-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NYMBowMBlki8tdh8uJf+RJywgRmeLwR/TotFpaoicEe8ffW/g9EQ3O8CSD3Ap/Ve 8VbwbEaMJJswxenJ1EVZJg== 0001144204-03-002527.txt : 20030516 0001144204-03-002527.hdr.sgml : 20030516 20030515174149 ACCESSION NUMBER: 0001144204-03-002527 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030516 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONTINENTAL SOUTHERN RESOURCES INC CENTRAL INDEX KEY: 0001112412 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] IRS NUMBER: 880448389 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-33439 FILM NUMBER: 03706501 BUSINESS ADDRESS: STREET 1: ONE BELMONT AVENUE STREET 2: SUITE 417 CITY: BALA CYNWYD STATE: PA ZIP: 19004 BUSINESS PHONE: 6106605906 MAIL ADDRESS: STREET 1: ONE BELMONT AVENUE STREET 2: SUITE 417 CITY: BALA CYNWYD STATE: PA ZIP: 19004 FORMER COMPANY: FORMER CONFORMED NAME: EXPRESSIONS GRAPHICS INC DATE OF NAME CHANGE: 20000419 10QSB 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-QSB [X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 2003 [_] Transition report under Section 13 or 15(d) of the Exchange Act of 1934 For the transition period from __________ to _______________ Commission file no. 000-33439 CONTINENTAL SOUTHERN RESOURCES, INC. (Exact Name of Small Business Issuer as Specified in Its Charter) NEVADA 88-0448389 --------------------------------------- ----------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 111 PRESIDENTIAL BOULEVARD, SUITE 158A BALA CYNWYD, PA 19004 ----------------------------------------------- (Address of Principal Executive Offices) (610) 771- 0680 ----------------------------------------------- (Issuer's Telephone Number, including Area Code) APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Check whether the registrant filed all documents and reports required to be filed by Section 12,13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [ ] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: There were 32,792,478 issued and outstanding shares of the registrant's common stock, par value $.001 per share, as of May 7, 2003. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets (unaudited) 2 Condensed Consolidated Statements of Operations - (unaudited) 3 Condensed Consolidated Statements of Cash Flows - (unaudited) 4 Notes to Condensed Financial Statements 5 Item 2. Management's Discussion and Analysis or Plan of Operations 15 Item 3. Controls And Procedures 20 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds 20 Item 5. Other Events 20 Item 6. Exhibits and Reports on Form 8-K 21 1 PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Condensed Consolidated Balance Sheets ASSETS ------
March 31, December 31, 2003 2002 ---------------- ----------------- (Unaudited) (Audited) Current Assets Cash and cash equivalents $ 65,480 $ 329,768 Notes receivable - related party 2,101,678 483,117 Notes receivable 152,500 152,500 Interest receivables 129,560 106,942 Marketable securities - related party 555,925 245,020 Marketable securities 460,000 600,000 Prepaid expenses and advance payments to operators 160,841 325,772 ---------------- ----------------- Total Current Assets 3,625,984 2,243,119 ---------------- ----------------- Oil and Gas Properties, Costs Not Being Amortized 10,052,574 15,077,643 Marketable Securities - Related Party 1,361,644 2,417,021 Equity Interests in Oil and Gas Properties 1,875,616 1,373,491 Property and Equipment, Net and Deposits 7,545 7,608 ---------------- ----------------- $16,923,363 $21,118,882 ================ ================= LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities Accounts payable and accrued expenses $ 1,184,253 $ 767,917 Accounts payable and accrued expenses - related party 94,087 787,808 Payables for oil and gas interest 815,603 1,164,135 Convertible debenture 1,308,629 737,839 Notes payable 935,625 - Notes payable - related party 350,000 - ---------------- ----------------- Total Current Liabilities 4,688,197 3,457,699 ---------------- ----------------- Minority Interest 76,974 85,773 ---------------- ----------------- Commitments and Contingencies Stockholders' Equity Preferred stock, Series A; $.001 par value; authorized - 9,500,000 shares; 4,090,713 shares at 2003 and 2002 (Liquidation preference: $4,363,427) 4,091 4,091 Preferred stock, Series B; $.001 par value; authorized - 500,000 shares; 143,427 shares at 2003 and 2002 (Liquidation preference: $14,725,113) 144 144 Common stock; $.001 par value; authorized - 150,000,000 shares; issued and outstanding - 32,717,478 shares at 2003 and 31,699,834 shares at 2002 and 75,000 shares issuable at 2003 and 1,017,644 at 2002 32,793 32,718 Additional paid-in capital 31,392,979 30,962,327 Less stock subscription receivables (1,301,000) (2,480,000) Less stock subscription receivable - related party (250,000) (1,156,250) Accumulated other comprehensive loss (1,334,777) (999,750) Deficit accumulated during the development stage (16,386,038) (8,787,870) ---------------- ----------------- Total Stockholders' Equity 12,158,192 17,575,410 ---------------- ----------------- $16,923,363 $21,118,882 ================ =================
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Condensed Consolidated Statements of Operations (Unaudited)
Three Months Ended March 31, January 13, 2000 ----------------------------------- (Inception) to 2003 2002 March 31, 2003 ------------------------------------------------------- Revenues $ - $ - $ 16,532 Expenses Operating expenses 610,255 - 868,815 Unproved property impairment 5,893,791 - 9,551,927 Bad debt expense - related party 900,000 - 1,450,601 General and administrative 227,355 114,813 1,479,733 General and administrative - related party 18,000 - 108,000 ------------------------------------------------------- Total Expenses 7,649,401 114,813 13,459,076 ------------------------------------------------------- Loss From Operations (7,649,401) (114,813) (13,442,544) ------------------------------------------------------- Other (Income) Expense Loss on partnership investment 19,375 - 47,097 Interest income (68,369) (20,313) (528,384) Interest expense 846,025 142,335 4,157,788 Gain on sale of oil and gas interest - related party (1,235,248) - (1,235,248) (Gain) Loss on sale of marketable securities - related party 24,454 - (140,535) ------------------------------------------------------- Total Other (Income) Expense (413,763) 122,022 2,300,718 ------------------------------------------------------- Loss Before Minority Interest (7,235,638) (236,835) (15,743,262) Minority Interest 8,299 - 12,351 ------------------------------------------------------- Net Loss $ (7,227,339) $ (236,835) $ (15,730,911) Preferred Stock Dividends (370,829) - (655,127) ------------------------------------------------------- Net Loss to Common Stockholders $ (7,598,168) $ (236,835) $ (16,386,038) ======================================================= Net Loss Per Common Share - Basic and Diluted $ (0.23) $ (0.01) =================================== Weighted Average Number of Common Shares Outstanding - Basic and Diluted 32,751,269 18,095,300 ===================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Condensed Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended March 31, January 13, 2000 ---------------------------------- (Inception) to 2003 2002 March 31, 2003 ------------------------------------------------------- Cash Flows from Operating Activities Net Cash Used in Operating Activities (1,611,616) (290,022) (3,086,704) ------------------------------------------------------- Cash Flows From Investing Activities Notes receivable - related party (146,000) - (146,000) Notes receivable - - (1,428,117) Repayment of notes receivable - related party 20,000 - 20,000 Repayment of notes receivable - - 792,500 Purchases of oil and gas interests and drilling costs (1,820,234) (7,808,000) (18,893,352) Investment in Limited Partnership (521,500) - (1,922,763) Proceeds from sale of oil and gas interests, net of cash 146,821 - 146,821 Purchase of marketable securities - (2,000,000) (4,304,036) Proceeds from sale of marketable securities 92,991 - 92,991 Purchases of equipment - - (12,858) ------------------------------------------------------- Net Cash Used in Investing Activities (2,227,922) (9,808,000) (25,654,814) ------------------------------------------------------- Cash Flows From Financing Activities Advances form stockholder - - 300,000 Repayments to stockholder - - (300,000) Repayment of loan (460,000) - (460,000) Proceeds from borrowings 1,320,000 9,080,000 16,755,800 Proceeds from borrowings - related party 630,000 - 630,000 Loan costs - - (245,000) Receipts of subscription receivable 1,179,000 - 1,179,000 Receipts of subscription receivable - related party 906,250 - 906,250 Proceeds from common and preferred stock issued and issuable - 1,153,000 10,040,948 ------------------------------------------------------- Net Cash Provided by Financing Activities 3,575,250 10,233,000 28,806,998 ------------------------------------------------------- Net Increase (Decrease) in Cash and Cash Equivalents (264,288) 134,978 65,480 Cash and Cash Equivalents, Beginning of Period 329,768 39,318 - ------------------------------------------------------- Cash and Cash Equivalents, End of Period $ 65,480 $ 174,296 $ 65,480 =======================================================
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Notes to Condensed Consolidated Financial Statements NOTE 1 - BASIS OF PRESENTATION The unaudited condensed financial statements included herein have been prepared by Continental Southern Resources, Inc. (the "Company" or "CSOR"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present such information. All such adjustments are of a normal recurring nature except for two impairment charges made in connection with the Company's Hell Hole mineral interest and note receivable from Touchstone Resources, Ltd. (see Notes 4 and 6). Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's 2002 Annual Report on Form 10-KSB filed with the Securities and Exchange Commission. The results of operations for interim periods are not necessarily indicative of the results for any subsequent quarter or the entire fiscal year ending December 31, 2003. NOTE 2 - DESCRIPTION OF BUSINESS Continental Southern Resources, Inc., formerly known as Expressions Graphics, Inc., was incorporated under the laws of the state of Nevada on January 13, 2000. On February 18, 2002, the Company experienced a change in management when all of its directors and officers resigned from their positions and the stockholders appointed new officers and directors. The Company's new management implemented a new business plan and completed a series of material transactions and the Company became engaged in the business of acquiring, exploring, developing and producing natural gas and oil properties. The Company is generally not involved as the operator of the projects in which it participates. Instead, the Company relies on third parties for drilling, delivering any gas or oil reserves that are discovered, and assisting in the negotiation of all sales contracts with such purchasing parties. With the assistance of such third parties, the Company plans to explore and develop these prospects and sell on the open market any gas or oil that is discovered. The Company relies on Touchstone Resources USA, Inc., a related party, to assist and advise the Company regarding the identification and leasing of properties on favorable terms. The company also relies on Touchstone Resources USA, Inc. to provide additional reserve assessment analysis and engineering services in connection with the exploration and development of the prospects. Touchstone Resources USA, Inc. has a significant level of experience in exploring and developing gas and oil properties in the regions where the prospects are located. This strategy is intended to reduce the level of overhead and capital expenditures required to maintain drilling and production operations. The Company does not own any drilling rigs, and independent drilling contractors conduct all of the drilling activities. The Company's properties are located in Louisiana, Mississippi, and Thailand. NOTE 3 - NOTE RECEIVABLE - RELATED PARTIES In August and October 2002, the Company loaned an aggregate of $425,000 and $220,000 to BPK Resources, Inc. ("BPK"), a related party, and its subsidiary, CSR - Hackberry Partners, L.P., respectively. The Company received various promissory notes due on demand with annual interest rates of 10% and 12%. The outstanding balance of these notes at March 31, 2003 was $250,000 and $25,000, respectively. Unpaid accrued interest totaled $19,642. The Company and BPK have one common director who is also president of BPK. 5 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Notes to Condensed Consolidated Financial Statements NOTE 3 - NOTE RECEIVABLE - RELATED PARTIES (Continued) On January 15, 2003, the Company sold its 99% Limited Partnership Interest in CSR-WAHA Partners, LP, a Delaware Limited Partnership (the "LP Interest") to BPK and in return, received a cash payment of $150,000, a $1,500,000 promissory note due on April 30, 2003, and 600,000 shares of the common stock of BPK Resources, Inc. As of March 31, 2003, the principal remained outstanding together with $31,790 in accrued interest. On February 21, 2003, Knox Miss Partners, LP ("Knox Miss") loaned $10,000 to Touchstone Resources, LTD. for which it received a 10% unsecured demand promissory note. As of March 31, 2003, the principal remained outstanding. On February 21, 2003, Knox Miss Partners, L.P. received a promissory note in exchange for a $10,000 loan from a related party. On March 4, 2003, the Company loaned $136,000 to FEQ Investments, Inc. for which it received a 10% unsecured demand promissory note. As of March 31, 2003, the principal remained outstanding along with $1,006 in accrued interest. NOTE 4 - OIL AND GAS PROPERTIES Hell Hole Bayou - --------------- From February through August 2002, the Company acquired various working interests in the leases underlying the North Hell Hole Prospect (the "Prospect"). The Prospect is subject to the terms and conditions of an A.A.P.L. Form 610 - Model Form Operating Agreement - 1989 with certain revisions. The purpose of the Prospect is to explore, develop and produce certain oil and gas interests it possesses in a contracted area, which contains Louisiana State Lease Nos. 16141, 16142, 17289, 17441, 17442 and 17443 known as Hell Hole Bayou located in Vermillion Parish, Louisiana. The Company acquired these interests from various leaseholders, including Touchstone Resources USA, Inc. ("Touchstone USA"). The Company's various interests are subject to various terms and specifications including restrictions, overriding royalty interests, specific drilling depths, future wells, specific locations, and other parties with priority in recovering their costs in certain net profits in the interests. As of March 31, 2003, the Company owned an aggregate working interest of 37.9% and an additional 10% back-in interest. In December 2002, it was determined by the Company's outside engineer and operator that the initial hole was dry. It was decided to sidetrack the hole 1,000 feet to the east to a depth of approximately 16,800 feet. Drilling on the sidetrack project commenced in January 2003. In April 2003, after testing all zones it was determined that the sidetracking well was a dry hole also. Leases Nos. 16141 and 16142 require the Company to commence new exploration within 90 days of the determination of the dry hole, approximately April 12, 2003, in order for the Company to retain its rights under these leases. Management has decided not to pursue additional exploration within these lease areas. Consequently, these leases will be allowed to lapse. The Company has recorded impairment charges of $3,635,136 in the fourth quarter of 2002 and $5,893,791 in the first quarter of 2003. The aggregate amount of these impairments is $9,528,927 which is comprised of all drilling costs incurred to date plus 50% of the lease acquisition costs for the entire Hell Hole Prospect. The Company is subject to receiving Authorization for Expenditure ("AFE") invoices for costs of additional land acquisition, exploration, drilling, etc. In order for the Company to retain its rights under Louisiana State Lease Nos. 17289, 17441, 17442 and 17443, the Company and its other co-investors will be required to make a rental payment in November 2003 equal to 50% of the original lease payment. Management anticipates the Company's portion of this amount to be $106,000. If these rental payments are not paid when due, the Company's rights under these leases will expire. 6 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Notes to Condensed Consolidated Financial Statements NOTE 4 - OIL AND GAS PROPERTIES (Continued) Knox Miss. Partners, L.P. - Limited Partnership Interest - -------------------------------------------------------- On March 23, 2002, the Company entered into a limited partnership agreement with Knox Miss, LLC and formed Knox Miss. Partners, L.P., a Delaware limited partnership. The Company is the sole limited partner with a 99% interest and Knox Miss, LLC is the general partner. As of March 31, 2003, the Company contributed $4,052,500 and the general partner contributed $27,325 to the limited partnership. Knox Miss. Partners, L.P. was formed to acquire interests in gas, oil and mineral leases of properties located in Mississippi. During 2002, Knox Miss entered into exploration agreements with SK Exploration, Inc., SKH Energy Partners II, LP and Clayton Williams Energy, Inc. ("Clayton") to jointly cooperate and participate in the exploration and development of oil, gas and leases in the Livingston Transform Area, Longview and Osborn prospects which cover several counties in Mississippi. During the first quarter of 2003, the Company acquired additional mineral leases for $233,387 and incurred $610,255 of exploration expenses. During February 2003, the Company entered into a Purchase and Sale Agreement ("Agreement") with BWP Gas, LLC ("BWP") whereby the Company agreed to sell between 10% and 20% of its investment interest in Knox Miss Partners, L.P. ("Knox Miss") for a purchase price of between $5,000,000 and $11,000,000 subject to BWP raising sufficient funds. The agreement contains provisions whereby a portion of the purchase price will be allocated towards the drilling and completion costs for the first well Knox Miss elects to drill and complete. As of March 31, 2003, oil and gas properties consisted of the following:
Hell Hole Bayou Knox-Miss Total --------------------- ------------------- ------------------ Unproved properties acquisition costs $ 10,675,197 $ 4,444,154 $ 15,119,351 Drilling in progress 3,781,120 - 3,781,120 Other capitalized costs 410,207 270,823 681,030 Allowance for impairment (9,528,927) - (9,528,927) --------------------- ------------------- ------------------ Net capitalized oil and gas properties $ 5,337,597 $ 4,714,977 $ 10,052,574 ===================== =================== ==================
NOTE 5 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES PHT Partners, L.P. - ------------------ On June 26, 2002, the Company entered into a limited partnership agreement with PHT Gas, LLC and formed PHT Partners, L.P. ("PHT"). The Company is the sole limited partner with a 99% interest and PHT Gas, LLC is the general partner. On August 4, 2002, the limited partnership agreement was amended to allow an additional partner. This decreased the Company's interest to 94.9%. In 2002 the Company contributed $1,151,000 to PHT. PHT thereupon invested $883,000 in APICO, LLC, a limited liability company, in return for 883 units out of a total of 4,100 units outstanding. The business of APICO, LLC is (i) to farm-in to certain concessions (the "Concessions") in Phu Horm Gas Field Project located in Khorat and Udon in the Kingdom of Thailand, which are controlled by Amerada Hess Limited (Thailand), which is acting as the operator; (ii) to acquire and own property interests and other rights in the Concessions; (iii) to participate in exploring the Concessions; (iv) in developing and operating oil and gas wells in the Concessions; (v) in financing its operations, in selling production from such wells and in selling interests in the Property and/or the Concessions; (vii) and to take all other actions necessary, appropriate or advisable in connection with such business. 7 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Notes to Condensed Consolidated Financial Statements NOTE 5 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued) The Company is not subject to capital calls in connection with its limited partnership interest in PHT. However, as explained below, PHT is subject to cash calls from its investment in APICO, LLC. If PHT does not meet its cash calls, then the Company's investment in PHT may become impaired. Pursuant to the APICO membership agreement, PHT and the other APICO members will be called upon from time to time for additional contributions so as to meet the reasonable capital requirements of APICO. If PHT or any other member fails to make required capital contributions or meet the required cash calls in the amounts and at the times specified in the membership agreement, then they would be in default. If the default is not cured within 45 days, then APICO has the right to repurchase the defaulting members' shares for 1% of their original purchase price. Louisiana Shelf Partners, L.P. - ------------------------------ On December 31, 2002, the Company entered into a limited partnership agreement with LS Gas, LLC and formed Louisiana Shelf Partners, L.P. ("LSP") of which the Company is a limited partner with an approximate 24% interest and LS Gas, LLC is the general partner. The Company contributed $240,000 to LSP in 2002 and $521,500 in the first quarter of 2003. As of March 31, 2003, LSP acquired various geological and geophysical data and interests in oil, gas and mineral leases located in Cameron Parish, Louisiana for an aggregate purchase price of $4,059,161. Pursuant to the partnership agreement, the Company and the other LSP members will be called upon from time to time for additional contributions so as to meet the reasonable capital requirements of LSP. LSP received an AFE from its operator for approximately $4,800,000 related to proposed exploration in the Cameron Parish prospect. The Company's portion of this AFE is approximately $1,150,000. The following table summarized the Company's interests in oil and gas non-public limited partnerships accounted for under the equity method of accounting as of March 31, 2003. March 31, 2003 ---------------------------------------- Excess of Carrying Value Carrying Value Over Net Assets ----------------- ------------------- PHT Investment in APICO $ 1,120,003 $ 283,728 Louisiana Shelf Partners 755,613 - ----------------- ------------------- $ 1,875,616 $ 283,728 ================= =================== 8 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Notes to Condensed Consolidated Financial Statements NOTE 5 - EQUITY INTERESTS IN OIL AND GAS PROPERTIES (Continued) The following table summarizes financial information for the limited partnerships accounted for under the equity method of accounting at March 31, 2003 and has been compiled from the financial statements of the respective entities: March 31, 2003 --------------------- (Unaudited) Total Assets $ 9,650,163 ===================== Total Liabilities $ 49,279 ===================== Three Months Ended March 31, 2003 --------------------- (Unaudited) Results of Operations: Revenue $ - Loss from operations $ (88,704) Net Loss $ (88,704) NOTE 6 - MARKETABLE SECURITIES - RELATED PARTIES In connection with the February 2002 acquisition of various working interests in the North Hell Hole Prospect, the Company purchased, for the sum of $2,000,000, a 10% secured convertible promissory note in the principal amount of $2,000,000 and a detached warrant to purchase 1,063,830 shares of common stock at an exercise price of US$1.88 from Touchstone Resources, Ltd. ("Touchstone"), a Canadian Exchange listed company and the parent company of Touchstone USA, Inc. The secured convertible promissory note, which matures August 22, 2004, has an initial conversion price of US$1.88 and is secured by the working interests in Hell Hole Bayou still owned by Touchstone. The fair values of the note receivable and warrants on the date the note was issued, valued by using the Black-Scholes Model, were $787,234 and $1,212,766, respectively. Consequently, a discount in the amount of $1,212,766 was recorded in connection with this note. In addition, as described below an impairment charge was recorded against this note. At March 31, 2003, this note is reflected in these financial statements at a carrying value of $400,000. The face value of this note is $2,000,000. The fair market value of the warrant was $127,660 as of March 31, 2003. In June 2002 the Company purchased, for the sum of $1,600,000, an additional 10% convertible promissory note in the principal amount of $1,600,000 and a detached warrant to purchase 2,000,000 shares of common stock at an exercise price of US$1.00 until December 28, 2002 from Touchstone. The secured convertible promissory note, which matured December 28, 2002, had an initial conversion price of US$.80. The fair values of the note receivable and warrants on the date the note was issued, valued by using the Black-Scholes Model, were $1,220,000 and $380,000, respectively. Consequently, a discount in the amount of $380,000 was recorded in connection with this note. On March 20, 2003, the Company renegotiated the $1,600,000 promissory note receivable from Touchstone. The principal amount of the new note increased to $1,725,586, which included accrued interest of $125,586. The note earns interest at 10% per annum and is due February 28, 2005. The note may be converted at any time into shares of Touchstone at one share for each $0.62 of principal amount. Interest due may also be satisfied by the issuance of shares of Touchstone valued as at the date of issuance. In addition, as described below an impairment charge was recorded against this note. At March 31, 2003, this note is reflected in these financial statements at a carrying value of $500,000. The face value of this note is $1,775,586. The original expiration date to purchase 2,000,000 shares of stock in Touchstone was extended until February 28, 2005. 9 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Notes to Condensed Consolidated Financial Statements NOTE 6 - MARKETABLE SECURITIES - RELATED PARTIES (Continued) The Company's marketable convertible debt securities and warrants can be converted into and exercised for shares of Touchstone, which have a readily determinable fair market value. Management determined the appropriate classification of its investment using SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities" at the time of purchase, and re-evaluates such determinations at each balance sheet date. Under SFAS No. 114 "Accounting by Creditors for Impairment of a Loan," amended by SFAS No. 118, management has evaluated the collectibility of the loan from Touchstone and believes that Touchstone may not be able to fully repay the loans. Therefore, the Company has measured and recorded impairment charges of $900,000 and $550,601 against these loans and accrued interest as of March 31, 2003 and December 31, 2002, respectively. The loans had a significant discount, which reduced their carrying value. In connection with the impairment charge the Company has stopped amortizing the loan discount and accruing interest as of the fourth quarter of 2002. Consequently the carrying value of the $2,000,000 and the $1,600,000 face value loans at March 31, 2003 is $500,000 and $400,000, respectively, which is based on the fair market value of the underlying loan collateral. On January 15, 2003, the Company received 600,000 shares of the common stock of BPK Resources, Inc. which was part of the consideration for the Company's sale of its 99% Limited Partnership Interest in CSR-WAHA Partners, LP. In March 2003, the Company sold 141,500 shares of BPK Resources, Inc. The Company incurred a loss of $24,454 in regards to the transaction. As of March 31, 2003, the Company owned 777,500 shares of BPK common stock with a fair market value of $555,925, which represented approximately 5% of ownership in BPK. The Company and BPK have one common director who is also president of BPK. The marketable securities reflected in these financial statements are deemed by management to be "available-for-sale" and, accordingly, are reported at fair value, with unrealized gains and losses reported in other comprehensive income and reflected as a separate component within the Statement of Stockholders' Equity. Realized gains and losses on securities available-for-sale are included in other income/expense and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. Gains and losses on the sale of available-for-sale securities are determined using the specific-identification method. Available-for-sale securities consist of the following at March 31, 2003:
Current --------------------------------------------------------- Gross Unrealized Cost Loss Fair Value ----------------- --------------- ---------------- Stock $ 560,000 $ (100,000) $ 460,000 Stock - related party 659,580 (103,655) 555,925 ----------------- --------------- ---------------- Total Current $ 1,219,580 $ (203,655) $1,015,925 ================= =============== ================
10 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Notes to Condensed Consolidated Financial Statements NOTE 6 - MARKETABLE SECURITIES - RELATED PARTIES (Continued)
Long Term ------------------------------------------------------------------------ Gross Allowance Amortized Unrealized For Cost Loss Impairment Fair Value -------------- --------------- --------------- --------------- Convertible debt Due 02/28/2005 $ 1,416,134 $ - $ (916,134) $ 500,000 Convertible debt Due 08/22/2004 934,467 - (534,467) 400,000 Warrants Expires 02/28/2005 380,000 (46,016) - 333,984 Warrants Expires 08/22/2004 1,212,766 (1,085,106) - 127,660 -------------- --------------- --------------- --------------- Total Non-Current - Related Party $ 3,943,367 $ (1,131,122) $ (1,450,601) $ 1,361,644 ============== =============== =============== ===============
NOTE 7 - NOTES PAYABLE Related Party - ------------- In January 2003, the Company borrowed a total of $250,000 from SPH Investments, Inc. and issued various 10% demand notes. As of March 31, 2003, accrued interest on the notes amounted to $5,247. In January 2003, the Company borrowed $100,000 from SPH Investments, Inc. Profit Sharing Plan and issued a 10% demand note. As of March 31, 2003, accrued interest on the note amounted to $2,110. In January 2003, the Company paid off all of the accrued interest on the $9,857,149 note which was converted into the Company's Series B Preferred Stock in December 2002. Other - ----- On February 19, 2003, Knox Miss Partners, L.P. borrowed $1,200,000 from Gibralt US, Inc. and issued a promissory note bearing interest at 12%. The note is payable the earlier of June 30, 2003 or upon closing of $2,000,000 of equity financing by the Company. The lender also received 75,000 shares of common stock in the Company for making the loan. The loan is guaranteed by the Company and FEQ Investments. During January and February 2003, Knox Miss Partners, L.P. borrowed $280,000 and $180,000 from Louisiana Shelf Partners, LP and Louisiana X Investors, LLC, respectively, and issued 10% demand notes. These notes were repaid in March 2003 plus aggregate accrued interest of $4,179. NOTE 8 - LOSS PER SHARE Loss per common share is calculated in accordance with SFAS No. 128, Earnings Per Share. Basic loss per common share is computed by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding. Diluted loss per share is computed similarly to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued and if the additional common shares were dilutive. Shares associated with stock options, warrants and convertible debt are not included because their inclusion would be antidilutive (i.e., reduce the net loss per share). At March 31, 2003 and December 31, 2002, the Company had potentially dilutive shares of 2,771,923 and 2,696,923, respectively. 11 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Notes to Condensed Consolidated Financial Statements NOTE 9 - STOCKHOLDERS' EQUITY In February 2003, in connection with the loan of $1,200,000 to Knox Miss Partners, L.P., the Company issued 75,000 shares of common stock of the Company to the lender. On March 24, 2003, the Company issued a warrant to Trident Growth Fund to purchase 25,000 shares of common stock at an initial exercise price of $1.60 per share subject to periodical adjustment based on market trading price. The warrants were issued in consideration of the waiver of certain loan covenants by Trident Growth Fund on the $1,500,000 convertible note due from CSOR. The warrants are exercisable immediately and will expire on April 30, 2012. Stock Warrants - -------------- The Company had the following outstanding warrants to purchase its common stock at March 31, 2003: Expiration Date Exercise Price Shares ---------------- --------------- -------------- Warrants 4/30/2012 $ 1.60 175,000 2/20/2005 $ 2.25 300,000 8/7/2005 $ 2.25 100,000 10/18/2005 $ 5.00 112,500 10/30/2005 $ 5.00 120,000 --------------- -------------- 807,500 ============== These warrants were issued in connection with the acquisition of Hell Hole and Waha/Lockridge interests and with the issuance of convertible promissory notes. NOTE 10 - RELATED PARTY TRANSACTIONS - NOT DESCRIBED ELSEWHERE / CONCENTRATIONS During March 2003, the Company paid investment-banking fees of $60,000 to FEQ Investments, Inc. The investment banking fees related to the certain debt placements for the benefit of Knox Miss Partners, L.P. On January 7, 2003, Louisiana Shelf Partners, L.P. loaned FEQ (the former managing member of PHT Gas, LLC and CSR, LLC) $1,200,000 and received a promissory note. In January 2003, SPH Investments, Inc. paid the full balance of its outstanding subscription agreements amounting to $906,250. NOTE 11 - LIQUIDITY AND CAPITAL RESOURCES The accompanying financial statements have been prepared in accordance with U.S. GAAP, which contemplates continuation of the Company as a going concern. The Company is in the development stage and has significant debt obligations to repay in future years and its current liabilities exceed its current assets. Additionally, the Company will need significant funds to meet its cash calls on its various interests in oil and gas prospects to explore, produce, develop, and eventually sell the underlying natural gas and oil products under its interests and to acquire additional properties. The Company believes that collections of its current subscription and notes receivable and sale of marketable securities will provide sufficient funds to fund its operations through December 2003. In the event that the Company locates additional prospects for acquisitions, experiences cost overruns at its prospects, or fails to 12 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Notes to Condensed Consolidated Financial Statements NOTE 11 - LIQUIDITY AND CAPITAL RESOURCES (Continued) generate projected revenues, the Company will be required to raise funds through additional offerings of its securities in order to have the funds necessary to complete these acquisitions and continue its operations. If the Company is unable to obtain additional funds when they are required or if the funds cannot be obtained on terms favorable to the Company, management may be required to delay, scale back or eliminate its well development program or even be required to relinquish its interest in the properties. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. NOTE 12 - COMPREHENSIVE LOSS Excluding net loss, the Company's source of comprehensive loss is from the net unrealized loss on its marketable debt securities, which are classified as available-for-sale. The following summarizes the components of comprehensive loss: Three Months Three Months Ended Ended March 31, 2003 March 31, 2002 --------------------- -------------------- Net loss $ (7,227,339) $ (236,835) Unrealized loss, net (335,027) - --------------------- -------------------- Comprehensive loss $ (7,562,366) $ (236,835) ===================== ==================== NOTE 13 - COMMITMENTS AND CONTINGENCIES General - ------- The oil and gas industry is subject to regulation by federal, state and local authorities. In particular, environmental protection statutes, tax statutes and other laws and regulations relating to the petroleum industry affect gas and oil production operations and economics. The Company believes it is in compliance with all federal, state and local laws, regulations applicable to the Company and its properties and operations, the violation of which would have a material adverse effect on the Company or its financial condition. On January 15, 2003, the Company entered into a consultant agreement with Rhodes Ventures, S.A. (the "Consultant") whereby the Company is committed to grant options to the Consultant to purchase 50,000 shares of the Company's common stock at an exercise price of $5.00 per share payable upon the completion of any equity financing the Consultant helps to raise. Operating Hazards and Insurance - ------------------------------- The gas and oil business involves a variety of operating risks, including the risk of fire, explosions, blow-outs, pipe failure, abnormally pressured formation, and environmental hazards such as oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which could result in substantial losses to the Company due to injury or loss of life, severe damage to or destruction of property, natural resources and equipment, pollution or other environmental damage, cleanup responsibilities, regulatory investigation and penalties and suspension of operations. 13 CONTINENTAL SOUTHERN RESOURCES, INC. (A Development Stage Entity) Notes to Condensed Consolidated Financial Statements NOTE 13 - COMMITMENTS AND CONTINGENCIES (Continued) There can be no assurance that insurance, if any, will be adequate to cover any losses or exposure to liability. Although the Company believes these policies provide coverage in scope and in amounts customary in the industry, they do not provide complete coverage against all operating risks. An uninsured or partially insured claim, if successful and of significant magnitude, could have a material adverse effect on the Company and its financial condition via its contractual liability to the Prospect. Potential Loss of Oil and Gas Interests/ Payments Due - ----------------------------------------------------- If the Company does not pay its share of future AFE invoices it may have to forfeit all of its rights in certain of its interests in the Prospect and any related profits. If one or more of the other members of the Prospect fail to pay their share of the Prospect costs, the Company may need to pay additional funds to protect its investment. The drilling efforts related to the Louisiana State Lease Nos. 16141 and 16142 were unsuccessful. Consequently, the operator has 90 additional days to commence drilling before the related drilling rights expire and revert back to the state. Neither the Company nor the operator plan to commence any new exploration on these leases. In the event any operation conducted in the existing well on the Hell Hole Bayou Prospect establishes commercial production, the Company will pay an additional $750,000 to the seller of the interest. NOTE 14 - SUBSEQUENT EVENTS During April 2003, APICO issued a capital call of $1,000,000 to its members for exploration costs in the Phu Horm prospect. PHT's portion of this call was $215,400 due on April 25, 2003. On April 25, 2003, the Company paid $215,400 related to its portion of the capital call. APICO advised PHT that they anticipate additional capital calls of $625,000 due on each of May 25 and June 25, 2003. On April 14, 2003, the Company agreed to extend the due date of the $1,500,000 promissory note due from BPK, a related party, from April 30, 2003 to June 30, 2004. In consideration for this extension, BPK will pay the Company one-half of funds received from any debt or equity offering to reduce the note; will pay the Company all proceeds from the sale of Ocean Resources Capital Holdings, PLC securities until the note has been paid; and will issue an additional 100,000 shares of its common stock to CSOR. In April 2003, the Company received principal payments of $225,000 related to the $1,500,000 promissory note due from BPK. 14 CAUTIONARY STATEMENT FOR FORWARD-LOOKING STATEMENTS The information contained in this Report on Form 10-QSB and in other public statements by the Company and Company officers include or may contain certain forward-looking statements. The words "may", "intend", "will", "expect", "anticipate", "believe", "estimate", "project", and similar expressions used in this Report are intended to identify forward-looking statements within the meaning of Section 27A of the U.S. Securities Act of 1933 and Sections 21E of the U.S. Securities Exchange of 1934. You should not place undue reliance on these forward-looking statements, which speak only as of the date made. We undertake no obligation to publicly release the result of any revision of these forward-looking statements to reflect events or circumstances after the date they are made or to reflect the occurrence of unanticipated events. You should also know that such statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions. These factors include, but are not limited to, those risks described in detail in the Company's Annual Report on Form 10-KSB under the caption "Risk Factors" and other filings with the Securities and Exchange Commission. Should any of these risks or uncertainties materialize, or should any of our assumptions prove incorrect, actual results may differ materially from those included within the forward-looking statement. ITEM 2. Management's Discussion And Analysis OVERVIEW Unless the context otherwise requires, references to the "Company", "CSOR", "we", "us" or "our", mean Continental Southern Resources, Inc. or any of our consolidated subsidiaries or partnership interests. The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and related Notes thereto included elsewhere in this Report. We are in the oil and gas exploration and development business. We target high-potential oil and gas assets primarily in the Mississippi, Louisiana and other traditional oil producing states in the southwestern United States and Thailand. Our operations are focused on exploration activities to find and evaluate prospective oil and gas properties and providing capital to participate in these projects. We participate in projects directly, through our consolidated subsidiaries, and as equity participants in limited partnerships. We currently have leasehold interests in prospects in Louisiana, Mississippi and Thailand. We are generally not involved as the operator of the projects in which we participate. Instead, we rely on third parties for most operational activities. We rely on Touchstone Resources USA, Inc. to assist and advise us regarding the identification and leasing of properties on favorable terms. We also rely upon Touchstone Resources USA, Inc. to provide us with additional reserve assessment analysis and engineering services in connection with the exploration and development of our prospects. Touchstone Resources USA, Inc. has a significant level of experience in exploring and developing gas and oil properties in the regions where our prospects are located. We rely upon various other third parties for drilling wells, delivering any gas or oil reserves which are discovered through pipelines to the ultimate purchasers and assisting in the negotiation of all sales contracts with any purchasing parties. With the 15 assistance of such third parties, we plan to explore and develop our prospects and sell on the open market any gas or oil that we discover. Business Strategy We play an active role in evaluating prospects and providing financial and other management functions with respect to the operations at each of our properties. We rely on third parties for most operational activities. This strategy is intended to reduce the level of overhead and capital expenditures required to maintain drilling and production operations. As we subcontract the performance of substantially all of the physical operations at our properties, we do not anticipate incurring a substantial amount of expenses related to the purchase of plant, machinery or equipment in connection with the exploration and development of our properties. Similarly, we do not anticipate any substantial increase in the number of persons that we employ. Our strategy also includes selling all or part of our interests in various partnerships or all or part of leasehold interests we own to realize immediate proceeds and limit or eliminate future risk associated with such projects. In January 2003, we sold our limited partnership interest in CSR-Waha Partners, L.P. and in March 2003 we assigned rights to purchase up to 20% of our partnership interest in Knox Miss. Partners, L.P. Our strategy is to develop reserves and increase our cash flow through the exploration of our Louisiana, Mississippi and Thailand prospects and through the selective acquisition of additional properties both offshore and onshore in these and other states. We consider our current leasehold portfolio to contain both high potential exploratory drilling prospects and lower risk exploitation and development drilling prospects. Prospects are identified, acquired, and developed through extensive geological and geophysical interpretation. Although our primary strategy is to grow our reserves through drilling, in the next twelve months we anticipate making opportunistic acquisitions in Louisiana, Mississippi or Texas with exploratory potential and in core areas of operation with exploitation and development potential. We may increase or decrease our planned activities for 2003, depending upon drilling results, product prices, the availability of capital resources, and other factors affecting the economic viability of such activities. We do not attempt to forecast our potential success rate on exploratory drilling. RESULTS OF OPERATIONS Three Months Ended March 31, 2003 As Compared To Three Months Ended March 31, 2002. Revenues - -------- We did not generate any revenue during the three months ended March 31, 2003 or during the corresponding period in 2002. Operating Expenses and Unproved Property Impairment Expenses - ------------------------------------------------------------ Operating Expenses were $610,000 and unproved property impairment expenses were $5,893,791 during the three months ended March 31, 2003. We did 16 not incur any operating expenses or unproved property impairment expenses during the three months ended March 31, 2002. The operating expenses consisted of expenses incurred by Knox Miss., L.P. in connection with exploration activities in the Black Warrior Basin, Mississippi pursuant to an exploration agreement with Clayton Williams Energy, Inc. The unproved property impairment expenses resulted from impairment of our interests in State Lease Nos. 16141 and 16142 in our North Hell Hole Bayou Prospect after it was determined that State Lease 16141 No. 2 well in the prospect was a dry hole. This amount consisted primarily of 50% of the acquisition costs of the prospect and all drilling costs incurred during the three months ended March 31, 2003. We expect to incur additional impairment expenses during the remainder of 2003 in connection our leasehold interests in the North Hell Hole Bayou Prospect. General And Administrative Expenses; Bad Debt Expenses - ------------------------------------------------------ General and administrative expenses increased $130,542 to $245,355 during the three months ended March 31, 2003 as compared to $114,813 for the corresponding period in 2002. These expenses consisted primarily of professional fees, officer compensation and consulting fees. Bad debt expenses were $900,000 during the three months ended March 31, 2003 and consisted of impairment charges related to our investment in Touchstone Resources, Ltd. Other (Income) Expense - ---------------------- Other income increased $535,785 to $413,763 during the three months ended March 31, 2003 as compared to other expense of $122,022 for the corresponding period in 2002. The expense consisted of interest expense of $846,025 incurred primarily on our outstanding promissory notes, a $19,375 loss in connection with our investments in APICO, LLC and Louisiana Shelf Partners, L.P. and a $24,454 loss in connection with the sale of common shares of BPK Resources, Inc. These amounts were offset by a $1,235,248 gain in connection with the sale of our partnership interest in CSR-Waha Partners, L.P. and interest income of $68,369 earned on outstanding notes and subscription receivables. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities during the three months ended March 31, 2003 was $1,611,616 as compared to $290,022 during the three months ended March 31, 2002. The primary use of cash during both periods was for professional fees and to fund our net loss. Net cash used in investing activities for the three months ended March 31, 2003 was $2,227,922 compared to net cash used in investing activities of $9,808,000 for the corresponding period in 2002 and consisted primarily of $1,820,234 of costs incurred in connection with our oil and gas interests and the purchase of $521,500 of limited partnership interests in Louisiana Shelf Partners, L.P. These amounts were offset by $146,821 realized from the sale of our limited partnership interest in CSR-Waha Partners, L.P. and $92,991 realized from the sale of common shares of BPK Resources, Inc. Net cash provided by financing activities during the three months ended March 31, 2003 was $3,575,250 compared to $10,233,000 in the same period in 2002 and consisted primarily of the proceeds of $1,950,000 of loans and the collection of subscription receivables of $2,085,250. These amounts were offset by repayment of $460,000 of loans. Our working capital increased $152,367 during the three months ended March 31, 2003 to a deficit of $1,062,213 as compared to a deficit of $1,214,580 as of December 31, 2002. This increase is primarily due to a note receivable from BPK Resources, Inc. in connection with the sale of our limited partnership 17 interesting CSR-Waha Partners, L.P. which was partially offset by increases in accounts payable, accrued expenses and outstanding convertible debentures. During February 2002, we obtained $10,000,000 through the issuance of unsecured promissory notes in the aggregate principal amount of $9,857,149. On December 30, 2002, the full principal amount of the notes were converted into 98,571 shares of our Series B Preferred Stock, $.001 par value per share (the "Series B Shares"). On June 13, 2002, the lender and its assignees exercised their option to invest an additional $4,000,000 and we received an additional $3,000,000 of funding on the terms described above and a subscription receivable with respect to the remaining $1,000,000. On September 30, 2002, the full principal amount of the notes was converted into 39,429 Series B Shares. The Series B Shares accrue a cumulative dividend of 8% of the $100 original issue price of such shares which is payable prior to any dividend or other distribution on shares of our common stock. In the event of a liquidation, dissolution or winding up of the Company, the holders of our Series B Shares have a liquidation preference of $100 per share plus accrued and unpaid dividends prior to any payment or distribution to holders of shares of our common stock. Unless waived by the holders of a majority of the outstanding Series B Shares, a merger in which we are not the surviving entity or the sale of all or substantially all of our assets is considered a liquidation event entitling the holders of shares of our Series B Shares to their liquidation preference. In March 2002, we issued an aggregate of $4,150,000 of unsecured convertible promissory notes. In September 2002, the full principal amount of the notes were converted into 5,928,797 shares of our common stock and 4,090,713 shares of our Series A Preferred Stock, $.001 par value per share (the "Series A Shares"). The Series A Shares accrue a cumulative dividend equal to 8% of the $1 original issue price of such shares which is payable prior to any dividend or other distribution on shares of our common stock. In the event of a liquidation, dissolution or winding up of the Company, the holders of the Series A Shares have a liquidation preference of $1 per share plus accrued and unpaid dividends prior to any payment or distribution to holders of shares of our common stock. Unless waived by the holders of a majority of the outstanding Series A Shares, a merger in which we are not the surviving entity or the sale of all or substantially all of our assets is considered a liquidation event entitling the holders of shares of our Series A Shares to their liquidation preference. In April 2002, we issued a $1,500,000 convertible promissory note (the "Convertible Note") to Trident Growth Fund f/k/a Gemini Growth Fund, LP ("Trident"). We also issued warrants to Trident to purchase 150,000 shares of our common stock at an exercise price of $1.60 per share. The Convertible Note is due October 31, 2003, accrues interest at 12% per annum payable monthly in arrears, is secured by substantially all of our assets, is convertible at the option of Trident into shares of our common stock at a conversion price of $1.60 per share (subject to anti dilution price adjustment) and is redeemable at our option at 100% of par prior to maturity. Interest is payable in cash unless Trident elects to have it paid in shares of common stock. The Convertible Note contains various financial covenants which we are required to comply with. We failed to comply with three financial covenants as of December 31, 2002 and have received a six month waiver from Trident in consideration of the issuance of a warrant to purchase 25,000 shares of common stock at an exercise price of $1.60 per share. We also received an option to extend the maturity date of the 18 Convertible Note until June 30, 2004. If we exercise this option, we will be required to issue warrants to Trident to purchase 100,000 shares of common stock at an exercise price of $1.60 per share. We are required to file a registration statement with the Securities and Exchange Commission to cover the public resale of all shares issuable upon conversion of the Convertible Note and exercise of warrants issued to Trident. From June through August, 2002, we obtained $4,260,000 through private placements of our common stock. In October 2002, we obtained $1,550,000 of funding through the issuance of 12% unsecured convertible promissory notes and warrants to purchase 232,500 shares of common stock at $5.00 per share. The notes are due October 15, 2003 and accrue interest from the date of issuance. Interest is payable upon the earlier of conversion or maturity. The notes may be prepaid in whole or in part and are convertible into shares of our common stock at the option of the holder at a conversion price of $3.25 per share. In November 2002, we obtained gross proceeds of $250,000 through the issuance of 76,923 shares of common stock. On January 15, 2003, we sold our limited partnership interest in CSR Waha Partners, L.P., for $2,000,000 of which $1,650,000 is payable in cash. Of this amount, we received $150,000 at closing and $1,500,000 through the receipt of a promissory note which is due June 30, 2004. On February 19, 2003, Knox Miss. Partners, L.P., our subsidiary, borrowed $1,200,000 from Gibralt USA, Inc. and issued a 12% promissory note due on the earlier on June 30, 2003 or our completion of an equity financing resulting in gross proceeds of at least $2,000,000. We issued 75,000 shares of common stock to the lender. The loan is guaranteed by the Company and FEQ Investments, Inc., a principal stockholder of the Company. The foregoing constitutes our principal sources of financing during the past twelve months. We do not currently maintain a line of credit or term loan with any commercial bank or other financial institution. Our capital needs have been, and continue to be principally met through proceeds from the sale of our equity and debt securities. We have used these funds to acquire leasehold interests in prospects located in Louisiana, Mississippi, Texas and Thailand and to purchase our investment in Touchstone Resources, Ltd. We estimate that we will incur approximately $8.0 million in expenditures related to the development of our leasehold interests in our Louisiana, Mississippi, and Thailand prospects, and will incur additional general and administrative expenses over the next twelve months. Specifically, Louisiana Shelf Partners, L.P. has received an authorization for expenditure in the amount of approximately $4.8 million, of which our share is approximately $1.15 million, PHT Partners, L.P. has been advised of additional capital calls of approximately $625,000 on each of May 25 and June 25, 2003, of which our share will be approximately $300,000 and we anticipate being required to make a $106,000 lease payment in November 2003 with respect to our leasehold interests in the North Hell Hole Bayou Prospect. We believe that our projected revenues from operations and our collection of subscriptions receivable and notes receivable will be sufficient to satisfy our cash requirements for the next twelve months, including budgeted expenses for our existing leasehold interests. In the event that we do not generate the amount of revenues we have projected or revenues are not generated at the same pace that we receive 19 authorizations for expenditures from the operators of our prospects, we will be required to raise additional funds through offerings of our securities in order to have the funds necessary to develop these prospects and continue our operations. Furthermore, in the event that we locate additional prospects for acquisition, receive authorizations for expenditures from the operators at our prospects in excess of budgeted amounts, or experience cost overruns at our prospects, we will be required to raise funds through additional offerings of our securities in order to have the funds necessary to complete these acquisitions and continue our operations. If we are unable to obtain additional funds when they are required or if the funds cannot be obtained on terms favorable to us, then we may be required to delay, scale back or eliminate some or all of our well development programs or even be required to relinquish our interest in certain properties. If one or more of the other owners of leasehold interests in our prospects fail to pay their equitable portion of development or operation costs, then we may need to pay additional funds to protect our ownership interests in our leasehold interests. ITEM 3. Controls And Procedures Within the 90-day period prior to the filing of this report, an evaluation was carried out under the supervision and with the participation of our Chief Executive Officer ("CEO") and Treasurer ("Treasurer"), of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our CEO and Treasurer has concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to the date we carried out this evaluation. PART II. OTHER INFORMATION ITEM 2. Changes In Securities And Use Of Proceeds On March 24, 2003, we issued 75,000 shares of common stock to Gibralt US, Inc., an accredited investor, in consideration of Gibralt loaning $1,200,000 to Knox Miss. Partners, L.P. The shares were issued in a private placement transaction exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereunder, without payment of underwriting discounts or commissions to any person. ITEM 5. Other Events As described in our Annual Report on SEC Form 10-KSB, the initial hole drilled on State Lease 16141 No. 2 well in our North Hell Hole Bayou Prospect (the "Prospect") was determined to be dry. In April 2003, after the testing of all zones of a sidetracking well, it was determined that the sidetracking well was also a dry hole. As leases 16141 and 16142 in the Prospect are past primary term and held by operations at the present time, the leases will terminate on or about July 14, 2003 unless further operations are commenced. We have decided not to pursue additional exploration within these lease areas and to let these leases lapse. As a result, as of March 31, 2003 we have recorded an impairment 20 of $9,528,927 related to all drilling costs incurred to date and 50% of the lease acquisition cost of the entire Prospect. ITEM 6. Exhibits And Reports On Form 8-K (a) The following exhibits are included herein:
- -------------------- -------------------------------------------- ----------------------------------------------- Exhibit No. Exhibit Method of Filing - -------------------- -------------------------------------------- ----------------------------------------------- 3.1 Articles of Incorporation Incorporated by reference to Exhibit 3.1 of our Form SB-1, Registration Number 333-38976 ("Registration Statement") - -------------------- -------------------------------------------- ----------------------------------------------- 3.2 Bylaws Incorporated by reference to Exhibit 3.2 to the Registration Statement - -------------------- -------------------------------------------- ----------------------------------------------- 3.3 Certificate of Designation of Series A Incorporated by reference to Exhibit 3.3 of Preferred Stock our Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 3.4 Certificate of Designation of Series B Incorporated by reference to Exhibit 3.4 of Preferred Stock our Quarterly Report on Form 10-QSB for the Quarter Ended September 30, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 4.1 Instruments defining rights of security Incorporated by reference to Article IV of holders the Articles of Incorporation and Article I, Section 5 of the By-Laws in Exhibit 3.1 of the Registration Statement - -------------------- -------------------------------------------- ----------------------------------------------- 4.2 Promissory Note in the principal amount of Incorporated by reference to Exhibit 4.2 of $7,885,720 dated February 13, 2002 issued our Quarterly Report on Form 10-QSB for the to Lancer Offshore, Inc. Quarter Ended March 31, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 4.3 Promissory Note in the principal amount of Incorporated by reference to Exhibit 4.3 of $1,971,429 dated February 13, 2002 issued our Quarterly Report on Form 10-QSB for the to Michael Lauer Quarter Ended March 31, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 4.4 Promissory Note in the principal amount of Incorporated by reference to Exhibit 4.4 of $2,464,287 dated June 13, 2002 issued to our Quarterly Report on Form 10-QSB for the Lancer Offshore, Inc. Quarter Ended June 30, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 4.5 12% Secured Convertible Promissory Note in Incorporated by reference to Exhibit 4.5 of the principal amount of $1,500,000 issued our Quarterly Report on Form 10-QSB for the to Gemini Growth Fund, L.P. Quarter Ended June 30, 2002 - -------------------- -------------------------------------------- -----------------------------------------------
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- -------------------- -------------------------------------------- ----------------------------------------------- 4.6 Warrants to purchase 750,000 shares of Incorporated by reference to Exhibit 4.6 of common stock issued to Gemini Growth Fund, our Quarterly Report on Form 10-QSB for the L.P. in April 2002 Quarter Ended June 30, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.1 Purchase and Sale Agreement dated February Incorporated by reference to Exhibit 10.1 of 17, 2002, by and between SKH Management, our Current Report on Form 8-K dated February L.P. and Touchstone Resources USA, Inc. 20, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.2 Purchase and Sale Agreement dated February Incorporated by reference to Exhibit 10.2 of 17, 2002, by and between SKH Management, our Current Report on Form 8- K dated L.P. and Touchstone Resources USA, Inc. February 20, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.3 Assignment Agreement by and between Incorporated by reference to Exhibit 10.3 of Touchstone Resources USA, Inc. and our Current Report on Form 8- K dated Expressions Graphics, Inc. dated February February 20, 2002 20, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.4 Exploration Agreement dated March 23, 2002 Incorporated by reference to Exhibit 10.1 of by and between SK Exploration, Inc. and our Current Report on Form 8-K dated April 8, Knox Miss. Partners, L.P. 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.5 Exploration Agreement dated March 23, 2002 Incorporated by reference to Exhibit 10.2 of by and between SKH Energy Partners II, our Current Report on Form 8-K dated April 8, L.P. and Knox Miss. Partners, L.P. 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.6 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.6 of Common Stock issued to Stephen P. our Annual Report on Form 10-KSB for the Year Harrington Ended December 31, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.7 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.7 of Common Stock issued to Humbert B. Powell, our Annual Report on Form 10-KSB for the Year III Ended December 31, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.8 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.8 of Common Stock issued to Gary Krupp our Annual Report on Form 10-KSB for the Year Ended December 31, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.9 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.9 of Common Stock issued to Thomas M. Curran our Annual Report on Form 10-KSB for the Year Ended December 31, 2002 - -------------------- -------------------------------------------- -----------------------------------------------
22
- -------------------- -------------------------------------------- ----------------------------------------------- 10.10 Option to Purchase 100,000 Shares of Incorporated by reference to Exhibit 10.10 of Common Stock issued to John B. Connally, our Annual Report on Form 10-KSB for the Year III Ended December 31, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.11 Warrant to Purchase 25,000 Shares of Incorporated by reference to Exhibit 10.11 of Common Stock issued to Trident Growth our Annual Report on Form 10-KSB for the Year Fund, L.P. Ended December 31, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.12 Exploration and Development Agreement Incorporated by reference to Exhibit 10.12 of dated May 23, 2002 between Clayton our Annual Report on Form 10-KSB for the Year Williams Energy, Inc. and Knox Miss. Ended December 31, 2002 Partners, L.P. - -------------------- -------------------------------------------- ----------------------------------------------- 10.13 Limited Partnership Agreement of PHT Filed herewith Partners, L.P. dated August 14, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.14 Limited Partnership Agreement of Knox Filed herewith Miss. Partners, L.P. dated March 23, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 10.15 Limited Partnership Agreement of Louisiana Filed herewith Shelf Partners, LP dated December 31, 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 99.1 Certificate of President of Registrant to Filed herewith 18 USC Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - -------------------- -------------------------------------------- ----------------------------------------------- 99.2 Certificate of Treasurer of Registrant Filed herewith Pursuant to 18 USC Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - -------------------- -------------------------------------------- -----------------------------------------------
(b) Current Reports on Form 8-K filed during the three month period ended March 31, 2003: None. 23 SIGNATURES In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONTINENTAL SOUTHERN RESOURCES, INC. Date: May 15, 2003 /s/ Stephen P. Harrington ____________________ Stephen P. Harrington Chief Executive Officer and Chief Financial Officer 24 CERTIFICATION I, Stephen P. Harrington, certify that: 1. I have reviewed this quarterly report on Form 10-QSB of Continental Southern Resources, Inc. (the "registrant"); 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our valuation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: May 15, 2003 /s/ Stephen P. Harrington _____________________ Stephen P. Harrington Chief Executive Officer and Chief Financial Officer 25 EXHIBIT INDEX ------------- EXHIBIT NUMBER DESCRIPTION 10.13 Limited Partnership Agreement of PHT Partners, L.P. dated August 14, 2002 10.14 Limited Partnership Agreement of Knox Miss. Partners, L.P. dated March 23, 2002 10.15 Limited Partnership Agreement of Louisiana Shelf Partners, LP dated December 31, 2002 99.1 Certificate of President of Registrant to 18 USC Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certificate of President of Registrant to 18 USC Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 26 EX-10.13 3 doc2.txt Exhibit 10.13 LIMITED PARTNERSHIP AGREEMENT OF PHT PARTNERS, L.P. August 14, 2002 Table of Contents
Page ARTICLE I. DEFINITIONS...........................................................................................1 ARTICLE II. ORGANIZATION.........................................................................................6 2.1 Name................................................................................................6 2.2 Place of Business...................................................................................6 2.3 Registered Office...................................................................................6 ARTICLE III. PURPOSE.............................................................................................6 3.1 Purpose.............................................................................................6 3.2 Powers of Partnership...............................................................................6 ARTICLE IV. TERM.................................................................................................7 ARTICLE V. CONTRIBUTIONS TO CAPITAL AND STATUS OF PARTNERS.......................................................7 5.1 Capital Contributions and Loan Amounts..............................................................7 5.2 Additional Limited Partners.........................................................................8 ARTICLE VI. DISTRIBUTIONS; ALLOCATION OF PROFITS AND LOSSES; CAPITAL ACCOUNTS....................................8 6.1 Cash Available for Distribution.....................................................................8 6.2 Allocation of Profits and Losses....................................................................8 6.3 Special Tax Allocations; Other Allocation Rules; Tax Allocations: Code Section 704(c)...............9 6.4 Allocations in the Event of Transfer................................................................9 6.5 Capital Accounts...................................................................................10 6.6 Tax Distributions..................................................................................11 ARTICLE VII. MANAGEMENT; RIGHTS, POWERS, AND OBLIGATIONS OF THE PARTNERS........................................11 7.1 Management of the Partnership......................................................................11 7.2 Certain Limitations of the General Partner.........................................................11 7.3 Meetings of the Partners...........................................................................12 7.4 Voting by the Partners.............................................................................12 7.5 Independent Activities.............................................................................13 7.6 Execution of Agreements and Instruments............................................................13 7.7 Holding of Assets..................................................................................13 7.8 Prior Expenses.....................................................................................13 ARTICLE VIII. TRANSFER OF INTERESTS IN THE PARTNERSHIP..........................................................13 8.1 Prohibited Transfers...............................................................................13 8.2 General Partner....................................................................................13
(i)
8.3 Limited Partners...................................................................................14 ARTICLE IX. WITHDRAWAL AND REMOVAL OF A PARTNER.................................................................16 9.1 Withdrawal.........................................................................................16 9.2 Removal of a Limited Partner.......................................................................16 9.3 Death or Disability of a Limited Partner...........................................................17 9.4 Effect of Removal..................................................................................17 9.5 Valuation of the Interest of a Partner.............................................................17 9.6 Payments to a Removed Limited Partner..............................................................18 ARTICLE X. DISSOLUTION AND WINDING UP OF THE PARTNERSHIP........................................................18 10.1 Dissolution of the Partnership....................................................................18 10.2 Winding Up of the Partnership.....................................................................18 10.3 Distribution In Kind..............................................................................19 ARTICLE XI. BOOKS OF ACCOUNTS, ACCOUNTING, REPORTS, FISCAL YEAR, BANKING AND TAX MATTERS PARTNER................19 11.1 Accounting, Books and Records.....................................................................19 11.2 Other Records.....................................................................................19 11.3 Reports...........................................................................................20 11.4 Fiscal Year.......................................................................................20 11.5 Partnership Funds.................................................................................21 11.6 Tax Matters Partner...............................................................................21 ARTICLE XII. INDEMNIFICATION....................................................................................21 12.1 Indemnification...................................................................................21 ARTICLE XIII. MISCELLANEOUS.....................................................................................22 13.1 Agreement for Further Execution...................................................................22 13.2 Amendments........................................................................................22 13.3 Notices...........................................................................................23 13.4 Governing Law and Jurisdiction....................................................................23 13.5 Binding Nature of Agreement.......................................................................24 13.6 Additional Partners...............................................................................24 13.7 Validity..........................................................................................24 13.8 Entire Agreement..................................................................................24 13.9 Indulgences, Etc..................................................................................24 13.10 Execution in Counterparts........................................................................24 13.11 Paragraph........................................................................................24 13.12 Number of Days...................................................................................24 13.13 Interpretation...................................................................................25 13.14 Corporate Authority..............................................................................25 13.15 Third Party Beneficiaries........................................................................25
(ii)
13.16 Appointment of Attorney-in-fact..................................................................25
Exhibit A - Partners Exhibit B - Special Allocations (iii) LIMITED PARTNERSHIP AGREEMENT OF PHT PARTNERS, L.P. THIS LIMITED PARTNERSHIP AGREEMENT is entered into effective as of August 14, 2002, by and among PHT GAS, LLC (the "General Partner") and those persons listed as Limited Partners on Exhibit A attached hereto, as amended from time to time after the date hereof. Intending to be legally bound, the parties hereto agree as follows: ARTICLE I. DEFINITIONS. Capitalized terms used in this Agreement and not defined elsewhere herein shall have the following meanings: "Act" means the Delaware Revised Uniform Limited Partnership Act, as amended from time to time. "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 next to last sentences of Regulations Sections 1.704-(2)(g)(1) and 1.704-2(i)(5); and (ii) debit to such Capital Account the items described in Sections 1.704-1 (b)(2)(ii)(d)(4), (5), and (6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. An "Affiliate" (whether or not capitalized) of, or a Person, association, partnership or corporation "affiliated" with, a specified Person, association, partnership or corporation, is a Person, association, partnership or corporation that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person, association, partnership or corporation. "Agreement" means this limited partnership agreement, as the same may be amended from time to time. "Appraiser" has the meaning set forth in Section 9.5(a) of this Agreement. "Bankruptcy" means, with respect to any Person, a "Voluntary Bankruptcy" or an "Involuntary Bankruptcy." A "Voluntary Bankruptcy" means, with respect to any Person, the inability of such Person generally to pay its debts as such debts become due, or an admission in writing by such Person of its inability to pay its debts generally or a general assignment by such Person for the benefit of creditors; the filing of any petition or answer by such Person seeking to adjudicate it a bankrupt or insolvent, or seeking for itself any liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of such Person or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking, consenting to, or acquiescing in the entry of an order for relief or the appointment of a receiver, trustee, custodian, or other similar official for such Person or for any substantial part of its property, or corporate action taken by such Person to authorize any of the actions set forth above. An "Involuntary Bankruptcy" means, with respect to any Person, without the consent or acquiescence of such Person, the entering of an order for relief or approving a petition for relief or reorganization or any other petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or other similar relief under any present or future bankruptcy, insolvency or similar statute, law, or regulation, or the filing of any such petition against such Person which petition shall not be dismissed within ninety (90) days, or, without the consent or acquiescence of such Person, the entering of an order appointing a trustee, custodian, receiver, or liquidator of such Person or of all or any substantial part of the property of such Person which order shall not be dismissed within sixty (60) days. "Capital Account" means, with respect to any Partner, such Partner's Capital Account determined in accordance with Section 6.6. "Capital Contribution" means, with respect to any Partner, the amount of money contributed to the Partnership by such Partner pursuant to Section 5.2. "Cash Available for Distribution" for any fiscal year or other period means the excess of (a) the amount of gross cash receipts of any kind received by the Partnership (including from any reserves previously established which the General Partner determines are no longer required by the Partnership) less (b) (i) Operating Expenses, (ii) any reserves established or increased by the General Partner which it deems reasonably necessary for the operation of the Partnership including, reserves for working capital and maturing debt obligations and other cash requirements of the Partnership, and (iii) amounts received by the Partnership as Capital Contributions. "Certificate of Limited Partnership" means the Partnership's Certificate of Limited Partnership filed with the Secretary of State of the State of Delaware, as the same may be amended from time to time. "Code" means the Internal Revenue Code of 1986, as amended. All references herein to Code sections shall include corresponding provisions of future federal tax statutes. "Depreciation" means, for each fiscal year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for 2 such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner. "General Partner" means PHT GAS, LLC. "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 fair market value of such asset, as agreed by the contributing Partner and the General Partner; (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 the original purchase at the time of formation of the Partnership) 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 of more than a de minimis amount of Partnership Property (other than cash) as consideration for an Interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g): provided, however, that the adjustments pursuant to clauses (a) and (b) above shall be made only 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; (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 Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section 6.3(h) hereof, provided, however, that Gross Asset Values shall not be adjusted pursuant hereto to the extent the General Partner determines that an adjustment pursuant hereto is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant hereto; and (v) If the Gross Asset Value of an asset has been determined or adjusted pursuant hereto, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. 3 "Indemnitee" has the meaning set forth in Section 12.1(a) of this Agreement. "Interest" means a Partner's economic rights and other interest in the Partnership as a Partner as provided in this Agreement. "Limited Partner" means any person named as a Limited Partner on Exhibit A in his, her or its capacity as a Limited Partner of the Partnership and any other person admitted to the Partnership as a Limited Partner. "Majority in Interest" means with respect to any particular group of Partners, those Partners whose Percentage Interests in the aggregate are greater than fifty percent (50%) of the Percentage Interests owned by all of the Partners within the group. "Nonrecourse Deductions" has the meaning set forth in Section 1.704-2(b)(1) of the Regulations. "Nonrecourse Liability" has the meaning set forth in Section 1.704-2(b)(3) of the Regulations. "Operating Expenses" means cash disbursements for operating expenses of, and proper payments by, the Partnership, including, but not limited to (i) legal representation relating to the Partnership, (ii) accounting and tax preparation and (iii) amounts paid to satisfy the Partnership's obligations with respect to working interests in oil and gas wells held by the Partnership. "Partner" means the General Partner or any Limited Partner. "Partner Nonrecourse Debt" has the meaning set forth in Section 1.704-2(b)(4) of the Regulations. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations. "Partner Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations. "Partnership" means PHT PARTNERS, L.P., a Delaware limited partnership. "Partnership Minimum Gain" has the meaning set forth in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations. "Partnership Property" means all properties and assets which the Partnership may own or have an interest in from time to time. 4 "Percentage Interest" means the Interest of a Partner expressed as a percentage. The Percentage Interest of each Partner as of the date hereof is as set forth on Exhibit A. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, non-incorporated organization or government or any agency or political subdivision thereof. "Prime Rate" means the interest rate published from time to time by the Wall Street Journal as the prime lending rate (regardless of how such rate is specifically described). "Profit or Profits" and "Loss or 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 determined by the Partnership's accountants, in accordance with Code ss.703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to ss.703(a)(1) of the Code shall be included in Profits or Losses), with the adjustments required to comply with the capital account maintenance rules of Treasury Regulations ss.1.704-1(b)(2)(iv) and the following adjustments: (i) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses shall be added back; (ii) Any expenditures of the Partnership described in ss.705(a)(2)(B) of the Code or treated as ss.705(a)(2)(B) expenditures pursuant to Treasury Regulations ss.1.704(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses, shall be subtracted from such taxable income or loss; (iii) If the Gross Asset Value of any Partnership asset is adjusted pursuant to this Agreement, the amount of such adjustment shall be taken into account in the taxable year as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of Partnership Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Partnership Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value; and (v) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with this Agreement. "Purchase Price" has the meaning set forth in Section 9.4 of this Agreement. "Regulations" means the regulations promulgated under the Code, as the same may be amended or supplemented from time to time. 5 "Regulatory Allocations" has the meaning set forth in Section 1(h) of Exhibit B of this Agreement. "Removal Event" has the meaning set forth in Section 9.2 of this Agreement. "Service" has the meaning set forth in Section 11.6 of this Agreement. "Term" has the meaning set forth in Article IV of this Agreement. "Transfer," with respect to any Interest in the Partnership, means any sale, bequest, assignment, pledge, encumbrance or gift thereof, or attempt to deliver a security interest therein, but shall not include a voluntary pledge or assignment pursuant to a written agreement by a Partner of only the rights to recover proceeds as distributed by the Partnership with respect to any Interest nor shall include a collateral assignment of one Partner's Interest to another Partner. "Unreturned Capital Balance" with respect to any Partner means all cash paid toward such Partner's Capital Contribution, reduced by distributions made to such Partner. "Valuation Date" has the meaning set forth in Section 9.5(a) of this Agreement. ARTICLE II. ORGANIZATION 2.1 Name. The name of the Partnership is "PHT Partners, L.P." 2.2 Place of Business. The principal place of business of the Partnership shall be at such place as determined by the General Partner. The Partnership may establish additional places of business within or without the State of Delaware as and when required by the business of the Partnership. 2.3 Registered Office. The registered office for the Partnership shall be located at such place as may be designated by the General Partner. ARTICLE III. PURPOSE. 3.1 Purpose. The purpose for which the Partnership is formed is to purchase leasehold interests in the in certain oil and gas prospects located in the Phu Horm Gas Field Project located in Khorat and Udon Concessions in the Kingdom of Thailand. In addition, the Partnership may engage in any lawful activity for which limited partnerships may be organized under the laws of the State of Delaware and otherwise in accordance with the terms of this Agreement. 3.2 Powers of Partnership. The Partnership shall have all the powers permitted by law which are necessary or desirable in carrying out the purposes and business of the Partnership, including, but not limited to, the following: 6 (a) Transact business in any state or nation in which the Partnership may lawfully act, for itself or as principal, agent or representative for any Person, respecting the business of the Partnership; (b) Enter into, make, perform and carry out, or cancel and rescind, contracts and other obligations for any lawful purpose pertaining to the business of the Partnership; (c) Apply for, register, obtain, purchase or otherwise acquire trademarks, trade names, labels and designs relating to or useful in connection with any business of the Partnership, and to use, exercise, develop and license the use of the same; (d) Employ on behalf of the Partnership legal counsel, accountants and other professional advisors with respect to any business of the Partnership; (e) Compromise, submit to arbitration, sue on, and defend claims in favor of or against the Partnership; and (f) Exercise all of the general rights, privileges and powers permitted by the provisions of the Act, as adopted or hereafter amended or supplemented. ARTICLE IV. TERM The Partnership shall continue in perpetuity from the date hereof unless dissolved sooner pursuant to Article X of this Agreement (the "Term"). ARTICLE V. CONTRIBUTIONS TO CAPITAL AND STATUS OF PARTNERS 5.1 Capital Contributions and Loan Amounts. (a) General Partner. The General Partner has made a capital contribution to the Partnership in the amount set forth on Exhibit A to this Agreement. (b) Limited Partners. Each Limited Partner shall make an initial Capital Contribution, as described in Exhibit A to this Agreement. The name, mailing address, taxpayer identification number, Capital Contribution, Percentage Interest of each Partner is set forth in Exhibit A. (c) Additional Capital Contributions. (i) The Partners shall not be obligated to make any additional contributions to the capital of the Partnership. (d) Withdrawal of Capital Contributions. No Partner shall have the right to withdraw or reduce its Capital Contribution, or to receive any distributions from the Partnership, except as otherwise provided herein. No Partner shall have the right to demand or receive any Partnership Property other than cash from the Partnership. No interest or royalties shall be paid 7 to any Partner on its Capital Contribution. No Partner shall have priority over any other Partner, either as to the return of its Capital Contribution or as to Profits, Losses or distributions, except as may be specifically set forth in this Agreement. 5.2 Additional Limited Partners. Additional Limited Partners may be admitted to the Partnership with the consent of the General Partner and without the consent of the Limited Partners. Any dilution of the Percentage Interest resulting from the admission of additional Limited Partners shall be borne by all Partners pro rata in accordance with their Percentage Interests. ARTICLE VI. DISTRIBUTIONS; ALLOCATION OF PROFITS AND LOSSES; CAPITAL ACCOUNTS. 6.1 Cash Available for Distribution. (a) Distributions Prior to Liquidation. Cash Available for Distribution, if any, shall be distributed at times and in amounts which the General Partner may, in its reasonable discretion, determine. Amounts not distributed in liquidation of the Partnership shall be distributed as follows: (i) First, 99 percent to the Limited Partners in proportion to and to the extent of their Unreturned Capital Balances and one percent to the General Partner until all Unreturned Capital Balances have been reduced to zero; (ii) Then, 80 and 20 percent to the General Partner. Notwithstanding the foregoing, the General Partner may in its sole and absolute discretion and at any time make a distribution to the Limited Partners in proportion to their respective Unreturned Capital Account balances. (b) Liquidating Distributions. Distributions in liquidation of the Partnership and redemption of Interests shall be made in accordance with Capital Accounts, determined after taking into account all allocations under this Article VI, including Profits or Losses with respect to property distributed in kind. 6.2 Allocation of Profits and Losses. (a) Allocation of Profits. After giving effect to the Regulatory Allocations set forth in Exhibit B of this Agreement, Profits for any fiscal year or other period of the Partnership will be credited to the Capital Accounts of the Partners in the following order of priority: (i) First, to each Partner in proportion to and to the extent of the excess, if any, of (A) cumulative prior allocations to the Partner under subsection (b) of this Section 6.2 over (B) cumulative prior allocations to the Partner 8 under this clause (i); (ii) Then, to each Partner in proportion to and to the extent of the excess, if any, of (A) cumulative distributions to the Partner under Section 6.1 (a) as of the date of allocation over (B) cumulative prior allocations under this clause (ii); (iii) Then, 80 percent to Limited Partner A and 20 percent to Limited Partner B and 1 percent to the General Partner. (b) Allocation of Losses. After giving effect to the Regulatory Allocations set forth in Exhibit B of this Agreement, Losses for any fiscal year or other period will be allocated as follows: (i) First, to each Partner in proportion to and to the extent of the excess, if any, of (A) cumulative Profits allocated to the Partner for all prior years under subsection (a) of this Section 6.2 over (B) cumulative prior Losses allocated during the same period under this clause (ii) Then, to Partners, if any, with positive Capital Account balances, in proportion to and to the extent of such balances; (iii) Then entirely to the General Partner. Notwithstanding the foregoing, Losses shall not be allocated to a Partner if the allocation would cause or increase a deficit in the Partner's Capital Account at a time when any other Partner has a positive Capital Account balance, and otherwise shall be allocated entirely to the General Partner. 6.3 Special Tax Allocations; Other Allocation Rules; Tax Allocations: Code Section 704(c). Special tax allocations, other allocation rules and tax allocations relating to Code Section 704(c) are as set forth on Exhibit B attached hereto and made a part hereof. 6.4 Allocations in the Event of Transfer. (a) If all or any portion of an Interest is transferred in accordance with Article VIII hereof (other than a hypothecation or any other encumbrance which secures an indebtedness but is not accompanied by immediate rights to distributions), Profits, Losses, each item thereof and all other items attributable to such Interest for the period from the beginning of the year in which the transfer is effected through the date of transfer shall be allocated to the transferor, and all items attributable for the balance of the year shall be allocated to the transferee. The General Partner may, in its sole discretion, determine the apportionment between pre- and post-transfer allocations on the basis of the number of days of the year in each period or by an interim closing 9 of books as of the end of the date of transfer, except that any items attributable to a transaction giving rise to capital gain or loss (including gain on the disposition of "Section 1231 property" within the meaning of Section 1231 of the Code) shall be allocated entirely to the period in which the transaction giving rise to the gain or loss occurred. The Partnership shall not make any adjustments for items of income, gain, loss, credit, or deduction realized or incurred prior to transfer but deferred in whole or part to a subsequent period. (b) Solely for purposes of allocating Profits, Losses and each item thereof as set forth in Sections 6.2 through 6.4, the Partnership shall recognize the Transfer of such Interest not later than the end of the calendar month during which it receives written notice of such Transfer and the other requirements of Article VIII hereof are satisfied, provided that if the Partnership does not receive a written notice stating the date such Interest was transferred and such other information as the General Partner may reasonably require within thirty (30) days after the end of the calendar year during which the Transfer occurs, then all of such items shall be allocated, and all distributions shall be made, to the Person who, according to the books and records of the Partnership, on the last day of the accounting period during which the Transfer occurs, was the owner of the Interest. The General Partner and the Partnership shall incur no liability for making allocations and distributions in accordance with the provisions of this Section 6.4, whether or not the General Partner or the Partnership has knowledge of any Transfer of ownership of any Interest. 6.5 Capital Accounts. (a) A Capital Account shall be maintained for each Partner. The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with the Regulations promulgated under Section 704(b) of the Code. The Capital Account of each Partner shall be increased by (a) the cash amounts of such Partner's Capital Contribution, (b) the Gross Asset Value of any property or services contributed to the Partnership by the Partner as agreed to by the contributing Partner and the Partnership, less any indebtedness to which such property is subject or which is assumed by the Partnership in connection with the contribution (except that any amount by which such indebtedness exceeds such Gross Asset Value of the property shall be treated as a debit to the Partner's Capital Account), and (c) such Partner's share of Profits and any items in the nature of income and gain specially allocated to it, and shall be decreased by (y) the amount of cash and the Gross Asset Value of other property actually distributed to such Partner by the Partnership less any indebtedness to which such property is subject or which is assumed by the Partner in connection with the distribution (except that any amount by which such indebtedness exceeds such Gross Asset Value of the property shall be treated as a credit to the Partner's Capital Account), and (z) such Partner's share of Losses. (b) In the event a Partner Transfers all or any portion of its Interest in accordance with the provisions of this Agreement, the transferee shall succeed to the individual Capital Account of the transferor to the extent such Capital Account relates to the transferred Interest. 10 (c) It is the intent of this Agreement that each Partner's allocations and distributions shall be made in accordance with Section 704(b) of the Code. If the Partnership is advised by legal counsel that any matter or matters contained in this Agreement are unlikely to be effective for federal income tax purposes, the General Partner is hereby granted the power to amend the allocation and/or distribution provisions of this Agreement, on the advice of legal counsel to the Partnership, to the minimum extent necessary to effect the allocation of Profits and Losses herein. (d) No Partner shall be required at any time to make any cash contribution to the Partnership by reason of any deficit balance in its Capital Account, and no such deficit balance shall increase or otherwise affect the liability of a Partner to third parties 6.6 Tax Distributions. Prior to any distributions pursuant to Section 6.1 hereof (or otherwise), the Partnership shall distribute Cash Available for Distribution to the Partners in such amounts as the General Partner, in good faith, estimates (the "Estimated Tax Liability") to be sufficient to permit each Partner to pay all federal and state income taxes which each Partner will incur as a result of the required inclusion of each Partner's proportionate share of the Profits of the Partnership in determining each Partner's federal and state tax liability, provided that such distribution shall be made no later than the 10th day of January of the year following the year in question and such amount shall be confirmed by the General Partner as soon thereafter as is reasonably practicable. Any distribution made under this Section 6.6 shall be applied against such amounts such Partner is entitled to receive pursuant to Section 6.1 hereof. In the event such Partner receives an amount pursuant to this Section 6.6 which the General Partner in good faith determines is (i) less than the Estimated Tax Liability, then the Partnership shall promptly distribute any shortfall, or (ii) greater than the amount such Partner was entitled to receive pursuant to Section 6.1 hereof, such Partner shall immediately return to the Partnership the difference between the amount received and the amount which should have been distributed. ARTICLE VII. MANAGEMENT; RIGHTS, POWERS, AND OBLIGATIONS OF THE PARTNERS 7.1 Management of the Partnership. Subject to Section 7.2 hereof, the management and control of the Partnership and its business and affairs, and the exercise of the powers of the Partnership described in Section 3.2 hereof, shall be vested in the General Partner. 7.2 Certain Limitations of the General Partner. Without obtaining the affirmative vote of a Majority in Interest of the Class A Limited Partners, voting as a separate class, the General Partner shall not do or permit any of the following acts on behalf of the Partnership unless otherwise specifically stated herein: (i) Act in contravention of this Agreement; (ii) Except as provided in Article X, do any act which would make it impossible to carry on the ordinary business of the Partnership; 11 (iii) Confess a judgment against the Partnership; (iv) Execute or deliver any assignment for the benefit of the creditors of the Partnership; (v) Impose a lien, lease, security interest, easement, liability or otherwise encumber Partnership Property, other than the Senior Security Interest and the Class A Security Interest; or (vi) sell or dispose of all or substantially all of the assets of the Partnership Property in a transaction outside of the Partnership's ordinary course of business, provided that the Partnership shall not be required to obtain such affirmative vote in the event that Mercantile is selling or disposing of all or substantially all of its assets pursuant to the same or a related transaction. 7.3 Meetings of the Partners. (a) Meetings of Partners. Except as otherwise specifically provided in this Agreement, special meetings of the Partners may be called by the General Partner, by written notice to the Partners given not less than ten (10) nor more than sixty (60) days prior to the date of such meeting. Meetings shall be held at such place within or without the State of Delaware as is designated in the notice of the meeting. (b) Quorum. Except as provided in other sections of this Agreement where less than all of the Partners are entitled to vote, the Partners necessary to approve any action to be taken at such meeting must be present for the conduct of business at any meeting of the Partners. (c) Written Consent. Any action of the Partners may be taken without a meeting if the Partners required to approve such action consent thereto in writing. (d) Meeting by Telephone. The meeting of the Partners may be held by telephone conference or similar communications equipment. (e) Proxies. A Partner may authorize one or more Persons to act for such Partner by proxy, provided the proxy is signed by such Partner. A proxy shall not be valid after the expiration of one (1) year from its date. (f) Waiver of Notice. Any notice required under this Agreement for the holding of meetings of the Partners may be waived by any Partner by an instrument in writing signed by such Partner either before or after the meeting to which such waiver relates. 7.4 Voting by the Partners. Unless otherwise stated in this Agreement, an affirmative vote of a Majority in Interest of the Limited Partners, voting as a class, shall be required to adopt any matter subject to a vote of the Limited Partners. 12 7.5 Independent Activities. Subject to any other agreement among the parties, Partners and Affiliates of Partners may, notwithstanding the existence of this Agreement, engage in whatever activities they choose without having or incurring any obligation to offer any interest in such activities to the Partnership or any Partner, and neither this Agreement nor any activity undertaken pursuant hereto shall prevent the Partners or any Affiliate of a Partner from engaging in any activity, or require the Partners or any Affiliate of a Partner to permit the Partnership or any Partner to participate therein. 7.6 Execution of Agreements and Instruments. Any agreement or instrument may be executed on behalf of the Partnership by the General Partner or as otherwise authorized by the General Partner. 7.7 Holding of Assets. All Partnership Property, whether real, personal or mixed, owned by the Partnership shall be held in the name of the Partnership. 7.8 Prior Expenses. To the extent expenses have been incurred in connection with the Partnership prior to the date of this Agreement, the Partnership shall pay such expenses or shall reimburse the General Partner or any other Person as appropriate for such expenses if already paid. ARTICLE VIII. TRANSFER OF INTERESTS IN THE PARTNERSHIP 8.1 Prohibited Transfers. Neither the General Partner nor any of the Limited Partners may sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or transfer or in any manner encumber, his or its Partnership Interest or any part thereof except as permitted in this Article VIII, and any act in violation of this Article VIII shall not be binding upon or recognized b, the Partnership regardless of whether the General Partner shall have knowledge thereof. 8.2 General Partner. (a) Upon the withdrawal, retirement, resignation, removal, death, insanity, dissolution or bankruptcy of a General Partner (the "Terminating General Partner") and the continuation of the business of the Partnership by the remaining General Partner[] (or if there is no remaining General Partner, a newly appointed General Partner, appointed upon the consent of a Majority in Interest of the Limited Partners), the Partnership Interest of such Terminating General Partner shall be converted to a Limited Partnership Interest; provided, however, that the distributions, Profits and Losses to which the Terminating General Partner shall be entitled shall not be changed from those to which the Terminating General Partner was entitled while a General Partner. (b) Until the dissolution and liquidation of the Partnership, no General Partner shall voluntarily withdraw, retire or resign from the Partnership without the consent of the then-remaining General Partners, or if there is no other General Partner, of a Majority in Interest of the Limited Partners. Although such withdrawal, retirement or resignation in breach of this Subsection 8.2(b) may not be enjoined, such General Partner shall be liable in damages to the 13 Partnership for such breach. A sole remaining General Partner seeking to withdraw, may do so only upon obtaining the prior written approval of a Majority-in-Interest of the Limited Partners. 8.3 Limited Partners. (a) The General Partner may (1) pursuant to this Section 8.3, admit as a substituted Limited Partner any successor in interest to a Limited Partner either deceased or under legal disability, and (2) pursuant to this Section 8.3 admit as substituted Limited Partners assignees of Limited Partners: (i) A substituted Limited Partner is a person admitted to all the rights of a Limited Partner; (ii) An assignee is a person to whom a Limited Partner has assigned his Interest in the Partnership but who has not become a substituted Limited Partner. An assignee shall have no right to require any information or accounting of the Partnership's transactions or to inspect the Partnership's books but shall only be entitled to receive the share of the distributions and allocations to which his assignor would otherwise be entitled as set forth in Article VI. (b) No assignee of the whole or any portion of a Limited Partner's Interest shall have the right to become a substituted Limited Partner in place of his assignor or have any other rights of a Limited Partner hereunder unless all of the following conditions are satisfied: (i) The written consent of the General Partner to such substitution shall be obtained, the granting or denial of which shall be within the sole and absolute discretion of the General Partner; (ii) A duly executed and acknowledged written instrument of assignment has been filed with the Partnership which sets forth the intention of the assignor that the assignee become a substituted Limited Partner in his place; (iii) The assignor and assignee execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such admission, including, without limitation, an opinion of counsel, acceptable to the General Partner, to the effect that the assignment of the interest will not violate the applicable provision of the Securities Act of 1933 and any applicable state securities laws, the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment, and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Paragraph 12 hereof; and (iv) A transfer fee not to exceed $300.00 per transaction has been paid to the Partnership. 14 (c) Any person admitted to the Partnership as a Substituted Limited Partner shall be subject to all of the provisions of this Agreement as if originally a party to it. (d) Subject to the provisions of subparagraph 8.3(j) hereof, compliance with the suitability standards imposed by the Partnership, applicable "blue sky" laws, if any, and the rules of any other applicable governmental authority and subject to the written consent of the General Partner (except that assignments to heirs and personal representatives may be made without consent upon the death of a Limited Partner), a Limited Partner shall have the right to assign all or a portion of his Interest by a written assignment, the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been duly executed by the assignor and received by the Partnership and recorded on the books thereof. Any assignment in contravention of any of the provisions of this Subsection 8.3(d) shall be of no force and effect and shall not be binding upon or recognized by the Partnership. THE INTERESTS EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THE INTERESTS ACQUIRED BY LIMITED PARTNERS MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE INTERESTS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH STATE LAWS AS MAY BE APPLICABLE, OR AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP THAT SUCH REGISTRATION IS NOT REQUIRED. (i) Except as provided in Subsections 8.3(h), 8.3(i) and 8.3(j), an assignee of an Interest shall be entitled to receive distributions of cash or other property from the Partnership attributable to the Interest acquired by reasons of such assignment from and after the effective date of the assignment of an Interest to him. The "effective date" of an assignment of an Interest shall be the last day of the calendar month in which the written instrument of assignment, in form and substance satisfactory to the General Partner, is received and approved by the General Partner. (ii) Anything contained herein to the contrary notwithstanding, both the Partnership and the General Partner shall be entitled to treat the assignor of a Partnership Interest as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash or other property made in good faith to him until such times as the written assignment has been received by, and recorded on the books of the Partnership, in accordance with the provisions of Subsection 8.3(d)(i). (e) The General Partner may elect to treat an assignee who has not become a substituted Limited Partner as a substituted Limited Partner in the place of his assignor, should it deem, in its sole and absolute discretion, that such treatment be in the best interest of the Partnership for any of its purposes or for any of the purposes of this Agreement. (f) No consent of any of the Limited Partners is required to elect the substitution of a Limited Partner, except that a Limited Partner who assigns his Interest shall, in 15 order for the assignee to be admitted as a substituted Limited Partner, evidence his intention that the assignee be admitted as a substituted Limited Partner in his place and must execute such instruments as the General Partner shall, in its sole and absolute discretion, determine to be necessary or desirable in connection therewith. (g) The General Partner shall be required to amend this Agreement only quarterly but may, in its sole and absolute discretion, within a reasonable time after the date of their written consent to the substitution of an assignee as a substituted Limited Partner, amend this Agreement to reflect the addition of said assignee as a Limited Partner. Neither copies of this Agreement nor any amendment thereto need be delivered to any of the Limited Partners and such requirement in any statute is hereby waived. However, upon request, the General Partner will promptly thereafter furnish the requesting Limited Partner with a copy of this Agreement and any amendments thereto as of the date of request. (h) Upon the death or legal incompetency of an individual Limited Partner, his personal representative shall have all of the rights of a Limited Partner for the purpose of settling or the managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of his Interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner. However, such personal representative shall not have the right to become a substituted Limited Partner in the place of his predecessor in interest unless the conditions of this Article VIII are first satisfied (except with respect to the requirement that the assignor execute and acknowledge instruments). (i) Upon the bankruptcy, dissolution or other cessation to exist as a legal entity of a General or Limited Partner, not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner for the purpose of effecting the orderly winding up and the disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner. However, such personal representative shall not have the right to become a substituted Limited Partner in the place of his predecessor in interest unless the conditions of this paragraph are first satisfied (except with respect to the requirement that the assignor execute and acknowledge instruments). (j) No assignment or transfer of an interest in the Partnership may be made which would result in the termination of the Partnership under Section 708 of the Code. ARTICLE IX. WITHDRAWAL AND REMOVAL OF A PARTNER 9.1 Withdrawal. No Partner may withdraw or resign voluntarily from the Partnership. 9.2 Removal of a Limited Partner. Upon the occurrence of any of the following events (each, a "Removal Event"), the Partnership shall have the option (but not the obligation) to remove a Limited Partner. A Limited Partner may only be removed pursuant to this Section 9.2 in the event of: 16 (a) The dissolution, termination, or Bankruptcy of the Limited Partner; (b) Any assignment or attempted assignment of the Interest of a Limited Partner or attempted withdrawal of the Limited Partner contrary to this Agreement; or (c) The material breach of this Agreement by the Limited Partner that is not cured (if such material breach is capable of being cured) within thirty (30) days of the receipt of notice form the General Partner of the occurrence of such material breach. 9.3 Death or Disability of a Limited Partner. In the event of the death or Disability of an individual Limited Partner, the Partnership shall have the assignable option (but not the obligation) to acquire all or any portion of such Limited Partner's Interest by notifying the Limited Partner, the Limited Partner's estate or the Limited Partner's representative, as the case may be, within ninety (90) days of the date of death or determination of Disability of such Limited Partner of the Partnership's intention to acquire the Interest of such Limited Partner in the Partnership. The price and terms of purchase pursuant to which the Partnership shall be entitled to exercise the option granted in this Section 9.3 shall be those set forth in Section 9.4 hereof. 9.4 Effect of Removal. If the Partnership exercises the options described in Sections 9.2 or 9.3, then the Partnership shall redeem the removed Partner's Interest for the purchase price (the "Purchase Price") determined under Section 9.5 to be paid on the terms described in Section 9.6. 9.5 Valuation of the Interest of a Partner. For purposes of this Article IX, the Purchase Price for a removed, deceased or Disabled Limited Partner's Interest shall be the value of such Limited Partner's Interest determined as follows: (a) The General Partner shall select an independent, third-party appraiser, experienced in appraising limited partnership interests similar to the Interests (the "Appraiser"). The Appraiser will determine the value of the Limited Partner's Interest as of the end of the calendar month immediately preceding the Removal Event based upon the value of the Partnership's assets net of liabilities assuming all assets were sold at such value and all liabilities were satisfied by cash payments at their present value and any resulting deem Profit or Loss was allocated to the Partners pursuant to the terms of this Agreement. The determination of the value of a Limited Partner's Capital Account shall assume the going concern of the Partnership and shall not take into account minority discounts for the Capital Account being valued. The date on which the Capital Account is to be valued pursuant to this Section shall be referred to herein as a "Valuation Date." The Appraiser shall within sixty (60) days of the Removal Event prepare a statement and report of the amount of the Limited Partner's Capital Account as of the Valuation Date. A copy of such statement and report will be forwarded to each Partner. (b) The Partnership's name and goodwill shall, as among the Partners, be deemed to have no value and shall belong to the Partnership, and no Partner shall have any right or claim individually to the use thereof. 17 9.6 Payments to a Removed Limited Partner. The Purchase Price, as determined under Section 9.5, shall be paid to the removed, deceased or Disabled Limited Partner, or its successor in interest as follows: (a) Ten percent (10%) in cash or immediately available funds by the ninetieth (90th) day following the date of the Removal Event, death or Disability (the "Closing Date"), and (b) The balance of principal together with interest on the unpaid principal balance at a rate of interest equal to the Prime Rate in effect on the business day prior to the Closing Date in twelve (12) equal installments, payable each March 31, June 30, September 30 and December 31, commencing on the first March 31, June 30, September 30 or December 31 following the Closing Date; provided, however, that (i) the Partnership may, at any time and from time to time at its sole option and election, without penalty or premium, repay the balance, in whole or in part, and (ii) the balance shall become immediately due and payable (A) if any installment of the balance shall not have been paid when due and the Partnership shall have failed to cure such default within ten (10) days after the Partnership's receipt of a written notice of such default or (B) if the Partnership is dissolved. ARTICLE X. DISSOLUTION AND WINDING UP OF THE PARTNERSHIP 10.1 Dissolution of the Partnership. The Partnership shall be dissolved upon the first to occur of any of the following events: (a) An order by a court of competent jurisdiction decrees that the Partnership be dissolved; (b) The determination of the General Partners and a Majority in Interest of the Limited Partners to dissolve; or (c) The sale or other disposition of all or substantially all of the assets of the Partnership. The occurrence of any Removal Event of any Limited Partner shall not cause the dissolution of the Partnership. 10.2 Winding Up of the Partnership. Upon a dissolution of the Partnership, the General Partner or other Person appointed by the General Partner, shall take full account of the Partnership's assets and liabilities and the assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof and as shall be necessary to timely make the distributions below described, and the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in the following order: 18 (a) First, to the payment and discharge of all of the Partnership's debts and liabilities other than liabilities owing to the Partners, including establishment of any necessary contingency reserves; (b) Then, in accordance with Section 6.1 (b). (b) Unreturned Capital Balance Unreturned Capital Balance 10.3 Distribution In Kind. Any Partnership Property distributed in kind in the liquidation shall be valued and treated pursuant to Section 9.5. The difference between the value of any item of Partnership Property distributed in kind and its book value shall be treated as a gain or loss on the disposition of Partnership Property and shall be allocated among the Partners as provided in Article VI. ARTICLE XI. BOOKS OF ACCOUNTS, ACCOUNTING, REPORTS, FISCAL YEAR, BANKING AND TAX MATTERS PARTNER 11.1 Accounting, Books and Records. The Partnership shall maintain at its principal place of business or such other places as the General Partner shall determine books of account for the Partnership which shall show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received, and all income derived in connection with the conduct of the Partnership and the operation of its business in accordance with generally accepted accounting principles consistently applied and, to the extent inconsistent therewith in accordance with this Agreement. The Partnership shall use the accrual method of accounting in preparation of its annual reports and for tax purposes and shall keep its books and records accordingly. Each Partner or its designated representative shall have the right, during ordinary business hours, to have access to, inspect and copy, at its sole expense, the contents of such books or records. 11.2 Other Records. (a) The Partnership shall maintain at its principal place of business the following: (i) A current list of the full names and last known business address of each Partner; (ii) A copy of the Certificate of Limited Partnership, all amendments thereto, and executed copies of any powers of attorney pursuant to which the same have been executed; (iii) A copy of this Agreement, all amendments thereto, and executed copies of any written powers of attorney pursuant to which the same have been executed; 19 (iv) Copies of any federal, state, and local income tax returns and reports of the Partnership for the three most recent years; and (v) Copies of any financial statements of the Partnership for the three most recent years. (b) Except as otherwise set forth herein, each Partner shall have the right, exercisable upon written demand, to examine the items described in Section 11.2(a) during ordinary business hours and for any purpose reasonably related to the Partner's Interest in the Partnership (which purpose must be stated in the written demand), and shall have the right, at its own expense, to make copies of all such items. 11.3 Reports. (a) The General Partner shall be responsible for the preparation of financial reports of the Partnership and the coordination of financial matters of the Partnership with the Accountant. (b) Within 90 days after the end of each fiscal year, the General Partner shall transmit to each Partner financial statements based upon the annual audit of the books and financial records of the Partnership, prepared in accordance with generally accepted accounting principles, and, to the extent inconsistent therewith, in accordance with this Agreement, including the following: (i) A copy of the balance sheet of the Partnership as of the last day of such fiscal year; (ii) A statement of income or loss for the Partnership for such fiscal year; (iii) A statement of the Partners' Capital Accounts and changes therein for such fiscal year; and (iv) A statement of Partnership cash flow for such fiscal year. (c) Within ninety (90) days after the end of each fiscal year, the General Partner shall transmit to each Partner a report indicating such Partner's share of all items of income or gain, expense, loss or other deduction and tax credit of the Partnership for such fiscal year, and such additional information to enable the Partners to complete their respective tax returns. (d) The General Partner shall transmit to the Limited Partners such other reports and information as the Limited Partners may reasonably request. 11.4 Fiscal Year. The fiscal year of Partnership shall be the calendar year. 20 11.5 Partnership Funds. All funds of the Partnership shall be deposited in its name in a separate bank account or accounts or in an account or accounts of a savings and loan association or brokerage firm as shall be determined by the General Partner. 11.6 Tax Matters Partner. The General Partner shall serve as the Partnership's "tax matters partner" (as such term is defined in the Code). In such capacity, the Tax Matters Partner is hereby authorized and empowered to act for and represent the Partnership and each of the Partners before (i) the Internal Revenue Service ("Service") in any audit or examination of any Partnership tax return, and (ii) any court selected by the Partners for judicial review of any adjustment assessed by the Service. The Partners specifically acknowledge, without limiting the general applicability of this Section, that the Tax Matters Partner shall not be liable, responsible or accountable in damages or otherwise to the Partnership or any Partner with respect to any action taken by him in his capacity as the Tax Matters Partner, provided he used reasonable business judgment with respect to the action taken. All out-of-pocket expenses incurred by the Tax Matters Partner in his capacity as the Tax Matters Partner shall be considered expenses of the Partnership for which the Tax Matters Partner shall be entitled to full reimbursement. ARTICLE XII. INDEMNIFICATION 12.1 Indemnification. (a) General Provisions. Except as otherwise set forth herein, the Partner and their members, partners, Affiliates, directors, officers, agents and employees and the members of the Governance Committee (herein referred to as an "Indemnitee"), shall be indemnified, held harmless and defended by the Partnership (out of Partnership assets, including the proceeds of liability insurance) against any claim, demand, controversy, dispute, cost, loss, damage, expense (including reasonable attorneys' fees), judgment and/or liability incurred by or imposed upon the Indemnitee in connection with any action, suit or proceeding (including any proceeding before any administrative or legislative body or agency) to which the Indemnitee may be a party or otherwise involved, or with which the Indemnitee may be threatened, by reason of any action or omission of the Indemnitee (or the Indemnitee's employee) in connection with the conduct of Partnership affairs. Such indemnification extends to the Indemnitee in its capacity, at the time the cause of action arose or thereafter, as general partner, member of any committee or as a member, Affiliate, director, officer, partner, employee or other agent of any other organization in which the Partnership owns an interest or of which the Partnership is a creditor, which other organization the Indemnitee (or its employee) serves in such capacity at the request of the Partnership (whether or not the Indemnitee or its employee continues to serve in such capacity at the time such action, suit or proceeding is brought or threatened). The indemnification set forth herein shall not extend with respect to actions or omissions of the Indemnitee (or its employee) which shall have been finally adjudicated (by settlement or otherwise) in any such action, suit or proceeding to have constituted actual fraud, willful misconduct or gross negligence. In the event of settlement of any action, suit or proceeding brought or threatened, such indemnification shall apply to all matters covered by the settlement. The foregoing right of indemnification shall be in addition to any rights to which any Indemnitee may otherwise be entitled and shall inure to the 21 benefit of the executors, administrators, personal representatives, successors or assigns of each such Indemnitee. (b) Advance Payment of Expenses. The Partnership shall pay the expenses incurred by an Indemnitee in defending a civil or criminal action, suit or proceeding, or in opposing any claim arising in connection with any potential or threatened civil or criminal action, suit or proceeding, in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by such Indemnitee to repay such payment if he shall be determined to be not entitled to indemnification therefore as provided herein; provided, however, that in such instance the Indemnitee is not commencing an action, suit, or proceeding against the Partnership, or defending an action, suit or proceeding commenced against him by the Partnership or any Partner thereof or opposing a claim by the Partnership or any Partner thereof arising in connection with any such potential or threatened action, suit or proceeding. (c) Insurance. The Partnership may purchase and maintain insurance with such limits or coverages as the General Partner reasonably deems appropriate, at the expense of the Partnership and to the extent available, for the protection of any Indemnitee against any liability incurred by such Indemnitee in any such capacity or arising out of his status as such, whether or not the Partnership has the power to indemnify such Indemnitee against such liability. The Partnership may purchase and maintain insurance for the protection of any officer, director, employee, consultant or other agent of any other organization in which the Partnership owns an interest or of which the Partnership is a creditor against similar liabilities, whether or not the Partnership has the power to indemnify him or it against such liabilities. Any amounts payable by the Partnership to an Indemnitee pursuant to the provisions of Section 12.1(a) above shall be payable first from the proceeds of any insurance recovery pursuant to policies purchased by the Partnership and then from the other assets of the Partnership; provided, that the foregoing shall not affect the Partnership's obligation to advance expenses pursuant to Section 12.1(b) hereof in circumstances in which the insurance Partnership who has issued such policy will not advance such expenses. ARTICLE XIII. MISCELLANEOUS 13.1 Agreement for Further Execution. The Partners agree to sign, swear or acknowledge any certificates or filings required by the laws of the State of Delaware or any other state, to sign, swear or acknowledge any amendment or cancellation of such certificate or filings whether or not such amendment or cancellation is required by law; to sign, swear or acknowledge such other certificates, filings, documents or affidavits of assumed name, trade name or the like (and any amendments or cancellations thereof that may be required for conduct of the Partnership's business) and to cause the filing of any of the same for record wherever such filing shall be required by law. This Section 13.1 shall not prejudice or affect the rights of the Partners to approve certain amendments to this Agreement as herein provided. 13.2 Amendments. 22 (a) Except as otherwise provided in this Agreement, no alteration, modification or amendment of this Agreement shall be made unless in writing and signed (in counterpart or otherwise) by the General Partner and a Majority in Interest of the Limited Partners, except that no alteration, modification or amendment of any Section hereof which would materially and adversely affect the economic interests of one or more (but not all) of the Limited Partners may be made (except as provided below) without the unanimous consent of all Limited Partners so adversely affected. Notwithstanding the foregoing, no increase in the amount required to be contributed to the Partnership by the Partners, other than as required herein or under applicable law, may be made without the consent of all the Partners. (b) Any provision to the contrary contained herein notwithstanding, the General Partner may, without the consent or approval of any Partners, make such amendments to this Agreement binding on the Partners, (i) to correct a typographical error, cure any ambiguity, correct or supplement any provision herein which may be inconsistent with any other provisions herein, (ii) to make any other amendment if such amendment is not adverse to the interests of the Limited Partners as a whole or as a class or if such amendment benefits the Limited Partners as a whole or as a class; and (iii) to reflect the addition of Limited Partners pursuant to Section 5.2; provided, however, that no amendment shall be adopted pursuant to this Section 13.2(b) unless the adoption thereof does not affect the status of the Partnership as a partnership for federal income tax purposes. 13.3 Notices. (a) Any notice to be given under this Agreement shall be made in writing and sent by express, registered or certified mail, return receipt requested, postage prepaid, fax, or commercial delivery service, addressed as set forth below: (i) If to the General Partner or the Partnership: 5858 Westheimer Street, Suite 708 Houston, TX 77057 (ii) If to any Partner, such notice shall be mailed to the address of the Partner appearing on the records of the Partnership. (b) Any Partner may change the address to which notice is to be sent by giving notice of such change to the Partnership in conformity with this Section 13.3. (c) Any such notice shall be deemed to be delivered, given and received for all purposes as of the date delivered if delivered by a commercial delivery service or by confirmed fax, or as of the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, if sent by express, registered or certified mail. 13.4 Governing Law and Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware as interpreted by the courts of 23 said Commonwealth, notwithstanding any rules regarding choice of law to the contrary. The parties to this Agreement agree to the exclusive jurisdiction of the courts of New Castle County, Delaware and the Federal courts of the District of Delaware for resolution of controversies arising out of or relating to this Agreement and any related instruments, agreements or documents. 13.5 Binding Nature of Agreement. Except as otherwise provided, this Agreement shall be binding upon and inure to the benefit of the Partners and their personal representatives, successors and assigns. 13.6 Additional Partners. Each substitute, additional or successor Partner shall become a signatory hereof by signing such number of counterparts of this Agreement and such other instrument or instruments and in such manner, as the General Partner shall determine. By so signing, each substitute, additional or successor Partner, as the case may be, shall be deemed to have adopted and to have agreed to be bound by all the provisions of this Agreement; provided, however, that no such counterpart shall be binding until it shall have been signed by the Partnership. 13.7 Validity. In the event that all or any portion of any provision of this Agreement shall be held to be invalid, the same shall not affect in any respect whatsoever the validity of the remainder of this Agreement. 13.8 Entire Agreement. This Agreement and the agreements attached hereto as Exhibits constitute the entire understanding and agreement among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as contained herein. 13.9 Indulgences, Etc. Neither the failure nor any delay on the part of any party hereto to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and signed by the party asserted to have granted such waiver. 13.10 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of such shall together constitute one and the same instrument. 13.11 Paragraph. The paragraph headings in this Agreement are for convenience only, form no part of this Agreement, and shall not affect its interpretation. 13.12 Number of Days. In computing the number of days for the purpose of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, 24 however, that if the final day of any time period falls on a Saturday, Sunday or holiday, then such final day shall be deemed to be the next day which is not a Saturday, Sunday or holiday. 13.13 Interpretation. No provision of this Agreement is to be interpreted for or against any party because that party or that party's legal representative drafted such provision. 13.14 Corporate Authority. Any corporation or trust signing this Agreement represents and warrants that the execution, delivery and performance of this Agreement by such corporation or trust has been duly authorized by all necessary corporate or trustee action. 13.15 Third Party Beneficiaries. Notwithstanding anything herein to the contrary, no provision of this Agreement is intended to benefit any party other than the Partners hereto and their successors and assigns in the Partnership and shall not be enforceable by any other party. 13.16 Appointment of Attorney-in-fact. Each Partner hereby irrevocably constitutes and appoints the General Partner its true and lawful attorney-in-fact, with full power of substitution, and with the General Partner having full power and authority in its name, place and stead to execute, acknowledge, deliver, swear to, file and record with the appropriate public offices such certificates, instruments and documents as may be necessary or appropriate to carry out the provisions of this Agreement or effectuate any action taken by or on behalf of the Partnership, including, but not limited to, any amendments to this Agreement or the Certificate of Limited Partnership approved by the Partners as provided herein. The appointment by the Partners of the General Partner as attorney-in-fact shall be deemed to be a power coupled with an interest, in recognition of the fact that each of the Partners under this Agreement will be relying upon the power of the General Partner to act as contemplated by this Agreement in any filing and other action by the General Partner on behalf of the Partnership and, shall to the fullest extent permitted by applicable law, survive the Bankruptcy, death or incompetency of any Partner hereby giving such power. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 25 IN WITNESS WHEREOF, the undersigned have set their hands and seals as of the day and year first above written. GENERAL PARTNER: PHT GAS, LLC By: ___________________________ Mark A. Bush, Managing Member LIMITED PARTNERS: Bepariko BioCom By: ___________________________ Cecile T. Coady Continental Southern Resources, Inc. By: ___________________________ Stephen P. Harrington PARTNERS AS OF August 14, 2002 Capital Percentage Contribution Interest - ----------------------------------------------------------------------------- Limited Partners: Bepariko BioCom $50,000 4.1% 5858 Westheimer Street, Suite 708 Houston, Texas 77057 Continental Southern Resources, Inc. $1,150,000 94.9% 111 Presidential Boulevard, Suite 158-A Bala Cynwyd, Pennsylvania 19004 - ----------------------------------------------------------------------------- General Partner: - ----------------------------------------------------------------------------- PHT Gas LLC 1.0.% 5858 Westheimer Street, Suite 708 Houston, Texas 77057 - ----------------------------------------------------------------------------- EXHIBIT B SPECIAL ALLOCATIONS 1. Special Tax Allocations. (a) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Regulations Section 1.704-1 (b)(2)(ii)(d)(4),(5), or (6), items of Partnership income and gain shall be specially allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible, provided that an allocation pursuant to this Section 1(a) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in Article VI hereof have been tentatively made as if this Section 1(a) were not in the Agreement. (b) 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 the sum of (i) the amount such Partner is obligated to restore, and (ii) the amount such Partner is deemed to be obligated to restore pursuant to the next to last sentences of Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such 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 1(b) shall be made if and only 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 6 have been tentatively made as if Section 1(a) hereof and this Section 1(b) were not in the Agreement. (c) Partnership Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of Article VI hereof if there is a net decrease in Partnership Minimum Gain during any fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Section 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section 1(c) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith. (d) Partner Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of Article VI hereof, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Partnership income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Section 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Section 1(d) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith. (e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal year shall be specially allocated among the Partners in proportion to their Limited Partnership Interests. (f) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Fiscal year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). (g) Code Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required 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 increased 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 1.704-1(b)(2)(iv)(m) of the Regulations. (h) Curative Allocations. The Regulatory Allocations consist of the allocations pursuant to Sections 1(a) through 1(g) hereof. Notwithstanding any other provision of this Agreement, the Regulatory Allocations shall be taken into account in allocating items of income, gain, loss and deduction among the Partners so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each Partner if the Regulatory Allocations had not occurred. 2. Other Allocations Rules. (a) For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly or other basis, as determined by the General Partner using any permissible method under Code Section 706 and the Regulations thereunder. (b) Except as otherwise provided in this Agreement, all items of Partnership income, gain, loss, deductions, and any other allocations not otherwise provided for shall be divided among the Partners in the same proportions as they share Profits or Losses, as the case may be, for the year. (c) The Partners are aware of the income tax consequences of the allocations made by this Exhibit B and hereby agree to be bound by the provisions of this Exhibit B in reporting their shares of Partnership income and loss for income tax purposes. 3. Tax Allocations: Code Section 704(c). In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value. In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to this Agreement, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. EX-10.14 4 doc3.txt Exhibit 10.14 LIMITED PARTNERSHIP AGREEMENT OF KNOX MISS. PARTNERS, L.P. March 23, 2002 Table of Contents
Page ARTICLE I. DEFINITIONS...........................................................................................1 ARTICLE II. ORGANIZATION.........................................................................................6 2.1 Name................................................................................................6 2.2 Place of Business...................................................................................6 2.3 Registered Office...................................................................................6 ARTICLE III. PURPOSE.............................................................................................6 3.1 Purpose.............................................................................................6 3.2 Powers of Partnership...............................................................................6 ARTICLE IV. TERM.................................................................................................7 ARTICLE V. CONTRIBUTIONS TO CAPITAL AND STATUS OF PARTNERS.......................................................7 5.1 Capital Contributions and Loan Amounts..............................................................7 5.2 Additional Limited Partners.........................................................................8 ARTICLE VI. DISTRIBUTIONS; ALLOCATION OF PROFITS AND LOSSES; CAPITAL ACCOUNTS....................................8 6.1 Cash Available for Distribution.....................................................................8 6.2 Allocation of Profits and Losses....................................................................8 6.3 Special Tax Allocations; Other Allocation Rules; Tax Allocations: Code Section 704(c)...............9 6.4 Allocations in the Event of Transfer................................................................9 6.5 Capital Accounts...................................................................................10 6.6 Tax Distributions..................................................................................11 ARTICLE VII. MANAGEMENT; RIGHTS, POWERS, AND OBLIGATIONS OF THE PARTNERS........................................11 7.1 Management of the Partnership......................................................................11 7.2 Certain Limitations of the General Partner.........................................................11 7.3 Meetings of the Partners...........................................................................12 7.4 Voting by the Partners.............................................................................12 7.5 Independent Activities.............................................................................13 7.6 Execution of Agreements and Instruments............................................................13 7.7 Holding of Assets..................................................................................13 7.8 Prior Expenses.....................................................................................13 ARTICLE VIII. TRANSFER OF INTERESTS IN THE PARTNERSHIP..........................................................13 8.1 Prohibited Transfers...............................................................................13 8.2 General Partner....................................................................................13
(i)
8.3 Limited Partners...................................................................................14 ARTICLE IX. WITHDRAWAL AND REMOVAL OF A PARTNER.................................................................16 9.1 Withdrawal.........................................................................................16 9.2 Removal of a Limited Partner.......................................................................16 9.3 Death or Disability of a Limited Partner...........................................................17 9.4 Effect of Removal..................................................................................17 9.5 Valuation of the Interest of a Partner.............................................................17 9.6 Payments to a Removed Limited Partner..............................................................18 ARTICLE X. DISSOLUTION AND WINDING UP OF THE PARTNERSHIP........................................................18 10.1 Dissolution of the Partnership....................................................................18 10.2 Winding Up of the Partnership.....................................................................18 10.3 Distribution In Kind..............................................................................19 ARTICLE XI. BOOKS OF ACCOUNTS, ACCOUNTING, REPORTS, FISCAL YEAR, BANKING AND TAX MATTERS PARTNER................19 11.1 Accounting, Books and Records.....................................................................19 11.2 Other Records.....................................................................................19 11.3 Reports...........................................................................................20 11.4 Fiscal Year.......................................................................................20 11.5 Partnership Funds.................................................................................21 11.6 Tax Matters Partner...............................................................................21 ARTICLE XII. INDEMNIFICATION....................................................................................21 12.1 Indemnification...................................................................................21 ARTICLE XIII. MISCELLANEOUS.....................................................................................22 13.1 Agreement for Further Execution...................................................................22 13.2 Amendments........................................................................................22 13.3 Notices...........................................................................................23 13.4 Governing Law and Jurisdiction....................................................................24 13.5 Binding Nature of Agreement.......................................................................24 13.6 Additional Partners...............................................................................24 13.7 Validity..........................................................................................24 13.8 Entire Agreement..................................................................................24 13.9 Indulgences, Etc..................................................................................24 13.10 Execution in Counterparts........................................................................25 13.11 Paragraph........................................................................................25 13.12 Number of Days...................................................................................25 13.13 Interpretation...................................................................................25 13.14 Corporate Authority..............................................................................25 13.15 Third Party Beneficiaries........................................................................25
(ii)
13.16 Appointment of Attorney-in-fact..................................................................25
Exhibit A - Partners Exhibit B - Special Allocations (iii) LIMITED PARTNERSHIP AGREEMENT OF KNOX MISS. PARTNERS, L.P. THIS LIMITED PARTNERSHIP AGREEMENT is entered into effective as of March 23, 2002, by and among KNOX MISS., LLC (the "General Partner") and those persons listed as Limited Partners on Exhibit A attached hereto, as amended from time to time after the date hereof. Intending to be legally bound, the parties hereto agree as follows: ARTICLE I. DEFINITIONS. Capitalized terms used in this Agreement and not defined elsewhere herein shall have the following meanings: "Act" means the Delaware Revised Uniform Limited Partnership Act, as amended from time to time. "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 next to last sentences of Regulations Sections 1.704-(2)(g)(1) and 1.704-2(i)(5); and (ii) debit to such Capital Account the items described in Sections 1.704-1 (b)(2)(ii)(d)(4), (5), and (6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. An "Affiliate" (whether or not capitalized) of, or a Person, association, partnership or corporation "affiliated" with, a specified Person, association, partnership or corporation, is a Person, association, partnership or corporation that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person, association, partnership or corporation. For purposes of this Agreement, Lubert (and Family Members of Lubert) and RG shall not be considered Affiliates of each other. "Agreement" means this limited partnership agreement, as the same may be amended from time to time. "Appraiser" has the meaning set forth in Section 9.5(a) of this Agreement. "Bankruptcy" means, with respect to any Person, a "Voluntary Bankruptcy" or an "Involuntary Bankruptcy." A "Voluntary Bankruptcy" means, with respect to any Person, the inability of such Person generally to pay its debts as such debts become due, or an admission in writing by such Person of its inability to pay its debts generally or a general assignment by such Person for the benefit of creditors; the filing of any petition or answer by such Person seeking to adjudicate it a bankrupt or insolvent, or seeking for itself any liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of such Person or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking, consenting to, or acquiescing in the entry of an order for relief or the appointment of a receiver, trustee, custodian, or other similar official for such Person or for any substantial part of its property, or corporate action taken by such Person to authorize any of the actions set forth above. An "Involuntary Bankruptcy" means, with respect to any Person, without the consent or acquiescence of such Person, the entering of an order for relief or approving a petition for relief or reorganization or any other petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or other similar relief under any present or future bankruptcy, insolvency or similar statute, law, or regulation, or the filing of any such petition against such Person which petition shall not be dismissed within ninety (90) days, or, without the consent or acquiescence of such Person, the entering of an order appointing a trustee, custodian, receiver, or liquidator of such Person or of all or any substantial part of the property of such Person which order shall not be dismissed within sixty (60) days. "Capital Account" means, with respect to any Partner, such Partner's Capital Account determined in accordance with Section 6.6. "Capital Contribution" means, with respect to any Partner, the amount of money contributed to the Partnership by such Partner pursuant to Section 5.2. "Cash Available for Distribution" for any fiscal year or other period means the excess of (a) the amount of gross cash receipts of any kind received by the Partnership (including from any reserves previously established which the General Partner determines are no longer required by the Partnership) less (b) (i) Operating Expenses, (ii) any reserves established or increased by the General Partner which it deems reasonably necessary for the operation of the Partnership including, reserves for working capital and maturing debt obligations and other cash requirements of the Partnership, and (iii) amounts received by the Partnership as Capital Contributions. "Certificate of Limited Partnership" means the Partnership's Certificate of Limited Partnership filed with the Secretary of State of the State of Delaware, as the same may be amended from time to time. "Code" means the Internal Revenue Code of 1986, as amended. All references herein to Code sections shall include corresponding provisions of future federal tax statutes. 2 "Depreciation" means, for each fiscal year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner. "General Partner" means Knox Miss., LLC "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 fair market value of such asset, as agreed by the contributing Partner and the General Partner; (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 the original purchase at the time of formation of the Partnership) 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 of more than a de minimis amount of Partnership Property (other than cash) as consideration for an Interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g): provided, however, that the adjustments pursuant to clauses (a) and (b) above shall be made only 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; (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 Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section 6.3(h) hereof, provided, however, that Gross Asset Values shall not be adjusted pursuant hereto to the extent the General Partner determines that an adjustment pursuant hereto is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant hereto; and 3 (v) If the Gross Asset Value of an asset has been determined or adjusted pursuant hereto, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. "Indemnitee" has the meaning set forth in Section 12.1(a) of this Agreement. "Interest" means a Partner's economic rights and other interest in the Partnership as a Partner as provided in this Agreement. "Limited Partner" means any person named as a Limited Partner on Exhibit A in his, her or its capacity as a Limited Partner of the Partnership and any other person admitted to the Partnership as a Limited Partner. "Majority in Interest" means with respect to any particular group of Partners, those Partners whose Percentage Interests in the aggregate are greater than fifty percent (50%) of the Percentage Interests owned by all of the Partners within the group. "Nonrecourse Deductions" has the meaning set forth in Section 1.704-2(b)(1) of the Regulations. "Nonrecourse Liability" has the meaning set forth in Section 1.704-2(b)(3) of the Regulations. "Operating Expenses" means cash disbursements for operating expenses of, and proper payments by, the Partnership, including, but not limited to (i) legal representation relating to the Partnership, (ii) accounting and tax preparation and (iii) amounts paid to satisfy the Partnership's obligations with respect to working interests in oil and gas wells held by the Partnership. "Partner" means the General Partner or any Limited Partner. "Partner Nonrecourse Debt" has the meaning set forth in Section 1.704-2(b)(4) of the Regulations. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations. "Partner Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations. "Partnership" means Knox Miss. Partners, L.P., a Delaware limited partnership. "Partnership Minimum Gain" has the meaning set forth in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations. "Partnership Property" means all properties and assets which the Partnership may own or have an interest in from time to time. "Percentage Interest" means the Interest of a Partner expressed as a percentage. The Percentage Interest of each Partner as of the date hereof is as set forth on Exhibit A. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, non-incorporated organization or government or any agency or political subdivision thereof. "Prime Rate" means the interest rate published from time to time by the Wall Street Journal as the prime lending rate (regardless of how such rate is specifically described). "Profit or Profits" and "Loss or 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 determined by the Partnership's accountants, in accordance with Code ss.703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to ss.703(a)(1) of the Code shall be included in Profits or Losses), with the adjustments required to comply with the capital account maintenance rules of Treasury Regulations ss.1.704-1(b)(2)(iv) and the following adjustments: (i) Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses shall be added back; (ii) Any expenditures of the Partnership described in ss.705(a)(2)(B) of the Code or treated as ss.705(a)(2)(B) expenditures pursuant to Treasury Regulations ss.1.704(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses, shall be subtracted from such taxable income or loss; (iii) If the Gross Asset Value of any Partnership asset is adjusted pursuant to this Agreement, the amount of such adjustment shall be taken into account in the taxable year as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of Partnership Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Partnership Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value; and (v) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with this Agreement. "Purchase Price" has the meaning set forth in Section 9.4 of this Agreement. 5 "Regulations" means the regulations promulgated under the Code, as the same may be amended or supplemented from time to time. "Regulatory Allocations" has the meaning set forth in Section 1(h) of Exhibit B of this Agreement. "Removal Event" has the meaning set forth in Section 9.2 of this Agreement. "Service" has the meaning set forth in Section 11.6 of this Agreement. "Term" has the meaning set forth in Article IV of this Agreement. "Transfer," with respect to any Interest in the Partnership, means any sale, bequest, assignment, pledge, encumbrance or gift thereof, or attempt to deliver a security interest therein, but shall not include a voluntary pledge or assignment pursuant to a written agreement by a Partner of only the rights to recover proceeds as distributed by the Partnership with respect to any Interest nor shall include a collateral assignment of one Partner's Interest to another Partner. "Unreturned Capital Balance" with respect to any Partner means all cash paid toward such Partner's Capital Contribution, reduced by distributions made to such Partner. "Valuation Date" has the meaning set forth in Section 9.5(a) of this Agreement. ARTICLE II. ORGANIZATION 2.1 Name. The name of the Partnership is "Knox Miss. Partners, L.P." 2.2 Place of Business. The principal place of business of the Partnership shall be at such place as determined by the General Partner. The Partnership may establish additional places of business within or without the State of Delaware as and when required by the business of the Partnership. 2.3 Registered Office. The registered office for the Partnership shall be located at such place as may be designated by the General Partner. ARTICLE III. PURPOSE. 3.1 Purpose. The purpose for which the Partnership is formed is to purchase leasehold interests in certain oil and gas prospects in Webster, Clay, Chickesaw, Calhoun and Grenada Counties, Mississippi. In addition, the Partnership may engage in any lawful activity for which limited partnerships may be organized under the laws of the State of Delaware and otherwise in accordance with the terms of this Agreement. 3.2 Powers of Partnership. The Partnership shall have all the powers permitted by law which are necessary or desirable in carrying out the purposes and business of the Partnership, including, but not limited to, the following: 6 (a) Transact business in any state or nation in which the Partnership may lawfully act, for itself or as principal, agent or representative for any Person, respecting the business of the Partnership; (b) Enter into, make, perform and carry out, or cancel and rescind, contracts and other obligations for any lawful purpose pertaining to the business of the Partnership; (c) Apply for, register, obtain, purchase or otherwise acquire trademarks, trade names, labels and designs relating to or useful in connection with any business of the Partnership, and to use, exercise, develop and license the use of the same; (d) Employ on behalf of the Partnership legal counsel, accountants and other professional advisors with respect to any business of the Partnership; (e) Compromise, submit to arbitration, sue on, and defend claims in favor of or against the Partnership; and (f) Exercise all of the general rights, privileges and powers permitted by the provisions of the Act, as adopted or hereafter amended or supplemented. ARTICLE IV. TERM The Partnership shall continue in perpetuity from the date hereof unless dissolved sooner pursuant to Article X of this Agreement (the "Term"). ARTICLE V. CONTRIBUTIONS TO CAPITAL AND STATUS OF PARTNERS 5.1 Capital Contributions and Loan Amounts. (a) General Partner. The General Partner has made a capital contribution to the Partnership in the amount set forth on Exhibit A to this Agreement. (b) Limited Partners. Each Limited Partner shall make an initial Capital Contribution, as described in Exhibit A to this Agreement. The name, mailing address, taxpayer identification number, Capital Contribution, Percentage Interest of each Partner is set forth in Exhibit A. (c) Additional Capital Contributions. The Partners shall not be obligated to make any additional contributions to the capital of the Partnership or to loan the Partnership any additional funds. (d) Withdrawal of Capital Contributions. No Partner shall have the right to withdraw or reduce its Capital Contribution, or to receive any distributions from the Partnership, except as otherwise provided herein. No Partner shall have the right to demand or receive any Partnership Property other than cash from the Partnership. No interest or royalties shall be paid 7 to any Partner on its Capital Contribution. No Partner shall have priority over any other Partner, either as to the return of its Capital Contribution or as to Profits, Losses or distributions, except as may be specifically set forth in this Agreement. 5.2 Additional Limited Partners. Additional Limited Partners may be admitted to the Partnership with the consent of the General Partner and without the consent of the Limited Partners. Any dilution of the Percentage Interest resulting from the admission of additional Limited Partners shall be borne by all Partners pro rata in accordance with their Percentage Interests. ARTICLE VI. DISTRIBUTIONS; ALLOCATION OF PROFITS AND LOSSES; CAPITAL ACCOUNTS. 6.1 Cash Available for Distribution. (a) Distributions Prior to Liquidation. Cash Available for Distribution, if any, shall be distributed at times and in amounts which the General Partner may, in its reasonable discretion, determine. Amounts not distributed in liquidation of the Partnership shall be distributed as follows: (i) First, 99 percent to the Limited Partners in proportion to and to the extent of their Unreturned Capital Balances and one percent to the General Partner until all Unreturned Capital Balances have been reduced to zero; (ii) Then, 75 percent to the Limited Partners in proportion to their Percentage Interests and 25 percent to the General Partner. Notwithstanding the foregoing, the General Partner may in its sole and absolute discretion and at any time make a distribution to the Limited Partners in proportion to their respective Unreturned Capital Account balances. (b) Liquidating Distributions. Distributions in liquidation of the Partnership and redemption of Interests shall be made in accordance with Capital Accounts, determined after taking into account all allocations under this Article VI, including Profits or Losses with respect to property distributed in kind. 6.2 Allocation of Profits and Losses. (a) Allocation of Profits. After giving effect to the Regulatory Allocations set forth in Exhibit B of this Agreement, Profits for any fiscal year or other period of the Partnership will be credited to the Capital Accounts of the Partners in the following order of priority: (i) First, to each Partner in proportion to and to the extent of the excess, if any, of (A) cumulative prior allocations to the Partner 8 under subsection (b) of this Section 6.2 over (B) cumulative prior allocations to the Partner under this clause (i); (ii) Then, to each Partner in proportion to and to the extent of the excess, if any, of (A) cumulative distributions to the Partner under Section 6.1 (a) as of the date of allocation over (B) cumulative prior allocations under this clause (ii); (iii) Then, 75 percent to the Limited Partners in proportion to their Percentage Interests and 25 percent to the General Partner.. (b) Allocation of Losses. After giving effect to the Regulatory Allocations set forth in Exhibit B of this Agreement, Losses for any fiscal year or other period will be allocated as follows: (i) First, to each Partner in proportion to and to the extent of the excess, if any, of (A) cumulative Profits allocated to the Partner for all prior years under subsection (a) of this Section 6.2 over (B) cumulative prior Losses allocated during the same period under this clause (ii) Then, to Partners, if any, with positive Capital Account balances, in proportion to and to the extent of such balances; (iii) Then entirely to the General Partner. Notwithstanding the foregoing, Losses shall not be allocated to a Partner if the allocation would cause or increase a deficit in the Partner's Capital Account at a time when any other Partner has a positive Capital Account balance, and otherwise shall be allocated entirely to the General Partner. 6.3 Special Tax Allocations; Other Allocation Rules; Tax Allocations: Code Section 704(c). Special tax allocations, other allocation rules and tax allocations relating to Code Section 704(c) are as set forth on Exhibit B attached hereto and made a part hereof. 6.4 Allocations in the Event of Transfer. (a) If all or any portion of an Interest is transferred in accordance with Article VIII hereof (other than a hypothecation or any other encumbrance which secures an indebtedness but is not accompanied by immediate rights to distributions), Profits, Losses, each item thereof and all other items attributable to such Interest for the period from the beginning of the year in which the transfer is effected through the date of transfer shall be allocated to the transferor, and all items attributable for the balance of the year shall be allocated to the transferee. The General Partner may, in its sole discretion, determine the apportionment between pre- and post-transfer allocations on the basis of the number of days of the year in each period or by an interim closing 9 of books as of the end of the date of transfer, except that any items attributable to a transaction giving rise to capital gain or loss (including gain on the disposition of "Section 1231 property" within the meaning of Section 1231 of the Cod) shall be allocated entirely to the period in which the transaction giving rise to the gain or loss occurred. The Partnership shall not make any adjustments for items of income, gain, loss, credit, or deduction realized or incurred prior to transfer but deferred in whole or part to a subsequent period. (b) Solely for purposes of allocating Profits, Losses and each item thereof as set forth in Sections 6.2 through 6.4, the Partnership shall recognize the Transfer of such Interest not later than the end of the calendar month during which it receives written notice of such Transfer and the other requirements of Article VIII hereof are satisfied, provided that if the Partnership does not receive a written notice stating the date such Interest was transferred and such other information as the General Partner may reasonably require within thirty (30) days after the end of the calendar year during which the Transfer occurs, then all of such items shall be allocated, and all distributions shall be made, to the Person who, according to the books and records of the Partnership, on the last day of the accounting period during which the Transfer occurs, was the owner of the Interest. The General Partner and the Partnership shall incur no liability for making allocations and distributions in accordance with the provisions of this Section 6.4, whether or not the General Partner or the Partnership has knowledge of any Transfer of ownership of any Interest. 6.5 Capital Accounts. (a) A Capital Account shall be maintained for each Partner. The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with the Regulations promulgated under Section 704(b) of the Code. The Capital Account of each Partner shall be increased by (a) the cash amounts of such Partner's Capital Contribution, (b) the Gross Asset Value of any property or services contributed to the Partnership by the Partner as agreed to by the contributing Partner and the Partnership, less any indebtedness to which such property is subject or which is assumed by the Partnership in connection with the contribution (except that any amount by which such indebtedness exceeds such Gross Asset Value of the property shall be treated as a debit to the Partner's Capital Account), and (c) such Partner's share of Profits and any items in the nature of income and gain specially allocated to it, and shall be decreased by (y) the amount of cash and the Gross Asset Value of other property actually distributed to such Partner by the Partnership less any indebtedness to which such property is subject or which is assumed by the Partner in connection with the distribution (except that any amount by which such indebtedness exceeds such Gross Asset Value of the property shall be treated as a credit to the Partner's Capital Account), and (z) such Partner's share of Losses. (b) In the event a Partner Transfers all or any portion of its Interest in accordance with the provisions of this Agreement, the transferee shall succeed to the individual Capital Account of the transferor to the extent such Capital Account relates to the transferred Interest. 10 (c) It is the intent of this Agreement that each Partner's allocations and distributions shall be made in accordance with Section 704(b) of the Code. If the Partnership is advised by legal counsel that any matter or matters contained in this Agreement are unlikely to be effective for federal income tax purposes, the General Partner is hereby granted the power to amend the allocation and/or distribution provisions of this Agreement, on the advice of legal counsel to the Partnership, to the minimum extent necessary to effect the allocation of Profits and Losses herein. (d) No Partner shall be required at any time to make any cash contribution to the Partnership by reason of any deficit balance in its Capital Account, and no such deficit balance shall increase or otherwise affect the liability of a Partner to third parties 6.6 Tax Distributions. Prior to any distributions pursuant to Section 6.1 hereof (or otherwise), the Partnership shall distribute Cash Available for Distribution to the Partners in such amounts as the General Partner, in good faith, estimates (the "Estimated Tax Liability") to be sufficient to permit each Partner to pay all federal and state income taxes which each Partner will incur as a result of the required inclusion of each Partner's proportionate share of the Profits of the Partnership in determining each Partner's federal and state tax liability, provided that such distribution shall be made no later than the 10th day of January of the year following the year in question and such amount shall be confirmed by the General Partner as soon thereafter as is reasonably practicable. Any distribution made under this Section 6.6 shall be applied against such amounts such Partner is entitled to receive pursuant to Section 6.1 hereof. In the event such Partner receives an amount pursuant to this Section 6.6 which the General Partner in good faith determines is (i) less than the Estimated Tax Liability, then the Partnership shall promptly distribute any shortfall, or (ii) greater than the amount such Partner was entitled to receive pursuant to Section 6.1 hereof, such Partner shall immediately return to the Partnership the difference between the amount received and the amount which should have been distributed. ARTICLE VII. MANAGEMENT; RIGHTS, POWERS, AND OBLIGATIONS OF THE PARTNERS 7.1 Management of the Partnership. Subject to Section 7.2 hereof, the management and control of the Partnership and its business and affairs, and the exercise of the powers of the Partnership described in Section 3.2 hereof, shall be vested in the General Partner. 7.2 Certain Limitations of the General Partner. Without obtaining the affirmative vote of a Majority in Interest of the Class A Limited Partners, voting as a separate class, the General Partner shall not do or permit any of the following acts on behalf of the Partnership unless otherwise specifically stated herein: (i) Act in contravention of this Agreement; (ii) Except as provided in Article X, do any act which would make it impossible to carry on the ordinary business of the Partnership; 11 (iii) Confess a judgment against the Partnership; (iv) Execute or deliver any assignment for the benefit of the creditors of the Partnership; (v) Impose a lien, lease, security interest, easement, liability or otherwise encumber Partnership Property, other than the Senior Security Interest and the Class A Security Interest; or (vi) sell or dispose of all or substantially all of the assets of the Partnership Property in a transaction outside of the Partnership's ordinary course of business, provided that the Partnership shall not be required to obtain such affirmative vote in the event that Mercantile is selling or disposing of all or substantially all of its assets pursuant to the same or a related transaction. 7.3 Meetings of the Partners. (a) Meetings of Partners. Except as otherwise specifically provided in this Agreement, special meetings of the Partners may be called by the General Partner, by written notice to the Partners given not less than ten (10) nor more than sixty (60) days prior to the date of such meeting. Meetings shall be held at such place within or without the State of Delaware as is designated in the notice of the meeting. (b) Quorum. Except as provided in other sections of this Agreement where less than all of the Partners are entitled to vote, the Partners necessary to approve any action to be taken at such meeting must be present for the conduct of business at any meeting of the Partners. (c) Written Consent. Any action of the Partners may be taken without a meeting if the Partners required to approve such action consent thereto in writing. (d) Meeting by Telephone. The meeting of the Partners may be held by telephone conference or similar communications equipment. (e) Proxies. A Partner may authorize one or more Persons to act for such Partner by proxy, provided the proxy is signed by such Partner. A proxy shall not be valid after the expiration of one (1) year from its date. (f) Waiver of Notice. Any notice required under this Agreement for the holding of meetings of the Partners may be waived by any Partner by an instrument in writing signed by such Partner either before or after the meeting to which such waiver relates. 7.4 Voting by the Partners. Unless otherwise stated in this Agreement, an affirmative vote of a Majority in Interest of the Limited Partners, voting as a class, shall be required to adopt any matter subject to a vote of the Limited Partners. 12 7.5 Independent Activities. Subject to any other agreement among the parties, Partners and Affiliates of Partners may, notwithstanding the existence of this Agreement, engage in whatever activities they choose without having or incurring any obligation to offer any interest in such activities to the Partnership or any Partner, and neither this Agreement nor any activity undertaken pursuant hereto shall prevent the Partners or any Affiliate of a Partner from engaging in any activity, or require the Partners or any Affiliate of a Partner to permit the Partnership or any Partner to participate therein. 7.6 Execution of Agreements and Instruments. Any agreement or instrument may be executed on behalf of the Partnership by the General Partner or as otherwise authorized by the General Partner. 7.7 Holding of Assets. All Partnership Property, whether real, personal or mixed, owned by the Partnership shall be held in the name of the Partnership. 7.8 Prior Expenses. To the extent expenses have been incurred in connection with the Partnership prior to the date of this Agreement, the Partnership shall pay such expenses or shall reimburse the General Partner or any other Person as appropriate for such expenses if already paid. ARTICLE VIII. TRANSFER OF INTERESTS IN THE PARTNERSHIP 8.1 Prohibited Transfers. Neither the General Partner nor any of the Limited Partners may sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or transfer or in any manner encumber, his or its Partnership Interest or any part thereof except as permitted in this Article VIII, and any act in violation of this Article VIII shall not be binding upon or recognized b, the Partnership regardless of whether the General Partner shall have knowledge thereof. 8.2 General Partner. (a) Upon the withdrawal, retirement, resignation, removal, death, insanity, dissolution or bankruptcy of a General Partner (the "Terminating General Partner") and the continuation of the business of the Partnership by the remaining General Partner[] (or if there is no remaining General Partner, a newly appointed General Partner, appointed upon the consent of a Majority in Interest of the Limited Partners), the Partnership Interest of such Terminating General Partner shall be converted to a Limited Partnership Interest; provided, however, that the distributions, Profits and Losses to which the Terminating General Partner shall be entitled shall not be changed from those to which the Terminating General Partner was entitled while a General Partner. (b) Until the dissolution and liquidation of the Partnership, no General Partner shall voluntarily withdraw, retire or resign from the Partnership without the consent of the then-remaining General Partners, or if there is no other General Partner, of a Majority in Interest of the Limited Partners. Although such withdrawal, retirement or resignation in breach of this Subsection 8.2(b) may not be enjoined, such General Partner shall be liable in damages to the 13 Partnership for such breach. A sole remaining General Partner seeking to withdraw, may do so only upon obtaining the prior written approval of a Majority-in-Interest of the Limited Partners. 8.3 Limited Partners. (a) The General Partner may (1) pursuant to this Section 8.3, admit as a substituted Limited Partner any successor in interest to a Limited Partner either deceased or under legal disability, and (2) pursuant to this Section 8.3 admit as substituted Limited Partners assignees of Limited Partners: (i) A substituted Limited Partner is a person admitted to all the rights of a Limited Partner; (ii) An assignee is a person to whom a Limited Partner has assigned his Interest in the Partnership but who has not become a substituted Limited Partner. An assignee shall have no right to require any information or accounting of the Partnership's transactions or to inspect the Partnership's books but shall only be entitled to receive the share of the distributions and allocations to which his assignor would otherwise be entitled as set forth in Article VI. (b) No assignee of the whole or any portion of a Limited Partner's Interest shall have the right to become a substituted Limited Partner in place of his assignor or have any other rights of a Limited Partner hereunder unless all of the following conditions are satisfied: (i) The written consent of the General Partner to such substitution shall be obtained, the granting or denial of which shall be within the sole and absolute discretion of the General Partner; (ii) A duly executed and acknowledged written instrument of assignment has been filed with the Partnership which sets forth the intention of the assignor that the assignee become a substituted Limited Partner in his place; (iii) The assignor and assignee execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such admission, including, without limitation, an opinion of counsel, acceptable to the General Partner, to the effect that the assignment of the interest will not violate the applicable provision of the Securities Act of 1933 and any applicable state securities laws, the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment, and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Paragraph 12 hereof; and (iv) A transfer fee not to exceed $300.00 per transaction has been paid to the Partnership. 14 (c) Any person admitted to the Partnership as a Substituted Limited Partner shall be subject to all of the provisions of this Agreement as if originally a party to it. (d) Subject to the provisions of subparagraph 8.3(j) hereof, compliance with the suitability standards imposed by the Partnership, applicable "blue sky" laws, if any, and the rules of any other applicable governmental authority and subject to the written consent of the General Partner (except that assignments to heirs and personal representatives may be made without consent upon the death of a Limited Partner), a Limited Partner shall have the right to assign all or a portion of his Interest by a written assignment, the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been duly executed by the assignor and received by the Partnership and recorded on the books thereof. Any assignment in contravention of any of the provisions of this Subsection 8.3(d) shall be of no force and effect and shall not be binding upon or recognized by the Partnership. THE INTERESTS EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THE INTERESTS ACQUIRED BY LIMITED PARTNERS MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE INTERESTS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH STATE LAWS AS MAY BE APPLICABLE, OR AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP THAT SUCH REGISTRATION IS NOT REQUIRED. (i) Except as provided in Subsections 8.3(h), 8.3(i) and 8.3(j), an assignee of an Interest shall be entitled to receive distributions of cash or other property from the Partnership attributable to the Interest acquired by reasons of such assignment from and after the effective date of the assignment of an Interest to him. The "effective date" of an assignment of an Interest shall be the last day of the calendar month in which the written instrument of assignment, in form and substance satisfactory to the General Partner, is received and approved by the General Partner. (ii) Anything contained herein to the contrary notwithstanding, both the Partnership and the General Partner shall be entitled to treat the assignor of a Partnership Interest as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash or other property made in good faith to him until such times as the written assignment has been received by, and recorded on the books of the Partnership, in accordance with the provisions of Subsection 8.3(d)(i). (e) The General Partner may elect to treat an assignee who has not become a substituted Limited Partner as a substituted Limited Partner in the place of his assignor, should it deem, in its sole and absolute discretion, that such treatment be in the best interest of the Partnership for any of its purposes or for any of the purposes of this Agreement. (f) No consent of any of the Limited Partners is required to elect the substitution of a Limited Partner, except that a Limited Partner who assigns his Interest shall, in 15 order for the assignee to be admitted as a substituted Limited Partner, evidence his intention that the assignee be admitted as a substituted Limited Partner in his place and must execute such instruments as the General Partner shall, in its sole and absolute discretion, determine to be necessary or desirable in connection therewith. (g) The General Partner shall be required to amend this Agreement only quarterly but may, in its sole and absolute discretion, within a reasonable time after the date of their written consent to the substitution of an assignee as a substituted Limited Partner, amend this Agreement to reflect the addition of said assignee as a Limited Partner. Neither copies of this Agreement nor any amendment thereto need be delivered to any of the Limited Partners and such requirement in any statute is hereby waived. However, upon request, the General Partner will promptly thereafter furnish the requesting Limited Partner with a copy of this Agreement and any amendments thereto as of the date of request. (h) Upon the death or legal incompetency of an individual Limited Partner, his personal representative shall have all of the rights of a Limited Partner for the purpose of settling or the managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of his Interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner. However, such personal representative shall not have the right to become a substituted Limited Partner in the place of his predecessor in interest unless the conditions of this Article VIII are first satisfied (except with respect to the requirement that the assignor execute and acknowledge instruments). (i) Upon the bankruptcy, dissolution or other cessation to exist as a legal entity of a General or Limited Partner, not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner for the purpose of effecting the orderly winding up and the disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner. However, such personal representative shall not have the right to become a substituted Limited Partner in the place of his predecessor in interest unless the conditions of this paragraph are first satisfied (except with respect to the requirement that the assignor execute and acknowledge instruments). (j) No assignment or transfer of an interest in the Partnership may be made which would result in the termination of the Partnership under Section 708 of the Code. ARTICLE IX. WITHDRAWAL AND REMOVAL OF A PARTNER 9.1 Withdrawal. No Partner may withdraw or resign voluntarily from the Partnership. 9.2 Removal of a Limited Partner. Upon the occurrence of any of the following events (each, a "Removal Event"), the Partnership shall have the option (but not the obligation) to remove a Limited Partner. A Limited Partner may only be removed pursuant to this Section 9.2 in the event of: 16 (a) The dissolution, termination, or Bankruptcy of the Limited Partner; (b) Any assignment or attempted assignment of the Interest of a Limited Partner or attempted withdrawal of the Limited Partner contrary to this Agreement; or (c) The material breach of this Agreement by the Limited Partner that is not cured (if such material breach is capable of being cured) within thirty (30) days of the receipt of notice form the General Partner of the occurrence of such material breach. 9.3 Death or Disability of a Limited Partner. In the event of the death or Disability of an individual Limited Partner, the Partnership shall have the assignable option (but not the obligation) to acquire all or any portion of such Limited Partner's Interest by notifying the Limited Partner, the Limited Partner's estate or the Limited Partner's representative, as the case may be, within ninety (90) days of the date of death or determination of Disability of such Limited Partner of the Partnership's intention to acquire the Interest of such Limited Partner in the Partnership. The price and terms of purchase pursuant to which the Partnership shall be entitled to exercise the option granted in this Section 9.3 shall be those set forth in Section 9.4 hereof. 9.4 Effect of Removal. If the Partnership exercises the options described in Sections 9.2 or 9.3, then the Partnership shall redeem the removed Partner's Interest for the purchase price (the "Purchase Price") determined under Section 9.5 to be paid on the terms described in Section 9.6. 9.5 Valuation of the Interest of a Partner. For purposes of this Article IX, the Purchase Price for a removed, deceased or Disabled Limited Partner's Interest shall be the value of such Limited Partner's Interest determined as follows: (a) The General Partner shall select an independent, third-party appraiser, experienced in appraising limited partnership interests similar to the Interests (the "Appraiser"). The Appraiser will determine the value of the Limited Partner's Interest as of the end of the calendar month immediately preceding the Removal Event based upon the value of the Partnership's assets net of liabilities assuming all assets were sold at such value and all liabilities were satisfied by cash payments at their present value and any resulting deem Profit or Loss was allocated to the Partners pursuant to the terms of this Agreement. The determination of the value of a Limited Partner's Capital Account shall assume the going concern of the Partnership and shall not take into account minority discounts for the Capital Account being valued. The date on which the Capital Account is to be valued pursuant to this Section shall be referred to herein as a "Valuation Date." The Appraiser shall within sixty (60) days of the Removal Event prepare a statement and report of the amount of the Limited Partner's Capital Account as of the Valuation Date. A copy of such statement and report will be forwarded to each Partner. (b) The Partnership's name and goodwill shall, as among the Partners, be deemed to have no value and shall belong to the Partnership, and no Partner shall have any right or claim individually to the use thereof. 17 9.6 Payments to a Removed Limited Partner. The Purchase Price, as determined under Section 9.5, shall be paid to the removed, deceased or Disabled Limited Partner, or its successor in interest as follows: (a) Ten percent (10%) in cash or immediately available funds by the ninetieth (90th) day following the date of the Removal Event, death or Disability (the "Closing Date"), and (b) The balance of principal together with interest on the unpaid principal balance at a rate of interest equal to the Prime Rate in effect on the business day prior to the Closing Date in twelve (12) equal installments, payable each March 31, June 30, September 30 and December 31, commencing on the first March 31, June 30, September 30 or December 31 following the Closing Date; provided, however, that (i) the Partnership may, at any time and from time to time at its sole option and election, without penalty or premium, repay the balance, in whole or in part, and (ii) the balance shall become immediately due and payable (A) if any installment of the balance shall not have been paid when due and the Partnership shall have failed to cure such default within ten (10) days after the Partnership's receipt of a written notice of such default or (B) if the Partnership is dissolved. ARTICLE X. DISSOLUTION AND WINDING UP OF THE PARTNERSHIP 10.1 Dissolution of the Partnership. The Partnership shall be dissolved upon the first to occur of any of the following events: (a) An order by a court of competent jurisdiction decrees that the Partnership be dissolved; (b) The determination of the General Partners and a Majority in Interest of the Limited Partners to dissolve; or (c) The sale or other disposition of all or substantially all of the assets of the Partnership. The occurrence of any Removal Event of any Limited Partner shall not cause the dissolution of the Partnership. 10.2 Winding Up of the Partnership. Upon a dissolution of the Partnership, the General Partner or other Person appointed by the General Partner, shall take full account of the Partnership's assets and liabilities and the assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof and as shall be necessary to timely make the distributions below described, and the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in the following order: 18 (a) First, to the payment and discharge of all of the Partnership's debts and liabilities other than liabilities owing to the Partners, including establishment of any necessary contingency reserves; (b) Then, in accordance with Section 6.1 (b). (b) Unreturned Capital Balance Unreturned Capital Balance 10.3 Distribution In Kind. Any Partnership Property distributed in kind in the liquidation shall be valued and treated pursuant to Section 9.5. The difference between the value of any item of Partnership Property distributed in kind and its book value shall be treated as a gain or loss on the disposition of Partnership Property and shall be allocated among the Partners as provided in Article VI. ARTICLE XI. BOOKS OF ACCOUNTS, ACCOUNTING, REPORTS, FISCAL YEAR, BANKING AND TAX MATTERS PARTNER 11.1 Accounting, Books and Records. The Partnership shall maintain at its principal place of business or such other places as the General Partner shall determine books of account for the Partnership which shall show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received, and all income derived in connection with the conduct of the Partnership and the operation of its business in accordance with generally accepted accounting principles consistently applied and, to the extent inconsistent therewith in accordance with this Agreement. The Partnership shall use the accrual method of accounting in preparation of its annual reports and for tax purposes and shall keep its books and records accordingly. Each Partner or its designated representative shall have the right, during ordinary business hours, to have access to, inspect and copy, at its sole expense, the contents of such books or records. 11.2 Other Records. (a) The Partnership shall maintain at its principal place of business the following: (i) A current list of the full names and last known business address of each Partner; (ii) A copy of the Certificate of Limited Partnership, all amendments thereto, and executed copies of any powers of attorney pursuant to which the same have been executed; (iii) A copy of this Agreement, all amendments thereto, and executed copies of any written powers of attorney pursuant to which the same have been executed; 19 (iv) Copies of any federal, state, and local income tax returns and reports of the Partnership for the three most recent years; and (v) Copies of any financial statements of the Partnership for the three most recent years. (b) Except as otherwise set forth herein, each Partner shall have the right, exercisable upon written demand, to examine the items described in Section 11.2(a) during ordinary business hours and for any purpose reasonably related to the Partner's Interest in the Partnership (which purpose must be stated in the written demand), and shall have the right, at its own expense, to make copies of all such items. 11.3 Reports. (a) The General Partner shall be responsible for the preparation of financial reports of the Partnership and the coordination of financial matters of the Partnership with the Accountant. (b) Within 90 days after the end of each fiscal year, the General Partner shall transmit to each Partner financial statements based upon the annual audit of the books and financial records of the Partnership, prepared in accordance with generally accepted accounting principles, and, to the extent inconsistent therewith, in accordance with this Agreement, including the following: (i) A copy of the balance sheet of the Partnership as of the last day of such fiscal year; (ii) A statement of income or loss for the Partnership for such fiscal year; (iii) A statement of the Partners' Capital Accounts and changes therein for such fiscal year; and (iv) A statement of Partnership cash flow for such fiscal year. (c) Within ninety (90) days after the end of each fiscal year, the General Partner shall transmit to each Partner a report indicating such Partner's share of all items of income or gain, expense, loss or other deduction and tax credit of the Partnership for such fiscal year, and such additional information to enable the Partners to complete their respective tax returns. (d) The General Partner shall transmit to the Limited Partners such other reports and information as the Limited Partners may reasonably request. 11.4 Fiscal Year. The fiscal year of Partnership shall be the calendar year. 20 11.5 Partnership Funds. All funds of the Partnership shall be deposited in its name in a separate bank account or accounts or in an account or accounts of a savings and loan association or brokerage firm as shall be determined by the General Partner. 11.6 Tax Matters Partner. The General Partner shall serve as the Partnership's "tax matters partner" (as such term is defined in the Code). In such capacity, the Tax Matters Partner is hereby authorized and empowered to act for and represent the Partnership and each of the Partners before (i) the Internal Revenue Service ("Service") in any audit or examination of any Partnership tax return, and (ii) any court selected by the Partners for judicial review of any adjustment assessed by the Service. The Partners specifically acknowledge, without limiting the general applicability of this Section, that the Tax Matters Partner shall not be liable, responsible or accountable in damages or otherwise to the Partnership or any Partner with respect to any action taken by him in his capacity as the Tax Matters Partner, provided he used reasonable business judgment with respect to the action taken. All out-of-pocket expenses incurred by the Tax Matters Partner in his capacity as the Tax Matters Partner shall be considered expenses of the Partnership for which the Tax Matters Partner shall be entitled to full reimbursement. ARTICLE XII. INDEMNIFICATION 12.1 Indemnification. (a) General Provisions. Except as otherwise set forth herein, the Partner and their members, partners, Affiliates, directors, officers, agents and employees and the members of the Governance Committee (herein referred to as an "Indemnitee"), shall be indemnified, held harmless and defended by the Partnership (out of Partnership assets, including the proceeds of liability insurance) against any claim, demand, controversy, dispute, cost, loss, damage, expense (including reasonable attorneys' fees), judgment and/or liability incurred by or imposed upon the Indemnitee in connection with any action, suit or proceeding (including any proceeding before any administrative or legislative body or agency) to which the Indemnitee may be a party or otherwise involved, or with which the Indemnitee may be threatened, by reason of any action or omission of the Indemnitee (or the Indemnitee's employee) in connection with the conduct of Partnership affairs. Such indemnification extends to the Indemnitee in its capacity, at the time the cause of action arose or thereafter, as general partner, member of any committee or as a member, Affiliate, director, officer, partner, employee or other agent of any other organization in which the Partnership owns an interest or of which the Partnership is a creditor, which other organization the Indemnitee (or its employee) serves in such capacity at the request of the Partnership (whether or not the Indemnitee or its employee continues to serve in such capacity at the time such action, suit or proceeding is brought or threatened). The indemnification set forth herein shall not extend with respect to actions or omissions of the Indemnitee (or its employee) which shall have been finally adjudicated (by settlement or otherwise) in any such action, suit or proceeding to have constituted actual fraud, willful misconduct or gross negligence. In the event of settlement of any action, suit or proceeding brought or threatened, such indemnification shall apply to all matters covered by the settlement. The foregoing right of indemnification shall be in addition to any rights to which any Indemnitee may otherwise be entitled and shall inure to the 21 benefit of the executors, administrators, personal representatives, successors or assigns of each such Indemnitee. (b) Advance Payment of Expenses. The Partnership shall pay the expenses incurred by an Indemnitee in defending a civil or criminal action, suit or proceeding, or in opposing any claim arising in connection with any potential or threatened civil or criminal action, suit or proceeding, in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by such Indemnitee to repay such payment if he shall be determined to be not entitled to indemnification therefore as provided herein; provided, however, that in such instance the Indemnitee is not commencing an action, suit, or proceeding against the Partnership, or defending an action, suit or proceeding commenced against him by the Partnership or any Partner thereof or opposing a claim by the Partnership or any Partner thereof arising in connection with any such potential or threatened action, suit or proceeding. (c) Insurance. The Partnership may purchase and maintain insurance with such limits or coverages as the General Partner reasonably deems appropriate, at the expense of the Partnership and to the extent available, for the protection of any Indemnitee against any liability incurred by such Indemnitee in any such capacity or arising out of his status as such, whether or not the Partnership has the power to indemnify such Indemnitee against such liability. The Partnership may purchase and maintain insurance for the protection of any officer, director, employee, consultant or other agent of any other organization in which the Partnership owns an interest or of which the Partnership is a creditor against similar liabilities, whether or not the Partnership has the power to indemnify him or it against such liabilities. Any amounts payable by the Partnership to an Indemnitee pursuant to the provisions of Section 12.1(a) above shall be payable first from the proceeds of any insurance recovery pursuant to policies purchased by the Partnership and then from the other assets of the Partnership; provided, that the foregoing shall not affect the Partnership's obligation to advance expenses pursuant to Section 12.1(b) hereof in circumstances in which the insurance Partnership who has issued such policy will not advance such expenses. ARTICLE XIII. MISCELLANEOUS 13.1 Agreement for Further Execution. The Partners agree to sign, swear or acknowledge any certificates or filings required by the laws of the State of Delaware or any other state, to sign, swear or acknowledge any amendment or cancellation of such certificate or filings whether or not such amendment or cancellation is required by law; to sign, swear or acknowledge such other certificates, filings, documents or affidavits of assumed name, trade name or the like (and any amendments or cancellations thereof that may be required for conduct of the Partnership's business) and to cause the filing of any of the same for record wherever such filing shall be required by law. This Section 13.1 shall not prejudice or affect the rights of the Partners to approve certain amendments to this Agreement as herein provided. 13.2 Amendments. 22 (a) Except as otherwise provided in this Agreement, no alteration, modification or amendment of this Agreement shall be made unless in writing and signed (in counterpart or otherwise) by the General Partner and a Majority in Interest of the Limited Partners, except that no alteration, modification or amendment of any Section hereof which would materially and adversely affect the economic interests of one or more (but not all) of the Limited Partners may be made (except as provided below) without the unanimous consent of all Limited Partners so adversely affected. Notwithstanding the foregoing, no increase in the amount required to be contributed to the Partnership by the Partners, other than as required herein or under applicable law, may be made without the consent of all the Partners. (b) Any provision to the contrary contained herein notwithstanding, the General Partner may, without the consent or approval of any Partners, make such amendments to this Agreement binding on the Partners, (i) to correct a typographical error, cure any ambiguity, correct or supplement any provision herein which may be inconsistent with any other provisions herein, (ii) to make any other amendment if such amendment is not adverse to the interests of the Limited Partners as a whole or as a class or if such amendment benefits the Limited Partners as a whole or as a class; and (iii) to reflect the addition of Limited Partners pursuant to Section 5.2; provided, however, that no amendment shall be adopted pursuant to this Section 13.2(b) unless the adoption thereof does not affect the status of the Partnership as a partnership for federal income tax purposes. 13.3 Notices. (a) Any notice to be given under this Agreement shall be made in writing and sent by express, registered or certified mail, return receipt requested, postage prepaid, fax, or commercial delivery service, addressed as set forth below: (i) If to the General Partner or the Partnership: One Belmont Avenue Suite 417 Bala Cynwyd, PA 19004 with a copy to: Klehr, Harrison, Harvey, Branzburg & Ellers LLP 260 S. Broad Street Philadelphia, PA 19102 Attn.: Lawrence D. Rovin (ii) If to any Partner, such notice shall be mailed to the address of the Partner appearing on the records of the Partnership. (b) Any Partner may change the address to which notice is to be sent by giving notice of such change to the Partnership in conformity with this Section 13.3. 23 (c) Any such notice shall be deemed to be delivered, given and received for all purposes as of the date delivered if delivered by a commercial delivery service or by confirmed fax, or as of the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, if sent by express, registered or certified mail. 13.4 Governing Law and Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware as interpreted by the courts of said Commonwealth, notwithstanding any rules regarding choice of law to the contrary. The parties to this Agreement agree to the exclusive jurisdiction of the courts of New Castle County, Delaware and the Federal courts of the District of Delaware for resolution of controversies arising out of or relating to this Agreement and any related instruments, agreements or documents. 13.5 Binding Nature of Agreement. Except as otherwise provided, this Agreement shall be binding upon and inure to the benefit of the Partners and their personal representatives, successors and assigns. 13.6 Additional Partners. Each substitute, additional or successor Partner shall become a signatory hereof by signing such number of counterparts of this Agreement and such other instrument or instruments and in such manner, as the General Partner shall determine. By so signing, each substitute, additional or successor Partner, as the case may be, shall be deemed to have adopted and to have agreed to be bound by all the provisions of this Agreement; provided, however, that no such counterpart shall be binding until it shall have been signed by the Partnership. 13.7 Validity. In the event that all or any portion of any provision of this Agreement shall be held to be invalid, the same shall not affect in any respect whatsoever the validity of the remainder of this Agreement. 13.8 Entire Agreement. This Agreement and the agreements attached hereto as Exhibits constitute the entire understanding and agreement among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as contained herein. 13.9 Indulgences, Etc. Neither the failure nor any delay on the part of any party hereto to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and signed by the party asserted to have granted such waiver. 24 13.10 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of such shall together constitute one and the same instrument. 13.11 Paragraph. The paragraph headings in this Agreement are for convenience only, form no part of this Agreement, and shall not affect its interpretation. 13.12 Number of Days. In computing the number of days for the purpose of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday, then such final day shall be deemed to be the next day which is not a Saturday, Sunday or holiday. 13.13 Interpretation. No provision of this Agreement is to be interpreted for or against any party because that party or that party's legal representative drafted such provision. 13.14 Corporate Authority. Any corporation or trust signing this Agreement represents and warrants that the execution, delivery and performance of this Agreement by such corporation or trust has been duly authorized by all necessary corporate or trustee action. 13.15 Third Party Beneficiaries. Notwithstanding anything herein to the contrary, no provision of this Agreement is intended to benefit any party other than the Partners hereto and their successors and assigns in the Partnership and shall not be enforceable by any other party. 13.16 Appointment of Attorney-in-fact. Each Partner hereby irrevocably constitutes and appoints the General Partner its true and lawful attorney-in-fact, with full power of substitution, and with the General Partner having full power and authority in its name, place and stead to execute, acknowledge, deliver, swear to, file and record with the appropriate public offices such certificates, instruments and documents as may be necessary or appropriate to carry out the provisions of this Agreement or effectuate any action taken by or on behalf of the Partnership, including, but not limited to, any amendments to this Agreement or the Certificate of Limited Partnership approved by the Partners as provided herein. The appointment by the Partners of the General Partner as attorney-in-fact shall be deemed to be a power coupled with an interest, in recognition of the fact that each of the Partners under this Agreement will be relying upon the power of the General Partner to act as contemplated by this Agreement in any filing and other action by the General Partner on behalf of the Partnership and, shall to the fullest extent permitted by applicable law, survive the Bankruptcy, death or incompetency of any Partner hereby giving such power. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 25 IN WITNESS WHEREOF, the undersigned have set their hands and seals as of the day and year first above written. GENERAL PARTNER: KNOX MISS., LLC By: ----------------------------------- Name: Title: LIMITED PARTNER: EXPRESSION GRAPHICS, INC. By: ----------------------------------- Name: Title: EXHIBIT A PARTNERS AS OF _____________, 2002
- ------------------------------ -------------------------------------- -------------------------------------- Capital Percentage Contribution Interest - ------------------------------ -------------------------------------- -------------------------------------- Limited Partners: - ------------------------------ -------------------------------------- -------------------------------------- Expressions Graphics, Inc. $2,712,675 99.0% One Belmont Avenue Suite 417 Bala Cynwyd, PA 19004 - ------------------------------ -------------------------------------- -------------------------------------- General Partner: - ------------------------------ -------------------------------------- -------------------------------------- Knox Miss., LLC $27,325 1.0% One Belmont Avenue Suite 417 Bala Cynwyd, PA 19004 - ------------------------------ -------------------------------------- --------------------------------------
EXHIBIT B SPECIAL ALLOCATIONS 1. Special Tax Allocations. (a) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Regulations Section 1.704-1 (b)(2)(ii)(d)(4),(5), or (6), items of Partnership income and gain shall be specially allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible, provided that an allocation pursuant to this Section 1(a) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in Article VI hereof have been tentatively made as if this Section 1(a) were not in the Agreement. (b) 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 the sum of (i) the amount such Partner is obligated to restore, and (ii) the amount such Partner is deemed to be obligated to restore pursuant to the next to last sentences of Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such 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 1(b) shall be made if and only 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 6 have been tentatively made as if Section 1(a) hereof and this Section 1(b) were not in the Agreement. (c) Partnership Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of Article VI hereof if there is a net decrease in Partnership Minimum Gain during any fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Section 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section 1(c) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith. (d) Partner Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of Article VI hereof, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Partnership income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Section 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Section 1(d) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith. (e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal year shall be specially allocated among the Partners in proportion to their Limited Partnership Interests. (f) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Fiscal year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). (g) Code Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required 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 increased 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 1.704-1(b)(2)(iv)(m) of the Regulations. (h) Curative Allocations. The Regulatory Allocations consist of the allocations pursuant to Sections 1(a) through 1(g) hereof. Notwithstanding any other provision of this Agreement, the Regulatory Allocations shall be taken into account in allocating items of income, gain, loss and deduction among the Partners so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each Partner if the Regulatory Allocations had not occurred. 2. Other Allocations Rules. (a) For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly or other basis, as determined by the General Partner using any permissible method under Code Section 706 and the Regulations thereunder. (b) Except as otherwise provided in this Agreement, all items of Partnership income, gain, loss, deductions, and any other allocations not otherwise provided for shall be divided among the Partners in the same proportions as they share Profits or Losses, as the case may be, for the year. (c) The Partners are aware of the income tax consequences of the allocations made by this Exhibit B and hereby agree to be bound by the provisions of this Exhibit B in reporting their shares of Partnership income and loss for income tax purposes. 3. Tax Allocations: Code Section 704(c). In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value. In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to this Agreement, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. EX-10.15 5 doc4.txt Exhibit 10.15 LIMITED PARTNERSHIP AGREEMENT OF LOUISIANA SHELF PARTNERS, L.P. December 31, 2002 Table of Contents
Page ARTICLE I. DEFINITIONS...........................................................................................1 ARTICLE II. ORGANIZATION.........................................................................................6 2.1 Name................................................................................................6 2.2 Place of Business...................................................................................6 2.3 Registered Office...................................................................................6 ARTICLE III. PURPOSE.............................................................................................6 3.1 Purpose.............................................................................................6 3.2 Powers of Partnership...............................................................................6 ARTICLE IV. TERM.................................................................................................7 ARTICLE V. CONTRIBUTIONS TO CAPITAL AND STATUS OF PARTNERS.......................................................7 5.1 Interests...........................................................................................7 5.2 Capital Contributions...............................................................................7 5.3 Additional Limited Partners.........................................................................9 ARTICLE VI. DISTRIBUTIONS; ALLOCATION OF PROFITS AND LOSSES; CAPITAL ACCOUNTS...................................10 6.1 Cash Available for Distribution....................................................................10 6.2 Allocation of Profits..............................................................................10 6.3 Allocation of Losses...............................................................................11 6.4 Special Tax Allocations; Other Allocation Rules; Tax Allocations: Code Section 704(c)..............12 6.5 Allocations in the Event of Transfer...............................................................12 6.6 Capital Accounts...................................................................................12 6.7 Tax Distributions..................................................................................13 ARTICLE VII. MANAGEMENT; RIGHTS, POWERS, AND OBLIGATIONS OF THE PARTNERS........................................13 7.1 Management of the Partnership......................................................................13 7.2 Certain Limitations of the General Partner.........................................................13 7.3 Meetings of the Partners...........................................................................14 7.4 Voting by the Partners.............................................................................14 7.5 Independent Activities.............................................................................14 7.6 Execution of Agreements and Instruments............................................................14 7.7 Holding of Assets..................................................................................15 7.8 Fees and Expenses..................................................................................15 ARTICLE VIII. TRANSFER OF INTERESTS IN THE PARTNERSHIP..........................................................15 8.1 Prohibited Transfers...............................................................................15 8.2 Limited Partners...................................................................................15
(i)
ARTICLE IX. DISSOLUTION AND WINDING UP OF THE PARTNERSHIP.......................................................18 9.1 Dissolution of the Partnership.....................................................................18 9.2 Winding Up of the Partnership......................................................................18 9.3 Distribution In Kind...............................................................................18 ARTICLE X. BOOKS OF ACCOUNTS, ACCOUNTING, REPORTS, FISCAL YEAR, BANKING AND TAX MATTERS PARTNER.................19 10.1 Accounting, Books and Records.....................................................................19 10.2 Other Records.....................................................................................19 10.3 Reports...........................................................................................20 10.4 Fiscal Year.......................................................................................20 10.5 Partnership Funds.................................................................................20 10.6 Tax Matters Partner...............................................................................20 ARTICLE XI. INDEMNIFICATION.....................................................................................21 11.1 Indemnification...................................................................................21 ARTICLE XII. MISCELLANEOUS......................................................................................22 12.1 Agreement for Further Execution...................................................................22 12.2 Amendments........................................................................................22 12.3 Notices...........................................................................................23 12.4 Governing Law and Jurisdiction....................................................................23 12.5 Binding Nature of Agreement.......................................................................23 12.6 Additional Partners...............................................................................23 12.7 Validity..........................................................................................24 12.8 Entire Agreement..................................................................................24 12.9 Indulgences, Etc..................................................................................24 12.10 Execution in Counterparts........................................................................24 12.11 Paragraph........................................................................................24 12.12 Number of Days...................................................................................24 12.13 Interpretation...................................................................................24 12.14 Corporate Authority..............................................................................24 12.15 Third Party Beneficiaries........................................................................24 12.16 Appointment of Attorney-in-fact..................................................................25
Exhibit A - Partners Exhibit B - Special Allocations (ii) LIMITED PARTNERSHIP AGREEMENT OF LOUISIANA SHELF PARTNERS, L.P. THIS LIMITED PARTNERSHIP AGREEMENT is entered into effective as of December 31, 2002, by and among LS GAS, LLC (the "General Partner") and those persons listed as Limited Partners on Exhibit A attached hereto, as amended from time to time after the date hereof. Intending to be legally bound, the parties hereto agree as follows: ARTICLE I. DEFINITIONS Capitalized terms used in this Agreement and not defined elsewhere herein shall have the following meanings: "Act" means the Delaware Revised Uniform Limited Partnership Act, as amended from time to time. "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 next to last sentences of Regulations Sections 1.704-(2)(g)(1) and 1.704-2(i)(5); and (ii) debit to such Capital Account the items described in Sections 1.704-1 (b)(2)(ii)(d)(4), (5), and (6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. An "Affiliate" (whether or not capitalized) of, or a Person, association, partnership or corporation "affiliated" with, a specified Person, association, partnership or corporation, is a Person, association, partnership or corporation that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, the specified Person, association, partnership or corporation. "Agreement" means this limited partnership agreement, as the same may be amended from time to time. "Appraiser" has the meaning set forth in Section 9.3 of this Agreement. "Bankruptcy" means, with respect to any Person, a "Voluntary Bankruptcy" or an "Involuntary Bankruptcy." A "Voluntary Bankruptcy" means, with respect to any Person, the inability of such Person generally to pay its debts as such debts become due, or an admission in writing by such Person of its inability to pay its debts generally or a general assignment by such Person for the benefit of creditors; the filing of any petition or answer by such Person seeking to adjudicate it a bankrupt or insolvent, or seeking for itself any liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of such Person or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking, consenting to, or acquiescing in the entry of an order for relief or the appointment of a receiver, trustee, custodian, or other similar official for such Person or for any substantial part of its property, or corporate action taken by such Person to authorize any of the actions set forth above. An "Involuntary Bankruptcy" means, with respect to any Person, without the consent or acquiescence of such Person, the entering of an order for relief or approving a petition for relief or reorganization or any other petition seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution, or other similar relief under any present or future bankruptcy, insolvency or similar statute, law, or regulation, or the filing of any such petition against such Person which petition shall not be dismissed within ninety (90) days, or, without the consent or acquiescence of such Person, the entering of an order appointing a trustee, custodian, receiver, or liquidator of such Person or of all or any substantial part of the property of such Person which order shall not be dismissed within sixty (60) days. "Capital Account" means, with respect to any Partner, such Partner's Capital Account determined in accordance with Section 6.6. "Capital Contribution" means, with respect to any Partner, the amount of money contributed to the Partnership by such Partner pursuant to Section 5.2. "Cash Available for Distribution" for any fiscal year or other period means the excess of (a) the amount of gross cash receipts of any kind received by the Partnership (including from any reserves previously established which the General Partner determines are no longer required by the Partnership) over (b) the sum of (i) Operating Expenses, (ii) any reserves established or increased by the General Partner which it deems reasonably necessary for the operation of the Partnership, including reserves for working capital and maturing debt obligations and other cash requirements of the Partnership, (iii) amounts received by the Partnership as Capital Contributions and (iv) payments of the principal amount of indebtedness of the Partnership. "Certificate of Limited Partnership" means the Partnership's Certificate of Limited Partnership filed with the Secretary of State of the State of Delaware, as the same may be amended from time to time. "Class A Interests" has the meaning set forth in Section 5.1 of this Agreement. "Class A Limited Partner" has the meaning set forth in Section 5.1 of this Agreement. "Class A Preferred Return" means an amount equal to a twenty-five percent (25%) annual return, compounded annually, on each Class A Limited Partner's Unreturned Capital. The Class A Preferred Return shall begin to accrue on the date a Capital Contribution is made and shall end 2 when such Class A Limited Partner's Unreturned Capital has been permanently reduced to zero. The Class A Preferred Return shall be calculated whenever an allocation or distribution is to be made under this Agreement, or as otherwise necessary; and the calculation of any such accrued amount shall be done by taking into account all Capital Contributions, as inflows, and all distributions, as outflows, with respect to the Class A Interests and by applying internal rate of return principles to such amounts and the timing of such payments. "Class B Interests" has the meaning set forth in Section 5.1 of this Agreement. "Class B Limited Partner" has the meaning set forth in Section 5.1 of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended. All references herein to Code sections shall include corresponding provisions of future federal tax statutes. "Depreciation" means, for each fiscal year or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable with respect to an asset for such year or other period, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such year or other period, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period bears to such beginning adjusted tax basis; provided, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such year or other period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the General Partner. "General Partner" means LS Gas, LLC "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 fair market value of such asset, as agreed by the contributing Partner and the General Partner; (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 the original purchase at the time of formation of the Partnership) 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 of more than a de minimis amount of Partnership Property (other than cash) as consideration for an Interest in the Partnership; and (c) the liquidation of the Partnership within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g): provided, however, that the adjustments pursuant to clauses (a) and (b) above shall be made only 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; 3 (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 Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and Section 6.3(h) hereof, provided, however, that Gross Asset Values shall not be adjusted pursuant hereto to the extent the General Partner determines that an adjustment pursuant hereto is necessary or appropriate in connection with a transaction that would otherwise result in an adjustment pursuant hereto; and (v) .If the Gross Asset Value of an asset has been determined or adjusted pursuant hereto, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses. "Indemnitee" has the meaning set forth in Section 11.1(a) of this Agreement. "Interest" means a Partner's economic rights and other interest in the Partnership as a Partner as provided in this Agreement. "Limited Partner" means any person named as a Limited Partner on Exhibit A in his, her or its capacity as a Limited Partner of the Partnership and any other person admitted to the Partnership as a Limited Partner. "Majority in Interest" means with respect to any particular group of Partners, those Partners whose Percentage Interests in the aggregate are greater than fifty percent (50%) of the Percentage Interests owned by all of the Partners within the group. "Nonrecourse Deductions" has the meaning set forth in Section 1.704-2(b)(1) of the Regulations. "Nonrecourse Liability" has the meaning set forth in Section 1.704-2(b)(3) of the Regulations. "Operating Expenses" means cash disbursements for operating expenses of, and proper payments by, the Partnership, including, but not limited to (i) legal representation relating to the Partnership, (ii) accounting and tax preparation, (iii) amounts paid to satisfy the Partnership's obligations with respect to working interests in oil and gas wells held by the Partnership, and (iv) accrued interest payable in cash on the principal amount of all loans or other indebtedness of the Partnership. "Partner" means the General Partner or any Limited Partner. "Partner Nonrecourse Debt" has the meaning set forth in Section 1.704-2(b)(4) of the Regulations. "Partner Minimum Gain" means an amount, with respect to each Partner Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if such Partner Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations. 4 "Partner Nonrecourse Deductions" has the meaning set forth in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations. "Partnership" means Louisiana Shelf Partners, L.P., a Delaware limited partnership. "Partnership Minimum Gain" has the meaning set forth in Sections 1.704-2(b)(2) and 1.704-2(d) of the Regulations. "Partnership Property" means all properties and assets which the Partnership may own or have an interest in from time to time. "Percentage Interest" means the Interest of a Partner expressed as a percentage. The Percentage Interest of each Partner as of the date hereof is as set forth on Exhibit A, including as it may be amended from time to time. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, non-incorporated organization or government or any agency or political subdivision thereof. "Profit or Profits" and "Loss or 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 determined by the Partnership's accountants, in accordance with Code ss.703(a) (for this purpose, all items of income, gain, loss or deduction required to be stated separately pursuant to ss.703(a)(1) of the Code shall be included in Profits or Losses), with the adjustments required to comply with the capital account maintenance rules of Treasury Regulations ss.1.704-1(b)(2)(iv) and the following adjustments: (i) .Any income of the Partnership that is exempt from federal income tax and not otherwise taken into account in computing Profits and Losses shall be added back; (ii) Any expenditures of the Partnership described in ss.705(a)(2)(B) of the Code or treated as ss.705(a)(2)(B) expenditures pursuant to Treasury Regulations ss.1.704(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses, shall be subtracted from such taxable income or loss; (iii) If the Gross Asset Value of any Partnership asset is adjusted pursuant to this Agreement, the amount of such adjustment shall be taken into account in the taxable year as gain or loss from the disposition of such asset for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of Partnership Property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the Partnership Property disposed of, notwithstanding that the adjusted tax basis of such Property differs from its Gross Asset Value; and (v) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such fiscal year or other period, computed in accordance with this Agreement. 5 "Regulations" means the regulations promulgated under the Code, as the same may be amended or supplemented from time to time. "Regulatory Allocations" has the meaning set forth in Section 1(h) of Exhibit B of this Agreement. "Service" has the meaning set forth in Section 10.6 of this Agreement. "Term" has the meaning set forth in Article IV of this Agreement. "Transfer," with respect to any Interest in the Partnership, means any sale, bequest, assignment, pledge, encumbrance or gift thereof, or attempt to deliver a security interest therein, but shall not include a voluntary pledge or assignment pursuant to a written agreement by a Partner of only the rights to recover proceeds as distributed by the Partnership with respect to any Interest nor shall include a collateral assignment of one Partner's Interest to another Partner. "Unreturned Capital" with respect to any Partner means all cash paid toward such Partner's Capital Contribution, reduced by distributions made to such Partner pursuant to Section 6.1(a)(ii) and 6.1(a)(iii). "Valuation Date" has the meaning set forth in Section 9.3(a) of this Agreement. ARTICLE II. ORGANIZATION 2.1 Name. The name of the Partnership is "Louisiana Shelf Partners, L.P." 2.2 Place of Business. The principal place of business of the Partnership shall be at such place as determined by the General Partner. The Partnership may establish additional places of business within or without the State of Delaware as and when required by the business of the Partnership. 2.3 Registered Office. The registered office for the Partnership shall be located at such place as may be designated by the General Partner. ARTICLE III. PURPOSE 3.1 Purpose. The purpose for which the Partnership is formed is to engage in oil and gas exploration activities on various properties located in Cameron Parish, Louisiana. In addition, the Partnership may engage in any lawful activity for which limited partnerships may be organized under the laws of the State of Delaware and otherwise in accordance with the terms of this Agreement. 3.2 Powers of Partnership. The Partnership shall have all the powers permitted by law which are necessary or desirable in carrying out the purposes and business of the Partnership, including, but not limited to, the following: 6 (a) Transact business in any state or nation in which the Partnership may lawfully act, for itself or as principal, agent or representative for any Person, respecting the business of the Partnership; (b) Enter into, make, perform and carry out, or cancel and rescind, contracts and other obligations for any lawful purpose pertaining to the business of the Partnership; (c) Apply for, register, obtain, purchase or otherwise acquire trademarks, trade names, labels and designs relating to or useful in connection with any business of the Partnership, and to use, exercise, develop and license the use of the same; (d) Employ on behalf of the Partnership legal counsel, accountants and other professional advisors with respect to any business of the Partnership; (e) Compromise, submit to arbitration, sue on, and defend claims in favor of or against the Partnership; and (f) Exercise all of the general rights, privileges and powers permitted by the provisions of the Act, as adopted or hereafter amended or supplemented. ARTICLE IV. TERM The Partnership shall continue in perpetuity from the date hereof unless dissolved sooner pursuant to Article X of this Agreement (the "Term"). ARTICLE V. CONTRIBUTIONS TO CAPITAL AND STATUS OF PARTNERS 5.1 Interests. The Partnership shall have two classes of Limited Partnership Interests, Class A interests ("Class A Interests") and Class B Interests ("Class B Interests"). Each Person owning a Class A Interest is hereafter referred to as a "Class A Limited Partner" and each Person owning a Class B Interest is hereinafter referred to as a "Class B Limited Partner." 5.2 Capital Contributions. (a) General Partner. The General Partner has made a capital contribution to the Partnership in the amount set forth on Exhibit A to this Agreement. (b) Limited Partners. Each Limited Partner shall make an initial Capital Contribution, as described in Exhibit A to this Agreement. The name, mailing address, taxpayer identification number, initial Capital Contribution, Percentage Interest of each Partner is set forth in Exhibit A. (c) Additional Capital Contributions. (i) The Partners shall be obligated to make all additional contributions to the capital of the Partnership, for whatever purpose, in any amounts requested by the General Partner, provided that, solely with respect to any Capital Calls made for the purpose of paying administrative expenses of the Partnership, the General Partner shall only be permitted to request 7 two additional contributions to the capital of the Partnership per calendar year in the aggregate amount of $300,000. The General Partner shall deliver written notice requesting any additional Capital Contribution to the Partnership (a "Capital Call") to each Limited Partner. Each Limited Partner shall be obligated to satisfy its pro rata portion of any Capital Call within fifteen (15) business days of receiving such written request. (ii) In the event any Class A Limited Partner fails to honor all or any portion of a Capital Call made in accordance with the preceding Subsection, the General Partner may take action to enforce such the obligation of such Class A Limited Partner (the "Delinquent Limited Partner") to satisfy the Capital Call, including but not limited to converting the Delinquent Limited Partner's Class A Interests into Class B Interests and permitting the remaining Class A Limited Partners to fund the unfunded portion of the Delinquent Limited Partner's aggregate Capital Call as follows: (A) The General Partner shall notify the remaining Class A Limited Partners in writing of the amount of the unfunded Capital Call and offer them the opportunity to fund the unfunded Capital Call; (B) The remaining Class A Limited Partners shall have a period of fifteen (15) days within which to accept the offer to fund the unfunded Capital Call. Such acceptance shall be made by written notice given to the Partnership, which notice shall set forth the portion of the unfunded Capital Call that each remaining Class A Limited Partner is willing to purchase. Each remaining Class A Limited Partner shall be entitled to purchase its pro rata share (based on the total Percentage Interest held by such Class A Limited Partner and by all remaining Class A Limited Partners) of the unfunded Capital Call. Should any of the remaining Class A Limited Partners desire to fund a portion of the unfunded Capital Call in excess of its pro rata share, and should any portion of the Capital Call remain unfunded after allocation to each electing Class A Limited Partner of the lesser of (i) the unfunded Capital Call that it has elected to fund or (ii) its pro rata share of the unfunded Capital Call, then, unless electing remaining Class A Limited Partners desiring to fund such unfunded Capital Call shall agree upon some other basis for allocation, any such unfunded Capital Call shall be allocated to remaining Class A Limited Partners desiring to fund it, pro rata based on the unfunded Capital Call in excess of their respective pro rata shares thereof which each such Remaining Class A Limited Partner indicated in writing a desire to purchase, until the entire unfunded Capital Call has been funded or all remaining Class A Limited Partners have funded all of the unfunded Capital Call which they elected to fund. (C) In the event that the remaining Class A Limited Partners shall fail to accept the offer pursuant to the previous paragraph within the time period set forth above as to the entire unfunded Capital Call, then the General Partner shall be required to fund up to $300,000 towards the satisfaction of such unfunded Capital Call and shall have the option to fund such additional amounts as it elects. (D) The remaining Class A Limited Partners and the General Partner, if necessary, shall fund the unfunded Capital Call within thirty (30) days of the date on which the written notice of the unfunded Capital Call is first sent to the remaining Class A Limited Partners. 8 (E) Any Interests converted into Class B Interests shall continue to be treated as Class A Interests for purposes of Article VI to the extent necessary to give such Interests the benefit of the Class A Preferred Return and allocated Profits up to the date of such conversion. Thus, accrued Class A Preferred Return and Profits allocable pursuant to Section 6.2(d) which have been earned as Profits, and have been allocated, but not yet distributed, at the time of conversion shall be distributed at the appropriate time as if no conversion took place; and Class A Preferred Return which has accrued, but has not been earned and allocated, at the time of conversion, shall be allocated when earned, and shall be distributed, as if no conversion took place. Other allocations, including those of Losses, shall be adjusted in accordance with the principles of this Section 5.2(c). If the Unreturned Capital of the converted interest is a positive number at the time of conversion, such amount shall become the Unreturned Capital attributable to the Class B Interests. If the Capital Account balance of the converted interest is less than its Unreturned Capital at the time of conversion as a result of allocations of Losses pursuant to Section 6.3(d) which have not been restored by subsequent allocations of Profits (but not if such reduction is due to distributions), then the Class B Interests shall be entitled to allocations of Profits pursuant to Section 6.2(b) on the same terms as if such Losses had been allocated pursuant to Section 6.3(c). Except as necessary to give the converted Interest the benefit of being a Class A Interest prior to conversion as described above, the Percentage Interest of any Class B Interest shall be zero. The Percentage Interest of the converted Interest shall be allocated among the Class A Partners (and General Partner, as applicable) making additional Capital Contributions, in proportion thereto, which fulfill part or all of the unfunded Capital Call of the converted Interest. The General Partner shall amend Schedule A to reflect such changes. (iii) The General Partner may in its sole discretion elect instead to avail the Partnership of any other remedies provided to it by the Act. Notwithstanding the foregoing, no Capital Call or other obligation to make an additional contribution may be enforced by a creditor of the Partnership or other Person other than the Partnership unless the General Partner expressly consents to such enforcement or to the assignment of the obligation to such creditor. (d) Withdrawal of Capital Contributions. No Partner shall have the right to withdraw or reduce its Capital Contribution, or to receive any distributions from the Partnership, except as otherwise provided herein. No Partner shall have the right to demand or receive any Partnership Property other than cash from the Partnership. No interest or royalties shall be paid to any Partner on its Capital Contribution. No Partner shall have priority over any other Partner, either as to the return of its Capital Contribution or as to Profits, Losses or distributions, except as may be specifically set forth in this Agreement. 5.3 Additional Limited Partners. Additional Limited Partners may be admitted to the Partnership with the consent of the General Partner and a Majority in Interest of the Class A Limited Partners. Any dilution of the Percentage Interest resulting from the admission of additional Limited Partners shall be borne by all Partners pro rata in accordance with their Percentage Interests. 9 ARTICLE VI. DISTRIBUTIONS; ALLOCATION OF PROFITS AND LOSSES; CAPITAL ACCOUNTS. 6.1 Cash Available for Distribution. (a) Distributions Prior to Liquidation. Except as otherwise provided in Section 6.7 or in Article IX hereof, Cash Available for Distribution, if any, shall be distributed among the Partners annually (or more frequently as determined by the General Partner), in arrears no later than the end of the first calendar quarter following the year in question in such aggregate amounts as the General Partner may determine. Cash Available for Distribution, if any, shall be distributed among the Partners in the following order of priority: (i) First, to the Class A Limited Partners, an amount equal to the accrued but unpaid Class A Preferred Return as of the date of the distribution, distributed to each Class A Limited Partner pro rata in proportion to the amount of each Class A Limited Partner's Unpaid Class A Preferred Return as of that date; (ii) Second, to the General Partner and the Class A Limited Partners in proportion to their respective Unreturned Capital as of the date of the distribution, until the General Partner's Unreturned Capital and each Class A Limited Partner's Unreturned Capital has been reduced to zero; (iii) Third, to the Class B Limited Partners in proportion to their respective Unreturned Capital, until each Class B Limited Partner's Unreturned Capital has been reduced to zero; and (iv) Thereafter, 40% to the General Partner, and 60% to the Class A Limited Partners pro rata in proportion to each Class A Limited Partner's Percentage Interest. Notwithstanding the foregoing, the General Partner may in its sole and absolute discretion and at any time make a distribution to the Class A Limited Partners and/or Class B Limited Partners in proportion to their respective Unreturned Capital balances. Section 6.1(a) shall be applied taking into account the provisions of Section 5.2(c) with respect to converted Interests. (b) Liquidating Distributions. Distributions in liquidation of the Partnership and redemption of Interests shall be made in accordance with Capital Accounts, determined after taking into account all allocations under this Article VI, including Profits or Losses with respect to property distributed in kind. 6.2 Allocation of Profits. After giving effect to the Regulatory Allocations set forth in Exhibit B of this Agreement and subject to the provisions of Section 5.2(c), Profits for any fiscal year or other period of the Partnership will be credited to the Capital Accounts of the Partners in the following order of priority: (a) First, to the Partners, in an amount sufficient to reverse the cumulative amount of any Losses allocated to the Partners in the current and all prior fiscal years, first pursuant to the proviso after Section 6.3(d) of this Agreement, and second pursuant to Section 10 6.3(d) of this Agreement, allocated to each Partner in the order and in proportion to the allocation of such Losses to such Partner; (b) Second, to the Class B Limited Partners, until the cumulative amount allocated pursuant to this Section 6.2(b) for the current and all prior fiscal years is equal to the cumulative amount of any Losses allocated pursuant to Section 6.3(c) of this Agreement in the current and all prior fiscal years to each Class B Limited Partner, pro rata in proportion to the Losses allocated to each such Class B Limited Partner; (c) Third, to the Class A Limited Partners, until the cumulative amount allocated pursuant to this Section 6.2(c) for the current and all prior fiscal years is equal to the cumulative Class A Preferred Return for all Class A Limited Partners in the current and all prior fiscal years plus the cumulative amount of any Losses allocated pursuant to Section 6.3(b) of this Agreement in the current and all prior fiscal years (which Losses reverse Profits allocated under this Section 6.2(c)) allocated to each Class A Limited Partner pro rata in proportion to each Class A Limited Partner's Class A Preferred Return; and (d) Thereafter, 40% to the General Partner and 60% to the Class A Limited Partners pro rata in proportion to each Class A Limited Partner's Percentage Interest. 6.3 Allocation of Losses. After giving effect to the Regulatory Allocations set forth in Exhibit B of this Agreement and subject to the provisions of Section 5.2(c), Losses for any fiscal year or other period will be charged to the Capital Accounts of the Partners in the following order of priority: (a) First, 40% to the General Partner and 60% to the Class A Limited Partners pro rata in proportion to each Class A Limited Partner's Percentage Interest in an amount sufficient to reverse, on a cumulative basis, the amount of Profits allocated under Section 6.2(d) of this Agreement in the current and all prior fiscal years; (b) Second, to the Class A Limited Partners in an amount sufficient to reverse, on a cumulative basis, the amount of Profits allocated under Section 6.2(c) of this Agreement in the current and all prior fiscal years; (c) Third, to the Class B Limited Partners in proportion to their respective Unreturned Capital, until each Class B Limited Partner's Unreturned Capital is reduced to zero; and (d) Fourth, among the General Partner and the Class A Limited Partners pro rata in proportion to each Partner's Percentage Interest; provided, however, that Losses that otherwise would be allocated to the Partners in accordance with their respective Percentage Interest will not be allocated to any Partner if such Losses would result in or increase an Adjusted Capital Account Deficit with respect to such Partner and any Losses that cannot be allocated to any Partner as a result of this proviso shall be allocated first to the Capital Accounts of the other Partners in proportion to the positive balances in their respective Capital Accounts until all such Capital Accounts are reduced to zero, and then one hundred percent (100%) to the General Partner. 11 6.4 Special Tax Allocations; Other Allocation Rules; Tax Allocations: Code Section 704(c). Special tax allocations, other allocation rules and tax allocations relating to Code Section 704(c) are as set forth on Exhibit B attached hereto and made a part hereof. 6.5 Allocations in the Event of Transfer. (a) If all or any portion of an Interest is transferred in accordance with Article VIII hereof during any fiscal year, Profits, Losses, each item thereof and all other items attributable to such Interest for such period shall be divided and allocated between the transferor and transferee pro rata in proportion to the number of days each Person owned such Interest during the period, unless the General Partner elects to provide for an interim closing of the Partnership's books. (b) Solely for purposes of allocating Profits, Losses and each item thereof as set forth in Sections 6.2 through 6.4, the Partnership shall recognize the Transfer of such Interest not later than the end of the calendar month during which it receives written notice of such Transfer and the other requirements of Article VIII hereof are satisfied, provided that if the Partnership does not receive a written notice stating the date such Interest was transferred and such other information as the General Partner may reasonably require within thirty (30) days after the end of the calendar year during which the Transfer occurs, then all of such items shall be allocated, and all distributions shall be made, to the Person who, according to the books and records of the Partnership, on the last day of the accounting period during which the Transfer occurs, was the owner of the Interest. The General Partner and the Partnership shall incur no liability for making allocations and distributions in accordance with the provisions of this Section 6.5, whether or not the General Partner or the Partnership has knowledge of any Transfer of ownership of any Interest. 6.6 Capital Accounts. (a) A Capital Account shall be maintained for each Partner. The provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with the Regulations promulgated under Section 704(b) of the Code. The Capital Account of each Partner shall be increased by (a) the cash amounts of such Partner's Capital Contribution, (b) the Gross Asset Value of any property or services contributed to the Partnership by the Partner as agreed to by the contributing Partner and the Partnership, less any indebtedness to which such property is subject or which is assumed by the Partnership in connection with the contribution (except that any amount by which such indebtedness exceeds such Gross Asset Value of the property shall be treated as a debit to the Partner's Capital Account), and (c) such Partner's share of Profits and any items in the nature of income and gain specially allocated to it, and shall be decreased by (y) the amount of cash and the Gross Asset Value of other property actually distributed to such Partner by the Partnership less any indebtedness to which such property is subject or which is assumed by the Partner in connection with the distribution (except that any amount by which such indebtedness exceeds such Gross Asset Value of the property shall be treated as a credit to the Partner's Capital Account), and (z) such Partner's share of Losses. 12 (b) In the event a Partner Transfers all or any portion of its Interest in accordance with the provisions of this Agreement, the transferee shall succeed to the individual Capital Account of the transferor to the extent such Capital Account relates to the transferred Interest. (c) It is the intent of this Agreement that each Partner's allocations and distributions shall be made in accordance with Section 704(b) of the Code. If the Partnership is advised by legal counsel that any matter or matters contained in this Agreement are unlikely to be effective for federal income tax purposes, the General Partner is hereby granted the power to amend the allocation and/or distribution provisions of this Agreement, on the advice of legal counsel to the Partnership, to the minimum extent necessary to effect the allocation of Profits and Losses herein. (d) No Partner shall be required at any time to make any cash contribution to the Partnership by reason of any deficit balance in its Capital Account, and no such deficit balance shall increase or otherwise affect the liability of a Partner to third parties 6.7 Tax Distributions. Prior to any distributions pursuant to Section 6.1 hereof (or otherwise), the Partnership shall distribute Cash Available for Distribution to the Partners in such amounts as the General Partner, in good faith, estimates (the "Estimated Tax Liability") to be sufficient to permit each Partner to pay all federal, state, and local income taxes which each Partner will incur as a result of the required inclusion of each Partner's proportionate share of the Profits of the Partnership in determining each Partner's federal, state, and local tax liability, provided that such distribution shall be made no later than 10 days before a quarterly estimated tax payment is due and such amount shall be confirmed by the General Partner as soon thereafter as is reasonably practicable provided, however, that the highest rate applicable to any Partner shall be applied to all Partners, including tax exempt Partners. Any distribution made under this Section 6.7 shall be applied against such amounts such Partner is entitled to receive pursuant to Section 6.1 hereof. The General Partner shall not be required to make the distributions described in this Section 6.7 (in respect of such taxes at such times or in such amounts) if such distributions will cause a default under the obligations to the Senior Secured Lender. ARTICLE VII. MANAGEMENT; RIGHTS, POWERS, AND OBLIGATIONS OF THE PARTNERS 7.1 Management of the Partnership. Subject to Section 7.2 hereof, the management and control of the Partnership and its business and affairs, and the exercise of the powers of the Partnership described in Section 3.2 hereof, shall be vested in the General Partner. 7.2 Certain Limitations of the General Partner. Without obtaining the affirmative vote of a Majority in Interest of the Class A Limited Partners, voting as a separate class, the General Partner shall not do or permit any of the following acts on behalf of the Partnership unless otherwise specifically stated herein: (i) Act in contravention of this Agreement; (ii) Except as provided in Article X, do any act which would make it impossible to carry on the ordinary business of the Partnership; 13 (iii) Confess a judgment against the Partnership; or (iv) Sell or dispose of all or substantially all of the assets of the Partnership Property in a transaction outside of the Partnership's ordinary course of business. 7.3 Meetings of the Partners. (a) Meetings of Partners. Except as otherwise specifically provided in this Agreement, meetings of the Partners may be called by the General Partner, by written notice to the Partners given not less than ten (10) nor more than sixty (60) days prior to the date of such meeting. Meetings shall be held at such place within or without the State of Delaware as is designated in the notice of the meeting. (b) Quorum. Except as provided in other sections of this Agreement where less than all of the Partners are entitled to vote, the Partners necessary to approve any action to be taken at such meeting must be present for the conduct of business at any meeting of the Partners. (c) Written Consent. Any action of the Partners may be taken without a meeting if the Partners required to approve such action consent thereto in writing. (d) Meeting by Telephone. The meeting of the Partners may be held by telephone conference or similar communications equipment. (e) Proxies. A Partner may authorize one or more Persons to act for such Partner by proxy, provided the proxy is signed by such Partner. A proxy shall not be valid after the expiration of one (1) year from its date. (f) Waiver of Notice. Any notice required under this Agreement for the holding of meetings of the Partners may be waived by any Partner by an instrument in writing signed by such Partner either before or after the meeting to which such waiver relates. 7.4 Voting by the Partners. Unless otherwise stated in this Agreement, an affirmative vote of a Majority in Interest of the Limited Partners, voting as a class, shall be required to adopt any matter subject to a vote of the Limited Partners. 7.5 Independent Activities. Subject to any other agreement among the parties, Partners and Affiliates of Partners may, notwithstanding the existence of this Agreement, engage in whatever activities they choose without having or incurring any obligation to offer any interest in such activities to the Partnership or any Partner, and neither this Agreement nor any activity undertaken pursuant hereto shall prevent the Partners or any Affiliate of a Partner from engaging in any activity, or require the Partners or any Affiliate of a Partner to permit the Partnership or any Partner to participate therein. 7.6 Execution of Agreements and Instruments. Any agreement or instrument may be executed on behalf of the Partnership by the General Partner or as otherwise authorized by the General Partner. 14 7.7 Holding of Assets. All Partnership Property, whether real, personal or mixed, owned by the Partnership shall be held in the name of the Partnership. 7.8 Fees and Expenses. To the extent expenses have been incurred in connection with the Partnership prior to the date of this Agreement, the Partnership shall pay such expenses or shall reimburse the General Partner or any other Person as appropriate for such expenses if already paid. In addition, to the extent that the General Partner incurs any fees and expenses in connection with the performance of its powers and duties as General Partner, through the provision of administrative services to the Partnership or otherwise on behalf of the Partnership, the Partnership shall reimburse the General Partner in accordance with its normal expense reimbursement procedures. ARTICLE VIII. TRANSFER OF INTERESTS IN THE PARTNERSHIP 8.1 Prohibited Transfers. Neither the General Partner nor any of the Limited Partners may sell, assign, transfer or otherwise dispose of, or pledge, hypothecate or transfer or in any manner encumber, his or its Partnership Interest or any part thereof except as permitted in this Article VIII, and any act in violation of this Article VIII shall not be binding upon or recognized by the Partnership regardless of whether the General Partner shall have knowledge thereof. 8.2 Limited Partners. (a) The General Partner may (1) pursuant to this Section 8.2, admit as a substituted Limited Partner any successor in interest to a Limited Partner either deceased or under legal disability, and (2) pursuant to this Section 8.2 admit as substituted Limited Partners assignees of Limited Partners: (i) A substituted Limited Partner is a person admitted to all the rights of a Limited Partner; (ii) An assignee is a person to whom a Limited Partner has assigned his Interest in the Partnership but who has not become a substituted Limited Partner. An assignee shall have no right to require any information or accounting of the Partnership's transactions or to inspect the Partnership's books but shall only be entitled to receive the share of the distributions and allocations to which his assignor would otherwise be entitled as set forth in Article VI. (b) No assignee of the whole or any portion of a Limited Partner's Interest shall have the right to become a substituted Limited Partner in place of his assignor or have any other rights of a Limited Partner hereunder unless all of the following conditions are satisfied: (i) The written consent of the General Partner to such substitution shall be obtained, which consent shall not be unreasonably withheld; (ii) A duly executed and acknowledged written instrument of assignment has been filed with the Partnership which sets forth the intention of the assignor that the assignee become a substituted Limited Partner in his place; 15 (iii) The assignor and assignee execute and acknowledge such other instruments as the General Partner may deem necessary or desirable to effect such admission, including, without limitation, an opinion of counsel, acceptable to the General Partner, to the effect that the assignment of the interest will not violate the applicable provision of the Securities Act of 1933 and any applicable state securities laws, the written acceptance and adoption by the assignee of the provisions of this Agreement and his execution, acknowledgment, and delivery to the General Partner of a Power of Attorney, the form and content of which are more fully described in Section 13.16 hereof; and (c) Any person admitted to the Partnership as a Substituted Limited Partner shall be subject to all of the provisions of this Agreement as if originally a party to it. (d) Subject to the provisions of subparagraph 8.3(j) hereof, compliance with the suitability standards imposed by the Partnership, applicable "blue sky" laws, if any, and the rules of any other applicable governmental authority and subject to the written consent of the General Partner (except that assignments to heirs and personal representatives may be made without consent upon the death of a Limited Partner), a Limited Partner shall have the right to assign all or a portion of his Interest by a written assignment, the terms of which are not in contravention of any of the provisions of this Agreement, which assignment has been duly executed by the assignor and received by the Partnership and recorded on the books thereof. Any assignment in contravention of any of the provisions of this Subsection 8.3(d) shall be of no force and effect and shall not be binding upon or recognized by the Partnership. THE INTERESTS EVIDENCED BY THIS AGREEMENT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THE INTERESTS ACQUIRED BY LIMITED PARTNERS MAY NOT BE SOLD OR OFFERED FOR SALE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE INTERESTS UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND SUCH STATE LAWS AS MAY BE APPLICABLE, OR AN OPINION OF COUNSEL SATISFACTORY TO THE PARTNERSHIP THAT SUCH REGISTRATION IS NOT REQUIRED. (i) Except as provided in Subsections 8.3(h), 8.3(i) and 8.3(j), an assignee of an Interest shall be entitled to receive distributions of cash or other property from the Partnership attributable to the Interest acquired by reasons of such assignment from and after the effective date of the assignment of an Interest to him. The "effective date" of an assignment of an Interest shall be the last day of the calendar month in which the written instrument of assignment, in form and substance satisfactory to the General Partner, is received and approved by the General Partner. (ii) Anything contained herein to the contrary notwithstanding, both the Partnership and the General Partner shall be entitled to treat the assignor of a Partnership Interest as the absolute owner thereof in all respects, and shall incur no liability for distributions of cash or other property made in good faith to him until such times as the written assignment has been received by, and recorded on the books of the Partnership, in accordance with the provisions of Subsection 8.3(d)(i). 16 (e) The General Partner may elect to treat an assignee who has not become a substituted Limited Partner as a substituted Limited Partner in the place of his assignor, should it deem, in its sole and absolute discretion, that such treatment be in the best interest of the Partnership for any of its purposes or for any of the purposes of this Agreement. (f) No consent of any of the Limited Partners is required to elect the substitution of a Limited Partner, except that a Limited Partner who assigns his Interest shall, in order for the assignee to be admitted as a substituted Limited Partner, evidence his intention that the assignee be admitted as a substituted Limited Partner in his place and must execute such instruments as the General Partner shall, in its sole and absolute discretion, determine to be necessary or desirable in connection therewith. (g) The General Partner shall be required to amend this Agreement only quarterly but may, in its sole and absolute discretion, within a reasonable time after the date of their written consent to the substitution of an assignee as a substituted Limited Partner, amend this Agreement to reflect the addition of said assignee as a Limited Partner. Neither copies of this Agreement nor any amendment thereto need be delivered to any of the Limited Partners and such requirement in any statute is hereby waived. However, upon request, the General Partner will promptly thereafter furnish the requesting Limited Partner with a copy of this Agreement and any amendments thereto as of the date of request. (h) Upon the death or legal incompetency of an individual Limited Partner, his personal representative shall have all of the rights of a Limited Partner for the purpose of settling or the managing his estate, and such power as the decedent or incompetent possessed to constitute a successor as an assignee of his Interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner. However, such personal representative shall not have the right to become a substituted Limited Partner in the place of his predecessor in interest unless the conditions of this Article VIII are first satisfied (except with respect to the requirement that the assignor execute and acknowledge instruments). (i) Upon the Bankruptcy, dissolution or other cessation to exist as a legal entity of a General or Limited Partner, not an individual, the authorized representative of such entity shall have all of the rights of a Limited Partner for the purpose of effecting the orderly winding up and the disposition of the business of such entity and such power as such entity possessed to constitute a successor as an assignee of its interest in the Partnership and to join with such assignee in making application to substitute such assignee as a Limited Partner. However, such personal representative shall not have the right to become a substituted Limited Partner in the place of his predecessor in interest unless the conditions of this paragraph are first satisfied (except with respect to the requirement that the assignor execute and acknowledge instruments). (j) No assignment or transfer of an interest in the Partnership may be made which would result in the termination of the Partnership under Section 708 of the Code, unless the General Partner determines that such termination will not have a material adverse effect on the Partnership or the Partners, or a Majority in Interest of the Class A Limited Partners consents to such transaction. 17 ARTICLE IX. DISSOLUTION AND WINDING UP OF THE PARTNERSHIP 9.1 Dissolution of the Partnership. The Partnership shall be dissolved upon the first to occur of any of the following events: (a) An order by a court of competent jurisdiction decrees that the Partnership be dissolved; (b) The determination of the General Partners and a Majority in Interest of the Class A Limited Partners to dissolve; (c) The sale or other disposition of all or substantially all of the assets of the Partnership; or (d) The dissolution of the last General Partner, provided that, the Partnership shall not be dissolved if, within ninety (90) days of such date, a Majority in Interest of the Class A Limited Partners appoints a new General Partner. 9.2 Winding Up of the Partnership. Upon a dissolution of the Partnership, the General Partner or other Person appointed by the General Partner, shall take full account of the Partnership's assets and liabilities and the assets shall be liquidated as promptly as is consistent with obtaining the fair value thereof and as shall be necessary to timely make the distributions below described, and the proceeds therefrom, to the extent sufficient therefor, shall be applied and distributed in the following order: (a) To the payment and discharge of all of the Partnership's debts and liabilities other than liabilities owing to the Partners, including establishment of any necessary contingency reserves; (b) To the Class A Limited Partners, an amount equal to the amounts owed on any loans which they may have made to the Partnership; (c) To the Class B Limited Partners, an amount equal to any loans which they may have made to the Partnership; and (d) To the Partners in accordance with Section 6.1(b). 9.3 Distribution In Kind. Any Partnership Property distributed in kind in the liquidation shall be valued as follows: (a) The General Partner shall select an independent, third-party appraiser, experienced in appraising limited partnership interests similar to the Interests (the "Appraiser"). The Appraiser will determine the value of the Limited Partner's Interest as of the end of the calendar month immediately preceding the distribution in kind based upon the value of the Partnership's assets net of liabilities assuming all assets were sold at such value and all liabilities were satisfied by cash payments at their present value and any resulting deem Profit or Loss was allocated to the Partners pursuant to the terms of this Agreement. The determination of the value of a Limited Partner's Capital Account shall assume the going concern of the Partnership and 18 shall not take into account minority discounts for the Capital Account being valued. The date on which the Capital Account is to be valued pursuant to this Section shall be referred to herein as a "Valuation Date." The Appraiser shall within sixty (60) days of the distribution in kind prepare a statement and report of the amount of the Limited Partner's Capital Account as of the Valuation Date. A copy of such statement and report will be forwarded to each Partner. The difference between the value of any item of Partnership Property distributed in kind and its book value shall be treated as a gain or loss on the disposition of Partnership Property and shall be allocated among the Partners as provided in Article VI. (b) The Partnership's name and goodwill shall, as among the Partners, be deemed to have no value and shall belong to the Partnership, and no Partner shall have any right or claim individually to the use thereof. ARTICLE X. BOOKS OF ACCOUNTS, ACCOUNTING, REPORTS, FISCAL YEAR, BANKING AND TAX MATTERS PARTNER 10.1 Accounting, Books and Records. The Partnership shall maintain at its principal place of business or such other places as the General Partner shall determine books of account for the Partnership which shall show a true and accurate record of all costs and expenses incurred, all charges made, all credits made and received, and all income derived in connection with the conduct of the Partnership and the operation of its business in accordance with generally accepted accounting principles consistently applied and, to the extent inconsistent therewith in accordance with this Agreement. The Partnership shall use the accrual method of accounting in preparation of its annual reports and for tax purposes and shall keep its books and records accordingly. Each Partner or its designated representative shall have the right, during ordinary business hours, to have access to, inspect and copy, at its sole expense, the contents of such books or records. 10.2 Other Records. (a) The Partnership shall maintain at its principal place of business the following: (i) A current list of the full names and last known business address of each Partner; (ii) A copy of the Certificate of Limited Partnership, all amendments thereto, and executed copies of any powers of attorney pursuant to which the same have been executed; (iii) A copy of this Agreement, all amendments thereto, and executed copies of any written powers of attorney pursuant to which the same have been executed; (iv) Copies of any federal, state, and local income tax returns and reports of the Partnership for the three most recent years; and (v) Copies of any financial statements of the Partnership for the three most recent years. 19 (b) Except as otherwise set forth herein, each Partner shall have the right, exercisable upon written demand, to examine the items described in Section 10.2(a) during ordinary business hours and for any purpose reasonably related to the Partner's Interest in the Partnership (which purpose must be stated in the written demand), and shall have the right, at its own expense, to make copies of all such items. 10.3 Reports. (a) The General Partner shall be responsible for the preparation of financial reports of the Partnership and the coordination of financial matters of the Partnership with the Accountant. (b) Within seventy-five (75) days after the end of each fiscal year, the General Partner shall transmit to each Partner financial statements based upon the annual audit of the books and financial records of the Partnership, prepared in accordance with generally accepted accounting principles, and, to the extent inconsistent therewith, in accordance with this Agreement, including the following: (i) A copy of the balance sheet of the Partnership as of the last day of such fiscal year; (ii) A statement of income or loss for the Partnership for such fiscal year; (iii) A statement of the Partners' Capital Accounts and changes therein for such fiscal year; and (iv) A statement of Partnership cash flow for such fiscal year. (c) Within seventy-five (75) days after the end of each fiscal year, the General Partner shall transmit to each Partner a report indicating such Partner's share of all items of income or gain, expense, loss or other deduction and tax credit of the Partnership for such fiscal year, and such additional information to enable the Partners to complete their respective tax returns. (d) The General Partner shall transmit to the Limited Partners such other reports and information as the Limited Partners may reasonably request. 10.4 Fiscal Year. The fiscal year of Partnership shall be the calendar year. 10.5 Partnership Funds. All funds of the Partnership shall be deposited in its name in a separate bank account or accounts or in an account or accounts of a savings and loan association or brokerage firm as shall be determined by the General Partner. 10.6 Tax Matters Partner. The General Partner shall serve as the Partnership's "tax matters partner" (as such term is defined in the Code). In such capacity, the Tax Matters Partner is hereby authorized and empowered to act for and represent the Partnership and each of the Partners before (i) the Internal Revenue Service ("Service") in any audit or examination of any 20 Partnership tax return, and (ii) any court selected by the Partners for judicial review of any adjustment assessed by the Service. All out-of-pocket expenses incurred by the Tax Matters Partner in his capacity as the Tax Matters Partner shall be considered expenses of the Partnership for which the Tax Matters Partner shall be entitled to full reimbursement. ARTICLE XI. INDEMNIFICATION 11.1 Indemnification. (a) General Provisions. Except as otherwise set forth herein, the Partners and their respective members, partners, Affiliates, directors, officers, agents and employees (herein referred to as an "Indemnitee"), shall be indemnified, held harmless and defended by the Partnership (out of Partnership assets, including the proceeds of liability insurance) against any claim, demand, controversy, dispute, cost, loss, damage, expense (including reasonable attorneys' fees), judgment and/or liability incurred by or imposed upon the Indemnitee in connection with any action, suit or proceeding (including any proceeding before any administrative or legislative body or agency) to which the Indemnitee may be a party or otherwise involved, or with which the Indemnitee may be threatened, by reason of any action or omission of the Indemnitee (or the Indemnitee's employee) in connection with the conduct of Partnership affairs. Such indemnification extends to the Indemnitee in its capacity, at the time the cause of action arose or thereafter, as general partner, member of any committee or as a member, Affiliate, director, officer, partner, employee or other agent of any other organization in which the Partnership owns an interest or of which the Partnership is a creditor, which other organization the Indemnitee (or its employee) serves in such capacity at the request of the Partnership (whether or not the Indemnitee or its employee continues to serve in such capacity at the time such action, suit or proceeding is brought or threatened). The indemnification set forth herein shall not extend with respect to actions or omissions of the Indemnitee (or its employee) which shall have been finally adjudicated (by settlement or otherwise) in any such action, suit or proceeding to have constituted actual fraud, willful misconduct or gross negligence. In the event of settlement of any action, suit or proceeding brought or threatened, such indemnification shall apply to all matters covered by the settlement. The foregoing right of indemnification shall be in addition to any rights to which any Indemnitee may otherwise be entitled and shall inure to the benefit of the executors, administrators, personal representatives, successors or assigns of each such Indemnitee. (b) Advance Payment of Expenses. The Partnership shall pay the expenses incurred by an Indemnitee in defending a civil or criminal action, suit or proceeding, or in opposing any claim arising in connection with any potential or threatened civil or criminal action, suit or proceeding, in advance of the final disposition of such action, suit or proceeding, upon receipt of an undertaking by such Indemnitee to repay such payment if he shall be determined to be not entitled to indemnification therefore as provided herein; provided, however, that in such instance the Indemnitee is not commencing an action, suit, or proceeding against the Partnership, or defending an action, suit or proceeding commenced against him by the Partnership or any Partner thereof or opposing a claim by the Partnership or any Partner thereof arising in connection with any such potential or threatened action, suit or proceeding. 21 (c) Insurance. The Partnership may purchase and maintain insurance with such limits or coverages as the General Partner reasonably deems appropriate, at the expense of the Partnership and to the extent available, for the protection of any Indemnitee against any liability incurred by such Indemnitee in any such capacity or arising out of his status as such, whether or not the Partnership has the power to indemnify such Indemnitee against such liability. The Partnership may purchase and maintain insurance for the protection of any officer, director, employee, consultant or other agent of any other organization in which the Partnership owns an interest or of which the Partnership is a creditor against similar liabilities, whether or not the Partnership has the power to indemnify him or it against such liabilities. Any amounts payable by the Partnership to an Indemnitee pursuant to the provisions of Section 11.1(a) above shall be payable first from the proceeds of any insurance recovery pursuant to policies purchased by the Partnership and then from the other assets of the Partnership; provided, that the foregoing shall not affect the Partnership's obligation to advance expenses pursuant to Section 11.1(b) hereof in circumstances in which the insurance Partnership who has issued such policy will not advance such expenses. ARTICLE XII. MISCELLANEOUS 12.1 Agreement for Further Execution. The Partners agree to sign, swear or acknowledge any certificates or filings required by the laws of the State of Delaware or any other state, to sign, swear or acknowledge any amendment or cancellation of such certificate or filings whether or not such amendment or cancellation is required by law; to sign, swear or acknowledge such other certificates, filings, documents or affidavits of assumed name, trade name or the like (and any amendments or cancellations thereof that may be required for conduct of the Partnership's business) and to cause the filing of any of the same for record wherever such filing shall be required by law. This Section 12.1 shall not prejudice or affect the rights of the Partners to approve certain amendments to this Agreement as herein provided. 12.2 Amendments. (a) Except as otherwise provided in this Agreement, no alteration, modification or amendment of this Agreement shall be made unless in writing and signed (in counterpart or otherwise) by the General Partner and a Majority in Interest of the Limited Partners, except that no alteration, modification or amendment of any Section hereof which would materially and adversely affect the economic interests of one or more (but not all) of the Limited Partners may be made (except as provided below) without the unanimous consent of all Limited Partners so adversely affected. Notwithstanding the foregoing, no increase in the amount required to be contributed to the Partnership by the Partners, other than as required herein or under applicable law, may be made without the consent of all the Partners. (b) Any provision to the contrary contained herein notwithstanding, the General Partner may, without the consent or approval of any Partners, make such amendments to this Agreement binding on the Partners, (i) to correct a typographical error, cure any ambiguity, correct or supplement any provision herein which may be inconsistent with any other provisions herein, (ii) to make any other amendment if such amendment is not adverse to the interests of the Limited Partners as a whole or as a class or if such amendment benefits the Limited Partners as a whole or as a class; and (iii) to reflect the addition of Limited Partners pursuant to Section 5.2; 22 provided, however, that no amendment shall be adopted pursuant to this Section 12.2(b) unless the adoption thereof does not affect the status of the Partnership as a partnership for federal income tax purposes. 12.3 Notices. (a) Any notice to be given under this Agreement shall be made in writing and sent by express, registered or certified mail, return receipt requested, postage prepaid, fax, or commercial delivery service, addressed as set forth below: (i) If to the General Partner or the Partnership: 5858 Westheimer Street Suite 708 Houston, TX 77057 with a copy to: Klehr, Harrison, Harvey, Branzburg & Ellers LLP 260 S. Broad Street Philadelphia, PA 19102 Attn.: Lawrence D. Rovin (ii) If to any Partner, such notice shall be mailed to the address of the Partner appearing on the records of the Partnership. (b) Any Partner may change the address to which notice is to be sent by giving notice of such change to the Partnership in conformity with this Section 12.3. (c) Any such notice shall be deemed to be delivered, given and received for all purposes as of the date delivered if delivered by a commercial delivery service or by confirmed fax, or as of the date on which the same was deposited in a regularly maintained receptacle for the deposit of United States mail, if sent by express, registered or certified mail. 12.4 Governing Law and Jurisdiction. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware as interpreted by the courts of said Commonwealth, notwithstanding any rules regarding choice of law to the contrary. The parties to this Agreement agree to the exclusive jurisdiction of the courts of New Castle County, Delaware and the Federal courts of the District of Delaware for resolution of controversies arising out of or relating to this Agreement and any related instruments, agreements or documents. 12.5 Binding Nature of Agreement. Except as otherwise provided, this Agreement shall be binding upon and inure to the benefit of the Partners and their personal representatives, successors and assigns. 12.6 Additional Partners. Each substitute, additional or successor Partner shall become a signatory hereof by signing such number of counterparts of this Agreement and such other 23 instrument or instruments and in such manner, as the General Partner shall determine. By so signing, each substitute, additional or successor Partner, as the case may be, shall be deemed to have adopted and to have agreed to be bound by all the provisions of this Agreement; provided, however, that no such counterpart shall be binding until it shall have been signed by the Partnership. 12.7 Validity. In the event that all or any portion of any provision of this Agreement shall be held to be invalid, the same shall not affect in any respect whatsoever the validity of the remainder of this Agreement. 12.8 Entire Agreement. This Agreement and the agreements attached hereto as Exhibits constitute the entire understanding and agreement among the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as contained herein. 12.9 Indulgences, Etc. Neither the failure nor any delay on the part of any party hereto to exercise any right, remedy, power or privilege under this Agreement shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege preclude any other or further exercise of the same or any waiver of any right, remedy, power or privilege with respect to any occurrence be construed as a waiver of such right, remedy, power or privilege with respect to any other occurrence. No waiver shall be effective unless it is in writing and signed by the party asserted to have granted such waiver. 12.10 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of such shall together constitute one and the same instrument. 12.11 Paragraph. The paragraph headings in this Agreement are for convenience only, form no part of this Agreement, and shall not affect its interpretation. 12.12 Number of Days. In computing the number of days for the purpose of this Agreement, all days shall be counted, including Saturdays, Sundays and holidays; provided, however, that if the final day of any time period falls on a Saturday, Sunday or holiday, then such final day shall be deemed to be the next day which is not a Saturday, Sunday or holiday. 12.13 Interpretation. No provision of this Agreement is to be interpreted for or against any party because that party or that party's legal representative drafted such provision. 12.14 Corporate Authority. Any corporation or trust signing this Agreement represents and warrants that the execution, delivery and performance of this Agreement by such corporation or trust has been duly authorized by all necessary corporate or trustee action. 12.15 Third Party Beneficiaries. Notwithstanding anything herein to the contrary, no provision of this Agreement is intended to benefit any party other than the Partners hereto and their successors and assigns in the Partnership and shall not be enforceable by any other party. 24 12.16 Appointment of Attorney-in-fact. Each Partner hereby irrevocably constitutes and appoints the General Partner its true and lawful attorney-in-fact, with full power of substitution, and with the General Partner having full power and authority in its name, place and stead to execute, acknowledge, deliver, swear to, file and record with the appropriate public offices such certificates, instruments and documents as may be necessary or appropriate to carry out the provisions of this Agreement or effectuate any action taken by or on behalf of the Partnership, including, but not limited to, any amendments to this Agreement or the Certificate of Limited Partnership approved by the Partners as provided herein. The appointment by the Partners of the General Partner as attorney-in-fact shall be deemed to be a power coupled with an interest, in recognition of the fact that each of the Partners under this Agreement will be relying upon the power of the General Partner to act as contemplated by this Agreement in any filing and other action by the General Partner on behalf of the Partnership and, shall to the fullest extent permitted by applicable law, survive the Bankruptcy, death or incompetency of any Partner hereby giving such power. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 25 IN WITNESS WHEREOF, the undersigned have set their hands and seals as of the day and year first above written. GENERAL PARTNER: LS GAS, LLC By: ----------------------------------- Mark Bush Managing Member LIMITED PARTNERS: Attached Powers of Attorneys. EXHIBIT B SPECIAL ALLOCATIONS 1. Special Tax Allocations. (a) Qualified Income Offset. In the event any Partner unexpectedly receives any adjustments, allocations, or distributions described in Regulations Section 1.704-1 (b)(2)(ii)(d)(4),(5), or (6), items of Partnership income and gain shall be specially allocated to each such Partner in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of such Partner as quickly as possible, provided that an allocation pursuant to this Section 1(a) shall be made if and only to the extent that such Partner would have an Adjusted Capital Account Deficit after all other allocations provided for in Article VI hereof have been tentatively made as if this Section 1(a) were not in the Agreement. (b) 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 the sum of (i) the amount such Partner is obligated to restore, and (ii) the amount such Partner is deemed to be obligated to restore pursuant to the next to last sentences of Regulation Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such 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 1(b) shall be made if and only 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 6 have been tentatively made as if Section 1(a) hereof and this Section 1(b) were not in the Agreement. (c) Partnership Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of Article VI hereof if there is a net decrease in Partnership Minimum Gain during any fiscal year, each Partner shall be specially allocated items of Partnership income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to such Partner's share of the net decrease in Partnership Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Section 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Section 1(c) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith. (d) Partner Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i)(4) of the Regulations, notwithstanding any other provision of Article VI hereof, if there is a net decrease in Partner Minimum Gain attributable to a Partner Nonrecourse Debt during any fiscal year, each Partner who has a share of the Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Partnership income and gain for such fiscal year (and, if necessary, subsequent fiscal years) in an amount equal to such Partner's share of the net decrease in Partner Minimum Gain attributable to such Partner Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Partner pursuant thereto. The items to be so allocated shall be determined in accordance with Section 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Section 1(d) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith. (e) Nonrecourse Deductions. Nonrecourse Deductions for any Fiscal year shall be specially allocated among the Partners in proportion to their Percentage Interests. (f) Partner Nonrecourse Deductions. Any Partner Nonrecourse Deductions for any Fiscal year shall be specially allocated to the Partner who bears the economic risk of loss with respect to the Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). (g) Code Section 754 Adjustment. To the extent an adjustment to the adjusted tax basis of any Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is required 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 increased 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 1.704-1(b)(2)(iv)(m) of the Regulations. (h) Curative Allocations. The Regulatory Allocations consist of the allocations pursuant to Sections 1(a) through 1(g) hereof. Notwithstanding any other provision of this Agreement, the Regulatory Allocations shall be taken into account in allocating items of income, gain, loss and deduction among the Partners so that, to the extent possible, the net amount of such allocations of other items and the Regulatory Allocations to each Partner shall be equal to the net amount that would have been allocated to each Partner if the Regulatory Allocations had not occurred. 2. Other Allocation Rules. (a) For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly or other basis, as determined by the General Partner using any permissible method under Code Section 706 and the Regulations thereunder. (b) Except as otherwise provided in this Agreement, all items of Partnership income, gain, loss, deductions, and any other allocations not otherwise provided for shall be divided among the Partners in the same proportions as they share Profits or Losses, as the case may be, for the year. (c) The Partners are aware of the income tax consequences of the allocations made by this Exhibit B and hereby agree to be bound by the provisions of this Exhibit B in reporting their shares of Partnership income and loss for income tax purposes. 3. Tax Allocations: Code Section 704(c). Tax allocations shall be made in accordance with the book allocations to Capital Accounts prescribed in Article VI and Exhibit B, but subject to the following provisions of this Section 3 of Exhibit B. In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Partnership shall, solely for tax purposes, be allocated among the Partners so as to take account of any variation between the adjusted basis of such property to the Partnership for federal income tax purposes and its initial Gross Asset Value. In the event the Gross Asset Value of any Partnership asset is adjusted pursuant to this Agreement, subsequent allocations of income, gain, loss and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Any elections or other decisions relating to such allocations shall be made by the General Partner in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Section are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Partner's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. EXHIBIT A PARTNERS AS OF DECEMBER 31, 2002 Initial Capital Percentage Contribution Interest --------------- ----------- Limited Partners: Continental Southern Resources Inc. $661,500 24.225% 111 Presidential Blvd. Suite 158A Bala Cynwyd, PA 19004 BPK Resources, Inc. $256,500 9.405% 5858 Westheimer Street, Suite 709 Houston, TX 77057 Michael Marcus $135,000 4.95% 1505 Rockcliff Road Austin, TX 78746 CBG Compagnie Bancaire Geneve $27,000 .99% Avenue De Rumine 20 1005 Lausanne Switzerland 6.93% Fenmore Consultants, Ltd. $189,000 PO Box 599, Suite 3 Caribbean Place, Providenciales Turks & Caicos Islands 1.98% Rhodes Ventures, S.A. $54,000 P.H. Plaza 200 Building 16th Floor - 50th Street Panama R.P. 5.94% Michael J. Garnick $162,000 1590 Stocton Road Meadowbrook, PA 19406 9.9% John Paul DeJoria $270,000 PO Box 34540 Las Vegas, NV 89133 1.485% William F. Miller III $40,500 2216 Sunset Houston, TX 77005 Richard Genovese $27,000 .99% Le Montagne 7 Avenue De Grand Bretagne Monte Carlo 98000 Monaco Louisiana X Investors, LLC $877,500 29.175% One Belmont Avenue, Suite 417 Bala Cynwyd, PA 19004 International Travel CD's Inc. Carried through 3.0% 5858 Westheimer Street, Suite 708 completion of Houston, Texas 77057 first well General Partner: LS Gas, LLC $27,000 1% 5858 Westheimer Street, Suite 708 Houston, TX 77057 EX-99.1 6 doc5.txt EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-QSB for the period ending March 31, 2003 as filed with the Securities and Exchange Commission by Continental Southern Resources, Inc. (the "Company") on the date hereof (the "Report"), I, Stephen P. Harrington, President of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Stephen P. Harrington ___________________ Stephen P. Harrington President May 15, 2003 EX-7 7 doc6.txt EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-QSB for the period ending March 31, 2003 as filed with the Securities and Exchange Commission by Continental Southern Resources, Inc. (the "Company") on the date hereof (the "Report"), I, Stephen P. Harrington, Treasurer of the Company, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Stephen P. Harrington ___________________ Stephen P. Harrington Treasurer May 15, 2003 -----END PRIVACY-ENHANCED MESSAGE-----