in such property at
the time of such sale or disposition; (B) in the case of
property contributed to the Tax Partnership, to the
Participant who contributed such property in an amount equal
to the difference between the fair market value of the
property at the time of the contribution and its simulated
basis at such time; and (C) thereafter, the Participants in
proportion to their share of the Working Interest in the
property sold or transferred;
(10) Notwithstanding anything to the contrary in this
Section 18, if any Participant's Capital Account has a
deficit balance because the Participant unexpectedly
received any adjustments, allocations, or distributions
described in Treasury Regulation Section
1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Tax
Partnership income and gain (including items of gross
income) shall be specially allocated to such Participant in
an amount and manner sufficient to eliminate, to the extent
required by the Treasury Regulations, such excess deficit
Capital Account balance as quickly as possible;
(11) Notwithstanding anything to the contrary in this
Section 18, if the allocation of any loss or deduction to a
Participant would cause the balance of such Participant's
Capital Account to be less than zero, only the amount that
reduces the balance in such Participant's Capital Account to
zero shall be allocated to such Participant and the
remainder shall be allocated to the Participants with
positive Capital Account balances in proportion to their
positive Capital Account balances;
(12) The allocations set forth in subsections 18(h)(10)
and (11) (the "Regulatory Allocations") are intended to
comply with certain requirements of Treasury Regulations
Sections 1.704-1 and 1.704-2. Notwithstanding anything to
the contrary in this Agreement (other than the Regulatory
Allocations), the Regulatory Allocations shall be taken into
account in allocating other taxable income and tax losses
and items of income, gain, loss and deduction among the
Participants so that, to the extent possible and consistent
with Treasury Regulation Sections 1.704-1 and 1.704-2, the
net amount of such allocations of other taxable income and
tax losses and other items and the Regulatory Allocations to
each Participant shall be equal to the net amount that would
have been allocated to each such Participant if the
Regulatory Allocations had not occurred.
(13) Notwithstanding anything to the contrary in this
Subsection 18(h), all deductions allowable under Section
83(h) of the Code shall be allocated to the Participant who
is allocated the income which gives rise to the deduction
under Section 83(h).
(14) In accordance with Section 704(c) of the Code and
the Treasury Regulations thereunder, income, gain, loss and
deduction with respect to any property contributed to the
Tax Partnership shall, solely for tax purposes, be allocated
among the Participants so as to take account of any
variation between the fair market value of such property and
its adjusted basis in the hands of the Partnership on the
contribution date. This subsection 18(h)(14) shall not
affect, or in any way be taken into account in computing,
any Participant's Capital Account or distributions pursuant
to any provision of this Agreement.
(i) No Participant may assign or transfer its interest in the
Tax Partnership without the prior approval of ESI; provided, however,
that ESI may only withhold its approval if it believes that such
assignment or transfer would result in the termination of this Tax
Partnership for Federal income tax purposes. In accordance with
Treasury Regulations under Section 6050K of the Code, any Participant
who sells or exchanges its interest in the Tax Partnership must notify
ESI within 30 days (or, if earlier, by January 15, of the calendar year
following the calendar year in which the exchange occurred) of such
transaction. Such notification must include the names, addresses and
taxpayer identification numbers (if known) of the transferor and
transferee and the date of the exchange. Thereafter, the Tax
Partnership shall notify the IRS of such sale or exchange of Working
Interest, along with the names and addresses of the transferor and
transferee and all other required information.
(j) Any distribution in termination of any Participant's
interest in the Tax Partnership other than pursuant to subsection 18(k)
below, shall be in an amount of cash or fair market value of property
equal to the Capital Account balance of such Participant at the time
such interest is terminated, after such Capital Account balance has
been adjusted in accordance with subsection 18(k)(4) below, and the
applicable Treasury Regulations under Section 704(b) of the Code, and
shall be made by the later of (1) the end of the Tax Partnership
taxable year in which such termination occurs or (2) within 90 days
after the date of such termination; provided, however, that if such
Capital Account balance is less than zero after taking into account
such adjustments and the distribution provided for in this subsection
18(j), such Participant shall contribute an amount of cash to the Tax
Partnership sufficient to cause his or its Capital Account to have a
zero balance by the later of (i) the end of the Tax Partnership taxable
year in which such termination occurs or (ii) within 90 days after the
date of such termination.
(k) Upon termination of the provisions of this Section 18, the
activities of the Participants under this Section 18 shall be concluded
and the property subject to this Section 18 and the other provisions of
this Agreement shall be distributed to the Participants in the manner
and in the order set forth below:
(1) Debts of the Participants owed to persons other
than the Participants and created pursuant to operations and
activities under this Agreement shall be paid.
(2) Debts owed among the Participants and created
pursuant to operations and activities under this Agreement
shall be paid.
(3) All cash on hand representing unexpended
contributions by any Participant shall be returned to the
contributor.
(4) The Participants' respective Capital Accounts shall
be adjusted by (1) assuming the sale of all remaining
properties subject to this Agreement for cash at their
respective fair market values as of the date of termination
of this Agreement and (2) debiting or crediting each
Participant's respective Capital Account with such
Participant's respective share of the hypothetical gains or
losses resulting from such assumed sales in the same manner
as such Participant's Capital Account would be debited or
credited under this subsection 18(k) for gains or losses on
actual sales of such properties.
(5) Thereafter, all remaining properties shall be
distributed to the Participants in accordance with their
respective positive Capital Account balances as so adjusted
by the later of (i) the end of the Tax Partnership taxable
year in which the termination occurs or (ii) within 90 days
after the date of such termination; provided, however, that
if such Capital Account balance is less than zero after
taking into account such adjustments and the distribution
provided for in this sub-paragraph, such Participant shall
contribute an amount of cash to the Tax Partnership
sufficient to cause his or its Capital Account to have a
zero balance by the later of (A) the end of the Tax
Partnership taxable year in which such termination occurs or
(B) within 90 days after the date of such termination. If
property subject to this Agreement is distributed pursuant
to this subsection 18(k), the amount of the distribution
shall be equal to the fair market value of the distributed
property.
(l) It is understood and agreed that it shall be the
obligation of each Participant to make such assignments as are required
upon termination of the provisions of this Section 18. Such assignments
shall be made subject to the liability of each assignee for costs,
expenses and liabilities therefore incurred or for which commitment had
been made by ESI prior to the date of termination and such costs,
expenses and liabilities shall be allocated to such assignee pursuant
to this Section 18.
19. FORCE MAJEURE.
(a) If ESI is rendered unable, wholly or in part, by force
majeure (as hereinafter defined) to carry out is obligations under this
Agreement, ESI shall give to the Participants prompt written notice of
the force majeure with reasonably full particulars concerning it;
thereupon, the obligations of ESI, so far as it is affected by the
force majeure, shall be suspended during but no longer than, the
continuance of the force majeure. ESI 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, change of law, 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 ESI's performance hereunder and is not
reasonably within the control of ESI.
(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 ESI, contrary to
its wishes; the method of handling all such difficulties shall be
entirely within the discretion of ESI.
20. TERM. This Agreement shall become effective when executed by ESI
and all Participants and, except as provided in subsection 6(c), shall
continue and remain in full force and effect for the productive lives of
the Wells being operated hereunder.
21. INVALIDITY. 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.
22. 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.
23. 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.
24. 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 prepared, to the following addresses until changed by certified or
registered letter so addressed to the other party:
Initial Address for ESI and All Participants:
280 Fort Sanders West Boulevard, Suite 200
Knoxville, Tennessee 37922
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.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first written above.
LEASEHOLD PARTICIPANT(S): OPERATOR AND MANAGER:
ENERGY SEARCH, INCORPORATED ENERGY SEARCH, INCORPORATED
a Tennessee Corporation a Tennessee Corporation
By: By:
Richard S. Cooper,
President Richard S. Cooper, President
IDC PARTICIPANT(S):
ENERGY SEARCH NATURAL GAS 1996 L.P.,
a Tennessee Limited Partnership
By: ENERGY SEARCH, INCORPORATED
Its Managing General Partner
By:
TANGIBLE PARTICIPANT(S): Richard S. Cooper, President
ENERGY SEARCH, INCORPORATED
a Tennessee Corporation
By:
Richard S. Cooper, President
<PAGE>
A-2
ANNEX A
TO JOINT DRILLING AND OPERATING AGREEMENT
PARTIAL ASSIGNMENT
OF
OIL AND GAS LEASE
THIS ASSIGNMENT made this ______ day of ________________, 1996, from ENERGY
SEARCH, INCORPORATED, a Tennessee corporation, with offices at 280 Fort Sanders
West Boulevard, Suite 200, Knoxville, Tennessee 37922 (the "Assignor") to ENERGY
SEARCH NATURAL GAS 1996 L.P., a Tennessee limited partnership, with offices at
280 Fort Sanders West Boulevard, Suite 200, Knoxville, Tennessee 37922 (the
"Assignee").
WITNESS THAT:
WHEREAS, Assignor is the present Lessee under that certain Oil and Gas Lease
(the "Lease") from ______________________, dated _______ _______________, and
recorded in Deed Book Volume _______________, Page _______, in the Recorder's
Office of _______________________ County, _________________, covering
approximately ________________ acres in ________________ Township,
________________ County, ___________;
WHEREAS, Assignor desires to assign a certain undivided percentage of its
interest to a depth of _____ feet in a portion of the oil and gas Lease estate
covered by the above-described Lease to each Assignee on the terms and
conditions herein set forth;
NOW THEREFORE, in consideration of One Dollar ($1.00) and other good and
valuable consideration, receipt of which is hereby acknowledged, Assignor does
hereby sell, assign, quitclaim, set over and transfer to Assignee, its
respective successors and assigns forever, an undivided ____ percent (___%) of
Working Interest in, to and under the above-described Lease with respect to that
portion of the oil and gas leasehold estate shown on the map attached hereto as
Exhibit A (the "Drillsite") and subject to the terms and conditions of the
aforesaid Lease only to a depth from the surface to one hundred (100) feet below
the base of the deepest stratigraphic Horizon encountered by a well drilled on
the Drillsite (the "Assigned Depth").
TOGETHER with all rights, titles and interest appurtenant hereto, as set forth
in said Lease, including such surface rights, easements (other than pipeline
easements) and other rights and privileges as are necessary or convenient for
access to or otherwise for the drilling and proper operation and maintenance of
oil and/or gas wells on the portion of the oil and gas leasehold estate covered
by this Assignment, and for the transportation, removal and sale of the oil and
gas produced therefrom.
Assignor hereby expressly excepts, reserves, and retains unto itself, its
successors and assigns, all of Assignor's right, title, interest and position as
the lessee in, to and under the above-described Lease with respect to the
remaining undivided percentage of Working Interest, if any, all oil and gas
rights below the Assigned Depth, and to the portion of the oil and gas leasehold
estate shown as being retained by Assignor on the map attached hereto as Exhibit
A, together with all rights, titles and interests appurtenant thereto, as set
forth in said Lease including, without limitation, all surface and sub-surface
rights, easements and other rights and privileges necessary or convenient to the
enjoyment of Assignor's retained estate.
Assignor represents and warrants to Assignee and its successors and assigns
that: (i) Assignor has delivered to Assignee true, correct and complete copies
of the Lease, the Assignment and any amendments, modifications or supplements
thereto; (ii) to the best knowledge of Assignor, no condition exists and no
event has occurred which constitutes a default under said Lease or related
Assignment, amendments, modifications or supplements; (iii) to the best
knowledge of Assignor, said Lease and related Assignment, amendments,
modifications or supplements have been duly executed and delivered by the
lessor(s) therein and/or the assignor(s) thereof, have been duly recorded, and
presently are in full force and effect and enforceable in accordance with their
respective terms; (iv) to the best knowledge of Assignor, all required consents
or approvals of, or notices to, the lessor(s) under said Lease (and related
Assignments, amendments, modifications and supplements), any governmental body
or other third parties, with respect to this Assignment, have been obtained or
given; (v) this Assignment effectively assigns and transfers to Assignee all of
the Assignor's right, title and interest in, to, and under said Lease and
related Assignment, amendments, modifications or supplements to the portion of
the leasehold estate covered hereby; and (vi) Assignor has not done, committed,
executed, permitted or suffered any act whereby its title to or interest in said
Lease has become encumbered in any manner or subject to an adverse interest. IT
IS EXPRESSLY UNDERSTOOD AND AGREED THAT, EXCEPT AS SET FORTH ABOVE, ASSIGNOR
MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, AS TO ITS TITLE OR THE
TITLE OF THE LESSOR(S) IN AND TO THE LANDS OR OIL AND GAS INTERESTS COVERED BY
SAID LEASE OR THIS ASSIGNMENT.
This Assignment shall be binding upon and shall inure to the benefit of Assignor
and Assignee and their respective successors and assigns.
IN WITNESS WHEREOF, Assignor has caused this Agreement to be duly executed on
the day and year first above written.
ASSIGNOR:
Witnesses: ENERGY SEARCH, INCORPORATED
a Tennessee Corporation
_________________________________ By
Richard S. Cooper, President
- ---------------------------------
[Corporate Seal]
STATE OF TENNESSEE )
)SS:
COUNTY OF KNOX )
On this ____ day of ______________, 1996, before me, a Notary Public,
personally appeared Richard S. Cooper, who acknowledged himself to be the
President of Energy Search, Incorporated, a Tennessee corporation, and that as
President being duly authorized to do so he executed the foregoing instrument
for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
Notary Public
My Commission Expires:
[Notary Seal]
<PAGE>
3
ANNEX B
TO JOINT DRILLING AND OPERATING AGREEMENT
AUTHORITY FOR EXPENDITURE FOR CLINTON WELL
April 19, 1996
Location: Washington, Athens or Meigs Counties, Ohio
Target Horizon: Clinton Sandstone
Depth: Approximately 5,600 Feet
===============================================================================
Item Intangible Cost Tangible Cost
Contract Drilling (5600' @ $7.25/ft.) $40,600
Engineering Supervision $12,500
Logging (open-hole/camera/cased-hole) $12,000
Geology $7,500
Title/Survey/Permit $3,500
Damages/Right of Way/Landowner Relations $3,000
FERC filing/Completion filing $2,500
Well Site Construction and Dozer Service $12,000
Reclamation $6,000
Water Hauling (Drilling/Completion/Reclamation) $7,000
Frac Tank Rental $3,000
Stimulation (Frac One Stage) $25,000
Acidizing $2,500
Cementing (Surface Pipe/Production Strings) $11,500
Frac Water Disposal $4,000
Service Rig/Roustabout $13,900
Trucking (Drilling/Completion) $3,500
Stone/Gravel/Hauling $5,000
Twp./Co. Road Maintenance $4,000
Administrative Overhead $10,000
Risk Allowance $26,000
60' 12.75" Conductor Pipe $500
1600' 8.625" Surface Pipe $11,000
5500' 4.5" Production Casing $17,000
5300' 2.375" Production Tubing $7,000
4.5" x 8.675" Casing Head $500
2.375" x 4.5" Tubing Head $500
Well Head Valves/Fitting $2,000
Separator/Tanks/Meter/Fittings $4,500
2000' 2" Flow Line/Installation $2,000
2500' 2" Sales Line/Installation $2,500
Tank Battery/Separator/Construction $1,000
Painting/Tanks/Separator/Well-Head $1,500
Total $215,000 $50,000
TOTAL INTANGIBLE AND TANGIBLE WELL COSTS $265,000*
* All Drillsite acquisition costs are contributed by ESI. To the extent that ESI
determines to complete a Well utilizing low radius horizontal techniques, the
Turnkey Price will be (i) reduced by those costs set forth in the AFE associated
with fracturing and (ii) increased by cost associated with the low radius
horizontal drilling completion activity billed to the Intangible Participants at
Cost plus 15%.
ESI PIPELINE OPERATING L.P.
LIMITED PARTNERSHIP AGREEMENT
TABLE OF CONTENTS
Page
ARTICLE I FORMATION OF PARTNERSHIP; DEFINITIONS
Section 1.1 ................. Formation 1
Section 1.2 ................. Name 1
Section 1.3 ................. Business 1
Section 1.4 ................. Principal Office; Resident Agent 1
Section 1.5 ................. Names and Addressees of Partners 1
Section 1.6 ................. Term 2
Section 1.7 ................. Filings 2
Section 1.8 ................. Title to Partnership Property 2
Section 1.9 ................. Defined Terms 2
ARTICLE II CAPITALIZATION
Section 2.1 ............. Capital Contributions by Limited Partner 9
Section 2.2 ............. Capital Contributions by General Partner 9
Section 2.3 ............. Return of Contributions 9
Section 2.4 ............. Use of Capital Contributions 9
Section 2.5 ............. Partnership Interests 9
ARTICLE III ALLOCATION OF PROFITS AND LOSSES
Section 3.1 .................................. General Allocations 10
Section 3.2 .................................. Special Allocations 10
Section 3.3 .................................. Allocations Relating to
Capital Account Deficits 10
Section 3.4 .................................. Regulatory Allocations 11
Section 3.5 .................................. Curative Allocations 12
Section 3.6 .................................. Allocation Variations 12
Section 3.7 .................................. Appointment Among Partners 13
ARTICLE IV CASH DISTRIBUTIONS
Section 4.1 Cash Distributions During Support Period 13
Section 4.2 Cash Distributions After the Support Period But
Prior to Liquidation 14
Section 4.3 Cash Distributions Upon Liquidation 14
Section 4.4 Pipeline System Capital Improvement and Extension
Distributions 14
Section 4.5 Support Distributions 14
Section 4.6 Restoration Distributions 15
Section 4.7 Capital Account Deficits 15
ARTICLE V COMPENSATION TO GENERAL PARTNER
Section 5.1 Operating Costs 15
Section 5.2 Pipeline System Management Fee 15
ARTICLE VI MANAGEMENT AND OPERATION OF BUSINESS
Section 6.1 .... Management 16
Section 6.2 .... Certificate of Limited Partnership 17
Section 6.3 .... Restrictions on General Partner's Authority 18
Section 6.4 .... Commitment of General Partner 19
Section 6.5 .... Contracts With General Partner or Affiliates 19
Section 6.6 .... Sales of Properties to Partnership 19
Section 6.7 .... Purchase of Properties From the Partnership 20
Section 6.8 .... Custody of Partnership Funds and Properties 20
Section 6.9 .... Liability of General Partner and Affiliates Thereof 20
Section 6.10 ... Indemnification of General Partner and Affiliates
Thereof 21
Section 6.11 ... Other Matters Concerning the General Partner 22
Section 6.12 ... Title to Partnership Assets 22
Section 6.13 ... Reliance by Third Parties 23
ARTICLE VII RIGHTS AND OBLIGATIONS OF LIMITED PARTNER
Section 7.1 Limitation of Liability 23
Section 7.2 Management of Business 23
Section 7.3 Outside Activities 24
Section 7.4 Return of Capital 24
Section 7.5 Rights of Limited Partner Relating to the Partnership 24
ARTICLE VIII BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting 25
Section 8.2 Fiscal Year 25
Section 8.3 Reports 25
ARTICLE IX TAX MATTERS
Section 9.1 Preparation of Tax Returns 25
Section 9.2 Tax Matters Partner 26
Section 9.3 Tax Elections 26
Section 9.4 Partner Representations 26
Section 9.5 Tax Controversies 26
Section 9.6 Organizational Expenses 27
Section 9.7 Withholding 27
<PAGE>
ARTICLE X TRANSFER OF PARTNERSHIP INTERESTS
Section 10.1 Transfer by General Partner 27
Section 10.2 Assignment by the Limited Partner 28
Section 10.3 Requirements and Restrictions on Transfer 29
ARTICLE XI WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal of the General Partner 30
Section 11.2 Removal of the General Partner 32
Section 11.3 Interest of Departing Partner and Successor
General Partner 32
Section 11.4 Withdrawal of Limited Partner 32
ARTICLE XII DISSOLUTION AND LIQUIDATION
Section 12.1 Dissolution 32
Section 12.2 Continuation of the Business of the Partnership
After Dissolution 33
Section 12.3 Liquidation 33
Section 12.4 Distributions in Kind 34
Section 12.5 Cancellation of Certificate of Limited Partnership 34
Section 12.6 Reasonable Time for Winding Up 34
Section 12.7 Return of Capital 35
Section 12.8 No Capital Account Restoration 35
Section 12.9 Waiver of Partition 35
ARTICLE XIII AMENDMENT OF PARTNERSHIP AGREEMENT;
LIMITED PARTNER ACTION
Section 13.1 Amendment to be Adopted Solely by the General Partner 35
Section 13.2 Amendment Procedures 36
Section 13.3 Amendment Requirements 36
Section 13.4 Action of Limited Partner 36
ARTICLE XIV MERGER
Section 14.1 Authority 36
Section 14.2 Procedure for Merger or Consolidation 36
Section 14.3 Approval by Limited Partner of Merger or Consolidation 37
Section 14.4 Certificate of Merger 38
Section 14.5 Effect of Merger 38
<PAGE>
ARTICLE XV GENERAL PROVISIONS
Section 15.1 Power of Attorney 38
Section 15.2 Addresses and Notices 39
Section 15.3 References 39
Section 15.4 Pronouns and Plurals 39
Section 15.5 Further Action 39
Section 15.6 Binding Effect 40
Section 15.7 Integration 40
Section 15.8 Creditors 40
Section 15.9 Waiver 40
Section 15.10 Counterparts 40
Section 15.11 Applicable Law 40
Section 15.12 Invalidity of Provisions 40
<PAGE>
-19-
LIMITED PARTNERSHIP AGREEMENT
ESI PIPELINE OPERATING L.P.
THIS LIMITED PARTNERSHIP AGREEMENT ("Agreement") dated January 5, 1993,
is made by and among ENERGY SEARCH INCORPORATED, a Tennessee corporation (the
"General Partner, and ENERGY SEARCH NATURAL GAS PIPELINE INCOME, L.P., a
Tennessee limited partnership (the "Limited Partner"). In consideration of the
mutual covenants and agreements contained herein, the parties hereto do hereby
agree as follows:
ARTICLE I
FORMATION OF PARTNERSHIP; DEFINITIONS
Section 1.1 Formation. Subject to the provisions of this Agreement, the
parties hereto hereby form a limited partnership pursuant to the provisions of
the Tennessee Revised Limited Partnership Act, as amended (the "Tennessee Act").
Section 1.2 Name. The name of the Partnership shall be ESI Pipeline
Operating L.P. Subject to all applicable laws, the business of the Partnership
may be conducted under such other name or names as the General Partner
determines to be necessary or desirable. The General Partner will file or cause
to be filed on behalf of the Partnership all assumed or fictitious name
certificates or similar instruments as may from time to time be required by law.
Section 1.3 Business. The business of the Partnership shall be to
engage in the gathering, purchase and sale of natural gas in and around the
Gathering Area. The Partnership will do so by acquiring the Pipeline System
pursuant to the Transaction. In connection with the Transaction, the Partnership
will pay the Partial Sale Proceeds to the General Partner. As additional
consideration for transferring the Pipeline System to the Partnership, along
with its receipt of the Partial Sales Proceeds, the General Partner will receive
its Partnership Interest. The Partnership may engage in all activities or action
necessary or incidental to ownership and operation of the Pipeline System, to
the extent such activities and action are consistent with the Tennessee Act and
the terms of the Memorandum.
Section 1.4 Principal Office; Resident Agent. The principal place of
business of the Partnership shall be located at Suite 200, 280 Fort Sanders West
Boulevard, Knoxville, Tennessee 37922. The General Partner, at any time and from
time to time, may change the location of the Partnership's principal place of
business and may establish such additional Partnership places of business as the
General Partner determines to be necessary or desirable, provided that notice
thereof is given to the Limited Partner within thirty (30) days after such
change or establishment. The resident agent for service of process shall be Mr.
Richard S. Cooper, President of the General Partner.
Section 1.5 Names and Addresses of Partners. ENERGY SEARCH INCORPORATED
shall serve as the General Partner. The General Partner's address is Suite 200,
280 Fort Sanders West Boulevard, Knoxville, Tennessee 37922. The name and
business, residence, or mailing address of the Limited Partner will be
maintained in the Partnership's records. The date upon which the Limited Partner
became a Partner in the Partnership shall be the date set forth in the
Partnership's records.
Section 1.6 Term. The Partnership will become Activated and will become
a limited partnership under the Tennessee Act upon the completion of filing for
recording of an initial Certificate of Limited Partnership for the Partnership
in accordance with the Tennessee Act and shall continue until terminated in
accordance with Article XII.
Section 1.7 Filings. Upon the request of the General Partner, the
parties hereto will immediately execute and deliver all such certificates and
other instruments conforming hereto as are necessary for the General Partner to
accomplish all filing, recording, publishing, and other acts appropriate to
comply with all requirements for the formation and operation of a limited
partnership under the laws of the State of Tennessee and for the formation,
qualification, and operation of a limited partnership (or a partnership in which
the Limited Partner have limited liability) in all other jurisdictions where the
Partnership proposes to conduct business.
Section 1.8 Title to Partnership Property. All property owned by the
Partnership, whether real or personal, tangible or intangible, shall be deemed
to be owned by the Partnership as an entity, and no Partner individually shall
have any ownership of such property.
Section 1.9 Defined Terms. When used in this Agreement and unless the
context otherwise requires, the following terms shall have the respective
meanings set forth below:
"Accrued and Unpaid Priority Return" means, as of the end of the
Support Period, the amount of cash distributions which (although not then
available) would be required to be paid as Support Distributions to the Limited
Partner in order for the Net Income Limited Partners of the Limited Partner to
be able to receive their Priority Return.
"Activation" means the date, as designated by the General Partner in
its sole discretion, that the Partnership shall be deemed formed and its
business activities shall commence. Immediately upon Activation, the General
Partner shall undertake to file a Certificate of Limited Partnership for the
Partnership with the office of the Tennessee Secretary of State.
"Adjusted Capital Account Deficit" means, with respect to any Partner,
the deficit balance, if any, in such Partner's Capital Account as of the end of
the relevant fiscal year, after giving effect to the following adjustments:
(i) Credit to such Capital Account any amounts which such
Partner is obligated to restore or is deemed to be obligated to restore
pursuant to the penultimate sentence of Treasury Regulation ss.
1.704-1T(b)(4)(iv)(f) or would be deemed obligated to restore if
Partner Loan Nonrecourse Deductions were treated as Nonrecourse
Deductions; and
(ii) Debit to such Capital Account the items described in
Treasury Regulation ss.ss. 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6).
The foregoing definition of Adjusted Capital Account Deficit is intended to
comply with the provisions of Treasury Regulation ss. 1.704-1(b)(2)(ii)(d) and
shall be interpreted consistently therewith.
"Adjusted Capital Contribution" means, as of any day, a Partner's
Capital Contribution adjusted as follows:
(i) Increased by the amount of any Partnership liabilities which
are assumed by such Partner or are secured by any Partnership property
distributed to such Partner, and
(ii) Reduced by the amount of cash and the Gross Asset Value of
any Partnership property distributed to such Partner pursuant to this
Agreement hereof and the amount of any liabilities of such Partner
assumed by the Partnership or which are secured by any property
contributed to such Partner to the Partnership.
(iii) In the event any Person transfers all or any portion of his
Partnership Interests in accordance with the terms of this Agreement,
his transferee shall succeed to the Adjusted Capital Contribution of
the transferor to the extent it relates to the transferred Partnership
Interests.
(iv) In determining the amount of any liability for purposes of
this definition, there shall be taken into account Code ss. 752(c) and
any other applicable provisions of the Code and Treasury Regulations.
"Affiliate" means, with respect to another person, (i) any person
directly or indirectly owning, controlling or holding with power to vote 10% or
more of the outstanding voting securities of or equity interests in such other
person, (ii) any person 10% or more of whose outstanding voting securities or
equity interests are directly controlling, controlled or held with power to vote
by such other person, (iii) any person directly or indirectly controlling,
controlled by or under common control with such other person, (iv) any officer
or director of such other person, and (v) any company for which any such officer
or director acts in any such capacity.
"Agreed Contribution Value" means the value of the Pipeline System
established by ESI for purposes of determining (i) the Partial Sale Proceeds,
(ii) ESI's Partnership Interest, and (iii) the Limited Partner's Partnership
Interest in connection with the Transaction. The Agreed Contribution Value, for
this purpose, has been determined by ESI to be $3,200,000.
"Assignee" means a Person to whom a Partnership Interest has been
transferred in a manner permitted under this Agreement, but who has not become a
Substituted Limited Partner pursuant to Section 10.2(a).
"Bankrupt" or "Bankruptcy" with respect to a person means that the
person has:
(a) Made an assignment for the benefit of creditors;
(b) Filed a voluntary petition in Bankruptcy;
(c) Been adjudicated as Bankrupt or insolvent;
(d) Filed a petition or answer seeking for himself any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation;
(e) Filed an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against him in
any proceeding of this nature;
(f) Sought, consented to or acquiesced in the appointment of a
trustee, receiver or liquidator for himself or of all or any
substantial part of his properties;
(g) If, within one hundred twenty (120) days after the
commencement of any proceeding against him seeking reorganization,
arrangement, composition, adjustment, liquidation, dissolution or
similar relief under any statute, law or regulation, the proceeding
has not been dismissed; or
(h) If, within ninety (90) days after the appointment without his
consent or acquiescence of a trustee, receiver or liquidator for
himself or of all or any substantial part of his properties, the
appointment is not vacated or stayed, or if, within ninety (90) days
after the expiration of any such stay, the appointment is not vacated.
"Capital Account" means, with respect to any Partner or Assignee, the
Capital Account maintained for such Person in accordance with the following
provisions:
(i) To each Person's Capital Account there shall be credited
such Person's Capital Contributions, such Person's distributive share
of Profits, and any items in the nature of income or gain that are
specially allocated pursuant to Sections 3.2, 3.3, 3.4 or 3.5 hereof,
and the amount of any Partnership liabilities assumed by such Person or
secured by any Partnership property distributed to such Person.
(ii) To each Person's Capital Account there shall be debited
the amount of cash and the gross asset value of any Partnership
property distributed to such Person pursuant to any provision of this
Agreement, such Person's distributive share of Losses, and any items in
the nature of expenses or losses that are specially allocated pursuant
to Section, 3.2, 3.3, 3.4 or 3.5 hereof, and the amount of any
liabilities of such Person assumed by the Partnership or which are
secured by any property contributed by such Person to the Partnership.
(iii) In the event any Partnership Interest is transferred in
accordance with the terms of this Agreement, the transferee shall
succeed to the Capital Account of the transferor to the extent it
relates to the transferred Partnership Interest.
(iv) In determining the amount of any liability for purposes
of the definition of Capital Account, there shall be taken into account
Code ss. 752(c) and any other applicable provisions of the Code and
Treasury Regulations.
The foregoing provisions and the other provisions of this Agreement to the
maintenance of Capital Accounts are intended to comply with Treasury Regulation
ss. 1.704-1(b) and Temporary Treasury Regulation ss. 1.704-1T(b), and shall be
interpreted and applied in a manner consistent with such Treasury Regulations.
In the event the General Partner shall determine that it is prudent to modify
the manner in which the Capital Accounts, or any debits or credits thereto
(including, without limitation, debits or credits relating to liabilities that
are secured by contributed or distributed property or that are assumed by the
Partnership or the General Partner and Limited Partner, are computed in order to
comply with such Treasury Regulations, the General Partner may make such
modification, provided that it is not likely to have a material effect on the
amounts distributable to any Partner pursuant to Section 4.1 hereof upon the
dissolution of the Partnership. The General Partner also shall (i) make any
adjustments that are necessary or appropriate to maintain equality between the
Capital Accounts of the Partners and the amount of Partnership capital reflected
on the Partnership's balance sheet, as computed for book purposes in accordance
with Treasury Regulation ss. 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate
modifications in the event unanticipated events might otherwise cause this
Agreement not to comply with Treasury Regulation ss. 1.704-1(b) and Temporary
Treasury Regulation ss. 1.704-1T(b).
"Capital Contribution" means, for the Limited Partner, the cash
contributions made to the Partnership pursuant to Section 2.1(a), and any other
contributions the Limited Partner is required to make by applicable law or by
this contract. For the General Partner, the Capital Contribution shall equal the
Pipeline System valued at the Agreed Contribution Value less the Partial Sales
Proceeds, increased by the Pipeline System Capital Improvement and Extension
Contributions; further increased by any additional contributions the General
Partner is required to be made pursuant to Section 2.2(a).
"Cause" means a court of competent jurisdiction has entered a final
judgment finding the General Partner liable for fraud, gross negligence, willful
or wanton misconduct or breach of fiduciary duty in its capacity as general
partner of the Partnership.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership filed with the Secretary of State of the State of Tennessee, as such
Certificate of Limited Partnership may be amended, supplemented or restated from
time to time.
"Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time, as interpreted by the applicable Treasury Regulations
thereunder. Any reference herein to a specific section or sections of the Code
shall be deemed to include a reference to any corresponding provision of future
law.
"Departing Partner" means a former General Partner, from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2 .
"ESI" means Energy Search Incorporated.
"Gas Price Adjustment Factor" means, for purposes of computing Gas
Servicing Compensation, the product of (i) the percentage increase (or decrease)
in the "Weighted Average Gas Price" in any calendar quarter from that in the
calendar quarter immediately preceding it, times (ii) 75%. For this purpose, the
term "Weighted Average Gas Price" means the weighted average price (net of all
downstream gathering, servicing and severance fees or taxes) received by the
Partnership from the sale of all natural gas sold through the Pipeline System at
any time during the preceding calendar quarter.
"Gas Servicing Agreement(s)" means the agreement(s) between the
Partnership and operators or producers of natural gas in the Gathering Area
pursuant to which such operators or producers agree to sell their natural gas to
the Partnership and the Partnership agrees to gather, buy and sell such gas.
"Gas Servicing Compensation" means the compensation payable to the
Partnership pursuant to the Gas Servicing Agreements for gathering, purchasing
and selling natural gas from wells in the Gathering Area. Gas Servicing
Compensation shall generally equal the Base Spread ($0.40 per Mcf) as adjusted
by the Gas Price Adjustment Factor.
"Gathering Area" means the geographic area serviced by the Pipeline
System currently comprised of Washington County and contiguous counties in the
state of Ohio.
"Gross Asset Value" means, with respect to any asset, the asset's
adjusted basis for federal income tax purposes, except as follows:
(i) The initial Gross Asset Value of any asset contributed by
a Partner to the Partnership shall be the gross market value of such
asset, as determined by the contributing Partner and the Partnership;
(ii) The Gross Asset Values of all Partnership assets shall be
adjusted to equal their respective gross fair market values, as
determined by the General Partner, as of the following times: (a) the
acquisition of an additional interest in the Partnership (other than
pursuant to Section 2.1 or 2.2 hereof) by any new or existing Partner
in exchange for more than a de minimis Capital Contribution; (b) the
distribution by the Partnership to a Partner or Assignee of more than a
de minimis amount of Partnership property as consideration for an
interest in the Partnership; and (c) the liquidation of the Partnership
within the meaning of Treasury Regulation ss. 1.704-1(b)(2)(ii)(g);
provided, however, that adjustments pursuant to clauses (a) and (b)
above shall only be made if the General Partner reasonably determines
that such adjustments are necessary or appropriate to reflect the
relative economic interests of the Partners in the Partnership;
(iii) The Gross Asset Value of any Partnership asset
distributed to any Partner shall be the gross fair market value of such
asset on the date of distribution; and
(iv) The Gross Asset Values of Partnership assets shall be
increased (or decreased) to reflect any adjustments to the adjusted
basis of such assets pursuant to Code ss.ss. 734(b) or 743(b), but only
to the extent that such adjustments are taken into account in
determining Capital Accounts pursuant to Treasury Regulation ss.
1.704-1(b)(2)(iv)(m) and Article III hereof; provided, however, that
Gross Asset Values shall not be adjusted pursuant to subpart (iv) of
this definition to the extent the General Partner determines that an
adjustment pursuant to subpart (ii) of the definition hereof is
necessary or appropriate in connection with a transaction that would
otherwise result in an adjustment pursuant to subpart (iv) of this
definition.
"IRS" means the Internal Revenue Service.
"Limited Partner" means Energy Search Natural Gas Pipeline Income L.P.
and any other Person admitted to the Partnership as a Substitute Limited
Partner or additional Limited Partner.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in Sections 12.1(a) and
12.1(b), the date on which the applicable time period during which the Limited
Partner has the right to elect to reconstitute the Partnership and continue its
business has expired without such an election being made, and (b) in the case of
any other event giving rise to the dissolution of the Partnership, the date on
which such event occurs.
"Liquidator" means the General Partner or other Person approved
pursuant to Section 12.3 who performs the functions described therein.
"General Partner" means ESI or its successor as general partner of the
Partnership.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"Net Income Limited Partner" means a limited partner in the Limited
Partner who elects to hold Net Income Units.
"Nonrecourse Deductions" has the meaning set forth in Treasury
Regulation ss. 1.704-1T(b)(4)(iv)(b). The amount of Nonrecourse Deductions for a
Partnership fiscal year equals the net increase, if any, in the amount of
Partnership Minimum Gain during that fiscal year, determined according to the
provisions of Treasury Regulation ss. 1.704-1T(b)(4)(iv)(c).
"Operating Costs" means normal operational expenditures and costs made
or incurred in gathering, purchasing and selling natural gas through the
Pipeline System from wells in the Gathering Area. Operating Costs include the
cost of any labor or materials furnished by the General Partner or its
Affiliates providing the cost of such items is no greater than the cost that the
Partnership could have obtained such items for from unrelated third parties
engaged in the business of furnishing the same in the geographic area of the
Pipeline System.
"Opinion of Counsel" means a written opinion of counsel (who may be
regular counsel to ESI, any Affiliate of ESI, the Partnership or the General
Partner) acceptable to the General Partner.
"Partial Sale Proceeds" means the amount of cash received by ESI from
the Partnership in partial consideration for its transfer of the Pipeline System
to the Partnership pursuant to the Transaction. The Partial Sale Proceeds shall
equal in amount the Capital Contributions of the Limited Partner to the
Partnership pursuant to Section 2.1(a).
"Partner(s)" means, individually and collectively, the General Partner and
the Limited Partner.
"Partnership" means ESI Pipeline Operating L.P. formed and continued
pursuant to this Agreement.
"Partnership Interest" means the interest of any Partner in the
Partnership, which shall include the Partnership Interest of the General Partner
or the Limited Partner, including all beneficial rights associated therewith.
"Partnership Loan Nonrecourse Deductions" means any Partnership
deductions that would be Nonrecourse Deductions if they were not attributable to
a loan made or guaranteed by a Partner within the meaning of Treasury Regulation
ss. 1.704-1T(b)(4)(iv)(g) (or, if Treasury Regulation ss. 1.704-1T(b)(4)(iv)(h)
becomes applicable to the Partnership, a Person related to a Partner or Interest
Holder within the meaning of such section of the Treasury Regulations).
"Partnership Minimum Gain" shall have the meaning set forth in Treasury
Regulation ss. 1.704-1T(b)(4)(iv)(c).
"Person" means an individual or a corporation, partnership, trust,
estate, joint stock company, joint venture, unincorporated organization,
association or other entity.
"Pipeline System" means the natural gas gathering and pipeline system
servicing wells in the Gathering Area to be acquired and operated by the
Partnership pursuant to this Agreement.
"Pipeline System Capital Improvement and Extension Allocations" means
the special allocations of income or gain to the Partnership, pursuant to
Section 3.2(c) of this Agreement, in connection with Pipeline System Capital
Improvement and Extension Distributions.
"Pipeline System Capital Improvement and Extension Costs" means any
capital expenditures made by the Partnership to improve or extend the Pipeline
System to connect one or more new wells in the Gathering Area.
"Pipeline System Capital Improvement and Extension Distributions"
means, in any period, the cash distributions to be made to the Partnership
pursuant to Section 4.4, in consideration for the General Partner's Capital
Contribution to the Partnership used to fund Pipeline System Capital Improvement
and Extension Costs.
"Priority Return" means the preferred, cumulative return to be
maintained in favor of Net Income Limited Partners of the Limited Partner
commencing in the first full calendar quarter following Activation of the
Limited Partner and continuing through December 31, 1997 (the "Support Period")
in an amount equal to 10.0% per annum (prorated for any partial year) of their
Capital Contributions to the Limited Partner.
"Profits" and "Losses" means, for each fiscal year or other period, an
amount equal to the Partnership's taxable income or loss for such year or period
as more particularly defined in the Code.
"Restoration Allocations" means the special allocations of income and
gain to the General Partner in accordance with Section 3.2(b), in connection
with Restoration Distributions.
"Restoration Distributions" means, in any period, the cash
distributions to be made to the General Partner pursuant to Section 4.6.
"Securities Act" means the Securities Act of 1933, as amended,
supplemented or restated from time to time and any successor to such statute.
"Substituted Limited Partner" means a Person who is admitted as a
Limited Partner to the Partnership pursuant to Section 10.2 in place of and with
all the rights of a Limited Partner and who is shown as a Limited Partner on the
books and records of the Partnership.
"Support Allocations" means the special allocations of income and gain
to the Limited Partner pursuant to Section 3.2(a) in connection with Support
Distributions.
"Support Distributions" means, in any period, the cash distributions
payable to the Limited Partner pursuant to Section 4.5.
"Support Period" means the period of time, commencing at Activation of
the Partnership and continuing through December 31, 1997, during which Support
Distributions will be required to be made pursuant to Section 4.5.
"Surviving Business Entity" has the meaning assigned to such term in
Section 14.2.
"Tax Matters Partner" shall have the meaning set forth in Section 9.2.
"Tennessee Act" means the Tennessee Revised Limited Partnership Act.
"Transaction" means the transfer by ESI of the Pipeline System to this
Partnership in exchange for (i) the Partial Sale Proceeds, and (ii) ESI's
Partnership Interest.
"Treasury Regulations" means the rules and regulations which have been
promulgated by the United States Department of Treasury under and with respect
to the Code and which are applied by the IRS.
"Withdrawal Opinion of Counsel" shall have the meaning set forth in Section
11.1(b).
"Working Capital Reserve" means the net cash from operations set aside
by the General Partner, not exceeding at any time five percent (5%) of Capital
Contributions of the Limited Partner, to meet anticipated liabilities,
obligations and expenses of the Partnership during the ensuing twelve (12)
months.
ARTICLE II
CAPITALIZATION
Section 2.1 Capital Contributions by Limited Partner.
(a) Cash Capital Contributions. Upon Activation, the Limited
Partner will contribute cash or cash equivalent to the Partnership in
such amounts and at such times as the Limited Partner desires. The
General Partner shall maintain accurate records of account regarding
the Capital Contribution of the Limited Partner.
(b) Assessments. Except as otherwise specifically provided in
this Agreement or as required under the Tennessee Act or other
applicable law, the Limited Partner will not be subject to voluntary or
mandatory assessments for additional Capital Contributions at any time.
Section 2.2 Capital Contributions by General Partner.
(a) Pipeline System. Upon Activation of the Partnership, the
General Partner shall assign and convey the Pipeline System to the
Partnership. In partial reduction of the Pipeline System Capital
Contribution, the Partnership shall pay the General Partner the
Partial Sales Proceeds pursuant to the Transaction. The Partial Sales
Proceeds payable to the General Partner will equal the cash Capital
Contributions of the Limited Partner pursuant to Section 2.1(a).
(b) Pipeline System Capital Improvements and Extensions. At its
option, the General Partner may contribute cash, property, materials
and/or services to the Partnership for the purpose of funding Pipeline
System Capital Improvement and Extension Costs.
(c) Additional Capital Contributions. Any amounts paid by the
General Partner as a result of its liability to Partnership creditors
pursuant to the Tennessee Act shall be deemed additional Capital
Contributions of the General Partner.
Section 2.3 Return of Contributions. Except as otherwise provided in
this Agreement, no interest shall accrue on any Capital Contributions to the
capital of the Partnership and no Partner shall have the right to withdraw or to
be repaid any capital contributed by that Partner.
Section 2.4 Use of Capital Contributions. Capital Contributions of the
Partners to the Partnership shall be used to acquire, own and operate the
Pipeline System in accordance with Section 1.3.
Section 2.5 Partnership Interests. The relative Partnership Interests
of the Partners shall be measured and stated as follows:
(a) The Partnership Interest of the Limited Partner shall
equal the percentage represented by the quotient of (A) the Limited
Partner's Capital Contribution pursuant to Section 2.1(a), divided by
(B) the Agreed Contribution Value of the Pipeline System.
(b) The Partnership Interest of the General Partner shall
equal the difference between (X) 100% less (Y) the percentage
represented by the Operating Partnership Interest of the Limited
Partner.
ARTICLE III
ALLOCATION OF PROFITS AND LOSSES
Section 3.1 General Allocations. After giving effect to the Special
Allocations set forth in Section 3.2, the allocations relating to Capital
Account deficits set forth in Section 3.3, the Regulatory Allocations set forth
in Section 3.4, and the Curative Allocations set forth in Section 3.5, Profits
and Losses for any fiscal year shall be allocated to the General Partner and the
Limited Partner in proportion to their Partnership Interests.
Section 3.2 Special Allocations. After giving effect to the allocations
relating to Capital Account deficits set forth in Section 3.3, the Regulatory
Allocations set forth in Section 3.4 and the Curative Allocations set forth in
Section 3.5, the Partners shall be specially allocated the following items of
Profit and Loss in the following order.
(a) Support Allocations. Items of income or gain for the year,
if any, shall be allocated to the Limited Partner until it has received
an amount which is equal to the cumulative amount of all Support
Distributions received by the Limited Partner since Activation of the
Partnership.
(b) Restoration Allocations. Items of income or gain for the
year, if any, shall be allocated to the General Partner until it has
received an amount which is equal to the cumulative amount of all
Restoration Distributions received by the General Partner since
Activation of the Partnership.
(c) Pipeline System Capital Improvement and Extension
Allocations. Items of income or gain for the year, if any, shall be
allocated to the General Partner an amount which is equal to the
cumulative amount of such Pipeline System Capital Improvement and
Extension Distributions to the General Partner since Activation of the
Partnership.
Section 3.3 Allocations Relating to Capital Account Deficits.
Notwithstanding anything to the contrary in this Agreement, no Partner shall be
allocated any item to the extent that such allocation would create or increase a
deficit in such Partner's Capital Account.
(a) Obligations to Restore. For purposes of this Section 3.3,
in determining whether an allocation would create or increase a deficit
in a Partner's Capital Account, such Capital Account shall be reduced
for those items described in Treasury Regulation ss.ss.
1.704-1(b)(2)(ii)(d)(4), (5), and (6) and shall be increased by any
amounts which such Partner is obligated to restore or is deemed
obligated to restore pursuant to the penultimate sentences of Treasury
Regulation ss.ss. 1.704-1T(b)(4)(iv)(f) and 1.704-1T(b)(4)(iv)(h)(5).
Further, such Capital Accounts shall otherwise meet the requirements of
Treasury Regulation ss. 1.704-1(b)(2)(ii)(d).
(b) Reallocations. Any loss or deduction of the Partnership,
the allocation of which to any Partner is prohibited by this Section
3.3, shall be reallocated to those Partners not having a deficit in
their Capital Accounts (as adjusted in Section 3.3(a)) in the
proportion that the positive balance of each such Partner's Capital
Account bears to the aggregate balance of all such Partners' adjusted
Capital Accounts, with any remaining losses or deductions being
allocated to the General Partner.
Section 3.4. Regulatory Allocations. The following allocations ("Regulatory
Allocations") shall be made in the following order:
(a) Minimum Gain Chargeback. Notwithstanding any other
provision of this Article III, if there is a net decrease in
Partnership Minimum Gain during any Partnership fiscal year, and if any
Partner would otherwise have an Adjusted Capital Account Deficit at the
end of such year, each such Partner shall be specially allocated items
of Partnership income and gain for such year (and, if necessary,
subsequent years) in an amount and manner sufficient to eliminate such
Adjusted Capital Account Deficit as quickly as possible. The items to
be so allocated shall be determined in accordance with Treasury
Regulation ss.1.704-1T(b)(4)(iv)(e). This Section 3.4(a) is intended to
comply with the minimum gain chargeback requirement in such section of
Treasury Regulation ss.1.704-1T(b)(iv)(c) and shall be interpreted
consistently therewith.
(b) Qualified Income Offset. In the event any Partner
unexpectedly receives any adjustments, allocations, or distributions
described in Treasury Regulation ss.1.704-1T(b)(2)(ii)(d)(4), (5) or
(6), items of Partnership income and gain shall be specially allocated
to the Partner in an amount and manner sufficient to eliminate, to the
extent required by the Treasury Regulations, the Adjusted Capital
Account Deficits created by such adjustments, allocations, or
distributions as quickly as possible, provided that an allocation
pursuant to this Section 3.4(b) shall be made only if and to the extent
that the Partner would have Adjusted Capital Account Deficits after all
other allocations provided for in this Article have been tentatively
made as if this Section 3.4(b) were not in the Agreement.
(c) Gross Income Allocation. In the event any Partner has a
deficit Capital Account at the end of any Partnership fiscal year that
is in excess of (i) the amount the Partner is obligated to restore
pursuant to any provision of this Agreement, and (ii) the amount the
Partner is deemed to be obligated to restore pursuant to the
penultimate sentence of Treasury Regulation
ss.ss.1.704-1T(b)(4)(iv)(f), and 1.704-1T(b)(4)(iv)(h)(5) and (iii) the
amount the Partner would be deemed obligated to restore if Partner Loan
Nonrecourse Deductions were treated as Nonrecourse Deductions, the
Partner shall be specially allocated items of Partnership income and
gain in the amount of such excess as quickly as possible, provided that
an allocation pursuant to this Section 3.3(c) shall be made only if and
to the extent that such Partner would have a deficit Capital Account in
excess of such sum after all other allocations provided for in this
Article have been tentatively made as if Section 3.4(b) hereof and this
Section 3.4(c) were not in the Agreement.
(d) Nonrecourse Deductions. Nonrecourse Deductions for any fiscal
year or other period shall be allocated to the General Partner and the
Limited Partner in proportion to their relative Partnership Interests.
(e) Partner Loan Nonrecourse Deductions. Any Partner Loan
Nonrecourse Deductions for any fiscal year or other period shall be
allocated to the Partner who bears the economic risk of loss with
respect to the loan to which such Partner Loan Nonrecourse Deductions
are attributable in accordance with Treasury Regulation
ss.1.704-1T(b)(4)(iv)(h).
(f) Code Section 754 Adjustments. To the extent an adjustment
to the adjusted tax basis of any Partnership asset pursuant to Code
ss.734(b) or Code ss.743(b) is required, pursuant to Treasury
Regulation ss.1.704-1(b)(2)(iv)(m), to be taken into account in
determining Capital Accounts, the amount of such adjustment to the
Capital Accounts shall be treated as an item of gain (if the adjustment
increases the basis of the asset) or loss (if the adjustment decreases
such basis), and such gain or loss shall be specially allocated to the
Partners in a manner consistent with the manner in which their Capital
Accounts are required to be adjusted pursuant to such section of the
Treasury Regulations.
Section 3.5. Curative Allocations. The allocations set forth in
subsections (a), (b), (c), (d), and (e) of Section 3.4 hereof are intended to
comply with certain requirements of Treasury Regulation ss.ss. 1.704-1(b) and
1.704-1T(b). Notwithstanding any other provisions of this Article, the
Regulatory Allocations shall be taken into account in allocating other Profits,
Losses and items of income, gain, loss, and deduction among the Partners so
that, to the extent possible, the net amount of such allocations of other
Profits, Losses and other items, and the Regulatory Allocations to each Partner
shall be equal to the net amount that would have been allocated to each such
Partner if the Regulatory Allocations had not occurred. Notwithstanding the
preceding sentence, Regulatory Allocations relating to (a) Nonrecourse
Deductions shall not taken into account except to the extent that there has been
a reduction in Partnership Minimum Gain and (b) Partner Loan Nonrecourse
Deductions shall not be taken into account except to the extent that there would
have been a reduction in Partnership Minimum Gain if the loan to which such
deductions are attributable were not made or guaranteed by a Partner within the
meaning of Treasury Regulation ss.1.704-1T(b)(4)(iv)(h).
Section 3.6. Allocation Variations. The General Partner shall have the
authority to vary allocations to preserve and protect the intention of the
Partners as follows:
(a) It is the intention of the Partners that each Partner's
distributive share of income, gain, loss, deduction or credit (or any
item thereof) shall be determined and allocated in accordance with this
Article to the fullest extent permitted by Code ss. 704(b). In order to
preserve and protect the allocations provided for in this Article, the
General Partner shall have the authority to allocate income, gain,
loss, deduction or credit (or any item thereof) arising in any year
differently than that expressly provided for in this Article, if and to
the extent that determining and allocating income, gain, loss,
deduction or credit (or any item thereof) in the manner expressly
provided for in this Article would cause the allocations of each
Partner's distributive share of income, gain, loss, deduction or credit
(or any item thereof) not to be permitted by Code ss. 704(b) and the
Treasury Regulations promulgated thereunder. Any allocation made
pursuant to this Section 3.6 shall be deemed to be a complete
substitute for any allocation otherwise expressly provided for in this
Article, and no amendment of this Agreement or further consent of any
partner shall be required therefor.
(b) In making any such allocation (the "new allocation") under
this Section 3.6, the General Partner shall be authorized to act only
after having been advised by the Partnership's accountants and/or
counsel that, under Code ss. 704(b) and the Treasury Regulations
thereunder, (i) the new allocation is necessary, and (ii) the new
allocation is the minimum modification of the allocations otherwise
expressly provided for in this Article which is necessary in order to
assure that, either in the then current year or in any preceding year,
each Partner's distributive share of income, gain, loss, deduction or
credit (or any item thereof) is determined and allocated in accordance
with this Article to the fullest extent permitted by Code ss.704(b) and
the Treasury Regulations thereunder.
(c) If the General Partner is required by this Section 3.6(c)
to make any new allocation in a manner less favorable to the Limited
Partner than is otherwise expressly provided for in this Article, then
the General Partner shall have the authority, only after having been
advised by the Partnership's accountants and/or counsel that they are
permitted by Code ss.704(b), to allocate income, gain, loss, deduction
or credit (or any item thereof) arising in later years in such a manner
as will make the allocations of income, gain, loss, deduction or credit
(or any item thereof) to the Limited Partner as comparable as possible
to the allocations otherwise expressly provided for or contemplated by
this Article.
(d) Any new allocation made by the General Partner under this
Section 3.6 in reliance upon the advice of the Partnership's
accountants and/or counsel shall be deemed to be made pursuant to the
fiduciary obligation of the General Partner to the Partnership and the
Limited Partner, and no such new allocation shall give rise to any
claim or cause of action by the Limited Partner.
Section 3.7. Apportionment Among Partners.
(a) Except as otherwise provided in this Agreement, all
allocations and distributions to the Partners shall be apportioned
among them in accordance with their Partnership Interests.
(b) For purposes of Section 3.7(a) hereof, a Partner's
Partnership Interest shall be calculated as of the end of the taxable
year for which such allocation has been made; provided, however, that
if a transferee of a Partnership Interest is admitted as a Partner
during the course of the taxable year, the apportionment of allocations
and distributions between the transferor and transferee of such
Partnership Interest shall be made in the manner provided in Section
3.7(c) hereof.
(c) If, during any taxable year of the Partnership, there is a
change in any Partner's Interest in the Partnership, each Partner's
allocation of any item of income, gain, loss, deduction, or credit of
the Partnership for such taxable year, other than "allocable cash basis
items" shall be determined by taking into account the varying interests
of the Partners pursuant to such method as is permitted by Code
ss.706(d) and the regulations thereunder. Each Partner's share of
"allocable cash basis items" shall be determined in accordance with
Code ss.706(d)(2) by (i) assigning the appropriate portion of each item
to each day in the period to which it is attributable, and (ii)
allocating the portion assigned to any such day among the Partners in
proportion to their interests in the Partnership at the close of such
day. "Allocable cash basis item" shall have the meaning ascribed to it
by Code ss.706(d)(2)(B) and the Treasury Regulations thereunder.
ARTICLE IV
CASH DISTRIBUTIONS
Section 4.1 Cash Distributions During Support Period. During the
Support Period, cash available for distribution from operations of the
Partnership shall be distributed on a monthly basis in the following order and
amounts:
(a) First, to the General Partner in the amount of any Pipeline
System Capital Improvement and Extension Distributions to be made as
determined pursuant to Section 4.4.
(b) Second, to the Limited Partner in the amount of Support
Distributions, if any, required to be made during such period,
pursuant to Section 4.5.
(c) Third, to the General Partner in the amount of Restoration
Distributions, if any, required to be made during such period,
pursuant to Section 4.6.
(d) Fourth, to the Partners in proportion to their respective
Partnership Interests.
Section 4.2 Cash Distributions After the Support Period But Prior to
Liquidation. Cash available for distribution from operations of the Operating
Partnership, after the Support Period but prior to liquidation, shall be
distributed monthly to the Partners in the following order and amounts:
(a) First, to the General Partner in the amount of any Pipeline
System Capital Improvement and Extension Distributions required to be
made as determined pursuant to Section 4.4.
(b) Second, to the General Partner in the amount of any
Restoration Distributions required to be made pursuant to Section 4.6.
(c) Third, to the Partners in accordance with their respective
Partnership Interests.
Section 4.3 Cash Distributions Upon Liquidation. Upon liquidation of
the Partnership, net liquidating proceeds shall be made in the following
order and amounts:
(a) First, to the General Partner in the amount of any accrued
and unpaid Pipeline System Capital Improvement and Extension
Distributions required to be made as determined pursuant to Section
4.4.
(b) Second, to the Limited Partner in the amount of any Accrued
and Unpaid Priority Return as determined pursuant to Section 4.5.
(c) Third, to the General Partner in the amount of any
Restoration Distributions required to be made pursuant to Section 4.6.
(d) Fourth, to the Partners in accordance with their positive
Capital Account balances.
Section 4.4 Pipeline System Capital Improvement and Extension
Distributions. In accordance with Section 2.2(b), the General Partner may elect
to make Pipeline System Capital Improvement and Extension Contributions to the
Partnership. To the extent such contributions are used to fund Pipeline System
Capital Improvement or Extension Costs which result in clearly identifiable new
wells to be connected to the Pipeline System, the General Partner shall be
entitled to receive all incremental cash revenues resulting from the new wells
being added to the Pipeline System until such time as the General Partner has
recovered 200% of its Pipeline System Capital Extension and Improvement
Contribution (including the reasonable and fair value of in-kind property
contributions, services and a reasonable allowance for overhead). To the extent
that the Pipeline System Capital Improvement and Extension Costs do not result
in clearly identifiable new wells connected to the Pipeline System, the General
Partner shall be entitled to recover from all revenues of the Partnership 125%
of the value of its Pipeline System Capital Extension and Improvement
Contributions (including the reasonable and fair value of in-kind property
contributions, services and a reasonable allowance for overhead) payable, on a
priority basis, commencing in the month following completion of the Pipeline
System Capital Improvement or Extension project, in twelve (12) equal monthly
distribution payments.
Section 4.5 Support Distributions. During the Support Period, the
Limited Partner, pursuant to its limited partnership agreement, will be required
to make cash distributions to its Net Income Limited Partners sufficient to
maintain a 10% per annum cumulative Priority Return on the capital contributions
of such Net Income Limited Partners. Commencing in April of any year during the
Support Period, if, during the previous fiscal year (or portion thereof) the
average monthly cash distributions from the Limited Partner to its Net Income
Limited Partners amounted to less than an annualized 10% rate of return, the
Limited Partner shall receive any distributable cash that would otherwise be
distributed to the General Partner pursuant to the Partners' Partnership
Interests sharing ratios to the extent necessary to allow the Limited Partner to
distribute cash to its Net Income Limited Partners in an amount sufficient to
maintain the Priority Return. After the Support Period, any Accrued and Unpaid
Priority Return shall be paid upon liquidation in accordance with Section
4.3(b).
Section 4.6 Restoration Distributions. To the extent that Support
Distributions are made to the Limited Partner pursuant to Section 4.4 during the
Support Period, the General Partner shall be entitled to receive return
preferred cash distributions ("Restoration Distributions") representing cash
that would otherwise be allocated and distributed to the Limited Partner
pursuant to its normal Partnership Interest sharing ratio. Such Restoration
Distributions shall be made to the General Partner only in months in which
Support Distributions are not paid to the Limited Partner and, during the
Support Period, cash distributions to the Limited Partner in such month are
sufficient to maintain the Priority Return for Net Income Limited Partners of
the Limited Partner. To the extent that accrued Restoration Distributions are
not made to the General Partner prior to liquidation, the same shall be paid
from distributable cash from liquidation in accordance with Section 4.3(c).
Section 4.7 Capital Account Deficits. No distributions shall be made to
any Partner to the extent such distribution would create or increase a deficit
in such Partner's Capital Account. Any distribution which is hereby prohibited
shall be made to those Partners not having a deficit in their Capital Account in
the proportion that the positive Capital Account of each such Partner's adjusted
Capital Account bears to the aggregate balance of all such Partners' adjusted
Capital Accounts.
ARTICLE V
COMPENSATION TO GENERAL PARTNER
Section 5.1 Operating Costs. The General Partner shall be reimbursed
for Operating Costs incurred on behalf of the Partnership in connection with
management and operation of the Pipeline System. Such Operating Costs may
include reasonable charges for direct labor or materials supplied by the General
Partner or its Affiliates to the Pipeline System provided the same are furnished
at rates no less favorable than those which would be charged by independent
third parties operating in the general area of the Gathering Area and engaged in
the business of providing such goods and services.
Section 5.2 Pipeline System Management Fee. The General Partner shall
be paid an amount equal to $5,000 per month subject to increase or decrease, but
not below $5,000 per month, on a calendar quarterly basis pursuant to the
increase (or decrease), in percentage terms, by the Gas Price Adjustment Factor
as compared to the previous calendar quarter.
<PAGE>
ARTICLE VI
MANAGEMENT AND OPERATION OF BUSINESS
Section 6.1 Management.
(a) The General Partner shall conduct, direct and manage all
activities of the Partnership. Except as otherwise expressly provided
in this Agreement, all management powers over the business and affairs
of the Partnership shall be exclusively vested in the General Partner,
and no Limited Partner shall have any management power over the
business and affairs of the Partnership. In addition to the powers now
or hereafter granted a general partner of a limited partnership under
the Tennessee Act or which are granted to the General Partner under any
other provision of this Agreement, the General Partner, subject to
Section 6.3, shall have full power and authority to do all things and
on such terms as it, in its sole discretion, may deem necessary or
appropriate to conduct the business of the Partnership, to effectuate
the purposes set forth in Section 1.3 and to exercise all powers set
forth in this Section 6.1, including, without limitation,
(i) the making of any expenditures and the incurring of
any other obligations;
(ii) the making of tax, regulatory and other filings,
or rendering of periodic or other reports to governmental or
other agencies having jurisdiction over the business or
assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge,
encumbrance, hypothecation or exchange of any or all of the
assets of the Partnership, or the merger or other
combination of the Partnership with or into another Person
(the matters described in this clause (iii) being subject,
however, to any prior approval that may be required by
Section 14.3);
(iv) the use of the assets of the Partnership
(including, without limitation, cash on hand) for any
purpose consistent with the terms of this Agreement;
(v) the negotiation, execution and performance of any
contracts, conveyances or other instruments including,
without limitation, the Gas Servicing Agreements and gas
sales contracts;
(vi) the distribution of Partnership cash in accordance
with Article IV;
(vii) the hiring and dismissal of contractors, agents,
outside attorneys, accountants, and consultants and the
determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the
benefit of the Partnership and the Partners (including,
without limitation, the assets of the Partnership) as it
deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest
in, and the contribution of property to, any other limited
or general partnerships, joint ventures, corporations or
other relationships.
(x) the control of any matters affecting the rights and
obligations of the Partnership, including, without
limitation, the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of
litigation, arbitration or other dispute resolution and the
incurring of legal expense and the settlement of claims and
litigation;
(xi) the indemnification of any Person against
liabilities and contingencies to the extent permitted by
law;
(xii) the reimbursement of Operating Costs to the
General Partner pursuant to Section 5.1;
(xiii) the payment to the General Partner of Pipeline
System Management Fees pursuant to Section 5.2; and
(xiv) the establishment of Working Capital Reserves,
not to exceed at any time five percent (5%) of Capital
Contributions of the Limited Partner, to meet anticipated
liabilities, obligations and expenses of the Partnership
during the ensuing 12 months.
(b) Notwithstanding any other provision of this Agreement, the
Tennessee Act or any applicable law, rule or regulation, the Limited
Partner and each other Person who may acquire a Partnership Interest
hereby:
(i) approves, ratifies and confirms the execution,
delivery and performance by the General Partner of this
Agreement, the Gas Servicing Agreements and any other
contract, document or agreement contemplated by any of the
foregoing, as the same shall be amended from time to time;
(ii) agrees that the General Partner is authorized to
execute, deliver and perform the agreements referred to in
clause (i) of this subparagraph 6.1(b) and the other
agreements, acts, transactions and matters described in the
Memorandum on behalf of the Partnership without any further
act, approval or vote of the Limited Partner or the other
Persons who may acquire a Partnership Interest; and
(iii) agrees that none of the execution, delivery or
performance by the General Partner, the Partnership or any
Affiliate thereof of this Agreement or any agreement
authorized or permitted under this Agreement shall constitute
a breach by the General Partner of any duty that the General
Partner may owe the Partnership or the Limited Partner or any
other Persons under this Agreement or of any duty stated or
implied by law or equity.
Section 6.2 Certificate of Limited Partnership. The General Partner has
caused the Certificate of Limited Partnership to be filed with the Secretary of
State of Tennessee as required by the Tennessee Act and shall use all reasonable
efforts to cause to be filed such other certificates or documents as may be
determined by the General Partner in its sole discretion to be reasonable and
necessary or appropriate for the formation, continuation, qualification and
operation of a limited partnership (or a partnership in which the limited
partners have limited liability) in the State of Tennessee or any other state in
which the Partnership may elect to do business or own property. To the extent
that such action is determined by the General Partner in its sole discretion to
be reasonable and necessary or appropriate, the General Partner shall file
amendments to and restatements of the Certificate of Limited Partnership and do
all things to maintain the Partnership as a limited partnership (or a
partnership in which the limited partners have limited liability) under the laws
of the State of Tennessee or of any other state in which the Partnership may
elect to do business or own property.
Section 6.3 Restrictions on General Partner's Authority.
Notwithstanding any other provision of this Agreement, the General Partner shall
not have the power or authority to, directly or indirectly, do, perform or
authorize the following:
(a) Without approval of the Limited Partner, take any action in
contravention of this Agreement.
(b) Except as provided in Articles XII and XIV, sell, exchange or
otherwise dispose of all or substantially all of the Partnership's
assets in a single transaction or a series of related transactions
without the approval of the Limited Partner; provided, however, that
this provision shall not preclude or limit, subject to other
applicable restrictions such as that in Section 6.3(e), the General
Partner's ability to mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of the Partnership's assets and
shall not apply to any forced sale of any or all of the Partnership's
assets pursuant to the foreclosure of, or other realization upon, any
such encumbrance.
(c) Without the approval of the Limited Partner, take any
action that would adversely affect the Partnership or the Limited
Partner.
(d) Unless approved by the Limited Partner, take any action or
refuse to take any reasonable action the effect of which, if taken or
not taken, as the case may be, would be to cause the Partnership to be
treated as an association taxable as a corporation or otherwise to be
taxed as an entity for federal income tax purposes; provided that this
Section 6.3(d) shall not be construed to apply to amendments to this
Agreement (which are governed by Article XIII) or mergers or
consolidations of the Partnership with any Person (which are governed
by Article XIV).
(e) Borrow any money or incur any obligation or indebtedness
in the name or on behalf of the Partnership unless (i) the total amount
of the borrowings or obligations outstanding (excluding trade credit
incurred in the normal course of business) does not exceed 25% of
Capital Contributions of the Limited Partner, (ii) the terms of any
such borrowing or financing or the effect of applicable law provide
that the lender has recourse only against Partnership assets or the
General Partner and not against any Limited Partner individually, and
(iii) the General Partner determines in good faith that such borrowing
is consistent with the business purposes of the Partnership and in the
best interest of the Limited Partner. This restriction does not apply
to any Pipeline System Capital Improvement and Extension Contributions
of the General Partner.
(f) Guarantee in the name or on behalf of the Partnership the
payment of money or the performance of any contract or other
obligation of any person.
(g) Use, or permit any other person to use, the Partnership's
name, funds, credit, or property for purposes other than legitimate
Partnership purposes;
(h) Take any action, or permit any other person to take any
action, with respect to the assets or property of the Partnership that
does not primarily benefit the Partnership, and is not substantially
consistent with the stated purposes of the Partnership as described in
Section 1.3, including, without limitation, utilization of funds of the
Partnership as compensating balances for its own benefit.
(i) On any loans made available to the Partnership by the
General Partner or any Affiliate, receive interest in excess of any of
the following: (i) the maximum rate permitted by applicable law, (ii)
the effective interest rate then being paid by the General Partner or
Affiliate for its funds, or (iii) the rate that would be charged the
Partnership (without regard to the General Partner's or Affiliate's
financial ability or guaranties) by unrelated banks on comparable loans
for the same purpose; and the General Partner and its Affiliate shall
not receive points or other finance charges or fees, regardless of
amount. This restriction shall not apply to any Pipeline System Capital
Improvement and Extension Contributions or Distributions.
(j) Receive, or permit an Affiliate to receive, rebates or
give-ups, or participate, or permit an Affiliate to participate, in any
reciprocal business arrangement which would circumvent the restrictions
and prohibitions on the General Partner and its Affiliates imposed by
this Article.
(k) Cause or permit to make loans or advance credit fees,
payments or expenses to the General Partner or its Affiliates,
including any Affiliated partnerships.
Section 6.4 Commitment of General Partner. During the existence of the
Partnership, the General Partner shall devote such time and effort to the
Partnership business as may be necessary to promote adequately the interests of
the Partnership and the mutual interests of the Partners; however, it is
specifically understood and agreed that the General Partner shall not be
required to devote full time to Partnership business, and each General Partner
and its Affiliates thereof may at any time and from time to time engage in and
possess interests in other business ventures of any and every type and
description, independently or with others including, without limitation, the
acquisition, ownership, exploration, development, operation, and management of
oil and gas properties, inside or outside the Gathering Area, for itself, its
Affiliates and other persons and the organization and management of other
partnerships and joint ventures similar to the Partnership, provided, at all
times, the General Partner acts consistent with its fiduciary duty to the
Partnership.
Section 6.5 Contracts with General Partner or Affiliates. The
Partnership may enter into contracts and agreements with the General Partner, or
any Affiliate of the General Partner, including the Limited Partner, for any
legitimate purpose consistent with the business purpose of the Partnership
including, without limitation, the rendering of services or the sale or lease of
materials, equipment or supplies, provided that the General Partner determines
in good faith that the terms, conditions, prices and compensation under such
contracts or agreements are fair and reasonable to the Partnership and generally
no less favorable than terms that the General Partner or Affiliate offer, or
would offer, to unrelated third parties in the same geographical area.
Specifically, the General Partner, on behalf of the Partnership, is authorized
to enter into and perform the Gas Servicing Agreements and any ancillary
contracts or agreements contemplated thereby. In no case shall the fact that the
other party to a contract or agreement with the Partnership is a Partner
(including any General Partner) or an Affiliate of a Partner prohibit or prevent
the Partnership from entering into or performing such contract or agreement
provided the General Partner determines that the terms thereof are fair and
reasonable to the Partnership and commensurate with terms that could be
negotiated with independent third parties in the same geographic area.
Section 6.6 Sales of Properties to Partnership. Neither a General
Partner nor any Affiliate shall sell, transfer or convey any interest in any
property to the Partnership except pursuant to a price and under terms and
conditions that are fair and reasonable to the Partnership. Notwithstanding the
foregoing, the transfer of the Pipeline System to the Partnership pursuant to
the Transaction as described in Section 1.3 shall conclusively be considered
fair and reasonable for purposes of this Section 6.6.
Section 6.7 Purchases of Properties From the Partnership. Neither the
General Partner nor any Affiliate may purchase or acquire any property of the
Partnership, directly or indirectly, except pursuant to a price and such other
terms and conditions that are fair and reasonable to the Partnership.
Section 6.8 Custody of Partnership Funds and Properties. The General
Partner and its Affiliates shall observe the following requirements in dealing
with Partnership funds and other properties:
(a) The General Partner will have a fiduciary responsibility
for the safekeeping and use of all funds and assets of the Partnership,
whether or not in the General Partner's possession or control.
(b) Funds of the Partnership shall not be commingled with
funds of any other entity. The General Partner may, however, establish
a master fiduciary account pursuant to which separate subtrust accounts
are maintained for the benefit of the Partnership and Affiliated
partnerships, provided that the Partnership's funds are afforded
maximum protection from the claims of other partnerships and their
creditors.
(c) Partnership property may be held in the names of nominees
temporarily to facilitate their acquisition and for similar valid
purposes. On a permanent basis, properties may be held in the name of a
special nominee entity organized by the General Partner for the sole
purpose of holding record title for oil and gas properties; provided,
however, that the nominee entity shall engage in no other business and
incur no other liabilities and the Property is held in the name of a
special nominee, either a ruling from the IRS or an Opinion of Counsel
shall be obtained to the effect that such arrangement shall not change
the ownership status of the properties for federal income tax purposes.
(d) Partnership funds may not be invested in the securities of
another partnership, corporation, trust or other legal entity except in
the following instances:
(1) investments in the partnerships, joint ventures or
associations in the ordinary course of the Partnership's business
pursuant to Section 1.3;
(2) temporary investments of Partnership funds in income
producing short-term, highly liquid investments, where there is
safety of principal substantially the same as U.S. Treasury
Bills, bank certificates of deposit or bank money market
accounts; and
(3) investments in entities established solely to limit the
Partnership's liabilities associated with the ownership or
operation of property or equipment, provided that in such
instances duplicative fees and expenses shall be prohibited.
Section 6.9 Liability of General Partner and Affiliates Thereof.
Neither the General Partner nor any Affiliate thereof shall have any liability
to the Partnership or to any Partner for any loss suffered by the Partnership
that arises out of any action or inaction performed or omitted by the General
Partner or any Affiliate thereof, if the General Partner or such Affiliate in
good faith determined that such course of conduct was in the best interest of
the Partnership and provided that such course of conduct did not constitute
gross negligence or misconduct on the part of the General Partner or such
Affiliate; provided further that nothing in this Agreement shall authorize the
General Partner or any Affiliate thereof to breach its fiduciary duty to either
the Partnership or the Partners.
<PAGE>
Section 6.10 Indemnification of General Partner and Affiliates
Thereof.
(a) The Partnership shall indemnify the General Partner and
its Affiliates against any losses, judgments, liabilities, expenses,
and amounts paid in settlement of any claims sustained by the General
Partner or its Affiliates in connection with the Partnership; provided
that (i) the General Partner or the indemnified Affiliate has
determined in good faith that the course of conduct that caused the
loss or liability was in the best interests of the Partnership and (ii)
the conduct of the General Partner or the indemnified Affiliate did not
constitute gross negligence or intentional misconduct.
(b) Notwithstanding Section 6.10(a), the General Partner shall
not be indemnified by the Partnership or the Limited Partner 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 laws violations as to the particular indemnitee and the
court approves indemnification of the litigation costs, (ii) such
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 securities
commissioners of the states of Alabama, Kentucky, Michigan and
Tennessee, and any state securities regulatory authority of a state in
which Partnership Interests were offered or sold as to indemnification
for violations of securities law.
(c) The Partnership may purchase and maintain insurance on
behalf of the General Partner and its Affiliates thereof against any
liabilities asserted against or expenses incurred by the General
Partner and Affiliate thereof in connection with Partnership
activities, provided that the Partnership shall not incur the cost of
that portion of any insurance that insures the General Partner or any
Affiliate thereof against any liability with respect to which the
General Partner and any Affiliates thereof are denied indemnification
under the provisions of this Agreement; provided, however, that nothing
contained herein shall preclude the Partnership from purchasing and
paying for such types of insurance including, without limitation,
extended coverage liability and casualty and workers compensation, as
would be customary for any person owning comparable assets and engaged
in a similar business, or from naming the General Partner and
Affiliates thereof as additional insured parties thereunder, provided
that such addition does not increase the premiums payable by the
Partnership.
(d) Legal expenses and other costs incurred as a result of a
claim described in this Section 6.10 shall be paid by the Partnership
from time to time in advance of the final disposition of such claim if
the following three conditions are satisfied: (i) the claim relates to
the performance of duties or services by the General Partner or any
Affiliates thereof on behalf of the Partnership; (ii) the claim is
initiated by a third party who is not a Limited Partner, or the claim
is initiated by a Limited Partner and a court of competent jurisdiction
specifically approves such advancement; and (iii) the General Partner
or its Affiliate undertakes to repay the advanced funds to the
Partnership, together with the applicable legal rate of interest
thereon, in the event it is later determined that such General Partner
or its Affiliate is not entitled to indemnification under the
provisions of this Section 6.10.
(e) The indemnification provided by this Section 6.10 shall
continue as to the General Partner and its Affiliates in the event it
ceases to be the General Partner of the Partnership with respect to
claims relating to the period in which the General Partner was the
General Partner of the Partnership and shall inure to the benefit of
the successors and assigns of the General Partner and Affiliates
thereof.
(f) The indemnification provided by this Section 6.10 shall be
made, and shall be recoverable by the General Partner or any Affiliate
thereof, only out of the assets of the Partnership and not from the
Limited Partner.
(g) For purposes of Section 6.9 and this Section 6.10, the
term "Affiliate" shall mean any person performing services or
participating in management decisions on behalf of the General Partner
and acting within the scope of the General Partner's authority who (i)
directly or indirectly controls, is controlled by or is under common
control with the General Partner, (ii) owns or controls ten percent
(10%) or more of the outstanding voting securities of the General
Partner, (iii) is an officer, director, agent, employee, partner or
trustee of the General Partner, or (iv) is an officer, director, agent,
employee, partner, or trustee of any company for which the General
Partner acts in any such capacity.
Section 6.11 Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in
acting or refraining from acting upon any resolution, certificate,
statement, instrument, opinion, report, notice, request, consent,
order, bond, debenture, or other paper or document believed by it to be
genuine and to have been signed or presented by the property party or
parties.
(b) The General Partner may consult with legal counsel,
accountants, appraisers, management consultants, investment bankers and
other consultants and advisers selected by it, and any act taken or
omitted to be taken in reliance upon the opinion (including, without
limitation, an Opinion of Counsel) of such Persons as to matters that
the General Partner reasonably believes to be within such Person's
professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such
opinion.
(c) The General Partner shall have the right, in respect of
any of its powers or obligations hereunder, to act through any of its
duly authorized officers and a duly appointed attorney or
attorneys-in-fact. Each such attorney shall, to the extent provided by
the General Partner in the power of attorney, have full power and
authority to do and perform each and every act and duty that is
permitted or required to be done by the General Partner hereunder.
(d) Any standard of care and duty imposed by this Agreement or
under the Tennessee Act or any applicable law, rule or regulation shall
be modified, waived or limited as required to permit the General
Partner to act under this Agreement or any other agreement contemplated
by this Agreement and to make any decision pursuant to the authority
prescribed in this Agreement so long as such action is reasonably
believed by the General Partner to be in, or not inconsistent with, the
best interests of the Partnership.
Section 6.12 Title to Partnership Assets. Title to Partnership assets,
whether real, personal or mixed and whether tangible or intangible, shall be
deemed to be owned by the Partnership as an entity, and no Partner or Assignee,
individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all of the
Partnership assets may be held in the name of the Partnership, the General
Partner, one or more of its Affiliates or one or more nominees, as the General
Partner may determine. The General Partner hereby declares and warrants that any
Partnership assets for which record title is held in the name of the General
Partner or one or more of its Affiliates or one or more nominees shall be held
by the General Partner or such Affiliate or nominee for the use and benefit of
the Partnership in accordance with the provisions of this Agreement; provided,
however, that the General Partner shall use its reasonable efforts to cause
record title to such assets (other than those assets in respect of which the
General Partner determines that the expense and difficulty of conveyancing makes
transfer of record title to the Partnership impracticable) to be vested in the
Partnership as soon as reasonably practicable; provided that, prior to the
withdrawal or removal of the General Partner or as soon thereafter as
practicable, the General Partner shall use reasonable efforts to effect the
transfer of record title to the Partnership and, prior to any such transfer,
will provide for the use of such assets in a manner satisfactory to the
Partnership. All Partnership assets shall be recorded as the property of the
Partnership in its books and records, irrespective of the name in which record
title to such Partnership assets is held.
Section 6.13 Reliance by Third Parties. Notwithstanding anything to the
contrary in this Agreement, any Person dealing with the Partnership shall be
entitled to assume that the General Partner has full power and authority to
encumber, sell or otherwise use in any manner any and all assets of the
Partnership and to enter into any contracts on behalf of the Partnership, and
such Person shall be entitled to deal with the General Partner as if it were the
Partnership's sole party in interest, both legally and beneficially. The Limited
Partner hereby waives any and all defenses or other remedies that may be
available against such Person to contest, negate or disaffirm any action of the
General Partner in connection with any such dealing. In no event shall any
Person dealing with the General Partner or its representatives be obligated to
ascertain that the terms of this Agreement have been complied with or to inquire
into the necessity or expedience of any action of the General Partner or its
representatives. Each and every certificate, document or other instrument
executed on behalf of the Partnership by the General Partner or its
representatives shall be conclusive evidence in favor of any and every Person
relying thereon or claiming thereunder that (a) at the time of the execution and
delivery of such certificate, document or instrument, this Agreement was in full
force and effect, (b) the Person executing and delivering such certificate,
document or instrument was duly authorized and empowered to do so for and on
behalf of the Partnership and (c) such certificate, document or instrument was
duly executed and delivered in accordance with the terms and provisions of this
Agreement and is binding upon the Partnership.
ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNER
Section 7.1 Limitation of Liability. The Limited Partner and any
Assignees shall have no liability under this Agreement except as expressly
provided in this Agreement or the Tennessee Act.
Section 7.2 Management of Business. No Limited Partner or Assignee
(other than the General Partner, any of its Affiliates or any officer, director,
employee, partner, agent or trustee of the General Partner or any of its
Affiliates, in its capacity as such, if such Person shall also be a Limited
Partner or Assignee) shall participate in the operation, management or control
(within the meaning of the Tennessee Act) of the Partnership's business,
transact any business in the Partnership's name or have the power to sign
documents for or otherwise bind the Partnership. The transaction of any such
business by the General Partner, any of its Affiliates or any officer, director,
employee, partner, agent or trustee of the General Partner or any of its
Affiliates, in its capacity as such, shall not affect, impair or eliminate the
limitations on the liability of the Limited Partner or Assignees under this
Agreement.
Section 7.3 Outside Activities. Subject to the provisions of Section
6.4, which shall continue to be applicable to the Persons referred to therein,
regardless of whether such Persons shall also be Limited Partner or Assignees,
any Limited Partner or Assignee shall be entitled to and may have business
interests and engage in business activities in addition to those relating to the
Partnership including, without limitation, business interests and activities in
direct competition with the Partnership. Neither the Partnership nor any of the
other Partners or Assignees shall have any rights by virtue of this Agreement in
any business ventures of any Limited Partner or Assignee.
Section 7.4 Return of Capital. Except as otherwise provided in Article
IV, no Limited Partner or Assignee shall be entitled to the withdrawal or return
of his Capital Contribution, except to the extent, if any, that distributions
made pursuant to this Agreement or upon termination of the Partnership may be
considered as such by law and then only to the extent provided for in this
Agreement. Except to the extent provided by Article IV or as otherwise expressly
provided in this Agreement, no Limited Partner or Assignee shall have priority
over any other Limited Partner or Assignee either as to the return of Capital
Contributions or as to revenues or distributions.
Section 7.5 Rights of Limited Partner Relating to the Partnership.
(a) In addition to other rights provided by this Agreement or
by applicable law, and except as limited by Section 7.5(b), the Limited
Partner shall have the right, for a purpose reasonably related to such
Limited Partner's interest as a limited partner in the Partnership,
upon reasonable demand and at such Limited Partner's own expense:
(i) to obtain true and full information regarding the status
of the business and financial condition of the Partnership;
(ii) promptly, after becoming available, to obtain a copy of
the Partnership's federal, state and local tax returns for each
year;
(iii) to have furnished to him, upon notification to the
General Partner, a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to have furnished to him, upon notification to the
General Partner, a copy of this Agreement and the Certificate of
Limited Partnership and all amendments thereto, together with a
copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and
all amendments thereto have been executed;
(v) to obtain such other information regarding the affairs
of the Partnership as is just and reasonable; and
(vi) upon affirmative vote or consent of the Limited
Partner, to commission an audit of the Partnership's financial
statements in the manner described in Section 8.3(c).
(b) Notwithstanding any other provision of this Agreement, the
General Partner may keep confidential from the Limited Partner and
Assignees, for such period of time as the General Partner deems
reasonable, any information that the General Partner reasonably
believes to be in the nature of trade secrets or other information, the
disclosure of which the General Partner in good faith believes is not
in the best interests of the Partnership or could damage the
Partnership or that the Partnership is required by law or by agreements
with third parties to keep confidential (other than agreements with
Affiliates the primary purpose of which is to circumvent the
obligations set forth in this Section 7.5).
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting. The General Partner shall keep or
cause to be kept at the principal office of the Partnership appropriate books
and records with respect to the Partnership's business including, without
limitation, all books and records necessary to provide to the Limited Partner
any information, lists and copies of documents required to be provided pursuant
to Section 7.5(a). Any books and records maintained by or on behalf of the
Partnership in the regular course of its business including, without limitation,
the books of account and records of Partnership proceedings, may be kept on or
be in the form of punch cards, magnetic tape, photographs, micrographics or any
other information storage device, provided that the books and records so
maintained are convertible into clearly legible written form within a reasonable
period of time. The books of the Partnership shall be maintained, for financial
reporting purposes, on an accrual basis in accordance, to the extent
practicable, with generally accepted accounting principles.
Section 8.2 Fiscal Year. The fiscal year of the Partnership shall be the
calendar year.
Section 8.3 Reports.
(a) As soon as practicable, but in no event later than 90 days
after the close of each fiscal year of the Partnership, the General
Partner shall cause to be mailed to the Limited Partner, as of a date
selected by the General Partner in its sole discretion, an annual
report containing financial statements of the Partnership for such
fiscal year of the Partnership, presented, to the extent practicable,
in accordance with generally accepted accounting principles, including
a balance sheet and statements of operations, Partners' equity and cash
flows, such statements to be compiled by a firm of independent public
accountants selected by the General Partner.
(b) Upon affirmative consent of the Limited Partner, the
General Partner shall have Partnership financial statements audited by
a firm of independent public accountants to be selected by the General
Partner. The cost of such audit shall be assessed and charged to the
Limited Partner. Upon completion, the audit report, audited financial
statements and footnotes thereto shall be mailed to the General Partner
and each Limited Partner.
ARTICLE IX
TAX MATTERS
Section 9.1 Preparation of Tax Returns. The General Partner shall
arrange for the preparation and timely filing of all returns of Partnership
income, gains, deductions, losses and other items required of the Partnership
for federal and state income tax purposes and shall use all reasonable efforts
to furnish, within 90 days of the close of each taxable year of the Partnership,
the tax information reasonably required by Limited Partner for federal and state
income tax reporting purposes. The classification, realization and recognition
of income, gain, losses and deductions and other items shall be on the accrual
method of accounting for federal income tax purposes. The taxable year of the
Partnership shall be the calendar year.
Section 9.2 Tax Matters Partner. The General Partner is hereby
designated and authorized to act as the "Tax Matters Partner" of the
Partnership, as that term is described and used in the Treasury Regulations
promulgated under Code ss. 6231. Each Partner consents to such designation of
the General Partner as the Tax Matters Partner and agrees to execute, certify,
acknowledge, deliver, swear to, file and record with the IRS or other
appropriate governmental authorities such documents as may be necessary or
appropriate to evidence such consent. The General Partner shall have the rights,
power and authority which are granted to a "Tax Matters Partner" under such
provisions of the Code and Treasury Regulations and shall be authorized, but not
obligated, to do any act specified therein. Any cost or expense incurred by the
Tax Matters Partner in connection with any of the foregoing matters shall be
payable by the Partnership as an Operating Cost, and the Partnership shall
indemnify and reimburse the Tax Matters Partner for all costs and expenses,
including legal and accounting fees, claims, liabilities, losses and damages
incurred in connection with any tax audit or judicial review with respect to the
tax liability of the Partners.
Section 9.3 Tax Elections.
(a) No election shall be made by the Partnership or any
Partner, pursuant to Code ss. 761, to have the Partnership excluded
from the application of the provisions of Subchapter K of Chapter 1 of
Subtitle A of the Code, or to be excluded from any similar provisions
of state tax laws.
(b) In the event of the transfer of a Partnership Interest or
in the event of the distribution of Partnership property to any
Partner, the Partnership may elect in accordance with Code ss. 754, in
the absolute discretion of the General Partner, to cause the basis of
the Partnership property to be adjusted for federal income tax purposes
as provided for by Code ss.ss. 734 and 743.
(c) The Tax Matters Partner shall have the authority on behalf
of the Partnership to make or refrain from making any other tax
election provided in the Code, or in Treasury Regulations or in any
other applicable federal or state tax law as deemed appropriate by the
Tax Matters Partner.
Section 9.4 Partner Representations. Each Partner hereby represents,
warrants and agrees as follows:
(a) Such Partner will not file the statement described in Code
ss. 6224(c)(3)(B) prohibiting as the Tax Matters Partner for the
Partnership from entering into a settlement on its behalf with respect
to Partnership items (as such term is defined in Code ss. 6231(s)(3))
of the Partnership;
(b) It 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 Code ss. 6223(b)(2); and
(c) The General Partner is authorized to file a copy of this
Agreement (or pertinent portions hereof) with the IRS pursuant to Code
ss. 6224(b) if necessary to perfect the waiver of rights under this
Subsection 9.4.
Section 9.5 Tax Controversies. Subject to the provisions hereof, the
General Partner is designated the Tax Matters Partner (as defined in Code ss.
6231), and is authorized and required to represent the Partnership (at the
Partnership's expense) in connection with all examinations of the Partnership's
affairs by tax authorities including, without limitation, resulting
administrative and judicial proceedings, and to expend Partnership funds for
professional services and costs associated therewith. Each Partner and Assignee
agrees to cooperate with the General Partner and to do or refrain from doing any
or all things reasonably required by the General Partner to conduct such
proceedings.
Section 9.6 Organizational Expenses. The Partnership shall elect to
deduct expenses, if any, incurred by it in organizing the Partnership ratably
over a 60-month period as provided in Code ss. 709.
Section 9.7 Withholding. Notwithstanding any other provision of this
Agreement, the General Partner is authorized to take any action that it
determines in its sole discretion to be necessary or appropriate to cause the
Partnership to comply with any withholding requirements established under the
Code or any other federal, state or local law including, without limitation,
pursuant to Code ss.ss. 1441, 1442, 1445 and 1446. To the extent that the
Partnership is required to withhold and pay over to any taxing authority any
amount resulting from the allocation or distribution of income to any Partner or
Assignee (including, without limitation, by reason of Code ss. 1446), the amount
withheld shall be treated as a distribution of cash pursuant to Section 4.1 in
the amount of such withholding from such Partner.
ARTICLE X
TRANSFER OF PARTNERSHIP INTERESTS
Section 10.1 Transfer by General Partner.
(a) Authority. The Partnership Interest of the General Partner in
the Partnership shall not be transferable, in whole or in part, except
in the event of one of the following:
(i) A disposition by the General Partner of all or
any part of its Partnership Interest to one or more Persons
that have, as the result of a merger, consolidation, corporate
reorganization, or other transaction, acquired all or
substantially all of the assets of the General Partner and
have assumed the obligations of the General Partner hereunder
and under the Partnership Agreement;
(ii) An assignment or transfer by the General Partner
of any part of its Partnership Interest to one or more Persons
who become additional Limited Partners or additional General
Partners in the Partnership, but only to the extent and
provided that the following occur:
(A) The provisions of Section 10.3(a) and (b) are met;
(B) The General Partner substitutes its recourse
guaranty in place of Support Allocations and Distributions
hereunder; and
(C) This Partnership Agreement and the Certificate of
Limited Partnership are properly amended to reflect the
additional Limited Partners.
(iii) An assignment or transfer by the General
Partner of all or any portion of its Partnership Interest by
way of mortgage, pledge, or charge as security for an advance
of monies to it, provided that the mortgagee or pledgee shall
hold such interest subject to the terms of this Agreement; or
(iv) Such assignment is made in accordance with the
requirements and restrictions of Section 10.3, to a substitute
General Partner which is approved by vote or consent of the
Limited Partner.
In the case of subsections 10.1(a)(i), (ii) and (iii), the
transfer shall be allowable only in the event the transferor or
transferee furnishes to the Partnership an Opinion of Counsel that such
merger, consolidation, combination, corporate reorganization, or other
transaction will not result in loss of limited liability of the Limited
Partner or cause the Partnership to be treated as an association
taxable as a corporation or otherwise be taxable as an entity for
federal income tax purposes.
(b) Substitution. In the event of a disposition, assignment,
or transfer referred to in clauses (i) and (iv) of Section 10.1(a), the
successor or Assignee shall be and become a substituted General Partner
with all rights, powers, authority, and obligations and duties of the
assigning General Partner hereunder, and shall continue the business of
the Partnership without the occurrence of any dissolution, and the
assigning General Partner may withdraw from the Partnership and each
Limited Partner hereby consents to the admission of that successor,
assignee, or transferee as a substituted General Partner to the extent
required by the Tennessee Act and to the continuance of the business of
the Partnership by that substituted General Partner, and authorizes the
substituted General Partner to ratify on his behalf pursuant to the
power of attorney granted in Section 15.1 the Limited Partner's consent
to the admission of the substitute General Partner as the General
Partner of the Partnership.
(c) Assignment of Allocations and Distributions Only. A
General Partner, upon compliance with the requirements of and
restrictions on transfer set forth in Section 10.3 and the last
sentence of Section 10.1(a), may sell, assign, pledge, hypothecate,
grant a security interest in or otherwise transfer its right to receive
allocations and distributions from the Partnership without the consent
of any other Partner; but the Assignee thereof (who does not become a
substitute General Partner as provided in Subsection 10.1(b)) shall not
have any rights under this Agreement, (including no right to receive
any information or accounting of the affairs of the Partnership, to
inspect the books or records of the Partnership or to manage, direct
and control the Partnership), other than the right to receive
allocations and distributions, or a portion thereof which, but for the
assignment, would have been made to the assignor.
Section 10.2 Assignment by the Limited Partner.
(a) Assignment by and Substitution of the Limited Partner. The
Limited Partner may sell and assign such Limited Partner's entire
Partnership Interest, may propose to such Limited Partner's prospective
Assignee admission as a Substitute Limited Partner and may withdraw
from the Partnership if all of the following conditions precedent
thereto have been satisfied: (i) the assignor and the General Partner
shall each have consented to the Assignee's admission as a Substitute
Limited Partner, which consent either the assignor or the General
Partner in its complete and sole discretion, with or without cause, may
withhold; and (ii) the assignor and Assignee shall have satisfied the
requirements of and restrictions on transfer set forth in Section 10.3
to the extent they are applicable.
<PAGE>
(b) Assignment of Allocations and Distributions Only.
(1) A Limited Partner, in compliance with the
requirements of and restrictions on transfer set forth in
Section 10.3, may sell, assign, pledge, hypothecate, grant a
security interest in or otherwise transfer all or a portion of
such Limited Partner's right to receive allocations and
distributions from the Partnership without the consent of any
other Partner; but the Assignee thereof (who does not become a
Substitute Limited Partner as provided in Section 10.2(a))
shall not have any rights under this Agreement (including no
right to receive any information or accounting of the affairs
of the Partnership, to inspect the books or records of the
Partnership or to vote or consent), other than the right to
receive allocations and distributions or a portion thereof
which, but for the assignment, would have been made to the
assignor.
(2) An heir, legatee, executor, administrator,
guardian or other legal representative or
successor-in-interest of an individual Limited Partner who has
died or has been adjudicated to be incompetent, or a receiver,
trustee, conservator or other legal representative or
successor-in-interest of a Limited Partner which is an entity,
shall be deemed to be and shall have only the rights of an
Assignee of such Limited Partner as provided in Section
10.2(b)(i) (except to the extent otherwise provided, in the
case of a legal representative of an individual Limited
Partner who has died, by the Tennessee Act).
(3) Notwithstanding Section 10.2(a) or (b), a Limited
Partner shall not sell, assign, pledge, hypothecate, grant a
security interest in or otherwise transfer (other than
involuntarily by operation of law) less than such Limited
Partner's entire Partnership Interest without the consent of
the General Partner, which consent may be withheld for any
reason or no reason.
Section 10.3 Requirements and Restrictions on Transfer.
(a) Requirements of Transfer. No assignment or other transfer
of the Partnership Interest of a Partner shall be valid or effective as
respects the Partnership unless and until each of the following
conditions precedent thereto has been satisfied: (i) any required
consents to the assignment as specified in Sections 10.1(b) or
10.2(b)(3) have been obtained; (ii) all conditions specified in this
Section 10.3 have been satisfied; (iii) an instrument of assignment or
other transfer, which is in form and substance satisfactory to the
General Partner, has been signed by the assignor, accepted by the
Assignee and delivered to the Partnership, in care of the General
Partner; (iv) such Assignee has agreed in such instrument or in another
written instrument delivered to the Partnership that, upon the granting
of written confirmation of the required consents to his or its
admission as a substitute Partner or additional Partner, such Assignee
shall become a party to and be bound by this Agreement and any other
agreement or instrument which may be applicable; (v) in the case of an
additional Limited Partner or General Partner pursuant to Section
10.1(a)(ii), necessary modifications and amendments to this Agreement
are made to reflect such substitution of the General Partner's full
recourse guaranty in place of Support Allocations and Support
Distributions, any other necessary charges, (vi) a certificate of
amendment of the Certificate of Limited Partnership and such other
instruments as are required by the Tennessee Act and the General
Partner shall have executed, delivered and filed for record to evidence
the assignment and its validity; and (vii) the assignor or the Assignee
shall have paid all reasonable expenses (including attorneys' fees) as
determined by the General Partner, which are or will be incurred by the
Partnership in connection with the assignment or other transfer.
(b) Restrictions on Transfer Which May Result in Termination
for Tax Purposes. A Partnership Interest, or any part thereof or
interest therein, shall not be sold, assigned or otherwise transferred
at any time, if and to the extent that any such sale, assignment or
other transfer would, according to Opinion of Counsel, result in the
termination of the Partnership for federal income tax purposes.
(c) Restrictions on Transfer Imposed by Securities Laws. The
Partnership Interests have not been registered under the Securities Act
of 1933, as amended, or under the securities laws of any state or other
jurisdiction but have been offered and sold pursuant to and in reliance
upon exemptions from registration thereunder. As a consequence of the
restrictions on subsequent transfer imposed by these exemptions, the
Partnership Interests shall not subsequently be sold, assigned,
conveyed, pledged, hypothecated or otherwise transferred by a holder
thereof except, pursuant to an effective registration statement
registering the Partnership Interests under the Securities Act and/or
applicable state securities laws, or pursuant to an Opinion of Counsel,
which has been obtained by such holder and which is in all respects
satisfactory to the General Partner, that such registration under the
Act and/or applicable state securities laws is not required for such
holder to lawfully affect such subsequent sale, assignment, conveyance,
pledge, hypothecation or other transfer.
(d) Notification of Transfer Required by the Code. Any Partner
who proposes to transfer a Partnership Interest, or part thereof or
interest therein, shall, within thirty (30) days of the proposed
effective date of the proposed transfer, whichever is earlier, provide
the General Partner with the information required under Code ss.ss.
6050K and 6112 and the Treasury Regulations promulgated thereunder.
(e) Reservation of Right to Refuse to Register Transfer. The
General Partner reserves and shall have the right to refuse to accept
or reject the assignment or other transfer of any Partnership Interest,
or any part thereof or any interest therein, unless and until the
conditions specified in this Section 10.3(a) have been satisfied.
(f) Effect on an Invalid Transfer. Any attempted or purported
sale, assignment, conveyance, pledge, hypothecation or other transfer
which is in contravention of the restrictions on transfer specified in
this Section 10.3 shall be invalid, ineffective and a fraud against the
Partnership and the other Partners. The purported transferor and
transferee, by their respective purported transfer or purported
acceptance thereof, severally agree to indemnify and hold harmless the
Partnership and the other Partners for any claim, loss or damage which
may accrue by reason of such purported transfer. If such claim, loss or
damage accruing by reason of the purported transfer is incapable of
being ascertained accurately, then any consideration paid in connection
with such purported transfer shall be transferred and paid over to the
Partnership as its liquidated damages.
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from
the Partnership upon the occurrence of any one of the following events
(each such event herein referred to as an "Event of Withdrawal");
(i) the General Partner voluntarily withdraws from the
Partnership by giving written notice to the Limited Partner;
(ii) the General Partner transfers all of its rights as
General Partner pursuant to Sections 10.1(a)(i) or
10.1(a)(iv);
(iii) the General Partner is removed pursuant to
Section 11.2;
(iv) the General Partner (A) makes a general assignment
for the benefit of creditors; (B) files a voluntary
Bankruptcy petition; (C) files a petition or answer seeking
for itself a reorganization, arrangement, composition,
readjustment, liquidation, dissolution or similar relief
under any law; (D) files an answer or other pleading
admitting or failing to contest the material allegations of
a petition filed against the General Partner in a proceeding
of the type described in clauses (A)-(C) of this Section
11.1(a)(iv); or (E) seeks, consents to or acquiesces in the
appointment of a trustee, receiver or Liquidator of the
General Partner or of all or any substantial part of its
properties;
(v) a final and non-appealable judgment is entered by a
court with appropriate jurisdiction ruling that the General
Partner is Bankrupt or insolvent, or a final and
non-appealable order for relief is entered by a court with
appropriate jurisdiction against the General Partner, in
each case under any federal or state Bankruptcy or
insolvency laws as are now or hereafter in effect; or
(vi) a certificate of dissolution or its equivalent is
filed for the General Partner, or 90 days expire after the
date of notice to the General Partner of revocation of its
charter without a reinstatement of its charter, under the
laws of its state of incorporation.
If an Event of Withdrawal specified in Section 11.1(a)(iv),
(v) or (vi) occurs, the withdrawing General Partner shall give notice
to the Limited Partner within 30 days after such occurrence. The
Partners hereby agree that only the Events of Withdrawal described in
this Section 11.1 shall result in the withdrawal of the General Partner
from the Partnership.
(b) Withdrawal of the General Partner from the Partnership
upon the occurrence of an Event of Withdrawal shall constitute a breach
of this Agreement except under the following circumstances: (i) the
General Partner voluntarily withdraws by giving at least 90 days'
advance notice of its intention to withdraw to the Limited Partner,
provided that, prior to the effective date of such withdrawal, the
withdrawal is approved by the Limited Partner and the General Partner
delivers to the Partnership an Opinion of Counsel ("Withdrawal Opinion
of Counsel") that such withdrawal (following the selection of the
successor General Partner) would not result in the loss of the limited
liability of the Limited Partner or cause the Partnership to be treated
as an association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes or (ii) at any time that the
General Partner ceases to be a General Partner pursuant to Section
11.1(a)(ii) or is removed pursuant to Section 11.2. If the General
Partner gives a notice of withdrawal pursuant to Section 11.1(a)(i),
the Limited Partner may, prior to the effective date of such
withdrawal, elect a successor General Partner. If, prior to the
effective date of the General Partner's withdrawal, a successor is not
selected by the Limited Partner as provided herein or the Partnership
does not receive a Withdrawal Opinion of Counsel, the Partnership shall
be dissolved in accordance with Section 12.1. Any such successor
General Partner shall be subject to the provisions of Section 11.3.
Section 11.2 Removal of the General Partner. The General Partner may be
removed only if such removal is for Cause and is approved by the Limited
Partner. Any such action by such Limited Partner for removal of the General
Partner must also provide for the election and succession of a new General
Partner. Such removal shall be effective immediately following the admission of
the successor General Partner. The right of the Limited Partner to remove the
General Partner shall not exist or be exercised unless the Partnership has
received an Opinion of Counsel opining as to the matters covered by a Withdrawal
Opinion of Counsel.
Section 11.3 Interest of Departing Partner and Successor General
Partner. In the event of withdrawal of the General Partner under circumstances
where such withdrawal does not violate this Agreement, the Departing Partner
shall, at its option exercisable prior to the effective date of the departure of
such Departing Partner, promptly receive from its successor in exchange for its
Partnership Interest as General Partner an amount in cash equal to the fair
market value, as determined by an independent expert, of the Departing Partner's
Partnership Interest as General Partner, such amount to be determined and
payable as of the effective date of its departure. If the General Partner is
removed by the Limited Partner under circumstances where Cause exists or if the
General Partner withdraws under circumstances where such withdrawal violates
this Agreement, its successor or the Partnership shall purchase the Departing
Partner's Partnership Interest for the appraised fair market value, as
determined by an independent expert, payable in equal installments over three
(3) years with interest on any unpaid balance at 8% per annum. Subject to
Section 12.3(b), the Departing Partner shall, as of the effective date of its
departure, cease to share in any allocations or distributions with respect to
its Partnership Interest as the General Partner, and Partnership income, gain,
loss, deduction and credit will be prorated and allocated as set forth in
Section 3.7.
Section 11.4 Withdrawal of Limited Partner. The Limited Partner shall
not have the right to withdraw from the Partnership; provided, however, that
when an Assignee of the Limited Partner's Partnership Interest, such
transferring Limited Partner shall cease to be a Limited Partner with respect to
the Partnership Interest so transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 Dissolution. The Partnership shall not be dissolved by the
admission of Substituted Limited Partner or by the admission of a successor
General Partner in accordance with the terms of this Agreement. Upon the removal
or withdrawal of the General Partner, any successor General Partner shall
continue the business of the Partnership. The Partnership shall dissolve, and
(subject to Section 12.2) its affairs should be wound up, upon:
(a) December 31, 2007.
(b) an Event of Withdrawal of the General Partner as
provided in Section 11.1 (other than Section 11.1(a)(ii),
unless a successor is elected and an Opinion of Counsel is
received as provided in Section 11.1(b) or 11.2 and such
successor is admitted to the Partnership pursuant to Section
10.3);
(c) an election to dissolve the Partnership by the
General Partner that is approved by the Limited Partner
thereafter;
(d) entry of a decree of judicial dissolution of the
Partnership pursuant to the provisions of the Tennessee Act;
(e) the sale of all or substantially all of the assets
and properties of the Partnership;
(f) the occurrence of any event causing dissolution
under the Tennessee Act.
Section 12.2 Continuation of the Business of the Partnership after
Dissolution. Upon (I) dissolution of the Partnership caused by the withdrawal or
removal of the General Partner and following a failure of all Partners, within
90 days after the withdrawal or removal of the General Partner, to agree to
continue the business of the Partnership and appoint a successor General Partner
as provided in Section 11.1 or 11.2, then within an additional 90 days or (II)
dissolution of the Partnership upon an event constituting an Event of Withdrawal
as defined in Section 11.1(a)(iv), (v) or (vi), then within 180 days thereafter,
the Limited Partner may elect to reconstitute the Partnership and continue its
business on the same terms and conditions set forth in this Agreement by forming
a new limited partnership on terms identical to those set forth in this
Agreement and having as a general partner a Person approved by the Limited
Partner. Upon any such election by the Limited Partner, all Partners shall be
bound thereby and shall be deemed to have approved same. Unless such an election
is made within the applicable time period as set forth above, the Partnership
shall conduct only activities necessary to wind up its affairs. If such an
election is so made, then:
(i) the reconstituted Partnership shall continue
until the end of the term set forth in Section 1.6 unless
earlier dissolved in accordance with this Article XII;
(ii) if the successor General Partner is not the
former General Partner, then the interest of the former
General Partner shall be treated thenceforth as the interest
of a Limited Partner;
(iii) all necessary steps shall be taken to cancel
this Agreement and the Certificate of Limited Partnership and
to enter into and, as necessary, to file a new partnership
agreement and certificate of limited partnership, and the
successor general partner may for this purpose exercise the
powers of attorney granted the General Partner pursuant to
Section 15.1; provided that the right of the Limited Partner
to approve a successor General Partner and to reconstitute and
to continue the business of the Partnership shall not exist
and may not be exercised unless the Partnership has received
an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited
Partner and (y) neither the Partnership nor the reconstituted
limited partnership would be treated as an association taxable
as a corporation or otherwise be taxable as an entity for
federal income tax purposes upon the exercise of such right to
continue.
Section 12.3 Liquidation. Upon dissolution of the Partnership, unless
the Partnership is continued under an election to reconstitute and continue the
Partnership pursuant to Section 12.2, the General Partner, or in the event the
General Partner has been dissolved or removed, become Bankrupt as set forth in
Section 11.1, or withdrawn from the Partnership, a liquidator or liquidating
committee approved by the Limited Partner, shall be the Liquidator. The
Liquidator (if other than the General Partner) shall be entitled to receive such
compensation for its services as may be approved by the Limited Partner. The
Liquidator shall agree not to resign at any time without 15 days' prior notice
and (if other than the General Partner) may be removed at any time, with or
without cause, by notice of removal approved by the Limited Partner. Upon
dissolution, removal or resignation of the Liquidator, a successor and
substitute Liquidator (who shall have and succeed to all rights, powers and
duties of the original Liquidator) shall within 30 days thereafter be approved
by the Limited Partner. The right to approve a successor or substitute
Liquidator in the manner provided herein shall be deemed to refer also to any
such successor or substitute Liquidator approved in the manner herein provided.
Except as expressly provided in this Article XII, the Liquidator approved in the
manner provided herein shall have and may exercise, without further
authorization or consent of any of the parties hereto, all of the powers
conferred upon the General Partner under the terms of this Agreement, but
subject to all of the applicable limitations, contractual and otherwise, upon
the exercise of such powers, other than the limitation on sale set forth in
Section 6.3(b) to the extent necessary or desirable in the good faith judgment
of the Liquidator to carry out the duties and functions of the Liquidator
hereunder for and during such period of time as shall be reasonably required in
the good faith judgment of the Liquidator to complete the winding-up and
liquidation of the Partnership as provided for herein. The Liquidator shall
liquidate the assets of the Partnership, and apply and distribute the proceeds
of such liquidation in the following order of priority, unless otherwise
required by mandatory provisions of applicable law:
(a) First, to pay expenses of liquidation;
(b) Second, to pay Partnership debts, liabilities and obligations
to third parties;
(c) Third, to establish reserves for contingent or unforeseen
debts, liabilities or obligations;
(d) Fourth, to repay debts, liabilities or obligations to
Partners or former Partners;
(e) Fifth, to the Partners pursuant to Section 4.3.
Section 12.4 Distributions in Kind. Notwithstanding the provisions of
Section 12.3, which require the liquidation of the assets of the Partnership,
but subject to the order of priorities set forth therein, if prior to or upon
dissolution of the Partnership the Liquidator determines that an immediate sale
of part or all of the Partnership's assets would be impractical or would cause
undue loss to the Partners, the Liquidator may, in its absolute discretion,
defer for a reasonable time the liquidation of any assets except those necessary
to satisfy liabilities of the Partnership (including, without limitation, those
to Partners as creditors) and/or distribute to the Partners or to specific
classes of Partners, in lieu of cash, as tenants in common and in accordance
with the provisions of Section 12.3, undivided interests in such Partnership
assets as the Liquidator deems not suitable for liquidation. Any such
distributions in kind shall be made only if, in the good faith judgment of the
Liquidator, such distributions in kind are in the best interest of the Limited
Partner, and shall be subject to such conditions relating to the disposition and
management of such properties as the Liquidator deems reasonable and equitable
and to any agreements governing the operation of such properties at such time.
The Liquidator shall determine the fair market value of any property distributed
in kind using such reasonable method of valuation as it may adopt.
Section 12.5 Cancellation of Certificate of Limited Partnership. Upon
the completion of the distribution of Partnership cash and property as provided
in Sections 12.3 and 12.4, the Partnership shall be terminated and the
Certificate of Limited Partnership and all qualifications of the Partnership as
a foreign limited partnership in jurisdictions other than the State of Tennessee
shall be cancelled and such other actions as may be necessary to terminate the
Partnership shall be taken.
Section 12.6 Reasonable Time for Winding Up. A reasonable time shall be
allowed for the orderly winding up of business and affairs of the Partnership
and the liquidation of its assets pursuant to Section 12.3 in order to minimize
any losses otherwise attendant upon such winding up, and the provisions of this
Agreement shall remain in effect between the Partners during the period of
liquidation.
Section 12.7 Return of Capital. Unless otherwise agreed by voted
amendment to this Agreement or agreement in writing otherwise, the General
Partner shall not be personally liable for, and shall have no obligation to
contribute or loan any monies or property to the Partnership to enable it to
effectuate, the return of the Capital Contributions of the Limited Partner, or
any portion thereof, it being expressly understood that any such return shall be
made solely from Partnership assets.
Section 12.8 No Capital Account Restoration. No Partner shall have any
obligation to restore any negative balance in its Capital Account upon
liquidation of the Partnership.
Section 12.9 Waiver of Partition. Each Partner hereby waives any right to
partition of the Partnership property.
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; LIMITED PARTNER ACTION
Section 13.1 Amendment to be Adopted Solely by the General Partner. The
Limited Partner agrees that the General Partner (pursuant to its powers of
attorney from the Limited Partner), without the approval of the Limited Partner,
may amend any provision of this Agreement, and execute, swear to, acknowledge,
deliver, file and record whatever documents may be required in connection
therewith to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent
of the Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner,
is reasonable and necessary or appropriate to qualify or continue the
qualification of the Partnership as a limited partnership or a
partnership in which the limited partners have limited liability under
the laws of any state or that is necessary or advisable in the opinion
of the General Partner to ensure that the Partnership will not be
treated as an association taxable as a corporation or otherwise taxed
as an entity for federal income tax purposes;
(d) a change (i) that, in the sole discretion of the General
Partner, does not adversely affect the Limited Partner in any material
respect, (ii) that is necessary or desirable to satisfy any
requirements, conditions or guidelines contained in any opinion,
directive, order, ruling or regulation of any federal or state agency
or judicial authority or contained in any federal or state statute
(including, without limitation, the Tennessee Act) or (iii) that is
required to effect the intent of the provisions of this Agreement or
is otherwise contemplated by this Agreement;
(e) an amendment that is necessary, in the Opinion of Counsel, to
prevent the Partnership or the General Partner or its directors or
officers from in any manner being subjected to the provisions of the
Investment Company Act of 1940, as amended, the Investment Advisors
Act of 1940, as amended, or "plan asset" regulations adopted under the
Employee Retirement Income Security Act of 1974, as amended, whether
or not substantially similar to plan asset regulations currently
applied or proposed by the United States Department of Labor;
(f) any amendment expressly permitted in this Agreement to be
made by the General Partner acting alone;
(g) an amendment effected, necessitated or contemplated by a
Merger Agreement approved in accordance with Section 14.2; or
(h) any other amendments substantially similar to the foregoing.
Section 13.2 Amendment Procedures. Except as provided in Sections 13.1
and 13.3, all amendments to this Agreement shall be made in accordance with the
following requirements. Amendments to this Agreement may be proposed only by or
with the consent of the General Partner. Each such proposal shall contain the
text of the proposed amendment. If an amendment if proposed, the General Partner
shall seek the written approval of Limited Partner. A proposed amendment shall
be effective upon its approval by the Limited Partner. The General Partner shall
notify the Limited Partner upon final adoption of any proposed amendment.
Section 13.3 Amendment Requirements.
(a) Notwithstanding the provisions of Sections 13.1 and 13.2,
no amendment to this Agreement may (i) enlarge the obligations of the
Limited Partner without its consent, (ii) enlarge the obligations of
the General Partner without its consent, which may be given or withheld
in its sole discretion, (iii) modify the amounts distributable,
reimbursable or otherwise payable to the General Partner by the
Partnership, (iv) change Section 12.1(a), (v) restrict in any way any
action by or rights of the General Partner as set forth in this
Agreement or (vi) change the term of the Partnership or give any Person
the right to dissolve the Partnership.
(b) Notwithstanding any other provision of this Agreement,
except for amendments pursuant to Section 13.1, no amendments shall
become effective without the approval of the Limited Partner unless the
Partnership obtains an Opinion of Counsel to the effect that (a) such
amendment will not cause the Partnership to be treated as an
association taxable as a corporation or otherwise taxable as an entity
for federal income tax purposes and (b) such amendment will not affect
the limited liability of the Limited Partner under applicable law.
Section 13.4 Action of Limited Partner. Any action that may be taken by
the Limited Partner hereunder may be taken by approval in writing setting forth
the action so taken signed by the Limited Partner.
ARTICLE XIV
MERGER
Section 14.1 Authority. The Partnership may merge or consolidate with
one or more corporations, business trusts or associations, real estate
investment trusts, common law trusts or unincorporated businesses, including,
without limitation, a general partnership or limited partnership, formed under
the laws of the State of Tennessee or any other state of the United States of
America, pursuant to a written agreement of merger or consolidation ("Merger
Agreement") in accordance with this Article.
Section 14.2 Procedure for Merger or Consolidation. Merger or
consolidation of the partnership pursuant to this Article requires the prior
approval of the General Partner. If the General Partner shall determine, in the
exercise of its sole discretion, to consent to the merger or consolidation, the
General Partner shall approve the Merger Agreement, which shall set forth:
(a) The names and jurisdictions of formation or organization of
each of the business entities proposing to merge or consolidate;
(b) The name and jurisdictions of formation or organization of
the business entity that is to survive the proposed merger or
consolidation (the "Surviving Business Entity");
(c) The terms and conditions of the proposed merger or
consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash,
property or general or limited partnership interests, rights,
securities or obligations of the Surviving Business Entity; and (i) if
any general or limited partnership interests, securities or rights of
any constituent business entity are not to be exchanged or converted
solely for, or into, cash, property or general or limited partnership
interests, rights, securities or obligations of the Surviving Business
Entity, the cash, property or general or limited partnership
interests, rights, securities or obligations of any limited
partnership, corporation, trust or other entity (other than the
Surviving Business Entity) which the holders of such general or
limited partnership interest are to receive in exchange for, or upon
conversion of, their securities or rights, and (ii) in the case of
securities represented by certificates, upon the surrender of such
certificates, which cash, property or general or limited partnership
interests, rights, securities or obligations of the Surviving Business
Entity or any limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity), or evidences thereof, are
to be delivered;
(e) A statement of any changes in the constituent documents or
the adoption of new constituent documents (the articles or certificate
of incorporation, articles of trust, declaration of trust, certificate
or agreement of limited partnership or other similar charter or
governing document) of the Surviving Business Entity to be effected by
such merger or consolidation;
(f) The effective time of the merger, which may be the date of
the filing of the certificate of merger pursuant to Section 14.4 or a
later date specified in or determinable in accordance with the Merger
Agreement (provided that, if the effective time of the merger is to be
later than the date of the filing of the certificate of merger, it
shall be fixed no later than the time of the filing of the certificate
of merger and stated therein); and
(g) Such other provisions with respect to the proposed merger
or consolidation as are deemed necessary or appropriate by the General
Partner.
Section 14.3 Approval by Limited Partner of Merger or Consolidation.
(a) The General Partner of the Partnership, upon its approval of
the Merger Agreement, shall direct that the Merger Agreement be
submitted for approval to the Limited Partner. A copy or a summary of
the Merger Agreement shall be sent to the Limited Partner.
(b) The Merger Agreement shall be approved upon receiving the
affirmative consent of the Limited Partner.
(c) After such approval by vote or consent of the Limited
Partner, and at any time prior to the filing of the certificate of
merger pursuant to Section 14.4, the merger or consolidation may be
abandoned pursuant to provisions therefor, if any, set forth in the
Merger Agreement.
Section 14.4 Certificate of Merger. Upon the required approval by the
General Partner and the Limited Partner of a Merger Agreement, a certificate of
merger shall be executed and filed with the Secretary of State of Tennessee in
conformity with the requirements of the Tennessee Act.
Section 14.5 Effect of Merger.
(a) Upon the effective date of the certificate of merger:
(i) all of the rights, privileges and powers of each
of the business entities that has merged or consolidated, and
all property, real, personal and mixed, and all debts due to
any of those business entities and all other things and causes
of action belonging to each of those business entities shall
be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving
Business Entity to the extent they were of each constituent
business entity;
(ii) the title to any real property vested by deed or
otherwise in any of those constituent business entities shall
not revert and is not in any way impaired because of the
merger or consolidation;
(iii) all rights of creditors and all liens on or
security interest in property of any of those constituent
business entities shall be preserved unimpaired; and
(iv) all debts, liabilities and duties of those
constituent business entities shall attach to the Surviving
Business Entity, and may be enforced against it to the same
extent as if the debts, liabilities and duties had been
incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this
Article shall not be deemed to result in a transfer or assignment or
assets or liabilities from one entity to another having occurred.
ARTICLE XV
GENERAL PROVISIONS
Section 15.1 Power of Attorney.
(a) The Limited Partner makes, constitutes and appoints the
General Partner and its authorized agent and successor, with full power
of substitution, the agent and attorney-in- fact for such Limited
Partner for all purposes relating to the Partnership and hereby grants
to said agent and attorney-in-fact full right, power and authority, in
such Limited Partner's name, place and stead, to make, execute, sign,
certify, acknowledge, verify, deliver, file and record from time to
time any writing, document, agreement, instrument or certificate
necessary or appropriate:
(i) To legally and validly establish or continue the
Partnership as a limited partnership under the laws of the State
of Tennessee;
(ii) To authorize the Partnership to transact business in
the State of Tennessee and the State of Ohio, or any other
jurisdiction;
(iii) To effectuate the provisions of this Agreement and to
carry on the business of the Partnership;
(iv) To authorize or effectuate the exercise of powers
granted to the General Partner under this Agreement;
(v) To effectuate the admission to the Partnership of a
substitute General Partner or a Substituted Limited Partner;
(vi) To effectuate the dissolution, liquidation and
termination of the Partnership pursuant to the terms of this
Agreement.
(b) Notwithstanding the foregoing, the power of attorney so
granted shall not constitute a waiver of, or be used to avoid, the
rights of the Limited Partner under this Agreement or be used in any
manner inconsistent with the status of the Partnership or a limited
partnership or the limited liability of the Limited Partner.
(c) The Limited Partner authorizes such attorney-in-fact to
take any further action which such attorney-in-fact shall consider
necessary or advisable to be done in and about the foregoing, including
the power to consent to items (i), (ii), (iii), (iv), (v) and (vi)
above, as fully as such Limited Partner might or could do if personally
present and hereby ratifies and confirms all that such attorney-in-fact
shall lawfully do or cause to be done by virtue hereof.
(d) The foregoing power of attorney is a durable and special
power of attorney coupled with an interest, is irrevocable and shall
survive the delivery of an assignment by the Limited Partner of the
whole or a portion of his interest in the Partnership, until the
assignee thereof becomes a Substituted Limited Partner, and shall
survive the incompetency or incapacity of the Limited Partner.
Section 15.2 Addresses and Notices. Any notice, demand, request or
report required or permitted to be given or made to a Partner or Assignee under
this Agreement shall be in writing and shall be deemed given or made when
delivered in person or when sent by first class United States mail or by other
means of written communication to the Partner or Assignee at the address
described below.
Section 15.3 References. Except as specifically provided otherwise,
references to "Articles" and "Sections" are to Articles and Sections of this
Agreement.
Section 15.4 Pronouns and Plurals. Whenever the context may require,
any pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa.
Section 15.5 Further Action. The parties shall execute and deliver all
documents, provide all information and take or refrain from taking action as may
be necessary or appropriate to achieve the purposes of this Agreement.
Section 15.6 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their heirs, executors,
administrators, successors, legal representatives and permitted assigns.
Section 15.7 Integration. This Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understandings pertaining thereto.
Section 15.8 Creditors. None of the provisions of this Agreement shall be
for the benefit of, or shall be enforceable by, any creditor of the Partnership.
Section 15.9 Waiver. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof shall
constitute waiver of any such breach or any other covenant, duty, agreement or
condition.
Section 15.10 Counterparts. This Agreement may be executed in
counterparts, all of which together shall constitute an agreement binding on all
the parties hereto, notwithstanding that all such parties are not signatories to
the original or the same counterpart. Each party shall become bound by this
Agreement immediately upon affixing its signature hereto.
Section 15.11 Applicable Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Tennessee, without
regard to the principles of conflicts of law.
Section 15.12 Invalidity of Provisions. If any provision of this
Agreement is or becomes invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not be affected thereby.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
GENERAL PARTNER:
ENERGY SEARCH INCORPORATED,
a Tennessee corporation
By
/s/
Richard S. Cooper
Its
President
LIMITED PARTNER:
ENERGY SEARCH NATURAL GAS PIPELINE INCOME L.P., a
Tennessee limited partnership
By: ENERGY SEARCH INCORPORATED
By
/s/
Richard S. Cooper
Its President
ENERGY SEARCH NATURAL GAS PIPELINE INCOME L.P.
LIMITED PARTNERSHIP AGREEMENT
TABLE OF CONTENTS
Page
ARTICLE I FORMATION OF PARTNERSHIP; DEFINITIONS 1
Section 1.1 ................. Formation 1
Section 1.2 ................. Name 1
Section 1.3 ................. Business 1
Section 1.4 ................. Principal Office; Resident Agent 1
Section 1.5 ................. Names and Addressees of Partners 1
Section 1.6 ................. Term 2
Section 1.7 ................. Filings 2
Section 1.8 ................. Title to Partnership Property 2
Section 1.9 ................. Defined Terms 2
ARTICLE II CAPITALIZATION 10
Section 2.1 ....... Capital Contributions by Limited Partners 10
Section 2.2 ....... Capital Contributions by Managing General Partner 10
Section 2.3 ....... Return of Contributions 11
Section 2.4 ....... Use of Capital Contributions 11
ARTICLE III SHARING OF COSTS AND REVENUES 11
Section 3.1 ....................... Sharing of Costs 11
Section 3.2 ....................... Sharing of Revenues 11
ARTICLE IV CASH DISTRIBUTIONS 12
Section 4.1 .... Cash Flow From Operations 12
Section 4.2 .... Net Proceeds From Nonliquidating Sale or Disposition
of Property 12
Section 4.3 ........ Net Proceeds From Liquidation of the Partnership 13
ARTICLE V TAX ALLOCATIONS 13
Section 5.1 ........ Capital Accounts 13
Section 5.2 ........ Allocations of Taxable Income and Taxable Loss 14
Section 5.3 ........ Apportionment Among Partners 15
<PAGE>
ARTICLE VI MANAGEMENT AND OPERATION OF BUSINESS 15
Section 6.1 ..... Management 15
Section 6.2 ..... Certificate of Limited Partnership 17
Section 6.3 ..... Restrictions on Managing General Partner's Authority 17
Section 6.4 ..... Reimbursement of the Managing General Partner 19
Section 6.5 ..... Commitment of Managing General Partner 19
Section 6.6 ..... Contracts With Managing General Partner or Affiliates 19
Section 6.7 ..... Sales of Properties to Partnership 19
Section 6.8 ..... Purchase of Properties From the Partnership 19
Section 6.9 ..... Custody of Partnership Funds and Properties 20
Section 6.10 .... Liability of Managing General Partner and
Affiliates Thereof 20
Section 6.11 .... Indemnification of Managing General Partner
and Affiliates Thereof 20
Section 6.12 .... Other Matters Concerning the Managing General Partner 22
Section 6.13 .... Title to Partnership Assets 22
Section 6.14 .... Reliance by Third Parties 23
Section 6.15 .... Partnership Monitor 23
ARTICLE VII RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS 24
Section 7.1 .... Limitation of Liability 24
Section 7.2 .... Management of Business 24
Section 7.3 .... Outside Activities 25
Section 7.4 .... Return of Capital 25
Section 7.5 .... Rights of Limited Partners Relating to the Partnership 25
ARTICLE VIII BOOKS, RECORDS, ACCOUNTING AND REPORTS 26
Section 8.1 ...................... Records and Accounting 26
Section 8.2 ...................... Fiscal Year 26
Section 8.3 ...................... Reports 26
ARTICLE IX TAX MATTERS 27
Section 9.1 .................... Preparation of Tax Returns 27
Section 9.2 .................... Tax Matters Partner 27
Section 9.3 .................... Tax Elections 27
Section 9.4 .................... Partner Representations 28
Section 9.5 .................... Tax Controversies 28
Section 9.6 .................... Organizational Expenses 28
Section 9.7 .................... Withholding 28
<PAGE>
ARTICLE X TRANSFER OF PARTNERSHIP INTERESTS 29
Section 10.1 ........ Transfer by Managing General Partner 29
Section 10.2 ........ Assignment by a Limited Partner 30
Section 10.3 ........ Requirements and Restrictions on Transfer 30
Section 10.4 ........ Citizenship Certificates; Non-citizen Assignees 32
Section 10.5 ........ Redemption of Units Relating to Citizenship 33
Section 10.6 ........ Limited Right of Presentment 34
Section 10.7 ........ Repurchase of Units in Certain Circumstances 34
ARTICLE XI WITHDRAWAL OR REMOVAL OF PARTNERS 35
Section 11.1 ..... Withdrawal of the Managing General Partner 35
Section 11.2 ..... Removal of the Managing General Partner 36
Section 11.3 ..... Interest of Departing Partner and Successor Managing
General Partner 36
Section 11.4 ..... Withdrawal of Limited Partners 36
ARTICLE XII DISSOLUTION AND LIQUIDATION 37
Section 12.1 ........ Dissolution 37
Section 12.2 ........ Continuation of the Business of the Partnership
After Dissolution 37
Section 12.3 ..... Liquidation 38
Section 12.4 ..... Distributions in Kind 39
Section 12.5 ..... Cancellation of Certificate of Limited Partnership 39
Section 12.6 ..... Reasonable Time for Winding Up 39
Section 12.7 ..... Return of Capital 39
Section 12.8 ..... No Capital Account Restoration 39
Section 12.9 ..... Waiver of Partition 39
ARTICLE XIII AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS;
RECORD DATE 40
Section 13.1 ....... Amendment to be Adopted Solely by the Managing
General Partner 40
Section 13.2 ........ Amendment Procedures 40
Section 13.3 ........ Amendment Requirements 41
Section 13.4 ........ Meetings 41
Section 13.5 ........ Notice of a Meeting 42
Section 13.6 ........ Record Date 42
Section 13.7 ........ Adjournment 42
Section 13.8 ........ Waiver of Notice; Approval of Meeting; Approval
of Minutes 42
Section 13.9 ........ Quorum 42
Section 13.10 ....... Conduct of Meeting 43
Section 13.11 ....... Action Without a Meeting 43
Section 13.12 ....... Voting and Other Rights 43
ARTICLE XIV MERGER 44
Section 14.1 .... Authority 44
Section 14.2 .... Procedure for Merger or Consolidation 44
Section 14.3 .... Approval by Limited Partners of Merger or Consolidation 45
Section 14.4 .... Certificate of Merger 45
Section 14.5 .... Effect of Merger 45
Section 14.6 .... Protection for Limited Partners 46
ARTICLE XV GENERAL PROVISIONS 47
Section 15.1 ..................... Power of Attorney 47
Section 15.2 ..................... Addresses and Notices 48
Section 15.3 ..................... References 48
Section 15.4 ..................... Pronouns and Plurals 48
Section 15.5 ..................... Further Action 48
Section 15.6 ..................... Binding Effect 48
Section 15.7 ..................... Integration 48
Section 15.8 ..................... Creditors 48
Section 15.9 ..................... Waiver 49
Section 15.10 .................... Counterparts 49
Section 15.11 .................... Applicable Law 49
Section 15.12 .................... Invalidity of Provisions 49
<PAGE>
-52-
LIMITED PARTNERSHIP AGREEMENT
ENERGY SEARCH NATURAL GAS PIPELINE INCOME L.P.
THIS LIMITED PARTNERSHIP AGREEMENT ("Agreement") dated January 5, 1993,
is made by and among ENERGY SEARCH INCORPORATED, a Tennessee corporation (the
"Managing General Partner"), and those persons who execute or adopt this
Agreement or counterparts hereof as Limited Partners and become such. In
consideration of the mutual covenants and agreements contained herein, the
parties hereto do hereby agree as follows:
ARTICLE I
FORMATION OF PARTNERSHIP; DEFINITIONS
Section 1.1 Formation. Subject to the provisions of this Agreement, the
parties hereto hereby form a limited partnership pursuant to the provisions of
the Tennessee Revised Limited Partnership Act, as amended (the "Tennessee Act").
Section 1.2 Name. The name of the Partnership shall be Energy Search
Natural Gas Pipeline Income, L.P. Subject to all applicable laws, the business
of the Partnership may be conducted under such other name or names as the
Managing General Partner determines to be necessary or desirable. The Managing
General Partner will file or cause to be filed on behalf of the Partnership all
assumed or fictitious name certificates or similar instruments as may from time
to time be required by law.
Section 1.3 Business. The business of the Partnership shall be to
engage in the gathering, purchase and sale of natural gas in and around the
Gathering Area, primarily by participation as a limited partner in the Operating
Partnership pursuant to the terms of the Operating Partnership Agreement; and to
engage in and perform any and all acts and activities customary or incident
thereto; all to the extent such acts or activities are not inconsistent with the
terms of the Tennessee Act. The business and purpose of the Partnership shall be
substantially consistent with the terms of the Memorandum.
Section 1.4 Principal Office; Resident Agent. The principal place of
business of the Partnership shall be located at Suite 200, 280 Fort Sanders West
Boulevard, Knoxville, Tennessee 37922. The Managing General Partner, at any time
and from time to time, may change the location of the Partnership's principal
place of business and may establish such additional Partnership places of
business as the Managing General Partner determines to be necessary or
desirable, provided that notice thereof is given to the Limited Partners within
thirty (30) days after such change or establishment. The resident agent for
service of process shall be Mr.
Richard S. Cooper, President of the Managing General Partner.
Section 1.5 Names and Addresses of Partners. ENERGY SEARCH INCORPORATED
shall serve as the Managing General Partner. The Managing General Partner's
address is Suite 200, 280 Fort Sanders West Boulevard, Knoxville, Tennessee
37922. The name and business, residence, or mailing address of each Limited
Partner will be maintained in the Partnership's records. The date upon which
each Limited Partner became a Partner in the Partnership shall be the date set
forth in the Partnership's records. The address of each Limited Partner for the
purpose of receiving notices and all other communications hereunder shall be the
address shown in the Subscription Agreement executed by that Limited Partner or
such other address as may be supplied by that Limited Partner to the Managing
General Partner in writing from time to time.
Section 1.6 Term. The Partnership will become Activated and will become
a limited partnership under the Tennessee Act upon the completion of filing for
recording of an initial Certificate of Limited Partnership for the Partnership
in accordance with the Tennessee Act and shall continue until terminated in
accordance with Article XII.
Section 1.7 Filings. Upon the request of the Managing General Partner,
the parties hereto will immediately execute and deliver all such certificates
and other instruments conforming hereto as are necessary for the Managing
General Partner to accomplish all filing, recording, publishing, and other acts
appropriate to comply with all requirements for the formation and operation of a
limited partnership under the laws of the State of Tennessee and for the
formation, qualification, and operation of a limited partnership (or a
partnership in which the Limited Partners have limited liability) in all other
jurisdictions where the Partnership proposes to conduct business.
Section 1.8 Title to Partnership Property. All property owned by the
Partnership, whether real or personal, tangible or intangible, shall be deemed
to be owned by the Partnership as an entity, and no Partner individually shall
have any ownership of such property.
Section 1.9 Defined Terms. When used in this Agreement and unless the
context otherwise requires, the following terms shall have the respective
meanings set forth below:
"Accrued and Unpaid Priority Return" means, as of the end of the
Support Period, the amount of cash distributions which (although not then
available) would be required to be paid by the Operating Partnership as Support
Distributions to the Partnership in order for the Net Income Limited Partners of
the Partnership to be able to receive their Priority Return.
"Activation" means the date, as designated by the Managing General
Partner in its sole discretion, after the Minimum Subscriptions have been sold,
that the Partnership shall be deemed formed and its business activities shall
commence. Immediately upon Activation, the Managing General Partner shall
undertake to file a Certificate of Limited Partnership for the Partnership with
the office of the Tennessee Secretary of State.
"Adjusted Capital Account" means the Capital Account maintained for
each Partner as of the end of each fiscal year of the Partnership, (A) increased
by any amounts that such Partner is obligated to restore under the standards set
by Treasury Regulation ss. 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation ss.ss. 1.704-2(g) and 1.704-2(i)(5), and(B)
decreased by (I) the amount of all losses and deductions that, as of the end of
such fiscal year, are reasonably expected to be allocated to such Partner in
subsequent years under Code ss.ss. 704(e)(2) and 706(d) and Treasury Regulation
ss. 1.751-1(b)(2)(ii), and (II) the amount of all distributions (including
Royalty Payments made or to be made to holders of Royalty Income Units) that, as
of the end of such fiscal year, are reasonably expected to be made to such
Partner in subsequent years in accordance with the terms of this Agreement or
otherwise to the extent they exceed offsetting increases to such Partner's
Capital Account that are reasonably expected to occur during (or prior to) the
year in which such distributions are reasonably expected to be made. The
foregoing definition of Adjusted Capital Account is intended to comply with the
provisions of Treasury Regulation ss. 1.704-1(b)(2)(ii)(d) and shall be
interpreted consistently therewith.
"Affiliate" means, with respect to another person, (i) any person
directly or indirectly owning, controlling or holding with power to vote 10% or
more of the outstanding voting securities of or equity interests in such other
person, (ii) any person 10% or more of whose outstanding voting securities or
equity interests are directly controlling, controlled or held with power to vote
by such other person, (iii) any person directly or indirectly controlling,
controlled by or under common control with such other person, (iv) any officer
or director of such other person, and (v) any company for which any such officer
or director acts in any such capacity.
"Aggregate Royalty Interest" means the product of (A) 40.0%, times (B)
the quotient of (x) the number of outstanding Royalty Income Units held by
Limited Partners, divided by (y) eighteen (18).
"Agreed Contribution Value" means the value of the Pipeline System
established by ESI for purposes of determining (i) the Partial Sale Proceeds,
(ii) ESI's Operating Partnership Interest, and (iii) the Partnership's Operating
Partnership Interest in connection with the Transaction. The Agreed Contribution
Value for this purpose has been determined by ESI to be $3,200,000.
"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Units has been transferred in a manner permitted under this Agreement, but who
has not become a Substituted Limited Partner pursuant to Section 10.2(a).
"Bankrupt" or "Bankruptcy" with respect to a person means that the person has:
(a) Made an assignment for the benefit of creditors;
(b) Filed a voluntary petition in Bankruptcy;
(c) Been adjudicated as Bankrupt or insolvent;
(d) Filed a petition or answer seeking for himself any
reorganization, arrangement, composition, readjustment, liquidation,
dissolution or similar relief under any statute, law or regulation;
(e) Filed an answer or other pleading admitting or failing to
contest the material allegations of a petition filed against him in
any proceeding of this nature;
(f) Sought, consented to or acquiesced in the appointment of a
trustee, receiver or liquidator for himself or of all or any
substantial part of his properties;
(g) If, within one hundred twenty (120) days after the
commencement of any proceeding against him seeking reorganization,
arrangement, composition, adjustment, liquidation, dissolution or
similar relief under any statute, law or regulation, the proceeding
has not been dismissed; or
(h) If, within ninety (90) days after the appointment without his
consent or acquiescence of a trustee, receiver or liquidator for
himself or of all or any substantial part of his properties, the
appointment is not vacated or stayed, or if, within ninety (90) days
after the expiration of any such stay, the appointment is not vacated.
"Capital Account" means the capital account maintained for a Partner or
Assignee pursuant to Section 5.1.
"Capital Contribution" means for any Partner the total dollar amount of
a cash contribution to the capital of the Partnership in exchange for its
Partnership Interest. The Capital Contribution of each Limited Partner is as set
forth in the Subscription Agreement executed by such Limited Partner.
"Cause" means a court of competent jurisdiction has entered a final
judgment finding the Managing General Partner liable for fraud, gross
negligence, willful or wanton misconduct or breach of fiduciary duty in its
capacity as general partner of the Partnership.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership filed with the Secretary of State of the State of Tennessee, as such
Certificate of Limited Partnership may be amended, supplemented or restated from
time to time.
"Citizenship Certification" means a properly completed certificate in
such form as may be specified by the Managing General Partner by which an
Assignee or a Limited Partner certifies that he is an Eligible Citizen.
"Code" means the Internal Revenue Code of 1986, as amended and in
effect from time to time, as interpreted by the applicable Treasury Regulations
thereunder. Any reference herein to a specific section or sections of the Code
shall be deemed to include a reference to any corresponding provision of future
law.
"Departing Partner" means a former Managing General Partner, from and
after the effective date of any withdrawal or removal of such former Managing
General Partner pursuant to Section 11.1 or 11.2 .
"Direct Administrative Costs" means all third-party expenses incurred
by the Managing General Partner in the conduct of Partnership administration
including legal, accounting, tax preparation, Partnership monitoring, travel,
long-distance telephone, postage, filing fees, data processing and other items
of a similar nature. Direct Administrative Costs shall reflect the actual,
third-party costs of the Managing General Partner, and shall exclude any
allocation of General Administrative Overhead.
"Due Diligence Fees" means the fees payable to the Placement Agent in
the amount of 2% of Investors' Subscriptions, payable to defray due diligence
costs incurred. The Placement Agent may reallow all or a portion of such Due
Diligence Fees to Participating Selling Agents.
"Eligible Citizen" means a Person qualified to own interests in real
property in jurisdictions in which the Partnership or the Operating Partnership
does business or proposes to do business from time to time, and whose status as
a Limited Partner or Assignee does not or would not subject the Partnership or
the Operating Partnership to a substantial risk of cancellation or forfeiture of
any of its properties or any interest therein.
"Escrow Account" means the escrow account established by the Managing
General Partner with First of America - West Michigan of Grand Rapids, Michigan,
with respect to subscriptions in the offering of Units.
"Event of Withdrawal" has the meaning assigned to such term in Section 11.1.
"Foreign Investor" means an Investor which at the time of subscription
is a nonresident alien individual, foreign corporation, foreign estate or
foreign trust within the meaning of Code ss.ss. 897 and 1445.
"Gas Price Adjustment Factor" means, for purposes of computing Gas
Servicing Compensation, the product of (i) the percentage increase (or decrease)
in the Weighted Average Gas Price in any calendar quarter from that of the
calendar quarter immediately preceding it, times (ii) 75%.
"Gas Servicing Agreement(s)" means the agreement(s) between the
Operating Partnership and producers or operators of natural gas in the Gathering
Area pursuant to which such producers or operators agree to sell their natural
gas produced from wells in the Gathering Area to the Operating Partnership and
the Operating Partnership agrees to gather, buy and sell such gas.
"Gas Servicing Compensation" means the compensation payable to the
Operating Partnership pursuant to the Gas Servicing Agreements for gathering,
purchasing and selling natural gas from wells in the Gathering Area. Gas
Servicing Compensation shall generally equal the Base Spread ($0.40 per Mcf) as
adjusted by the Gas Price Adjustment Factor.
"Gathering Area" means the geographic area serviced by the Pipeline
System currently comprised of Washington County and contiguous counties in the
state of Ohio.
"General Administrative Overhead" means all customary and routine
expenses incurred by the Managing General Partner or its Affiliates in the
conduct of Partnership Administration, exclusive of Direct Administrative Costs,
including a reasonable allocation of legal, finance, accounting, secretarial,
travel, office rent, telephone, data processing and other items of a similar
nature. General Administrative Overhead shall not be duplicated under any other
cost category and shall not exceed 1% of Partnership Gross Operating Revenues
other than that from Support Distributions received from the Operating
Partnership.
"Gross Cash Flow From Operations" means, for any period, all cash flow
generated from Gross Operating Revenue of the Partnership.
"Gross Cash Flow Subject to Royalty Payments" means, for any period,
all cash flow resulting from Gross Operating Revenue of the Partnership
exclusive of Support Distributions received from the Operating Partnership.
"Gross Operating Revenues" means, for any period, all gross revenue of
the Partnership from the operation of the Pipeline System in the normal course
of business.
"IRS" means the Internal Revenue Service.
"Limited Partner(s)" means each Person who subscribes for the purchase
of Units and is admitted to the Partnership as either a Royalty Income Limited
Partner or Net Income Limited Partner.
"Limited Right of Presentment" shall have the meaning set forth in Section
10.6.
"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in Sections 12.1(a) and
12.1(b), the date on which the applicable time period during which the Limited
Partners have the right to elect to reconstitute the Partnership and continue
its business has expired without such an election being made, and (b) in the
case of any other event giving rise to the dissolution of the Partnership, the
date on which such event occurs.
"Liquidator" means the Managing General Partner or other Person
approved pursuant to Section 12.3 who performs the functions described therein.
"Majority In Interest" means, with respect to any agreement or vote of
Limited Partners, those Limited Partners whose combined Units, at the time of
determination thereof, exceed 50% of the total Units held by Limited Partners
who are eligible to participate in such agreement or vote; provided, however,
Units held by the Managing General Partner and any of its Affiliates shall not
be counted. "One-Quarter in Interest" shall have a similar meaning except the
necessary combined Units must exceed one-quarter (1/4), excluding any Units held
by the Managing General Partner or any of its Affiliates.
"Managing General Partner" means ESI or any successor as managing
general partner of the Partnership, designated pursuant to this Agreement.
"Marketing Compensation" means Sales Commissions, Placement Fees and
Due Diligence Fees paid by or on behalf of the Partnership to the Placement
Agent, all or a portion of which may be reallowed to the Participating Selling
Agents as compensation for selling Units and to defray the cost of due diligence
investigation.
"Memorandum" means the Confidential Private Placement Memorandum dated
November 1, 1992, relating to the offering of Units, which document may be
supplemented or amended from time to time.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"Minimum Subscriptions" means the minimum number of Units required to
be sold and accepted by the Managing General Partner in order to Activate the
Partnership. The Minimum Subscriptions shall be five (5) Units ($250,000).
"Monitor Agreement" means the agreement between the Partnership Monitor
and the Partnership as described in Section 6.15.
"Net Cash Flow From Operations" means, for any period, Gross Cash Flow
From Operations less (i) Royalty Payments, (ii) cash flow utilized to fund
Operating Costs, Direct Administrative Costs and General Administrative
Overhead, and (iii) cash flow utilized to service Partnership debt.
"Net Income Limited Partner" means a Limited Partner who elects to hold Net
Income Units.
"Net Income Unit" means a Unit of Partnership Interest in the
Partnership that is not a Royalty Income Unit and which entitles the holder to,
among other things, distributions of the Partnership's net income after Royalty
Payments. Net Income Units also benefit from the Priority Return.
"Net Offering Proceeds" means the total Investor Subscriptions to the
Partnership less Marketing Compensation and Organization and Offering Expenses.
"Net Operating Revenues" means, for any period, Gross Operating Revenue
of the Partnership less Royalty Payments, Operating Costs, Direct Administrative
Costs and General Administrative Overhead.
"Non-citizen Assignee" means a Person who the Managing General Partner
has determined in its sole discretion does not constitute an Eligible Citizen
pursuant to Section 10.4.
"Offering" means the offering of Royalty Income Units and Net Income
Units in the Partnership pursuant to the Memorandum.
"Operating Costs" means normal operational expenditures and costs made
or incurred in gathering, purchasing and selling natural gas through the
Pipeline System from wells in the Gathering Area. Operating Costs may include
the cost of any labor or materials furnished by the Managing General Partner or
its Affiliates providing the cost of such items is no greater than the cost that
the Partnership could have obtained such items for from unrelated third parties
engaged in the business of furnishing the same in the geographic area of the
Pipeline System.
"Operating Partnership" means ESI Pipeline Operating L.P., a Tennessee
limited partnership.
"Operating Partnership Agreement" means the Limited Partnership
Agreement for ESI Pipeline Operating L.P., as it may be amended, supplemented or
restated from time to time.
"Operating Partnership Capital Contribution" means the contribution of
cash or property to the Operating Partnership by a partner therein. The
Operating Partnership Capital Contribution of the Partnership, as limited
partner, shall be cash in the amount of the Net Offering Proceeds of the
Partnership. The Operating Partnership Capital Contribution of ESI, as general
partner, shall be the Agreed Contribution Value of the Pipeline System, less the
Partial Sale Proceeds received by ESI pursuant to the Transaction.
"Operating Partnership Interest" means the partnership interest of any
partner in the Operating Partnership.
"Operating Partnership Interest Acquisition Cost" means the cost to the
Partnership of its Operating Partnership Interest pursuant to the Operating
Partnership Agreement.
"Organization and Offering Expenses" means all costs of organizing and
selling the offering of Partnership Units (exclusive of Marketing Compensation),
including, but not limited to, expenses for printing, mailing, escrow, expenses
of compliance of the sale of securities under federal and state law, including
taxes, accountants' and attorneys' fees.
"Opinion of Counsel" means a written opinion of counsel (who may be
regular counsel to ESI, any Affiliate of ESI, the Partnership or the Managing
General Partner) acceptable to the Managing General Partner.
"Outstanding Units" means those Units which are issued and outstanding.
"Participating Selling Agents" means those persons who are authorized
to act as registered broker dealers or representatives thereof under state and
federal securities laws, and are members in good standing of the National
Association of Securities Dealers, Inc. ("NASD") and that agree to offer and
sell Units to Limited Partners.
"Partner(s)" means, individually and collectively, the Managing General
Partner and the Limited Partners; solely for purposes of Articles V and VI and
Sections 12.3 and 12.4, the Assignees.
"Partnership" means the Energy Search Natural Gas Pipeline Income L.P.
heretofore formed and continued pursuant to this Agreement.
"Partnership Interest" means the interest of any Partner in the
Partnership, which shall include the Partnership Interest of the Managing
General Partner, the Royalty Income Limited Partners and the Net Income Limited
Partners, including all beneficial rights associated therewith.
"Partnership Monitor" means the independent firm that will monitor and
report to Limited Partners on certain activities and performance of the
Partnership and the Managing General Partnership on behalf of Limited Partners.
The Partnership Monitor for the Partnership shall be Kaz & Associates of Long
Beach, California.
"Person" means an individual or a corporation, partnership, trust,
estate, joint stock company, joint venture, unincorporated organization,
association or other entity.
"Pipeline System" means the natural gas gathering and pipeline system
servicing wells in the Gathering Area to be acquired and operated by the
Operating Partnership pursuant to the Operating Partnership Agreement.
"Pipeline System Capital Improvement and Extension Allocations" means
the special allocations of costs and revenues to ESI, pursuant to the Operating
Partnership Agreement, in connection with Pipeline System Capital Improvement
and Extension Distributions.
"Pipeline System Capital Improvement and Extension Costs" means any
capital expenditures made by the Operating Partnership to extend the Pipeline
System to connect one or more new wells in the Gathering Area.
"Pipeline System Capital Improvement and Extension Distributions"
means, in any period, the cash distributions required to be made by the
Operating Partnership to ESI pursuant to the Operating Partnership Agreement in
connection with its contribution of capital to the Operating Partnership used to
fund Pipeline System Capital Improvement and Extension Costs.
"Placement Agent" means Equity Financial Corporation of Knoxville,
Tennessee.
"Placement Fees" means the fees payable to the Placement Agent as
compensated for arranging the offering and sale of Units in the amount of 1% of
Investors' Subscriptions.
"Presentment Term" means, for purposes of Section 10.6, the term
commencing January 1, 1996 and continuing throughout the term of the
Partnership.
"Priority Return" means the preferred, cumulative return to be
maintained in favor of Net Income Limited Partners commencing in the first full
calendar quarter following Activation of the Partnership and continuing through
December 31, 1997 (the "Support Period") in an amount equal to 10.0% per annum
(prorated for any partial year) of Capital Contributions of Net Income Limited
Partners.
"Record Date" means the date established by the Managing General
Partner for determining (a) the identity of the Record Holder entitled to notice
of, or to vote at, any meeting of Limited Partners or entitled to vote by ballot
or give approval of Partnership action in writing without a meeting or entitled
to exercise rights in respect of any lawful action of Limited Partners or (b)
the identity of Record Holders entitled to receive any report or distribution.
"Record Holder" means the Person in whose name a Unit is registered on
the books of the Partnership of the opening of business on any given business
day.
"Redeemable Units" means any Units for which a redemption notice has
been given, and has not been withdrawn, under Section 10.5.
"Restoration Allocations" means the special allocations of income and
gain to ESI, pursuant to the Operating Partnership Agreement, in connection with
Restoration Distributions.
"Restoration Distributions" means, in any period, the cash
distributions to be made to ESI pursuant to Section 4.6 of the Operating
Partnership Agreement.
"Royalty Income Limited Partners" means any Limited Partner who holds
Royalty Income Units.
"Royalty Income Unit(s)" means Units which are entitled to receive,
among other things, cash distributions in the form of Royalty Payments pursuant
to Section 4.1(a).
"Royalty Payments" means the cash distributions received by Royalty
Income Limited Partners from the Partnership pursuant to Section 4.1(a) and
computed as the product of (A) the Aggregate Royalty Interest times (B) Gross
Cash Flow subject to Royalty Payments for the applicable period.
"Sales Commissions" means commissions, in an aggregate amount equal to
8% of the Capital Contributions of Limited Partners, to be paid to the Placement
Agent, and reallowable to the Participating Selling Agents, for selling Units.
"Securities Act" means the Securities Act of 1933, as amended,
supplemented or restated from time to time and any successor to such statute.
"Subscription Agreement" means, with respect to a Limited Partner, the
subscription agreement executed and delivered by that Limited Partner in
connection with his subscription to purchase Units and containing certain
representations, warranties, covenants and agreements of that Limited Partner.
"Substituted Limited Partner" means a Person who is admitted as a
Limited Partner to the Partnership pursuant to Section 10.2 in place of and with
all the rights of a Limited Partner and who is shown as a Limited Partner on the
books and records of the Partnership.
"Support Allocations" means the special allocations of income and gain
to the Partnership pursuant to the Operating Partnership Agreement in connection
with Support Distributions.
"Support Distributions" means, in any period, the cash distributions
payable to the Partnership over and above its normal Operating Partnership
Interest required to be made by the Operating Partnership to the Partnership in
order to allow the Partnership to be able to make cash distributions to its Net
Income Limited Partners in an amount sufficient to maintain the Priority Return.
The Support Distributions received by the Partnership shall be distributed to
Net Income Limited Partners pursuant to Section 4.1(b).
"Support Period" means the period of time, commencing at Activation of
the Partnership and continuing through December 31, 1997, during which Support
Distributions will be required to be made, if necessary, under the Operating
Partnership Agreement.
"Surviving Business Entity" has the meaning assigned to such term in
Section 14.2.
"Tax Matters Partner" shall have the meaning set forth in Section 9.2.
"Tax Opinion" means the tax opinion of Stead & Sughroue, P.C., as
described in the Memorandum.
"Tennessee Act" means the Tennessee Revised Limited Partnership Act.
"Transaction" means ESI's transfer of the Pipeline System to the
Operating Partnership in exchange for (i) the Partial Sale Proceeds, and (ii)
ESI's Operating Partnership Interest.
"Treasury Regulations" means the rules and regulations which have been
promulgated by the United States Department of Treasury under and with respect
to the Code and which are applied by the IRS.
"Unit" means the Partnership Interest of a Limited Partner subscribed for
in the offering. Units shall be either Royalty Income Units or Net Income Units.
"Unit Holder" means all Persons who hold Units regardless of whether
they are Partners.
"Withdrawal of Opinion of Counsel" shall have the meaning set forth in
Section 11.1(b).
"Working Capital Reserve" means the Net Cash From Operations set aside
by the Managing General Partner, not exceeding at any time three percent (3%) of
the Capital Contributions of the Limited Partners to meet anticipated
liabilities, obligations and expenses of the Partnership during the ensuing
twelve (12) months.
ARTICLE II
CAPITALIZATION
Section 2.1 Capital Contributions by Limited Partners.
(a) Capital Contributions. Each subscriber to Units of
Partnership shall be accepted as a Limited Partner only after (i) that
subscriber has deposited or has had deposited on its behalf in the
Escrow Account the full amount of the subscription price for the Units
subscribed ($50,000 per Unit) and (ii) the Managing General Partner has
approved and accepted the Subscription Agreement executed by such
subscriber. By executing and delivering the Subscription Agreement and
upon its acceptance, each Limited Partner shall, subject to applicable
state Blue Sky laws to the contrary, be irrevocably committed to
contribute to the capital of the Partnership the amount stated in that
Limited Partner's Subscription Agreement as its Capital Contribution.
This Partnership will not be Activated unless Capital Contributions of
Limited Partners, including those of the Managing General Partner or
its Affiliates investing as Limited Partners, equal or exceed $250,000
(the "Minimum Subscriptions").
(b) Assessments. Except as otherwise provided under the
Tennessee Act or other applicable law, Limited Partners will not be
subject to voluntary or mandatory assessments for additional Capital
Contributions at any time.
Section 2.2 Capital Contributions by Managing General Partner.
(a) Capital Contributions. Concurrently with the termination of
the offering of Units in the Partnership, the Managing General Partner
shall contribute to the capital of the Partnership an amount equal to
one percent (1%) of the Capital Contributions of all Limited Partners.
(b) Additional Capital Contributions. Any amounts paid by the
Managing General Partner as a result of its liability to Partnership
creditors pursuant to the Tennessee Act shall be deemed additional
Capital Contributions of the Managing General Partner.
Section 2.3 Return of Contributions. Except as otherwise provided in
this Agreement, no interest shall accrue on any Capital Contributions to the
capital of the Partnership and no Partner shall have the right to withdraw or to
be repaid any capital contributed by that Partner.
Section 2.4 Use of Capital Contributions. Capital Contributions of the
Partners to the Partnership shall be used to pay (or reimburse the Managing
General Partner or its Affiliate for prior payment of) Marketing Compensation
not to exceed 11% of Capital Contributions of Limited Partners; Organization and
Offering Expenses not exceeding 4% of Capital Contributions of Limited Partners;
the Partnership's Operating Partnership Capital Contribution; a Working Capital
Reserve in an amount not to exceed 1% of the Capital Contribution of Limited
Partners. In the event the Partnership has not used, or committed for use in a
written document, the amount of Capital Contributions available for the purposes
described above within one (1) year of the Activation of the Partnership, the
remaining amounts shall be distributed pro rata to the Partners in the same
proportion to their Capital Contributions without reduction for Marketing
Compensation or Organization and Offering Expenses.
ARTICLE III
SHARING OF COSTS AND REVENUES
Section 3.1 Sharing of Costs. Costs and expenses of the Partnership shall
be charged and shared as follows:
(a) Marketing Compensation shall be charged 100% to Limited
Partners, and allocated among them, to the particular Limited Partners
to whom such items specifically relate.
(b) Organization and Offering Expenses shall be charged 100%
to Limited Partners, and allocated among them, to the particular
Limited Partners to whom such items specifically relate.
(c) Operating Partnership Interest Acquisition Costs shall be
charged and allocated to the Partners in proportion to their Capital
Contributions.
(e) Pipeline System Capital Improvement and Extension Costs
paid from Partnership revenues shall be charged and allocated to the
Partners in the same proportions as they share the revenues utilized to
pay such costs.
(f) Operating Costs, Direct Administrative Costs and General
Administrative Overhead and any other costs of Partnership operations
or administration shall be charged 99% to the Net Income Limited
Partners, and allocated among them, in proportion to the number of Net
Income Units held, and 1% to the Managing General Partner.
Section 3.2 Sharing of Revenues. Revenues of the Partnership shall be
credited and shared as set forth below:
(a) Revenues from the temporary investment of Unit
subscription proceeds of Limited Partners shall be credited 100% to
Limited Partners, and allocated among them, in accordance with the
terms of the Memorandum.
(b) Royalty Income Limited Partners shall be credited with
revenue in the amount of Royalty Payments payable pursuant to Section
4.1(a). Among Royalty Income Limited Partners, Royalty Payments shall
be allocated in proportion to the number of Royalty Income Units held.
(c) Revenues relating to Support Allocations received from the
Operating Partnership shall be credited 100% to the Net Income Limited
Partners, and shared among them, in proportion to the number of Net
Income Units held.
(d) Other Net Operating Revenues shall be credited 1% to the
Managing General Partner and 99% to the Net Income Limited Partners,
and allocated among such Net Income Limited Partners in proportion to
the number of Net Income Units held.
(e) Revenues from the sale or disposition of Partnership
depreciable property shall be credited to the Partners in proportion to
their Capital Contributions.
ARTICLE IV
CASH DISTRIBUTIONS
Section 4.1 Cash Flow From Operations.
(a) Gross Cash Flow Subject to Royalty Payments shall be
distributed on a monthly basis to Royalty Income Limited Partners in
the amount of Royalty Payments for such period. Such Royalty Payments
shall be shared among Royalty Income Limited Partners in proportion to
the number of Royalty Income Units held.
(b) Cash received by the Partnership as Support Distributions
from the Operating Partnership shall be distributed on a monthly basis
100% to Net Income Limited Partners, and allocated among them, in
proportion to the number of Net Income Units held.
(c) Net Cash Flow From Operations, excluding any Support
Distributions received from the Operating Partnership, shall be
distributed on a monthly basis, 99% to Net Income Limited Partners and
1% to the Managing General Partner. Among the Net Income Limited
Partners, such Net Cash Flow From Operations shall be allocated in
proportion to the number of Net Income Units held.
Section 4.2 Net Proceeds From Nonliquidating Sale or Disposition of
Property. Net proceeds from sale or disposition of depreciable property of the
Partnership, other than in connection with a liquidation or dissolution of the
Partnership, shall be distributed first, to the Net Income Limited Partners in
the amount of any Accrued and Unpaid Priority Return, and second, to the
Partners in proportion to their respective Capital Contributions.
Section 4.3 Net Proceeds From Liquidation of the Partnership. Net
Proceeds from a liquidation of the Partnership shall be distributed first, to
the Net Income Limited Partners in the amount of any Accrued and Unpaid Priority
Return, and second, to the Partners in proportion to their relative Capital
Contributions.
ARTICLE V
TAX ALLOCATIONS
Section 5.1 Capital Accounts. A separate Capital Account shall be
established and maintained by the Partnership for each Partner throughout the
term of the Partnership as provided below:
(a) The Capital Account of each Partner shall, except as
otherwise provided herein, be increased by (1) such Partner's Capital
Contributions to the Partnership, (2) the fair market value of any
other assets contributed by such Partner to the Partnership (net of
liabilities secured by such contributed assets that the Partnership is
considered to assume, or take subject to, pursuant to Code ss. 752),
(3) the amount of any item of taxable income or gain and the amount of
any item of income or gain exempt from tax allocated to such Partner,
and decreased by (x) the amount of any item of tax deduction or loss
allocated to such Partner, (y) such Partner's allocable share of
expenditures of the Partnership not deductible in computing the
Partnership's taxable income and not properly chargeable as capital
expenditures and (z) the amount of cash (including Royalty Payments) or
the fair market value of any assets distributed to such Partner (net of
liabilities secured by such distributed assets that such Partner is
considered to assume, or take subject to, pursuant to Code ss. 752).
(b) Immediately prior to any distribution of assets by the
Partnership that is not pursuant to a liquidation of the Partnership,
the Partners' Capital Accounts shall be adjusted by (1) assuming that
the distributed assets were sold by the Partnership for cash at their
respective fair market values as of the date of distribution by the
Partnership and (2) increasing or decreasing each Partner's Capital
Account with such Partner's respective share of the hypothetical gains
or losses resulting from such assumed sales in the same manner as gains
or losses on actual sales of such assets would be allocated under
Article III.
(c) Adjustments of the basis of Partnership assets provided
for pursuant to Code ss.ss. 734 and 743 (resulting from an election
under Code ss. 754) shall not affect the Capital Accounts of the
Partners, except to the extent required by Treasury Regulation ss.
1.704-1(b)(2)(iv)(m), or any successor thereto.
(d) Capital Accounts shall be adjusted, in a manner consistent
with this Section 5.1, to reflect any adjustments in items of
Partnership income, gain, loss or deduction that result from amended
returns filed by the Partnership or pursuant to an agreement by the
Partnership with the IRS or a final court decision.
(e) In the case of property contributed to the Partnership by
a Partner, the Partner's Capital Accounts may be debited or credited
for items of depreciation, cost recovery, amortization and gain or loss
with respect to such property computed in the same manner as such items
would be computed if the adjusted tax basis of such property were equal
to its fair market value on the date of its contribution to the
Partnership, in lieu of the Capital Account adjustments provided above
for such items, all in accordance with Treasury Regulation ss.
1.704-1(b)(2)(iv)(g), or any successor thereto.
(f) It is the intention of the Partners that the Capital
Account of each Partner shall be maintained in the manner required
under Treasury Regulation ss. 1.704-1(b)(2)(iv) or any successor
Treasury Regulation. To the extent that any additional adjustment to
the Capital Accounts is required by such Regulation, the Tax Matters
Partner, as defined in Section 9.2, shall be authorized to make such
adjustment provided that such adjustment is not likely to materially
affect the distributions to the Partners under Article IV.
Section 5.2 Allocation of Taxable Income and Taxable Loss.
(a) Each Partner shall be allocated a distributive share of
income, gain, loss, deduction or credit (or item thereof) determined in
accordance with Code ss. 704(b) and Treasury Regulations promulgated
thereunder. In making such allocations, the Managing General Partner
shall consider (i) the agreement of the Partners to share costs and
revenues as set forth in Article III, (ii) the cash distributions to
which Partners are entitled as set forth in Article IV and (iii) such
other facts and circumstances as shall be deemed relevant by the
Managing General Partner or required to be taken into account under
Code ss. 704(b) and Treasury Regulations thereunder. In determining the
allocations of taxable income and loss hereunder, the Managing General
Partner may consult with the Partnership's tax accountant or Tax
Counsel, and the expense of the same shall be deemed a Direct
Administrative Cost.
(b) Any gain allocated to the Partners upon the sale or other
taxable disposition of any Partnership asset shall, to the extent
possible, after taking into account other required allocations of gain
pursuant to this Section 5.2, be characterized as recapture income in
the same proportions and to the same extent as such Partners (or their
predecessors in interest) have been allocated any deductions directly
or indirectly giving rise to the treatment of such gains as recapture
income.
(c) All items of income, gain, loss, deduction and credit
recognized by the Partnership for federal income tax purposes and
allocated to the Partners in accordance with the provisions hereof
shall be determined without regard to any election under Code ss. 754
which may be made by the Partnership; provided, however, that such
allocations, once made, shall be adjusted as necessary or appropriate
to take into account those adjustments permitted or required by Code
ss.ss. 734 and 743.
(d) Each item of Partnership income, gain, loss and deduction
attributable to a transferred Partnership Interest of the Managing
General Partner or to transferred Units shall, for federal income tax
purposes, be determined on an annual basis and prorated on a monthly
basis and shall be allocated to the Partners as of the first business
day of each month. The Managing General Partner may revise, alter or
otherwise modify such methods of allocation as it determines necessary,
to the extent permitted or required by Code ss. 706 and the Treasury
Regulations or rulings promulgated thereunder.
(e) Allocations that would otherwise be made to a Limited
Partner under the provisions of this Article V shall instead be made to
the beneficial owner of Units held by a nominee in any case in which
the nominee has furnished the identity of such owner to the Partnership
in accordance with Code ss. 6031(c) or any other method acceptable to
the Managing General Partner in its sole discretion.
Section 5.3 Apportionment Among Partners.
(a) Except as otherwise provided in this Agreement, all
allocations and distributions to the Partners shall be apportioned
among them in accordance with their Partnership Interests.
(b) For purposes of Section 5.3(a) hereof, a Partner's
Partnership Interest shall be calculated as of the end of the taxable
year for which such allocation has been made; provided, however, that
if a transferee of a Partnership Interest is admitted as a Partner
during the course of the taxable year, the apportionment of allocations
and distributions between the transferor and transferee of such
Partnership Interest shall be made in the manner provided in Section
5.3(c) hereof.
(c) If, during any taxable year of the Partnership, there is a
change in any Partner's Interest in the Partnership, each Partner's
allocation of any item of income, gain, loss, deduction, or credit of
the Partnership for such taxable year, other than "allocable cash basis
items," shall be determined by taking into account the varying
interests of the Partners pursuant to such method as is permitted by
Code ss. 706(d) and the Treasury Regulations thereunder. Each Partner's
share of "allocable cash basis items" shall be determined in accordance
with Code ss. 706(d)(2) by (i) assigning the appropriate portion of
each item to each day in the period to which it is attributable, and
(ii) allocating the portion assigned to any such day among the Partners
in proportion to their interest in the Partnership at the close of such
day. "Allocable cash basis item" shall have the meaning ascribed to it
by Code ss. 706(d)(2)(B) and the Treasury Regulations thereunder.
ARTICLE VI
MANAGEMENT AND OPERATION OF BUSINESS
Section 6.1 Management.
(a) The Managing General Partner shall conduct, direct and
manage all activities of the Partnership. Except as otherwise expressly
provided in this Agreement, all management powers over the business and
affairs of the Partnership shall be exclusively vested in the Managing
General Partner, and no Limited Partner or Assignee shall have any
management power over the business and affairs of the Partnership. In
addition to the powers now or hereafter granted a general partner of a
limited partnership under the Tennessee Act or which are granted to the
Managing General Partner under any other provision of this Agreement,
the Managing General Partner, subject to Section 6.3, shall have full
power and authority to do all things and on such terms as it, in its
sole discretion, may deem necessary or appropriate to conduct the
business of the Partnership, to effectuate the purposes set forth in
Section 1.3 and to exercise all powers set forth in this Section 6.1,
including, without limitation,
(i) the making of any expenditures and the incurring of any
other obligations;
(ii) the making of tax, regulatory and other filings, or
rendering of periodic or other reports to governmental or other
agencies having jurisdiction over the business or assets of the
Partnership;
(iii) the acquisition, disposition, mortgage, pledge,
encumbrance, hypothecation or exchange of any or all of the
assets of the Partnership, or the Merger or other combination of
the Partnership with or into another Person (the matters
described in this clause (iii) being subject, however, to any
prior approval that may be required by Section 14.3);
(iv) the use of the assets of the Partnership (including,
without limitation, cash on hand) for any purpose consistent with
the terms of this Agreement;
(v) the negotiation, execution and performance of any
contracts, conveyances or other instruments;
(vi) the distribution of Partnership cash in accordance with
Article IV;
(vii) the hiring and dismissal of contractors, agents,
outside attorneys, accountants, and consultants and the
determination of their compensation and other terms of employment
or hiring;
(viii) the maintenance of such insurance for the
benefit of the Partnership and the Partners (including,
without limitation, the assets of the Partnership) as it deems
necessary or appropriate;
(ix) the formation of, or acquisition of an interest
in, and the contribution of property to, any other limited or
general partnerships, joint ventures, corporations or other
relationships (including, without limitation, the acquisition
of a limited partner interest in, and the contribution of cash
to, the Operating Partnership);
(x) the control of any matters affecting the rights
and obligations of the Partnership, including, without
limitation, the bringing and defending of actions at law or in
equity and otherwise engaging in the conduct of litigation,
arbitration or other dispute resolution and the incurring of
legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities
and contingencies to the extent permitted by law;
(xii) the purchase, sale or other acquisition or disposition
of Units; and
(xiii) the undertaking of any action consistent with the
Partnership's participation as a limited partner in the Operating
Partnership.
(b) Notwithstanding any other provision of this Agreement, the
Operating Partnership Agreement, the Tennessee Act or any applicable
law, rule or regulation, each of the Limited Partners and Assignees and
each other Person who may acquire an interest in Units hereby:
(i) approves, ratifies and confirms the execution,
delivery and performance by the Managing General Partner of
this Agreement, the Operating Partnership Agreement, the Gas
Servicing Agreements and any other contract, document or
agreement contemplated by any of the foregoing, as the same
shall be amended from time to time;
(ii) agrees that the Managing General Partner is
authorized to execute, deliver and perform the agreements
referred to in clause (i) of this subparagraph 6.1(b) and the
other agreements, acts, transactions and matters described in
the Memorandum on behalf of the Partnership without any
further act, approval or vote of the Limited Partners or the
Assignees or the other Persons who may acquire an interest in
Units; and
(iii) agrees that none of the execution, delivery or
performance by the Managing General Partner, the Partnership,
the Operating Partnership or any Affiliate of any of them of
this Agreement or any agreement authorized or permitted under
this Agreement shall constitute a breach by the Managing
General Partner of any duty that the Managing General Partner
may owe the Partnership or the Limited Partners or the
Assignees or any other Persons under this Agreement or of any
duty stated or implied by law or equity.
Section 6.2 Certificate of Limited Partnership. The Managing General
Partner has caused the Certificate of Limited Partnership to be filed with the
Secretary of State of Tennessee as required by the Tennessee Act and shall use
all reasonable efforts to cause to be filed such other certificates or documents
as may be determined by the Managing General Partner in its sole discretion to
be reasonable and necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a partnership in which
the limited partners have limited liability) in the State of Tennessee or any
other state in which the Partnership may elect to do business or own property.
To the extent that such action is determined by the Managing General Partner in
its sole discretion to be reasonable and necessary or appropriate, the Managing
General Partner shall file amendments to and restatements of the Certificate of
Limited Partnership and do all things to maintain the Partnership as a limited
partnership (or a partnership in which the limited partners have limited
liability) under the laws of the State of Tennessee or of any other state in
which the Partnership may elect to do business or own property.
Section 6.3 Restrictions on Managing General Partner's Authority.
Notwithstanding any other provision of this Agreement, the Managing General
Partner shall not have the power or authority to, directly or indirectly, do,
perform or authorize the following:
(a) Without approval of a Majority In Interest of the Limited
Partners, take any action in contravention of this Agreement.
(b) Except as provided in Articles XII and XIV, sell, exchange
or otherwise dispose of all or substantially all of the Partnership's
assets in a single transaction or a series of related transactions or
approve on behalf of the Partnership the sale, exchange or other
disposition of all or substantially all of the assets of the Operating
Partnership, without the approval of at least a Majority In Interest of
the Limited Partners; provided, however, that this provision shall not
preclude or limit the Managing General Partner's ability to mortgage,
pledge, hypothecate or grant a security interest in all or
substantially all of the Partnership's assets and shall not apply to
any forced sale of any or all of the Partnership's assets pursuant to
the foreclosure of, or other realization upon, any such encumbrance.
(c) Without the approval of a Majority In Interest of the
Limited Partners, consent to any amendment to the Operating Partnership
Agreement or take any action permitted to be taken by the general
partner of the Operating Partnership, in either case, that would
adversely affect the Partnership, as a limited partner of the Operating
Partnership.
(d) Without the approval of a Majority In Interest of the
Limited Partners, except as permitted under Sections 10.1 and 11.1,
elect or cause the Partnership to elect a successor general partner of
the Operating Partnership.
(e) Unless approved by a Majority In Interest of the Limited
Partners, take any action or refuse to take any reasonable action the
effect of which, if taken or not taken, as the case may be, would be to
cause the Partnership or the Operating Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as an
entity for federal income tax purposes; provided that this Section
6.3(e) shall not be construed to apply to amendments to this Agreement
(which are governed by Article XIII) or Mergers or consolidations of
the Partnership with any Person (which are governed by Article XIV).
(f) Borrow any money or incur any obligation or indebtedness
in the name or on behalf of the Partnership unless (i) the total amount
of the borrowings or obligations outstanding (excluding trade credit
incurred in the normal course of business) does not exceed 5% of
Capital Contributions of Limited Partners, (ii) the terms of any such
borrowing or financing or the effect of applicable law provide that the
lender has recourse only against Partnership assets or the Managing
General Partner and not against any Limited Partner individually, and
(iii) the Managing General Partner determines in good faith that such
borrowing is consistent with the business purposes of the Partnership
and in the best interest of Limited Partners.
(g) Guarantee in the name or on behalf of the Partnership the
payment of money or the performance of any contract or other
obligation of any person.
(h) Use, or permit any other person to use, the Partnership's
name, funds, credit, or property for purposes other than legitimate
Partnership purposes;
(i) Take any action, or permit any other person to take any
action, with respect to the assets or property of the Partnership that
does not primarily benefit the Partnership, and is not substantially
consistent with the stated purposes of the Partnership as described in
Section 1.3, including, without limitation, utilization of funds of the
Partnership as compensating balances for its own benefit.
(j) On any loans made available to the Partnership by the
Managing General Partner or any Affiliate, receive interest in excess
of any of the following: (i) the maximum rate permitted by applicable
law, (ii) the effective interest rate then being paid by the Managing
General Partner or Affiliate for its funds, or (iii) the rate that
would be charged the Partnership (without regard to the Managing
General Partner's or Affiliate's financial ability or guaranties) by
unrelated banks on comparable loans for the same purpose; and the
Managing General Partner and its Affiliate shall not receive points or
other finance charges or fees, regardless of amount.
(k) Receive, or permit an Affiliate to receive, rebates or
give-ups, or participate, or permit an Affiliate to participate, in any
reciprocal business arrangement which would circumvent the restrictions
and prohibitions on the Managing General Partner and its Affiliates
imposed by this Article.
(l) Cause or permit to make loans or advance credit fees,
payments or expenses to the Managing General Partner or its Affiliates,
including any Affiliated partnerships.
<PAGE>
Section 6.4 Reimbursement of the Managing General Partner.
(a) Except as provided in this Section 6.4 and elsewhere in
this Agreement or in the Operating Partnership Agreement, the Managing
General Partner shall not be compensated for its services as general
partner of the Partnership.
(b) The Managing General Partner shall be reimbursed on a
monthly basis, or such other basis as the Managing General Partner may
determine in its sole discretion, for all Direct Administrative Costs
and General Administrative Overhead incurred in the management and
administration of the Partnership.
Section 6.5 Commitment of Managing General Partner. During the
existence of the Partnership, the Managing General Partner shall devote such
time and effort to the Partnership business as may be necessary to promote
adequately the interests of the Partnership and the mutual interests of the
Partners; however, it is specifically understood and agreed that the Managing
General Partner shall not be required to devote full time to Partnership
business, and each Managing General Partner and its Affiliates thereof may at
any time and from time to time engage in and possess interests in other business
ventures of any and every type and description, independently or with others
including, without limitation, the acquisition, ownership, exploration,
development, operation, and management of oil and gas properties, inside or
outside the Gathering Area, for itself, its Affiliates and other persons and the
organization and management of other partnerships and joint ventures similar to
the Partnership, provided, at all times, each Managing General Partner acts
consistent with its fiduciary duty to the Partnership.
Section 6.6 Contracts with Managing General Partner or Affiliates. The
Partnership may enter into contracts and agreements with the Managing General
Partner, or any Affiliate of the Managing General Partner, including the
Operating Partnership, for any legitimate purpose consistent with the business
purpose of the Partnership including, without limitation, the rendering of
services or the sale or lease of materials, equipment or supplies, provided that
the Managing General Partner determines in good faith that the terms,
conditions, prices and compensation under such contracts or agreements are fair
and reasonable to the Partnership and generally no less favorable than terms
that the Managing General Partner or Affiliate offer, or would offer, to
unrelated third parties in the same geographical area. Specifically, the
Managing General Partner, on behalf of the Partnership and the Operating
Partnership, is authorized to enter into and perform the Operating Partnership
Agreement, the Gas Servicing Agreements and any ancillary contracts or
agreements contemplated thereby. In no case shall the fact that the other party
to a contract or agreement with the Partnership is a Partner (including any
Managing General Partner) or an Affiliate of a Partner prohibit or prevent the
Partnership from entering into or performing such contract or agreement provided
the Managing General Partner determines that the terms thereof are fair and
reasonable to the Partnership and commensurate with terms that could be
negotiated with independent third parties in the same geographic area.
Section 6.7 Sales of Properties to Partnership. Neither a Managing
General Partner nor any Affiliate (including the Operating Partnership) shall
sell, transfer or convey any interest in any property to the Partnership except
pursuant to a price and under terms and conditions that are fair and reasonable
to the Partnership.
Section 6.8 Purchases of Properties From the Partnership. No Managing
General Partner nor any Affiliate (including the Operating Partnership or any
other partnership or program now or in the future affiliated with the Managing
General Partner) may purchase or acquire any property of the Partnership or the
Operating Partnership, directly or indirectly, except pursuant to terms and
conditions that are fair and reasonable to the Partnership.
Section 6.9 Custody of Partnership Funds and Properties. The Managing
General Partner and its Affiliates shall observe the following requirements in
dealing with Partnership funds and other properties:
(a) The Managing General Partner will 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.
(b) Funds of the Partnership shall not be commingled with
funds of any other entity. The Managing General Partner may, however,
establish a master fiduciary account pursuant to which separate
subtrust accounts are maintained for the benefit of the Partnership and
Affiliated partnerships, provided that the Partnership's funds are
afforded maximum protection from the claims of other partnerships and
their creditors.
(c) Partnership property may be held in the names of nominees
temporarily to facilitate their acquisition and for similar valid
purposes. On a permanent basis, properties may be held in the name of a
special nominee entity organized by the Managing General Partner for
the sole purpose of holding record title for oil and gas properties;
provided, however, that the nominee entity shall engage in no other
business and incur no other liabilities and the Property is held in the
name of a special nominee, either a ruling from the IRS or an Opinion
of Counsel shall be obtained to the effect that such arrangement shall
not change the ownership status of the properties for federal income
tax purposes.
(d) Partnership funds may not be invested in the securities of
another partnership, corporation, trust or other legal entity except in
the following instances:
(1) investments in the Operating Partnership in the
ordinary course of the Partnership's business pursuant to
Section 1.3 hereof and the Memorandum;
(2) temporary investments of Partnership funds in
income producing short-term, highly liquid investments, where
there is safety of principal substantially the same as U.S.
Treasury Bills, bank certificates of deposit or bank money
market accounts; and
(3) investments in entities established solely to
limit the Partnership's liabilities associated with the
ownership or operation of property or equipment, provided that
in such instances duplicative fees and expenses shall be
prohibited.
Section 6.10 Liability of Managing General Partner and Affiliates
Thereof. Neither the Managing General Partner nor any Affiliate thereof shall
have any liability to the Partnership or to any Partner for any loss suffered by
the Partnership that arises out of any action or inaction performed or omitted
by the Managing General Partner or any Affiliate thereof, if the Managing
General Partner or such Affiliate in good faith determined that such course of
conduct was in the best interest of the Partnership and provided that such
course of conduct did not constitute gross negligence or misconduct on the part
of the Managing General Partner or such Affiliate; provided further that nothing
in this Agreement shall authorize the Managing General Partner or any Affiliate
thereof to breach its fiduciary duty to either the Partnership or the Partners.
Section 6.11 Indemnification of Managing General Partner and Affiliates
Thereof.
(a) The Partnership shall indemnify the Managing General
Partner and its Affiliates against any losses, judgments, liabilities,
expenses, and amounts paid in settlement of any claims sustained by the
Managing General Partner or its Affiliates in connection with the
Partnership; provided that (i) the Managing General Partner or the
indemnified Affiliate has determined in good faith that the course of
conduct that caused the loss or liability was in the best interests of
the Partnership and (ii) the conduct of the Managing General Partner or
the indemnified Affiliate did not constitute negligence or misconduct.
(b) Notwithstanding Section 6.11(a), neither the Managing
General Partner nor any Affiliate thereof nor any Participating Selling
Agent selling Units in the Partnership shall be indemnified by the
Partnership or any Limited Partner 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
laws violations as to the particular indemnitee and the court approves
indemnification of the litigation costs, (ii) such 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 securities commissioners of the
states of Alabama, Kentucky, Michigan and Tennessee, and any state
securities regulatory authority of a state in which Units were offered
or sold as to indemnification for violations of securities law.
(c) The Partnership may purchase and maintain insurance on
behalf of the Managing General Partner and its Affiliates thereof
against any liabilities asserted against or expenses incurred by the
Managing General Partner and Affiliate thereof in connection with
Partnership activities, provided that the Partnership shall not incur
the cost of that portion of any insurance that insures the Managing
General Partner or any Affiliate thereof against any liability with
respect to which the Managing General Partner and any Affiliates
thereof are denied indemnification under the provisions of this
Agreement; provided, however, that nothing contained herein shall
preclude the Partnership from purchasing and paying for such types of
insurance including, without limitation, extended coverage liability
and casualty and workers compensation, as would be customary for any
person owning comparable assets and engaged in a similar business, or
from naming the Managing General Partner and Affiliates thereof as
additional insured parties thereunder, provided that such addition does
not increase the premiums payable by the Partnership.
(d) Legal expenses and other costs incurred as a result of a
claim described in this Section 6.11 shall be paid by the Partnership
from time to time in advance of the final disposition of such claim if
the following three conditions are satisfied: (i) the claim relates to
the performance of duties or services by the Managing General Partner
or any Affiliates thereof on behalf of the Partnership; (ii) the claim
is initiated by a third party who is not a Limited Partner, or the
claim is initiated by a Limited Partner and a court of competent
jurisdiction specifically approves such advancement; and (iii) the
Managing General Partner or its Affiliate undertakes to repay the
advanced funds to the Partnership, together with the applicable legal
rate of interest thereon, in the event it is later determined that such
Managing General Partner or its Affiliate is not entitled to
indemnification under the provisions of this Section 6.11.
(e) The indemnification provided by this Section 6.11 shall
continue as to the Managing General Partner and its Affiliates in the
event it ceases to be the Managing General Partner of the Partnership
with respect to claims relating to the period in which the Managing
General Partner was the Managing General Partner of the Partnership and
shall inure to the benefit of the successors and assigns of the
Managing General Partner and Affiliates thereof.
(f) The indemnification provided by this Section 6.11 shall be
made, and shall be recoverable by the Managing General Partner or any
Affiliate thereof, only out of the assets of the Partnership and not
from the Limited Partners.
(g) For purposes of Section 6.10 and this Section 6.11, the
term "Affiliate" shall mean any person performing services or
participating in management decisions on behalf of the Managing General
Partner and acting within the scope of the Managing General Partner's
authority who (i) directly or indirectly controls, is controlled by or
is under common control with the Managing General Partner, (ii) owns or
controls ten percent (10%) or more of the outstanding voting securities
of the Managing General Partner, (iii) is an officer, director, agent,
employee, partner or trustee of the Managing General Partner, or (iv)
is an officer, director, agent, employee, partner, or trustee of any
company for which the Managing General Partner acts in any such
capacity.
Section 6.12 Other Matters Concerning the Managing General Partner.
(a) The Managing General Partner may rely and shall be
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
consent, order, bond, debenture, or other paper or document believed by
it to be genuine and to have been signed or presented by the property
party or parties.
(b) The Managing General Partner may consult with legal
counsel, accountants, appraisers, management consultants, investment
bankers and other consultants and advisers selected by it, and any act
taken or omitted to be taken in reliance upon the opinion (including,
without limitation, an Opinion of Counsel) of such Persons as to
matters that the Managing General Partner reasonably believes to be
within such Person's professional or expert competence shall be
conclusively presumed to have been done or omitted in good faith and in
accordance with such opinion.
(c) The Managing General Partner shall have the right, in
respect of any of its powers or obligations hereunder, to act through
any of its duly authorized officers and a duly appointed attorney or
attorneys-in-fact. Each such attorney shall, to the extent provided by
the Managing General Partner in the power of attorney, have full power
and authority to do and perform each and every act and duty that is
permitted or required to be done by the Managing General Partner
hereunder.
(d) Any standard of care and duty imposed by this Agreement or
under the Tennessee Act or any applicable law, rule or regulation shall
be modified, waived or limited as required to permit the Managing
General Partner to act under this Agreement or any other agreement
contemplated by this Agreement and to make any decision pursuant to the
authority prescribed in this Agreement so long as such action is
reasonably believed by the Managing General Partner to be in, or not
inconsistent with, the best interests of the Partnership.
Section 6.13 Title to Partnership Assets. Title to Partnership assets,
whether real, personal or mixed and whether tangible or intangible, shall be
deemed to be owned by the Partnership as an entity, and no Partner or Assignee,
individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all of the
Partnership assets may be held in the name of the Partnership, the Managing
General Partner, one or more of its Affiliates or one or more nominees, as the
Managing General Partner may determine. The Managing General Partner hereby
declares and warrants that any Partnership assets for which record title is held
in the name of the Managing General Partner or one or more of its Affiliates or
one or more nominees shall be held by the Managing General Partner or such
Affiliate or nominee for the use and benefit of the Partnership in accordance
with the provisions of this Agreement; provided, however, that the Managing
General Partner shall use its reasonable efforts to cause record title to such
assets (other than those assets in respect of which the Managing General Partner
determines that the expense and difficulty of conveyancing makes transfer of
record title to the Partnership impracticable) to be vested in the Partnership
as soon as reasonably practicable; provided that, prior to the withdrawal or
removal of the Managing General Partner or as soon thereafter as practicable,
the Managing General Partner shall use reasonable efforts to effect the transfer
of record title to the Partnership and, prior to any such transfer, will provide
for the use of such assets in a manner satisfactory to the Partnership. All
Partnership assets shall be recorded as the property of the Partnership in its
books and records, irrespective of the name in which record title to such
Partnership assets is held.
Section 6.14 Reliance by Third Parties. Notwithstanding anything to the
contrary in this Agreement, any Person dealing with the Partnership shall be
entitled to assume that the Managing General Partner has full power and
authority to encumber, sell or otherwise use in any manner any and all assets of
the Partnership and to enter into any contracts on behalf of the Partnership,
and such Person shall be entitled to deal with the Managing General Partner as
if it were the Partnership's sole party in interest, both legally and
beneficially. Each Limited Partner hereby waives any and all defenses or other
remedies that may be available against such Person to contest, negate or
disaffirm any action of the Managing General Partner in connection with any such
dealing. In no event shall any Person dealing with the Managing General Partner
or its representatives be obligated to ascertain that the terms of this
Agreement have been complied with or to inquire into the necessity or expedience
of any action of the Managing General Partner or its representatives. Each and
every certificate, document or other instrument executed on behalf of the
Partnership by the Managing General Partner or its representatives shall be
conclusive evidence in favor of any and every Person relying thereon or claiming
thereunder that (a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (b) the Person executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on behalf of the
Partnership and (c) such certificate, document or instrument was duly executed
and delivered in accordance with the terms and provisions of this Agreement and
is binding upon the Partnership.
Section 6.15 Partnership Monitor.
(a) The Managing General Partner shall enter into a
Partnership Monitor Agreement with Kaz & Associates of Long Beach,
California (the "Monitor Agreement") pursuant to which the Partnership
Monitor will review and report on various aspects of the Partnership,
including the following:
(i) The application of proceeds from the Offering as
consistent with the provisions of the Memorandum.
(ii) Preparation and execution of Partnership
organization documents, establishment of Partnership bank
accounts, execution and recording, if necessary, of title
conveyance documents in connection with the Pipeline System.
(iii) Reports, financial statements and
communications and other information from the Managing General
Partner to the Limited Partners.
(iv) Partnership cash distribution performance in light
of Financial Forecast Data in the Memorandum.
(v) Partnership federal income tax returns.
(b) The Partnership Monitor will annually conduct an on-site
inspection of the Managing General Partner's principal or field offices
to conduct a general spot check review concerning: maintenance of
Partnership bank accounts, physical condition of the Pipeline System,
interview the Managing General Partner's technical employees and
consultants regarding maintenance and operation of the Pipeline System,
gas sales, marketing contract and pricing matters, and existing and
planned drilling and production activities in the Gathering Area.
(c) On or before September 1 of each year, the Partnership
Monitor will prepare a report for Limited Partners summarizing the
results and observations of the Partnership Monitor in connection with
the matters reviewed in the prior year. Each report prepared by the
Partnership Monitor pursuant to the terms hereof shall be sent in final
form to the Managing General Partner at least 30 days prior to
dissemination to Limited Partners. The Managing General Partner shall
review the report for factual consistency and accuracy. The Managing
General Partner is free to prepare and disseminate to Limited Partners
explanatory, competing, contradictory, supplemental or other
information to any report prepared by the Partnership Monitor. The
Partnership Monitor shall disseminate or cause to be disseminated to
Limited Partners the reports after confirmation as to factual accuracy
and consistency by the Managing General Partner. The Managing General
Partner authorizes the Partnership Monitor to answer any questions (or
refer such questions to the Managing General Partner) that Limited
Partners may have concerning any report. The Partnership Monitor shall,
simultaneously with dissemination to Limited Partners, send the
Managing General Partner a final version of the report.
(d) The Managing General Partner agrees to cooperate fully and
in good faith with the Partnership Monitor in all aspects of its review
and reporting function including, without limitation, timely providing
the Partnership Monitor with reports, memoranda, correspondence,
financial statements or other information concerning the Limited
Partner or the Partnership. The Managing General Partner agrees to make
itself and its officers and agents reasonably available to answer
questions and otherwise communicate with the Partnership Monitor. The
Partnership Monitor shall have reasonable access to books, records,
reports, data and other information relevant to the Limited Partners or
the Partnership for purposes of its review and report.
(e) The Partnership Monitor shall be paid such fees and
reimbursed such costs as are reasonable under the circumstances and
payable pursuant to the Monitor Agreement.
ARTICLE VII
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 7.1 Limitation of Liability. The Limited Partners and the
Assignees shall have no liability under this Agreement except as expressly
provided in this Agreement or the Tennessee Act.
Section 7.2 Management of Business. No Limited Partner or Assignee
(other than the Managing General Partner, any of its Affiliates or any officer,
director, employee, partner, agent or trustee of the Managing General Partner or
any of its Affiliates, in its capacity as such, if such Person shall also be a
Limited Partner or Assignee) shall participate in the operation, management or
control (within the meaning of the Tennessee Act) of the Partnership's business,
transact any business in the Partnership's name or have the power to sign
documents for or otherwise bind the Partnership. The transaction of any such
business by the Managing General Partner, any of its Affiliates or any officer,
director, employee, partner, agent or trustee of the Managing General Partner or
any of its Affiliates, in its capacity as such, shall not affect, impair or
eliminate the limitations on the liability of the Limited Partners or Assignees
under this Agreement.
Section 7.3 Outside Activities. Subject to the provisions of Section
6.5, which shall continue to be applicable to the Persons referred to therein,
regardless of whether such Persons shall also be Limited Partners or Assignees,
any Limited Partner or Assignee shall be entitled to and may have business
interests and engage in business activities in addition to those relating to the
Partnership including, without limitation, business interests and activities in
direct competition with the Partnership or the Operating Partnership. Neither
the Partnership nor any of the other Partners or Assignees shall have any rights
by virtue of this Agreement in any business ventures of any Limited Partner or
Assignee.
Section 7.4 Return of Capital. No Limited Partner or Assignee shall be
entitled to the withdrawal or return of his Capital Contribution, except to the
extent, if any, that distributions made pursuant to this Agreement or upon
termination of the Partnership may be considered as such by law and then only to
the extent provided for in this Agreement. Except to the extent provided by
Article IV or as otherwise expressly provided in this Agreement, no Limited
Partner or Assignee shall have priority over any other Limited Partner or
Assignee either as to the return of Capital Contributions or as to revenues or
distributions.
Section 7.5 Rights of Limited Partners Relating to the Partnership.
(a) In addition to other rights provided by this Agreement or
by applicable law, and except as limited by Section 7.5(b), each
Limited Partner shall, directly or through his duly authorized
representative, have the right, for a purpose reasonably related to
such Limited Partner's interest as a limited partner in the
Partnership, upon reasonable demand and at such Limited Partner's own
expense:
(i) to obtain true and reasonably full information
regarding the status of the business and financial condition
of the Partnership;
(ii) promptly, after becoming available, to obtain a
copy of the Partnership's federal, state and local tax
returns for each year;
(iii) to have furnished to him, upon notification to
the Managing General Partner, a current list of the name and
last known business, residence or mailing address of each
Partner;
(iv) to have furnished to him, upon notification to
the Managing General Partner, a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto,
together with a copy of the executed copies of all powers of
attorney pursuant to which this Agreement, the Certificate of
Limited Partnership and all amendments thereto have been
executed;
(v) to obtain such other information regarding the
affairs of the Partnership as is just and reasonable; and
(vi) upon affirmative vote or consent of at least 25%
in interest of Limited Partners, to commission an audit of the
Partnership's financial statements in the manner described in
Section 8.3(c).
(b) Notwithstanding any other provision of this Agreement, the
Managing General Partner may keep confidential from the Limited
Partners and Assignees, for such period of time as the Managing General
Partner deems reasonable, any information that the Managing General
Partner reasonably believes to be in the nature of trade secrets or
other information, the disclosure of which the Managing General Partner
in good faith believes is not in the best interests of the Partnership
or the Operating Partnership or could damage the Partnership or the
Operating Partnership or that the Partnership or the Operating
Partnership is required by law or by agreements with third parties to
keep confidential (other than agreements with Affiliates the primary
purpose of which is to circumvent the obligations set forth in this
Section 7.5).
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 8.1 Records and Accounting. The Managing General Partner shall keep
or cause to be kept at the principal office of the Partnership appropriate books
and records with respect to the Partnership's business including, without
limitation, all books and records necessary to provide to the Limited Partners
any information, lists and copies of documents required to be provided pursuant
to Section 7.5(a). Any books and records maintained by or on behalf of the
Partnership in the regular course of its business including, without limitation,
the record of the Record Holders and Assignees of Units, books of account and
records of partnership proceedings, may be kept on or be in the form of punch
cards, magnetic tape, photographs, micrographics or any other information
storage device, provided that the books and records so maintained are
convertible into clearly legible written form within a reasonable period of
time. The books of the Partnership shall be maintained, for financial reporting
purposes, on an accrual basis in accordance, to the extent practicable, with
generally accepted accounting principles.
Section 8.2 Fiscal Year. The fiscal year of the Partnership shall be the
calendar year.
Section 8.3 Reports.
(a) As soon as is practicable after termination of the
offering, the Managing General Partner shall deliver to Limited
Partners a written report of the application of proceeds of the
offering of Partnership Units.
(b) As soon as practicable, but in no event later than 120
days after the close of each fiscal year of the Partnership, the
Managing General Partner shall cause to be mailed to each Record Holder
of a Unit, as of a date selected by the Managing General Partner in its
sole discretion, an annual report containing financial statements of
the Partnership for such fiscal year of the Partnership, presented, to
the extent practicable, in accordance with generally accepted
accounting principles, including a balance sheet and statements of
operations, Partners' equity and cash flows, such statements to be
compiled by a firm of independent public accountants selected by the
Managing General Partner.
(c) Upon affirmative vote of at least Twenty-five percent
(25%) In Interest of Limited Partners, the Managing General Partner
shall have Partnership financial statements audited by a firm of
independent public accountants to be selected or approved by the
Managing General Partner. The cost of such audit shall be assessed and
charged to the Limited Partners who affirmatively voted to commission
the audit. Upon completion, the audit report, audited financial
statements and footnotes thereto shall be mailed to the Managing
General Partner and each Limited Partner.
(d) Within 120 days after each fiscal year end, the Managing
General Partner shall cause the Partnership Monitor to send to Limited
Partners its Partnership Monitor Report for the prior fiscal year
(together with the Managing General Partner's independent comments
thereon) summarizing the results of the prior year's Partnership
Monitoring.
ARTICLE IX
TAX MATTERS
Section 9.1 Preparation of Tax Returns. The Managing General Partner
shall arrange for the preparation and timely filing of all returns of
Partnership income, gains, deductions, losses and other items required of the
Partnership for federal and state income tax purposes and shall use all
reasonable efforts to furnish, within 90 days of the close of each taxable year
of the Partnership, the tax information reasonably required by Limited Partners
for federal and state income tax reporting purposes. The classification,
realization and recognition of income, gain, losses and deductions and other
items shall be on the accrual method of accounting for federal income tax
purposes. The taxable year of the Partnership shall be the calendar year.
Section 9.2 Tax Matters Partner. The Managing General Partner is hereby
designated and authorized to act as the "Tax Matters Partner" of the
Partnership, as that term is described and used in the Treasury Regulations
promulgated under Code ss. 6231. Each Partner consents to such designation of
the Managing General Partner as the Tax Matters Partner and agrees to execute,
certify, acknowledge, deliver, swear to, file and record with the IRS or other
appropriate governmental authorities such documents as may be necessary or
appropriate to evidence such consent. The Managing General Partner shall have
the rights, power and authority which are granted to a "Tax Matters Partner"
under such provisions of the Code and Treasury Regulations and shall be
authorized, but not obligated, to do any act specified therein. Any cost or
expense incurred by the Tax Matters Partner in connection with any of the
foregoing matters shall be payable by the Partnership as a Direct Administrative
Cost, and the Partnership shall indemnify and reimburse the Tax Matters Partner
for all costs and expenses, including legal and accounting fees, claims,
liabilities, losses and damages incurred in connection with any tax audit or
judicial review with respect to the tax liability of the Partners.
Section 9.3 Tax Elections.
(a) No election shall be made by the Partnership or any
Partner, pursuant to Code ss. 761, to have the Partnership excluded
from the application of the provisions of Subchapter K of Chapter 1 of
Subtitle A of the Code, or to be excluded from any similar provisions
of state tax laws.
(b) In the event of the transfer of a Unit or in the event of
the distribution of Partnership property to any Partner, the
Partnership may elect in accordance with Code ss. 754, in the absolute
discretion of the Managing General Partner, to cause the basis of the
Partnership property to be adjusted for federal income tax purposes as
provided for by Code ss.ss. 734 and 743.
(c) The Tax Matters Partner shall have the authority on behalf
of the Partnership to make or refrain from making any other tax
election provided in the Code, or in Treasury Regulations or in any
other applicable federal or state tax law as deemed appropriate by the
Tax Matters Partner.
Section 9.4 Partner Representations. Each Partner hereby represents,
warrants and agrees as follows:
(a) Such Partner will not file the statement described in Code
ss. 6224(c)(3)(B) prohibiting as the Tax Matters Partner for the
Partnership from entering into a settlement on its behalf with respect
to Partnership items (as such term is defined in Code ss. 6231(s)(3))
of the Partnership;
(b) 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 Code ss. 6223(b)(2); and
(c) The Managing General Partner is authorized to file a copy
of this Agreement (or pertinent portions hereof) with the IRS pursuant
to Code ss. 6224(b) if necessary to perfect the waiver of rights under
this Subsection 9.4.
Section 9.5 Tax Controversies. Subject to the provisions hereof, the
Managing General Partner is designated the Tax Matters Partner (as defined in
Code ss. 6231), and is authorized and required to represent the Partnership (at
the Partnership's expense) in connection with all examinations of the
Partnership's affairs by tax authorities including, without limitation,
resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner and
Assignee agrees to cooperate with the Managing General Partner and to do or
refrain from doing any or all things reasonably required by the Managing General
Partner to conduct such proceedings.
Section 9.6 Organizational Expenses. The Partnership shall elect to
deduct expenses, if any, incurred by it in organizing the Partnership ratably
over a 60-month period as provided in Code ss. 709.
Section 9.7 Withholding. Notwithstanding any other provision of this
Agreement, the Managing General Partner is authorized to take any action that it
determines in its sole discretion to be necessary or appropriate to cause the
Partnership and the Operating Partnership to comply with any withholding
requirements established under the Code or any other federal, state or local law
including, without limitation, pursuant to Code ss.ss. 1441, 1442, 1445 and
1446. To the extent that the Partnership is required to withhold and pay over to
any taxing authority any amount resulting from the allocation or distribution of
income to any Partner or Assignee (including, without limitation, by reason of
Code ss. 1446), the amount withheld shall be treated as a distribution of cash
pursuant to Section 4.1 in the amount of such withholding from such Partner.
<PAGE>
ARTICLE X
TRANSFER OF PARTNERSHIP INTERESTS
Section 10.1 Transfer by Managing General Partner.
(a) Authority. The Partnership Interest of the Managing General
Partner in the Partnership shall not be transferable, in whole or in
part, except in the event of one of the following:
(i) A disposition by the Managing General Partner of
all or any part of its Partnership Interest to one or more
Persons that have, as the result of a Merger, consolidation,
corporate reorganization, or other transaction, acquired all
or substantially all of the assets of the Managing General
Partner and have assumed the obligations of the Managing
General Partner hereunder and under the Operating Partnership
Agreement;
(ii) An assignment or transfer by the Managing
General Partner of all or any portion of its Partnership
Interest by way of mortgage, pledge, or charge as security for
an advance of monies to it, provided that the mortgagee or
pledgee shall hold such interest subject to the terms of this
Agreement; or
(iii) Such assignment is made in accordance with the
requirements and restrictions of Section 10.3, to a substitute
Managing General Partner which is approved by vote or consent
of a Majority in Interest of Limited Partners.
In the case of subsections 10.1(a)(i) and (ii), the transfer
shall be allowable only in the event the transferor or transferee
furnishes to the Partnership an Opinion of Counsel that such Merger,
consolidation, combination, corporate reorganization, or other
transaction will not result in loss of limited liability of any Limited
Partner or of any limited partner in the Operating Partnership or cause
the Partnership or the Operating Partnership to be treated as an
association taxable as a corporation or otherwise be taxable as an
entity for federal income tax purposes.
(b) Substitution. In the event of a disposition, assignment,
or transfer referred to in clauses (i) and (iii) of Section 10.1(a),
the successor or Assignee shall be and become a substituted Managing
General Partner with all rights, powers, authority, and obligations and
duties of the assigning Managing General Partner hereunder, and shall
continue the business of the Partnership without the occurrence of any
dissolution, and the assigning Managing General Partner may withdraw
from the Partnership and each Limited Partner hereby consents to the
admission of that successor, assignee, or transferee as a substituted
Managing General Partner to the extent required by the Tennessee Act
and to the continuance of the business of the Partnership by that
substituted Managing General Partner, and authorizes the substituted
Managing General Partner to ratify on his behalf pursuant to the power
of attorney granted in Section 15.1 the Limited Partner's consent to
the admission of the substitute Managing General Partner as the
Managing General Partner of the Partnership.
(c) Assignment of Allocations and Distributions Only. A
Managing General Partner, upon compliance with the requirements of and
restrictions on transfer set forth in Section 10.3 and the last
sentence of Section 10.1(a), may sell, assign, pledge, hypothecate,
grant a security interest in or otherwise transfer its right to receive
allocations and distributions from the Partnership without the consent
of any other Partner; but the Assignee thereof (who does not become a
substitute Managing General Partner as provided in Subsection 10.1(b))
shall not have any rights under this Agreement, (including no right to
receive any information or accounting of the affairs of the
Partnership, to inspect the books or records of the Partnership or to
manage, direct and control the Partnership), other than the right to
receive allocations and distributions, or a portion thereof which, but
for the assignment, would have been made to the assignor.
Section 10.2 Assignment by a Limited Partner.
(a) Assignment by and Substitution of a Limited Partner. A
Limited Partner may sell and assign such Limited Partner's entire
Partnership Interest, may propose to such Limited Partner's prospective
Assignee admission as a Substitute Limited Partner and may withdraw
from the Partnership if all of the following conditions precedent
thereto have been satisfied: (i) the assignor and the Managing General
Partner shall each have consented to the Assignee's admission as a
Substitute Limited Partner, which consent either the assignor or the
Managing General Partner in its complete and sole discretion, with or
without cause, may withhold; and (ii) the assignor and Assignee shall
have satisfied the requirements of and restrictions on transfer set
forth in Section 10.3 to the extent they are applicable.
(b) Assignment of Allocations and Distributions Only.
(1) A Limited Partner, in compliance with the
requirements of and restrictions on transfer set forth in
Section 10.3, may sell, assign, pledge, hypothecate, grant a
security interest in or otherwise transfer all or a portion of
such Limited Partners' right to receive allocations and
distributions from the Partnership without the consent of any
other Partner; but the Assignee thereof (who does not become a
Substitute Limited Partner as provided in Section 10.2(a))
shall not have any rights under this Agreement (including no
right to receive any information or accounting of the affairs
of the Partnership, to inspect the books or records of the
Partnership or to vote or consent), other than the right to
receive allocations and distributions or a portion thereof
which, but for the assignment, would have been made to the
assignor.
(2) An heir, legatee, executor, administrator,
guardian or other legal representative or
successor-in-interest of an individual Limited Partner who has
died or has been adjudicated to be incompetent, or a receiver,
trustee, conservator or other legal representative or
successor-in-interest of a Limited Partner which is an entity,
shall be deemed to be and shall have only the rights of an
Assignee of such Limited Partner as provided in Section
10.2(b)(1) (except to the extent otherwise provided, in the
case of a legal representative of an individual Limited
Partner who has died, by the Tennessee Act).
(3) Notwithstanding Section 10.2(a) or (b), a Limited
Partner shall not sell, assign, pledge, hypothecate, grant a
security interest in or otherwise transfer (other than
involuntarily by operation of law) less than such Limited
Partner's entire Partnership Interest without the consent of
the Managing General Partner, which consent may be withheld
for any reason or no reason.
Section 10.3 Requirements and Restrictions on Transfer.
(a) Requirements of Transfer. No assignment or other transfer
of the Partnership Interest of a Partner shall be valid or effective as
respects the Partnership unless and until each of the following
conditions precedent thereto has been satisfied: (i) any required
consents to the assignment as specified in Sections 10.1(b) or
10.2(b)(3) have been obtained; (ii) all conditions specified in this
Section 10.3 have been satisfied; (iii) an instrument of assignment or
other transfer, which is in form and substance satisfactory to the
Managing General Partner, has been signed by the assignor, accepted by
the Assignee and delivered to the Partnership, in care of the Managing
General Partner; (iv) such Assignee has agreed in such instrument or in
another written instrument delivered to the Partnership that, upon the
granting of written confirmation of the required consents to his or its
admission as a substitute Partner, such Assignee shall become a party
to and be bound by this Agreement and any other agreement or instrument
which may be applicable; (v) a certificate of amendment of the
Certificate of Limited Partnership and such other instruments as are
required by the Tennessee Act and the Managing General Partner shall
have executed, delivered and filed for record to evidence the
assignment and its validity; and (vi) the assignor or the Assignee
shall have paid all reasonable expenses (including attorneys' fees) as
determined by the Managing General Partner, which are or will be
incurred by the Partnership in connection with the assignment or other
transfer.
(b) Restrictions on Transfer Which May Result in Termination
for Tax Purposes. A Partnership Interest, or any part thereof or
interest therein, shall not be sold, assigned or otherwise transferred
at any time, if and to the extent that any such sale, assignment or
other transfer would, in the Opinion of Counsel to the Partnership,
result in the termination of the Partnership for federal income tax
purposes.
(c) Restrictions on Transfer Imposed by Securities Laws. The
Units have not been registered under the Securities Act of 1933, as
amended, or under the securities laws of any state or other
jurisdiction but have been offered and sold pursuant to and in reliance
upon exemptions from registration thereunder. As a consequence of the
restrictions on subsequent transfer imposed by these exemptions, the
Units shall not subsequently be sold, assigned, conveyed, pledged,
hypothecated or otherwise transferred by a holder thereof except,
pursuant to an effective registration statement registering the Units
under the Securities Act and/or applicable state securities laws, or
pursuant to an opinion of counsel, which has been obtained by such
holder and which is in all respects satisfactory to the Managing
General Partner, that such registration under the Act and/or applicable
state securities laws is not required for such holder to lawfully
affect such subsequent sale, assignment, conveyance, pledge,
hypothecation or other transfer.
(d) Notification of Transfer Required by the Code. Any Partner
who proposes to transfer a Partnership Interest, or part thereof or
interest therein, shall, within thirty (30) days of the proposed
effective date of the proposed transfer, whichever is earlier, provide
the Managing General Partner with the information required under Code
ss.ss. 6050K and 6112 and the Treasury Regulations promulgated
thereunder.
(e) Reservation of Right to Refuse to Register Transfer. The
Managing General Partner reserves and shall have the right to refuse to
accept or reject the assignment or other transfer of any Partnership
Interest, or any part thereof or any interest therein, unless and until
the conditions specified in this Section 10.3 have been satisfied.
(f) Effect on an Invalid Transfer. Any attempted or purported
sale, assignment, conveyance, pledge, hypothecation or other transfer
which is in contravention of the restrictions on transfer specified in
this Section 10.3 shall be invalid, ineffective and a fraud against the
Partnership and the other Partners. The purported transferor and
transferee, by their respective purported transfer or purported
acceptance thereof, severally agree to indemnify and hold harmless the
Partnership and the other Partners for any claim, loss or damage which
may accrue by reason of such purported transfer. If such claim, loss or
damage accruing by reason of the purported transfer is incapable of
being ascertained accurately, then any consideration paid in connection
with such purported transfer shall be transferred and paid over to the
Partnership as its liquidated damages.
Section 10.4 Citizenship Certificates; Non-citizen Assignees.
(a) If the Partnership or the Operating Partnership is or
becomes subject to any federal, state or local law or regulation that,
in the reasonable determination of the Managing General Partner,
provides for the cancellation or forfeiture of any property in which
the Partnership or the Operating Partnership has an interest based on
the nationality, citizenship or other related status of a Limited
Partner or Assignee, the Managing General Partner may request any
Limited Partner or Assignee to furnish to the Managing General Partner,
within 30 days after receipt of such request, an executed Citizenship
Certification or such other information concerning his nationality,
citizenship or other related status (or, if the Limited Partner or
Assignee is a nominee holding for the account of another Person, the
nationality, citizenship or other related status of such Person) as the
Managing General Partner may request. If a Limited Partner or Assignee
fails to furnish to the Managing General Partner within the
aforementioned 30-day period such Citizenship Certification or other
requested information or if upon receipt of such Citizenship
Certification or other requested information the Managing General
Partner determines, with the advice of counsel, that a Limited Partner
or Assignee is not an Eligible Citizen, the Units owned by such Limited
Partner or Assignee shall be subject to redemption in accordance with
the provisions of Section 10.5. In addition, the Managing General
Partner may require that the status of any such Limited Partner or
Assignee be changed to that of a Non-citizen Assignee, and, thereupon,
the Managing General Partner shall be substituted for such Non-citizen
Assignee as the Limited Partner in respect of his Units.
(b) The Managing General Partner shall, in exercising voting
rights in respect of Units held by it on behalf of Non-citizen
Assignees, distribute the votes in the same ratios as the votes of
Limited Partners in respect of Units other than those of Non-citizen
Assignees are cast, either for, against or abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen
Assignee shall have no right to receive a distribution in kind pursuant
to Section 12.4 but shall be entitled to the cash equivalent thereof,
and the Managing General Partner shall provide cash in exchange for an
assignment of the Non-citizen Assignee's share of the distribution in
kind. Such payment and assignment shall be treated for Partnership
purposes as a purchase by the Managing General Partner from the
Non-citizen Assignee of his Partnership Interest (representing his
right to receive his share of such distribution in kind).
(d) At any time after he can and does certify that he has
become an Eligible Citizen, a Non-citizen Assignee may, upon
application to the Managing General Partner, request admission as a
Substituted Limited Partner with respect to any Units of such
Non-citizen Assignee not redeemed pursuant to Section 10.5, and upon
his admission pursuant to Section 10.2 the Managing General Partner
shall cease to be deemed to be the Limited Partner in respect of the
Non-citizen Assignee's Units.
<PAGE>
Section 10.5 Redemption of Units Relating to Citizenship.
(a) If at any time a Limited Partner or Assignee fails to
furnish a Citizenship Certification or other information requested
within the 30-day period specified in Section 10.4(a), or if upon
receipt of such Citizenship Certification or other information the
Managing General Partner determines, with the advice of counsel, that a
Limited Partner or Assignee is not an Eligible Citizen, the Partnership
may, unless the Limited Partner or Assignee establishes to the
satisfaction of the Managing General Partner that such Limited Partner
or Assignee is an Eligible Citizen or has transferred his Units to a
Person who furnishes a Citizenship Certification to the Managing
General Partner prior to the date fixed for redemption as provided
below, redeem the Partnership Interest of such Limited Partner or
Assignee as follows:
(i) The Managing General Partner shall, not later
than the 30th day before the date fixed for redemption, give
notice of redemption to the Limited Partner or Assignee, at
his last address designated on the records of the Partnership,
by registered or certified mail, postage prepaid. The notice
shall be deemed to have been given when so mailed. The notice
shall specify the Redeemable Units, the date fixed for
redemption, the place of payment, that payment of the
redemption price will be made upon delivery of an assignment
instrument evidencing the Redeemable Units, and that on and
after the date fixed for redemption no further allocations or
distributions to which the Limited Partner or Assignee would
otherwise be entitled in respect of the Redeemable Units will
accrue or be made.
(ii) The aggregate redemption price for Redeemable
Units shall be an amount equal to the aggregate subscription
price for such Units less (A) Marketing Compensation, (B)
allocable Organization and Offering Expenses less (C)
aggregate cash distributions received to date with respect to
such Units, and (D) the Managing General Partner's
administrative and legal costs in connection with the
redemption. The redemption price shall be paid, in the sole
discretion of the Managing General Partner, in cash or by
delivery of a promissory note of the Partnership in the
principal amount of the redemption price, bearing interest at
the rate of 10% annually and payable in three equal annual
installments of principal together with accrued interest,
commencing one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited
Partner or Assignee, at the place specified in the notice of
redemption, of the Certificate evidencing the Redeemable
Units, duly endorsed in blank or accompanied by an assignment
duly executed in blank, the Limited Partner or Assignee or his
duly authorized representative shall be entitled to receive
the payment therefor.
(b) The provisions of this Section 10.5 shall also be
applicable to Units held by a Limited Partner or Assignee as nominee of
a Person determined to be other than an Eligible Citizen.
(c) Nothing in this Section 10.5 shall prevent the recipient
of a notice of redemption from transferring his Units before the
redemption date if such transfer is otherwise permitted under this
Agreement. Upon receipt of notice of such a transfer, the Managing
General Partner shall withdraw the notice of redemption, provided the
transferee of such Units certifies that he is an Eligible Citizen. If
the transferee fails to make such certification, such redemption shall
be effected from the transferee on the original redemption date.
<PAGE>
Section 10.6 Limited Right of Presentment.
(a) Notice and Presentment. On or before September 30 of any
year during the Presentment Term, any Limited Partner may provide by
certified mail, return receipt requested, written notice of intent to
present such Limited Partner's Units for purchase by the Managing
General Partner. Any Limited Partner electing to present Units for
purchase pursuant to this Section 10.6 must present all Units held.
(b) Obligation to Purchase. Subject to the conditions of
Section 10.6(c), the Managing General Partner shall purchase in each
year during the Presentment Term no less than three (3) Units presented
for purchase pursuant to Section 10.6(a). To the extent that more than
three (3) Units are properly presented for purchase, the Managing
General Partner shall purchase the Units presented on a first come,
first served basis, determined by when the notice of presentment was
received. In its sole discretion, the Managing General Partner may
purchase more than three (3) Units presented for purchase.
(c) Conditions to Purchase. The Managing General Partner's
obligation or right to purchase any Units presented shall be subject to
the Managing General Partner receiving an Opinion of Counsel that the
purchase of Units will not result in a termination of the Partnership
under Code ss. 708, or cause the Partnership to be classified as a
"publicly traded partnership" for purposes of Code ss.ss. 469 and 7704.
Any purchase of Units pursuant to this Section 10.6 by the Managing
General Partner shall be for investment purposes and not with a view of
resale or distribution.
(d) Unit Repurchase Price. The purchase price for purposes of
the Limited Right of Presentment shall be 100% of the original
subscription price for the Unit (reduced proportionately for fractional
interests) less all cash distributions made by the Partnership with
respect to the Unit purchased, payable in cash or cash equivalent no
later than December 31 of the year the Units are presented.
(e) Liquidation. The obligation of the Managing General
Partner to purchase any Units pursuant to this Limited Right of
Presentment in any calendar year shall be cancelled in the event the
Partnership dissolves or is liquidated in such calendar year.
Section 10.7 Repurchase of Units in Certain Circumstances. In the event
any representation, warranty or covenant made by a Limited Partner in the
Subscription Agreement is or shall become untrue, or if a Limited Partner is or
shall become unqualified to hold interests in federal or other oil and gas
leases, the Limited Partner must immediately notify the Managing General Partner
in writing, and the Managing General Partner shall have the right, but not the
obligation, to purchase or cause to be purchased, all or any part of such
Limited Partner's Units in the Partnership at an amount equal to the aggregate
subscription price for such Units less (A) Marketing Compensation, (B) allocable
Organization and Offering Expenses less (C) aggregate cash distributions
received to date with respect to such Units, and (D) the Managing General
Partner's administrative and legal costs in connection with the repurchase. The
repurchase price shall be paid, in the sole discretion of the Managing General
Partner, in cash or by delivery of a promissory note of the Partnership in the
principal amount of the repurchase price, bearing interest at the rate of 10%
annually and payable in three equal annual installments of principal together
with accrued interest, commencing one year after the repurchase date.
<PAGE>
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
Section 11.1 Withdrawal of the Managing General Partner.
(a) The Managing General Partner shall be deemed to have
withdrawn from the Partnership upon the occurrence of any one of the
following events (each such event herein referred to as an "Event of
Withdrawal");
(i) the Managing General Partner voluntarily withdraws
from the Partnership by giving written notice to the other
Partners (and it shall be deemed that the Managing General
Partner has withdrawn pursuant to this Section 11.1(a)(i) if
the Managing General Partner voluntarily withdraws as
general partner of the Operating Partnership);
(ii) the Managing General Partner transfers all of its
rights as Managing General Partner pursuant to Sections
10.1(a)(i) or 10.1(a)(iii);
(iii) the Managing General Partner is removed pursuant
to Section 11.2;
(iv) the Managing General Partner (A) makes a general
assignment for the benefit of creditors; (B) files a
voluntary Bankruptcy petition; (C) files a petition or
answer seeking for itself a reorganization, arrangement,
composition, readjustment, liquidation, dissolution or
similar relief under any law; (D) files an answer or other
pleading admitting or failing to contest the material
allegations of a petition filed against the Managing General
Partner in a proceeding of the type described in clauses
(A)-(C) of this Section 11.1(a)(iv); or (E) seeks, consents
to or acquiesces in the appointment of a trustee, receiver
or liquidator of the Managing General Partner or of all or
any substantial part of its properties;
(v) a final and non-appealable judgment is entered by
a court with appropriate jurisdiction ruling that the Managing
General Partner is Bankrupt or insolvent, or a final and
non-appealable order for relief is entered by a court with
appropriate jurisdiction against the Managing General Partner,
in each case under any federal or state Bankruptcy or
insolvency laws as are now or hereafter in effect; or
(vi) a certificate of dissolution or its equivalent
is filed for the Managing General Partner, or 90 days expire
after the date of notice to the Managing General Partner of
revocation of its charter without a reinstatement of its
charter, under the laws of its state of incorporation.
If an Event of Withdrawal specified in Section 11.1(a)(iv),
(v) or (vi) occurs, the withdrawing Managing General Partner shall give
notice to the Limited Partners within 30 days after such occurrence.
The Partners hereby agree that only the Events of Withdrawal described
in this Section 11.1 shall result in the withdrawal of the Managing
General Partner from the Partnership.
(b) Withdrawal of the Managing General Partner from the
Partnership upon the occurrence of an Event of Withdrawal shall
constitute a breach of this Agreement except under the following
circumstances: (i) the Managing General Partner voluntarily withdraws
by giving at least 90 days' advance notice of its intention to withdraw
to the Limited Partners, provided that, prior to the effective date of
such withdrawal, the withdrawal is approved by a Majority In Interest
of the Limited Partners (excluding for purposes of such determination
Units owned by the Managing General Partner and its Affiliates) and the
Managing General Partner delivers to the Partnership an Opinion of
Counsel ("Withdrawal Opinion of Counsel") that such withdrawal
(following the selection of the successor Managing General Partner)
would not result in the loss of the limited liability of any Limited
Partner or of the limited partner of the Operating Partnership or cause
the Partnership or the Operating Partnership to be treated as an
association taxable as a corporation or otherwise to be taxed as an
entity for federal income tax purposes or (ii) at any time that the
Managing General Partner ceases to be a Managing General Partner
pursuant to Section 11.1(a)(ii) or is removed pursuant to Section 11.2.
If the Managing General Partner gives a notice of withdrawal pursuant
to Section 11.1(a)(i), a Majority In Interest of the Limited Partners
(excluding for purposes of such determination Units owned by the
Managing General Partner and its Affiliates) may, prior to the
effective date of such withdrawal, elect a successor Managing General
Partner. If, prior to the effective date of the Managing General
Partner's withdrawal, a successor is not selected by the Limited
Partners as provided herein or the Partnership does not receive a
Withdrawal Opinion of Counsel, the Partnership shall be dissolved in
accordance with Section 12.1. Any such successor Managing General
Partner shall be subject to the provisions of Section 11.3.
Section 11.2 Removal of the Managing General Partner. The Managing
General Partner may be removed if such removal is for Cause and is approved by a
Majority In Interest of the Limited Partners (excluding for purposes of such
determination Units owned by the Managing General Partner and its Affiliates).
Any such action by such Limited Partners for removal of the Managing General
Partner must also provide for the election and succession of a new Managing
General Partner. Such removal shall be effective immediately following the
admission of the successor Managing General Partner. The right of the Limited
Partners to remove the Managing General Partner shall not exist or be exercised
unless the Partnership has received an opinion opining as to the matters covered
by a Withdrawal Opinion of Counsel.
Section 11.3 Interest of Departing Partner and Successor Managing
General Partner. In the event of withdrawal of the Managing General Partner
under circumstances where such withdrawal does not violate this Agreement, the
Departing Partner shall, at its option exercisable prior to the effective date
of the departure of such Departing Partner, promptly receive from its successor
in exchange for its Partnership Interest as Managing General Partner an amount
in cash equal to the fair market value, as determined by an independent expert,
of the Departing Partner's Partnership Interest as Managing General Partner,
such amount to be determined and payable as of the effective date of its
departure. If the Managing General Partner is removed by the Limited Partners
under circumstances where Cause exists or if the Managing General Partner
withdraws under circumstances where such withdrawal violates this Agreement or
the Operating Partnership Agreement, its successor or the Partnership shall
purchase the Departing Partner's Partnership Interest for 80% of appraised
value, as determined by an independent expert, payable in equal installments
over three (3) years with interest on any unpaid balance at 8% per annum.
Subject to Section 12.3(b), the Departing Partner shall, as of the effective
date of its departure, cease to share in any allocations or distributions with
respect to its Partnership Interest as the Managing General Partner, and
Partnership income, gain, loss, deduction and credit will be prorated and
allocated as set forth in Section 5.3(g).
Section 11.4 Withdrawal of Limited Partners. No Limited Partner shall
have any right to withdraw from the Partnership; provided, however, that when an
Assignee of a Limited Partner's Units becomes a Record Holder, such transferring
Limited Partner shall cease to be a Limited Partner with respect to the Units so
transferred.
ARTICLE XII
DISSOLUTION AND LIQUIDATION
Section 12.1 Dissolution. The Partnership shall not be dissolved by the
admission of Substituted Limited Partners or by the admission of a successor
Managing General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the Managing General Partner, any successor
Managing General Partner shall continue the business of the Partnership. The
Partnership shall dissolve, and (subject to Section 12.2) its affairs should be
wound up, upon:
(a) December 31, 2007.
(b) an Event of Withdrawal of the Managing General Partner as
provided in Section 11.1 (other than Section 11.1(a)(ii), unless a
successor is elected and an Opinion of Counsel is received as provided
in Section 11.1(b) or 11.2 and such successor is admitted to the
Partnership pursuant to Section 10.3);
(c) an election to dissolve the Partnership by the Managing
General Partner that is approved by at least a Majority In Interest of
the Limited Partners thereafter (and all Limited Partners hereby
expressly consent that such approval may be effected upon written
consent of a Majority In Interest of the Limited Partners);
(d) entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Tennessee Act;
(e) the sale of all or substantially all of the assets and
properties of the Partnership or the Operating Partnership; or
(f) the occurrence of any event causing dissolution under the
Tennessee Act.
Section 12.2 Continuation of the Business of the Partnership after
Dissolution. Upon (I) dissolution of the Partnership caused by the withdrawal or
removal of the Managing General Partner and following a failure of all Partners,
within 90 days after the withdrawal or removal of the Managing General Partner,
to agree to continue the business of the Partnership and appoint a successor
Managing General Partner as provided in Section 11.1 or 11.2, then within an
additional 90 days or (II) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or
(vi), then within 180 days thereafter, a Majority In Interest of the Limited
Partners may elect to reconstitute the Partnership and continue its business on
the same terms and conditions set forth in this Agreement by forming a new
limited partnership on terms identical to those set forth in this Agreement and
having as a general partner a Person approved by a Majority In Interest of the
Limited Partners. Upon any such election by a Majority In Interest by the
Limited Partners, all Partners shall be bound thereby and shall be deemed to
have approved same. Unless such an election is made within the applicable time
period as set forth above, the Partnership shall conduct only activities
necessary to wind up its affairs. If such an election is so made, then:
(i) the reconstituted Partnership shall continue
until the end of the term set forth in Section 1.6 unless
earlier dissolved in accordance with this Article XII;
(ii) if the successor Managing General Partner is not
the former Managing General Partner, then the interest of the
former Managing General Partner shall be treated thenceforth
as the interest of a Limited Partner;
(iii) all necessary steps shall be taken to cancel
this Agreement and the Certificate of Limited Partnership and
to enter into and, as necessary, to file a new partnership
agreement and certificate of limited partnership, and the
successor general partner may for this purpose exercise the
powers of attorney granted the Managing General Partner
pursuant to Section 15.1; provided that the right of a
Majority In Interest of the Limited Partners to approve a
successor Managing General Partner and to reconstitute and to
continue the business of the Partnership shall not exist and
may not be exercised unless the Partnership has received an
Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited
Partner and (y) neither the Partnership, the reconstituted
limited partnership nor the Operating Partnership would be
treated as an association taxable as a corporation or
otherwise be taxable as an entity for federal income tax
purposes upon the exercise of such right to continue.
Section 12.3 Liquidation. Upon dissolution of the Partnership, unless
the Partnership is continued under an election to reconstitute and continue the
Partnership pursuant to Section 12.2, the Managing General Partner, or in the
event the Managing General Partner has been dissolved or removed, become
Bankrupt as set forth in Section 11.1, or withdrawn from the Partnership, a
liquidator or liquidating committee approved by a Majority In Interest of the
Limited Partners, shall be the Liquidator. The Liquidator (if other than the
Managing General Partner) shall be entitled to receive such compensation for its
services as may be approved by a Majority In Interest of the Limited Partners.
The Liquidator shall agree not to resign at any time without 15 days' prior
notice and (if other than the Managing General Partner) may be removed at any
time, with or without cause, by notice of removal approved by a Majority In
Interest of the Limited Partners. Upon dissolution, removal or resignation of
the Liquidator, a successor and substitute Liquidator (who shall have and
succeed to all rights, powers and duties of the original Liquidator) shall
within 30 days thereafter be approved by a Majority In Interest of the Limited
Partners. The right to approve a successor or substitute Liquidator in the
manner provided herein shall be deemed to refer also to any such successor or
substitute Liquidator approved in the manner herein provided. Except as
expressly provided in this Article XII, the Liquidator approved in the manner
provided herein shall have and may exercise, without further authorization or
consent of any of the parties hereto, all of the powers conferred upon the
Managing General Partner under the terms of this Agreement, but subject to all
of the applicable limitations, contractual and otherwise, upon the exercise of
such powers, other than the limitation on sale set forth in Section 6.3(b) to
the extent necessary or desirable in the good faith judgment of the Liquidator
to carry out the duties and functions of the Liquidator hereunder for and during
such period of time as shall be reasonably required in the good faith judgment
of the Liquidator to complete the winding-up and liquidation of the Partnership
as provided for herein. The Liquidator shall liquidate the assets of the
Partnership, and apply and distribute the proceeds of such liquidation in the
following order of priority, unless otherwise required by mandatory provisions
of applicable law:
(a) First, to pay expenses of liquidation;
(b) Second, to pay Partnership debts, liabilities and obligations
to third parties;
(c) Third, to establish reserves for contingent or unforeseen
debts, liabilities or obligations;
(d) Fourth, to repay debts, liabilities or obligations to
Partners or former Partners;
(e) Fifth, to the Net Income Limited Partners to the extent the
Partnership received any distributions from the Operating Partnership
with respect to Accrued and Unpaid Priority Returns, in the amount so
received by the Partnership.
(e) Sixth, to the Partners in proportion to their relative
Capital Contributions.
Section 12.4 Distributions in Kind. Notwithstanding the provisions of
Section 12.3, which require the liquidation of the assets of the Partnership,
but subject to the order of priorities set forth therein, if prior to or upon
dissolution of the Partnership the Liquidator determines that an immediate sale
of part or all of the Partnership's assets would be impractical or would cause
undue loss to the Partners, the Liquidator may, in its absolute discretion,
defer for a reasonable time the liquidation of any assets except those necessary
to satisfy liabilities of the Partnership (including, without limitation, those
to Partners as creditors) and/or distribute to the Partners or to specific
classes of Partners, in lieu of cash, as tenants in common and in accordance
with the provisions of Section 12.3, undivided interests in such Partnership
assets as the Liquidator deems not suitable for liquidation. Any such
distributions in kind shall be made only if, in the good faith judgment of the
Liquidator, such distributions in kind are in the best interest of the Limited
Partners, and shall be subject to such conditions relating to the disposition
and management of such properties as the Liquidator deems reasonable and
equitable and to any agreements governing the operation of such properties at
such time. The Liquidator shall determine the fair market value of any property
distributed in kind using such reasonable method of valuation as it may adopt.
Section 12.5 Cancellation of Certificate of Limited Partnership. Upon
the completion of the distribution of Partnership cash and property as provided
in Sections 12.3 and 12.4, the Partnership shall be terminated and the
Certificate of Limited Partnership and all qualifications of the Partnership as
a foreign limited partnership in jurisdictions other than the State of Tennessee
shall be cancelled and such other actions as may be necessary to terminate the
Partnership shall be taken.
Section 12.6 Reasonable Time for Winding Up. A reasonable time shall be
allowed for the orderly winding up of business and affairs of the Partnership
and the liquidation of its assets pursuant to Section 12.3 in order to minimize
any losses otherwise attendant upon such winding up, and the provisions of this
Agreement shall remain in effect between the Partners during the period of
liquidation.
Section 12.7 Return of Capital. The Managing General Partner shall not
be personally liable for, and shall have no obligation to contribute or loan any
monies or property to the Partnership to enable it to effectuate, the return of
the Capital Contributions of the Limited Partners, or any portion thereof, it
being expressly understood that any such return shall be made solely from
Partnership assets.
Section 12.8 No Capital Account Restoration. No Partner shall have any
obligation to restore any negative balance in its Capital Account upon
liquidation of the Partnership.
Section 12.9 Waiver of Partition. Each Partner hereby waives any right to
partition of the Partnership property.
<PAGE>
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
Section 13.1 Amendment to be Adopted Solely by the Managing General
Partner. Each Limited Partner agrees that the Managing General Partner (pursuant
to its powers of attorney from the Limited Partners and Assignees), without the
approval of any Limited Partner or Assignee, may amend any provision of this
Agreement, and execute, swear to, acknowledge, deliver, file and record whatever
documents may be required in connection therewith to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent
of the Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the Managing General
Partner, is reasonable and necessary or appropriate to qualify or
continue the qualification of the Partnership as a limited partnership
or a partnership in which the limited partners have limited liability
under the laws of any state or that is necessary or advisable in the
opinion of the Managing General Partner to ensure that the Partnership
will not be treated as an association taxable as a corporation or
otherwise taxed as an entity for federal income tax purposes;
(d) a change (i) that, in the sole discretion of the Managing
General Partner, does not adversely affect the Limited Partners in any
material respect, (ii) that is necessary or desirable to satisfy any
requirements, conditions or guidelines contained in any opinion,
directive, order, ruling or regulation of any federal or state agency
or judicial authority or contained in any federal or state statute
(including, without limitation, the Tennessee Act) or (iii) that is
required to effect the intent of the provisions of this Agreement or
is otherwise contemplated by this Agreement;
(e) an amendment that is necessary, in the Opinion of Counsel, to
prevent the Partnership or the Managing General Partner or its
directors or officers from in any manner being subjected to the
provisions of the Investment Company Act of 1940, as amended, the
Investment Advisors Act of 1940, as amended, or "plan asset"
regulations adopted under the Employee Retirement Income Security Act
of 1974, as amended, whether or not substantially similar to plan
asset regulations currently applied or proposed by the United States
Department of Labor;
(f) any amendment expressly permitted in this Agreement to be
made by the Managing General Partner acting alone;
(g) an amendment effected, necessitated or contemplated by a
Merger Agreement approved in accordance with Section 14.2; or
(h) any other amendments substantially similar to the foregoing.
Section 13.2 Amendment Procedures. Except as provided in Sections 13.1
and 13.3, all amendments to this Agreement shall be made in accordance with the
following requirements. Amendments to this Agreement may be proposed only by or
with the consent of the Managing General Partner. Each such proposal shall
contain the text of the proposed amendment. If an amendment if proposed, the
Managing General Partner shall seek the written approval of the requisite
percentage of Limited Partners or call a meeting of the Limited Partners to
consider and vote on such proposed amendment. A proposed amendment shall be
effective upon its approval by a Majority In Interest of the Limited Partners
unless a greater or different percentage is required under this Agreement. The
Managing General Partner shall notify all Limited Partners upon final adoption
of any proposed amendment.
Section 13.3 Amendment Requirements.
(a) Notwithstanding the provisions of Sections 13.1 and 13.2,
no provision of this Agreement that establishes a percentage interest
of Limited Partners required to take any action shall be amended,
altered, changed, repealed or rescinded in any respect that would have
the effect of reducing such voting requirement unless such amendment is
approved by the written consent or the affirmative vote of the Limited
Partners whose aggregate Units constitute not less than the voting
requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 13.1 and 13.2,
no amendment to this Agreement may (i) enlarge the obligations of any
Limited Partner without its consent, (ii) enlarge the obligations of
the Managing General Partner without its consent, which may be given or
withheld in its sole discretion, (iii) modify the amounts
distributable, reimbursable or otherwise payable to the Managing
General Partner by the Partnership or the Operating Partnership, (iv)
change Section 12.1(a), (v) restrict in any way any action by or rights
of the Managing General Partner as set forth in this Agreement or (vi)
change the term of the Partnership or give any Person the right to
dissolve the Partnership.
(c) Notwithstanding any other provision of this Agreement,
except for amendments pursuant to Section 13.1, no amendments shall
become effective without the approval of a Majority In Interest of the
Limited Partners unless the Partnership obtains an Opinion of Counsel
to the effect that (a) such amendment will not cause the Partnership or
the Operating Partnership to be treated as an association taxable as a
corporation or otherwise taxable as an entity for federal income tax
purposes and (b) such amendment will not affect the limited liability
of any Limited Partner or any limited partner of the Operating
Partnership under applicable law.
Section 13.4 Meetings. All acts of Limited Partners to be taken
hereunder shall be taken in the manner provided in this Article XIII. Meetings
of the Limited Partners may be called by the Managing General Partner or by
Limited Partners owning 20% or more of the outstanding Units of the class for
which a meeting is proposed. Limited Partners shall call a meeting by delivering
to the Managing General Partner one or more requests in writing stating that the
signing Limited Partners wish to call a meeting and indicating the general or
specific purposes for which the meeting is to be called. Within 60 days after
receipt of such a call from Limited Partners or within such greater time as may
be reasonably necessary for the Partnership to comply with any statutes, rules,
regulations, or similar requirements governing the holder of a meeting or the
solicitation of proxies for use at such a meeting, the Managing General Partner
shall send a notice of the meeting to the Limited Partners. A meeting shall be
held at a time and place determined by the Managing General Partner on a date
not more than 60 days after the mailing of notice of the meeting. Limited
Partners shall not vote on matters that would cause the Limited Partners to be
deemed to be taking part in the management and control of the business and
affairs of the Partnership so as to jeopardize the Limited Partners' limited
liability under the Tennessee Act or the law of any other state in which the
Partnership is qualified to do business.
Section 13.5 Notice of a Meeting. Notice of a meeting called pursuant
to Section 13.4 shall be given to the Record Holders in writing by mail or other
means of written communication in accordance with Section 15.2. The notice shall
be deemed to have been given at the time when deposited in the mail or sent by
other means of written communication.
Section 13.6 Record Date. For purposes of determining the Limited
Partners entitled to notice of or to vote at a meeting of the Limited Partners
or to give approvals without a meeting as provided in Section 13.11, the
Managing General Partner may set a Record Date, which shall not be less than 10
nor more than 60 days before (a) the date of the meeting or (b) in the event
that approvals are sought without a meeting, the date by which Limited Partners
are requested in writing by the Managing General Partner to give such approvals.
Section 13.7 Adjournment. When a meeting is adjourned to another time
or place, notice need not be given of the adjourned meeting and a new Record
Date need not be fixed if the time and place thereof are announced at the
meeting at which the adjournment is taken, unless such adjournment shall be for
more than 45 days. At the adjourned meeting, the Partnership may transact any
business which might have been transacted at the original meeting. If the
adjournment is for more than 45 days or if a new Record Date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given in
accordance with this Article XIII.
Section 13.8 Waiver of Notice; Approval of Meeting; Approval of
Minutes. The transactions of any meeting of Limited Partners, however called and
noticed and whenever held, shall be as valid as if had at a meeting duly held
after regular call and notice, if a quorum is present either in person or by
proxy, and if, either before or after the meeting, each of the Limited Partners
entitled to vote, present in person or by proxy, signs a written waiver of
notice or an approval of the holding of the meeting or an approval of the
minutes thereof. All waivers and approvals shall be filed with the Partnership
records or made a part of the minutes of the meeting. Attendance of a Limited
Partner at a meeting shall constitute a waiver of notice of the meeting, except
when the Limited Partner does not approve, at the beginning of the meeting, of
the transaction of any business because the meeting is not lawfully called or
convened; and except that attendance at a meeting is not a waiver of any right
to disapprove the consideration of matters required to be included in the notice
of the meeting, but not so included, if the disapproval is expressly made at the
meeting.
Section 13.9 Quorum. A Majority In Interest of the Limited Partners of
the class for which a meeting has been called represented in person or by proxy
shall constitute a quorum at a meeting of Limited Partners of such class unless
any such action by the Limited Partners requires approval by holders of a
Majority In Interest of such Units, in which case the quorum shall be a majority
(excluding, in either case, outstanding Units owned by the Managing General
Partner and its Affiliates). At any meeting of the Limited Partners duly called
and held in accordance with this Agreement at which a quorum is present, the act
of Limited Partners holding Outstanding Units that in the aggregate represent a
Majority In Interest of the Limited Partners entitled to vote and be present in
person or by proxy at such meeting shall be deemed to constitute the act of all
Limited Partners, unless a greater or different percentage is required with
respect to such action under the provisions of this Agreement, in which case the
act of the Limited Partners holding Outstanding Units that in the aggregate
represent at least such greater or different percentage shall be required. The
Limited Partners present at a duly called or held meeting at which a quorum is
present may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Limited Partners to leave less than a quorum, if any action
taken (other than adjournment) is approved by the required percentage of the
Limited Partners specified in this Agreement. In the absence of a quorum, any
meeting of Limited Partners may be adjourned from time to time by the
affirmative vote of a Majority In Interest of the Limited Partners represented
either in person or by proxy, but no other business may be transacted, except as
provided in Section 13.7.
Section 13.10 Conduct of Meeting. The Managing General Partner shall
have full power and authority concerning the manner of conducting any meeting of
the Limited Partners or solicitation of approvals in writing including, without
limitation, the determination of Persons entitled to vote, the existence of a
quorum, the satisfaction of the requirements of Section 13.4, the conduct of
voting, the validity and effect of any proxies and the determination of any
controversies, votes or challenges arising in connection with or during the
meeting or voting. The Managing General Partner shall designate a Person to
serve as chairman of any meeting and shall further designate a Person to take
the minutes of any meeting, in either case including, without limitation, a
Partner or a director or officer of the Managing General Partner. All minutes
shall be kept with the records of the Partnership maintained by the Managing
General Partner. The Managing General Partner may make such other regulations
consistent with applicable law and this Agreement as it may deem advisable
concerning the conduct of any meeting of the Limited Partners or solicitation of
approvals in writing including, without limitation, regulations in regard to the
appointment of proxies, the appointment and duties of inspectors of votes and
approvals, the submission and examination of proxies and other evidence of the
right to vote, and the revocation of approvals in writing.
Section 13.11 Action Without a Meeting. Any action that may be taken at
a meeting of the Limited Partners may be taken without a meeting if an approval
in writing setting forth the action so taken is signed by Limited Partners
owning not less than the minimum percentage of the Outstanding Units that would
be necessary to authorize or take such action at a meeting at which all the
Limited Partners were present and voted. Prompt notice of the taking of action
without a meeting shall be given to the Limited Partners who have not approved
in writing. The Managing General Partner may specify that any written ballot
submitted to Limited Partners for the purpose of taking any action without a
meeting shall be returned to the Partnership within the time period, which shall
be not less than 20 days, specified by the Managing General Partner. If a ballot
returned to the Partnership does not vote all of the Units held by the Limited
Partner, the Partnership shall be deemed to have failed to receive a ballot for
the Units that were not voted. If approval of the taking of any action by the
Limited Partners is solicited by any Person other than by or on behalf of the
Managing General Partner, the written approvals shall have no force and effect
unless and until (a) they are deposited with the Partnership in care of the
Managing General Partner, (b) approvals sufficient to take the action proposed
are dated as of a date not more than 90 days prior to the date sufficient
approvals are deposited with the Partnership and (c) an Opinion of Counsel is
delivered to the Managing General Partner to the effect that the exercise of
such right and the action proposed to be taken with respect to any particular
matter (i) will not cause the Limited Partners to be deemed to be taking part in
the management and control of the business and affairs of the Partnership so as
to jeopardize the Limited Partners' limited liability, (ii) will not jeopardize
the status of the Partnership as a partnership under applicable tax laws and
regulations and (iii) is otherwise permissible under the state statutes then
governing the rights, duties and liabilities of the Partnership and the
Partners.
Section 13.12 Voting and Other Rights.
(a) Only those Limited Partners who are Record Holders of
Units on the Record Date set pursuant to Section 13.6 shall be entitled
to notice of, and to vote at, a meeting of Limited Partners or to act
with respect to matters as to which the Limited Partners have the right
to vote or to act.
(b) With respect to Units that are held for a Person's account
by another Person (such as a broker, dealer, bank, trust company or
clearing corporation, or an agent of any of the foregoing), in whose
name such Units are registered, such broker, dealer or other agent
shall, in exercising the voting rights in respect of such Units on any
matter, and unless the arrangement between such Persons provides
otherwise, vote such Units in favor of, and at the direction of, the
Person who is the beneficial owner, and the Partnership shall be
entitled to assume it is so acting without further inquiry. Each Unit
held by a Limited Partner eligible to vote shall have one (1) vote.
Fractional Units shall have fractional votes. For purposes of any vote
by Limited Partners under this Agreement, any Units held by the
Managing General Partner, or its Affiliates, shall be excluded in
determining the existence of a quorum or the requisite percentage in
interest of the Units necessary to carry the vote of Limited Partners.
After every vote of Limited Partners, the Managing General Partner
shall tally the vote and send written notice to the Limited Partners of
the results of the voting. The Managing General Partner shall keep
complete and accurate records of all votes of the Limited Partners.
ARTICLE XIV
MERGER
Section 14.1 Authority. The Partnership may merge or consolidate with
one or more corporations, business trusts or associations, real estate
investment trusts, common law trusts or unincorporated businesses, including,
without limitation, a general partnership or limited partnership, formed under
the laws of the State of Tennessee or any other state of the United States of
America, pursuant to a written agreement of merger or consolidation ("Merger
Agreement") in accordance with this Article.
Section 14.2 Procedure for Merger or Consolidation. Merger or
consolidation of the partnership pursuant to this Article requires the prior
approval of the Managing General Partner. If the Managing General Partner shall
determine, in the exercise of its sole discretion, to consent to the merger or
consolidation, the Managing General Partner shall approve the Merger Agreement,
which shall set forth:
(a) The names and jurisdictions of formation or organization of
each of the business entities proposing to merge or consolidate;
(b) The name and jurisdictions of formation or organization of
the business entity that is to survive the proposed merger or
consolidation (the "Surviving Business Entity");
(c) The terms and conditions of the proposed merger or
consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash,
property or general or limited partnership interests, rights,
securities or obligations of the Surviving Business Entity; and (i) if
any general or limited partnership interests, securities or rights of
any constituent business entity are not to be exchanged or converted
solely for, or into, cash, property or general or limited partnership
interests, rights, securities or obligations of the Surviving Business
Entity, the cash, property or general or limited partnership
interests, rights, securities or obligations of any limited
partnership, corporation, trust or other entity (other than the
Surviving Business Entity) which the holders of such general or
limited partnership interest are to receive in exchange for, or upon
conversion of, their securities or rights, and (ii) in the case of
securities represented by certificates, upon the surrender of such
certificates, which cash, property or general or limited partnership
interests, rights, securities or obligations of the Surviving Business
Entity or any limited partnership, corporation, trust or other entity
(other than the Surviving Business Entity), or evidences thereof, are
to be delivered;
(e) A statement of any changes in the constituent documents or
the adoption of new constituent documents (the articles or certificate
of incorporation, articles of trust, declaration of trust, certificate
or agreement of limited partnership or other similar charter or
governing document) of the Surviving Business Entity to be effected by
such merger or consolidation;
(f) The effective time of the merger, which may be the date of
the filing of the certificate of merger pursuant to Section 14.4 or a
later date specified in or determinable in accordance with the Merger
Agreement (provided that, if the effective time of the merger is to be
later than the date of the filing of the certificate of merger, it
shall be fixed no later than the time of the filing of the certificate
of merger and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the Managing
General Partner.
Section 14.3 Approval by Limited Partners of Merger or Consolidation.
(a) The Managing General Partner of the Partnership, upon its
approval of the Merger Agreement, shall direct that the Merger
Agreement be submitted to a vote of Limited Partners whether at a
meeting or by written consent, in either case in accordance with the
requirements of Article XIII. A copy or a summary of the Merger
Agreement shall be included in or enclosed with the notice of a meeting
or the written consent.
(b) The Merger Agreement shall be approved upon receiving the
affirmative vote or consent of at least two-thirds in interest of the
Limited Partners unless the Merger Agreement contains any provision
which, if contained in an amendment to this Agreement, the provisions
of this Agreement or the Tennessee Act would require the vote or
consent of a greater percentage of the Outstanding Units or of any
class of Limited Partners, in which case such greater percentage vote
or consent shall be required for approval of the Merger Agreement.
(c) After such approval by vote or consent of the Limited
Partners, and at any time prior to the filing of the certificate of
merger pursuant to Section 14.4, the merger or consolidation may be
abandoned pursuant to provisions therefor, if any, set forth in the
Merger Agreement.
Section 14.4 Certificate of Merger. Upon the required approval by the
Managing General Partner and the Limited Partners of a Merger Agreement, a
certificate of merger shall be executed and filed with the Secretary of State of
Tennessee in conformity with the requirements of the Tennessee Act.
Section 14.5 Effect of Merger.
(a) Upon the effective date of the certificate of merger:
(i) all of the rights, privileges and powers of each
of the business entities that has merged or consolidated, and
all property, real, personal and mixed, and all debts due to
any of those business entities and all other things and causes
of action belonging to each of those business entities shall
be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving
Business Entity to the extent they were of each constituent
business entity;
(ii) the title to any real property vested by deed or
otherwise in any of those constituent business entities shall
not revert and is not in any way impaired because of the
merger or consolidation;
(iii) all rights of creditors and all liens on or
security interest in property of any of those constituent
business entities shall be preserved unimpaired; and
(iv) all debts, liabilities and duties of those
constituent business entities shall attach to the Surviving
Business Entity, and may be enforced against it to the same
extent as if the debts, liabilities and duties had been
incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this
Article shall not be deemed to result in a transfer or assignment or
assets or liabilities from one entity to another having occurred.
Section 14.6 Protection for Limited Partners. Notwithstanding any other
provisions of this Article XIV, in connection with a proposed Merger, the
following shall apply:
(a) 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 the securities of a Surviving Business
Entity, the appraisal shall be filed with the Securities and Exchange
Commission and the state securities administrator of an applicable
state as an exhibit to the registration statement for the offering. 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 assuming an
orderly liquidation as of a date immediately prior to the announcement
of the proposed Merger transaction. The terms of the engagement of the
Independent Expert shall clearly state that the engagement is for the
benefit of the Partnership and the Limited Partners. A summary of the
independent appraisal, indicating all material assumptions underlying
the appraisal, shall be included in a report to the Limited Partners in
connection with a proposed Merger.
(b) In connection with a proposed Merger, Limited Partners who
vote "no" on the proposal shall be offered the choice of:
(i) accepting the securities of the Surviving Business
Entity offered in the proposed Merger;
(ii) remaining as Limited Partners 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 Limited
Partners' pro-rata share of the appraised value of the net assets
of the Partnership.
(c) The Partnership shall not participate in any proposed
Merger which, if approved, would result in the diminishment of any
Limited Partner's voting rights under the Surviving Business Entity's
chartering agreement. In no event shall the democracy rights of Limited
Partners in the Surviving Business Entity be less than those provided
for under this Agreement. If the Surviving Business Entity is a
corporation, the democracy rights of Limited Partners shall correspond
to the democracy rights provided for in this Agreement to the greatest
extent possible.
ARTICLE XV
GENERAL PROVISIONS
Section 15.1 Power of Attorney.
(a) Each Limited Partner makes, constitutes and appoints the
Managing General Partner and its authorized agent and successor, with
full power of substitution, the agent and attorney-in- fact for such
Limited Partner for all purposes relating to the Partnership and hereby
grants to said agent and attorney-in-fact full right, power and
authority, in such Limited Partner's name, place and stead, to make,
execute, sign, certify, acknowledge, verify, deliver, file and record
from time to time any writing, document, agreement, instrument or
certificate necessary or appropriate:
(i) To legally and validly establish or continue the
Partnership as a limited partnership under the laws of the State
of Tennessee;
(ii) To authorize the Partnership to transact business in
the State of Tennessee and the State of Ohio, or any other
jurisdiction;
(iii) To effectuate the provisions of this Agreement and to
carry on the business of the Partnership;
(iv) To authorize or effectuate the exercise of powers
granted to the Managing General Partner under this Agreement;
(v) To effectuate the admission to the Partnership of a
substitute Managing General Partner or a Substituted Limited
Partner;
(vi) To effectuate the dissolution, liquidation and
termination of the Partnership pursuant to the terms of this
Agreement.
(b) Notwithstanding the foregoing, the power of attorney so
granted shall not constitute a waiver of, or be used to avoid, the
rights of a Limited Partner under this Agreement or be used in any
manner inconsistent with the status of the Partnership or a limited
partnership or the limited liability of any Limited Partner.
(c) Each Limited Partner authorizes such attorney-in-fact to
take any further action which such attorney-in-fact shall consider
necessary or advisable to be done in and about the foregoing, including
the power to consent to items (i), (ii), (iii), (iv), (v) and (vi)
above, as fully as such Limited Partner might or could do if personally
present and hereby ratifies and confirms all that such attorney-in-fact
shall lawfully do or cause to be done by virtue hereof.
(d) The foregoing power of attorney is a durable and special
power of attorney coupled with an interest, is irrevocable and shall
survive the delivery of an assignment by a Limited Partner of the whole
or a portion of his interest in the Partnership, until the assignee
thereof becomes a substituted Limited Partner, and shall survive the
incompetency or incapacity of any Limited Partner.
Section 15.2 Addresses and Notices. Any notice, demand, request, report
or proxy materials required or permitted to be given or made to a Partner or
Assignee under this Agreement shall be in writing and shall be deemed given or
made when delivered in person or when sent by first class United States mail or
by other means of written communication to the Partner or Assignee at the
address described below. Any notice, payment or report to be given or made to a
Partner or Assignee hereunder shall be deemed conclusively to have been given or
made, and the obligation to give such notice or report or to make such payment
shall be deemed conclusively to have been fully satisfied, upon sending of such
notice, payment or report to the Record Holder of such Unit at his address as
shown on the records of the Partnership, regardless of any claim of any Person
who may have an interest in such Unit or the Partnership Interest of a Managing
General Partner by reason of any assignment or otherwise. An affidavit or
certificate of making of any notice, payment or report in accordance with the
provisions of this Section 15.2 executed by the Managing General Partner, or the
mailing organization shall be prima facie evidence of the giving or making of
such notice, payment or report. If any notice, payment or report addressed to a
Record Holder at the address of such Record Holder appearing on the books and
records of the Partnership is returned by the United States Post Office marked
to indicate that the United States Postal Service is unable to deliver it, such
notice, payment or report and any subsequent notices, payments and reports shall
be deemed to have been duly given or made without further mailing (until such
time as such Record Holder or another Person notifies the Partnership of a
change in his address) if they are available for the Partner or Assignee at the
principal office of the Partnership for a period of one year from the date of
the giving or making of such notice, payment or report to the other Partners and
Assignees. Any notice to the Partnership shall be deemed given if received by
the Managing General Partner at the principal office of the Partnership
designated pursuant to Section 1.4. The Managing General Partner may rely and
shall be protected in relying on any notice or other document from a Partner,
Assignee or other Person if believed by it to be genuine.
Section 15.3 References. Except as specifically provided otherwise,
references to "Articles" and "Sections" are to Articles and Sections of this
Agreement.
Section 15.4 Pronouns and Plurals. Whenever the context may require, any
pronoun used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa.
Section 15.5 Further Action. The parties shall execute and deliver all
documents, provide all information and take or refrain from taking action as may
be necessary or appropriate to achieve the purposes of this Agreement.
Section 15.6 Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their heirs, executors,
administrators, successors, legal representatives and permitted assigns.
Section 15.7 Integration. This Agreement constitutes the entire
agreement among the parties hereto pertaining to the subject matter hereof and
supersedes all prior agreements and understandings pertaining thereto.
Section 15.8 Creditors. None of the provisions of this Agreement shall be
for the benefit of, or shall be enforceable by, any creditor of the Partnership.
Section 15.9 Waiver. No failure by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon a breach thereof shall
constitute waiver of any such breach or any other covenant, duty, agreement or
condition.
Section 15.10 Counterparts. This Agreement may be executed in
counterparts, all of which together shall constitute an agreement binding on all
the parties hereto, notwithstanding that all such parties are not signatories to
the original or the same counterpart. Each party shall become bound by this
Agreement immediately upon affixing its signature hereto.
Section 15.11 Applicable Law. This Agreement shall be construed in
accordance with and governed by the laws of the State of Tennessee, without
regard to the principles of conflicts of law.
Section 15.12 Invalidity of Provisions. If any provision of this
Agreement is or becomes invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not be affected thereby.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
MANAGING GENERAL PARTNER:
ENERGY SEARCH INCORPORATED
By
/s/
Richard S. Cooper
Its
President
LIMITED PARTNERS:
All Limited
Partners now and
hereafter admitted
as limited
partners of the
Partnership,
pursuant to Powers
of Attorney now
and hereafter
executed in favor
of, and granted
and delivered to,
the Managing
General Partner.
By: ENERGY SEARCH INCORPORATED,
Managing General Partner, as
attorney-in-fact for all Limited Partners
pursuant to the Powers of Attorney granted
pursuant to Section 15.1.
By
/s/
Richard S. Cooper
Its President
GAS SERVICING AGREEMENT
THIS AGREEMENT made and entered into on the date specified with the
execution hereof by and between ENERGY SEARCH INCORPORATED, a Tennessee
corporation, acting as operator for the oil and gas wells described herein,
whose mailing address is Suite 200, 280 Fort Sanders West Boulevard, Knoxville,
Tennessee 37922, hereinafter called "Seller," and ESI PIPELINE OPERATING L.P., a
Tennessee limited partnership whose mailing address is Suite 200, 280 Fort
Sanders West Boulevard, Knoxville, Tennessee 37922, hereinafter called "Buyer";
RECITALS
WHEREAS, Seller has developed a supply of natural gas ("gas") from the
gas well(s) located on the tract(s) of land described on Exhibit A, attached
hereto and made a part hereof by reference;
WHEREAS, Seller is the owner of such gas or is the authorized agent for
the owner or owners of such gas and, as agent, has the authority to contract for
the sale of such gas;
WHEREAS, Seller desires to sell and agrees to sell for those owners for
which it is the authorized agent all of the natural gas produced from the gas
well(s) currently located on the leasehold(s) described on Exhibit A (referred
to as the "Well(s)"), and Buyer desires to purchase such gas; and
NOW THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the parties hereto agree as
follows:
AGREEMENT
1. Agreement. Subject to the terms of this Agreement, Seller does
hereby agree to sell to Buyer and Buyer does hereby agree to purchase, pursuant
to the terms described herein, during the continuing term of this Agreement, the
natural gas that is produced by Seller or its successors or assigns from the
Well(s). It is agreed that with the prior written consent of Buyer, Exhibit A,
attached hereto, may be amended from time to time for the purpose of adding an
additional well or wells which will be subject to this Agreement. Seller will
operate or cause to be operated the Well(s) in accordance with good oil and gas
field practices and will sell and deliver gas produced from the Well(s) and
leasehold(s) to Buyer at the designated delivery point(s) described on Exhibit
B. All costs and expenses of drilling, completing and operating the Well(s)
committed to this Agreement, of constructing and maintaining all facilities
required for delivery of natural gas to the delivery point(s), and any such
costs incurred in the future are the sole responsibility of Seller, it being
understood that Buyer's only obligation is to purchase gas as herein prescribed
at the delivery point(s) and to remit to Seller the amounts due for the volumes
of gas delivered.
2. Term. This Agreement shall become effective on the day of execution
by the parties hereto; and, subject to the other provisions hereof, delivery of
gas shall begin as soon thereafter as connections are made to the Buyer's
gathering system (the "Pipeline System") described on Exhibit B, attached hereto
and made a part hereof by reference. Subject to the provisions herein, this
Agreement shall continue in force for an original term of five (5) years and
from year to year thereafter for as long as gas is produced or capable of being
produced, unless either party gives written notice of termination at least sixty
(60) days in advance of any contract anniversary date of this Agreement. If at
any time there is a change in any law, rule or regulation or an administrative
or judicial interpretation of any present law, rule or regulation, which
requires Buyer to obtain any governmental certificate or authorization to buy
gas from Seller or sell gas, or which prevents or prohibits Buyer from selling
gas, this Agreement may be cancelled by Buyer, upon the giving of thirty (30)
days' advance written notice to Seller, which notice shall specify the grounds
for such cancellation.
3. Facilities. Seller shall provide, but Buyer shall construct, all
meters measuring gas delivered to the delivery point(s) from the Well(s) (the
"submeters") on a site to be provided by Seller at the delivery point(s)
described on Exhibit B. At the termination of this Agreement, all facilities and
equipment supplied by Buyer, including but not limited to meters, pipeline and
fitting, and the submeters provided by Seller shall remain or become the
property of Buyer. Buyer shall read or cause the submeters to be read and shall
calculate the deliveries and perform any other measuring service necessary in
connection with the measurement of said gas. Should either party challenge the
accuracy of the measuring device or devices used as submeters, Buyer shall
furnish a competent inspector to make an inspection of such metering device or
devices at which inspection a representative of Seller may be present. Any
errors found to exist shall be adjusted but shall not cover any period more than
90 days before the challenge as to accuracy. All measurement records shall be
retained by Buyer for two (2) years after date of delivery, during which time
they will be open to inspection by Seller or authorized parties at any and all
times during normal business hours. All gathering lines and fittings to connect
any Well(s) on said lands to the submeters shall be furnished, constructed and
promptly put into operation by Seller. All drips and devices that may be found
necessary to separate any fluids from the gas prior to delivery to Buyer, or gas
heaters of a design to be approved by Buyer to bring the gas delivered to the
proper temperature, shall be installed at Seller's cost and operated by Seller.
Seller shall also install a gate valve equal to the rock pressure of any Well(s)
to be located at the inlet side of any submeter. Buyer or a party designated by
Buyer shall have access to said drips, devices, heater and gate valves. Upon
notification of Seller, Buyer shall also have the right to operate the same, if
necessary, but without assuming any duty to do so.
4. Measurement.
(a) All volumes delivered by Seller to Buyer shall be in their
natural state, without the previous extraction of any valuable
substance or addition of any substance. The gas shall be commercially
free from air, dust, gum, gum-forming constituents, harmful or noxious
vapors, or other solid or liquid matter which might interfere with its
merchantability of cause injury to or interference with the proper
operation of Buyer's Pipeline System and other equipment. All gas shall
be measured by the submeters provided by Seller. It is anticipated that
gas purchased from Seller will be sold by Buyer to The East Ohio Gas
Company ("East Ohio") or to gas marketers or industrial end-user which
will require transportation through East Ohio facilities and through an
East Ohio master meter provided for Buyer's Pipeline System ("Master
Meter"). Therefore, the East Ohio rules, guidelines and policies, as
may be changed from time to time, shall define and set forth, among
other things, the units of measurement, measurement specifications,
quality, heating value, testing specifications, and delivery terms and
specification of the gas to be delivered to Buyer hereunder. All such
definitions, specifications, procedures and terms, and all other terms
and provisions of East Ohio relating to the delivery of gas are hereby
expressly incorporated herein by reference and shall be applicable to
and binding upon Seller and all natural gas sold by Seller to Buyer.
East Ohio's current specifications are attached hereto as Exhibit C.
The parties acknowledge, however, that Exhibit C may not include all of
East Ohio's specifications to be incorporated herein, and in the event
all such specifications are not included in Exhibit C or if such
specifications are superseded or modified by East Ohio, the parties
agree to be bound by same.
(b) Pursuant to any rights it may have, Buyer shall ask for
measuring checks to be made of the Master Meter if Seller requests that
Buyer have such checks made. In the event that Buyer is liable to pay
for the costs of such measuring checks, Seller shall reimburse Buyer
for such costs, or Buyer may offset these costs against proceeds due
Seller.
(c) All compressor fuel used by Buyer in the operation of its
Pipeline System shall be prorated between Seller and all others selling
or gathering gas on Buyer's Pipeline System. In addition, all line loss
and unaccounted-for gas experienced by Buyer in the operation of its
Pipeline System shall be prorated between all submeters on Buyer's
Pipeline System against the East Ohio Master Meter readings submitted
to Buyer monthly by East Ohio.
<PAGE>
5. Heating Value.
(a) It is recognized that East Ohio measures, purchases and
sells gas on a volumetric ("Mcf") basis rather than a thermal ("Btu")
basis. For this reason and for so long as East Ohio continues to sell
gas on the Mcf basis, the sales under this Agreement will be made on an
Mcf basis. The price described herein shall be determined by assuming
that the gas delivered hereunder has a 1,000 Btu per cubic foot heating
value, notwithstanding its actual heating value. In the event that East
Ohio changes its basis for industrial gas sales to a thermal basis, and
Buyer is able to sell gas on a thermal basis, the price for gas
delivered hereunder shall thereafter be determined by using the actual
Btu heating value credited to Buyer by East Ohio at the Master Meter.
(b) In the event that the total heating value of the gas
tendered for delivery hereunder falls below the equivalent of one
thousand (1,000) Btu per cubic foot, Buyer shall have the option (i) to
refuse to accept said gas so long as said heating value remains below
the equivalent of one thousand (1,000) Btu per cubic foot or (ii) to
continue to accept delivery of said gas, in which case a reduction
shall be made in the price Buyer would otherwise pay for gas delivered
hereunder during such months if the total heating value were the
equivalent of one thousand (1,000) Btu. Should the total heating value
of the gas tendered be less than the equivalent of one thousand (1,000)
Btu cubic foot, then the price shall be determined by multiplying the
price otherwise payable by a fraction, the numerator of which is the
actual equivalent Btu content of the gas per cubic foot and the
denominator of which is one thousand (1,000). Any such price adjustment
shall be reflected on the bill rendered for gas delivered during such
month.
6. Right to Enter. Seller grants unto Buyer and such party or parties
designated by Buyer the right of entry, use and occupation of the surface of
said lands covered by the leasehold(s) described on Exhibit A for the purpose of
implementing this Agreement.
7. Price.
(a) Buyer shall pay Seller, for gas delivered and sold to
Buyer, a price which is forty cents ($0.40) per Mcf (the "Base Spread")
below the price actually received by Buyer for the sale of such gas at
Buyer's delivery point into East Ohio; provided, however, that, on a
quarterly basis, within 30 days following the close of any calendar
quarter, the price for gas delivered and sold to Buyer shall be
adjusted upward (but in no case above seventy-five cents ($0.75) per
Mcf) or downward (but in no case lower than the Base Spread) in
percentage terms by the "Gas Price Adjustment Factor." The "Gas Price
Adjustment Factor" shall equal the product of (i) the percentage
increase (or decrease) in the "Weighted Average Gas Price" in any
calendar quarter from that of the calendar quarter immediately
preceding it, times (ii) 75%. The "Weighted Average Gas Price" shall
equal the weighted average price (net of all transportation, servicing
and severance fees and taxes) received by Buyer from the sale of all
natural gas sold through the Pipeline System at any time during the
preceding calendar quarter.
(b) Payment for all gas purchased will be made monthly to that
party designated by Seller and shown on Exhibit D, attached hereto and
made a part hereof by reference, not later than twenty (20) days after
Buyer receives payment from the purchaser of the gas.
8. Disposition of Gas. Seller agrees that it will not dispose of any of
the gas produced from the leasehold(s) subject hereto to any other company or
persons during the existence of this Agreement; it being understood, however,
that this covenant shall not interfere in any way with Seller's use of gas for
fuel in operating for oil and gas purposes or the disposition of free gas as
provided under the terms of any lease or right-of-way agreement.
9. Delivery Regulations. This Agreement is entered into with the
understanding that Buyer plans to deliver the gas delivered and sold pursuant
hereto primarily to East Ohio, gas marketers and/or industrial gas purchasers
pursuant to a natural gas "self-help" plan. Recognizing this, it is agreed that
Buyer may regulate its receipt of gas from the leasehold(s) subject hereto to
meet its contractual obligations with East Ohio, gas marketers and/or the
industrial gas purchasers. Buyer shall have the right to operate valves or other
apparatus of Seller or Buyer for the purpose of regulating the pressures and the
delivery volumes of gas from Seller's leasehold(s).
10. Force Majeure. If either party is rendered unable, wholly or in
part, by force majeure or any other cause of any kind not reasonably within its
or their control to perform or comply with any obligation or condition of this
Agreement, upon giving notice in writing and reasonably full particulars to the
other party, such obligation or condition shall be suspended during the
continuance of the inability so caused, and such party shall be relieved of
liability and shall suffer no prejudice for failure to perform the same during
such period; provided, however, Buyer's obligation to make payments for gas
accepted shall not be suspended. The force majeure condition shall be remedied
so far as practicable with reasonable dispatch. Settlement of strikes and
lockouts shall be wholly within the discretion of the party adversely affected
thereby. The term "force majeure" shall include, without limitation, the
following: acts of God and the public enemy, war, civil unrest, rebellion, fire,
casualties, blockades, freezing of wells or lines of pipe, failure of wells and
equipment, inability of Buyer after diligent effort to make reasonable
arrangements for selling natural gas from the Wells, vandalism, strikes and any
other industrial strife, interruption of civil or public service, inability to
obtain materials, contractors, suppliers, permits or labor and any laws, order,
rules, regulations, acts or restraints of any governmental authority, whether or
not lawfully made.
11. Title, Control, Ownership and Indemnity.
(a) Seller warrants the title to the gas hereby sold as and
when delivered, and in the event that Seller is acting as agent for
others in the sale of the gas sold hereby, Seller warrants that it is
fully authorized to deliver and sell such gas. Seller agrees to
indemnify and save harmless Buyer from all suits, claims, actions,
accounts, debts, damages, costs, losses, expenses and other liability
of any kind or type arising from or out of claims of any person or
party regarding the ownership of the gas sold hereunder or Seller's
authority to sell such gas. In the event that any adverse claim of any
type or a lien or other encumbrance is asserted concerning said gas,
Buyer may withhold payment for such gas until such adverse claim, lien
or encumbrance is released or has been finally determined by a court of
competent jurisdiction, or until Seller shall have furnished bond to
Buyer in an amount and with sureties satisfactory to Buyer to protect
and indemnify Buyer against such claim, lien or encumbrance. No sale or
other transfer by Seller of any title to, or interest in the gas hereby
sold or the payments therefor, shall be binding on Buyer unless and
until Buyer has been furnished evidence satisfactory to it of such
transfer or sale and the validity thereof. Buyer may withhold all
payments accruing hereunder for the interests so sold or transferred.
Should Seller elect to surrender, sell or otherwise dispose of any
Well(s) or lease, or parts thereof, included in this Agreement, Buyer
shall be given thirty (30) days' prior written notice of such
disposition or the expiration of the term of any lease included in this
Agreement and also of the termination of any of said lease(s) for any
other cause.
(b) Seller shall be deemed to be in control and possession of
the gas hereunder until it shall have been delivered to Buyer at the
delivery point(s) designated above. Buyer shall have no responsibility
with respect to any gas hereunder at any time because of anything which
may be done, happen or arise with respect to said gas before delivery
to Buyer in accordance with the terms and conditions hereof. It is the
understanding and intent of the parties hereto that Seller will assume
the full cost and expense, as well as full and complete liability and
responsibility, for collecting, gathering and transporting the gas to
Buyer under the terms hereof, including the full cost and expense of
any compression and other facilities necessary for delivery. Seller
will indemnify and save Buyer harmless from any and all loss or damage
to the property of Buyer and will indemnify, defend and save Buyer
harmless from and against any and all suits, actions, claims, damages
or costs arising out of the loss or damage to the property of any
person or persons whomsoever, in the event that such loss, damage,
injury or death shall be proximately caused by any act or omission or
any breach of any statutory duty of Seller or its employees or agent
occurring either in the performance of this Agreement, or outside said
performance but in, on or about the Well(s) subject to this Agreement.
(c) Buyer will indemnify and save Seller harmless from any and
all loss or damage to the property of Seller and will indemnify, defend
and save Seller harmless from and against any and all suits, actions,
claims, damages or costs arising out of the loss or damage to the
property of any person or persons whomsoever, in the event that such
loss, damage, injury or death shall be proximately caused by any act or
omission or any breach of any statutory duty of Buyer or its employees
or agent occurring either in the performance of this Agreement or in
its operation of the Pipeline System to which Seller's gas is to be
delivered.
12. Assignment. All the covenants, conditions and obligations of this
Agreement shall extend to and be binding upon the heirs, personal
representatives, successors and assigns respectively of the parties hereto and
the owners for whom Seller acts as agent. Seller, for itself and those owners
upon whose behalf it is acting, agrees that this Agreement shall be binding upon
any assignee in interest in the leasehold(s) subject hereto of Seller or cause
assignment of interest in such leasehold(s) to contain a provision making such
assignments subject to this Agreement.
13. Miscellaneous.
(a) Seller shall furnish to Buyer the following documents for
each Well: Well Completion Record, location plat, recorded copy of
meter site and pipeline right-of-way agreement (if applicable). Upon
request, Seller shall furnish to Buyer a recorded copy of the oil and
gas lease(s), and any relevant assignment(s), affecting the leaseholds
subject hereto, and the drilling permit for each Well located on lands
covered thereby. Also upon request, Seller shall furnish to Buyer a
copy of a power of attorney or other evidence of authority permitting
Seller to act on behalf of the owners of the production from the
Well(s) which are subject hereto.
(b) It is agreed that the terms and conditions contained
herein constitute the full and complete agreement between the parties
hereto and any change to be made must be submitted in writing and
agreed to by both parties.
(c) Seller will pay all production, severance, or other taxes
levied on the gas delivered hereunder, including state or federal
sales, excise or value added taxes. Nothing in this paragraph, however,
shall apply to any tax imposed on Buyer after title to such gas shall
have passed to Buyer at the delivery point(s).
(d) Seller shall pay all royalty payments due on the gas sold
and delivered hereunder and shall indemnify and hold Buyer harmless
from any liability or obligation for the payment of such royalties.
(e) It is understood and agreed that Buyer's commitment to
purchase gas from Seller under this Agreement is not an exclusive
arrangement and that Buyer shall be free to acquire gas from others,
but that such acquisition shall not relieve Buyer from any obligations
under this Agreement.
<PAGE>
14. Notices. Whenever under the terms of this Agreement any notice is
required or permitted to be given by one party to the other, it shall be given
for all purposes hereof if sent by telegram or if mailed, postage prepaid, to
the parties at the addresses set forth below.
Buyer: ESI PIPELINE OPERATING L.P.
Suite 200
280 Fort Sanders West Boulevard
Knoxville, TN 37922
Seller: ENERGY SEARCH INCORPORATED
Suite 200
280 Fort Sanders West Boulevard
Knoxville, TN 37922
EXECUTED on the 5th day of January, 1993.
ESI PIPELINE OPERATING L.P.,
a Tennessee Limited Partnership
By: ENERGY SEARCH INCORPORATED,
General Partner
By
/s/
Richard S. Cooper
President
SELLER
ENERGY SEARCH
INCORPORATED,
Individually and
as Operator and
authorized Selling
Agent for all
owners of the
Well(s) listed on
Exhibit A
By
/s/
Richard S. Cooper
President
<PAGE>
EXHIBIT A
To Gas Purchase Agreement Between ESI PIPELINE OPERATING L.P.
and ENERGY SEARCH INCORPORATED, dated January 5, 1993
SUBJECT WELL(S) AND LEASEHOLD(S):
Well Name Lot/Section County Township Permit #
<PAGE>
EXHIBIT B
To Gas Purchase Agreement Between ESI PIPELINE OPERATING L.P.
and ENERGY SEARCH INCORPORATED, dated January 5, 1993
Pipeline System Location and Submeter Site(s) (for each
delivery point):
Describe by location and ownership and include construction
responsibility.
Attach map indicating location of subject well(s), sales line(s), and
producer measurement meter station(s) (submeter) at delivery point(s).
<PAGE>
EXHIBIT C
To Gas Purchase Agreement Between ESI PIPELINE OPERATING L.P.
and ENERGY SEARCH INCORPORATED, dated January 5, 1993
[Attach the East Ohio specifications to this Exhibit]
<PAGE>
EXHIBIT D
To Gas Purchase Agreement Between ESI PIPELINE OPERATING L.P.
and ENERGY SEARCH INCORPORATED, dated January 5, 1993
Payment Designation
Payment for all gas purchased will be made monthly to the party
designated by Seller and shown below.
SELLING AGREEMENT
(Best Efforts)
For Class B Convertible Preferred Shares of Energy Search, Incorporated
THIS AGREEMENT dated as of the ____ day of March, 1996, between ENERGY
SEARCH INCORPORATED, a Tennessee corporation (the Company ) of Suite 200, 280
Fort Sanders West Boulevard, Knoxville, Tennessee 37922, EQUITY FINANCIAL
CORPORATION, a Tennessee corporation (the Placement Agent ) of Suite 200, 280
Fort Sanders West Boulevard, Knoxville, Tennessee 37922, and DERRY M. THOMPSON
(the Participating Selling Agent ) of 7121 Cresthill Drive, Knoxville, Tennessee
37919.
RECITALS:
A. On or about March 4, 1996, the Company commenced an offering to sell
up to a total of 450,000 convertible Preferred Shares offered in a combination
of Class A Preferred Shares and Class B Preferred Shares. The Company will offer
2,169,450 Class A Preferred Shares exclusively to the holders of the Company s
variable rate subordinated debentures due no later than December 31, 2001 (the
Debentures ) in exchange, on a dollar-for-dollar basis for outstanding principal
owed on the Debentures as of the Settlement Date. The Company will also offer a
number of Class B Preferred Shares equal to the difference between the total
Preferred Shares the Company desires to issue (450,000 Preferred Shares) and the
total number of Class A Preferred Shares actually subscribed by Debenture
holders as of the Settlement Date (not to exceed 2,169,450 shares). In no event
will more than 450,000 Class B Preferred Shares be offered or sold.
The Offering is being conducted as an exempt transaction pursuant to
Rule 506 of Regulation D promulgated under the Securities Act of 1933 (the
Securities Act ) and certain private or limited offering exemptions adopted in
various states, as are approved from time to time by the Company. The Offering
is being conducted subject to and by way of a confidential private placement
memorandum dated March 4, 1996 (the Memorandum ) a copy of which has been
furnished to the Participating Selling Agent.
The Preferred Shares will be offered for outstanding Debenture
principal retirement (in the case of Class A Preferred Shares) or cash (in the
case of Class B Preferred Shares) at a value to the Company of $10.00 per
Preferred Share. The minimum subscription per subscriber of Class A Preferred
Shares is one (1) share. The minimum subscription per subscriber of Class B
Preferred Shares is 3,000 shares ($30,000); however, the Company in its sole
discretion may allow a subscriber to subscribe for less than 3,000 Class B
Preferred Shares, but in no event less than 1,000 shares ($10,000).
Subscriptions above 3,000 Class B Preferred Shares may be made in 500 share
increments ($5,000), unless otherwise approved by the Company. There is no
minimum aggregate subscription of Class A Preferred Shares, nor is there a
minimum aggregate subscription of Class B Preferred Shares. All subscribers to
Preferred Shares must meet the investment suitability requirements set forth in
the INVESTOR SUITABILITY section of the Memorandum and in the Blue Sky
Memorandum dated March 4, 1996 (the Blue Sky Memorandum ) prepared by legal
counsel for the Company.
The offering of Class A Preferred Shares will terminate as of the
Settlement Date (no later than May 15, 1996, subject to extension in the sole
discretion of the Company to no later than September 30, 1996). The offering of
Class B Preferred Shares will terminate no later than May 15, 1997 subject to
extension in the sole discretion of the Company to no later than February 15,
1998 (the Termination Date ).
The Class A Preferred Shares will accrue a 5% per annum cumulative,
noncompounded dividend payable upon a Surrender Event or earlier if declared by
the Board of Directors. Class B Preferred Shares will accrue no dividends and be
entitled to no dividend preference over Class A Preferred Shares or Common
Shares. The Board of Directors has no present intent to declare or pay any
dividends on any Preferred Shares or Common Shares prior to the occurrence of a
Surrender Event. In the event any dividends were declared by the Board of
Directors on either Class A or Class B Preferred Shares, other than the 5%
cumulative, noncompounded dividend to Class A Preferred Shares, such dividends
would not be entitled to any preference over dividends with respect to Common
Shares.
Holders of Class A Preferred Shares will receive $10.00 per share plus
their accrued and unpaid 5% per annum cumulative, noncompounded, dividend prior
to any distribution to the holders of Class B Preferred Shares or to the holders
of Common Shares, upon dissolution of the Company. The holders of Class B
Preferred Shares will receive $10.00 per share prior to any distribution to the
holders of Common Shares upon dissolution of the Company.
The Preferred Shares shall have no voting rights (other than those
prescribed by Tennessee law) unless and until they are converted into Common
Shares, at which time they shall enjoy the same voting rights as all other
Common Shares.
All Preferred Shares which are not redeemed upon occurrence of a
Surrender Event are automatically convertible into Common Shares (the Underlying
Common Shares. ) The conversion ratio is one Common Share for each Preferred
Share converted.
In the event the Company undertakes to register any Common Shares, it
shall use its best efforts to register all Underlying Common Shares into which
the Preferred Shares are convertible. In the event the managing underwriter
determines not to register any Underlying Common Shares, the holder of the
Preferred Shares associated with such Underlying Common Shares shall have the
right at such holder s option and expense, to register his or her Underlying
Common Shares.
Class A and Class B Preferred Shares are redeemable by the Company, at
the option of the holder, at $10.00 per share (plus, in the case of Class A
Preferred Shares, accrued and unpaid 5% per annum cumulative, noncompounded
dividends) upon the occurrence of a Surrender Event.
The Common Shares of the Original Common Shareholders, Charles P.
Torrey, Jr., Robert L. Remine and Richard S. Cooper shall be subject to an
agreement (the Co-Sale Agreement ) in favor of Preferred Shareholders, pursuant
to which the Original Common Shareholders, acting alone or in concert, may not
enter any agreement for the sale or disposition of any of their Common Shares to
an outside third party unless holders of Preferred Shares are afforded the
opportunity to sell or otherwise dispose of their Underlying Common Shares on
the same terms (and in the same proportion) as the Original Common Shareholders
who negotiated the transaction.
For purposes of redemption and conversion of all Preferred Shares and
the payment of accrued dividends in the case of Class A Preferred Shares, the
following shall constitute Surrender Events: (a) the Company merges or
consolidates with another company in a transaction in which the Company is not
the survivor; (b) the Company sells or disposes of all, or substantially all, of
its assets; or (c) management of the Company undertakes a registration and
initial public offering of any of its Common Shares.
B. As placement agent for the Offering, the Placement Agent is authorized
to enter into one or more selling agreement(s) with licensed securities
broker/dealers who are members of the National Association of Securities
Dealers, Inc. (the NASD ) for the sale of Class B Preferred Shares.
C. The Participating Selling Agent is an NASD member registered and in good
standing as a securities broker/dealer under federal securities laws, and
licensed to conduct its securities broker/dealer business in the following
states
D. The Company and the Placement Agent desire to enter into this
Agreement with the Participating Selling Agent for the sale of certain Class B
Convertible Preferred Shares of the Company.
IT IS AGREED:
1. AUTHORIZATION TO OFFER AND SELL CLASS B PREFERRED SHARES. On the
basis of the representations and warranties contained in this Agreement, and
subject to the terms and conditions herein contained, the Participating Selling
Agent agrees to use its best efforts to sell Class B Preferred Shares in a
manner consistent with the terms of this Agreement, the Memorandum, the rules
and regulations of the NASD and any applicable federal or state securities laws.
Specifically, but without limitation, the Participating Selling Agent shall
comply with all investor suitability requirements set forth in the Memorandum
and any exhibits thereto, the Blue Sky Memorandum and any applicable investor
suitability provisions contained in NASD rules and regulations or provided by
federal or state securities laws. Notwithstanding the foregoing, the
Participating Selling Agent is authorized to sell Class B Preferred Shares to no
more than three (3) investors who are not Accredited Investors as defined in
Regulation D promulgated under the Securities Act.
2. COMPENSATION.
(a) COMMISSION. As compensation for this Agreement and for
services rendered, the Participating Selling Agent shall receive a
commission equal to 8.0% of the sales price of the Class B Preferred
Shares sold by the Participating Selling Agent and accepted by the
Company during the term of this Agreement. The Memorandum provides that
up to 30,000 Class B Preferred Shares may be sold in the Offering by
the Company net of Sales Commissions. The Placement Agent shall receive
Sales Commissions as defined in the Memorandum, which the Placement
Agent may re-allow to Participating Selling Agents. Any compensation
payable to Participating Selling Agent hereunder will be paid from (and
not in addition to) said source by the Company or the Placement Agent
(in whole or in part) from Class B Preferred Share Offering proceeds
and under no circumstances is the Participating Selling Agent
authorized to deduct or withhold any amounts from Class B Preferred
Share subscriptions received by Participating Selling Agent.
(b) COMMON SHARE WARRANTS. To the extent determined by the
Company in its sole discretion, upon consultation with legal counsel,
to be consistent with applicable federal and state laws, the Company
may issue warrants for up to 5% of its issued and outstanding Common
Stock to the Placement Agent or to one or more Participating Selling
Agents who meet certain sales performance requirements in connection
with the offering of Class B Preferred Shares. Accordingly, the
Participating Selling Agent will be entitled to 60 Common Share
Warrants for each $30,000 sale (accepted by the Company) in Class B
Preferred Shares. The Common Share Warrants will be exercisable at
$10.00 per share (the Exercise Price ) at a rate of one (1) Common
Share for each Common Share Warrant (the Exercise Rate ) only upon the
occurrence of a Surrender Event. Participating Selling Agents who
receive Common Share Warrants may be restricted by federal securities
laws or by the managing underwriter in a subsequent public offering of
the Company s Common Shares in their ability to transfer the underlying
Common Shares which may be acquired with their Common Share Warrants.
Their right to transfer such shares may be allowed pursuant to Rule 144
promulgated under the Securities Act, or other applicable authority.
3. SUBSCRIPTION PROCEDURE. There is no minimum aggregate subscription
for Class B Preferred Shares. Each subscriber will be required to bear his or
her personal expenses incurred in connection with subscription to Class B
Preferred Shares. In order to subscribe for Class B Preferred Shares, a
subscriber must submit to the Company the following items, each of which must be
properly completed and appropriately signed.
1. Subscription Agreement and Investor Questionnaire
2. Subscription Application
3. A check, money order or wire transfer in the
amount of $10.00 per share for each Class B Preferred
Share purchased. The minimum purchase per
subscription of Class B Preferred Shares shall be
3,000 shares ($30,000), subject to reduction of such
minimum, in the discretion of the Company to not less
than 1,000 Class B Preferred Shares ($10,000). Checks
and money orders should be made payable to Energy
Search, Incorporated. Wiring instructions can be
obtained from the Company.
At the Settlement Date, all qualified subscriptions for Class A
Preferred Shares which have been accepted by the Company will be settled. At
such time, the Company will: (a) pay all accrued and unpaid interest on the
Debentures; (b) issue to subscribers Class A Preferred Share certificates for
the number of Class A Preferred Shares subscribed; (c) cancel the original
Debenture Notes exchanged for Class A Preferred Shares subscribed; and (d) if
necessary or applicable, issue new Debenture Notes for any portion of the
original Debenture Notes not exchanged for Class A Preferred Shares. These New
Debenture Notes will be promptly prepaid by the Company with cash.
Upon receipt of accurate and complete Class B Preferred Share
subscription documents and payment in full for Class B Preferred Shares, and
after such subscription has been accepted by the Company, the Company will issue
to subscribers Class B Preferred Share certificates for the number of Class B
Preferred Shares subscribed.
4. ACCEPTANCE OF SUBSCRIPTIONS. All Class B Preferred Shares offered or
sold by the Participating Selling Agent shall be in a manner and according to
the procedure described in the this Agreement and in the Memorandum. The
Participating Selling Agent shall utilize the Subscription Documents
accompanying the Memorandum. No Class B Preferred Share subscription sold by the
Participating Selling Agent shall be final or effective unless and until such
subscription is accepted by the Company. The Company reserves the right to
reject, condition or limit any subscription for Class A Preferred Shares or
Class B Preferred Shares. If a subscription for Class B Preferred Shares is
rejected by the Company, the subscription proceeds will be promptly returned by
the Company to the subscriber without interest.
5. TERM. Except as provided below, the term of this Agreement shall
commence as of the date of this Agreement and terminate at such time as the
Offering shall be terminated by the Company which shall be no later than 11:59
p.m. March 1, 1997 or to such later time as the Offering may remain open by
virtue of extension by the Company (the Expiration Time ). The Participating
Selling Agent shall have no authority to offer or sell Class B Preferred Shares
after the Expiration Time. Notwithstanding the foregoing, the terms of this
Agreement shall terminate as of the Termination Date of the Offering if the same
occurs prior to the Expiration Time. The Participating Selling Agent shall be
entitled to compensation payable pursuant to paragraph 2 on all Class B
Preferred Shares sold by it and accepted by the Company during the term of this
Agreement. The Participating Selling Agent shall have the right to terminate
this Agreement upon written notice to the Company and the Placement Agent in the
event, in the reasonable opinion of the Participating Selling Agent, the Company
or the Placement Agent has breached any warranty or representation made by them
in this Agreement.
6. REPRESENTATIONS AND WARRANTIES OF THE PARTICIPATING SELLING AGENT. The
Participating Selling Agent represents and warrants to the Placement Agent and
the Company that:
(a) the Participating Selling Agent is a licensed broker/dealer
in good standing under the Securities and Exchange Act of 1934 and the
applicable laws of the State of __________ and that he is a member in
good standing with the NASD;
(b) the Class B Preferred Shares to be offered and sold by
Participating Selling Agent pursuant to the Memorandum and this
Agreement shall be offered or sold in compliance with the terms of the
Memorandum, the Blue Sky Memorandum and accompanying documents, the
rules and regulations of the NASD and all applicable federal and state
laws;
(c) the Participating Selling Agent will offer and sell the Class
B Preferred Shares only within and to residents of states authorized by
the Placement Agent and the Company;
(d) this Agreement has been duly authorized, executed and
delivered by him and is a valid and binding obligation on his part;
(e) the consummation of the transactions contemplated herein and
those contemplated by the Memorandum will not result in any breach of
any term or condition of, or constitute a default under, any indenture,
agreement or other instrument to which he is a party, or violate any
order directed to him by any court or any federal or state regulatory
body or administrative agency having jurisdiction over it or over its
affiliate;
(f) the Participating Selling Agent:
(i) will limit the Offering of the Class B Preferred
Shares to persons who it has reasonable grounds to believe
meet the suitability requirements set forth in the
Memorandum and under applicable state or federal law and
NASD rules and regulations;
(ii) in the event it utilizes any sales materials,
reports and other analyses other than the Memorandum, it
will not use such materials unless such materials are
accompanied or preceded by the Memorandum and only with
the prior written approval by legal counsel to the Company
and the Placement Agent;
(iii) shall not make any oral or written
representations which are inconsistent with the terms of the
Memorandum;
(iv) will not offer or sell any Class B Preferred
Shares by means of advertising or general solicitation, as
such terms are defined for purposes of Regulation D
promulgated under the Securities Act; and
(v) has received a copy of the Memorandum and has
read the Memorandum and all exhibits thereto and has had
an opportunity to ask any questions about the Offering,
the Company or the Memorandum that he/she may have, and
Participating Selling Agent and its principals and
affiliates (if applicable) fully understand all material
terms and conditions of the same;
7. REPRESENTATIONS AND WARRANTIES BY THE COMPANY AND THE PLACEMENT AGENT.
The Company and the Placement Agent represent and warrant to the Participating
Selling Agent that:
(a) the Company is duly organized and in good standing as a
business corporation under the laws of the State of Tennessee and in
accord with the Memorandum;
(b) the Placement Agent is duly organized, validly existing and
in good standing under the laws of the State of Tennessee;
(c) to the best of their knowledge and belief, the Memorandum
does not contain any untrue statement of material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading; and
(d) the Participating Selling Agent will be furnished with copies
of the Memorandum for delivery to offerees and their purchaser
representatives.
8. INDEMNIFICATION.
(a) The Company and the Placement Agent will indemnify and hold
the Participating Selling Agent harmless against any losses, claims,
damages or liabilities, joint or several, to which the Participating
Selling Agent may become subject under the federal or applicable state
securities laws, or otherwise, insofar as such losses claims, damages
or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue or misleading fact contained in the Memorandum,
or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading; and will
reimburse the Participating Selling Agent for any legal or other
expenses reasonably incurred in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company and the Placement Agent shall not be liable
in any such case to the extent that any such loss, claim, damage or
liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission (i) made orally or in
writing by the Participating Selling Agent, its agents or affiliates,
and not authorized by the Company and the Placement Agent or (ii) made
in the Memorandum in reliance upon and in conformity with written
information furnished to the Company or the Placement Agent by the
Participating Selling Agent specifically for use in the preparation
thereof. The foregoing indemnity agreement shall extend upon the same
terms and conditions to, and shall inure to the benefit of, each
person, if any, who controls the Participating Selling Agent (if not an
individual).
(b) The Participating Selling Agent will indemnify and hold
harmless the Company, the Placement Agent and all officers, directors,
employees, additional general partners, affiliates and legal counsel of
the Company or the Placement Agent, against any losses, claims, damages
or liabilities, joint or several, to which they may become subject,
under the federal or state laws insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are
based upon the Participating Selling Agent s obligations under this
Agreement, or any untrue or misleading statement or alleged untrue or
misleading statement of material fact made orally or in writing by the
Participating Selling Agent, or its agents or affiliates, and not
authorized by the Company or the Placement Agent, or arise out of or
are based upon the omission or the alleged omission to state in
connection therewith a material fact required to be stated in
connection therewith or necessary to make the statements made not
misleading, and the Participating Selling Agent will reimburse such
parties for any legal or other expenses reasonably incurred in
connection with investigating or defending such loss, claim, damage,
liability or action. The foregoing indemnity agreement shall extend
upon the same terms and conditions to, and shall inure to the benefit
of, each person, if any, who controls the Company and the Placement
Agent, and to legal counsel for the Company or the Placement Agent.
(c) Promptly after receipt by an indemnified party of notice of
the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party
under paragraphs (a) and (b) of this paragraph, notify the indemnifying
party in writing of the commencement thereof; but the omission to so
notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under such
paragraphs. In case any such action shall be brought against such
indemnified party, it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall desire, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified and indemnifying
parties, and after the indemnified party shall have received notice
from the agreed-upon counsel that the defense under such paragraph has
been so assumed, the indemnifying party shall not be responsible for
any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof.
10. CAPITALIZED TERMS. If a word in this Agreement is capitalized, it shall
have the meaning contained in the definition set forth in this Agreement, or if
no definition is provided in this Agreement, the capitalized term shall have
that meaning ascribed to it in the Memorandum.
11. NO ASSIGNMENT. This Agreement may not be assigned by the Participating
Selling Agent in whole or in part without prior written consent of the Company
or the Placement Agent.
12. BINDING EFFECT. This Agreement will be governed by and construed in
accordance with the laws of the State of Tennessee.
The parties have executed this Agreement as of the date first above
written.
ENERGY SEARCH, INCORPORATED
a Tennessee corporation
By:________________________________
Richard S. Cooper
Its: President
EQUITY FINANCIAL CORPORATION
a Tennessee corporation
By: ___________________________________
Charles P. Torrey, Jr.
Its: President
-----------------------------------------
DERRY M. THOMPSON
SELLING AGREEMENT
(Best Efforts)
For Class A and Class B Convertible Preferred
Shares of Energy Search, Incorporated
THIS AGREEMENT dated as of the 4th day of March4, 1996, between ENERGY
SEARCH INCORPORATED, a Tennessee corporation (the "Company") of Suite 200, 280
Fort Sanders West Boulevard, Knoxville, Tennessee 37922 and EQUITY FINANCIAL
CORPORATION, a Tennessee corporation (the "Placement Agent") of Suite 200, 280
Fort Sanders West Boulevard, Knoxville, Tennessee 37922.
RECITALS:
Capited terms used herein shall have the same definition as set forth in the
Memorandum, defined below, unless indicated otherwise herein.
A. On or about March 4, 1996, the Company commenced an offering to sell
up to a total of 450,000 convertible Preferred Shares offered in a combination
of Class A Preferred Shares and Class B Preferred Shares. The Company will offer
216,945 Class A Preferred Shares exclusively to the holders of the Company's
variable rate subordinated debentures due no later than December 31, 2001 (the
"Debentures") in exchange, on a dollar-for-dollar basis for outstanding
principal owed on the Debentures as of the Settlement Date. The Company will
also offer a number of Class B Preferred Shares equal to the difference between
the total Preferred Shares the Company desires to issue (450,000 Preferred
Shares) and the total number of Class A Preferred Shares actually subscribed by
Debenture holders as of the Settlement Date (not to exceed 216,945 shares). In
no event will more than 450,000 Class B Preferred Shares be offered or sold.
The Offering is being conducted as an exempt transaction pursuant to
Rule 506 of Regulation D promulgated under the Securities Act of 1933 (the
"Securities Act") and certain private or limited offering exemptions adopted in
various states, as are approved from time to time by the Company. The Offering
is being conducted subject to and by way of a confidential private placement
memorandum dated March 4, 1996 (the "Memorandum" ) a copy of which has been
furnished to the Placement Agent.
The Class A Preferred Shares will be offered in exchange, on a dollar
for dollar basis, for outstanding principal owed on the Debentures as of the
Settlement at a rate of $10.00 of outstanding Debentures for each Class A
Preferred Share. There is no minimum subsription per investor or in the
aggregate with respect to the Class A Preferred Shares.
The Class B Preferred Shares will be offered for cash at a value to the
Company of $10.00 per Preferred Share. The minimum subscription per subscriber
of Class B Preferred Shares is 3,000 shares ($30,000); however, the Company in
its sole discretion may allow a subscriber to subscribe for less than 3,000
Class B Preferred Shares, but in no event less than 1,000 shares ($10,000).
Subscriptions above 3,000 Class B Preferred Shares may be made in 500 share
increments ($5,000), unless otherwise approved by the Company. There is no
minimum aggregate subscription of Class B Preferred Shares.
All subscribers to Preferred Shares must meet the investment
suitability requirements set forth in the INVESTOR SUITABILITY section of the
Memorandum and in the Blue Sky Memorandum dated March 4, 1996 (the "Blue Sky
Memorandum") prepared by legal counsel for the Company.
The termination of the offering of Class A Preferred Shares in exchange
for outstanding principal on the Debentures will be no later than May 15, 1996,
subject to extension, in the discretion of the Company to no later than
September 30, 1996 (the "Settlement Date"). The offering of Class B Preferred
Shares will terminate no later than May 15, 1997 subject to extension in the
sole discretion of the Company to no later than February 15, 1998 (the
"Termination Date").
B. As placement agent for the Offering, the Placement Agent is authorized
to enter into one or more selling agreement(s) with licensed securities
broker/dealers (the "Participating Selling Agents") who are members of the
National Association of Securities Dealers, Inc. (the "NASD" ) for the sale of
Class B Preferred Shares.
C. The Company and the Placement Agent desire to enter into this
Agreement for the sale of Class A and Class B Convertible Preferred Shares of
the Company.
IT IS AGREED:
1. AUTHORIZATION TO OFFER AND SELL CLASS B PREFERRED SHARES. On the
basis of the representations and warranties contained in this Agreement, and
subject to the terms and conditions herein contained, the Placement Agent agrees
to use its best efforts to sell Class A Preferred Shares and Class B Preferred
Shares in a manner consistent with the terms of this Agreement, the Memorandum,
the rules and regulations of the NASD and any applicable federal or state
securities laws. Specifically, but without limitation, the Placement Agent shall
comply with all investor suitability requirements set forth in the Memorandum
and any exhibits thereto, the Blue Sky Memorandum and any applicable investor
suitability provisions contained in NASD rules and regulations or provided by
federal or state securities laws.
2. COMPENSATION.
(a) COMMISSION.
(i) As compensation for this Agreement and for services rendered,
the Placement Agent shall receive a commission equal to 4.0% of the
exchange price of the Class A Preferred Shares sold by the Placement
Agent and accepted by the Company during the term of this Agreement.
(ii) As compensation for this Agreement and for services
rendered, the Participating Selling Agent shall receive a commission
equal to 8.0% of the sales price of the Class B Preferred Shares sold
by the Participating Selling Agent and accepted by the Company during
the term of this Agreement. The Memorandum provides that up to 30,000
Class B Preferred Shares may be sold in the Offering by the Company net
of Sales Commissions. The Placement Agent shall receive Sales
Commissions as defined in the Memorandum, which the Placement Agent may
re-allow to Participating Selling Agents.
(b) COMMON SHARE WARRANTS. To the extent determined by the
Company in its sole discretion, upon consultation with legal counsel,
to be consistent with applicable federal and state laws, the Company
may issue warrants for up to 5% of its issued and outstanding Common
Stock to the Placement Agent or to one or more Participating Selling
Agents who meet certain sales performance requirements in connection
with the offering of Class B Preferred Shares. Accordingly, the
Placement Agent or Participating Selling Agent will be entitled to 60
Common Share Warrants for each $30,000 sale (accepted by the Company)
in Class B Preferred Shares. The Common Share Warrants will be
exercisable at $10.00 per share (the "Exercise Price") at a rate of one
(1) Common Share for each Common Share Warrant (the "Exercise Rate")
only upon the occurrence of a Surrender Event. Placement Agent or
Participating Selling Agents who receive Common Share Warrants may be
restricted by federal securities laws or by the managing underwriter in
a subsequent public offering of the Company's Common Shares in their
ability to transfer the underlying Common Shares which may be acquired
with their Common Share Warrants. Their right to transfer such shares
may be allowed pursuant to Rule 144 promulgated under the Securities
Act, or other applicable authority.
3. SUBSCRIPTION PROCEDURE. There is no minimum aggregate subscription
for Class A or Class B Preferred Shares. Each subscriber will be required to
bear his or her personal expenses incurred in connection with subscription to
Class A or Class B Preferred Shares. In order to subscribe for Class A or Class
B Preferred Shares, a subscriber must submit to the Company the following items,
each of which must be properly completed and appropriately signed.
In order to subscribe for Preferred Shares, a subscriber must submit to
the Company the following items, each of which must be properly completed and
appropriately signed.
1. Subscription Agreement and Investor Questionnaire
2. Subscription Application
3. Debenture Note Cancellation Certificate (if applicable)
4. (a) For Class A Preferred Shares:
The Subscriber must deliver his original Debenture
Note issued by the Company, endorsed to the Company
for cancellation; or, if the Original Debenture Note
is lost, destroyed or cannot be located, the
Subscriber must complete and sign a Debenture Note
Cancellation Certificate.
(b) For Class B Preferred Shares:
A check, money order or wire transfer in the
amount of $10.00 per share for each Class B Preferred
Share purchased. The minimum purchase per
subscription of Class B Preferred Shares shall be
3,000 shares ($30,000), subject to reduction of such
minimum, in the discretion of the Company to not less
than 1,000 Class B Preferred Shares ($10,000). Checks
and money orders should be made payable to Energy
Search, Incorporated. Wiring instructions can be
obtained from the Company.
At the Settlement Date, all qualified subscriptions for Class A
Preferred Shares which have been accepted by the Company will be settled. At
such time, the Company will: (a) pay all accrued and unpaid interest on the
Debentures; (b) issue to subscribers Class A Preferred Share certificates for
the number of Class A Preferred Shares subscribed; (c) cancel the original
Debenture Notes exchanged for Class A Preferred Shares subscribed; and (d) if
necessary or applicable, issue new Debenture Notes for any portion of the
original Debenture Notes not exchanged for Class A Preferred Shares. These New
Debenture Notes will be promptly prepaid by the Company with cash.
Upon receipt of accurate and complete Class B Preferred Share
subscription documents and payment in full for Class B Preferred Shares, and
after such subscription has been accepted by the Company, the Company will issue
to subscribers Class B Preferred Share certificates for the number of Class B
Preferred Shares subscribed.
4. ACCEPTANCE OF SUBSCRIPTIONS. All Preferred Shares offered or sold by
the Placement Agent and Participating Selling Agents shall be in a manner and
according to the procedure described in the this Agreement and in the
Memorandum. The Placement Agent and Participating Selling Agents shall utilize
the Subscription Documents accompanying the Memorandum. No Preferred Share
subscription sold by the Placement Agent or Participating Selling Agents shall
be final or effective unless and until such subscription is accepted by the
Company. The Company reserves the right to reject, condition or limit any
subscription for Preferred Shares. If a subscription for Preferred Shares is
rejected by the Company, the subscription proceeds will be promptly returned by
the Company to the subscriber without interest.
5. TERM. Except as provided below, the term of this Agreement shall
commence as of the date of this Agreement and terminate at such time as the
Offering shall be terminated by the Company which shall be no later than 11:59
p.m. March 1, 1997 or to such later time as the Offering may remain open by
virtue of extension by the Company (the "Expiration Time"). The Placement Agent
shall have no authority to offer or sell Preferred Shares after the Expiration
Time. Notwithstanding the foregoing, the terms of this Agreement shall terminate
as of the Termination Date of the Offering if the same occurs prior to the
Expiration Time. The Placement Agent shall be entitled to compensation payable
pursuant to paragraph 2 on all Preferred Shares sold by it and accepted by the
Company during the term of this Agreement. The Placement Agent shall have the
right to terminate this Agreement upon written notice to the Company.
6. REPRESENTATIONS AND WARRANTIES OF THE PLACEMENT AGENT. The Placement
Agent represents and warrants to the Company that:
(a) the Placement Agent is a licensed broker/dealer in good
standing under the Securities and Exchange Act of 1934 and the
applicable laws of the State of Tennessee and that he is a member in
good standing with the NASD;
(b) the Preferred Shares to be offered and sold by Placement
Agent pursuant to the Memorandum and this Agreement shall be offered or
sold in compliance with the terms of the Memorandum, the Blue Sky
Memorandum and accompanying documents, the rules and regulations of the
NASD and all applicable federal and state laws;
(c) the Placement Agent will offer and sell the Preferred Shares
only within and to residents of states authorized by the Company;
(d) this Agreement has been duly authorized, executed and
delivered by iit and is a valid and binding obligation on its part;
(e) the consummation of the transactions contemplated herein and
those contemplated by the Memorandum will not result in any breach of
any term or condition of, or constitute a default under, any indenture,
agreement or other instrument to which he is a party, or violate any
order directed to him by any court or any federal or state regulatory
body or administrative agency having jurisdiction over it or over its
affiliate;
(f) the Placement Agent:
(i) will limit the Offering of the Preferred Shares
to persons who it has reasonable grounds to believe meet
the suitability requirements set forth in the Memorandum
and under applicable state or federal law and NASD rules
and regulations;
(ii) in the event it utilizes any sales materials,
reports and other analyses other than the Memorandum, it
will not use such materials unless such materials are
accompanied or preceded by the Memorandum and only with
the prior written approval by legal counsel to the
Company;
(iii) shall not make any oral or written
representations which are inconsistent with the terms of the
Memorandum;
(iv) will not offer or sell any Preferred Shares by
means of advertising or general solicitation, as such
terms are defined for purposes of Regulation D promulgated
under the Securities Act; and
(v) has received a copy of the Memorandum and has
read the Memorandum and all exhibits thereto and has had
an opportunity to ask any questions about the Offering,
the Company or the Memorandum that he/she may have, and
Placement Agent and its principals and affiliates (if
applicable) fully understand all material terms and
conditions of the same;
7. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company represents
and warrants to the Placement Agent that:
(a) the Company is duly organized and in good standing as a
business corporation under the laws of the State of Tennessee and in
accord with the Memorandum;
(b) to the best of their knowledge and belief, the Memorandum
does not contain any untrue statement of material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading; and
(c) the Placement Agent will be furnished with copies of the
Memorandum for delivery to offerees and their purchaser
representatives.
8. INDEMNIFICATION.
(a) The Company will indemnify and hold the Placement Agent
harmless against any losses, claims, damages or liabilities, joint or
several, to which the Placement Agent may become subject under the
federal or applicable state securities laws, or otherwise, insofar as
such losses claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue or misleading fact
contained in the Memorandum, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and will reimburse the Placement Agent for any legal or
other expenses reasonably incurred in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement or
omission or alleged omission (i) made orally or in writing by the
Placement Agent, its agents or affiliates, and not authorized by the
Company or (ii) made in the Memorandum in reliance upon and in
conformity with written information furnished to the Company by the
Placement Agent specifically for use in the preparation thereof. The
foregoing indemnity agreement shall extend upon the same terms and
conditions to, and shall inure to the benefit of, each person, if any,
who controls the Placement Agent.
(b) The Placement Agent will indemnify and hold harmless the
Company and all officers, directors, employees, additional general
partners, affiliates and legal counsel of the Company, against any
losses, claims, damages or liabilities, joint or several, to which they
may become subject, under the federal or state laws insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the Placement Agent's obligations under
this Agreement, or any untrue or misleading statement or alleged untrue
or misleading statement of material fact made orally or in writing by
the Placement Agent, or its agents or affiliates, and not authorized by
the Company, or arise out of or are based upon the omission or the
alleged omission to state in connection therewith a material fact
required to be stated in connection therewith or necessary to make the
statements made not misleading, and the Placement Agent will reimburse
such parties for any legal or other expenses reasonably incurred in
connection with investigating or defending such loss, claim, damage,
liability or action. The foregoing indemnity agreement shall extend
upon the same terms and conditions to, and shall inure to the benefit
of, each person, if any, who controls the Company, and to legal counsel
for the Company.
(c) Promptly after receipt by an indemnified party of notice of
the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party
under paragraphs (a) and (b) of this paragraph, notify the indemnifying
party in writing of the commencement thereof; but the omission to so
notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under such
paragraphs. In case any such action shall be brought against such
indemnified party, it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall desire, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified and indemnifying
parties, and after the indemnified party shall have received notice
from the agreed-upon counsel that the defense under such paragraph has
been so assumed, the indemnifying party shall not be responsible for
any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof.
10. CAPITALIZED TERMS. If a word in this Agreement is capitalized, it shall
have the meaning contained in the definition set forth in this Agreement, or if
no definition is provided in this Agreement, the capitalized term shall have
that meaning ascribed to it in the Memorandum.
11. NO ASSIGNMENT. This Agreement may not be assigned by the Placement
Agent in whole or in part without prior written consent of the Company.
12. BINDING EFFECT. This Agreement will be governed by and construed in
accordance with the laws of the State of Tennessee.
The parties have executed this Agreement as of the date first above
written.
ENERGY SEARCH, INCORPORATED
a Tennessee corporation
By:________________________________
Richard S. Cooper
Its: President
EQUITY FINANCIAL CORPORATION
a Tennessee corporation
By:_______________________________
Charles P. Torrey, Jr.
Its: President
SELLING AGREEMENT
(Best Efforts)
For Variable Rate Subordinated Debentures due no later than
December 31, 2001of Energy Search, Incorporated
THIS AGREEMENT dated as of the 19th day of Septmeber 19, 1996, between
ENERGY SEARCH INCORPORATED, a Tennessee corporation (the "Company") of Suite
200, 280 Fort Sanders West Boulevard, Knoxville, Tennessee 37922 and EQUITY
FINANCIAL CORPORATION, a Tennessee corporation (the "Placement Agent") of Suite
200, 280 Fort Sanders West Boulevard, Knoxville, Tennessee 37922.
RECITALS:
Capitalized terms used herein shall have the same definition as set forth in the
Memorandum, defined below, unless indicated otherwise herein.
A. On or about March 19, 1996, the Company commenced an offering to
sell up to a total of $2,00,000 variable rate subordinated debentures due no
later than December 31, 2001 (the "Debentures").
The Offering is being conducted as an exempt transaction pursuant to
Rule 506 of Regulation D promulgated under the Securities Act of 1933 (the
"Securities Act") and certain private or limited offering exemptions adopted in
various states, as are approved from time to time by the Company. The Offering
is being conducted subject to and by way of a confidential private placement
memorandum dated September 19, 1994 (the "Memorandum" ) a copy of which has been
furnished to the Placement Agent.
All subscribers to Debentures must meet the investment suitability
requirements set forth in the INVESTOR SUITABILITY section of the Memorandum and
in the Blue Sky Memorandum dated September 19, 1994 (the "Blue Sky Memorandum")
prepared by legal counsel for the Company.
The termination of the offering of Debentures will be no later than
September 19, 1994, subject to extension, in the discretion of the Company to no
later than December 31, 1995 (the "Termination Date").
B. As placement agent for the Offering, the Placement Agent is authorized
to enter into one or more selling agreement(s) with licensed securities
broker/dealers (the "Participating Selling Agents") who are members of the
National Association of Securities Dealers, Inc. (the "NASD" ) for the sale of
Debentures.
C. The Company and the Placement Agent desire to enter into this Agreement
for the sale of Debentures of the Company.
IT IS AGREED:
1. AUTHORIZATION TO OFFER AND SELL DEBENTURES. On the basis of the
representations and warranties contained in this Agreement, and subject to the
terms and conditions herein contained, the Placement Agent agrees to use its
best efforts to sell Debentures in a manner consistent with the terms of this
Agreement, the Memorandum, the rules and regulations of the NASD and any
applicable federal or state securities laws. Specifically, but without
limitation, the Placement Agent shall comply with all investor suitability
requirements set forth in the Memorandum and any exhibits thereto, the Blue Sky
Memorandum and any applicable investor suitability provisions contained in NASD
rules and regulations or provided by federal or state securities laws.
<PAGE>
2. COMPENSATION.
(a) COMMISSION. As compensation for this Agreement and for
services rendered, the Placement Agent shall receive a commission equal
to 4.0% of the issue price of the Debentures sold by the Placement
Agent and accepted by the Company during the term of this Agreement.
3. SUBSCRIPTION PROCEDURE. The subsription procedure for the Debentures
shall be as described in the Memorandum.
4. ACCEPTANCE OF SUBSCRIPTIONS. All Debentures offered or sold by the
Placement Agent and Participating Selling Agents shall be in a manner and
according to the procedure described in the this Agreement and in the
Memorandum. The Placement Agent and Participating Selling Agents shall utilize
the Subscription Documents accompanying the Memorandum. No Preferred Share
subscription sold by the Placement Agent or Participating Selling Agents shall
be final or effective unless and until such subscription is accepted by the
Company. The Company reserves the right to reject, condition or limit any
subscription for Debentures. If a subscription for Debentures is rejected by the
Company, the subscription proceeds will be promptly returned by the Company to
the subscriber without interest.
5. TERM. Except as provided below, the term of this Agreement shall
commence as of the date of this Agreement and terminate at such time as the
Offering shall be terminated by the Company which shall be no later than 11:59
p.m. December 31, 1994 or to such later time as the Offering may remain open by
virtue of extension by the Company (the "Expiration Time"). The Placement Agent
shall have no authority to offer or sell Debentures after the Expiration Time.
Notwithstanding the foregoing, the terms of this Agreement shall terminate as of
the Termination Date of the Offering if the same occurs prior to the Expiration
Time. The Placement Agent shall be entitled to compensation payable pursuant to
paragraph 2 on all Debentures sold by it and accepted by the Company during the
term of this Agreement. The Placement Agent shall have the right to terminate
this Agreement upon written notice to the Company.
6. REPRESENTATIONS AND WARRANTIES OF THE PLACEMENT AGENT. The Placement
Agent represents and warrants to the Company that:
(a) the Placement Agent is a licensed broker/dealer in good
standing under the Securities and Exchange Act of 1934 and the
applicable laws of the State of Tennessee and that he is a member in
good standing with the NASD;
(b) the Debentures to be offered and sold by Placement Agent
pursuant to the Memorandum and this Agreement shall be offered or sold
in compliance with the terms of the Memorandum, the Blue Sky Memorandum
and accompanying documents, the rules and regulations of the NASD and
all applicable federal and state laws;
(c) the Placement Agent will offer and sell the Debentures only
within and to residents of states authorized by the Company;
(d) this Agreement has been duly authorized, executed and
delivered by it and is a valid and binding obligation on its part;
(e) the consummation of the transactions contemplated herein and
those contemplated by the Memorandum will not result in any breach of
any term or condition of, or constitute a default under, any indenture,
agreement or other instrument to which he is a party, or violate any
order directed to him by any court or any federal or state regulatory
body or administrative agency having jurisdiction over it or over its
affiliate;
(f) the Placement Agent:
(i) will limit the Offering of the Debentures to
persons who it has reasonable grounds to believe meet the
suitability requirements set forth in the Memorandum and
under applicable state or federal law and NASD rules and
regulations;
(ii) in the event it utilizes any sales materials,
reports and other analyses other than the Memorandum, it
will not use such materials unless such materials are
accompanied or preceded by the Memorandum and only with
the prior written approval by legal counsel to the
Company;
(iii) shall not make any oral or written
representations which are inconsistent with the terms of the
Memorandum;
(iv) will not offer or sell any Debentures by means
of advertising or general solicitation, as such terms are
defined for purposes of Regulation D promulgated under the
Securities Act; and
(v) has received a copy of the Memorandum and has
read the Memorandum and all exhibits thereto and has had
an opportunity to ask any questions about the Offering,
the Company or the Memorandum that he/she may have, and
Placement Agent and its principals and affiliates (if
applicable) fully understand all material terms and
conditions of the same;
7. REPRESENTATIONS AND WARRANTIES BY THE COMPANY. The Company represents
and warrants to the Placement Agent that:
(a) the Company is duly organized and in good standing as a
business corporation under the laws of the State of Tennessee and in
accord with the Memorandum;
(b) to the best of their knowledge and belief, the Memorandum
does not contain any untrue statement of material fact or omit to state
any material fact required to be stated therein or necessary to make
the statements therein not misleading; and
(c) the Placement Agent will be furnished with copies of the
Memorandum for delivery to offerees and their purchaser
representatives.
8. INDEMNIFICATION.
(a) The Company will indemnify and hold the Placement Agent
harmless against any losses, claims, damages or liabilities, joint or
several, to which the Placement Agent may become subject under the
federal or applicable state securities laws, or otherwise, insofar as
such losses claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue or misleading fact
contained in the Memorandum, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and will reimburse the Placement Agent for any legal or
other expenses reasonably incurred in connection with investigating or
defending any such loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or
is based upon an untrue statement or alleged untrue statement or
omission or alleged omission (i) made orally or in writing by the
Placement Agent, its agents or affiliates, and not authorized by the
Company or (ii) made in the Memorandum in reliance upon and in
conformity with written information furnished to the Company by the
Placement Agent specifically for use in the preparation thereof. The
foregoing indemnity agreement shall extend upon the same terms and
conditions to, and shall inure to the benefit of, each person, if any,
who controls the Placement Agent.
(b) The Placement Agent will indemnify and hold harmless the
Company and all officers, directors, employees, additional general
partners, affiliates and legal counsel of the Company, against any
losses, claims, damages or liabilities, joint or several, to which they
may become subject, under the federal or state laws insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon the Placement Agent's obligations under
this Agreement, or any untrue or misleading statement or alleged untrue
or misleading statement of material fact made orally or in writing by
the Placement Agent, or its agents or affiliates, and not authorized by
the Company, or arise out of or are based upon the omission or the
alleged omission to state in connection therewith a material fact
required to be stated in connection therewith or necessary to make the
statements made not misleading, and the Placement Agent will reimburse
such parties for any legal or other expenses reasonably incurred in
connection with investigating or defending such loss, claim, damage,
liability or action. The foregoing indemnity agreement shall extend
upon the same terms and conditions to, and shall inure to the benefit
of, each person, if any, who controls the Company, and to legal counsel
for the Company.
(c) Promptly after receipt by an indemnified party of notice of
the commencement of any action, such indemnified party shall, if a
claim in respect thereof is to be made against the indemnifying party
under paragraphs (a) and (b) of this paragraph, notify the indemnifying
party in writing of the commencement thereof; but the omission to so
notify the indemnifying party shall not relieve it from any liability
which it may have to any indemnified party otherwise than under such
paragraphs. In case any such action shall be brought against such
indemnified party, it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled to
participate in, and, to the extent that it shall desire, jointly with
any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified and indemnifying
parties, and after the indemnified party shall have received notice
from the agreed-upon counsel that the defense under such paragraph has
been so assumed, the indemnifying party shall not be responsible for
any legal or other expenses subsequently incurred by such indemnified
party in connection with the defense thereof.
10. CAPITALIZED TERMS. If a word in this Agreement is capitalized, it shall
have the meaning contained in the definition set forth in this Agreement, or if
no definition is provided in this Agreement, the capitalized term shall have
that meaning ascribed to it in the Memorandum.
11. NO ASSIGNMENT. This Agreement may not be assigned by the Placement
Agent in whole or in part without prior written consent of the Company.
12. BINDING EFFECT. This Agreement will be governed by and construed in
accordance with the laws of the State of Tennessee.
The parties have executed this Agreement as of the date first above
written.
ENERGY SEARCH, INCORPORATED
a Tennessee corporation
By:________________________________
Richard S. Cooper
Its: President
EQUITY FINANCIAL CORPORATION
a Tennessee corporation
By:________________________________________
Charles P. Torrey, Jr.
Its: President
AIRCRAFT LEASE
Lease of aircraft made the 1st day of February, 1995, between
CHARLES P. TORREY, JR., of Knoxville, Knox County, Tennessee, herein referred to
as Lessor, and ENERGY SEARCH, INCORPORATED, a Tennessee Corporation, of
Knoxville, Knox County, herein referred to as Lessee.
The parties recite and declare that:
A. Lessor is the registered owner of an aircraft described as follows:
Beechcraft V35-B Bonanza, serial number D 9102, United States registration
number N 4042A, herein referred to as the Aircraft.
B. Lessee desires to lease the Aircraft under such terms and conditions as
are mutually satisfactory to the parties.
The parties agree as follows:
SECTION ONE: LEASE OF AIRCRAFT
In consideration of the rent to be charged as set forth below,
Lessor agrees to lease to Lessee the Aircraft together with all accessories and
equipment necessary for its proper operation. The Aircraft shall be made
available to Lessee at Island Home Airport, Knoxville, Tennessee.
SECTION TWO: TERM
This lease shall commence on the date of this Agreement and
continue month to month until terminated by either party. The Agreement may be
terminated by either party upon thirty (30) days written notice to the other.
SECTION THREE: RENT
The rent payable by Lessee to Lessor shall be a base rental
rate (Base Rent) of One Thousand Five Hundred Seventy-Five Dollars ($1,575) per
month. The Base Rent shall be due and payable in advance on the first day of
each month, the first such payment to be due on February 1, 1995. The Base Rent
shall cover Lessee use of the plane for twelve (12) hours each month. Any use by
Lessee of the plane in any given month in excess of twelve (12) hours shall be
subject to an hourly charge of One Hundred Dollars ($100) per hour. Lessor shall
pay all expenses (except as noted below) associated with the plane including
gas, oil, maintenance, et cetera, as well as all annual or other inspections
required to keep the plane in compliance with all regulatory authorities.
Insurance on the plane will be paid by Lessee, it being acknowledged that the
cost of same is materially higher as a result of Lessee's officer pilot use. As
to each month during the term of this agreement, the excess rent above the Base
Rate shall be due and payable no more than ten (10) days after the close of each
month. All rent shall be paid to Lessor at the address set forth above or to
such other person and at such other place as Lessor may from time to time
designate in writing.
SECTION FOUR: RISK OF LOSS
Lessor shall be liable for any loss or damage to the Aircraft
during the term of this lease. Lessor shall keep the Aircraft, together will all
its equipment and accessories, insured against loss or damage from crash, fire,
windstorm, collision, or other casualty. The cost of said insurance as mentioned
in Section Three shall be paid during the term of this Agreement by Lessee. The
amount of such insurance shall be that determined appropriate by Lessor in his
sole discretion.
SECTION FIVE: RESTRICTIONS ON USE
Lessee may operate the Aircraft only for the purposes, and
within the geographical limits, set forth in the insurance policy or policies
obtained in compliance with Section Four of this agreement. Furthermore, Lessee
shall not use Aircraft in violation of any foreign, federal, state, territorial,
or municipal law or regulation and shall be solely responsible for any fines,
penalties, or forfeitures occasioned by any violation. If such fines or
penalties are imposed on Lessor and paid by Lessor, Lessee shall reimburse
Lessor for the amount thereof within thirty (30) days of receipt by Lessee of
written demand from Lessor.
Lessee agrees that the Aircraft shall be flown only by
licensed and qualified pilots and shall be maintained only by licensed and
qualified mechanics. In the event that the insurance on the Aircraft is
invalidated because of Lessee being unable to obtain licensed and qualified
pilots and mechanics, Lessee shall not operate the Aircraft until such time as
licensed and qualified pilots and mechanics are obtained and insurance on the
Aircraft is made valid.
SECTION SIX: INSPECTION BY LESSOR
Lessee agrees to permit Lessor or his duly authorized agent to
inspect the Aircraft at any reasonable time and to furnish any information in
respect to the Aircraft and its use that Lessor may reasonably request.
SECTION SEVEN: ALTERATIONS
Lessee shall not have the right to alter, modify, or made
additions or improvements to the Aircraft without written permission from
Lessor. All such alterations, modifications, additions, and improvements as are
so made shall become the property of Lessor and shall be subject to all the
terms of this agreement.
SECTION EIGHT: MAINTENANCE AND REPAIR
Lessor shall, at his own cost and expense, repair and maintain
the Aircraft so as to keep it in as good and safe operating condition, ordinary
wear and tear from use and ordinary deterioration excepted. Lessor shall pay all
cost and expenses of new parts and accessories for replacement, including the
transportation charges thereon.
All inspections, repairs, modifications, maintenance, and
overhaul work to be accomplished by Lessor shall be performed by personnel duly
licensed to perform such work and shall be performed in accordance with the
standards set by the Federal Aviation Administration regulations and
requirements.
Lessor shall maintain all log books and records pertaining to
the Aircraft during the term of this agreement in accordance with the rules and
regulations of the Federal Aviation Administration.
SECTION NINE: TITLE
The registration of, and title to, the Aircraft shall be in
the name of Lessor, and the Aircraft shall at all times during the term of this
agreement, or any extension here, bear United States registration markings.
SECTION TEN: PAYMENT OF TAXES
Lessor shall pay or cause to be paid all taxes incurred by
reason of ownership of the Aircraft during the term of this agreement, including
personal property taxes.
SECTION ELEVEN: ASSIGNMENT
Lessee shall not assign this lease or any interest in the
Aircraft, or sublet the Aircraft, without prior written consent of Lessor.
Subject to the foregoing, the lease inures to the benefit of, and is binding on,
the heirs, legal representatives, successors, and assigns of the parties hereto.
SECTION TWELVE: ACCIDENT AND CLAIM
Lessee shall immediately notify Lessor of any accident
involving the Aircraft, which notification shall specify the time, place, and
nature of the accident or damage, the names and addresses of parties involved,
persons injured, witnesses, and owners of properties damages, and such other
information as may be known. Lessee shall advise Lessor of all correspondence,
papers, notices, and documents whatsoever received by Lessee in connection with
any claim or demand involving or relating to Aircraft or its operation, and
shall aid in any investigation instituted by Lessor and in the recovery of
damages from third persons liable therefor.
SECTION THIRTEEN: RETURN OF PLANE TO OWNER
On the termination of this lease by expiration or otherwise,
Lessee shall return the Aircraft to Lessor at Island Home Airport in as good
operating condition and appearance as when received, ordinary wear, tear, and
deterioration excepted, and shall indemnify Lessor against any claim for loss or
damage occurring prior to the actual physical delivery of the Aircraft to
Lessor.
SECTION FOURTEEN: DEFAULT
If Lessee fails to make any payment of rent or other charges
within thirty (30) days after such amounts are due and payable, or if Lessee
fails to comply with any provision of this agreement, Lessor shall have the
right to take possession of the Aircraft wherever it may be located, without
demand or notice and without any court order or other process of law and to
pursue any other remedy available to him at law or in equity, in the event of
such default by Lessee, Lessor may, at his option, terminate this agreement.
Notwithstanding any repossession or other action that Lessor may take, Lessee
shall be and remain liable for the full performance of all obligations on the
part of Lessee to be performed under this lease. Lessor's waiver of any default
on the part of Lessee shall not constitute a waiver of subsequent defaults.
SECTION FIFTEEN: MODIFICATION OF AGREEMENT; GOVERNING LAW
This agreement constitutes the entire understanding between
the parties, and any change or modification hereof must be in writing and signed
by both parties. This agreement is entered into under, and is to be construed in
accordance with, the laws of the State of Tennessee.
IN WITNESS WHEREOF, the parties have executed this lease agreement the day
and year first above written.
LESSOR:
_______/s/____________________________
CHARLES P. TORREY, JR.
LESSEE:
ENERGY SEARCH, INCORPORATED
By: /s/___________________________
Its: President
STATE OF TENNESSEE
COUNTY OF KNOX
Personally appeared before me Laverne H. Giger, a Notary
Public in and for said County the within named bargainor, CHARLES P. TORREY,
JR., with whom I am personally acquainted, and who acknowledged that he executed
the within instrument for the purposes therein contained.
WITNESS my hand and seal this 1st day of February, 1995.
_____/s/_______________________
NOTARY PUBLIC
My commission expires:
5/21/95
- -------------------
STATE OF TENNESSEE
COUNTY OF KNOX
Personally appeared before me Laverne H. Giger, a Notary
Public in and for said county and state, _Richard S. Cooper, with whom I am
personally acquainted (or proved to me on the basis of satisfactory evidence)
and who, upon oath, acknowledged himself to be the President (or other officer
authorized to execute the instrument) of ENERGY SEARCH, INCORPORATED, the
within-named bargainor, a Tennessee Corporation, and that he as such officer
executed the foregoing instrument for the purpose therein contained, by signing
the name of the partnership by himself as President.
WITNESS my hand and seal this 1st day of February, 1995.
________/s/_________________________
My commission expires: NOTARY PUBLIC
__5/21/95________
THIS AGREEMENT OF LEASE (sometimes hereinafter referred to as this
Agreement or this Lease ) made and entered effective as of the 15th day of
September, 1996, by and between BEAVER COAL COMPANY, LIMITED, a limited
partnership formed and existing under and by virtue of The Uniform Limited
Partnership Act (as adopted by the Commonwealth of Pennsylvania and by the State
of West Virginia), as amended, party of the first part, hereinafter sometimes
called the "Lessor", and ENERGY SEARCH, INC., a corporation incorporated,
organized and existing under and by virtue of the laws of the State of
Tennessee, party of the second part, hereinafter sometimes called the "Lessee",
W I T N E S S E T H:
That the Lessor, for and in consideration of the sum of Ten Dollar
($10.00) to it in hand paid by the Lessee, the receipt of which is hereby
acknowledged, and of the payment by the Lessee of the royalties and rentals
hereinafter reserved to be paid by the Lessee, and the full and faithful
compliance by the Lessee with and performance and observance by the Lessee of
the covenants and agreements hereinafter contained has granted, demised, let and
leased, and by these presents does hereby grant, demise, let and lease unto the
Lessee, with covenants of Special Warranty only, the sole and exclusive right
and privilege of drilling and exploring on, in, over and through the tracts or
parcels of land hereinafter described, and of operating the same for the sole
and only purpose of exploring, drilling, extracting and removing oil and gas and
their constituents, and for no other purpose or purposes whatsoever; said tracts
or parcels of land as to which the said right and privilege is hereby granted
(hereinafter sometimes referred to as the Premises or Leased Premises) demised,
let and leased, being situate in Slab Fork, Town, Shady Spring and Trap Hill
Magisterial Districts of Raleigh County, West Virginia, containing by agreed
estimate of the parties 17,000 net acres, more or less (subject to adjustment if
subsequently determined to be inaccurate), and being more particularly described
as follows:
PARCEL NO. 1 - Being that certain tract or parcel of land situated,
lying and being in Slab Fork, Town and Shady Springs Magisterial Districts of
Raleigh County, containing, by estimation, a Gross Area of Thirteen Thousand and
Eight Hundred and Eighty Three and Fifty Seven hundredths (13,883.57) acres,
more or less, and after deducting the tracts or parcels of land hereinafter
excepted and reserved, a Net Area of Twelve Thousand and Six Hundred and Sixteen
and Ninety Five hundredths (12,616.95) acres, more or less, and more
particularly bounded and described as follows:
BEGINNING at a set stone, the common corner of Tract 18
(Britton & Gray), of Tract 172 (Gulf Coal Co.) and of Tract 196 (Prince
E. Lilly), as the said Tract 18, Tract 172, Tract 196, and all other
numbered and named Tracts hereinafter mentioned and described (except
those Tracts acquired by the Beaver Coal Company and/or its successor
the Beaver Coal Corporation since January 19, 1904,) are numbered,
named and shown on a general map entitled "Map of Tracts of Land in
Raleigh County, West Virginia, Conveyed to the Beaver Coal Company by
Deeds Dated January 19, 1904, from Piney Coal Company, et al., "
attached to and forming part of a certain deed dated January 19, 1904,
from the White Stick Coal Company to the Beaver Coal Company, recorded
in the Office of the Clerk of the County Court of Raleigh County, West
Virginia, in Deed Book No. 29, page 1, etc.; said general map being on
page 55 of said Deed Book No. 29;-the said beginning point being also a
corner of a tract of approximately 9,400 acres leased by the Beaver
Coal Company to Godfrey L. Cabot, Inc., by supplemental lease dated
March 28, 1931; thence following the boundary line of the said tract of
9,400 acres by Tract 18 (Britton & Gray), N 14(degree) 07' E 8047.15
feet to the 8 notched chestnut, the common corner of Tract 18 (Britton
& Gray), of Tract 27 (H.L. Gillespie), of Tract 172 (Gulf Coal Co.) and
of Tract 173 (Gulf Coal Co.); thence S 82(degree) 28' W 1585.14 feet to
a red oak; thence S 82(degree) 28' W 2730 feet to a set stone and
sourwood, the common corner of Tract 18 (Britton & Gray), of Tract
87-87a (B.P. Ball) and of Tract 171 (H.M. Riffe); thence by Tract
87-87a (B.P. Ball), N 12(degree) 56' W 1633.00 feet to a white thorn
bush and set stone, a common corner of Tract 87-87a (B.P. Ball) and of
Tract 171 (H.M. Riffe); thence passing into Tract 87-87a (B.P. Ball), N
12(degree) 56' W 74.00 feet to a point in the boundary line of a tract
of 8,581.58 acres, net area, being Parcel No. 1 of the lands leased by
the Beaver Coal Company to Godfrey L. Cabot, Inc., by lease dated April
10, 1929; thence leaving the boundary line of the said tract of 9,400
acres and following the boundary line of the said tract of 8,581.58
acres, passing trough Tract 87-87a (B.P. Ball), Tract 163 (Simeon
Mankin) and into Tract 176 (Daniel & Mary F. Polk), N 70(degree) 00' E
925.00 feet to a point; thence passing out of Tract 176 (Daniel & Mary
F. Polk), through Tract 163 (Simeon Mankin), Tract 19 (A.F. Mathews), N
28(degree) 11' E 4534.00 feet to a white oak; thence passing through
Tract 174 (H.M. Riffe & J.M. Dunn) and into Tract 14 (James A. Walker),
N 25(degree) 18' E 6692.90 feet to a hub witnessed by a chestnut and
hickory; thence N 35(degree) 03' W 1515.50 feet to a white oak and gum;
thence leaving the boundary line of the said tract of 8581.58 acres by
land of the Crab Orchard Coal & Land Co., N 72(degree) 27' E 3990.00
feet to a point on the north side of the county road leading from
Beckley to Lester; thence following the north side of the said county
road, N 51(degree) 27' E 386.00 feet to a point; thence crossing the
said county road, N 78(degree) 37' E 92.00 feet to a point; thence
leaving the said county road, E 53(degree) 09' W 221.00 feet to a
concrete monument; thence N 39(degree) 46' W 125.13 feet to a stake, a
corner of the German Baptist Church lot; thence by the said German
Baptist Church lot, N 50(degree) 59' E 420.09 feet to a stake; thence N
32(degree) 01' W 214.50 feet to a stake in the boundary line of land of
the Crab Orchard Fuel Co.; thence by land of the Crab Orchard Fuel Co.,
N 81(degree) 59' E 31.10 feet to a stake; thence N 80(degree) 43' E
1364.60 feet to a white oak, a common corner of land of the Crab
Orchard Fuel Co., and of Tract 117 (A.E. Huddleston); thence passing
through Tract 17 (A.E. Huddleston), S 85(degree) 57' E 1969.03 feet to
a concrete monument, a common corner of Tract 17 (A.E. Huddleston) and
of land formerly owned by J.D. Bower; thence by the said land formerly
owned by J.D. Bower, S 1(degree) 02' E 228.97 feet to a concrete
monument; thence N 26(degree) 07' E 236.04 feet to a concrete monument;
thence S 79(degree) 57' E 2482.79 feet to a concrete monument; thence
due North 82.50 feet to a chestnut; thence N 50(degree) 00' E 640.00
feet to a spruce pine by a branch; thence up said branch as it meanders
1297.00 feet to a spruce pine; thence continuing up said branch, N
14(degree) 30' W 252.00 feet to a maple; thence N 25(degree) 00' W
197.00 feet to a maple; thence N 50(degree) 00' W 479.00 feet to a
white oak; thence N 70(degree) 00' W 372. 00 feet to a white oak, the
common corner of Tract 92 (B.F.Ruff), of Tract 186 (Tolbert Smokeless
Coal Co.) and of land formerly owned by J.D. Bower; thence by said
Tract 186, N 33(degree) 30' W 352.00 feet to a white oak; thence N
46(degree) 50' W 565.00 feet to a sourwood in the boundary line of land
of J.A. Ewart s Heirs; thence by the said land of J.A. Ewart s Heirs, N
56(degree) 20' E 1301.00 feet to a Spanish oak and two hickories;
thence N 86(degree) 50' E 470.00 feet to a chestnut; thence N
45(degree) 00' E 524.00 feet to two white oaks; thence N 28(degree) 45'
E 740.00 feet to a double chestnut; thence N 4(degree) 15' W 700.00
feet to a poplar, a corner of the Shanks tract; thence by the said
Shanks tract, N 38(degree) 45' E 1491.00 feet to a white oak and steel
rail, the common corner of Tract 92 (B.F. Ruff), of Tract 34 (John
McVey), of Tract 99 (David Robertson), and of the said Shanks tract;
thence N 77(degree) 43' W 1466.22 feet to a steel rail between a poplar
and white oak, a common corner of land formerly owned by W.R. Graham;
thence by the said land formerly owned by W.R. Graham thence by the
said land formerly owned by W.R. Graham N. 9(degree) 55' E. 2966.0 feet
to 2 White oaks, a common corner of Tract 99 (David Robertson), Tract
184 (Thomas H. Wickham); thence by Tract 184 (Thomas H. Wickham) N.
80(degree) 15' W 560.0 feet to a white pine, a common corner of land
formerly owned by W.R. Graham and Tract 184 (Thomas H. Wickham); thence
by land formerly owned by W.R. Graham and Tract 126 (W.R. Graham) and
Tract 123 (S.J. Snuffer) N 12(degree) 11' E 2709.0 feet to a chestnut
oak on the south side of a road, a common corner of Tract 99 (David
Robertson) and Tract 123 (S.J. Snuffer); thence by Tract 123 (S.J.
Snuffer) N 70(degree) 08' E 759.64 feet to a chestnut on the north side
of the Logan Turnpike, a common corner of Tract 99 (David Robertson)
and Tract 123 (S.J. Snuffer); thence with the Logan Turnpike and Tract
99 (David Robertson) in an easterly direction for a distance of 1770
feet, more or less, to a chestnut stump on the north side of the Logan
Turnpike; thence with the boundary line of Tract 99 (David Robertson)
S. 12(degree) 00' W 2528.0 feet to a point in the boundary line of
Tract 34 (John McVey); thence by Tract 34 (John McVey) S 78(degree) 15'
E 2173.0 feet to a point in the boundary line of Tract 92 (B.F. Ruff);
thence by Tract 92 (B.F. Ruff) N 11(degree) 15' E 969.0 feet, N
66(degree) 00' E 379.0 feet, N 24(degree) 00' W 462.0 feet, S
61(degree) 55' E 357.0 feet, S 81(degree) 05' E 682.0 feet, S 6(degree)
10' W 128.0 feet, S 77(degree) 45' E 438.0 feet to a common corner with
Tract 208 (Dicie S. Lilly); thence by Tract 208 (Dicie S. Lilly) N
5(degree) 27-1/2' E 553.95 feet, S 82(degree) 10' E. 153.32 feet, N
8(degree) 04' E 1011.06 feet S 68(degree) 33' E 457.45 feet to a common
corner with Tract 209c (Hal M. Scott); thence by Tract 209c (Hal M.
Scott), N 26(degree) 03' E 412.0 feet to a common corner with Tract 209
(Hal M. Scott) S 78(degree) 17' W 297.0 feet, N 25(degree) 39' W 378.71
feet; thence passing a common corner of Tract 209 (Hal M. Scott) and
Tract 290a (Hal M Scott), N 23(degree) 28' W 603.41 feet to a corner of
Tract 209a (Hal M. Scott); thence by Tract 290a (Hal M. Scott) S
76(degree) 58' E 990 feet to a common corner with Tract 199 (Araminta
Prince et al); thence by Tract 199 (Araminta Prince et al) N 26(degree)
03' E 360.88 feet to a common corner with Tract 209b (Hal M. Scott);
thence by Tract 209b (Hal M. Scott) N 79(degree) 03' W 439.93 feet, N
23(degree) 02' E 589.50 feet, S 66(degree) 33' E 436.04 feet to a
common corner with Tract 199 (Araminta Prince et al); thence N
26(degree) 03' E 1334.35 feet, N 23(degree) 53' E 306.30 feet, S
64(degree) 00' E 1170.0 feet, S 22(degree) 37' W 955.60 feet S
19(degree) 13' W 695.0 feet to a common corner with Tract 210 (Koppers
Coal Company); thence by Tract 210 (Koppers Coal Company) S 67(degree)
14' E 2114.68 feet to a common corner with Tract 201 (Elkhorn Piney
Coal Mining Company); thence by Tract 201 (Elkhorn Piney Coal Mining
Company); S 24(degree) 18' W 329.55 feet to a point in the boundary of
Tract 105 (Jane Beckley); thence by Tract 105 (Jane Beckley), S
65(degree) 51' E 1327.50 feet to a common corner with Tract 201
(Elkhorn Piney Coal Mining Company) and Tract 92a (B.F. Ruff); thence
by Tract 92a (B.F. Ruff) N 34(degree) 31' E 1570.0 feet to a common
corner with the Pinecrest Sanitarium (Surface) and a point in Tract 100
(Ruff and Nichol); thence by Tract 100 (Ruff and Nichol); thence by
Tract 100 (Ruff and Nichol) and Pinecrest Sanitarium (Surface) N
53(degree) 17' W 975.0 feet to a corner of Pinecrest Sanitarium; thence
by Pinecrest Sanitarium N 23(degree) 06' E 2338.40 feet N 66(degree)
54' W 981.15 feet to a common corner with Pinecrest Sanitarium
(Surface) and Tract 100 (Ruff and Nichol); thence by Pinecrest
Sanitarium (Surface) N 23(degree) 06' E 1264.54 feet, S 64(degree) 50'
E 3105.57 feet, S 5(degree) 07' E 2061.88 feet, S 53(degree) 25' W
2465.47 feet to a point in the boundary line between Tract 100 (Ruff
and Nichol) and Tract 92a (B.F. Ruff); thence by Tract 92a (B.F. Ruff)
S 52(degree) 57' E 265.0 feet to a point in the boundary line between
Tract 100 (Ruff and Nichol) and Tract 92a (B.F. Ruff); thence passing
through Tract 92a (B.F. Ruff), 92b (B.F.Ruff) Tract 92 (B.F. Ruff) S
5(degree) 50' E 6925.00 feet, more or less, to a point in the middle of
the Piney River opposite the mouth of Big Beaver Creek; thence leaving
the middle of Piney River and up the middle of Big Beaver Creek S
40(degree) 14' E 238.88 feet to a point; thence leaving Big Beaver
Creek, by land formerly owned by Prince E. Lilly, S 88(degree) 28' W
115.50 feet to a steel rail; thence S 3(degree) 32' E 39.60 feet to a
steel rail; thence S 19(degree) 15' E 537.90 feet to a stone; thence S
84(degree) 39' E 363.00 feet to a white oak (down); thence S 2(degree)
01' W 438.10 feet to a white oak and double spruce pine stump thence S
44(degree) 18' W 456.20 feet to a white oak and poplar stumps; thence S
11(degree) 31' E 1216.90 feet to a white oak stump thence S 61(degree)
43' E 420.20 feet to a white oak (down); thence S 1(degree) 01' W
928.70 feet to a double spruce pine and white oak; thence S 58(degree)
39' E 1835.40 feet to two hickories (one down); thence by land of the
Blue Jay Lumber Co., S 33(degree) 45' W 2830.00 feet to a stake near a
burnt chestnut oak; thence S 57(degree) 00' E 1760.00 feet to a
chestnut; thence N 36(degree) 35' E 2520.00 feet to two chestnuts and a
locust; thence N 59(degree) 39; W 1633.50 feet to a white oak (gone);
thence N 30(degree) 16' E 359.40 feet to a stone; thence by land
formerly owned by Prince E. Lilly, S 59(degree) 39' E 314.00 feet to a
chestnut oak; thence N 25(degree) 15' E 1100.00 feet to two hemlocks
(one down); thence by land of the Blue Jay Lumber Co., S 56(degree) 08'
E 2664.80 feet to a white oak (down); thence S 84(degree) 40' W 1475.40
feet to two chestnuts; thence S 7(degree) 10' E 4872.00 feet to a
chestnut oak; thence S 36(degree) 24' W 1608.00 feet to a stake (white
oak gone); thence S 76(degree) 57' W 3540.00 feet to a stake (white oak
and hickory gone); thence S 58(degree) 06' W 1060.00 feet to a white
pine stump; thence by land formerly owned by Lee Scott, N 33(degree)
30' W 1669.00 feet to a white oak; thence S 56(degree) 00' W 2798.00
feet to a burned white oak; thence passing through Tract 30b (E.
Prince) S 62(degree) 00' W 7000 feet, more or less, to a chestnut oak,
a common corner of Tract 30b (E. Prince) and land of the McVey Heirs;
thence by land of the McVey Heirs N 77(degree) 48' W 4140.0 feet to a
gum, N 85(degree) 45' W 838.0 feet to a spruce pine stump on the bank
of Piney River, a common corner of land of the McVey Heirs, Tract 30b
(E. Prince) and Tract 88 (Emily Sessler); thence following the property
line between land of the McVey Heirs and Tract 88 (Emily Sessler) Tract
86 (J.B.F. Mawley) and Tract 61 (Richard McVey) up the middle of Piney
River for a distance of 2126 feet, more or less, to a point opposite
the mouth of Laurel Branch, a common corner of land of the McVey Heirs
and Tract 61 (Richard McVey), thence by Tract 61 (Richard McVey) up the
middle of Laurel Branch 470 feet, more or less, to a maple and pine, a
common corner of land of the McVey Heirs, Tract 61 (Richard McVey) and
Tract 92d (B.F. Ruff and C.E. Speer); thence by Tract 92d (B.F. Ruff
and C.E. Speer) S 44(degree) 20' E 3058.0 feet to a chestnut and gum, a
common corner of land of the McVey Heirs, Tract 92d (B.F. Ruff and C.E.
Speer) and Tract 28 (Emily Halstead); thence by Tract 28 (Emily
Halstead) N 73(degree) 41' E 698.0 feet to a gum, N 34(degree) 08' E
317.0 feet to three dogwoods, N 89(degree) 33' E 736.0 feet to a maple
and chestnut, N 62(degree) 00' E 482.0 feet to a sourwood and maple, S
69(degree) 00' E 204.0 feet to a point on the bank of Piney River, a
common corner of land of the McVey Heirs, Tract 28 (Emily Halstead) and
Tract 158 (B.M. McVey); thence up the middle of Piney River, which is
the boundary line between Tract 28 (Emily Halstead), Tract 158 (B.M
McVey), Tract 92d (B.F. Ruff and C.E. Speer), Tract 30B (E. Prince) and
Tract 21 (August Koethe) for a distance of 5870 feet, more or less, to
a common corner of Tract 21 (August Koethe) and Tract 198 (Prince E.
Lilly et al); thence by Tract 198 (Prince E. Lilly, et al), N
70(degree) 16' W 2338.38 feet, S 69(degree) 46' W 1999.13 feet to a
common corner with Tract 21 (August Koethe) and Tract 92d (B.F. Ruff
and C.E. Speer); thence passing through Tract 92d (B.F. Ruff and C.E.
Speer), N 88(degree) 58' 1680 feet, more or less, to a common corner of
Tract 92d (B.F. Ruff and C.E. Speer), Tract 35 (Aden Thompson) and
Tract 187 (Daniel Boone); thence by Tract 35 (Aden Thompson) N
77(degree) 45' W 3080. feet, more or less, to a set stone, gum and
sourwood, a common corner of Tract 92d (B.F. Ruff and C.E. Speer),
Tract 35 (Aden Thompson) and land of the Winding Gulf Collieries;
thence by the boundary between Tract 92d (B.F. Ruff and C.E. Speer) and
land of Winding Gulf Collieries , N 51(degree) 45-1/2' W 3712.93 feet
to a set stone and white oak, a common corner of Tract 92d (B.F. Ruff
and C.E. Speer), Tract 27 (H.L. Gillespie), Tract 172 (Gulf Coal
Company) and land of Winding Gulf Collieries; thence following the
boundary line between Tract 172 (Gulf Coal Company) and land of Winding
Gulf Collieries S 30(degree) 17-1/2' W 5925.35 feet to an iron rail, S
36(degree) 57' W 1014.91 feet to an iron rail, S 60(degree) 33' W
810.31 feet to a set stone, N 63(degree) 27' W 1255.86 feet to a set
stone, a common corner of Tract 172 (Gulf Coal Company), Tract 196
(Prince E. Lilly et al) and land of Winding Gulf Collieries; thence by
Tract 196 (Prince E. Lilly, et al) N 63(degree) 32' W 402.23 feet to
the point of beginning, containing 13,883.57 acres, gross area.
EXCEPTING AND RESERVING, NEVERTHELESS, from and out of the parcel of
land above described and designated as Parcel 1, and from and out of the
operation of this lease,
FIRST - The tracts or parcels of land next hereinafter described by metes
and bounds and designated as No 1, No. 2, No. 3, No. 4, No. 5, No. 6, No. 7, No.
8, No. 9, and No. 10, being lands lying inside the exterior boundary lines of
said Parcel No 1 as above described, but not owned by the Lessor herein: No 1
The F.P. Cloud Store Lot:
BEGINNING at a stump, a common corner of Tract 60 (F. P. Cloud) and of
Tract 88 (Emily J. Sessler); thence by Tract 88 (Emily J. Sessler), N 28(degree)
10' E 62.69 feet to a stump; thence S 53(degree) 00' E 75.95 feet; thence S
28(degree) 40' E 160.61 feet; thence S 22(degree) 54' W 98.74 feet; thence N
68(degree) 53' W 75.88 feet to a point in the middle of the old county road;
thence by Tract 60 (F.P. Cloud), N 16(degree) 37' W 203.51 feet to the point of
beginning; Containing 0.58 of an acre, more or less.
No. 2. The J.B.F. Hawley 4.86 acre Reservation:
BEGINNING at a point in the old road leading to Soak Creek, a
common corner of Tract 86 (J.B.F. Hawley) and of Tract 88 (Emily J.
Sessler); thence by Tract 88 (Emily J. Sessler), N 46(degree) 00' W
188.94 feet; thence N 26(degree) 00' W 488.00 feet, thence N 1(degree)
10' W 67.00 feet; thence S 70(degree) 00' E 109.81 feet; thence S
74(degree) 55' E 228.10 feet; thence S 65(degree) 00' E 172.00 feet;
thence S 4(degree) 15' W 110.02 feet; thence S 80(degree) 20' E 130.89
feet; thence by Tract 86 (J.B.F. Hawley), S 12(degree) 35' W 345.37
feet; thence N 89(degree) 30' W 173.63 feet to the point of beginning;
Containing 4.86 acres, more or less.
No. 3. The J.B.F. Hawley 1.04 acre Reservation:
BEGINNING at a point in the old road leading to Soak Creek, a
common corner of Tract 86 (J.B.F. Hawley) and of Tract 88 (Emily J.
Sessler); thence by Tract 88 (Emily J. Sessler), N 29(degree) 30' E
370.00 feet to a point; thence by Tract 86 (J.B.F. Hawley), S
54(degree) 30' E 123.00 feet; thence S 29(degree) 30' W 370.00 feet;
thence N 54(degree) 30'W 123.00 feet to the point of beginning;
Containing 1.04 acres, more or less.
No. 4. The Emily J. Sessler 15.70 acre Reservation:
BEGINNING at a stake, a common corner of Tract 60 (F.P. Cloud)
and of Tract 88 (Emily J. Sessler); thence by Tract 88 (Emily J.
Sessler), S 49(degree) 33' E 109.95 feet; thence S 34(degree) 59' E
108.97 feet; thence S 27(degree) 32' E 134.78 feet; thence S 20(degree)
41' E 300.84 feet; thence S 15(degree) 04' E 105.35 feet; thence S
0(degree) 43' E 99.19 feet; thence S 7(degree) 57' W 248.67 feet;
thence S 21(degree) 37' W 179.37 feet; thence S 32(degree) 28' W 303.80
feet; thence S 27(degree) 36' W 94.80 feet; thence S 10(degree) 49' W
117.34 feet; thence by Tract 51a (Fleming A. Via), N 85(degree) 00' W
409.12 feet; thence by Tract 60 (F.P. Cloud), N 2(degree) 09' W 168.31
feet; thence N 40(degree) 40' E 88.96 feet; thence N 18(degree) 00' E
217.50 feet; thence N 11(degree) 32' E 273.36 feet; thence N 9(degree)
03' E 130.04 feet; thence N 11(degree) 26' E 149.32 feet; thence N
27(degree) 59' E 105.50 feet; thence N 10(degree) 37' E 479.09 feet;
thence N 34(degree) 53(degree) E 56.85 feet to the point of beginning;
Containing 15.70 acres, more or less.
No. 5. The Nannie L. Phillips Tract:
BEGINNING at a point in the middle of Soak Creek at the mouth
of a small stream, the common corner of Tract 8 (Wilson Phillips), of
Tract 60 (F.P. Cloud) and of land formerly owned by Nannie L. Phillips;
thence by Tract 8 (Wilson Phillips), N 12(degree) 14' W 228.90 feet to
a point; thence by Tract 167 (Nannie L. Phillips), N 71(degree) 16' E
445.00 feet to a large dead white oak; thence S 18(degree) 12' E 132.00
feet to a point in the western right of way boundary line of the
Raleigh & Southwestern Branch of the Chesapeake & Ohio Railway Company,
opposite Station 324+84.7 P.O.T. of the center line of said railway and
25 feet, measured at right angles, therefrom; thence following the said
western right of way boundary line on a tangent, parallel to and 25
feet from the said center line, N 55(degree) 06' E 403.00 feet to a
point opposite Station 320+81.7 P.C. of said center line; thence
curving to the left with a radius of 385.3 feet, through an arc of
29(degree) 58' (the chord of the arc bearing N 40(degree) 06' E and
being 200.40 feet in length), to a point opposite Station 318+67.5 P.T.
of said center line; thence N 64(degree) 54' W 50.00 feet to a point;
thence on a tangent, parallel to and 75 feet distance from said center
line, N 25(degree) 06' E 1200.00 feet to a point in the middle of Piney
River opposite Station 306+67.5 P.O.T. of said center line; thence
leaving the western right of way boundary line of said railway, and up
the middle of Piney River, following the meanders thereof, by Tract 30b
(Edwin Prince), for a distance of 2100.00 feet to a point opposite the
mouth of Soak Creek; thence leaving the middle of Piney River and up
the middle of Soak Creek, following the meanders thereof, by Tract 88
(Emily J. Sessler) and Tract 60 (F.P. Cloud), for a distance of 1663.00
feet, more or less, to the point of beginning; Containing 19.00 acres,
more or less.
No. 6. The Nannie L. Phillips Tract:
BEGINNING at a point in the middle of the Piney River and in
the western right of way boundary line of the Raleigh & Southernwestern
Branch of the Chesapeake & Ohio Railway Company opposite Station 295+08
P.O.T. of the center line of said railway and 25 feet distant, measured
at right angles, therefrom; thence following the said western right of
way boundary line, on a tangent, parallel to and 25 feet from the said
center line, N 28(degree) 50' E 35.00 feet to a point opposite Station
294+73 P.C. of said center line; thence curving to the left with a
radius of 385.3 feet, through an arc of 66(degree) 30' (the chord of
the arc bearing N 5(degree) 35' W and being 435.5 feet in length), to a
point opposite Station 289+81.3 P.T. of said center line; thence on
tangent N 40(degree) 00' W 106.3 feet to a point opposite Station
288+75 P.C. of said center line; thence curving to the right with a
radius of 435.3 feet, through an arc of 28(degree) 31' (the chord of
the arc bearing N 24(degree) 57' W and being 226.1 feet in length), to
a point in the middle of Piney River opposite Station 286+60 P.O. C. Of
the said center line; thence leaving the western right of way boundary
line of said railway, and up the middle of Piney River, following the
meanders thereof, by Tract 30b (Edwin Prince), for a distance of
2050.00 feet, more or less, to the point of beginning; Containing 9.50
acres, more or less.
No. 7. The P. Spangler Tract:
BEGINNING at a point in the middle of Piney River at the mouth
of Rocky Branch, the common corner of Tract 30b (Edwin Prince), of
Tract 108 (Simeon Mankin) and of the P. Spangler tract; thence up Rocky
Branch, following the meanders thereof, by Tract 108 (Simeon Mankin),
for a distance of 600.00 feet, more or less, to a spruce pine; thence
leaving the middle of said Rocky Branch, by Tract 92 (B.F. Ruff), S
74(degree) 35' E 1070.00 feet to a white pine; thence S 84(degree) 20'
E 990.00 feet to a double maple; thence S 3(degree) 30' W 1255.00 feet
to a point in the middle of Piney River opposite the mouth of a small
branch; thence up the middle of Piney River, following the meanders
thereof, by Tract 30b (Edwin Prince), for a distance of 2500.00 feet to
the point of beginning; Containing 53.00 acres, more or less.
No 8. The J. Fitzpatrick Tract:
BEGINNING at a white pine and spruce pine on the north bank of
Piney River, a common corner of Tract 92 (B.F. Ruff) and of the J.
Fitzpatrick tract; thence by Tract 92 (B.F. Ruff), N 18(degree) 25' E
835.00 feet to a large spruce pine; thence N 18(degree) 50' W 500.00
feet to a white pine and spruce pine; thence N 37(degree) 00' E 1308.00
feet to a gum; thence S 71(degree) 20' E 2812.00 feet to a black oak
and chestnut; thence S 44(degree) 40' W 2950.00 feet to a point in the
middle of Piney River opposite the mouth of a small branch; thence down
the middle of Piney River, following the meanders thereof, for a
distance of 1800.00 feet, more or less, to a point in the middle of
Piney River opposite two spruce pines on the east bank; thence leaving
the middle of Piney River, by Tract 30b (Edwin Prince), S 67(degree)
20' W 1105.00 feet to two spruce pines; thence S 18(degree) 34' W
241.00 feet to two spruce pines; thence by Tract 46 (J.W. Pittman), N
41(degree) 58' W 1400.00 feet to two spruce pines and a maple on the
mouth bank of Piney River; thence down the middle of Piney River,
following the meanders thereof, by Tract 92 (B.F. Ruff), for a distance
of 3100.00 feet, more or less, to the point of beginning; Containing
252.00 acres, more or less.
No. 9. The Raleigh Coal & Coke Company Lots:
BEGINNING at a point in the middle of Piney River, a point in
the boundary line between Tract 92 (B.F. Ruff) and Tract 109 (Lewis
Hull Heirs); thence down the middle of Piney River, by Tract 92 (B.F.
Ruff), N 62(degree) 02' E 30.00 feet to a point; thence leaving the
middle of Piney River and passing through Tract 109 (Lewis Hull Heirs),
S 38(degree) 23' E 148.50 feet to a steel rail in the northern right of
way boundary line of the Piney Creek Branch of the Chesapeake & Ohio
Railway Company; thence S 62(degree) 06' W 115.00 feet to a steel rail
in said northern right of way boundary line; thence S 25(degree) 38' W
181.50 feet to a point; thence N 70(degree) 22' W 65.00 feet to a
stake; thence N 9(degree) 38' W 35.41 feet to a stake; thence N
60(degree) 07' E 126.00 feet to a stake; thence N 45(degree) 19' W
73.20 feet to the point of beginning; Containing 0.56 of an acre, more
or less.
No. 10. The United States of America (Being a total mineral
boundary of 30.55 acres which is described as a fee tract of 25.00
acres, out of which a surface exception of 1.41 acres is taken, and a
mineral tract of 5.55 acres.)
BEGINNING at a set stone in Tract 92 (B.F. Ruff), as the said
Tract 92 and all numbered and named Tracts hereinafter mentioned and
described (except those Tracts acquired by the Beaver Coal Company
and/or its successors (the Beaver Coal Corporation since January 19,
1904) are numbered, named and shown on a general map entitled Map of
Tracts of Land in Raleigh County, West Virginia, conveyed to the Beaver
Coal Company by deed dated January 19, 1904, from Piney Coal Company et
al.. attached to and forming part of a certain deed dated January 19,
1904, from the White Stick Coal Company to the Beaver Coal Company,
recorded in the Office of the Clerk of the County Court of Raleigh
County, West Virginia, in Deed Book No. 29, page 1 etc., said general
map being on page 55 of said Deed Book No 29;--the said beginning point
being also a common corner of a tract of 17.59 acres of surface
conveyed by the Beaver Coal Company and the Raleigh Coal and Coke
Company to J.P. White by deed dated October 18, 1919, and of a tract of
25.76 acres of surface conveyed by the Beaver Coal Company and the
Raleigh Coal and Coke Company to the South Beckley Land Company by deed
dated September 13, 1927; thence following the boundary line of the
said tract of 25.76 acres, passing through Tract 92 (B.F. Ruff), South
74(degree) 17' 16" East twenty-eight and sixty-three-one--hundredths
(28.63) feet to a stake; thence leaving the boundary line of the said
tract of 25.76 acres, continuing through Tract 92 (B.F. Ruff), South
18(degree) 28' 28" West one thousand two hundred one and ninety-four
one-hundredths (1201.94) feet to a stake in the northern right of way
boundary line of the Piney Creek Branch of The Chesapeake and Ohio
Railway Company, said stake being 33 feet, measured at right angles
from the center line of said railway; thence following the said
northern right of way boundary line of said railway, parallel to and 33
feet distant from the said center line, North 66(degree) 05' 32" West
ninety-six and two one-hundredths (96.02) feet to a stake; thence,
passing out of Tract 92 (B.F. Ruff) and into Tract 34 (John McVey),
curving to left with a radius of two thousand one hundred ninety-three
and ninety-three one-hundredths (2193.93) feet, through an arc of five
hundred thirty and sixty-two one-hundredths (530.62) feet, (the chord
of the arc bearing North 73(degree) 57' 40" West and being five hundred
twenty-nine and thirty-five one-hundredths (529.35) feet in length) to
a stake; thence North 79(degree) 56' 58" West three hundred nineteen
and ninety-eight one-hundredths (319.98) feet to a stake; thence
leaving the said northern right of way boundary line of said railway,
continuing though Tract 34 (John McVey) North 17(degree) 04' 48" East
eleven hundred nineteen and eighty-two one-hundredths (1119.82) feet to
a stake in the southernmost boundary line of a tract of 7.65 acres of
surface conveyed by the Beaver Coal Company and the Raleigh Coal and
Coke Company to Festus Scott by deed dated October 3, 1928; thence
following the boundary line of the said tract of 7.65 acres and the
above mentioned tract of 17.59 acres, passing out of Tract 34 (John
McVey) and into Tract 92 (B.F. Ruff), South 80(degree) 04' 46" East
nine hundred fifth and twenty-eight one-hundredths (950.28) feet to the
point of beginning, containing 25.00 acres, more or less, and being
part of Beaver Coal Corporation s Tracts 34 (John McVey) and 92 (B.F.
Ruff). All courses and distances are based on a survey by United States
Engineers.
EXCEPTION - SURFACE OWNED BY C.H. GOODWIN
BEGINNING at a stake in the southernmost boundary line of the
said tract of 7.65 acres of surface conveyed by the Beaver Coal Company
and the Raleigh Coal and Coke Company to Festus Scott by deed dated
October 3, 1928, said stake being the northwest corner of the tract of
25.00 acres, South 80(degree) 04' 46" East two hundred seventy-five and
thirty-eight one-hundredths (275.38) feet to a stake; thence leaving
the boundary line of and passing through the said tract of 25.00 acres,
South 11(degree) 21' 14" West two hundred six and sixteen
one-hundredths (206.16) feet to a stake; thence North 83(degree) 34'
05" West two hundred ninety-one and forty-four one-hundredths (291.44)
feet to a tack in a cut-off fence post; thence North 54(degree) 49' 53"
West seven and seventy-five one-hundredths (7.75) feet to a stake in
the western boundary line of the tract of 25.00 acres; thence following
the western boundary line of the said tract of 25.00 acres, North
17(degree) 04' 48" East two hundred twenty-two and twenty-five
one-hundredths (222.25) feet to the point of beginning, containing 1.41
acres, more or less.
BEGINNING at a set stone in Tract 92 (B.F. Ruff), as the said
Tract 92 and all unnumbered and named tracts hereinafter mentioned and
described (except those tracts acquired by the Beaver Coal Company and/
or its successor, the Beaver Coal Corporation, since January 19, 1904)
are numbered, named and shown on a general map entitled Map of Tracts
of Land in Raleigh County, West Virginia, conveyed to the Beaver Coal
Company by deeds dated January 19, 1904, from Piney Coal Company, et
al., attached to and forming part of a certain deed dated January 19,
1904, from the White Stick Coal Company to the Beaver Coal Company
recorded in the office of the Clerk of the County Clerk of Raleigh
County, West Virginia, in Deed Book No. 29, page 1, etc., said general
map being on page 55 of said Deed Book No. 29;--the said beginning
point being also a common corner of a tract of 17.59 acres of surface
conveyed by the Beaver Coal Company and the Raleigh Coal and Coke
Company to J.P. White by deed dated October 18, 1919, and of a tract of
25.76 acres of surface conveyed by the Beaver Coal Company and the
Raleigh Coal and Coke Company to the South Beckley Land Company by deed
dated September 13, 1927; the said beginning point being also the
beginning point of a tract of land conveyed by the Beaver Coal
Corporation and Raleigh Coal and Coke Company, to the United States of
America be deed dated January 30, 1948, and recorded in Book 254, page
440, of the land records of Raleigh County, West Virginia; thence
following the boundary line of the said tract of 25.76 acres, passing
through Tract 92 (B.F. Ruff) South 74(degree) 17' 16" East twenty-eight
and sixty-three one-hundredths (28.63) feet to a stake; thence North
18(degree) 28' 28" East one-hundred twenty and fourteen one-hundredths
(120.14) feet; thence North 74(degree) 17'16" West forty and forty-nine
one-hundredths (40.49) feet; thence North 80(degree) 04' 46" West one
thousand forty-two and four one-hundredths (1042.04) feet; thence South
17(degree) 04' 48" West one thousand two hundred forty and fifty-three
one-hundredths (1240.53) feet; thence South 79(degree) 56' 58" East one
hundred and seventy-six one-hundredths (100.76) feet to a stake; thence
North 17(degree) 04' 48" East one thousand one hundred nineteen and
eighty-two one hundredths (1119.82) feet to a stake; thence South
80(degree) 04' 46" East nine hundred fifty and twenty--eight
one-hundredths (950.28) feet to the point of beginning, containing 5.55
acres of mineral.
SECOND. - The following tracts and parts of tracts of land, as
numbered and designated on the map attached hereto and made a part hereof, to
which reference is here made (the acreage given being by estimation only):
Tract Number Acres
------------ -----
171 20.00
Pt. 176 91.00
179 77.62
178 78.42
177 102.75
177a 1.00
177b 45.50
175 101.40
Pt. 174 16.90
41 192.62
40 100.22
169 52.40
----------------
Total 879.83
The Net Area of Parcel No. 1 above described, after deducting therefrom
the aggregate acreage of the tracts and parts of tracts hereinbefore excepted
and reserved thereout and therefrom is (by estimation) 12,616.95 acres, more or
less.
For the purpose of more accurately defining the location and boundaries
of the tract or parcel of land above described, the parties hereto have attached
to this lease as EXHIBIT A, a special map of the tract or parcel of land,
entitled Map Showing Parcel No. 1 Containing 12,616.95 Acres, More or less, Net
Area, Leased by Beaver Coal Company, Limited to United Fuel Gas Company for oil
and gas purposed by Lease Dated April 1, 1971, Scale 1"--1500', which is
attached hereto and made a part hereof and is to be taken and read as a part of
the description hereinbefore set forth.
PARCEL NO. 2. - Being that certain tract or parcel of land situated,
lying and being in Town Magisterial District of Raleigh County, containing, by
estimation, a gross area of Four Thousand and Ninety Five and Thirty Four
hundredths (4095.34) acres, more or less, and after deducting the tracts or
parcels of land hereinafter excepted and reserved, a net area of Three Thousand
Five Hundred and Fifty Nine and Ninety Two hundredths (3559.92) acres, by
estimation, more or less, and more particularly described as follows:
BEGINNING at a white oak, the common corner of Tract 52
(Marshall Bailey), of Tract 98 (Dyar, Addison & Co.), of land of the
New River Company (R. Tench), and of land of the Cranberry Fuel Company
(Tract 98a) as the said Tract 52, Tract 98, land of the New River
Company, land of the Cranberry Fuel Company, and all numbered and named
Tracts hereinafter mentioned and described (except those Tracts
acquired by the Beaver Coal Company and/or its successor the Beaver
Coal Corporation (since January 19, 1904) are numbered, named and shown
on a general map entitled Map of Tracts of Land in Raleigh County, West
Virginia, conveyed to the Beaver Coal Company by deeds dated January
19, 1904, from Piney Coal Company et al., attached to and forming part
of a certain deed dated January 19, 1904, from the White Stick Coal
Company to the Beaver Coal Company, recorded in the Office of the Clerk
of the County Court of Raleigh County, West Virginia, in Deed Book No.
29, page 1 etc.; said general map being on page 55 of said Deed Book
No. 29;--thence by land of the Cranberry Fuel Company (Tract 98a) S
61(degree) 48' E 1050.00 feet to a set stone; thence by land of the
Cranberry Fuel Company (Tract 98a), and land of M.C. Bibb (Tracts 7a
and 59a), S 0(degree) 56' E 5360.75 feet to a hub between a chestnut
and chestnut oak stump, the common corner of Tract 59 (W.P. Willis), of
land of M.C. Bibb (Tract 59a), and of land formerly owned by J.H.
McGinnis; thence by land formerly owned by J.H. McGinnis N 65(degree)
49' W 775.07 feet to a hub and hickory, the common corner of Tract 59
(W.P. Willis), of Tract 97 (Robert T. Thurman), and of land formerly
owned by J. H. McGinnis; thence S 52(degree) 28' W 2665.58 feet to a
chestnut snag, the common corner of Tract 97 (Robert T. Thurman), of
Tract 65 (W.C. Thurman), and of land formerly owned by J.H. McGinnis;
thence S 46(degree) 52' E 1003.00 feet to a chestnut oak stump, the
common corner of Tract 65 (W. C. Thurman), of Tract 123 (S.J. Snuffer),
and of land formerly owned by J.H. McGinnis; thence N 79(degree) 27' E
1747.04 feet to a stone at Logan Turnpike, the common corner of Tract
123 (S.J. Snuffer), of land formerly owned by J.H. McGinnis and of land
of J.A. Ewart s Heirs; thence by land of J.A. Ewart s Heirs S
42(degree) 25' E 415.20 feet to a chestnut on the northeast side of
Logan Turnpike, the common corner of Tract 123 (S.J. Snuffer) of land
of J.A. Ewart s Heirs and of Tract 99 (David Robertson) (the said
chestnut marking also a corner of a tract of 8312.10 acres leased by
the said Beaver Coal Company to the Raleigh Coal and Coke Company by
lease dated the 16th day of October, 1899); thence following the
boundary line of the said tract of 8312.10 acres, by Tract 99 (David
Robertson), S 70(degree) 08' W 759.64 feet to an iron rail on the south
side of Maple Meadow Road (a double chestnut oak called for); thence S
12(degree) 11' W 2068.72 feet to an iron rail, the common corner of
Tract 126 (W.R. Graham), of Tract 99 (David Robertson), and of land
formerly owned by W.R. Graham; thence leaving the boundary line of the
said tract of 8312.10 acres, by land formerly owned by W.R. Graham; S
52(degree) 22' W 692.95 feet to an iron rail (a double maple called
for); thence S 0(degree) 47' W 1100.87 feet to a point in the center
line of the Chesapeake and Ohio Railway, the common corner of Tract 126
(W.R. Graham), of Tract 126a (W.R. Graham), of land formerly owned by
W.R. Graham and of land of the Mabscott Coal and Coke Company (J.W.
McCreery); thence by land of the Mabscott Coal and Coke Company (J.W.
McCreery) S 79(degree) 22' W 1570.00 feet to a white oak, the common
corner of Tract 126a (W.R. Graham), of Tract 20 (John A Covey), and of
land of the Mabscott Coal and Coke Company (J. W. Bower and J.W.
McCreery); thence S 16(degree) 15' W 2136.61 feet to a large chestnut
on south side of road, the common corner of Tract 20 (John A. Covey),
of Tract 82 (D.S. Cline), and of land of the Mabscott Coal and Coke
Company (J.W. Bower); thence S 43(degree) 36' E 844.05 feet to a stake
between a white oak and a chestnut, the common corner of Tract 82 (D.S.
Cline), of land of the Mabscott Coal and Coke Company (J.W. Bower), and
of land of J.A. Ewart s Heirs; thence by land of J. A. Ewart s Heirs S
56(degree) 07' W 1258.64 feet to a stake in a chestnut stump, the
common corner of Tract 82 (D. S. Cline), of land of J.A. Ewart s Heirs,
and of land of J. Hutchinson; thence by land of J. Hutchinson and of
Ward Cook s Heirs N 36(degree) 04' W 1281.63 feet to a large chestnut,
a common corner of Tract 82 (D.S. Cline) and of land of Ward Cook s
Heirs; thence by land of Ward Cook s Heirs N 32(degree) 54' E 159.26
feet to a white oak in a hollow; thence N 33(degree) 21' W 657.22 feet
to a hub between a large chestnut and a hickory, the common corner of
Tract 82 (D. S. Cline), of Tract 101 (Archie Stover), and of land of
Ward Cook s Heirs; thence by land of Ward Cook s Heirs and J.
Hutchinson S 55(degree) 21' W 1531.41 feet to a red oak, the common
corner of Tract 101 (Archie Stover), of Tract 3 (Archie Stover), and of
land of J. Hutchinson; thence S 55(degree) 06' W 370.70 feet to a white
oak and a chestnut stump, the common corner of Tract 3 (Archie Stover),
of Tract 106 (J. Beckley), and of land of J. Hutchinson; thence S.
6(degree) 58' W 426.74 feet to a white pine, the common corner of Tract
106 (J. Beckley), of Tract 25 (Daniel Fitzpatrick), and of land of J.
Hutchinson; thence S 54(degree) 21' E 1802.77 feet to a hub between two
gums, the common corner of Tract 25 (Daniel Fitzpatrick), and of land
of J. Hutchinson and of J.A. Ewart s Heirs; thence by land of J.A.
Ewart s Heirs S 37(degree)14' E 167.78 feet to a white oak, the common
corner of Tract 25 (Daniel Fitzpatrick), of Tract 17 (A.E. Huddleston),
and of land of J.A. Ewart s Heirs; thence S 79(degree) 45' E 706.79
feet to a gum; thence S 38(degree) 59' E 1220.44 feet to a hub between
two white oaks near a stump, the common corner of Tract 17 (A.E.
Huddleston), of Tract 186 (Tolbert Smokeless Coal Company), and of land
of J.A. Ewart s Heirs S 42(degree) 02' E 886.90 feet to a stake; thence
N 54(degree) 36' E 566.66 feet to a sourwood, the common corner of
Tract 186 (Tolbert Smokeless Coal Company), of Tract 92 (B.F. Ruff),
and of land of J.A. Ewart s Heirs, said point being also a corner of
the said tract of 8312.10 acres; thence following the boundary line of
the said tract of 8312.10 acres, by Tract 92 (B.F. Ruff), S 46(degree)
50' E 553.51 feet to a white oak; thence S 33(degree) 30' E 263.90 feet
to a sourwood, the common corner of Tract 92 (B.F. Ruff), of Tract 186
(Tolbert Smokeless Coal Company), and of land of Fitzpatrick Heirs
(J.D. Bower); thence leaving the boundary line of the said tract of
8312.10 acres and Tract 92 (B.F. Ruff), by land of Fitzpatrick Heirs
(J.D. Bower), S 66(degree) 00' W 1442.00 feet to a chestnut, maple and
two sourwoods, a common corner of Tract 186 (Tolbert Smokeless Coal
Company), and of land of Fitzpatrick Heirs (J.D. Bower), and being a
point in the boundary line of Tract 17 (A.E. Huddleston); thence by
land of Fitzpatrick Heirs (J.D. Bower) S 10(degree) 44' E 776.55 feet
to a double white oak; thence S 53(degree) 58' W 1039.78 feet to a
stake between two white oaks; thence S 33(degree) 48' W 396.37 feet to
a spruce pine stump, the common corner of land of Fitzpatrick Heirs
(J.D. Bower), of Tract 108 (Simeon Makin), and of Tract 17 (A.E.
Huddleston); thence passing through Tract 17 (A.E. Huddleston), N
85(degree) 57' W 1969.03 feet to a white oak, a common corner of Tract
17 (A. E. Huddleston), and of land of the Crab Orchard Fuel Company
(Joshua Griffith); thence by land of the Crab Orchard Fuel Company
(Joshua Griffith) N 16(degree) 31' E 795.35 feet to a white oak; thence
N 24(degree) 32' W 926.24 feet to a stone, the common corner of Tract
17 (A.E. Huddleston), of Tract 53 (Mary M. Cole), and of land of the
Crab Orchard Fuel Company (Joshua Griffith); thence S 55(degree) 30' W
977.48 feet to a stake, the common corner of Tract 53 (Mary M. Cole),
and of land of the Crab Orchard Fuel Company (Joshua Griffith and
Beaver Coal Company s Tract 53); thence by land of the Crab Orchard
Fuel Company (Beaver Coal Company s Tract 53) N 35(degree) 08' W
1401.50 feet to a stake; thence S 55(degree) 30' W 495.00 feet to a
stake (white oak gone), the common corner of Tract 145 (John Snuffer),
of Tract 53 (Mary M. Cole), of land of the Crab Orchard Fuel Company
(Beaver Coal Company s Tract 53), and of land of The Crab Orchard Coal
& Land Company (J.P. Sutphin and John Snuffer); thence following the
division line between the properties of the Crab Orchard Coal & Land
Company and the Beaver Coal Corporation, passing through lands of John
Snuffer and J.C. Snuffer, N 22(degree) 53' W 2618.98 feet to a white
pine and maple sprout, the common corner of Tract 147 (J.W. Snuffer,
S.H. Snuffer and F.H. Good), of Tract 79 (J.W. Tolbert), of Tract 146
(J.O. Snuffer), and of lands of J.O. Snuffer and F.H. Good; thence
passing through lands of F.H. Good, S.H. Snuffer and J. Jones (Tract
75), and by land of the Crab Orchard Coal & Land Company (Lewis
Williams), N 22(degree) 49' W 6962.80 feet to a double maple, the
common corner of Tract 111 (G.W. Hutchinson), of Tract 69 (Anderson
Godby), of Tract 16 (Lewis Williams), and of land of The Crab Orchard
Coal & Land Company (I. And J. Howery); thence by land of The Crab
Orchard Coal & Land Company (I and J. Howery) N 31(degree) 36' W
1142.85 feet to a stone and gum, the common corner of Tract 111 (G. W.
Hutchinson), of Tract 189a (Owen Davis s Heirs), and of land of The
Crab Orchard Coal & Land Company (I. And J. Howery); thence N
31(degree)27' W 602.61 feet to an iron rail in the southern mineral
right of way boundary line of the Piney Creek Branch of the Chesapeake
and Ohio Railway Company, said iron rail being 25 feet, measured at
right angles, from the center line of said railway as now located;
thence leaving the land of The Crab Orchard Coal & Land Company (I and
J. Howery), and following the southern mineral right of way boundary
line, parallel to and 25 feet distant from the said center line as now
located, the five following courses and distances: (1) N 40(degree) 52'
E 1407.28 feet to an iron rail at a P.C.; (2) curving to the south with
a radius of 1297.53 feet, through an arc of 352.45 feet, (the chord of
the arc bearing N 48(degree) 39' E, and being 351.45 feet in length),
to an iron rail at a P.T.; (3) N 56(degree) 26' E 496.47 feet to an
iron rail at a P.C.; (4) curving to the south with a radius of 1297.53
feet, through an arc of 161.50 feet, (the chord of the arc bearing N
60(degree) 00' E, and being 161.45 feet in length), to an iron rail at
a P.T.; (5) N 63(degree) 34' E 1531.45 feet to a P.O.T.; thence leaving
the said southern mineral right of way boundary line, and crossing the
mineral right of way of said railway, N 26(degree) 26' W 50.00 feet to
an iron rail in the northern mineral right of way boundary line of said
railway, said iron rail being 25 feet, measured at right angles, from
said center line as now located; thence leaving the said mineral right
of way, by land of Prince E. Lilly (Perry Davis s Heirs), N 44(degree)
23' E 346.25 feet to an iron rail between two large white oaks, the
common corner of Tract 189d (Perry Davis s Heirs), of Tract 191a (I.C.
Prince) of land of Prince E. Lilly (Perry Davis s Heirs), and of a
tract of 231.6 acres in which the coal and other minerals were conveyed
by William Prince and wife to The Crab Orchard Coal & Land Company, by
deed dated October 25th, 1901, and recorded in the Office of the Clerk
of the County Court of Raleigh County, West Virginia, in Deed Book W ,
at page 143, thence following the boundary line of the said tract of
231.6 acres. N 58(degree) 28' E 584.08 feet to an iron rail in a wild
cherry stump on the south bank of Big White Stick Creek, a common
corner of Tract 189 (Andrew Davis), of Tract 189e (Andrew Davis), and
of Tract 190 (Andrew Davis), being also a common corner of the said
Tract of 231.6 acres; thence continuing with the boundary line of the
said tract of 231.6 acres, down said Big White Stick Creek, following
the general direction thereof, N 79(degree) 08' E 158.00 feet to an
iron rail on the north bank of said creek; thence S 50(degree) 48' E
180.00 feet to an iron rail on the north bank of said creek; thence S
40(degree) 22' E, at 296.96 feet, running 440.00 feet to an iron rail
on the south bank of said creek, a common corner of Tract 189 (Andrew
Davis), of Tract 189f (Andrew Davis) and of Tract 190a (Andrew Davis);
thence by Tract 190a (Andrew Davis), S 55(degree) 22' E 480.20 feet to
a stake, a common corner of Tract 189 (Andrew Davis), of Tract 189f
(Andrew Davis) and of Tract 190a (Andrew Davis); thence by Tract 190a
(Andrew Davis), S 55(degree) 22' E 480.20 feet to a stake, a common
corner of Tract 189 (Andrew Davis), of Tract 189f (Andrew Davis) and of
Tract 190a (Andrew Davis), and a point in the boundary line of Tract 89
(James H. Cook); thence with the said tract of 231.6 acres, N
11(degree) 58' E 591.65 feet to a white oak stump, the common corner of
Tract 89a (Henry Prince), of Tract 90b (Henry Prince) and of Tract 192
(Henry Prince); thence N 10(degree) 23' E 1028.43 feet to a white oak
on the road; thence leaving the boundary line of the said tract of
231.6 acres, by land of The Crab Orchard Coal & Land Company (J.W.
Gunther), S 79(degree) 39' E 925.37 feet to a hub in a fence corner;
thence N 78(degree) 16' E 230.24 feet to a stone; thence S 87(degree)
18' E 719.17 feet to a stone, the common corner of Tract 91 (Harvey
Cook), of Tract 90 (T.E. Combs), and of said land of The Crab Orchard
Coal & Land Company (J.W. Gunther); thence S 4(degree) 25' E 477.32
feet to a dogwood and maple; thence N 7(degree) 20' W 2074.44 feet to a
white oak, the common corner of Tract 91 (Harvey Cook), of Tract 203
(Daniel Phipps), and of land of The Crab Orchard Coal & Land Company
(J.W. Gunther); thence continuing by land of The Crab Orchard Coal &
Land Company, S 79(degree) 57' W 1191.72 feet to a point; thence N
10(degree) 48' E 500.00 feet to a chestnut stump; thence N 88(degree)
26' W 1820.51 feet to an iron rail; thence N 34(degree) 04' E 1856.52
feet to a stake, the common corner of Tract 48 (G.W. Humphries), of
Tract 203 (Daniel Phipps), and of land of The Crab Orchard Coal & Land
Company; thence N 34(degree) 04' E 163.12 feet to a white oak stump by
the road, the common corner of Tract 48, (G. W. Humphries), of Tract
204 (Joe L. Smith), and of the said land of The Crab Orchard Coal &
Land Company; thence N 34(degree) 45' W 3211.38 feet to a chestnut and
hickory by an old road; thence N 66(degree) 34' E 720.42 feet to a gum
and chestnut oak below the road, the common corner of Tract 26 (Andrew
Williams), of Tract 204 (Joe L. Smith), and of land of The Crab Orchard
Coal & Land Company (W. Prince); thence by land of The Crab Orchard
Coal & Land Company (W. Prince) N 59(degree) 13' E 2023.44 feet to a
stake, a corner on line of Tract 205 (The Crab Orchard Coal & Land
Company), and of land of The Crab Orchard Coal & Land Company (W.
Prince); thence by land of The Crab Orchard Coal & Land Company (W.
Prince), N 8(degree) 36' 46" W 1147.68 feet to a stake, the common
corner of Tract 32 (Granger), of Tract 205 (The Crab Orchard Coal &
Land Company), and of land of The Crab Orchard Coal & Land Company (W.
Prince and Tract 32); thence by land of The Crab Orchard Coal & Land
Company (Tract 32) N 8(degree) 36' 46" W 1976.79 feet to a stake, the
common corner of Tract 32 (Granger), of land of The Crab Orchard Coal &
Land Company (Tract 32), and of land of The New River Company (Andrew
Biggs); thence by land of The New River Company (Andrew Biggs) S
65(degree) 21' E 2190.15 feet to an iron rail, the common corner of
Tract 32 (Granger) and of land of J.M. Bailey s Heirs; thence by land
of J.M. Bailey s Heirs S 8(degree) 49' E 1331.18 feet to an iron rail,
the common corner of Tract 117 (Otis A. Tench), of Tract 32 (Granger),
and of land of J. M. Bailey s Heirs; thence N 42(degree) 05' E 106.86
feet to an iron rail; thence S 75(degree)25' E 380.80 feet to a stone,
the common corner of Tract 117 (Otis A. Tench), and of lands of J. M.
Bailey s Heirs and The New River Company; thence by land of The New
River Company S 16(degree) 55' W 465.16 feet to a maple; thence S
85(degree) 17' E 330.00 feet to a poplar; thence N 67(degree) 18' E
307.68 feet to a chestnut; thence S 30(degree) 06' E 1322.07 feet to
two white oaks, the common corner of Tract 133 (M.C. Bibb), of Tract
117 (Otis A. Tench), and of lands of The New River Company and the
Cranberry Fuel Company; thence by land of the Cranberry Fuel Company S
26(degree) 11' W 1442.45 feet to a point, the common corner of Tract 50
(William H. Smith), of Tract 133 (M.C. Bibb), and of land of the
Cranmberry Fuel Company; thence S 35(degree) 37' E 234.91 feet to a
point, the common corner of Tract 72 (John Bailey), of Tract 50
(William H. Smith), and of land of the Cranberry Fuel Company; thence S
53(degree) 05' E 1857.33 feet to a black pine and chestnut; thence S
47(degree) 06' W 82.80 feet to a maple stump; thence S 18(degree) 11' E
114.03 feet to a point; thence S 10(degree) 15' E 841.95 feet to a
white oak; thence S 24(degree) 40' E 295.76 feet to a dogwood and white
oak; thence S 71(degree) 26' E 862.63 feet to a point, the common
corner of Tract 52 (Marshall Bailey), of Tract 72 (John Bailey), and of
land of the Cranberry Fuel Company; thence N 24(degree) 46' E 380.78
feet to a stone; thence N 34(degree) 37' E 1044.18 feet to a white oak,
the common corner of Tract 52 (Marshall Bailey), and of lands of the
Cranberry Fuel Company and The New River Company (R. Tench); thence by
land of The New River Company (R. Tench) S 61(degree) 48' E 870.03 feet
to the point of beginning; Containing by estimation 4095.34 acres, more
or less, gross area.
EXCEPTING AND RESERVING, NEVERTHELESS, from and out of the tract
or parcel of land above described and designated as Parcel No. 2, and
from and out of the operation of this Lease,
FIRST - The School Lot excepted and reserved, as
Exception First from the supplemental indenture of lease from the said
Beaver Coal Company to the Beckley Coal & Coke Company, dated January
2, 1924, and recorded in the Office of the Clerk of the County Court of
Raleigh County, West Virginia, in Lease Record No. 3, Page 387, which
is more particularly bounded and described as follows:BEGINNING at a
point in the division line between Tract 117 (Otis A. Tench) and Tract
26 (Andrew Williams), said point being N 0(degree) 30' E from the large
white oak marking the common corner of Tract 117 (Otis A. Tench), of
Tract 151 (Dennis Poff) and of Tract 26 (Andrew Williams), and distant
therefrom 99 feet; thence by Tract 26 (Andrew Williams) N 5(degree) 00'
W 264.00 feet to a white oak, a common corner of Tract 26 (Andrew
Williams) and of Tract 32 (Granger); thence by Tract 32 (Granger) N
89(degree) 30' E 264.00 feet to a black oak, a common corner of Tract
32 (Granger) and of Tract 117 (Otis A. Tench); thence by Tract 117
(Otis A. Tench) S 42(degree) 00' W 356.9 feet to the point of
beginning; Containing 0.76 of an acre, more or less.
SECOND - The Alfred Beckley Tract excepted and reserved as
Exception Second from and out of the tract and parcel of land above described
and from and out of the operation of this Lease which is more particularly
bounded and described as follows:
BEGINNING at a point in the center of the bridge over Big White Stick
Creek on Maple Meadow Road, the common corner of Tract 124 (E.E.
White), of Tract 130 (E.E. White), of Tract 13 (C.C. Snuffer), and of
Tract 131 (E.E. White); thence by Tract 131 (E.E. White) and Tract 119
(Gordon Lester), in the center of and following the various courses and
meanderings of Big White Stick Creed and a small branch thereof, to a
black pine stump, the common corner of Tract 119 (Gordon Lester), of
Tract 63 (W.N. Davis), and of Tract 124 (E.E. White); thence by Tract
124 (E.E. White) S 39(degree) 08' E 621.00 feet to the point of
beginning, containing 0.75 of an acre, more or less.
THIRD - The following tracts and part of a tract of land, as
numbered and designated on the map attached hereto and made part hereof, to
which reference is here made (the acreage given being by estimation only):
Tract Number Acres
------------ -----
90a 2.98
114 84.50
114a 2.75
115 22.22
119 48.81
120 1.01
123 61.63
124 11.75
129 1.23
129a 1.10
130 8.80
131 0.65
Tract Number Acres
------------ -----
132 0.25
145 8.38
146 1.32
147 150.80
186 24.68
Pt. 189 37.06
189c 15.32
189d 48.67
-----
Total 533.91
The net area of Parcel No. 2 above described, after deducting
the exceptions and reservations set forth above, is (by estimation) 3559.92
acres, more or less.
For the purpose of more accurately defining the location and
boundaries of the tract or parcel of land above described, the parties hereto
have attached as EXHIBIT B to this Lease a special map of the tracts or parcel
of land, entitled Map Showing Parcel No. 2 Containing 3559.92 Acres, More or
Less, Net Area Leased by Beaver Coal Company, Limited to United Fuel Gas Company
For Oil and Gas Purposes by Lease Dated April 1, 1971, Scale-1000 feet to an
inch, which is attached hereto and made a part hereof and is to be taken and
read as a part of the description hereinbefore set forth.
PARCEL No. 3. - Being that certain tract or parcel of land
situated, lying and being in Town and Trap Hill Magisterial Districts of Raleigh
County, containing, by estimation, a gross area of One Thousand Eight Hundred
and Thirty and Ninety eight hundredths (1930.98) acres, more or less, and after
deducting the tracts or parcels of land hereinafter excepted and reserved; a net
area of One Thousand Four Hundred and Sixty One and Fifty one-hundredths
(1461.51) acres, by estimation, more or less, and more particularly described as
follows:
BEGINNING at an iron rail (Black oak on a ridge called for), a common
corner of Tract 93h (Bond Bros. & Co.) and of land formerly owned by
Mrs. M.E. Cochrane and children, as the said Tract 93h, land formerly
owned by Mrs. M.E. Cochrane and children, and all numbered and named
tracts hereinafter mentioned and described (except those tracts
acquired by the Beaver Coal Company and/or its successor the Beaver
Coal Corporation since January 19, 1904) are numbered, named and shown
on a general map entitled Maps of Tracts of Land in Raleigh County,
West Virginia, Conveyed to the Beaver Coal Company by Deeds Dated
January 19, 1904, from Piney Coal Company et als., attached to and
forming part of a certain deed dated January 19, 1904, from the White
Stick Coal Company to the Beaver Coal Company, recorded in the Office
of the Clerk of the County Court of Raleigh County, West Virginia, in
Deed Book No. 29, page 1 etc; thence by land formerly owned by Mrs. M.
B. Cochrane and children, N 23(degree) 24' W 825.00 feet to a chestnut
(dead); thence by land of S.J. Snuffer and P.P. Lester, N 18(degree)
52' W 3,484.00 feet to a gum and white oak, the common corner of Tract
4 (William C. Riffe), of Tract 93h (Bond Bros. & Co.) And of land of
S.J. Snufffer and P.P. Lester; thence N 12(degree) 38' W 845.00 feet to
a large poplar; thence S 63(degree) 42' W 410.00 feet to a white oak,
the common corner of Tract 4 (William C. Riffe), of land of S. J.
Snuffer and P.P. Lester and of Tract 134 (Rock House Fork Land
Company); thence S 9(degree) 51' E 1478.00 feet to two white oaks, the
common corner of Tracts 134 and 135 (Rock House Fork Land Company) and
of land of S.J. Snuffer and P.P. Lester; thence S 2(degree) 30' E
299.00 feet to a gum; thence S 23(degree) 06' E 291.00 feet to a gum;
thence S 84(degree) 12' E 90.00 feet to a stake, the common corner of
Tracts 135 and 155 (Rock House Fork Land Company) and of land of S. J.
Snuffer and P.P. Lester; thence S 22(degree) 37' E 52.87 feet to a
stake; the common corner of Tract 155 (Rock House Fork Land Company),
of land of S.J. Snuffer and P.P. Lester and of land of the Rock House
Fork Land Company; thence by land of the Rock House Fork Land Company,
N 72(degree) 32' W 4823.83 feet to a large chestnut, the common corner
of Tract 93I (Bond Bros. & Co.), of Tract 134 (Rock House Fork Land
Company) and of land of the Rock House Fork Land Company; thence N
72(degree) 41' W 1390.00 feet to a white oak and gum; thence N
36(degree)34' W 435.00 feet to a stake; thence N 57(degree) 30' W
550.00 feet to a white oak; thence N 16(degree) 30' W 955.00 feet to
two small sourwoods; thence N 38(degree) 44' W 427.00 feet to a white
oak; thence S 80(degree) 30' W 368.00 feet to a white pine and spruce
pine; thence S 58(degree) 30' W 320.00 feet to a spruce pine; thence N
18(degree) 26' W 2069.00 feet to a stake; thence N 44(degree) 19' E
1490.00 feet to a white oak by the road, the common corner of Tract 93I
(Bond Bros. & Co.), of Tract 150 (Crab Orchard Coal and Land Company),
of land of the Rock House Fork Land Company and of land of the Crab
Orchard Coal and Land Company; thence by land of the Crab Orchard Coal
and Land Company, N 25(degree) 56' E 1815.00 feet to a stake in the
middle of Marsh Fork of Coal River; thence up the middle of said Marsh
Fork, N 40(degree) 34' E 300.00 feet to a point; thence N 44(degree)
14' E 525.00 feet to a point; thence S 88(degree) 56' E 375.00 feet to
a point in the middle of said Marsh Fork at the mouth of Stevens
Branch; thence leaving the middle of said Marsh Fork and up the middle
of said Stevens Branch, N 25(degree) 26' W 200.00 feet to a point;
thence N 34(degree) 04' E 130.00 feet to a point; thence N 36(degree)
56' W 140.00 feet to a point; thence leaving the middle of said Stevens
Branch, N 44(degree) 14' E 4075.00 feet to a stake; thence S 44(degree)
26' E 823.00 feet to a gum; thence leaving the lands of the Crab
Orchard Coal and Land Company, S 49(degree) 29' E 628.00 feet to a
stake in a line of Tract 148 (Crab Orchard Coal and Land Company);
thence S 78(degree) 20' E 300.00 feet, more or less, to a dead white
oak and small gum, a large white oak and small black pine marked as
pointers; thence S 39(degree) 10' W 140.00 feet, more or less, to a
stake; thence S 49(degree) 29' E 963.00 feet to a point on the bank of
Ugly Branch, a common corner of Track 93I (Bond Bros. & Co.) And of
land of The Triple Seam Land Company; thence down Ugly Branch,
following the general direction thereof, S 47(degree) 11' W 2070.00
feet to a point in said Ugly Branch; thence leaving said Ugly Branch, S
39(degree) 32' E 1155.00 feet to a set stone (white oak called for);
thence S 81(degree) 05' W 674.40 feet to a gum; thence N 60(degree) 10'
W 814.51 feet to a point; thence N 77(degree) 52' W 627.41 feet to a
white oak stump; thence S 75(degree) 31' W 1082.65 feet to a spruce
pine stump; thence S 41(degree) 27' W 564.18 feet to a point (White oak
and spruce pine called for); thence S 35(degree) 11' W 513.83 feet to a
stake (spruce pine called for); thence S 13(degree) 50' W 1357.00 feet
to two chestnut oak stumps on a ridge; thence S 48(degree) 05' E 383.88
feet to a gum; thence S 15(degree) 17' W 338.27 feet to a chestnut
stump, the common corner of Tract 93I (Bond Bros. & Co.), of Tract 150
(Crab Orchard Coal and Land Company) and of land of The Triple Seam
Land Company; thence S 27(degree) 10' E 506.00 feet to a gum on a
ridge; thence S 7(degree) 04' E 909.92 feet to a point; thence S
7(degree) 04' E 689.45 feet to a white oak stump; thence S 76(degree)
21' E 825.16 feet to a gum; thence S 39(degree) 11' E 380.49 feet to a
stake (chestnut oak called for); thence S 60(degree) 13' E 617.16 feet
to a white oak stump, the common corner of Tract 93i (Bond Bros. &
Co.), of Tract 134 (Rock House Fork Land Company) and of land of The
Triple Seam Land Company; thence N 20(degree) 33' E 2158.12 feet to a
birch on the bank of a branch; thence N 77(degree) 23' E 572.01 feet to
a gum (dead); thence S 45(degree) 41" E 305.55 feet to a stake (white
oak and white walnut called for), the common corner of Tract 4 (William
C. Riffe), of Tract 93I (Bond Bros. & Co.) And of land of The Triple
Seam Land Company; thence N 2(degree) 21' E 1221.21 feet to a point on
the south side of the old County Road; thence N 42(degree) 52' E
1642.10 feet to a white oak stump; thence S 39(degree) 32' E 612.00
feet to a stake; thence N 48(degree) 33' E 2551.48 feet to a white oak
and dogwood, the common corner of Tract 93I (Bond Bros. & Co.), of land
of The Triple Seam Land Company and of land of the Crab Orchard Coal
and Land Company; thence by land of the Crab Orchard Coal and Land
Company S 56(degree) 33' E 6710.00 feet to a point; thence S 46(degree)
20' W 8277.58 feet to the point of beginning, containing by estimation
1830.98 acres, more or less, gross area.
EXCEPTING AND RESERVING, NEVERTHELESS, from out of the tract or
parcel of land above described, and from and out of the operations of this
Lease, the following part of tracts of land numbered and designated on the map
attached hereto and made a part hereof (the acreage being by estimation only):
Tract Number Acres
Pt. 93I 279.70
Pt. 142 89.77
Total 369.47
The net area of the said tract or parcel of land above described and
hereby leased, after deducting therefrom the aggregate acreage of the part of
tracts of land hereby excepted and reserved thereout and therefrom is (by
estimation) 1461.51 acres, more or less.
For the purpose of more accurately defining the location and
boundaries of the tract or parcel of land above described, the parties hereto
have attached as EXHIBIT C to this Lease a special map of the tract or parcel of
land, entitled Map Showing Parcel No. 3 Containing 1461.51 Acres, More or Less,
Net Area, Leased by Beaver Coal Company, Limited to United Fuel Gas Company For
Oil and Gas Purposes by Lease Dated April 1, 1971, Scale - 1500 feet to an inch,
which is attached hereto and made a part hereof and is to be taken and read as a
part of the description hereinbefore set forth.
The aggregate net area of Parcel No. 1, Parcel No. 2 and Parcel No. 3
above described, after deducting all the exceptions and reservations above set
forth, is (by estimation) 17,638.38 acres, more or less; However, there is
excepted from these parcels 8,342.01 acres by Partial Cancellation and Surrender
of Lease 1065713-000 dated April 11, 1995 of record in Roll 72 page 2258 of the
records of the Clerk of the County Commission of Raliegh County, West Virginia,
and by agreement of the parties 267.21 acres +/- by Ratification of Lease
1065713-000 dated October 12, 1995, of record at Roll 86 and Page 1109 in the
records of the Clerk of the County Commission of Raleigh County, West Virginia.
Also the following described lands situate in Town, Slab Fork and
Shady Springs Magisterial Districts of Raleigh County, West Virginia containing
in aggregate, a gross area of ten thousand two hundred thirty-five (10,235)
acres, more or less, and, after deducting tracts or parcels of land hereinafter
excepted and reserved, a net area of ten thousand forty-seven (10,047) acres,
more or less, and being more particularly bounded and described as follows:
BEGINNING at a set stone, gum and sourwood, the common corner of Tract
35 (Aden Thompson), Tract 92d (B.F. Ruff and C.E. Speer) and land under
lease to Winding Gulf Collieries, as the said Tract 35, Tract 92d, land
under lease to Winding Gulf Collieries, and all other numbered and
named tracts hereinafter mentioned and described (except those Tracts
acquired by the Beaver Coal Company and/or its successor the Beaver
Coal Corporation since January 19, 1904) are numbered, named and shown
on a general map entitled Map of Tracts of land in Raleigh County, West
Virginia, Conveyed to the Beaver Coal Company be Deeds Dated January
19, 1904, from Piney Coal Company, et al,: attached to and forming part
of a certain deed dated January 19, 1904, from the White Stick Coal
Company to the Beaver Coal Company, recorded in the Office of the Clerk
of the County Court of Raleigh County, West Virginia, in Deed Book No.
29, Page 1, etc.; said general map being on Page 55 of said Deed Book
No 29, the said beginning point being also a corner of Parcel No. 1,
containing 20,774.88 acres, more or less, net area, leased for oil and
gas purposes by Beaver Coal Corporation to Godfrey L. Cabot, Inc. By
Supplemental Lease dated December 31, 1942; thence passing into said
Parcel No. 1 of 20,774.88 acres, S. 77(degree) 45' E. 3080.0 feet to a
chestnut oak and hickory a common corner of Tract 35 (Aden Thompson),
92d (B.F. Ruff and C.E. Speer) and Tract 187 (Daniel Boone); thence S.
88(degree) 58' E. 1680 feet, more or less, to a large chestnut stump a
common corner of Tract 92d (B.F. Ruff & C.E. Speer), Tract 21 (August
Koethe) and Tract 198 (Prince E. Lilly), thence N. 69(degree) 46' E.
1999.13 feet to a stake, a common corner of Tract 21 (August Koethe)
and Tract 198 (Prince E. Lilly); thence S. 70(degree) 16' E. 2338.28
feet, passing a birch and spruce pine on the north bank of Piney River,
to the middle of Piney River, a common corner of Tract 21 (August
Koethe), Tract 198 (Prince E. Lilly) and Tract 30b (Edwin Prince);
thence down the middle of Piney River, as it meanders, 5,870 feet, more
or less, to the mouth of Laurel Branch, a common corner of Tract 158
(V.M. McVey) and land of the McVey Heirs; thence up the middle of
Laurel Branch, with the property line of the McVey Heirs, 807 feet more
or less to a hemlock and birch; thence N. 10(degree) 52' E 143.00 feet
to two beeches and a sourwood; thence N 15(degree) 36' W 1960.00 feet
to a chestnut oak, a common corner of Tract 30b (Edwin Prince) and land
of the McVey Heirs; thence N. 69(degree) 00' E. 7000 feet, more or
less, to a burnt white oak, a common corner of Tract 30b (Edwin Prince)
and land formerly owned by Lee Scott, said corner being also a point in
the boundary line of Parcel No. 1 of 20,774.88 acres hereinbefore
mentioned; thence following the boundary line of the said Parcel No. 1
of 20,774.88 acres S. 32(degree) 00' E. 1724.00 feet to a hickory;
thence N. 49(degree) 00' E. 442.00 feet to a white oak stump; thence by
land of the Blue Jay Lumber Co., S. 41(degree) 30' E 949.00 feet to
three white oaks; thence S. 81(degree) 06' E. 2306.00 feet to a
chestnut stump; thence S. 1(degree) 45' W. 322.00 feet to a red oak and
dogwood; thence S. 80(degree) 00' E. 1485.00 feet to a point in the
middle of Big Beaver Creek; thence up the middle of Big Beaver Creek,
following the meanders thereof, for a distance of 3729.00 feet, more or
less, to a point in the middle of said Creek opposite a spruce pine on
the south bank; thence leaving the middle of said Creek, S. 33(degree)
00' W 2145.00 feet to a large Spanish oak on a ridge; thence S.
16(degree) 19' W. 613.03 feet to two chestnuts; thence S. 6(degree) 48'
W. 512.00 feet to a white oak stump on a ridge; thence S. 87(degree)
00' E. 1250.00 feet to a chestnut; thence S. 6(degree) 18' E. 998.00
feet to three white oaks; thence S. 83(degree) 00' E 1250.00 feet to a
stake on the division line between Lots 3 & 7 of the Moore and Beckley
partition; thence following said division line, N. 14(degree) 45' E.
2875.00 feet, more or less, to a point in the middle of Big Beaver
Creek; thence up the middle of Big Beaver Creek, following the meanders
thereof, by land formerly owned by W.H. Warner, Trustee, and land of
the Blue Jay Lumber Company, for a distance of 12,361 feet, more or
less, to a wild cherry at the three forks of said Creek; thence leaving
the middle of said Creek and the lands of the Blue Jay Lumber Co., N
83(degree) 15' W. 780.00 feet to a double white oak and Spanish oak;
thence S. 21(degree) 15' W. 1235.00 feet to a stake; thence S.
0(degree) 20' W. 190.00 feet to two white oaks and a chestnut; thence N
69(degree) 50' W. 1060.00 feet to two white oaks and a dogwood; thence
S 75(degree) 25' W. 624.00 feet to a large chestnut stump on a ridge;
thence S. 30(degree) 50' W 302.00 feet to a chestnut oak; thence S.
58(degree) 30' W 370.00 feet to a chestnut and chestnut oak; thence S.
87(degree) 55' W. 1300.00 feet to a stake; thence N. 1(degree) 40' W.
500.00 feet to a locust and yellow lynn; thence N. 36(degree) 00' E.
555.00 feet to a double white oak; thence N. 44(degree) 40' E. 285.00
feet to a white oak; thence N. 11(degree) 15' W. 955.00 feet to a
chestnut and chestnut oak; thence N. 53(degree) 30' E. 905.00 feet to a
chestnut and two Spanish oaks; thence S. 76(degree) 00' W. 1743.00 feet
to two small hickories; thence S. 34(degree) 06' W. 1270.00 feet to a
chestnut sprout, yellow lynn and hickory; thence S. 45(degree) 00' E.
647.00 feet to two chestnuts; thence S. 31(degree) 00' E. 870.00 feet
to a stake; thence N. 85(degree) 48' W. 1096.00 feet to a chestnut and
two chestnut oaks; thence S. 42(degree) 12' W. 800.00 feet to a
dogwood; thence S. 65(degree) 00' W. 526.00 feet to a hickory; thence
S. 5(degree) 12' W. 430.00 feet to a white oak; thence S. 51(degree)
30' W. 411.00 feet to a chestnut oak, Spanish oak and hickory; thence
S. 35(degree) 00' E. 750.00 feet to a small hickory; thence S.
25(degree) 06' W. 692.00 feet to a gum; thence S. 37(degree) 00' W.
750.00 feet to a small hickory; thence S. 21(degree) 30' W. 350.00 feet
to a chestnut oak; thence S. 57(degree) 00' W. 186.00 feet to a
chestnut stump; thence S. 25(degree) 00' W. 492.00 feet to a chestnut
oak; thence S. 38(degree) 00' W. 560.00 feet to a chestnut; then S.
17(degree) 00' W. 359.00 feet to a hickory; thence S. 27(degree) 10' E.
480.00 feet to a double chestnut oak; thence S. 61(degree) 42' E.
838.00 feet to a Spanish oak; thence N. 68(degree) 00' E. 159.00 feet
to a Spanish oak; thence S. 68(degree) 00' E. 194.00 feet to a yellow
lynn; thence N. 75(degree) 30' E. 285.00 feet to a hickory; thence S.
56(degree) 45' E 330.00 feet to a sourwood; thence N. 80(degree) 30' E
148.00 feet to chestnut; thence S. 62(degree) 54' E. 370.00 feet to a
Spanish oak; thence S. 55(degree) 00' E. 88.00 feet to a chestnut;
thence S. 4(degree) 12' W. 848.00 feet to a chestnut oak stump; thence
S. 20(degree) 00' W. 480.00 feet to a hickory; thence S. 16(degree) 18;
E. 237.00 feet to two chestnut oaks; thence S. 73(degree) 30' E. 976.00
feet to a chestnut oak; thence S. 67(degree) 00' E. 257.00 feet to a
sourwood; thence S. 7(degree) 00' E. 800.00 feet to two chestnuts;
thence S. 58(degree) 30' W. 2040.00 feet to a yellow lynn and hickory;
thence S. 7(degree) 42' W 1148.00 feet to a hickory, four chestnuts and
two Spanish oaks on the division line between Lots Nos. 7 & 8 of the
Moore & Beckley Partition; thence with said division line, N.
64(degree) 24' W. 900.00 feet to a hickory, sourwood and chestnut;
thence leaving said division line, N. 42(degree) 42' E. 976.00 feet to
a Spanish oak and birch; thence N. 13(degree) 54' W. 4515.00 feet to
two red oaks; thence N 75(degree) 36' W. 2344.00 feet to two dogwoods,
a chestnut and white oak on the division line between Lots Nos. 3 & 7
of the Moore & Beckley Partition; thence with said division line, N
14(degree) 45' E. 2530.00 feet to a white oak stump and white oak
sapling; thence leaving the said division line by the William Halstead
tract, N. 74(degree) 00' W 777.00 feet to a chestnut and chestnut oak;
thence S. 46(degree) 20' W. 311.00 feet to a stake; thence N.
80(degree) 50' W. 366.00 feet to a stake; thence S. 55(degree) 00' W.
285.00 feet to a locust; thence S. 36(degree) 45' W. 445.00 feet to a
locust; thence S. 51(degree) 25' W. 183.00 feet to a chestnut; thence
S. 76(degree) 00' W. 159.00 feet to a chestnut; thence N. 79(degree)
00' W. 279.00 feet to a chestnut; thence S. 53(degree) 30' W. 195.00
feet to two Spanish oaks and a hickory; thence S. 3(degree) 10' W.
1815.00 feet to a white oak; thence S. 57(degree) 30' E. 759.00 feet to
a gum at the public road; thence following the middle of the said
public road in a southeasterly direction for a distance of 1302.00 feet
to a chestnut on the division line between Lots Nos. 3 & 7 of the Moore
& Beckley Partition; thence following the said division line by land
formerly owned by Rubin Phillips, S. 14(degree) 45' W. 2849 feet to a
set stone, a common corner of Lots Nos. 3, 4, 7 & 8 of the Moore &
Beckley Partition; thence following the division line between Lots Nos.
3 & 4 of said Partition, by land of the Piney Coking Coal Land Co., N.
64(degree) 00' W. 2409.00 feet to a small hickory; thence leaving the
said division line by the John Cooper tract, N. 32(degree) 15' E.
491.00 feet to a hickory, red oak and chestnut; thence N. 37(degree)
20' W. 643.00 feet to a sourwood and chestnut oak; thence N. 68(degree)
30' W. 429.00 feet to a stake; thence N. 28(degree) 30' W. 755.00 feet
to a poplar and chestnut oak; thence S. 31(degree) 15' W. 4148.00 feet
to a beech and birch; thence S. 41(degree) 40' E. 1800.00 feet to a
beech, birch and maple; thence by land of the Piney Coking Coal Land
Co., S. 21(degree) 15' W. 1632.00 feet to a Spanish oak; thence S.
42(degree) 00' E. 115.00 feet to a chestnut and dogwood; thence N.
85(degree) 34' W. 2580.00 feet to a point; thence N. 33(degree) 38' W.
3003.00 feet to a stake; thence N. 41(degree) 08' W. 3500.00 feet to a
stake; thence Due West 69.50 feet to a point in the western right of
way boundary line of the Virginian Railway Company for the Piney Creek
Extension, said point being 30 feet, measured radially, from the center
line of said railway; thence following the western right of way
boundary line of the said railway, parallel to and 30 feet distant from
the said center line, curving to the right with a radius of 985.37
feet, through an arc of 38(degree) 50' (the chord or the arc bearing N.
23(degree) 07' E. And being 655.14 feet in length), to a point opposite
Station 2761+20 P.C.C. of said center line and 30 feet distant,
measured radially, therefrom; thence curving to the right with a radius
of 603.68 feet, through an arc of 52(degree) 30' (the chord of the arc
bearing N. 68(degree) 47' E. And being 534.00 feet in length), to a
point opposite Station 2755+95 P.T. of said center line and 30 feet
distant, measured radially, therefrom; thence on tangent N. 84(degree)
58' W 255.30 feet to a point opposite Station 2753+39 P.C. of said
center line and 30 feet distant, measured at right angles, therefrom;
thence curving to the left with a radius of 607.27 feet, through an arc
of 31(degree) 59' (the chord of the arc bearing N 79(degree) 03' E. And
being 334.44 feet in length), to a point in the boundary line of land
of the Pineydale Coal & Land Co.; thence leaving the western right of
way boundary line of said railway, by land of the Pineydale Coal & Land
Co., S. 35(degree) 38' W. 450.00 feet, more or less, to a white oak;
thence S. 48(degree) 20' E. 922.65 feet to a white oak stump; thence N.
81(degree) 35' E. 1723.29 feet to a white oak and maple; thence S.
41(degree) 40' E. 1337.00 feet to three beeches and a chestnut; thence
N. 3(degree) 25' E. 3260.00 feet to a chestnut, chestnut oak and black
oak; thence S. 72(degree) 28' W. 1644.00 feet to a chestnut, Spanish
oak and hickory; thence S. 18(degree) 03' W. 841.15 feet to two Spanish
oaks and a black gum; thence S. 7(degree) 53' W. 438.70 feet to a
stake; thence N. 77(degree) 37' W. 1149.00 feet to a point in the
western right of way boundary line of The Virginian Railway Company for
the Piney Creek Extension, said point being 30 feet, measured radially,
from the center line of said railway; thence following the said western
right of way boundary line, parallel to and 30 feet distant from the
said center line, by land of the Piney Coking Coal Land Co., curving to
the left with a radius of 607.27 feet, through an arc of 36(degree) 45'
(the chord of the arc bearing N. 28(degree) 00' E. And being 382.87
feet in length), to a point opposite Station 2743+86 P.C.C. of said
center line; thence curving to the left with a radius of 3551.1 feet,
through an arc of 1(degree) 35' (The chord of the arc bearing N.
8(degree) 50' E. And being 98.08 feet in length), to a point opposite
Station 2742+88.1 of said center line; thence curving to the left with
a radius of 3551.1 feet, through an arc of 7(degree) 05' (the chord of
the arc bearing N. 4(degree) 38' E. And being 439.77 feet in length),
to a point opposite Station 2738+44.4 P.T. of said center line; thence
by a tangent N. 1(degree) 06' E. 663.60 feet to a point opposite
Station 2731+80.8 P.C. of said center line; thence curving to the right
with a radius of 1462.69 feet, through an arc of 14(degree) 26' (the
chord of the arc bearing N. 8(degree) 19' E. And being 367.49 feet in
length), to a rail angle bar driven in the ground at a point opposite
Station 2728+20 P.O.C. of said center line and 30 feet distant,
measured radially, therefrom; thence leaving the western right of way
boundary line of said railway, continuing by land of the Piney Coking
Coal Land Co., N. 64(degree) 28' W. 3915.62 feet to a stake; thence S.
33(degree) 55' W 4421.00 feet to a stake; thence S. 38(degree) 07' W.
1571.00 feet to a stake, thence S. 10(degree) 58' W. 1013.10 feet to a
stake; thence S.67(degree) 06' W. 415.00 feet to a stake on the east
bank of Laurel Branch; thence up Laurel Branch, following the general
direction thereof, by land formerly owned by Prince E. Lilly, N.
16(degree) 02' W 315.30 feet to a stake; thence N. 9(degree) 08' E.
160.50 feet to a stake; thence N. 15(degree) 03' W 271.50 feet to a
stake; thence N. 25(degree) 51' E. 299.30 feet to a stake; thence N
1(degree) 20' E. 172.40 feet to a stake; thence N. 18(degree) 07' E.
154.40 feet to a dogwood stump; thence N. 55(degree) 19' E. 399.30 feet
to a maple stump; thence N. 42(degree) 09' E. 225.60 feet to a beech
(gone); thence N 31(degree) 19' E. 194.80 feet to a stake; thence N.
36(degree) 43' E. 223.60 feet to a stake; thence N. 36(degree) 17' E.
403.10 feet to a stake; thence N 33(degree) 28' E. 244.70 feet to a
point; thence N. 62(degree) 42' E. 124.70 feet to a stake, thence
leaving said Laurel Branch, N. 50(degree) 10' W 889.80 feet to a stake;
thence by the Joseph Lilly 600 acre tract, N. 42(degree) 01' E. 203.50
feet to a set stone (chestnut gone); thence N. 50(degree) 55' E. 608.20
feet to a white oak and gum pointer; thence N. 5(degree) 56' W 1592.76
feet to a white oak (down); thence N. 20(degree) 20' E. 593.50 feet to
a stake; thence N. 20(degree) 25' E. 1274.70 feet to a black oak
(down); thence by land under lease to the Winding Gulf Collieries, S.
65(degree) 19' E. 1070.29 feet to a stake in Laurel Branch; thence up
the middle of Laurel Branch the seven following courses and distances,
to-wit: (1) N. 32(degree) 42' E. 239.35 feet; (2) N. 49(degree) 34' E.
280.16 feet; (3) N. 23(degree) 47' E. 114.50 feet; (4) N. 16(degree)
01' E. 305.70 feet; (5) N. 20(degree) 00' W. 111.07 feet; (6) N.
4(degree) 18' E. 185.32 feet; and (7) N. 29(degree) 16' E. 57.87 feet
to a point; thence leaving the middle of Laurel Branch, N 48(degree)
02' W., at 10 feet passing a maple and poplar corner, running 772.00
feet to a chestnut; thence N. 80(degree) 21' W. 290.78 feet to a set
stone; thence N. 16(degree) 23' E. 469.39 feet to a steel rail; thence
N. 74(degree) 47' W. 496.39 feet to a sourwood; thence N. 45(degree)
18' W. 839.70 feet to a sourwood; thence N. 20(degree) 55' E. 694.73
feet to a dogwood; thence N. 80(degree) 45' W. 290.96 feet to a white
oak; thence N. 8(degree) 18' W. 1203.43 feet to a stake (white oak
stump gone); thence N. 8(degree) 34 1/2' W. 587.45 feet to a sourwood
stump by a branch; thence down said branch, S 89(degree) 30' W. 806.95
feet to a stake (Two spruce pine stumps gone); thence N. 75(degree) 41'
W 459.02 feet to a white oak; thence leaving said branch N.29(degree)
28' E. 149.37 feet to a black oak; thence N. 69(degree) 50' W. 1020.59
feet to a gum; thence S. 43(degree) 32' W. 367.98 feet to a stake in a
field; thence N. 68(degree) 26 1/2' W. 2023.84 feet to a set stone and
two locusts; thence N. 38(degree) 16' E. 3681.76 feet to the point of
beginning containing 10,235 acres, more or less, gross area.
EXCEPTING AND RESERVING, NEVERTHELESS, from and out of the tract
or parcel of land above described and from and out of the operation of
this Lease: No. 1 The John W. Thompson 10 Acre Reservation:
BEGINNING at a stake; thence N. 59(degree) 00' W. 660 feet to a
stake (a sourwood and white oak marked as pointers); thence N.
31(degree) 00' E. 660 feet to a stake near the top of a ridge in a
field; thence S. 59(degree) 00' E. 660 feet to a stake by three
chestnuts from one root; thence S. 31(degree) 00' W. 660 feet to the
point of beginning; containing 10 acres, more or less.
No 12. The George H. Smith Tract:
BEGINNING at a poplar, two sourwoods and a white oak, the common
corner of Tract 30b (Edwin Prince), of Tract 182a (Prince E. Lilly)
and of the George H. Smith tract; thence by Tract 182a (Prince E.
Lilly), S. 56(degree) 53' E. 1060.11 feet to stake; thence N.
39(degree) 15' E. 166.97 feet to a stake; thence S. 70(degree) 37' E.
841.09 feet to a yellow lynn; thence S. 51(degree) 37' W. 331.45 feet
to a locust; thence by Tract 30b (Edwin Prince), S. 10(degree) 15' W.
1565.00 feet to a chestnut oak and cucumber; thence S. 73(degree) 30'
W. 778.00 feet to a chestnut and ironwood; thence N. 35(degree) 48' W.
1130.00 feet to a white oak and sourwood; thence N. 12(degree) 00' E.
1070.00 feet to a white oak stump; thence N. 4(degree) 12' W. 698.00
feet to the point of beginning; containing 72.00 acres, more or less.
No. 13 The John Waddle Tract:
BEGINNING at a chestnut, a common corner of Tract 30c (Edwin
Prince), of Tract 182 (Prince E. Lilly) and of the John Waddle tract;
thence by Tract 30c (Edwin Prince), N 16(degree) 30' W. 1388.00 feet
to a small beech; thence N. 74(degree) 00' E. 1640.00 feet to a white
oak; thence S. 76(degree) 48' E. 1302.00 feet to a chestnut oak;
thence S. 0(degree) 21' W. 1750.00 feet to a white oak; thence S.
74(degree) 48' W 607.00 feet to a chestnut oak; thence by Tract 182
(Prince E. Lilly), N 6(degree) 33' W. 241.59 feet to a red oak; thence
N. 39(degree) 19' W. 254.95 feet to a chestnut oak; thence N.
43(degree) 07' W. 297.47 feet to a chestnut oak; thence N. 61(degree)
41' W 315.57 feet to a double chestnut oak; thence N. 31(degree) 53'
W. 216.98 feet to a chestnut oak; thence S. 64(degree) 27' W. 1222.59
feet to the point of beginning, containing 95.00 acres, more or less.
The K. Douglas Bowers, Trustee Tract:
BEGINNING at a white oak, (corner to David Robertson s 200 acre
tract); thence N. 35(degree) E 55 1/3 poles to white oak and poplar;
thence N. 55(degree) W. 38 poles to white oak and hickory (white oak
down); thence S. 19(degree) W 17 poles to chestnut; thence S.
20(degree) W 43 1/2 poles to 2 chestnut oak saplings; thence S. 61
1/2(degree)E. 22 1/2 poles to beginning, containing 11 acres to be the
same more or less. The aggregate net area of the above parcel after
deducting all the exceptions and reservations is by estimate 10,047
acres more or less; However, there is excepted from this parcel 2,049
more or less by Partial Cancellation and Surrender of Lease
1066449-000 dated April 11, 1995 recorded at Roll 72 page 2263 of
record in the office of the Clerk of the County Commission of Raliegh
County, West Virginia. For the purpose of more accurately defining the
location and boundaries of the tract or parcel of land above described
and of the tracts of land excepted and reserved therefrom the parties
hereto have attached as EXHIBIT D to this Lease a special map of the
tract or parcel of land entitled Map of a Tract of 10,047 acres, more
or Less, Net Area, Leased by Beaver Coal Company, Limited to Columbia
Gas Transmission Corporation, for Oil and Gas Purposes by Lease Dated
January 1, 1972" which is attached hereto and made a part hereof and
is to be taken and read as part of the description hereinbefore set
forth. The intention of the parties hereto is to include in this Lease
all the lands released from those certain oil and gas leases (the Base
Leases ) by and between the Lessor and United Fuel Gas Company and
Columbia Gas Transmission Corporation by their successor in title,
Columbia Natural Resources, Inc., in a Partial Cancellation and
Surrender of Lease 1065713-000 dated April 11, 1995 and recorded on
Micro Film Roll #72 at page 2258 and also in a Partial Cancellation of
Surrender of Lease 1066449-000 dated April 11, 1995 and recorded on
Micro Film Roll #72 at page 2263 all in the records of the Clerk of
the County Commission of Raleigh County, West Virginia, containing
approximately Seventeen Thousand, Two Hundred Sixty-Seven and 21/100
(17,267.21) acres, more or less. A series of 4 maps reflecting the
released acreage leased hereby and described in this paragraph is
attached as cummulative Exhibit E(1-5) showing 17,000 more or less net
acres. By agreement of the parties hereto, the Land Rental defined
hereinafter will be calculated based on this acreage amount. The
Lessor hereby grants to and the Lessee shall also have the first right
of refusal to lease any acreage covered under the Base Leases referred
to above which may be released and or surrendered, in the future, in a
separate lease addendum, under the same terms and conditions as
described herein, except the number of wells required to be drilled to
hold the entire released tract shall be reduced proportionately based
of the ratio of the number of acres released divided by the agreed net
total acreage of 17,000. In the event of a release of acreage from the
Base Leases, Lessor shall promptly notify Lessee in writing certified
mail return receipt requested of any such release of acreage from the
Base Leases and Lessee shall then notify Lessor in writing certified
mail return receipt requested of its intention to exercise said right
of first refusal within thirty (30) days of receipt of said written
notification of a release of said acreage from Base Leases. This right
of first refusal subject to the condition that the same be exercised
if at all by the expiration of the primary term of September 15, 2001.
This Agreement is subject to any prior conveyance of lots, parcels or
pieces of land and/or surface land within the Leased Premises
heretofore granted and conveyed by the Lessor, or its predecessors in
title, for church, school and public purposes, and for railroad and
other rights of way, and for any and all other purposes whatsoever,
whether public or private, and also all rights heretofore granted to
the Appalachian Power Company, The Chesapeake & Potomac Telephone
Company, and other utility companies in connection with distribution,
service and other utility lines. THIS LEASE CONVEYANCE IS MADE
TOGETHER with all necessary and proper rights of way over and across
the leased premises to the place or places of drilling and operating
for the purpose of laying pipelines over and across these premises to
and from wells on the leased premises and from wells on other tracts
of land as well as to places of operation on these premises as may be
necessary or proper for the purpose of transporting oil and gas and
their constituents; and together with the rights of way and privilege
of constructing drips, and of building tanks, stations, telephone,
telegraph and electric power lines, and houses for gates, meters,
compressors and regulators, with all other rights, privileges,
appliances and structures necessary, incident or convenient for the
operation of the premises included in this Lease and other wells and
tracts of land, and the right and privilege of occupying and using as
much of the surface of the tracts or parcels of land above described
as may be necessary for said purposes; IT BEING UNDERSTOOD AND AGREED,
HOWEVER, that there shall be no drilling in mining camps or
settlements or within one hundred sixty (160) feet of any of the
buildings erected in connection with a coal mining plant on the tracts
or parcels of land above described, except with the written consent of
the coal lessee to which the said mining camp or plant may belong; or
within fifty feet of farm tenement buildings now on the premises,
except with the written consent of the Lessor herein, or the tenant of
any such building. BUT IT IS DISTINCTLY UNDERSTOOD AND AGREED by and
between the parties hereto that the rights and privileges hereinbefore
granted are and shall be construed as limited to such rights and
privileges only as the Lessor, as owner or grantee, possesses and has
the lawful right to grant, and that where the Lessor owns the mineral
right only, this Agreement of Lease shall not be construed as granting
or attempting to grant to the Lessee any rights and privileges in the
surface or any rights whatsoever other than such as are granted or
reserved to the Lessor in and by the deeds or other instruments under
which it claims the mineral right, anything herein contained to the
contrary notwithstanding. EXCEPTING AND RESERVING, MOREOVER, to the
Lessor, its successors and assigns, and its or their lessee or
lessees, the fee title ownership and control of the tracts or parcels
of land above described, and the timber, coal and other minerals and
mineral products therein and thereon, other than oil and gas and their
constituents, for all other purposes; and the right to sell or
otherwise use or dispose of any surface other than such as may be
granted to and used by the Lessee in its operations under this Lease.
Any sale of the mineral rights or surface tracts shall be subject to
the terms and conditions of this Agreement as long as it is in effect.
This Lease, however, is made upon and subject to the following terms,
conditions, covenants, stipulations and agreements, each and all of
which the Lessee covenants fully and faithfully to keep, comply with,
perform and observe, to-wit: FIRST: This Lease shall remain in force
for the term of Five (5) years from the date hereof, and as long
thereafter as the Leases Premises are operated by the Lessee or its
assigns in the diligent search for or extraction and production of oil
and gas, or either of them; Subject to the terms and conditions
herein. SECOND: The Lessee covenants and agrees to deliver to the
credit of the Lessor, its successors or assigns, free of cost, in the
pipeline to which said Lessee may connect its wells, a royalty of
forteen and eighty four one hundredths percent (14.84%) part of the
ultimate amount realized from all oil and gas produced, saved and
marketed, in an arms length transaction from the leased premises,
payable each month, for the gas produced and marketed from each and
every well produced on said premises. Lessee shall make payment to be
received by Lessor no later than the 25th of the third month following
production of gas and oil subject to this royalty payment. THIRD: All
gas produced from the leased premises, before being used commercially
upon or sold off of the leased premises, shall be measured by a meter
or meters located at convenient points, as may be hereafter determined
by the Lessee. Said meters shall be of a modern standard type,
properly adapted for the volumes to be handled, and shall be
furnished, connected to the wells, maintained and operated by the
Lessee, at its own expense. The Lessee shall have sole charge of said
meters, shall repair the same when it deems necessary or test shows
inaccuracy. The Lessor shall have access at all times to said meters
in company with representatives of Lessee. In case the Lessor
challenges the accuracy of any meter in use, the Lessee shall, upon
receipt of written notice addressed to its office at Knoxville,
Tennessee, requesting it so to do, have the same tested and a report
of the results given to the Lessor, and the Lessor shall have the
right to have its own representative present at the making of such
test. Should such tests disclose the meter to be in a good state of
repair, but not otherwise, the Lessor shall pay the cost of testing
said meter. If the meter is shown by said test to be three percentum
(3%) or more slow, the cost of testing said meter shall be borne by
the Lessee. The cost of repairing a meter found to be in need of
repair shall be borne by the Lessee. Meter measurements found to be in
error more than three percentum (3%) shall be corrected and accounts
adjusted accordingly, but the period of adjustment shall not exceed
one-half (1/2) of the period elapsed since the last test. The Lessee
agrees to test the meters in the field at such intervals as is
considered good practice in the industry, or as a prudent operator
would do under like circumstances. During such time as a meter or
meters are out of repair, the gas may be delivered through a by-pass
and the amount estimated by the use of the readings of the repaired
meter when replaced. The specific gravity of such gas for the purpose
of measurement shall be determined by the Lessee by accurate test,
subject to check by the Lessor, but in the event no tests are taken,
the specific gravity shall be assumed as 0.675. The unit of
measurement shall be one thousand (1,000) cubic feet at a standard
temperature of sixty degrees (60(degree)) Fahrenheit at a pressure of
ten (10) ounces above an atmospheric pressure of fourteen and seven
tenths (14.7) pounds, according to the methods of computation
contained in Report No. 3 of the Gas Measurement Committee of the
American Gas Association, including any revisions thereof, applied in
a practical manner. Where gas from a well producing gas only is not
sold or used by Lessee, it will be considered as being produced in
paying quantities provided the Lessee pays or tenders the delay
rentals as provided herein and if such payment is made it will be
considered that gas is being produced within the meaning of this
Lease. FOURTH: The Lessee covenants and agrees to pay upon delivery of
this Lease a land rental, of $10.00 per acre for the first year in
advance and in subsequent years a delay rental of $5.00 per acre in
arrears due on, or before, the anniversary date of each of the
remaining four years of the primary term of this Agreement, ie. the
first delay rental will be due on or before September 15, 1998 subject
to the following stipulation: For each well drilled by the Lessee
herein, the annual delay rental shall be reduced by One Dollar ($1.00)
per acre but shall never be less than $1.00 per acre annually. To
clarify, the annual delay rental provided herein is $5.00 per acre and
should the Lessee drill Four (4) wells within the first year of this
agreement the delay rental for the balance of the primary term shall
be reduced by One Dollar ($1.00) per acre, per well drilled, down to a
minimum of $1.00 per acre per year; PROVIDED, however, that any
royalties paid from producing wells shall be credited toward the
annual delay rental. If the royalties from said well/s do not equal or
exceed the minimum annual delay rental, then the deficiency shall be
paid to the Lessor by the Lessee within 30 days of the expiration of
the lease term year until enough producing wells are drilled to
produce sufficient royalties to equal or exceed said annual delay
rental. Production royalties from one lease term year can not be
applied to the delay rental obligation of any succeeding years. Upon
the drilling of a well yielding no royalty to the Lessor, the Lessee
may continue to hold the leased premises upon the payment of the delay
rental, for such further term as the Lessee may desire, not exceeding
a term of five years after the expiration of the term above mentioned.
In case a producing well is drilled, then Lessee shall hold the Lease
for as long thereafter as oil or gas is produced, subject to the
minimum annual delay rental provisions of this paragraph. FIFTH: The
Lessee shall furnish to the Lessor a prompt report of each and every
sale of oil and gas produced and saved from all wells drilled within
the leased premises; said reports shall be made monthly, along with
the royalty payments, showing the amount of gas and oil produced and
saved during the production month from which said royalty is derived,
measured as provided in Article Third of this Lease, and shall pay to
the Lessor the royalty on said gas due at the rate of royalty provided
in Article Second of this Lease. Lessee shall keep books of account of
the oil and gas produced and saved from the leased premises, which
books shall be available upon reasonable request, during normal
business hours for the inspection of the Lessor, its agents or
attorneys, for the purpose of comparing and verifying the reports so
made. SIXTH: All payments hereunder shall be made direct to the Lessor
by check payable to it and mailed to it at P.O. Box 1537, Beckley,
West Virginia 25801. SEVENTH: It is agreed that all rents and
royalties hereby agreed to be paid or delivered shall be deemed and
treated as rents reserved upon contract by the Lessor, which reserves
to itself all rights of landlords under the laws of the State of West
Virginia for the collection of the same; and if any rents or royalties
shall remain unpaid or undelivered for fifteen days after the same
become due and payable, the Lessor shall have the right to enforce the
payment of the same by the remedies given by law to landlords against
delinquent tenants. And it is further agreed that not only the
personal property shall be subject to distress, as contemplated and
directed by law, but also the Lessor may enter upon the leasehold and
sell the same, or any part thereof, together with the improvements
thereon, for the default in the payment or delivery of the rents and
royalties as aforesaid; and the Lessor shall have a lien upon the said
leasehold, and all the structures and improvements and personal
property connected therewith, for all arrears of rent or royalties or
failure to deliver oil or gas as herein provided for. It is understood
and agreed that where the default is in the delivery of the royalties,
as heretofore provided for, distress may be had and a lien is retained
for the market value of the oil or gas in the delivery of which
default was made. At any sale of this Lease or leasehold, or any part
thereof, under this clause, or any property connected therewith, the
Lessor shall have the right to become the purchaser thereof, free from
any and all claims of the Lessee. Regardless of any provision found
herein, the Lessee shall not be held in default for any infraction or
failure to uphold any of the terms and conditions of this agreement,
unless the Lessor notifies the Lessee by certified mail, return
receipt requested, specifying the default or infraction the Lessor
maintains to have been committed and the Lessee fails to take action
to remedy or does not remedy said default after a period of Sixty (60)
days after receipt of notice of default from the Lessor. EIGHTH: If
the Lessee drills and produces a minimum of 20 wells within the
primary term of this Agreement, Lessee will be deemed to have earned
the rights to hold the entire leased premises by production royalties
paid and to be paid for as long as oil and gas are produced in paying
quantities in an amount equal to or exceeding the minimum $1.00 per
acre delay rental as set out herein. Should the Lessee fail to drill
and produce the minimum 20 wells set forth in this paragraph on the
leased premises by the expiration of the 5 year primary term, then the
Lessee, upon the request by the Lessor, shall file a release within
thirty (30) days of the notice by Lessor, releasing the remaining
acreage not held by production unto the Lessor. Production royalty
payments for any lease term year can not be applied to any succeeding
lease term years. Should the Lessee be required to release any acreage
pursuant to the preceding paragraph, then the Lessee shall retain all
the leasehold estate contained within a 1,500 foot radius circle,
encompassing 160 acres, surrounding each well drilled and produced, or
capable of production, subject to payment of the minimum annual delay
rentals per well set forth herein. NINTH: The Lessee shall protect the
boundary lines of the leased premises, and if a well (an Offsetting
Well/s ) shall be drilled on property adjacent to the leased premises
and within five hundred (500) feet of the boundary of the leased
premises, whether by the Lessee or by some other person or
corporation, and if said well shall produce fifteen (15) barrels of
oil or five hundred thousand cubic feet of gas per day for a period of
30 days, the Lessee shall at the expiration of 60 days notice by the
Lessor of the existence of such an Offsetting Well and that said well
is capable of the production levels aforesaid, commence drilling a
well on the leased premises, within a reasonable, economically
feasible, distance from the Offsetting Well and shall drill and
complete the said well, if geologically prudent, with reasonable
diligence; or, upon the Lessee's decision, based on its own geologic
and economic evaluation, not to drill an offsetting well, the Lessor
may demand the Lessee surrender 160 acres in the general form of a
square, or as near as possible to 160 acres and in square shape, which
would compose the offset drilling unit, reserving unto the Lessee any
acreage around any existing wells within a 1,500 foot radius circle.
TENTH: The Lessee shall give notice in writing to the Lessor at least
fifteen (15) days before beginning to drill any well, either for oil
or gas, on the leased premises, showing the exact location of the
proposed well; and if said well shall be located within the boundaries
of any coal mining leasehold, then the Lessee shall also give similar
notice to the superintendent or managing officer of such coal mining
lessee. ELEVENTH: The Lessee shall keep an accurate record of the
strata through which each well passes, and furnish the Lessor with a
copy of the same on completion of each well. The operations of the
Lessee and all wells, buildings, structures and fixtures made or
erected by the Lessee shall be open at all reasonable times to the
inspection of the Lessor and its agents. TWELFTH: The Lessee agrees to
pay all taxes that may be assessed against the improvements erected on
the leased premises by the Lessee and upon all gas or oil obtained
from the premised and any increase in taxation against the gas or oil
rights in the leased premises. And if any such taxes and assessments
are paid by the Lessor, the Lessee shall repay to the Lessor the
amount thereof, such amount to be recovered, in default of prompt
payment, in the manner provided in Article Seventh of this Lease.
THIRTEENTH: The Lessor, subject to the limitations below, may lay its
own pipeline at its own expense and risk to any gas well or wells, on
said land to take a maximum of two hundred thousand cubic feet, per
well, per year, produced from said well or wells located on the leased
premises , for the use of Lessor only for heat and light in any
dwelling house on said land; and subject to reasonable safety
requirements of Lessee with respect to installation of the hookup of
the pipeline to the well, the use, operation, pumping and the right of
abandonment of the well or wells; the first two hundred thousand cubic
feet of gas from each well or wells, so taken in each year shall be
free, but all gas in excess of two hundred thousand cubic feet taken
in each year shall be paid for by the Lessor to the Lessee at the
current published local rates of the Lessee and measurement and
regulation shall be by meter and regulators set at the tap on the
well, purchased by the Lessor and maintained by the Lessee at Lessor s
expense. This privilege is upon condition that the Lessor shall use
said gas with economy, in safe and proper pipes and appliances, and
shall subscribe to and be bound by the reasonable rules and
regulations of the Lessee published at such time relating to such use
of gas. FOURTEENTH: It is hereby understood and agreed and made a
condition hereof, that this Lease and all the rights and privileges
granted to the Lessee hereunder shall be subject and subordinate at
all times to any and all coal mining leases, and the rights and
privileges granted thereunder, which may now or hereafter be in
effect, covering any part or parts or the whole of the premises hereby
leased. However, it is fully understood that the Lessor shall not
grant any coal mining leases which shall impose any greater
obligations on the Lessee herein than are imposed by this Lease. The
Lessee hereby covenants and agrees to and with the Lessor to assume
any and all liability for damages caused by the negligence of Lessee
and/or its contractors to the coal seam or seams in, on and under the
lands hereby leased, whether accruing to the Lessor, its successors or
assigns, or to any of its or their coal mining lessees or their
successors or assigns, together with full liability for the death or
injury of its or their employees or any other persons, as well as
damages to the mines, operations, plants, structures, shafts, slopes,
drifts, tunnels, entries, headings, airways, rooms, working places,
haulways, passageways, drains, sumps, pumps, timbers, posts, braces,
fans, doors, brattices, wires, pipes, hose, tracts, motors, mining
machines, and all other machinery and equipment belonging to or used
by the Lessor, its successors or assigns, or its or their coal mining
lessees, or their successors or assigns, or any of them, engaged in
the mining and removal of coal in, on and under the lands hereby
leased or any of them, caused by or growing out of the operations of
the Lessee hereunder, its agents, employees, or assigns; and to
indemnify and save harmless the Lessor herein from liability for any
and all such damages. FIFTEENTH: If the Lessee injures growing crops,
marketable timber or fences of the Lessor or of any of its other
tenants, it will pay the Lessor reasonable damages therefor. Timber
damage including cost of the estimate will be determined by a
qualified forester. SIXTEENTH: If the Lessee desires to drill a well
in lands under lease to a coal mining lessee of the Lessor herein, it
shall agree with that coal mining lessee upon the place where the said
well shall be drilled; and shall case and otherwise protect the said
well so as to prevent the escape of oil or gas into the workings of
that coal mining lessee, and to protect the said well from being
damaged by the mining operations of that coal mining lessee. And when
land in which a well has been drilled when unleased, is leased for
coal mining purposes, or the right and privilege of mining coal from
such land has been leased to a coal mining lessee, the Lessee herein
shall then take like precautions to prevent the escape of oil or gas,
or damage to the said well. And in any and every case of damage to a
well within the leasehold of a coal mining lessee of the Lessor,
whether the lease to such lessee be prior or subsequent to this Lease,
caused by the mining operations of the coal mining lessee, the Lessee
herein shall have no claim or right of recovery against either the
said coal mining lessee or the Lessor herein; except that the Lessee
herein may have a right of recovery against a coal mining lessee only
(and not against the Lessor herein) for any intentional act or willful
negligence or failure of such coal mining lessee to comply with the
mining laws of the State of West Virginia and regulations of the
Department of Mines. SEVENTEENTH: Before constructing any improvement,
or appropriating or using any right of way, which, under the
provisions of this Lease, the Lessee herein is granted the right to
construct, appropriate or use, on or in any part of the above
described tracts or parcels of land then under lease to a coal mining
lessee, the Lessee herein shall first endeavor to agree upon the
location of such improvement or right of way with the said coal mining
lessee; and if the Lessee herein and said coal mining lessee cannot
agree upon the location of any such improvement or right of way, the
question of the location of such improvement or right of way shall be
submitted to the decision of the superintendent of the Lessor, whose
decision shall be final as to the Lessee herein. EIGHTEENTH: It is
agreed that the Lessee is to have the privilege of using sufficient
water and gas from the said premises to run all machinery necessary
for drilling and operating thereon, and at any time to remove all
machinery and fixtures placed on said premises; PROVIDED, HOWEVER,
that no machinery or fixtures shall be removed while the Lessee is in
default in the payment or delivery of the rents or royalties due
hereunder; and it is further agreed that upon the payment of one
dollar at any time, but not prior to September 14, 2001, by the Lessee
to the Lessor, the Lessee shall have the right to surrender all or any
part or portion of the leased premised for cancellation, after which
all payments and liabilities thereafter to accrue under and by virtue
of the terms of this Lease shall cease and determine as to all or any
part or portion thereof so surrendered, and this Lease shall become
absolutely null and void as to the same. The Lessor agrees that the
recordation of a deed of surrender in the proper county, and the
mailing in the post office of a check payable as above provided, for
said last-mentioned sum and all amounts then due hereunder, shall be
accepted as full and legal surrender of the Lessee s right under this
Lease as to all or any part or portion of said leased premises;
PROVIDED, that the form of said deed of surrender shall be approved by
the Lessor before it is recorded. NINETEENTH: Upon the termination,
surrender, forfeiture or cancellation of this Lease according to the
terms hereof, all the wells drilled by the Lessee, whether the same be
producing oil or gas or not, shall revert to and become the property
of the Lessor. The Lessee, if not in default in the payment of rent or
royalty hereunder, upon such termination, surrender, forfeiture or
cancellation, may remove all pumps, engines, machines, meters,
fixtures, tools, tank batteries, compressors, rods and casings and any
other equipment incident to its operations from all wells. Any well or
wells which may be abandoned by said Lessee, however, shall be plugged
and protected by said Lessee in conformity with the laws of the State
of West Virginia regarding the same, and in the most approved and
efficient manner. TWENTIETH: The Lessee further covenants and agrees
that it will comply with any and all laws of the United States or of
the State of West Virginia, or of any municipality or subdivision
having jurisdiction over the leased premises or any part thereof,
governing the operations under this Lease. TWENTY-FIRST: The Lessee
further covenants not to create, or permit to be created, any nuisance
upon the leased premises; and not to use, or knowingly permit the same
to be used, for any purpose contrary to the laws of the State of West
Virginia or of the United States. And that it will not keep, sell or
transport, or knowingly allow to be kept, sold or transported, any
intoxicating liquors on, over or across the leased premises during the
continuance of this Lease. TWENTY-SECOND: The Lessee further covenants
and agrees that it will not assign, convey, lease, underlet, sublet or
set over any of its estate, interest or term, in whole or in part, in
the leased premises, or any part thereof, to any person or persons
whomsoever, or corporation whatsoever, for any time whatsoever,
without the transferee assuming in writing all the obligations of the
Lessee hereunder in a form satisfactory to the Lessor. The transferee
shall be subject to the approval of the Lessor, such approval of the
Lessor not to be unreasonably withheld. Any transfer by operation or
process of law shall be deemed an assignment by the Lessee within the
meaning of this provision. But this covenant shall not be deemed to
apply to or prevent the leasing by the Lessee of any house or building
or part thereof to its officers, agents or employees for purposes
connected with its operations under this Lease. The Lessee shall be
allowed to assign fractional working interest, in any wells the Lessee
drills hereunder, to its drilling partners or program investors, and
may pledge any well/s drilled hereon or reserves derived from wells
drilled on the leased premises to secure corporate financing for the
Lessee as long as the Lessee remains as the operator of said wells,
and not in default under the provisions of this Lease. TWENTY-THIRD:
Should any question arise between the parties hereto as to the
performance by the Lessee of any of the articles of this Lease, or of
any covenant contained in any of said articles, every such question
shall be determined by arbitration in the manner provided for in this
article; and each party hereby covenants with the other to comply with
and carry out promptly the decision or award of any and every
arbitrator so appointed. Questions in dispute to be determined by
arbitration hereunder shall be submitted to two disinterested
arbitrators, one of whom shall be appointed by each of the parties
hereto respectively, and in case the two thus chosen cannot agree,
they shall appoint a third who shall also be disinterested; and in
case either party hereto shall neglect to nominate an arbitrator for
the space of ten days after receiving notice from the other party to
nominate an arbitrator, then the other party shall nominate two, and
the two thus appointed shall appoint a third, all of them to be
disinterested. The decisions and awards of such arbitrators, or any
two of them, shall be final and conclusive and binding upon the
parties hereto, with no right of appeal; and the said arbitrators, or
any two of them, may, in their decision or award, as a part thereof,
decide by whom the costs of such arbitration shall be borne and paid
and the amount of such costs. In case no two of the arbitrators
appointed under this Article shall agree upon a decision or award,
then the arbitrators shall be discharged, and new arbitrators shall be
appointed in accordance with the provisions of this Article, who shall
have the same powers and duties as the first arbitrators; and so from
time to time, until some two arbitrators shall agree upon a decision
or award. TWENTY-FOURTH: If Lessor owns a lesser interest in the above
described land than the entire and undivided oil and gas estate
therein, then all payments herein provided for shall be reduced
proportionately. TWENTY-FIFTH: Lessee shall have the right to pool all
or any part or parts of leased premises or rights therein with any
other land in the vicinity thereof, or with any leasehold, operating
or other rights or interests in such other land so as to create units
of such size and surface acreage as Lessee may desire but containing
not more than one hundred sixty (160) acres for oil or gas. If at any
time larger units are required under any then applicable law, rule,
regulation or order of any governmental authority for the drilling,
completion, or operation of a well, or for obtaining maximum
allowable, any such unit may be established or enlarged to conform to
the size specified. Each unit may be created by recording a
Declaration containing a description of the unit so created, and
specifying the mineral and/or horizon so pooled. Any well which is
commenced, or is drilled or is producing on any part of any lands
theretofore, or thereafter so pooled shall, except for the payment of
royalties, be considered a well commenced, drilled, and producing on
leased premises under this Lease. There shall be allocated to the
portion of the leased premises included in any such pooling such
proportion of the actual production from all lands so pooled as such
portion of leased premises, commuted on an acreage basis, bears to the
entire acreage of the lands so pooled. The production so allocated
shall be considered for the purpose of payment or delivery of royalty
to be the entire production from the portion of leased premises
included in such pooling in the same manner as though produced from
such portion of leased premises under the terms of this Lease. Each of
said options may be exercised by Lessee from time to time, and a unit
may be formed either before or after a well has been drilled or
production has been established on leased premises or on the portion
of leased premises which is included in the pool or on other lands
which are pooled therewith. TWENTY-SIXTH: Lessor hereby agrees that
Lessee, at its option, may pay and discharge any taxes, mortgages, or
other items existing, levied, or assessed on or against the above
described lands and, in event it exercises such option, it shall be
subrogated to the rights of any holder or holders thereof and may
reimburse itself by applying to the discharge of any such mortgage,
tax or other lien, any royalty or rentals accruing hereunder.
TWENTY-SEVENTH: All the terms, provisions, conditions, limitations,
covenants, stipulations and agreements of this Lease shall inure to
the benefit of and be binding upon the successors, assigns, and
lessees of the parties hereto, respectively. TWENTY-EIGHTH: When by
the provisions of this Agreement Notice is required to be given, the
same shall be provided in writing by certified mail, return receipt
requested, at the following addresses: Lessor:Beaver Coal Company P.
O. Box 1537 Beckley, WV 25801
<PAGE>
2
1
Lessee:Suite 200
280 Ft. Sanders West Boulevard
Knoxville, TN 37922
IN WITNESS WHEREOF, the Beaver Coal Company, Limited, party of the
first part hereto, has caused this Agreement of Lease, in two uniform originals,
to be signed in its name by its General Partner, Beaver Management Corporation,
in its corporate name, by its President, or presiding officer, and the corporate
seal of said General Partner, attested by the signature of its Secretary, to be
hereto affixed, and Energy Search, Incorporated, party of the second part
hereto, has caused this Agreement of Lease, in two uniform originals, to be
signed in its corporate name by its President, and its corporate seal, attested
by the signature of its Secretary, to be hereto affixed, all effective as of the
day and year first above written.
(EXECUTED IN DUPLICATE)
BEAVER COAL COMPANY, LIMITED
By its General Partner
BEAVER MANAGEMENT CORPORATION
By: _______/s/_______________________
Its President
ATTEST:
_________/s/__________________________
Secretary
ENERGY SEARCH, INC.
By: __________/s/_____________________
Its President
ATTEST:
_____________/s/______________________
Secretary
STATE OF PENNSYLVANIA )
) to-wit:
COUNTY OF Philadelphia )
I, Joseph G. Kern, a Notary Public in and for said county and state, do
hereby certify that Paul M. Ingersoll, who signed the foregoing writing bearing
date of the 15th day of September, 1996, for BEAVER MANAGEMENT CORPORATION,
General Partner of Beaver Coal Company, Limited, has this day acknowledged the
same, before me, to be the act and deed of said partnership.
Given under my hand this 9th day of September, 1996.
_________/s/_______________________
Notary Public
My commission expires: __5/9/98___________
STATE OF TENNESSEE )
) to-wit:
COUNTY OF KNOX )
I, Laverne H. Giger, a Notary Public in and for said county and state, do
hereby certify that Richard S. Cooper, who signed the foregoing writing bearing
date of the 15th day of September, 1996, for ENERGY SEARCH, INCORPORATED, as its
President, has this day acknowledged the same, before me, to be the act and deed
of said corporation.
Given under my hand this 30th day of August, 1996.
________/s/________________________
Notary Public
My commission expires: 5/31/99
EMPLOYMENT AGREEMENT
THIS AGREEMENT is hereby made and entered into by and between ENERGY
SEARCH, INCORPORATED, a Tennessee corporation ("Employer"), and JOHN M. JOHNSTON
("Employee"), this 10st day of September, 1996.
W I T N E S S E T H:
1. EMPLOYMENT. Employer employs Employee, and Employee accepts employment,
upon the terms and conditions of this Agreement.
2. TERM. The term of this Agreement, and of Employee's employment
hereunder, shall begin on January 1, 1997, and shall terminate on December 31,
1997. This Agreement, and Employee's employment hereunder, shall be renewed
automatically for successive periods of one (1) year each, subject to
termination as provided hereinafter.
3. COMPENSATION.
(a) During the first year of employment, Employer shall pay to
Employee as Base Salary Compensation for his services the sum of Seventy-Two
Thousand Dollars ($72,000) per annum, which shall be paid in arrears in equal
biweekly installments of Three Thousand Dollars ($3,000) each.
(b) If the gross working interest revenue of the Employer
increases by 20% per annum, Employee shall receive as additional compensation, a
yearly Performance Bonus of twenty-five percent (25%) of Employee s Base Salary.
(i) For those periods of Employee's employment that do not
coincide with Employer's fiscal year, the amount of the Performance Bonus shall
be based upon the proportion of whole months Employee is in the employ of
Employer during such fiscal year bears to twelve (12) months.
(ii) Payment of the bonus shall be made no later than ninety
(90) days after the end of the fiscal year for which the calculation is made and
shall be accompanied by a copy of the financial data on which the Performance
Bonus is based.
4. DUTIES. Employee is engaged as Vice-President of Exploration and
Development for Employer and shall have such authority as is commensurate with
said position and shall have the following specific duties: Coordinating all
geologic activities of the Company including geologic evaluation of sites, site
selection, coordination of all leasing, drilling and completion activities, and
the general supervision of company personnel in the field and such other duties
as the President of the Company delegates.
5. EXTENT OF SERVICES. Employee shall devote his entire time,
attention, and energies to Employer's business and shall not during the term of
this Agreement be engaged in any other business activity whether or not such
business activity is pursued for gain, profit, or other pecuniary advantage.
However, Employee may invest his assets in such form or manner as will not
require his services in the operation of the affairs of the companies or
entities in which such investments are made.
6. WORKING FACILITIES. Employee shall have a private office, stenographic
help, typing and filing assistance, telephone(s) and facsimile machine(s), and
such other facilities and services as are suitable to his position and
appropriate for the performance of his duties.
7. EXPENSES.
(a) Reimbursement. Employer shall reimburse Employee for all
reasonable and necessary business expenses incurred by him in carrying out his
duties under this Agreement. Employee shall present to Employer from time to
time an itemized account of such expenses in such form as may be required by
Employer.
(b) Automobile. In recognition of Employee's need for an
automobile for business purposes, Employer will provide Employee with an
automobile, and pay all maintenance, repair, insurance and reasonable costs
incident thereto.
8. BENEFITS. Employer shall further:
(a) provide Employee with key man life insurance in the amount of $300,000,
of which $200,000 will be for the benefit of employee and $100,000 will be for
the benefit of the Employer, provided Employee is insurable at standard rates;
however, if extra premiums are necessitated by virtue of Employee's not being
insurable at standard rates, Employee shall be obligated to pay such additional
premiums or accept such reduced death benefits as may be purchased for the cost
of standard premiums;
(b) provide Employee with the same medical health and hospitalization
insurance coverage as Employer provides to its other employees;
(c) provide Employee with the same disability insurance coverage which
Employer provides to its other employees; and
(d) allow Employee to take part in any executive bonus plan, profit-sharing
plan, qualified salary deferral plan, and pension plan which Employer now has or
may hereafter adopt during the term of Employee's employment hereunder.
9. VACATIONS. Employee shall be entitled each year to a vacation of three
(3) weeks, during which time his compensation shall be paid in full.
10. TERMINATION.
(a) Without cause, Employer and Employee may terminate this
Agreement at any time upon one hundred twenty (120) days' written notice. In
such event, Employee, if requested by Employer, shall continue to render his
services and shall be paid his regular compensation up to the date of
termination. In addition, there shall be paid to Employee on the date of
termination a severance allowance of one (1) year s salary (less all amounts
required to be withheld and deducted), plus the Performance Bonus set forth in
Section 3(b), ratably apportioned if termination is not at the end of the fiscal
year.
(b) Employer may terminate Employee's employment for cause if:
(1) Employee refuses to perform, or does not perform, in a normal business
manner his duties of employment with Employer;
(2) Employee fails or refuses to obey and comply with the instructions,
rules and regulations of Employer as promulgated by its Board of Directors
respecting the operations of Employer; or
(3) Employee engages in any unlawful conduct in connection with his duties
of employment with Employer, is guilty of any acts of dishonesty in connection
therewith, is convicted of a felony, is convicted of a misdemeanor involving
moral turpitude, or engages in any conduct clearly detrimental to the business
of Employer.
(4) Employee breaches any confidentiality or non-competition covenant or
agreement with the Employer.
If Employee's employment is terminated for cause, as set forth just
hereinabove, Employee shall receive his Base Salary accrued up through the date
of termination and shall be entitled to receive any Performance Bonuses (or
portion thereof) and severance pay set forth in herein.
Upon termination for any reason, except as may be otherwise required by
law, all benefits set forth in Section 8 shall cease, although Employee may keep
any pension or other similar rights which have already vested in him.
11. DEATH DURING EMPLOYMENT. If Employee dies during the term of
employment, Employer shall pay to the estate of Employee the Base Salary and
Performance Bonus (but excluding severance pay) that would otherwise be payable
to Employee up to the end of the month in which his death occurs.
12. NOTICES. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing and delivered in person or by
courier or sent by certified, United States mail, return receipt requested,
postage prepaid, to his residence in the case of Employee, or to its principal
office in the case of Employer. Notice shall be effective upon the date of
delivery, if delivered in person or by courier, or three (3) days after
depositing the notice in the United States mail, if sent by certified mail.
13. WAIVER OF BREACH. The waiver by Employer of a breach of any provision
of this Agreement by Employee shall not operate or be construed as a waiver of
any subsequent breach by Employee. No waiver shall be valid unless in writing
and signed by an authorized officer of Employer.
14. ASSIGNMENT. Employee acknowledges that the services to be rendered by
him are unique and personal. Accordingly, Employee may not assign any of his
rights or delegate any of his duties or obligations under this Agreement. The
rights and obligations of Employer under this Agreement shall inure to the
benefit of, and shall be binding upon, the successors and assigns of Employer.
15. CONFIDENTIALITY. Employee acknowledges that he will become familiar
with Employer's special methods of processing, pricing formulae, trade secrets,
operational procedures, strategic plans, pricing guidelines, product
development, confidential reports and lists of costs, customers and suppliers.
Employee further acknowledges that said data is confidential and proprietary to
Employer and agrees not to impart to any third party any of such proprietary
data. Employer shall be entitled to protect its interest herein by specific
performance and the right to enjoin Employee from engaging in such prohibited
practices, without limiting any other remedies available to it. Employee agrees
to execute and deliver any confidentiality agreement or similar document
required by Employer of its employees.
16. COVENANT AGAINST COMPETITION. In recognition of the close personal
contact Employee will have with Employer's confidential and proprietary
information and records, and the position of trust in which Employer holds
Employee, Employee agrees as follows:
(a) Non-Compete. During the initial term of this Agreement, any
periods for which the Agreement may be extended and for a period of one (1) year
thereafter, Employee shall not, either as an officer, stockholder, director,
employee, representative, broker, partner, sole proprietor or in any other
manner or capacity directly or indirectly work for or on behalf of a competitor
of Employer in the Appalachian Basin.
(b) Anti-Solicitation: Customers, contractors, investors and
employees. During the initial term of this Agreement, any periods for which the
Agreement may be extended and for a period of one (1) year thereafter, Employee
shall not, either as an officer, stockholder, director, employee,
representative, broker, partner, sole proprietor or in any other manner or
capacity directly or indirectly call upon or solicit any customer, contractor,
investor or employee of Employer for the purpose of doing business, investing or
working, directly or indirectly, in the oil and gas industry, within any states
in which Employer, during the term of Employee s employment, conducted any
business or investment activities.
(c) Anti-Solicitation: Employees. During the initial term of the
Agreement, any periods for which the Agreement may be extended, and for a period
of one (1) years thereafter, Employee shall not, directly or indirectly, or by
action in concert with others, induce or influence or seek to induce or
influence any person who has been engaged by Employer as an executive, employee,
manager, salesman, broker, independent contractor or otherwise, to terminate his
relationship with Employer.
(d) Judicial Modification, Severability and Survival. If any
provision of this Section 16, or any other Section of the Agreement, shall be
held to be invalid or unenforceable, the remaining provisions hereof shall
nevertheless continue to be valid and enforceable as though the invalid or
unenforceable parts had not been included herein. In the event that any
provision of this Section 16 relating to the duration, subject matter, or
territory shall be declared by a court of competent jurisdiction to exceed the
maximum duration, subject matter, or territory, such court deems reasonable and
enforceable, then the provision(s) deemed unenforceable shall be amended to
reflect the maximum duration, subject matter or territory which shall be
enforceable. Notwithstanding anything else herein contained, the parties hereto
expressly agree that this Section 16 shall survive the termination or expiration
of Employee's employment by Employer regardless of the reason for such
termination or expiration.
(e) Remedy for Breach. The parties hereto recognize that the
services to be rendered under this Agreement by Employee are of a special and
unique character; and that in the event of the breach by Employee of the terms
and conditions of this Agreement to be performed by Employee, or in the event
the Employee shall violate any of the restrictions set forth in this Section 16,
then Employer shall be entitled, if it so elects, to institute and prosecute
proceedings in any court of competent jurisdiction, either at law or in equity,
to obtain damages for any breach of this Agreement, to enforce the specific
performance hereof and to enjoin Employee from performing any prohibited act
hereunder. Nothing herein contained shall be construed to prevent Employer's
election of any such remedy in the event of the breach of the Agreement by
Employee.
17. APPLICABLE LAW. This Agreement has been negotiated and entered into and
to some extent shall be performed in the State of Ohio, and by agreement of the
parties shall be interpreted and construed in accordance with and pursuant to
the laws of the State of Tennessee.
18. TAXES. Employer shall withhold all taxes, such as FICA and all
employment-related taxes (income or otherwise), from the compensation, bonuses
and benefits paid hereunder, as required by law. Employee shall be responsible
for the payment of his income taxes on such compensation, bonuses, and benefits,
though the Employer will withhold such taxes as it is required to withhold.
19. ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties. It may not be changed orally but only by an agreement in writing
signed by both parties hereto.
20. CAPTIONS. The captions herein contained in no way limit or extend the
meaning of any Section, or the provisions therein, and are to be used for
reference purposes only. IN WITNESS WHEREOF, the parties hereto have executed
this Agreement in duplicate at Knoxville, Tennessee, on the day and date first
above written.
EMPLOYER: EMPLOYEE:
ENERGY SEARCH, INCORPORATED
------------------------------
By: ___________________________ John M. Johnston
Richard S. Cooper, President
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is hereby made and entered into by and between ENERGY
SEARCH, INCORPORATED, a Tennessee corporation ("Employer"), and ROBERT L. REMINE
("Employee"), this 18th day of September, 1996.
W I T N E S S E T H:
1. EMPLOYMENT. Employer employs Employee, and Employee accepts employment,
upon the terms and conditions of this Agreement.
2. TERM. The term of this Agreement, and of Employee's employment
hereunder, shall begin on January 1, 1997, and shall terminate on December 31,
2002. This Agreement, and Employee's employment hereunder, shall be renewed
automatically for successive periods of one (1) year each, subject to
termination as provided hereinafter.
3. COMPENSATION.
(a) During the first year of employment, Employer shall pay to
Employee as Base Salary Compensation for his services the sum of One Hundred
Eight Thousand Dollars ($180,000) per annum, which shall be paid in arrears in
equal biweekly installments of Seven Thousand Five Hundred Dollars ($7,500)
each. Base Salary Compensation thereafter shall increase at the rate of six
percent (6%) per annum and shall be subject to review by Employer's Board of
Directors, but in no event shall it be less than the One Hundred Eighty Thousand
Dollars ($180,000) per annum. (plus applicable six percent (6%) increases).
(b) If the gross working interest revenue of the Employer
increases by 20% per annum, Employee shall receive as additional compensation, a
yearly Performance Bonus of twenty-five percent (25%) of Employee s Base Salary.
(i) For those periods of Employee's employment that do not
coincide with Employer's fiscal year, the amount of the Performance Bonus shall
be based upon the proportion of whole months Employee is in the employ of
Employer during such fiscal year bears to twelve (12) months.
(ii) Payment of the bonus shall be made no later than ninety
(90) days after the end of the fiscal year for which the calculation is made and
shall be accompanied by a copy of the financial data on which the Performance
Bonus is based.
4. DUTIES. Employee is engaged as CFO of Employer and shall have such
authority as is commensurate with said position and as is further enumerated in
the By-Laws of the Employer and shall in general have the following duties:
Supervision of all aspects of the Company s financial operations (internal and
external reporting), and accounting policies, procedures and reporting (public
and private), and such other duties as the Board of the Employer from time to
time may designate.
5. EXTENT OF SERVICES. Employee shall devote his entire time,
attention, and energies to Employer's business and shall not during the term of
this Agreement be engaged in any other business activity whether or not such
business activity is pursued for gain, profit, or other pecuniary advantage.
However, Employee may invest his assets in such form or manner as will not
require his services in the operation of the affairs of the companies or
entities in which such investments are made.
6. WORKING FACILITIES. Employee shall have a private office, stenographic
help, typing and filing assistance, telephone(s) and facsimile machine(s), and
such other facilities and services as are suitable to his position and
appropriate for the performance of his duties.
7. EXPENSES.
(a) Reimbursement. Employer shall reimburse Employee for all
reasonable and necessary business expenses incurred by him in carrying out his
duties under this Agreement. Employee shall present to Employer from time to
time an itemized account of such expenses in such form as may be required by
Employer.
(b) Automobile. In recognition of Employee's need for an
automobile for business purposes, Employer will provide Employee with an
automobile allowance of One Thousand Dollars ($1,000) per month to compensate
for maintenance, repair and insurance. Fuel and automobile cleaning are to be
reimburses as per P. 7(a)
8. BENEFITS. Employer shall further:
(a) provide Employee with life insurance in the amount of $500,000 and as
is set forth in the Shareholders Agreement (with Employee to name the
beneficiary thereof), provided Employee is insurable at standard rates; however,
if extra premiums are necessitated by virtue of Employee's not being insurable
at standard rates, Employee shall be obligated to pay such additional premiums
or accept such reduced death benefits as may be purchased for the cost of
standard premiums;
(b) provide Employee with the same medical health and hospitalization
insurance coverage as Employer provides to its other executive officers;
(c) provide Employee with the same disability insurance coverage which
Employer provides to its other executive officers; and
(d) allow Employee to take part in any executive bonus and/or stock option
plan, profit-sharing plan, qualified salary deferral plan, and pension plan
which Employer now has or may hereafter adopt during the term of Employee's
employment hereunder.
(e) provide Employee with a membership at Fort Sanders Health and Fitness
Center.; and (f) allow Employee to participate with Employer in the drilling of
company wells as follows: Employer hereby grants Employee the option to purchase
a one percent (1%) Working Interest in any well drilled by the Company to be
owned by the Company (not for the benefit of a syndicated drilling program) for
a price equal to the pro rata one percent (1%) completion costs for said well,
i.e.. Employee is carried through the drilling and casing point but shall be
responsible for his pro rata portion of actual third party completion costs.
9. VACATIONS. Employee shall be entitled each year to a vacation of three
(3) weeks, during which time his compensation shall be paid in full.
10. TERMINATION.
(a) Without cause, Employer and Employee may terminate this
Agreement at any time upon one hundred twenty (120) days' written notice. In
such event, Employee, if requested by Employer, shall continue to render his
services and shall be paid his regular compensation up to the date of
termination. In addition, there shall be paid to Employee on the date of
termination a severance allowance of twenty-four (24) months salary (less all
amounts required to be withheld and deducted), plus the Performance Bonus set
forth in Section 3(b), ratably apportioned if termination is not at the end of
the fiscal year.
(c) Employer may terminate Employee's employment for cause if:
(1) Employee refuses to perform, or does not perform, in a normal
business manner his duties of employment with Employer;
(2) Employee fails or refuses to obey and comply with the
instructions, rules and regulations of Employer as promulgated by its Board
of Directors respecting the operations of Employer; or
(3) Employee engages in any unlawful conduct in connection with his
duties of employment with Employer, is guilty of any acts of dishonesty in
connection therewith, is convicted of a felony, is convicted of a
misdemeanor involving moral turpitude, or engages in any conduct clearly
detrimental to the business of Employer.
(4) Employee breaches any confidentiality or non-competition covenant
or agreement with the Employer.
If Employee's employment is terminated for cause, as set forth just
hereinabove, Employee shall receive his Base Salary accrued up through the date
of termination and shall be entitled to receive any Performance Bonuses (or
portion thereof) and severance pay set forth in herein.
Upon termination for any reason, except as may be otherwise required by
law, all benefits set forth in Section 8 shall cease, although Employee may keep
any pension or other similar rights which have already vested in him.
11. DEATH DURING EMPLOYMENT. If Employee dies during the term of
employment, Employer shall pay to the estate of Employee the Base Salary and
Performance Bonus (but excluding severance pay) that would otherwise be payable
to Employee up to the end of the month in which his death occurs.
12. NOTICES. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing and delivered in person or by
courier or sent by certified, United States mail, return receipt requested,
postage prepaid, to his residence in the case of Employee, or to its principal
office in the case of Employer. Notice shall be effective upon the date of
delivery, if delivered in person or by courier, or three (3) days after
depositing the notice in the United States mail, if sent by certified mail.
13. WAIVER OF BREACH. The waiver by Employer of a breach of any provision
of this Agreement by Employee shall not operate or be construed as a waiver of
any subsequent breach by Employee. No waiver shall be valid unless in writing
and signed by an authorized officer of Employer.
14. ASSIGNMENT. Employee acknowledges that the services to be rendered by
him are unique and personal. Accordingly, Employee may not assign any of his
rights or delegate any of his duties or obligations under this Agreement. The
rights and obligations of Employer under this Agreement shall inure to the
benefit of, and shall be binding upon, the successors and assigns of Employer.
15. CONFIDENTIALITY. Employee acknowledges that he will become familiar
with Employer's special methods of processing, pricing formulae, trade secrets,
operational procedures, strategic plans, pricing guidelines, product
development, confidential reports and lists of costs, customers and suppliers.
Employee further acknowledges that said data is confidential and proprietary to
Employer and agrees not to impart to any third party any of such proprietary
data. Employer shall be entitled to protect its interest herein by specific
performance and the right to enjoin Employee from engaging in such prohibited
practices, without limiting any other remedies available to it. Employee agrees
to execute and deliver any confidentiality agreement or similar document
required by Employer of its employees.
16. COVENANT AGAINST COMPETITION. In recognition of the close personal
contact Employee will have with Employer's confidential and proprietary
information and records, and the position of trust in which Employer holds
Employee, Employee agrees as follows:
(a) Anti-Solicitation: Customers, contractors, investors and
employees. During the initial term of this Agreement, any periods for which
the Agreement may be extended and for a period of two (2) years thereafter,
Employee shall not, either as an officer, stockholder, director, employee,
representative, broker, partner, sole proprietor or in any other manner or
capacity directly or indirectly call upon or solicit any customer,
contractor, investor or employee of Employer for the purpose of doing
business, investing or working, directly or indirectly, in the oil and gas
industry, within any states in which Employer, during the term of Employee
s employment, conducted any business or investment activities.
(b) Judicial Modification, Severability and Survival. If any provision
of this Section 16, or any other Section of the Agreement, shall be held to
be invalid or unenforceable, the remaining provisions hereof shall
nevertheless continue to be valid and enforceable as though the invalid or
unenforceable parts had not been included herein. In the event that any
provision of this Section 16 relating to the duration, subject matter, or
territory shall be declared by a court of competent jurisdiction to exceed
the maximum duration, subject matter, or territory, such court deems
reasonable and enforceable, then the provision(s) deemed unenforceable
shall be amended to reflect the maximum duration, subject matter or
territory which shall be enforceable. Notwithstanding anything else herein
contained, the parties hereto expressly agree that this Section 16 shall
survive the termination or expiration of Employee's employment by Employer
regardless of the reason for such termination or expiration.
(c) Remedy for Breach. The parties hereto recognize that the services
to be rendered under this Agreement by Employee are of a special and unique
character; and that in the event of the breach by Employee of the terms and
conditions of this Agreement to be performed by Employee, or in the event
the Employee shall violate any of the restrictions set forth in this
Section 16, then Employer shall be entitled, if it so elects, to institute
and prosecute proceedings in any court of competent jurisdiction, either at
law or in equity, to obtain damages for any breach of this Agreement, to
enforce the specific performance hereof and to enjoin Employee from
performing any prohibited act hereunder. Nothing herein contained shall be
construed to prevent Employer's election of any such remedy in the event of
the breach of the Agreement by Employee.
17. APPLICABLE LAW. This Agreement has been negotiated and entered into and
to some extent shall be performed in the State of Tennessee, and by agreement of
the parties shall be interpreted and construed in accordance with and pursuant
to the laws of the State of Tennessee.
18. TAXES. Employer shall withhold all taxes, such as FICA and all
employment-related taxes (income or otherwise), from the compensation, bonuses
and benefits paid hereunder, as required by law. Employee shall be responsible
for the payment of his income taxes on such compensation, bonuses, and benefits,
though the Employer will withhold such taxes as it is required to withhold.
19. ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties. It may not be changed orally but only by an agreement in writing
signed by both parties hereto.
20. CAPTIONS. The captions herein contained in no way limit or extend the
meaning of any Section, or the provisions therein, and are to be used for
reference purposes only.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
duplicate at Knoxville, Tennessee, on the day and date first above written.
EMPLOYER: EMPLOYEE:
ENERGY SEARCH, INCORPORATED
/s/
By: ___/s/______________________ Robert L. Remine
Richard S. Cooper, President
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is hereby made and entered into by and between ENERGY
SEARCH, INCORPORATED, a Tennessee corporation ("Employer"), and CHARLES P.
TORREY, JR. ("Employee"), this 18th day of September, 1996.
W I T N E S S E T H:
1. EMPLOYMENT. Employer employs Employee, and Employee accepts employment,
upon the terms and conditions of this Agreement.
2. TERM. The term of this Agreement, and of Employee's employment
hereunder, shall begin on January 1, 1997, and shall terminate on December 31,
2002. This Agreement, and Employee's employment hereunder, shall be renewed
automatically for successive periods of one (1) year each, subject to
termination as provided hereinafter.
3. COMPENSATION.
(a) During the first year of employment, Employer shall pay to
Employee as Base Salary Compensation for his services the sum of One Hundred
Eight Thousand Dollars ($180,000) per annum, which shall be paid in arrears in
equal biweekly installments of Seven Thousand Five Hundred Dollars ($7,500)
each. Base Salary Compensation thereafter shall increase at the rate of six
percent (6%) per annum and shall be subject to review by Employer's Board of
Directors, but in no event shall it be less than the One Hundred Eighty Thousand
Dollars ($180,000) per annum. (plus applicable six percent (6%) increases).
(b) If the gross working interest revenue of the Employer
increases by 20% per annum, Employee shall receive as additional compensation, a
yearly Performance Bonus of twenty-five percent (25%) of Employee s Base Salary.
(i) For those periods of Employee's employment that do not
coincide with Employer's fiscal year, the amount of the Performance Bonus shall
be based upon the proportion of whole months Employee is in the employ of
Employer during such fiscal year bears to twelve (12) months.
(ii) Payment of the bonus shall be made no later than ninety
(90) days after the end of the fiscal year for which the calculation is made and
shall be accompanied by a copy of the financial data on which the Performance
Bonus is based.
4. DUTIES. Employee is engaged as CEO of Employer and shall have such
authority as is commensurate with said position and as is further enumerated in
the By-Laws of the Employer and shall in general have the following duties:
developing corporate strategy; executive management; securities industry
relations; capital formation for future drilling partnerships; and such other
duties as the Board of the Employer from time to time may designate.
5. EXTENT OF SERVICES. Employee shall devote his entire time,
attention, and energies to Employer's business and shall not during the term of
this Agreement be engaged in any other business activity whether or not such
business activity is pursued for gain, profit, or other pecuniary advantage.
However, Employee may invest his assets in such form or manner as will not
require his services in the operation of the affairs of the companies or
entities in which such investments are made.
6. WORKING FACILITIES. Employee shall have a private office, stenographic
help, typing and filing assistance, telephone(s) and facsimile machine(s), and
such other facilities and services as are suitable to his position and
appropriate for the performance of his duties.
7. EXPENSES.
(a) Reimbursement. Employer shall reimburse Employee for all
reasonable and necessary business expenses incurred by him in carrying out his
duties under this Agreement. Employee shall present to Employer from time to
time an itemized account of such expenses in such form as may be required by
Employer.
(b) Automobile. In recognition of Employee's need for an
automobile for business purposes, Employer will provide Employee with an
automobile allowance of One Thousand Dollars ($1,000) per month to compensate
for maintenance, repair and insurance. Fuel and automobile cleaning are to be
reimburses as per P. 7(a)
8. BENEFITS. Employer shall further:
(a) provide Employee with life insurance in the amount of $500,000 and as
is set forth in the Shareholders Agreement (with Employee to name the
beneficiary thereof), provided Employee is insurable at standard rates; however,
if extra premiums are necessitated by virtue of Employee's not being insurable
at standard rates, Employee shall be obligated to pay such additional premiums
or accept such reduced death benefits as may be purchased for the cost of
standard premiums;
(b) provide Employee with the same medical health and hospitalization
insurance coverage as Employer provides to its other executive officers;
(c) provide Employee with the same disability insurance coverage which
Employer provides to its other executive officers; and
(d) allow Employee to take part in any executive bonus and/or stock option
plan, profit-sharing plan, qualified salary deferral plan, and pension plan
which Employer now has or may hereafter adopt during the term of Employee's
employment hereunder.
(e) provide Employee with a membership at Fort Sanders Health and Fitness
Center.; and (f) allow Employee to participate with Employer in the drilling of
company wells as follows: Employer hereby grants Employee the option to purchase
a one percent (1%) Working Interest in any well drilled by the Company to be
owned by the Company (not for the benefit of a syndicated drilling program) for
a price equal to the pro rata one percent (1%) completion costs for said well,
i.e.. Employee is carried through the drilling and casing point but shall be
responsible for his pro rata portion of actual third party completion costs.
9. VACATIONS. Employee shall be entitled each year to a vacation of three
(3) weeks, during which time his compensation shall be paid in full.
10. TERMINATION.
(a) Without cause, Employer and Employee may terminate this Agreement
at any time upon one hundred twenty (120) days' written notice. In such
event, Employee, if requested by Employer, shall continue to render his
services and shall be paid his regular compensation up to the date of
termination. In addition, there shall be paid to Employee on the date of
termination a severance allowance of twenty-four (24) months salary (less
all amounts required to be withheld and deducted), plus the Performance
Bonus set forth in Section 3(b), ratably apportioned if termination is not
at the end of the fiscal year.
(c) Employer may terminate Employee's employment for cause if:
(1) Employee refuses to perform, or does not perform, in a normal
business manner his duties of employment with Employer;
(2) Employee fails or refuses to obey and comply with the
instructions, rules and regulations of Employer as promulgated by its
Board of Directors respecting the operations of Employer; or
(3) Employee engages in any unlawful conduct in connection with
his duties of employment with Employer, is guilty of any acts of
dishonesty in connection therewith, is convicted of a felony, is
convicted of a misdemeanor involving moral turpitude, or engages in
any conduct clearly detrimental to the business of Employer.
(4) Employee breaches any confidentiality or non-competition
covenant or agreement with the Employer.
If Employee's employment is terminated for cause, as set forth just
hereinabove, Employee shall receive his Base Salary accrued up through the date
of termination and shall be entitled to receive any Performance Bonuses (or
portion thereof) and severance pay set forth in herein.
Upon termination for any reason, except as may be otherwise required by
law, all benefits set forth in Section 8 shall cease, although Employee may keep
any pension or other similar rights which have already vested in him.
11. DEATH DURING EMPLOYMENT. If Employee dies during the term of
employment, Employer shall pay to the estate of Employee the Base Salary and
Performance Bonus (but excluding severance pay) that would otherwise be payable
to Employee up to the end of the month in which his death occurs.
12. NOTICES. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing and delivered in person or by
courier or sent by certified, United States mail, return receipt requested,
postage prepaid, to his residence in the case of Employee, or to its principal
office in the case of Employer. Notice shall be effective upon the date of
delivery, if delivered in person or by courier, or three (3) days after
depositing the notice in the United States mail, if sent by certified mail.
13. WAIVER OF BREACH. The waiver by Employer of a breach of any provision
of this Agreement by Employee shall not operate or be construed as a waiver of
any subsequent breach by Employee. No waiver shall be valid unless in writing
and signed by an authorized officer of Employer.
14. ASSIGNMENT. Employee acknowledges that the services to be rendered by
him are unique and personal. Accordingly, Employee may not assign any of his
rights or delegate any of his duties or obligations under this Agreement. The
rights and obligations of Employer under this Agreement shall inure to the
benefit of, and shall be binding upon, the successors and assigns of Employer.
15. CONFIDENTIALITY. Employee acknowledges that he will become familiar
with Employer's special methods of processing, pricing formulae, trade secrets,
operational procedures, strategic plans, pricing guidelines, product
development, confidential reports and lists of costs, customers and suppliers.
Employee further acknowledges that said data is confidential and proprietary to
Employer and agrees not to impart to any third party any of such proprietary
data. Employer shall be entitled to protect its interest herein by specific
performance and the right to enjoin Employee from engaging in such prohibited
practices, without limiting any other remedies available to it. Employee agrees
to execute and deliver any confidentiality agreement or similar document
required by Employer of its employees.
16. COVENANT AGAINST COMPETITION. In recognition of the close personal
contact Employee will have with Employer's confidential and proprietary
information and records, and the position of trust in which Employer holds
Employee, Employee agrees as follows:
(a) Anti-Solicitation: Customers, contractors, investors and
employees. During the initial term of this Agreement, any periods for which
the Agreement may be extended and for a period of two (2) years thereafter,
Employee shall not, either as an officer, stockholder, director, employee,
representative, broker, partner, sole proprietor or in any other manner or
capacity directly or indirectly call upon or solicit any customer,
contractor, investor or employee of Employer for the purpose of doing
business, investing or working, directly or indirectly, in the oil and gas
industry, within any states in which Employer, during the term of Employee
s employment, conducted any business or investment activities.
(b) Judicial Modification, Severability and Survival. If any provision
of this Section 16, or any other Section of the Agreement, shall be held to
be invalid or unenforceable, the remaining provisions hereof shall
nevertheless continue to be valid and enforceable as though the invalid or
unenforceable parts had not been included herein. In the event that any
provision of this Section 16 relating to the duration, subject matter, or
territory shall be declared by a court of competent jurisdiction to exceed
the maximum duration, subject matter, or territory, such court deems
reasonable and enforceable, then the provision(s) deemed unenforceable
shall be amended to reflect the maximum duration, subject matter or
territory which shall be enforceable. Notwithstanding anything else herein
contained, the parties hereto expressly agree that this Section 16 shall
survive the termination or expiration of Employee's employment by Employer
regardless of the reason for such termination or expiration.
(c) Remedy for Breach. The parties hereto recognize that the services
to be rendered under this Agreement by Employee are of a special and unique
character; and that in the event of the breach by Employee of the terms and
conditions of this Agreement to be performed by Employee, or in the event
the Employee shall violate any of the restrictions set forth in this
Section 16, then Employer shall be entitled, if it so elects, to institute
and prosecute proceedings in any court of competent jurisdiction, either at
law or in equity, to obtain damages for any breach of this Agreement, to
enforce the specific performance hereof and to enjoin Employee from
performing any prohibited act hereunder. Nothing herein contained shall be
construed to prevent Employer's election of any such remedy in the event of
the breach of the Agreement by Employee.
17. APPLICABLE LAW. This Agreement has been negotiated and entered into and
to some extent shall be performed in the State of Tennessee, and by agreement of
the parties shall be interpreted and construed in accordance with and pursuant
to the laws of the State of Tennessee.
18. TAXES. Employer shall withhold all taxes, such as FICA and all
employment-related taxes (income or otherwise), from the compensation, bonuses
and benefits paid hereunder, as required by law. Employee shall be responsible
for the payment of his income taxes on such compensation, bonuses, and benefits,
though the Employer will withhold such taxes as it is required to withhold.
19. ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties. It may not be changed orally but only by an agreement in writing
signed by both parties hereto.
20. CAPTIONS. The captions herein contained in no way limit or extend the
meaning of any Section, or the provisions therein, and are to be used for
reference purposes only.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
duplicate at Knoxville, Tennessee, on the day and date first above written.
EMPLOYER: EMPLOYEE:
ENERGY SEARCH, INCORPORATED
__/s/_________________________
By: __/s/_______________________ Charles P. Torrey, Jr.
Richard S. Cooper, President
<PAGE>
EMPLOYMENT AGREEMENT
THIS AGREEMENT is hereby made and entered into by and between ENERGY
SEARCH, INCORPORATED, a Tennessee corporation ("Employer"), and RICHARD S.
COOPER ("Employee"), this 18th day of September, 1996.
W I T N E S S E T H:
1. EMPLOYMENT. Employer employs Employee, and Employee accepts employment,
upon the terms and conditions of this Agreement.
2. TERM. The term of this Agreement, and of Employee's employment
hereunder, shall begin on January 1, 1997, and shall terminate on December 31,
2002. This Agreement, and Employee's employment hereunder, shall be renewed
automatically for successive periods of one (1) year each, subject to
termination as provided hereinafter.
3. COMPENSATION.
(a) During the first year of employment, Employer shall pay to
Employee as Base Salary Compensation for his services the sum of One Hundred
Eight Thousand Dollars ($180,000) per annum, which shall be paid in arrears in
equal biweekly installments of Seven Thousand Five Hundred Dollars ($7,500)
each. Base Salary Compensation thereafter shall increase at the rate of six
percent (6%) per annum and shall be subject to review by Employer's Board of
Directors, but in no event shall it be less than the One Hundred Eighty Thousand
Dollars ($180,000) per annum. (plus applicable six percent (6%) increases).
(b) If the gross working interest revenue of the Employer
increases by 20% per annum, Employee shall receive as additional compensation, a
yearly Performance Bonus of twenty-five percent (25%) of Employee s Base Salary.
(i) For those periods of Employee's employment that do not
coincide with Employer's fiscal year, the amount of the Performance Bonus shall
be based upon the proportion of whole months Employee is in the employ of
Employer during such fiscal year bears to twelve (12) months.
(ii) Payment of the bonus shall be made no later than ninety
(90) days after the end of the fiscal year for which the calculation is made and
shall be accompanied by a copy of the financial data on which the Performance
Bonus is based.
4. DUTIES. Employee is engaged as President of Employer and shall have
such authority as is commensurate with said position and as is further
enumerated in the By-Laws of the Employer and shall in general have the
following duties: Managerial responsibility for all day to day operations of the
Employer and such other duties as the Board of the Employer from time to time
may designate.
5. EXTENT OF SERVICES. Employee shall devote his entire time,
attention, and energies to Employer's business and shall not during the term of
this Agreement be engaged in any other business activity whether or not such
business activity is pursued for gain, profit, or other pecuniary advantage.
However, Employee may invest his assets in such form or manner as will not
require his services in the operation of the affairs of the companies or
entities in which such investments are made.
6. WORKING FACILITIES. Employee shall have a private office, stenographic
help, typing and filing assistance, telephone(s) and facsimile machine(s), and
such other facilities and services as are suitable to his position and
appropriate for the performance of his duties.
7. EXPENSES.
(a) Reimbursement. Employer shall reimburse Employee for all
reasonable and necessary business expenses incurred by him in carrying out his
duties under this Agreement. Employee shall present to Employer from time to
time an itemized account of such expenses in such form as may be required by
Employer.
(b) Automobile. In recognition of Employee's need for an
automobile for business purposes, Employer will provide Employee with an
automobile allowance of One Thousand Dollars ($1,000) per month to compensate
for maintenance, repair and insurance. Fuel and automobile cleaning are to be
reimburses as per P. 7(a)
8. BENEFITS. Employer shall further:
(a) provide Employee with life insurance in the amount of $500,000 and
as is set forth in the Shareholders Agreement (with Employee to name the
beneficiary thereof), provided Employee is insurable at standard rates;
however, if extra premiums are necessitated by virtue of Employee's not
being insurable at standard rates, Employee shall be obligated to pay such
additional premiums or accept such reduced death benefits as may be
purchased for the cost of standard premiums;
(b) provide Employee with the same medical health and hospitalization
insurance coverage as Employer provides to its other executive officers;
(c) provide Employee with the same disability insurance coverage which
Employer provides to its other executive officers; and
(d) allow Employee to take part in any executive bonus and/or stock
option plan, profit-sharing plan, qualified salary deferral plan, and
pension plan which Employer now has or may hereafter adopt during the term
of Employee's employment hereunder.
(e) provide Employee with a membership at Fort Sanders Health and
Fitness Center.; and (f) allow Employee to participate with Employer in the
drilling of company wells as follows: Employer hereby grants Employee the
option to purchase a one percent (1%) Working Interest in any well drilled
by the Company to be owned by the Company (not for the benefit of a
syndicated drilling program) for a price equal to the pro rata one percent
(1%) completion costs for said well, i.e.. Employee is carried through the
drilling and casing point but shall be responsible for his pro rata portion
of actual third party completion costs.
9. VACATIONS. Employee shall be entitled each year to a vacation of three
(3) weeks, during which time his compensation shall be paid in full.
10. TERMINATION.
(a) Without cause, Employer and Employee may terminate this Agreement at
any time upon one hundred twenty (120) days' written notice. In such event,
Employee, if requested by Employer, shall continue to render his services and
shall be paid his regular compensation up to the date of termination. In
addition, there shall be paid to Employee on the date of termination a severance
allowance of twenty-four (24) months salary (less all amounts required to be
withheld and deducted), plus the Performance Bonus set forth in Section 3(b),
ratably apportioned if termination is not at the end of the fiscal year.
(c) Employer may terminate Employee's employment for cause if:
(1) Employee refuses to perform, or does not perform, in a normal
business manner his duties of employment with Employer;
(2) Employee fails or refuses to obey and comply with the
instructions, rules and regulations of Employer as promulgated by its Board
of Directors respecting the operations of Employer; or
(3) Employee engages in any unlawful conduct in connection with his
duties of employment with Employer, is guilty of any acts of dishonesty in
connection therewith, is convicted of a felony, is convicted of a
misdemeanor involving moral turpitude, or engages in any conduct clearly
detrimental to the business of Employer.
(4) Employee breaches any confidentiality or non-competition covenant
or agreement with the Employer.
If Employee's employment is terminated for cause, as set forth just
hereinabove, Employee shall receive his Base Salary accrued up through the date
of termination and shall be entitled to receive any Performance Bonuses (or
portion thereof) and severance pay set forth in herein.
Upon termination for any reason, except as may be otherwise required by
law, all benefits set forth in Section 8 shall cease, although Employee may keep
any pension or other similar rights which have already vested in him.
11. DEATH DURING EMPLOYMENT. If Employee dies during the term of
employment, Employer shall pay to the estate of Employee the Base Salary and
Performance Bonus (but excluding severance pay) that would otherwise be payable
to Employee up to the end of the month in which his death occurs.
12. NOTICES. Any notice required or desired to be given under this
Agreement shall be deemed given if in writing and delivered in person or by
courier or sent by certified, United States mail, return receipt requested,
postage prepaid, to his residence in the case of Employee, or to its principal
office in the case of Employer. Notice shall be effective upon the date of
delivery, if delivered in person or by courier, or three (3) days after
depositing the notice in the United States mail, if sent by certified mail.
13. WAIVER OF BREACH. The waiver by Employer of a breach of any provision
of this Agreement by Employee shall not operate or be construed as a waiver of
any subsequent breach by Employee. No waiver shall be valid unless in writing
and signed by an authorized officer of Employer.
14. ASSIGNMENT. Employee acknowledges that the services to be rendered by
him are unique and personal. Accordingly, Employee may not assign any of his
rights or delegate any of his duties or obligations under this Agreement. The
rights and obligations of Employer under this Agreement shall inure to the
benefit of, and shall be binding upon, the successors and assigns of Employer.
15. CONFIDENTIALITY. Employee acknowledges that he will become familiar
with Employer's special methods of processing, pricing formulae, trade secrets,
operational procedures, strategic plans, pricing guidelines, product
development, confidential reports and lists of costs, customers and suppliers.
Employee further acknowledges that said data is confidential and proprietary to
Employer and agrees not to impart to any third party any of such proprietary
data. Employer shall be entitled to protect its interest herein by specific
performance and the right to enjoin Employee from engaging in such prohibited
practices, without limiting any other remedies available to it. Employee agrees
to execute and deliver any confidentiality agreement or similar document
required by Employer of its employees.
16. COVENANT AGAINST COMPETITION. In recognition of the close personal
contact Employee will have with Employer's confidential and proprietary
information and records, and the position of trust in which Employer holds
Employee, Employee agrees as follows:
(a) Anti-Solicitation: Customers, contractors, investors and
employees. During the initial term of this Agreement, any periods for which
the Agreement may be extended and for a period of two (2) years thereafter,
Employee shall not, either as an officer, stockholder, director, employee,
representative, broker, partner, sole proprietor or in any other manner or
capacity directly or indirectly call upon or solicit any customer,
contractor, investor or employee of Employer for the purpose of doing
business, investing or working, directly or indirectly, in the oil and gas
industry, within any states in which Employer, during the term of Employee
s employment, conducted any business or investment activities.
(b) Judicial Modification, Severability and Survival. If any provision
of this Section 16, or any other Section of the Agreement, shall be held to
be invalid or unenforceable, the remaining provisions hereof shall
nevertheless continue to be valid and enforceable as though the invalid or
unenforceable parts had not been included herein. In the event that any
provision of this Section 16 relating to the duration, subject matter, or
territory shall be declared by a court of competent jurisdiction to exceed
the maximum duration, subject matter, or territory, such court deems
reasonable and enforceable, then the provision(s) deemed unenforceable
shall be amended to reflect the maximum duration, subject matter or
territory which shall be enforceable. Notwithstanding anything else herein
contained, the parties hereto expressly agree that this Section 16 shall
survive the termination or expiration of Employee's employment by Employer
regardless of the reason for such termination or expiration.
(c) Remedy for Breach. The parties hereto recognize that the services
to be rendered under this Agreement by Employee are of a special and unique
character; and that in the event of the breach by Employee of the terms and
conditions of this Agreement to be performed by Employee, or in the event
the Employee shall violate any of the restrictions set forth in this
Section 16, then Employer shall be entitled, if it so elects, to institute
and prosecute proceedings in any court of competent jurisdiction, either at
law or in equity, to obtain damages for any breach of this Agreement, to
enforce the specific performance hereof and to enjoin Employee from
performing any prohibited act hereunder. Nothing herein contained shall be
construed to prevent Employer's election of any such remedy in the event of
the breach of the Agreement by Employee.
17. APPLICABLE LAW. This Agreement has been negotiated and entered into and
to some extent shall be performed in the State of Tennessee, and by agreement of
the parties shall be interpreted and construed in accordance with and pursuant
to the laws of the State of Tennessee.
18. TAXES. Employer shall withhold all taxes, such as FICA and all
employment-related taxes (income or otherwise), from the compensation, bonuses
and benefits paid hereunder, as required by law. Employee shall be responsible
for the payment of his income taxes on such compensation, bonuses, and benefits,
though the Employer will withhold such taxes as it is required to withhold.
19. ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties. It may not be changed orally but only by an agreement in writing
signed by both parties hereto.
20. CAPTIONS. The captions herein contained in no way limit or extend the
meaning of any Section, or the provisions therein, and are to be used for
reference purposes only.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in
duplicate at Knoxville, Tennessee, on the day and date first above written.
EMPLOYER: EMPLOYEE:
ENERGY SEARCH, INCORPORATED
___/s/_________________________
By: ____/s/______________________ RICHARD S. COOPER
Charles P. Torrey, Jr., CEO
Date: July 29, 1994 Amount: $30,000.00
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned promises to pay to the
order of CHARLES P. TORREY, JR. the principal sum of Thirty Thousand Dollars
($30,000) and the same shall be payable at the following address: 280 Ft.
Sanders Boulevard, Suite 200, Knoxville, Tennessee 37922, unless the maker is
advised otherwise, the principal amount of the within Note shall be payable in
the following manner, to-wit:
The principal amount plus interest at the rate of ten
percent (10%) per annum on the outstanding balance shall be
due and payable upon demand.
Right is hereby granted to the maker to prepay this Note at any time prior to
the due date.
The maker understands and hereby agrees that should a default
occur in the payment of this Note, when by the terms same is to be paid, the
entire balance shall become due and payable at once. Should this Note be placed
in the hands of an attorney for collection by reason of such default, maker
agrees to pay all costs of collection.
ENERGY SEARCH, INCORPORATED
By: __________________________
Its: President
Sworn to and subscribed before me this ____ day of ____________, 1994.
- -----------------------
Notary Public
My commission expires:
- -----------------------
<PAGE>
Date: September 10, 1996 Amount: $35,000.00
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned promises to pay to the order of
CHARLES P. TORREY, JR. the principal sum of Thirty-Five Thousand Dollars
($35,000) and the same shall be payable at the following address: 280 Ft.
Sanders Boulevard, Suite 200, Knoxville, Tennessee 37922, unless the maker is
advised otherwise, the principal amount of the within Note shall be payable in
the following manner, to-wit:
The principal amount plus interest at the rate of ten percent
(10%) per annum on the outstanding balance shall be due and
payable upon demand.
Right is hereby granted to the maker to prepay this Note at any time
prior to the due date. The maker understands and hereby agrees that
should a default occur in the payment of this Note,
when by the terms same is to be paid, the entire balance shall become due and
payable at once. Should this Note be placed in the hands of an attorney for
collection by reason of such default, maker agrees to pay all costs of
collection.
ENERGY SEARCH, INCORPORATED
By: ____________________________
Its: President
Sworn to and subscribed before me this 10th day of September, 1996.
- --------------------------
Notary Public
My commission expires: 5-31-99
<PAGE>
Date: July 29, 1994 Amount: $30,000.00
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned promises to pay to the
order of ROBERT L. REMINE the principal sum of Thirty Thousand Dollars ($30,000)
and the same shall be payable at the following address: 280 Ft. Sanders
Boulevard, Suite 200, Knoxville, Tennessee 37922, unless the maker is advised
otherwise, the principal amount of the within Note shall be payable in the
following manner, to-wit:
The principal amount plus interest at the rate of ten
percent (10%) per annum on the outstanding balance shall be
due and payable upon demand.
Right is hereby granted to the maker to prepay this
Note at any time prior to the due date.
The maker understands and hereby agrees that should a default occur in the
payment of this Note, when by the terms same is to be paid, the entire balance
shall become due and payable at once. Should this Note be placed in the hands of
an attorney for collection by reason of such default, maker agrees to pay all
costs of collection.
ENERGY SEARCH, INCORPORATED
By: __________________________
Its: President
Sworn to and subscribed before me this ____ day of ____________, 1994.
- -----------------------
Notary Public
My commission expires:
- -----------------------
<PAGE>
Date: July 29, 1994 Amount: $30,000.00
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned promises to pay to the
order of ROBERT L. REMINE the principal sum of Thirty Thousand Dollars ($30,000)
and the same shall be payable at the following address: 280 Ft. Sanders
Boulevard, Suite 200, Knoxville, Tennessee 37922, unless the maker is advised
otherwise, the principal amount of the within Note shall be payable in the
following manner, to-wit:
The principal amount plus interest at the rate of ten
percent (10%) per annum on the outstanding balance shall be
due and payable upon demand.
Right is hereby granted to the maker to prepay this
Note at any time prior to the due date.
The maker understands and hereby agrees that should a default occur in the
payment of this Note, when by the terms same is to be paid, the entire balance
shall become due and payable at once. Should this Note be placed in the hands of
an attorney for collection by reason of such default, maker agrees to pay all
costs of collection.
ENERGY SEARCH, INCORPORATED
By: __________________________
Its: President
Sworn to and subscribed before me this ____ day of ____________, 1994.
- -----------------------
Notary Public
My commission expires:
- -----------------------
<PAGE>
Date: July 29, 1994 Amount: $30,000.00
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned promises to pay to the
order of ROBERT L. REMINE the principal sum of Thirty Thousand Dollars ($30,000)
and the same shall be payable at the following address: 280 Ft. Sanders
Boulevard, Suite 200, Knoxville, Tennessee 37922, unless the maker is advised
otherwise, the principal amount of the within Note shall be payable in the
following manner, to-wit:
The principal amount plus interest at the rate of ten
percent (10%) per annum on the outstanding balance shall be
due and payable upon demand.
Right is hereby granted to the maker to prepay this
Note at any time prior to the due date.
The maker understands and hereby agrees that should a default occur in the
payment of this Note, when by the terms same is to be paid, the entire balance
shall become due and payable at once. Should this Note be placed in the hands of
an attorney for collection by reason of such default, maker agrees to pay all
costs of collection.
ENERGY SEARCH, INCORPORATED
By: __________________________
Its: President
Sworn to and subscribed before me this ____ day of ____________, 1994.
- -----------------------
Notary Public
My commission expires:
- -----------------------
<PAGE>
Date: July 29, 1994 Amount: $30,000.00
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned promises to pay to the
order of ROBERT L. REMINE the principal sum of Thirty Thousand Dollars ($30,000)
and the same shall be payable at the following address: 280 Ft. Sanders
Boulevard, Suite 200, Knoxville, Tennessee 37922, unless the maker is advised
otherwise, the principal amount of the within Note shall be payable in the
following manner, to-wit:
The principal amount plus interest at the rate of ten
percent (10%) per annum on the outstanding balance shall be
due and payable upon demand.
Right is hereby granted to the maker to prepay this
Note at any time prior to the due date.
The maker understands and hereby agrees that should a default occur in the
payment of this Note, when by the terms same is to be paid, the entire balance
shall become due and payable at once. Should this Note be placed in the hands of
an attorney for collection by reason of such default, maker agrees to pay all
costs of collection.
ENERGY SEARCH, INCORPORATED
By: __________________________
Its: President
Sworn to and subscribed before me this ____ day of ____________, 1994.
- -----------------------
Notary Public
My commission expires:
- -----------------------
<PAGE>
Date: July 29, 1994 Amount: $30,000.00
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned promises to pay to the
order of ROBERT L. REMINE the principal sum of Thirty Thousand Dollars ($30,000)
and the same shall be payable at the following address: 280 Ft. Sanders
Boulevard, Suite 200, Knoxville, Tennessee 37922, unless the maker is advised
otherwise, the principal amount of the within Note shall be payable in the
following manner, to-wit:
The principal amount plus interest at the rate of ten
percent (10%) per annum on the outstanding balance shall be
due and payable upon demand.
Right is hereby granted to the maker to prepay this
Note at any time prior to the due date.
The maker understands and hereby agrees that should a default occur in the
payment of this Note, when by the terms same is to be paid, the entire balance
shall become due and payable at once. Should this Note be placed in the hands of
an attorney for collection by reason of such default, maker agrees to pay all
costs of collection.
ENERGY SEARCH, INCORPORATED
By: __________________________
Its: President
Sworn to and subscribed before me this ____ day of ____________, 1994.
- -----------------------
Notary Public
My commission expires:
- -----------------------
Form of Lock-Up Agreement
, 1996
LA JOLLA SECURITIES CORPORATION
8214 Westchester, Suite 500
Dallas, Texas 75225
Re: Agreement Not to Sell
Gentlemen:
Reference is made to the proposed public offering of 100,000 Units by
Energy Search, Inc. (the "Company"), to be made pursuant to a Registration
Statement (the "Registration Statement") filed with the Securities and Exchange
Commission and to be underwritten by La Jolla Securities Corporation, Inc. ("La
Jolla") as representative (the "Representative") of the several underwriters
(the "Underwriters") to be named in an underwriting agreement.
In consideration of the offer and sale of such Units by the Company and
the Underwriters and of other good and valuable consideration the receipt of
which is hereby acknowledged, the undersigned agrees that, without the express
prior written consent of La Jolla acting alone, he will not offer, sell, make
any short sale of, loan, encumber, grant any option for the purchase of, or
otherwise dispose of (the "Resale Restrictions"), any securities of the Company
beneficially owned or otherwise held by the undersigned as of the date of this
letter or hereafter acquired by the undersigned (other than those securities
included in the registration, if any) (collectively, the "Shares") until
__________ (the "Lock-up Period"). The foregoing Resale Restrictions are
expressly agreed to preclude the holder of the Shares from engaging in any
hedging or other transaction which may lead to or result in a sale of Shares
during the Lock-up Period even if such Shares would be sold by someone other
than the undersigned. Such prohibited hedging or other transactions would
include without limitation any short sale (whether or not against the box), any
pledge or any purchase, sale or grant of any right (including without limitation
any put or call option) with respect to any of the Shares.
The undersigned agrees and consents to the entry of stop transfer
instructions with the transfer agent for the Company's Common Stock against any
transfer of shares of Common Stock by the undersigned in contravention of the
Resale Restrictions. In addition, the undersigned agrees to be bound by the
Resale Restrictions whether or not the undersigned participates in the public
offering. The undersigned understands that the Underwriters and the Company will
rely upon the representations set forth in this letter in proceeding with the
public offering. The undersigned understands that the agreements of the
undersigned are irrevocable and shall be binding upon the undersigned's heirs,
legal representatives, successors and assigns.
<PAGE>
Notwithstanding the foregoing, the undersigned may transfer any or all
of the Shares either during his lifetime or on death by will or intestacy to his
immediate family or to a trust the beneficiaries of which are exclusively the
undersigned and/or a member or members of his immediate family; provided,
however, that in any such case it shall be a condition to the transfer that the
transferee execute an agreement stating that the transferee is receiving and
holding the Shares except in accordance with this Lock-up Agreement. For
purposes of this paragraph, "immediate family" shall mean spouse, lineal
descendant, father, mother, brother or sister of the transferor.
Very truly yours,
By:
Signature
Richard S. Cooper
Accepted and Agreed to:
LA JOLLA SECURITIES CORPORATION
As Representative of the
Several Underwriters
By:____________________________
Title___________________________
PLEASE COMPLETE AND RETURN TO:
La Jolla Securities Corporation
8214 Westchester
Suite 500
Dallas, Texas 75225
CONSENT OF INDEPENDENT ACCOUNTANT
I consent to the use in this Registration Statement of Energy Search,
Incorporated on Form S-B of my report dated January 30, 1996, included herein,
on the financial statements of Energy Search, Incorporated as of December 31,
1995 and 1994 and for each of the two years ended December 31, 1995. I also
consent to the reference to me under the heading "Experts" in the Proxy
Statement/Prospectus, which is part of this Registration Statement.
/s/
Ronald D. Cameron, CPA
September 13, 1996
Knoxville, Tennessee
CONSENT OF INDEPENDENT GEOLOGIST
I consent to the use in this Registration Statement of Energy Search,
Incorporated on Form S-B of my report dated September 17, 1996, included herein,
on the oil and gas reserves of Energy Search, Incorporated as of December 31,
1995 and 1994. I also consent to the reference to me as an expert in geology and
oil and gas reserve analysis under the heading "Experts" in the Prospectus,
which is part of this Registration Statement.
/s/
Kim A. Walbe
September 17, 1996
Charleston, WV
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
registrant's audited balance sheet as of December 31, 1995, audited statement of
operations for the year ended December 31, 1995, unaudited balance sheet as of
June 30, 1996 and unaudited statement of operations for the period ended June
30, 1996, and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000932181
<NAME> Energy Search, Incorporated
<S> <C> <C>
<PERIOD-TYPE> Year 6-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1995
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 Jun-30-1996
<CASH> 105,978 285,561
<SECURITIES> 0 0
<RECEIVABLES> 1,295,735 335,689
<ALLOWANCES> 102,468 102,468
<INVENTORY> 62,165 75,432
<CURRENT-ASSETS> 1,361,410 594,214
<PP&E> 5,821,752 6,026,967
<DEPRECIATION> (2,784,772) (2,947,282)
<TOTAL-ASSETS> 5,811,806 5,397,195
<CURRENT-LIABILITIES> 3,891,177 2,410,581
<BONDS> 2,285,592 75,404
0 3,573,000
0 0
<COMMON> 1,200 1,200
<OTHER-SE> (366,163) (662,990)
<TOTAL-LIABILITY-AND-EQUITY> 5,811,806 5,397,195
<SALES> 173,162 104,449
<TOTAL-REVENUES> 2,565,603 1,136,620
<CGS> 21,781 8,920
<TOTAL-COSTS> 1,916,294 1,077,354
<OTHER-EXPENSES> 88,779 82,080
<LOSS-PROVISION> 42,290 0
<INTEREST-EXPENSE> 249,898 151,555
<INCOME-PRETAX> 268,342 (174,369)
<INCOME-TAX> 0 108,873
<INCOME-CONTINUING> 268,342 (65,496)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (79,251)
<CHANGES> 0 0
<NET-INCOME> 268,342 (144,747)
<EPS-PRIMARY> 0.22 (0.12)
<EPS-DILUTED> 0 0
</TABLE>
